The Corporation Code

NOTE: There is no willful misconduct if the airplane incorporation law or charter or by means of general
was lost without a trace. In such case, no willful corporation law.
misconduct can be proved because if the airplane is
lost without a trace, there is no proof of the act or XPN: For corporations by prescription, such
omission or the proximate cause of the accident. authority is not necessary (De Leon, 2010).
(Wyman and Barlett v. Pan American Airways, Inc.,
CCH 1 AVI 1093 (1943) NOTE: A corporation by prescription is one which
has exercised powers for an indefinite period
without interference on the part of the sovereign
power and which by fiction of law, is given the status
THE CORPORATION CODE (CC)
of a corporation (De Leon, 2010).

The creation of a corporation is by operation of

law
CORPORATION
NOTE: The Philippine jurisprudence adopted the
Concession or fiat theory, which states that a
(Note: Those which are affected by the Revised corporation is conceived as an artificial person
Corporation Code is not included in the 2019 Bar owing existence through creation by a foreign
Syllabus. The reader must be guided accordingly.) power. Further, a corporation has without any
existence until it has received the imprimatur of the
DEFINITION State acting according to law, through the SEC
(Tayag v. Benguet Consolidated, Inc., GR No. L-23145,
A corporation is an artificial being created by November 29, 1968).
operation of law, having the right of succession and
the powers, attributes and properties expressly Q: Since February 8, 1935, the legislature has
authorized by law or incident to its existence (CC, not passed even a single law creating a private
Sec. 2). corporation. What provision of the constitution
precludes the passage of such law? (2008 Bar)
ATTRIBUTES OF A CORPORATION
A: Article XII, Section 16 of the 1987 Constitution
[ALS– PAPI] provides that Congress shall not, except by general
law, provide for the formation, organization, or
1. It is an Artificial being regulation of private corporations. Government-
2. It is created by operation of Law owned and controlled corporations may be created
3. It enjoys the right of Succession or established by special charters in the interest of
4. It has the Powers, Attributes and Properties the common good and subject to the test of
expressly authorized by law or Incident to its economic viability.
existence.
Private corporations owned or controlled by the
1. Artificial Personality government can only be created by special law often
referred to as “Charters”.
A corporation is a legal or juridical person with a
personality separate and apart from individual Q: A corporation was created by a special law.
stockholders or members and from any other legal Later, the law creating it was declared invalid.
entity into which it may be connected or related. May such corporation claim to be a de facto
corporation?
2. Corporation as a Creation of Law or By
Operation of Law A: NO. A private corporation may be created only
under the Corporation Code. Only public
No corporation can exist without the consent or corporations may be created under a special law.
grant of the sovereign, and that the power to create Where a private corporation is created under a
corporations is one of the attributes of sovereignty. special law, there is no attempt at a valid
Corporations cannot come into existence by mere incorporation and it cannot claim a de facto status.
agreement of the parties (De Leon, 2010).
Q: A Special Audit Team from COA audited the
GR: A legislative grant or authority is required for accounts of Leyte Metropolitan Water District
the creation of a corporation, either by a special (LMWD). Subsequently, LMWD and received a
requested for payment of auditing fees from

UNIVERSITY OF SANTO TOMAS 162

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 Mercantile Law
COA. As LMWD GM Feliciano sent a reply government assets and does not receive any
informing COA that the water district could not appropriation from the Philippine Congress. It is a
pay the auditing fees, citing as basis for his non-profit, donor-funded, voluntary organization,
action Presidential Decree 198 (PD 198) as well whose mission is to bring timely, effective and
as Republic Act No. 6758 (RA 6758). Thereafter, compassionate humanitarian assistance for the
Feliciano asked COA for refund of all auditing most vulnerable without consideration of
fees LMWD previously paid to COA. The COA nationality, race, religion, gender, social status or
Chairman denied LMWD’s request. Feliciano political affiliation. This does not mean however
maintains that LWDs are not GOCCs with that the charter of PNRC is unconstitutional. PNRC
original charters. He argues that LWDs are is sui generis. Although it is neither a subdivision,
private corporations, and thus not subject to agency or instrumentality of the government nor a
COA’s jurisdiction. Is a Local Water District GOCC or a subsidiary thereof, so much so that
created under PD 198, as amended, a GOCC Gordon was correctly allowed to hold his position as
subject to the audit jurisdiction of COA? Chairman thereof concurrently while he served as a
Senator, such a conclusion does not ipso facto imply
A: YES. LWDs are GOCCs subject to the audit that the PNRC is a private corporation within the
jurisdiction of COA. The Constitution and existing contemplation of the provision of the Constitution
laws mandate COA to audit all government agencies, that must be organized under the Corporation Code.
including GOCCs with original charters. An LWD is a The PNRC enjoys a special status as an important
GOCC with an original charter. The Constitution ally and auxiliary of the government in the
recognizes two classes of corporations. The first humanitarian field in accordance with its
refers to private corporations created under a commitments under international law (Liban, et al.,
general law. The second refers to GOCCs created by v. Gordon, G. R. No. 175352, January 18, 2011, in
special charters. Congress cannot enact a law Divina, 2014).
creating a private corporation with a special
charter. Such legislation would be Q: Dennis A.B. Funa requested the COA for a copy
unconstitutional. Private corporations may exist of the latest financial and audit report of the
only under a general law. The Constitution Manila Economic and Cultural Office (MECO).
authorizes Congress to create GOCCs through The MECO was organized as a non-stock, non-
special charters. Since private corporations cannot profit corporation under the Corporation Code,
have special charters, it follows that Congress can in view of the desire of the Philippines and
create corporations with special charters only if Taiwan to maintain an unofficial relationship in
such corporations are government-owned or lieu of official diplomatic ties severed by the
controlled. Obviously, LWDs are not private One-China policy. Upon receipt of COA’s reply
corporations because they are not created under the that it does not audit MECO, Funa filed a petition
Corporation Code (Engr. Ranulfo C. Feliciano v. COA, for mandamus to compel COA to audit MECO as
et al., G.R. No. 147402, January 14, 2004). the latter was a GOCC as it performs functions
relating to public needs and is controlled by the
Q: In Liban, et al. v. Gordon (July 15, 2009) the government through the appointment of its
Court held that Richard Gordon did not forfeit board of directors. Is Funa correct?
his seat in the Senate when he accepted the
chairmanship of the Philippine National Red A: NO. The MECO is not owned or controlled by the
Cross Board of Governors, as the office of the government, hence it is not a GOCC or a government
PNRC Chairman is neither a government office instrumentality. GOCCs are "stock or non-stock"
nor an office in a government-owned or corporations "vested with functions relating to
controlled corporation for purposes of the public needs" that are "owned by the Government
prohibition in Section 13, Article VI of the 1987 directly or through its instrumentalities." By
Constitution. However, the decision declared definition, three attributes thus make an entity a
void the PNRC Charter as it creates the PNRC as GOCC:
a private corporation and ruled that the PNRC
should incorporate under the Corporation Code a. First, its organization as stock or non-
and register with the SEC if it wants to be a stock corporation;
private corporation. Is PNRC a private b. Second, the public character of its
corporation? function; and
c. Third, government ownership over the
A: NO. Although the PNRC was created by a special same.
charter, it cannot be considered as a GOCC in
absence of the essential elements of ownership and Possession of all three attributes is necessary to
control by the government. It does not have deem an entity a GOCC. In this case, there is not

UNIVERSITY OF SANTO TOMAS

163 FACULTY OF CIVIL LAW
 The Corporation Code
much dispute that the MECO possesses the first and its non-governmental character, the MECO handles
second attributes. It is the third attribute, which the government funds in the form of the "verification
MECO lacks. fees" it collects on behalf of the DOLE and the
"consular fees" it collects under Section 2(6) of EO
The MECO is not owned or controlled by the No. 15, s. 2001. Hence, under existing laws, the
government. Organization as a non-stock accounts of the MECO pertaining to its collection of
corporation and the mere performance of functions such "verification fees" and "consular fees" should
with a public aspect, however, are not by be audited by the COA (Funa v. Manila Economic and
themselves sufficient to consider the MECO as a Cultural Office and COA, G.R. No. 193462, February,
GOCC. In order to qualify as a GOCC, a corporation 2014).
must also, if not more importantly, be owned by the
government. Franchise

The government owns a stock or non-stock A franchise includes any special privilege or right
corporation if it has controlling interest in the affected with public interest, conferred by the State
corporation. In a stock corporation, the controlling on corporations or persons and which does not
interest of the government is assured by its belong to the citizens of the country, generally as a
ownership of at least fifty-one percent (51%) of the matter of common right (De Leon, 2010, citing JRS
corporate capital stock. In a non-stock corporation, Business Corp. v. Imperial Insurance, Inc., G.R. No. L-
like the MECO, jurisprudence teaches that the 19891, July 31, 1964)
controlling interest of the government is affirmed
when "at least majority of the members are Kinds of franchise
government officials holding such membership by
appointment or designation" or there is otherwise Primary vs. Secondary Franchise
"substantial participation of the government in the
selection" of the corporation’s governing board. PRIMARY
SECONDARY FRANCHISE
FRANCHISE
The fact of the incorporation of the MECO under the Special authority given to a
Corporation Code is the key. The MECO was correct corporation to engage in a
in postulating that, as a corporation organized specialized business (e.g.
under the Corporation Code, it is governed by the banks, insurance companies,
appropriate provisions of the said code, its articles right to use the streets of a
of incorporation and its by-laws. In this case, it is the municipality to lay pipes of
by-laws of the MECO that stipulates that its tracks, erect poles, or string
directors are elected by its members; its officers are wires).
elected by its directors; and its members, other than
the original incorporators, are admitted by way of a Certain rights and privileges
unanimous board resolution. conferred upon existing
The franchise corporations (J.R.S. Business
It is significant to note that none of the original or authority to Corp. v. Imperial Insurance,
incorporators of the MECO were shown to be exist as a supra).
government officials at the time of the corporation’s corporation
organization. Indeed, none of the members, officers The franchise to exercise
or board of directors of the MECO, from its powers and privileges granted
incorporation up to the present day, were to such corporation to the
established as government appointees or public business for which it was
officers designated by reason of their office. There created, including those
is, in fact, no law or executive order that authorizes conferred for purposes of
such an appointment or designation. Hence, from a public benefit such as the
strictly legal perspective, it appears that the power of eminent domain and
presidential "desire letters" pointed out by Funa other powers and privileges
are, no matter how strong its persuasive effect may enjoyed by public utilities (De
be, merely recommendatory. Leon, 2010).
GR: Granted by
It is a sui generis private entity especially entrusted the
by the government with the facilitation of unofficial Granted by a Government
Corporation
relations with the people in Taiwan without Agency, or a Municipal
Code
jeopardizing the country’s faithful commitment to Corporation
XPN: In GOCC’s
the One China policy of the PROC. However, despite with a special

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2019 GOLDEN NOTES
 Mercantile Law
charter, a using the right to take property for private use (De
special law Leon, 2010, citing SEC Opinion, October 28, 1968).
grants the
franchise Rule on whether a defective incorporation
It may ordinarily be conveyed result into a partnership
or mortgaged under a general
power granted to a The answer depends on whether or not there is a
corporation to dispose of its clear intent to participate in the management of the
Cannot be business affairs on the part of the investor. Parties
property (i.e. Through board
transferred who intend to participate or has actually
resolution or approval of
without the participated in the business affairs of the proposed
stockholders (Villarey v. Ferrer
approval of corporation would be considered as partners under
G.R. No. L-23893, October 29,
Congress a de facto partnership. On the other hand, parties
1968).
(Sundiang Sr. & who took no part notwithstanding their
Aquino, 2011) subscriptions do not become partners with other
It can be subject to levy and
sale on execution together with subscribers (Pioneer Insurance vs. CA, GR No. 84197,
corporate property (Sundiang July 28, 1989).
Sr. & Aquino, 2011).
Engagement into a contract of partnership or a
3. Right to succession joint venture

A corporation has a capacity of continuous existence GR: Corporations have no power to enter into
irrespective of the death, withdrawal, insolvency, or partnership.
incapacity of the individual stockholders or
members and regardless of the transfer of their XPN: The SEC allowed corporations to enter into
interest or shares of stock (De Leon, 2010). partnerships with other corporations and
individuals provided: (ENLiT)
A corporation may exist up to the period stated in
the articles of incorporation not exceeding 50 years 1. The authority to enter into partnership relation
from the date of incorporation, unless sooner is expressly conferred by the Charter or the
dissolved or unless said period is extended (CC, Sec. Articles of Incorporation (AOI)
11). Note: The Revised Corporation Code now allows 2. The nature of the business venture to be
corpotations to have perpetual existence. undertaken by the partnership is in line with
the business authorized by the charter or the
4. Powers, attributes and properties of a AOI (SEC Opinions, Feb. 29, 1980, December 1,
Corporation 1993, and February 23, 1994).
3. The partnership must be a limited partnership
The powers that a corporation can exercise are only and the corporation must be a limited partner.
those which are granted by the law of its creation. 4. If it is a foreign corporation, it must obtain a
All powers which may be implied from those license to transact business in the country.
expressly provided by law and those which are
incidental or essential to the corporation’s existence Q: May a corporation enter into a joint venture?
may also be exercised (CC, Sec. 36). (1996 Bar)

TEST: Whether the act of the corporation is in direct A: YES. A corporation may enter into a joint venture
and immediate furtherance of its business, fairly with another where the nature is in line with the
incidental to the express powers and reasonably business authorized by its charter. (Tuason v.
necessary to their exercise. Bolanos, G.R. L-4935, May 28, 1954).

The power to institute expropriation However, in as much as the term “joint venture” has
proceedings is not granted to all corporations no precise legal definition, it may take various
forms. It could take the form of a simple pooling of
Only quasi-public corporations or those affected resources (not involving incorporation) between
with public interest are given the power to institute two or more corporations for a specific project,
condemnation proceedings against owners of purpose or undertaking, or for a limited time. It may
private property. To grant the right of eminent involve the creation of a more formal structure, and,
domain to purely private entities exercising hence, the formation of a corporation. What is
functions, which are not public in nature, would be prohibited by law is the creation of partnership

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165 FACULTY OF CIVIL LAW
 The Corporation Code
between corporations but not the creation of joint Existence of
venture. the
corporation
Advantages vs. Disadvantages of a Corporation commences
from the date
ADVANTAGES DISADVANTAGES of issuance of
More complicated in the Certificate
The capacity to act as a From the
formation and of
legal unit moment of
management Incorporation
meeting of
Limitation of, or by the
Higher cost of minds of the
exemption from Securities and
formation and partners
liability of Exchange
operation Commenceme
shareholders Commission
nt of juridical The term of a
Lack of personal (SEC).
Continuity of Existence personality partnership
element and term of may be
Transferability of Greater government Existence
existence established
shares control and regulation CANNOT be
for any
Management and for a term in
Centralized period of
control are separate excess of 50
management of BOD time
from ownership years. The
stipulated by
Standardized method Stockholders have term of a
the partners
of organization and little voice in the corporation
finance conduct of business may be
extended to
Joint Account vs. Partnership not more than
50 years at
JOINT ACCOUNT PARTNERSHIP any single
Has no firm name and is instance.
conducted in the name GR: Requires
Has a firm name. at least 5
of the ostensible
partner. incorporators
May be
Has no juridical but not more
Has juridical Number of organized by
personality and can sue than 15
personality and may incorporators at least 2
or be sued only in the persons
sue or be sued under XPN:
name of the ostensible
its firm name Corporation
partner.
sole
Has no common fund. Has a common fund.
GR: May
The ostensible partner All general partners
manages its business have the right of exercise any
power May exercise
operations. management.
authorized only such
Liquidation may, by
Liquidation thereof can by the powers as may
agreement, be
only be done by the partners. be granted by
entrusted to a partner
ostensible partner. law and its
or partners.
Powers XPN: Acts articles of
which are incorporation,
contrary to implied
Corporation vs. Partnership
law, morals, therefrom or
good incidental
BASIS PARTNERS CORPORATIO
customs, thereto.
HIP N
public order,
Created by public policy
Created by
mere
operation of When GR: Power to
agreement of
As to creation law and management do business
the parties
and governed by is not agreed and manage
and
governing law the Management upon, every its affairs is
governed by
Corporation partner is an vested in the
the Civil
Code agent of the Board of
Code
partnership Directors

UNIVERSITY OF SANTO TOMAS 166

2019 GOLDEN NOTES
 Mercantile Law
(BOD) / Board debts to third
of Trustees persons
(BOT)
XPN: Limited
XPNs: partner
1. Executive No right of
Committe succession
e (Sec. 35, (ie. a
Right of Has right of
CC) partnership
Succession succession
2. Managem dissolves
ent upon death
Contract of a partner)
(Sec. 44, Stockholder
CC) has the right
3. The AOI of Partner
to transfer his
a close cannot
shares
corporati transfer his
without prior
on may interest in
Transferabilit consent of the
provide the
y of other
that the partnership
Shareholder’s stockholders
business without the
interest unless the
of the consent of all
right of first
corporati the other
refusal is
on shall be existing
embodied in
managed partners.
the articles of
by the incorporation.
stockhold May be
ers of the dissolved
corporati Can only be
any time by
on rather dissolved with
the will of
than by a the consent of
any or all of
board of the State.
the partners.
directors.
(Sec. 97, Dissolution Death or
Death, civil
CC) insolvency of
interdiction
The suit shareholders
and
against a cannot
insolvency of
member of the dissolve the
a partner
BOD or BOT corporation.
dissolve the
who partnership.
A partner as mismanages
Effect of such can sue must be
mismanagem a co-partner brought in the CLASSES OF CORPORATION
ent who name of the
mismanages. corporation;
this is The following are the classes of corporation:
commonly 1. As to whether their membership is represented
known as by shares of stock or not:
“derivative a. Stock –one which has:
suit”. 1. Capital stock divided into shares;
GR: Partners and
are liable Stockholders 2. Are authorized to distribute to the
personally are liable only holders of such shares dividends
Extent of and to the extent of or allotments or the surplus profits
liability to subsidiarily the shares on the basis of the shares held (Sec.
third persons (sometimes subscribed by 3, CC).
solidarily) them whether
for paid or not.
partnership

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167 FACULTY OF CIVIL LAW
 The Corporation Code
b. Non-Stock – is one which does - not b. Open ‐open to any person who
issue shares and is - created not for may wish to become a stockholder
profit but for public good and welfare or member thereto.
and where no part of its income is
distributable as dividends to its 8. As to their relation to another corporation:
members, trustees, or officers. (Sec. 87, a. Parent or Holding ‐ related to another
CC) corporation that it has the power
either, directly or indirectly to, elect
2. As to the number of persons who compose the majority of the director of such
them: other corporation.
a. Corporation Aggregate b. Subsidiary ‐ so related to another
- corporation consisting of more corporation that the majority of its
than one member or corporator. directors can be elected either, directly
The CC requires that these or indirectly, by such other corporation
corporations must be formed by
“not less than 5 persons” (Sec. 10, 9. As to whether they are corporations in a true
CC). sense or only in a limited sense:
b. Corporation Sole a. True ‐ exists by statutory authority
‐ Religious corporation which b. Quasi ‐ exist without formal legislative
consists of one member which is grant:
the head of the religious sect or i. Corporation by prescription ‐ has
corporator only and his successor. exercised corporate powers for an
indefinite period without interference
3. As to whether they are for religious purpose or on the part of the sovereign power and
not: which by fiction of law, is given the
a. Ecclesiastical Corporation ‐ one status of a corporation;
organized for religious purpose. ii. Corporation by estoppel ‐ in reality is
b. Lay Corporation ‐ one organized not a corporation, either de jure or de
for a purpose other than for facto, because it is so defectively
religion. formed, but is considered a corporation
in relation to those only who, by reason
4. As to whether they are for charitable purpose of theirs acts or admissions, are
or not: precluded from asserting that it is not a
a. Eleemosynary ‐ one established corporation (Sec. 21, CC).
for charitable purposes.
b. Civil ‐ one established for business 10. As to whether they are for public (government)
or profit. or private purpose: (2001, 2004 Bar)
a) Public - formed or organized for the
5. As to state or country under or by whose laws government of a portion of the State (like
they have been created: cities and municipalities) for the purpose of
a. Domestic ‐ incorporated under the serving the general good and welfare.
laws of the Philippines. (Aquino, 2014)
b. Foreign ‐ formed, organized, or b) Private - one formed for some private
existing under any laws other than purpose, benefit or end. It may either be a
those of the Philippines and whose stock or non-stock (Aquino, 2014).
laws allow Filipino citizens and
corporations to do business in its The fact that a certain juridical entity is impressed
own country or state (Sec. 123, CC). with public interest does not, by that circumstance
alone, make the entity a public corporation,
6. As to their legal right to corporate existence: inasmuch as a corporation may be private although
a. De jure ‐existing both in fact and in law. its charter contains provisions of a public character,
b. De facto ‐existing in fact but not in law. incorporated solely for the public good. This class of
corporations may be considered quasi-public
7. As to whether they are open to the public or not: corporations, which are private corporations that
a. Close ‐limited to selected persons render public service, supply public wants, or
or members of the family (Sec. 96‐ pursue other eleemosynary objectives. While
105, CC). purposely organized for the gain or benefit of its
members, they are required by law to discharge
functions for the public benefit. Examples of these

UNIVERSITY OF SANTO TOMAS 168

2019 GOLDEN NOTES
 Mercantile Law
corporations are utility, railroad, warehouse, 3. Name of the corporation closely resembles that
telegraph, telephone, water supply corporations of a pre-existing corporation that will tend to
and transportation companies. It must be stressed deceive the public;
that a quasi-public corporation is a species of 4. Incorporators or a certain number of them are
private corporations, but the qualifying factor is not residents of the Philippines;
the type of service the former renders to the public: 5. Acknowledgment of the articles of
if it performs a public service, then it becomes a incorporation or certificate of incorporation is
quasi-public corporation (Philippine Society for the insufficient or defective in form, or it was
Prevention of Cruelty to Animals v. COA, G.R. No. acknowledged before the wrong officer;
169752, September 25, 2007). 6. Percentage of Filipino ownership of the capital
stock required for the business is less than that
Requisites for the formation of a stock prescribed by law; or
corporation 7. Failure to submit by-laws on time.

For a stock corporation to exist, two requisites must Defects precluding creation of corporation
be complied with, to wit:
1. A capital stock divided into shares and 1. Absence of articles of incorporation;
2. An authority to distribute to the holders of such 2. Failure to file articles of incorporation with SEC;
shares, dividends or allotments of the surplus 3. Lack of certificate of incorporation from SEC.
profits on the basis of the shares held (Sec. 3, CC;
CIR v. Club Filipino de Ceb, G.R. No. L-12719, May NOTE: In this case, neither a de jure nor a de facto
31, 1962). corporation is created.

DE FACTO CORPORATION Q: University Publishing Company (UPC),

through its president, entered into a contract
A de facto corporation is one which actually exists with Albert to publish the commentaries on the
for all practical purposes as a corporation but which Revised Penal Code. UPC published the
has no legal right to corporate existence as against commentaries but it did not remit the amount
the State (8 Fletcher, pp. 62-63). due to Albert. This prompted Albert to file a
collection suit. The RTC ruled against UPC. When
Requisites of a de facto corporation (LAP) the Sheriff were about to implement the writ of
execution against the company, he discovered
1. Organized under a valid Law. that UPC is not a registered corporation.
2. Colorable Compliance - Attempt in good faith to Consequently, the president of UPC was
form a corporation according to the substituted in the writ of execution. The
requirements of the law. president invoked the separate legal
personality of the corporation as his defense.
NOTE: Issuance of Certificate of Incorporation
by SEC is a minimum requirement for the a. Is UPC a de facto corporation?
formation of the corporation in good b. Can the defense that UPC is a corporation by
faith.(Sundiang Sr. & Aquino, 2009) estoppel be invoked by the president?
c. Who is liable for the debts of the
3. Actual User - Use of corporate Powers; The corporation?
corporation must have performed the acts
which are peculiar to a corporation like A:
entering into a subscription agreement, a. NO. UPC cannot be a considered a de facto
adopting by-laws, and electing directors. corporation because it was not registered with
the SEC.
Defects resulting in creation of de facto b. NO. One who has induced another to act upon
corporation: (IM-CRAPS) his willful misrepresentation that a corporation
was duly organized and existing under the law,
1. Articles of incorporation fails to state all the cannot thereafter set up against his victim the
matters required by the Code to be stated, or principle of corporation by estoppel.
state some of them incorrectly; c. The president who negotiated with Albert is
2. Minimum paid-up capital stock has not been liable. A person acting or purporting to act on
paid to and received by the corporate treasurer behalf of a corporation which has no valid
contrary to his affidavit; existence assumes such privileges and
obligations and becomes personally liable for
contracts entered into or for other acts

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169 FACULTY OF CIVIL LAW
 The Corporation Code
performed as such agent (Albert v. University corporate existence as requirements for
Publishing Co., G.R. No. L-19118, January 30, against the State. incorporation.
1965). There is a colorable There is substantial
compliance with the compliance with the
Liabilities of officers and directors/trustees of a requirements of the requirements of the
de facto corporation law creating the law creating the
corporation. corporation.
The liabilities and penalties attending to officers Its right to exist as a
and directors/ trustees of a de jure corporation shall corporation cannot be
be the same as those of a de facto corporation. This successfully attacked
includes the liability under the criminal law. Can be attacked
or questioned by any
directly but not
party even in direct
Members of a de facto corporation cannot be collaterally.
proceeding for that
held liable as partners by third persons purpose by the State.
(De Leon, 2010)
The members of a de facto corporation cannot be Stockholders enjoy exemption from personal
held liable as partners by third persons who deal liability for corporate obligations
with them in their supposed corporate capacity,
merely on account of a technical defect in the CORPORATION BY ESTOPPEL
formation of the corporation.
A corporation by estoppel has no real existence in
On the other hand, where an attempt to organize a law. It is neither a de jure nor de facto corporation,
corporation fails by omission of some substantial but is a “mere fiction existing for the particular case,
step or proceeding required by the law, its members and vanishing where the element of estoppels is
or stockholders are liable as partners (De Leon, absent” (8 Fletcher, p. 219).
2010).
Rules governing a corporation by estoppel
The existence of a de facto corporation cannot be
collaterally attacked 1. All persons who assume to act as a corporation
knowing it to be without authority to do so shall
GR: The existence of a de facto corporation shall not be liable as general partners for all debts,
be inquired into collaterally in any private suit to liabilities and damages incurred or arising as a
which such corporation may be a party. Such result.
inquiry may be made by the Solicitor General in a 2. When any such ostensible corporation is sued
quo warranto proceeding (Sec. 20, CC). on any transaction entered by it as a
corporation or on any tort committed by it as
XPN: Collateral attack can be permitted when the such, it shall not be allowed to use as a defense
lack of right or the wrong doing of the corporation its lack of corporate personality.
is in issue because it is in violation of public policy 3. One who assumes an obligation to an ostensible
or of express or implied statutory requirement, such corporation as such, cannot resist performance
as denial of its right to enforce contracts entered thereof on the ground that there was in fact no
into without compliance with prohibitions of corporation (CC, Sec. 21).
express or implied statutory or public policy.
NOTE: Where there is no third person involved and
Thus, the defendant may question the personality of the conflict arises only among those assuming the
a foreign corporation transacting business in the form of a corporation who know that the
Philippines to maintain a suit on the ground that it corporation has not been registered, there is NO
is not duly licensed to do business in our country corporation by estoppel (Lozano v. Santos, G. R. No.
(De Leon, 2010, citing 18 Am. Jur. 2d 606 and Sec. 133 125221, June 19, 1997).
of the CC).
Q: On behalf of Ocean Quest Fishing Corporation,
De facto Corporation vs. De jure Corporation Antonio Chua and Peter Yao entered into a
contract for the purchase of fishing nets of
DE FACTO DE JURE various sizes from the Philippine Fishing Gear
One which actually Industries, Inc. They claimed that they were
One created in strict or
exists for all practical engaged in a business venture with Lim Tong
substantial conformity
purposes as a Lim, who however was not a signatory to the
with the mandatory
corporation but which agreement. The buyers failed to pay for the
statutory
has no legal right to fishing nets and the floats; hence, Philippine

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Fishing Gear filed a collection suit against Chua, Abante Tonite as a party defendant despite its
Yao and Lim Tong Lim. The suit was brought lack of juridical personality?
against the three in their capacities as general
partners, on the allegation that Ocean Quest A: YES. In rejecting the contention, the CA
Fishing Corporation was a nonexistent categorized Abante Tonite as a corporation by
corporation. The trial court ruled in favor of estoppel as the result of its having represented itself
Philippine Fishing Gear and that Chua, Yao and to the reading public as a corporation despite its not
Lim are liable as general partners. Lim contends being incorporated. The non-incorporation of
that the doctrine of corporation by estoppel Abante Tonite with the SEC was of no consequence,
applies only to Yao and Chua. Lim insists that for, otherwise, whoever of the public who would
only those who dealt in the name of the suffer any damage from the publication of articles in
ostensible corporation should be held the pages of its tabloids would be left without
liable. Since his name does not appear on any of recourse. The SC cannot disagree with the CA,
the contracts and since he never directly considering that the editorial box of the daily tabloid
transacted with the Ocean Quest Fishing disclosed that although Monica Publishing
Corporation, he cannot be held liable. Is Lim Corporation had published the tabloid on a daily
jointly liable with Chua and Yao? basis, nothing in the box indicated that Monica
Publishing Corporation had owned Abante Tonite
A: YES. Lim should be held liable jointly with Chua (Macasaet, et al.v. Co, G.R. No. 156759, June 5, 2013).
and Yao. Unquestionably, Lim benefited from the
use of the nets found inside F/B Lourdes, the boat De facto corporation vs. Corporation by estoppel
which has earlier been proven to be an asset of the
partnership. Lim, Chua and Yao decided to form a CORPORATION BY
DE FACTO
corporation. Although it was never legally formed ESTOPPEL (2004
CORPORATION
for unknown reasons, this fact alone does not Bar)
preclude the liabilities of the three as contracting There is existence in There is no existence in
parties in representation of it. Clearly, under the law law
law on estoppel, those acting on behalf of a The dealings among The dealings among
corporation and those benefited by it, knowing it to the parties on a the parties on a
be without valid existence, are held liable as general corporate basis is not corporate basis is
partners. Technically, it is true that Lim did required required
not directly act on behalf of the The State reserves the
corporation. However, having reaped the benefits right to question its Quo warranto
of the contract entered into by persons with whom existence through a proceeding is not
he previously had an existing relationship, he is quo warranto applicable
deemed to be part of said association and is covered proceeding
by the scope of the doctrine of corporation by Stockholders in a de
estoppel (Lim Tong Lim v. Philippine Fishing Gear Stockholders are liable
facto corporation are
Industries, Inc., G.R. No. 136448, November 3, 1999). as general partners for
liable as a de jure
all debts, liabilities and
corporation
Q: Francisco Co, Jr. sued Abante Tonite, a daily damages incurred
tabloid of general circulation, and its publisher
and staffs - claiming damages because of an SPECIAL CORPORATIONS
allegedly libelous article they published in an
issue. Macasaet, et al moved, among others, to A religious group is not required to be registered
drop Abante Tonite as a defendant by virtue of as a corporation
its being neither a natural nor a juridical person
that could be impleaded as a party in a civil The Corporation Code does not require any religious
action. groups to be registered as a corporation but if it
wants to acquire legal personality, its members
The RTC denied the staffs’motion, holding that should incorporate under the Code.
assuming “Abante Tonite” is not registered with
the SEC, it is deemed a corporation by estoppel Organization of a corporation sole
considering that it possesses attributes of a
juridical person, otherwise it cannot be held A corporation sole is organized by the mere filing of
liable for damages and injuries it may inflict to the verified articles of incorporation by the head of
other persons. The CA affirmed the RTC ruling. any religious denomination, sect or church with the
Was the CA correct in upholding the inclusion of SEC without the need of an issuance of a certificate of
incorporation. Once filed, a separate juridical

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character is acquired which is separate and distinct nationality of the actual incumbent of the parish
from his natural character. (the Corporation Sole or the head of the church or
NOTE: A corporation sole is not required to file by- congregation) (De Leon, 2010, citing SEC Opinions,
laws. It is governed by the rules, regulations and Nov. 6, 1990 and Sept. 21, 1993).
discipline of its religious denomination, sect or
church. Alienation of properties by a corporation sole

Nationality of a corporation sole A corporation sole may alienate properties by:

A corporation sole does not have any nationality but 1. Obtaining an order from the RTC of the
for purposes of applying nationalization laws, province where the property is situated after
nationality is determined not by the nationality of notice of the application for leave to sell or
its presiding elder but by the nationality of its mortgage has been given by publication or
members, constituting the sect in the Philippines. otherwise and by showing that it is for the
Thus, the Roman Catholic Church can acquire lands interest of the corporation that leave to sell or
in the Philippines even if it is headed by the Pope mortgage should be granted;
(Roman Catholic Apostolic Church v. Land 2. In cases where the rules, regulations and
Registration Commission, G.R. No. L-8451, December discipline of the religious denomination, sect or
20, 1957). church, religious society or order concerned
represented by such corporation sole regulate
Acquisition of property by a corporation sole the method of acquiring, holding, selling and
mortgaging real estate and personal property,
A corporation sole may acquire property even such rules, regulations and discipline shall
without court intervention by purchase, donation control, and the intervention of the courts shall
and other lawful means (Ibid). not be necessary (Sec. 113, CC).

The minority of Filipinos Catholic congregation who In a case, the Canons of the Iglesia Filipino
separated and refused to recognize the authority of Independiente provide that all real properties of the
the Roman Catholic Church has no right to claim the church can be disposed of only with the approval
property, because they committed schism. (Canelo and conformity of the laymen’s committee, the
vs. CA 171 SCRA 13) parish priest, the Diocesan Bishop, with sanction of
the Supreme Council, and finally with the approval
Q: Father X, an American priest who came from of the Supreme Bishop, as administrator of all the
New York, registered the Diocese of Bacolod of temporalities of the Church, yet the Supreme Bishop
the Roman Catholic Church which was sold motu propio a parcel of land of the IFI despite
incorporated as a corporation sole. There were the objection of the laymen, the sale is void and the
years when the head of the Diocese was a land must be reconveyed to IFI (Iglesia Filipina
Filipino, but there were more years when the Independiente v. Heirs of Bernardino Tazea, G.R. No.
heads were foreigners. Today, the head is an 179597, February 3, 2014).
American again. Y donated a piece of land
located in Bacolod City for use as a school. Which Dissolution of a corporation sole is not
statement is most accurate? (2012 Bar) necessary for it to become a corporation
aggregate
A: C. “Any corporation sole may purchase and hold
real estate and personal property for its church, There is no point in dissolving the corporation sole
charitable, benevolent or educational purposes, and of one member to enable the corporation aggregate
may receive bequests or gifts for such purposes” to emerge from it. The Corporation Code provides
(Sec. 113, CC). no specific mechanism for amending the articles of
incorporation of a corporation sole but Section 109
Being a mere administrator of the temporalities or of the Corporation Code allows the application to
properties titled in his name, the constitutional religious corporations of the general provisions
provisions requiring 60% (or 100%) Filipino governing non-stock corporations.
ownership are not applicable to the corporation
sole. The ownership thereof devolves upon the In non-stock corporations, the amendment needs
church or congregation acquiring the same. To own the concurrence of at least two-thirds of its
the property, compliance with the constitutionally membership. If such approval mechanism is made
required 60% (or 100%) Filipino capital is to operate in a corporation sole, its one member in
determined by the nationality of the constituents of whom all the powers of the corporation technically
the diocese (church or congregation), and not the belongs, needs to get the concurrence of two-thirds

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of its membership (Iglesia Evangelica Metodista v. own stocks in a SEC-registered enterprise, at
Bishop Lazaro, GR. 184088, July 6, 2010). least 60% of the capital stock outstanding and
entitled to vote of both corporations and at least
60% of the members of the board of directors of
NATIONALITY OF CORPORATIONS both corporations must be Filipino citizens
(DOUBLE 60% RULE).

Tests in determining the nationality of 2. Corporations organized abroad and registered

corporations as doing business in the Philippines under the
Corporation Code of which 100% of the capital
1. Place of Incorporation test stock entitled to vote belong to Filipinos.
2. Control test
3. Grandfather rule – Nationality is attributed to Q: What is the nationality of a corporation
the percentage of equity in the corporation used organized and incorporated under the laws of a
in nationalized or partly nationalized area. This foreign country, but owned 100% by Filipinos?
test is an exception to the Control Test and was (1998 Bar)
applied by the SEC in several cases.
4. Domiciliary test – Determined by the principal A: Under the control test of corporate nationality, a
place of business of the corporation. corporation organized and incorporated under the
laws of a foreign country, but owned 100% by
PLACE OF INCORPORATION TEST Filipinos is classified as a Philippine National.
Where the grounds for piercing the veil of corporate
In using the Place of Incorporation test, the entity are present, the corporation will follow the
nationality of a corporation is determined by the nationality of the controlling members or
state of incorporation, regardless of the nationality stockholders, since the corporation will then be
of the stockholders. considered as one and the same.

CONTROL TEST NOTE: The fact that the religious organization has
no capital stock does not suffice to escape the
In determining the nationality of a corporation, the constitutional inhibition, since it is admitted that its
control test uses the nationality of the controlling members are of foreign nationality. The purpose of
stockholders or members of the corporation. the 60% requirement is obviously to ensure that
corporations or associations allowed to acquire
A corporation organized/incorporated abroad and agricultural land or to exploit natural resources
registered as doing business in the Philippines shall be controlled by Filipinos; and the spirit of the
under the Corporation Code, of which 100% of the Constitution demands that in the absence of capital
capital stock outstanding and entitled to vote is stock, the controlling membership should be
wholly owned by Filipinos, may be considered a composed of Filipino citizens (Register of Deeds vs.
Philippine National under the Foreign Investments Ung Sui Si Temple, G.R. No. L-6776, May 21, 1955).
Act of 1991. This is the only exception to the place of
incorporation test (SEC Opinion No. 04-14, March 3, GRANDFATHER RULE
2004; De Leon, 2010). This test was adopted by the
said law as a general guideline in determining the To ensure compliance with the constitutional
nationality of corporations engaged in a limitation(s) of corporations engaging in
nationalized activity (Sec Opinion No. 07-20, nationalized activities, the nationality of a
November 20, 2007). corporation must be determined by ascertaining if
60% of the investing corporation’s outstanding
Who are considered as Philippine Nationals capital stock is owned by “Filipino citizens”, or as
interpreted, by natural or individual Filipino
Under RA 7042 (Foreign Investment Act of 1991), citizens. If such investing corporation is in turn
the following are considered Philippine Nationals: owned to some extent by another investing
corporation, the same process must be observed.
1. Corporations organized under Philippine laws
of which 60% of the capital stock outstanding Reason: One must not stop until the citizenships of
and entitled to vote is owned and held by the individual or natural stockholders of layer after
Filipino citizens. layer of investing corporations have been
established, for this is the very essence of the
NOTE: RA 7042 provides that where a Grandfather Rule (Redmont Consolidated Mines
corporation and its non-Filipino stockholders

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 The Corporation Code
Corp. vs. McArthur Mining Corp., SEC En Banc Case owned by citizens of the Philippines. They
No. 09-09-177, March 25, 2010). asserted that though MBMI owns 40% of the
shares of PLMDC (which owns majority shares of
Rules governing the application of the Narra), 40% of the shares of MMC (which owns
Grandfather Rule majority shares of McArthur) and 40% of the
shares of SMMC (which, in turn, owns majority
1. The grandfather rule should be used in shares of Tesoro), the shares of MBMI will not
determining the nationality of a corporation make it the owner of at least 60% of the capital
engaged in a partly nationalized activity. This stock of each of petitioners. They added that the
applies in cases where the stocks of a best tool used in determining the nationality of
corporation are owned by another corporation a corporation is the “control test,” embodied in
with foreign stockholders exceeding 40% of the Sec. 3 of RA 7042 or the Foreign Investments Act
capital stock of the corporation (SEC-OGC of 1991.
Opinion No. 10-31, December 9, 2010).
2. The Grandfather Rule will not apply in cases The controversy reached the CA, which used the
where the 60-40 Filipino-alien equity grandfather rule to hold that MBMI in effect
ownership in a particular natural resource owned majority of the common stocks of Narra,
corporation is not in doubt. If the stockholder et al., and thus the latter were foreign
corporation is 60% or more owned by Filipinos, corporations.
all the stock held by the stockholder
corporation is deemed to be held by Filipinos a. Was the CA wrong in applying the
(DOJ Opinion No. 19, s. 1989). Grandfather Rule instead of the Control
3. When there is doubt as to the actual extent of Test?
Filipino equity in the investee corporation, the b. Will the Grandfather Rule apply only when
SEC is not precluded from using the less than 60% of the capital stock are
Grandfather Rule (SEC-OGC Opinion No. 22-07 Filipino-owned? (2016 Bar)
dated December 7, 2007).
A:
As further defined by Dean Cesar Villanueva, the a. NO. Basically, there are two acknowledged tests
Grandfather Rule is "the method by which the in determining the nationality of a corporation:
percentage of Filipino equity in a corporation the control test and the grandfather rule. The
engaged in nationalized and/or partly nationalized "control test" is still the prevailing mode of
areas of activities, provided for under the determining whether or not a corporation is a
Constitution and other nationalization laws, is Filipino corporation, within the ambit of Sec. 2,
computed, in cases where corporate shareholders Art. XII of the 1987 Constitution, entitled to
are present, by attributing the nationality of the undertake the exploration, development and
second or even subsequent tier of ownership to utilization of the natural resources of the
determine the nationality of the corporate Philippines. When in the mind of the Court
shareholder." (Villanueva, Cesar Lapuz, Philippine there is doubt, based on the attendant facts and
Corporate Law (2001), p. 54.) circumstances of the case, in the 60-40 Filipino-
equity ownership in the corporation, then it
Note: To arrive at the actual Filipino ownership and may apply the "grandfather rule".
control in a corporation, both the direct and indirect b. NO. The assertion of Narra, et al. that “doubt”
shareholdings in the corporation are determined. only exists when the stockholdings are less than
60% fails to convince this Court. It would be
Q: Redmont, a mining company, sought to ludicrous to limit the application of the said
invalidate the Mining Production and Sharing word only to the instances where the
Agreement applications of three domestic stockholdings of non-Filipino stockholders are
mining companies, namely: Narra, Tesoro and more than 40% of the total stockholdings in a
McArthur, on the ground that at least 60% of the corporation. The corporations interested in
capital stock of Narra, et al. are owned and circumventing our laws would clearly strive to
controlled by MBMI, a 100% Canadian have “60% Filipino Ownership” at face value. It
corporation; thus they were disqualified to would be senseless for these applying
engage in mining activities though MPSAs, which corporations to state in their respective articles
are reserved only for Filipino Citizens. of incorporation that they have less than 60%
Filipino stockholders since the applications will
Narra, et al. claimed that the issue on nationality be denied instantly. Thus, various corporate
should not be raised since they are in fact schemes and layerings are utilized to
Philippine Nationals as 60% of their capital is circumvent the application of the Constitution.

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 Mercantile Law
A corporation that complies with the 60-40 Filipino 100% Filipino Owned
to foreign equity requirement can be considered a (Zero percent (0%) foreign equity)
Filipino corporation if there is no doubt as to who Code: CoFi AMMaN Co. – MiSe- US$2.5M
has the “beneficial ownership” and “control” of the
corporation. In this case, a further investigation as 1. COoperatives(Art. 26, Ch. III, R.A. 6938)
to the nationality of the personalities with the 2. Manufacture of FIrecrackers and other
beneficial ownership and control of the corporate pyrotechnic devices. (Sec. 5, R.A. 7183)
shareholders in both the investing and investee 3. Manufacture, repair, stockpiling and/or
corporations is necessary. “Doubt” refers to various distribution of biological, chemical and
indicia that the “beneficial ownership” and “control” radiological weapons and Anti-personnel
of the corporation do not in fact reside in Filipino mines (Various treaties to which the
shareholders but in foreign stakeholders. Even if at Philippines is a signatory and conventions
first glance the petitioners comply with the 60-40 supported by the Philippines)
Filipino to foreign equity ratio, doubt exists in the 4. Mass media except recording
present case that gives rise to a reasonable 5. Utilization of MArine resources (Sec. 2, Art. XII,
suspicion that the Filipino shareholders do not Constitution)
actually have the requisite number of control and 6. Manufacture, repair, stockpiling and/or
beneficial ownership in petitioners Narra, Tesoro, distribution of Nuclear weapons (Sec. 8, Art. II,
and McArthur. Constitution)
7. COckpits (Sec. 5, P.D. 449)
Moreover, the ultimate Filipino ownership of the 8. Small-scale MIning (Sec. 3, R.A. 7076)
shares must first be traced to the level of the 9. Private SEcurity agencies (Sec. 4, R.A. 5487)
Investing Corporation and added to the shares 10. Retail trade enterprises with paid-up capital of
directly owned in the Investee Corporation x x x. less than US$2.5 M(Sec. 5, R.A. 8762)
Concluding from the above-stated facts, it is quite
safe to say that petitioners McArthur, Tesoro and 80 % Filipino Owned
Narra are not Filipino since MBMI, a 100% Canadian (Up to twenty percent (20%) foreign equity)
corporation, owns 60% or more of their equity Code: Prc
interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners, 1. Private Radio Communications network (R.A.
namely: MMI, SMMI and PLMDC. Going further and 3846)
adding to the picture, Noticeably, the ownership of
the "layered" corporations boils down to MBMI, 75 % Filipino Owned
Olympic or corporations under the "Alpha" group (Up to twenty percent (25%) foreign equity)
wherein MBMI has joint venture agreements with, Code: LoRD F
practically exercising majority control over the
corporations mentioned. In effect, whether looking 1. Contracts for the construction and repair of
at the capital structure or the underlying LOcally-funded public works (Sec. 1, CA 541, LOI
relationships between and among the corporations, 630) except:
petitioners are NOT Filipino nationals and must be a) infrastructure/development projects
considered foreign since 60% or more of their covered in R.A. 7718; and
capital stocks or equity interests are owned by b) projects which are foreign funded or
MBMI assisted and required to undergo
international competitive bidding (Sec.
Hence, the Court is correct in using the Grandfather 2[a], R.A. 7718)
Rule in determining the nationality of the
petitioners (Narra Nickel Mining and Development 2. Private Recruitment, whether for local or
Corp., et al. v. Redmont Consolidated Mines, G.R. No. overseas employment (Art. 27, P.D. 442)
195580, January 28, 2015). 3. Contracts for the construction of Defense-
related structures; (Sec. 1, CA 541)
Note: "Corporate layering" is admittedly allowed 4. Under the Flag Law, in the purchase of articles
by the FIA; but if it is used to circumvent the for the Government, preference shall be given
Constitution and pertinent laws, then it becomes to materials and supplies produced, made, or
illegal. manufactured in the Philippines, and to
domestic entities. Domestic entities means any
NATIONALIZED ACTIVITIES RESERVED FOR citizen of the Philippines or commercial
FILIPINOS UNDER THE CONSTITUTION company at least 75% of the capital of which is
AND SPECIAL LAWS owned by citizens of the Philippines (Sec. 1, CA
138)

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175 FACULTY OF CIVIL LAW
 The Corporation Code
70 % Filipino Owned registered with the SEC. Its authorized capital
(Up to twenty percent (30%) foreign equity) stock consists of voting common shares and
Code: AdPawn non-voting preferred shares, with equal par
values of P100.00/share. Currently, the issued
1. Advertising (Art. XVI, Constitution) and outstanding capital stock of BellPhil
2. Corporations engaged in pawnshop business consists only of common shares shared between
(Sec. 8, P.D. 114) Bayani Cruz, a Filipino with 60% of the issued
common shares, and Bernard Fleet, a Canadian,
60 % Filipino Owned with 40%.
(Up to twenty percent (40%) foreign equity)
Code: Go LEARN CUPIDCo To secure additional working fund, BellPhil
issued preferred shares to Bernard Fleet
1. Contracts for the supply of materials, goods and equivalent to the currently outstanding
commodities to GOCC, agency or municipal common shares. A suit was filed questioning the
corporation (Sec. 1, R.A. 5183) corporation action on the ground that the
2. Ownership of private Lands (Sec. 7, Art. XII, foreign equity holdings in the company would
Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A. now exceed 40% foreign equity limit allowed
9182) under the Constitution for public utilities.
3. Ownership/establishment and administration
of Educational institutions (Sec. 4, Art. XIV, Rule on the legality of Bernard Fleet’s current
Constitution) holdings. (2013 Bar)
4. Adjustment Companies (Sec. 323, P.D. 613)
5. Culture, production, milling, processing, trading A: The holding of Bernard Fleet equivalent to the
excepting retailing, of rice and corn and outstanding common shares is illegal. His holdings
acquiring, by barter, purchase or otherwise, of preferred shares could not exceed 40%. Since the
Rice and corn and the by-products thereof (Sec. constitutional requirement of 60% Filipino
5, P.D. 194) ownership of the capital of public utilities applies
6. Exploration, development and utilization of not only to voting control but also to beneficial
Natural resources (Sec. 2, Art. XII, Constitution) ownership of the corporation, it should also apply to
7. Ownership of Condominium units where the the preferred shares. Preferred shares are also
common areas in the condominium project are entitled to vote in certain corporate matters. The
co-owned by the owners of the separate units state shall develop a self-reliant and independent
or owned by a corporation (Sec. 5, R.A. 4726) national economy effectively controlled by Filipinos
8. Operation and management of public Utilities The effective control here should be mirrored
(Sec. 11, Art. XII, Constitution; Sec. 16, CA 146) across the board on all kinds of shares (Gamboa v.
9. Project Proponent and Facility Operator of a Teves, G.R. No. 176579, June 28, 2011; 1987
BOT project requiring a public utilities Constitution, Art. II, Sec. 19).
franchise (Sec. 11, Art. XII, Constitution; Sec. 2a,
R.A. 7718)
10. Manufacture, repair, storage and/ or CORPORATE JURIDICAL PERSONALITY
distribution of products/ Ingredients requiring
PNP clearance (R.A. 7042 as amended by R.A.
8179) DOCTRINE OF SEPARATE JURIDICAL
11. Operation of Deep sea commercial fishing PERSONALITY
vessel (Sec. 27, R.A. 8550)
12. Corporations engaged in Coastwise shipping The doctrine of corporate juridical personality
(Sec. 806, P.D. 1464) states that a corporation is a juridical entity with
legal personality separate and distinct from those
40 % Filipino Owned acting for and in its behalf and, in general, from the
(Up to twenty percent (60%) foreign equity) people comprising it (Francisco v. Mallen Jr. G.R. No.
Code: FI [SEC] 173169, September 22, 2010).

1. Financing companies regulated by the SEC (Sec. Q: The Olongapo City filed a complaint for sum
6, R.A. 5980 as amended by R.A. 8556) of money and damages against Olongapo City
2. Investment houses regulated by the SEC (Sec. 5, Water District (OCWD). It alleged that OCWD
P.D. 129 as amended by R.A. 8366) failed to pay its electricity bills to Olongapo City
and remit its payment under the contract to pay,
Q: Bell Philippines, Inc. (BellPhil.) is a public pursuant to OCWD’s acquisition of Olongapo
utility company, duly incorporated and City’s water system. In the interim, OCWD

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 Mercantile Law
entered into a Joint Venture Agreement with Note between Puyat and NSI, represented by
SBMA, Biwater and DMCI. Pursuant to this Nuccio. It was agreed that Puyat would extend a
agreement, Subic Water – a new corporate entity credit line with a limit of P500,000.00 to NSI, to
– was incorporated, with the following equity be paid within 30 days from the time of the
participation from its shareholders: SBMA signing of the document. The loan carried an
19.99% or 20%; OCWD 9.99% or 10%; Biwater interest rate of 17% per annum, or at an
29.99% or 30%; and DMCI 39.99% or 40%. adjusted rate of 25% per annum if payment is
Subic Water was granted the franchise to beyond the stipulated period. NSI and Nuccio
operate and to carry on the business of received a total amount of P300,000.00 and
providing water and sewerage services in the certain machineries intended for their business.
Subic Bay Free Port Zone, as well as in Olongapo The proposed business, however, failed to
City. Hence, Subic Water took over OCWD’s materialize. When the petitioners defaulted in
water operations in Olongapo City. To finally the payment of the loan, Puyat filed a collection
settle their money claims against each other, suit alleging mainly that the NSI and Nuccio still
Olongapo City and OCWD entered into a owe him the value of the [Link] RTC
compromise agreement. ordered them, jointly and severally, to pay the
balance. CA also affirmed the RTC ruling that
To enforce the compromise agreement, they are one and the same. Did CA commit a
Olongapo City filed a motion for the issuance of reversible error in affirming the RTC’s decision
a writ of execution with the RTC. OCWD’s former holding them jointly and severally liable for the
counsel filed a manifestation alleging that amount claimed?
OCWD had already been dissolved and that
Subic Water is now the former OCWD. Because A: YES. Piercing the veil of corporate fiction is not
of this assertion, Subic Water also filed a justified. The NSI and Nuccio are not one and the
manifestation informing the RTC that as borne same. The records of the case, however, do not show
out by the articles of incorporation and general that Nuccio had control or domination over NSI’s
information sheet of Subic Water, OCWD is not finances. The mere fact that it was Nuccio who, in
Subic Water. The manifestation also indicated behalf of the corporation, signed the MOA is not
that OCWD was only a ten percent (10%) sufficient to prove that he exercised control over the
shareholder of Subic Water; and that its 10% corporation’s finances. Neither the absence of a
share was already in the process of being board resolution authorizing him to contract the
transferred to Olongapo City pursuant to a Deed loan nor NSI’s failure to object thereto supports this
of Assignment. conclusion. These may be indicators that, among
others, may point the proof required to justify the
Can Subic Water be made liable under the writ piercing the veil of corporate fiction, but by
of execution issued by RTC in favor of Olongapo themselves, they do not rise to the level of proof
City? required to support the desired conclusion. It
should be noted in this regard that while Nuccio was
A: NO. OCWD and Subic Water are two separate and the signatory of the loan and the money was
different entities. Subic Water clearly demonstrated delivered to him, the proceeds of the loan were
that it was a separate corporate entity from OCWD. unquestionably intended for NSI’s proposed
OCWD is just a ten percent (10%) shareholder of business plan. That the business did not materialize
Subic Water. As a mere shareholder, OCWD’s is not also sufficient proof to justify a piercing, in the
juridical personality cannot be equated nor absence of proof that the business plan was a
confused with that of Subic Water. It is basic in fraudulent scheme geared to secure funds from the
Corporation Law that a corporation is a juridical respondent for the petitioners’ undisclosed goals.
entity vested with a legal personality separate and NSI’s liability should not attach to Nuccio (Saverio v.
distinct from those acting for and in its behalf and, Puyat, G.R. No. 186433, November 27, 2013).
in general, from the people comprising it. Under this
corporate reality, Subic Water cannot be held liable Q: Richard owns 90% of the shares of the capital
for OCWD’s corporate obligations in the same stock of GOM Co. On one occasion, GOM
manner that OCWD cannot be held liable for the represented by Richard as President and
obligations incurred by Subic Water as a separate General Manager executed a contract to sell a
entity (Olongapo City v. Subic Water and Sewerage subdivision lot in favor of Tomas. For failure of
Co., Inc., G.R. No. 171626, August 6, 2014). GOM to develop a subdivision, Tomas filed an
action for rescission and damages against GOM
Q: Puyat granted a loan to NS International, Inc. and Richard. Will the action prosper? Explain
(NSI). The loan was made pursuant to the (1996 Bar)
Memorandum of Agreement and Promissory

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A: The action will prosper against GOM Corporation 5. Changes in individual membership – corporation
but it shall not be the same with regard to the action remains unchanged and unaffected in its
against Richard. Such is the case because Richard identity by changes in its individual
has a separate and distinct personality from the membership or ownership of its stocks.
corporation. His mere ownership of 90% of the
shares of the capital stock of GOM does not make Q: As a result of perennial business losses, a
him as one with the corporation. Mere ownership by corporation's net worth has been wiped out. In
a single stockholder, or by another corporation, of fact, it is now in negative territory. Nonetheless,
all or nearly all of the capital stock of a corporation the stockholders did not like to give up.
is not itself a sufficient ground for disregarding the Creditor-banks, however, do not share the
separate corporate personality (Secosa v. Heirs of confidence of the stockholders and refuse to
Erwin Suarez Francisco, G.R. No. 160039, June 29, grant more loans.
2004).
a. What tools are available to the stockholders
Significance of the doctrine of separate to replenish capital?
personality b. Assuming that the corporation continues to
operate even with depleted capital, would
1. Liability for acts or contracts – As a general rule, the stockholders or the managers be
the obligation of the corporation is not the solidarily liable for the obligations incurred
liability of the stockholders, officers or by the corporations? (1999 Bar)
directors (1992, 1996, 2010 Bar).
A:
A corporation may not, generally, be made to a. In the case where the creditor-banks refused to
answer for acts or liabilities of its stockholders grant more loans to the stockholders, the
or those of the legal entities to which it may be stockholders can publicly sell their shares and
connected, and vice versa (Cease vs. CA, G.R. No. assets. They can also demand payment from
L-33172, October 18, 1979). Note: XPN to this is stockholders of their unpaid subscriptions
the reverse piercing of the corporate veil. where there is no due date inscribed in the
subscription contract.
2. Right to bring actions – may bring civil and b. No, the stockholders or managers cannot be
criminal actions in its own name in the same held solidarily liable for the obligations
manner as natural persons (Art. 46, Civil Code). incurred by the corporation. They cannot be
held personally liable for as long as their acts
NOTE: Rights belonging to the corporation are for and in behalf of the corporation, within
cannot be invoked by the stockholders (or the scope of their authority and in good faith.
directors and officers) even if the latter owns Also, a corporation has a personality separate
substantial majority of the shares of the shares and distinct from its individual stockholders
in that corporation and rights of the (Consolidated Bank and Trust Corp. v. CA, G.R.
stockholders, directors and officers cannot be No. 114286, April 19, 2001).
invoked by the corporation (Stonehill vs.
Diokno, G.R. 19550, June 19, 1967). Stockholders are not the owners of corporate
properties and assets
3. Right to acquire and possess property – property
conveyed to or acquired by the corporation is in The interest of the shareholder in the properties of
law the property of the corporation itself as a the corporation is inchoate only. The interest of the
distinct legal entity and not that of the shareholder on a particular property becomes
stockholders or members (Art. 44[3], Civil actual, direct and existing only upon the liquidation
Code). of the assets of the corporation and provided that
the same property is assigned to the shareholder
NOTE: The interest of the stockholders over the concerned.
properties are merely inchoate (Saw vs. CA, G.R.
No. 90580, April 8, 1991; 1996, 2000 Bar). Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are
4. Acquisition of jurisdiction – service of summons regarded as equity in trust for the payment of
may be made only on the president, general corporate creditors which are preferred over the
manager, corporate secretary, treasurer or in- stockholders in the distribution of corporate assets.
house counsel (Rules of Court, Rule 14, Sec. 11). The distribution of corporate assets and property
cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of

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the corporation unless the indispensable conditions Dick Seldon issued a check for P50,000 in favor
and procedures for the protection of corporate of Shamron. A week later, Turtle sold the tractor
creditors are followed (Yamamoto v. Nishino to Briccio Industries (Briccio) for P 60,000.
Leather Industries, Inc., G.R. No. 150283, April 16, Briccio discovered that the engine of the tractor
2008). was reconditioned so he refused to pay Turtle.
As a result, Dick Seldon ordered “Stop Payment”
Q: RISCO ceased operation due to business of the check issued to Shamron. Shamron sued
reverses. Due Aznar et. al’s desire to rehabilitate Turtle and Dick Seldon. Shamron obtained a
RISCO, they contributed a total amount of favourable judgment holding co-defendants
P212,720.00 which was used in the purchase of Turtle and Dick Seldon jointly and severally
the three (3) parcels of land located in various liable. Comment on the decision of the trial
areas in the Cebu Province. Pursuant to the court. Discuss fully. (1995 Bar)
Minutes of the Special Meeting of the Board of
Directors of RISCO, the contributed amounts A: I disagree with the trial court’s ruling. Dick
constitute liens and encumbrances on the Seldon should not be solidarily liable with Turtle
aforementioned properties as annotated in the because of his position as President and Manager of
titles of the said lots. Such annotation was made. the corporation. Turtle Corporation has a separate
Thereafter, various subsequent annotations juridical personality from its officers. Corporate
were made on the same titles in favor of PNB. As officers cannot be personally liable for the
a result, a Certificate of Sale was issued in favor consequences of their acts, for as long as these are
of PNB, being the lone and highest bidder of the for and behalf of the corporation, within the scope
three (3) parcels of land and was also issued of their authority and in good faith (Consolidated
Transfer Certificate of Title over the said parcels Bank and Trust Corp. v. CA, G.R. No. 114286, April 19,
of land. Aznar, et. al filed a complaint seeking the 2001).
quieting of their supposed title to the subject
properties. They alleged that the subsequent Entitlement of corporations to Constitutional
annotations on the titles are subject to the prior rights
annotation of their liens and encumbrances. On
the other hand, PNB assert that, as mere Corporations are entitled to the following rights
stockholders of RISCO, they do not have any under the constitution:
legal or equitable right over the properties of
the corporation. Do the defendants herein 1. Right to Due Process (Sec. 1, Art. III,
(Aznar et. al.) have the legal or equitable rights Constitution)
over the subject properties? 2. Right against unreasonable searches and
seizures (Sec. 2, ibid)
A: NO. Stockholders cannot claim ownership over
corporate properties by virtue of the Minutes of a NOTE: Corporations are not entitled to the right
Stockholder’s Meeting which merely evidence a against self-incrimination, being a mere creature of
loan agreement between the stockholders and the law (Bataan Shipyard & Engineering v. PCGG, G.R. No.
corporation. As such, their interest over the 75885, May 27, 1987).
properties is merely inchoate (PNB v. Merelo B.
Aznar, et al, G.R. No. 171805, May 30, 2014). It cannot refuse to produce the books and papers if
Stockholders are not real parties in interest to lawfully required by the appropriate government
claim damages and recover compensation agency. It is presumed that they are incorporated
for the benefit of the public thereby making its
The personality of a corporation is distinct and power limited.
separate from the personalities of its stockholders.
Hence, its stockholders are not themselves the real LIABILITY FOR TORTS AND CRIMES
parties in interest to claim and recover
compensation for the damages arising from the A corporation may be held liable for torts
wrongful attachment of corporate assets. Only the
corporation is the real party in interest for that The corporation is liable for every tort which it
purpose (Stronghold Insurance Company, Inc. v. expressly directs or authorizes (PNB v. CA, G.R. No.
Cuenca, G.R. No. 173297, March 6, 2013). L-27155, May 18, 1978).

Q: Ronald Sham doing business under the name Reason for liability in cases of torts
of SHAMRON Machineries (Shamron) sold to
Turtle Mercantile (Turtle) a diesel farm tractor. A corporation is civilly liable in the same manner as
In payment, Turtle’s President and Manager natural persons for torts, because generally

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speaking, the rules governing the liability of a NOTE: While the court may allow the grant of moral
principal or master for a tort committed by an agent damages to corporation, it is not automatically
or servant are the same, whether the servant or granted; there must still be proof of the existence of
agent is a natural or artificial person (Ibid) the factual basis of the damage and its causal
relation to the defendant’s acts. Moral damages is
Corporations incapable of intent designed to compensate the claimant for actual
injury suffered and not to impose a penalty on the
Corporations are incapable of intent, hence they wrongdoer (Crystal vs. BPI, G.R. No. 172428,
cannot commit felonies that are punishable under November 28, 2008)
the Revised Penal Code. They cannot commit crimes
that are punishable under special laws because Q: "Exposé" is a radio documentary program
crimes are personal in nature. In addition, the hosted by Rima and Alegre. It is aired every
penalty of imprisonment cannot be imposed. morning over DZRC-AM which is owned by FBNI.
However, the corporation may be dissolved for One morning, Rima and Alegre exposed various
violations of the Corporation Code (CC, Sec. 144). alleged complaints from students, teachers and
parents against AMEC and its administrators.
Liability of a corporation in cases of crimes Claiming that the broadcasts were defamatory,
AMEC and Ago, as Dean of AMEC’s College of
GR: Since a corporation is a mere creation of legal Medicine, filed a complaint for damages against
fiction, it cannot be held liable for crimes committed FBNI, Rima and Alegre. As a defense, FBNI claims
by its officers; in such case the responsible officers that AMEC is not entitled to moral damages
would be criminally liable (People v. Tan Boon Kong, because it is a corporation. Is AMEC is entitled to
G.R. No. L-32066, March 15, 1930). moral damages?

XPN: If the penalty of the crime is only fine or A: YES. AMEC is entitled to moral damages. A
forfeiture of license or franchise (Ching v Secretary juridical person is generally not entitled to moral
of Justice, supra). damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as
RECOVERY OF MORAL DAMAGES wounded feelings, serious anxiety, mental anguish
or moral shock. Nevertheless, AMEC’s claim for
Recovery of moral damages moral damages falls under item 7 of Article 2219 of
the Civil Code. This provision expressly authorizes
GR: A corporation is not entitled to moral damages the recovery of moral damages in cases of libel,
because it has no feelings, no emotions, no senses slander or any other form of defamation. Article
(ABS-CBN Broadcasting Corp. v. CA, G.R. No. 128690 2219(7) does not qualify whether the plaintiff is a
January 21, 1999). natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain
XPNs: for libel or any other form of defamation and claim
1. The corporation may recover moral damages for moral damages (Filipinas Broadcasting Network,
under item 7 of Article 2219 of the New Civil Inc., v. AMEC-BCCM, supra).
Code because said provision expressly
authorizes the recovery of moral damages in Q: Meralco and T.E.A.M. Electronics Corporation
cases of libel, slander, or any other form of (TEC) were parties to two separate contracts for
defamation. the sale of electric energy. Meralco undertook to
supply TEC’s building known as DCIM with
NOTE: Article 2219(7) does not qualify electric power. One day, Meralco conducted a
whether the injured party is a natural or surprise inspection of the electric meters
juridical person. Therefore, a corporation, as a installed at the DCIM building. Two meters
juridical person, can validly complain for libel were found to be allegedly tampered with and
or any other form of defamation and claim for did not register the actual power consumption
moral damages (Filipinas Broadcasting in the building. Meralco informed TEC of the
Network, Inc. v. AMEC-BCCM, G.R. No. 141994, results of the inspection and demanded from the
January 17, 2005). latter the payment of its unregistered
consumption. TEC failed to pay the same.
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the business For failure to pay, Meralco disconnected the
realm (MERALCO v. T.E.A.M. Electronics Corp., et. al., electricity supply to the DCIM building. TEC
G.R. No. 131723, December 13, 2007). demanded from Meralco the reconnection of
electrical service, claiming that it had nothing to

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do with the alleged tampering but the latter and the liability will attach directly to the
refused to heed the demand. The ERB officers and stocholders.
immediately ordered the reconnection of the 2. Where there are two (2) corporations, they will
service but Meralco did not immediately be merged into one, the one being merely
comply. TEC filed a complaint for damages regarded as the instrumentality, agency,
against Meralco before the RTC. The RTC ruled conduit or adjunct of the other.
in favor of TEC and it awarded, among others,
moral damages. Is TEC entitled to moral NOTE: Notwithstanding that the corporate veil has
damages? been pierced, the corporation continues for other
legitimate objectives, the corporate character is not
A: NO. TEC is not entitled to moral damages. TEC’s necessarily abrogated (Reynoso IV vs. CA, G.R. Nos.
claim was premised allegedly on the damage to its 116124-25, November 22, 2000).
goodwill and reputation. As a rule, a corporation is
not entitled to moral damages because, not being a GROUNDS FOR APPLICATION OF DOCTRINE
natural person, it cannot experience physical
suffering or sentiments like wounded feelings, It applies upon the following circumstances: (FACO)
serious anxiety, mental anguish and moral
shock. The only exception to this rule is when the a. if the fiction is used to perpetrate fraud (Fraud
corporation has a reputation that is debased, Test)
resulting in its humiliation in the business realm. b. if the complete control of one corporate entity
But in such a case, it is imperative for the claimant to another which perpetuated the wrong is the
to present proof to justify the award. It is essential proximate cause of the injury (Control Test)
to prove the existence of the factual basis of the c. if a certain corporation is only an adjunct or an
damage and its causal relation to Meralco’s acts. In extension of the personality of the corporation
the present case, the records are bereft of any (Alter ego or Instrumentality Test)
evidence that the name or reputation of TEC/TPC d. if the fiction is pierced to make the stockholders
has been debased as a result of Meralco’s acts liable for the obligation of the corporation
(MERALCO v. T.E.A.M. Electronics Corpet al., supra). (Objective Test)

DOCTRINE OF PIERCING THE CORPORATE VEIL Q: Rosario Lorezo received, upon inquiry, a
letter from the Social Security System, informing
The doctrine of piercing the corporate veil is the her that she cannot avail of their retirement
doctrine that allows the State to disregard, for benefits since per their record she has only paid
certain justifiable reasons, the notion that a 16 months. Aggrieved, Lorezo then filed her
corporation has a personality separate and distinct Amended Petition before the SSC, alleging that
from the persons composing it. she was employed as laborer in. Cataywa
managed by Jose Marie Villanueva in 1970 but
Where it appears that business enterprises are was reported to the SSS only in 1978. She alleged
owned, conducted and controlled by the same that SSS contributions were deducted from her
parties, law and equity will disregard the legal wages from 1970 to 1995, but not all were
fiction that these corporations are distinct entities remitted to the SSS which, subsequently, caused
and shall treat them as one. This is in order to the rejection of her claim. She also impleaded
protect the rights of third persons (Vicmar Talisay Farms, Inc. by virtue of its Investment
Development Corporation v. Elarcos, et al., G.R. No. Agreement with Mancy and Sons Enterprises.
202215, December 09, 2015, Del Castillo, J.). She also prayed that the veil of corporate fiction
be pierced since she alleged that Mancy and
In order to justify the piercing of the corporate veil, Sons Enterprises and Manuel and Jose Marie
allegation or proof of fraud or other public policy Villanueva are one and the same. Should Mancy
considerations is needed (Hacienda Luisita and Sons Enterprises’ veil of corporate fiction be
Incorporated vs. Presidential Agrarian Reform pierced?
Council, G.R. No. 171101, November 22, 2011).
A: NO. The Court has expressed the language of
NOTE: This is an exception to the Doctrine of piercing doctrine when applied to alter ego cases, as
Separate Corporate Entity. follows: Where the stock of a corporation is owned
by one person whereby the corporation functions
Effect of piercing the corporate veil only for the benefit of such individual owner, the
corporation and the individual should be deemed
1. The corporation will be treated merely as an the same.
association of persons -undertaking a business

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This Court agrees with the petitioners that there is Kukan International Corporation (KIC) filed a
no need to pierce the corporate veil. Lorezo failed to third-party complaint, alleging that it was the
substantiate her claim that Mancy and Sons owner of the levied properties. Morales prayed
Enterprises, Inc. and Manuel and Jose Marie that the principle of piercing the veil of
Villanueva are one and the same. She based her corporate fiction be applied in order to satisfy
claim on the SSS form wherein Manuel Villanueva the judgment debt of Kukan. The RTC granted
appeared as employer. However, this does not the motion of Morales and declared KIC and
prove, in any way, that the corporation is used to Kukan as one and the same corporation. The CA
defeat public convenience, justify wrong, protect affirmed the RTC. Did the RTC properly apply the
fraud, or defend crime, or when it is made as a shield doctrine?
to confuse the legitimate issues, warranting that its
separate and distinct personality be set aside. Also, A: NO. The principle of piercing the veil of
it was not alleged nor proven that Mancy and Sons corporate fiction, and the resulting treatment of
Enterprises, Inc. functions only for the benefit of two related corporations as one and the same
Manuel Villanueva, thus, one cannot be an alter ego juridical person with respect to a given transaction,
of the other (Hacienda Cataywa/Manuel Villanueva, is basically applied only to determine established
et al. v. Rosario Lorezo, G.R. No. 179640, March 18, liability; it is not available to confer on the court a
2015). jurisdiction it has not acquired over a party not
impleaded in a case. Elsewise put, a corporation not
Q: Mr. Pablo, a rich merchant in his early forties, impleaded in a suit cannot be subject to the courts
was a defendant in a lawful suit which could process by piercing the veil of its corporate fiction.
subject him to substantial damages. A year In that situation, the court has not acquired
before the court rendered judgment, Pablo jurisdiction over the corporation and, hence, any
sought his lawyer’s advice on how to plan his proceedings taken against that corporation and its
estate to avoid taxes. He suggested that he property would infringe on its right to due process.
should form a corporation with himself, his wife, Aguedo Agbayani, a recognized authority on
and his children (all students and still Commercial Law, stated that piercing the veil of
unemployed) as stockholders and then transfer corporate entity applies to determination of liability
all his assets and liabilities to this corporation. not of jurisdiction because the doctrine of piercing
Mr. Pablo followed the recommendation of his the veil of corporate fiction comes to play only
lawyer. 1 year later, the court rendered during the trial of the case after the court has
judgment against Pablo and the plaintiff sought already acquired jurisdiction over the corporation.
to enforce this judgment. The sheriff, however, Hence, before this doctrine can be applied, based
could not locate any property in the name of on the evidence presented, it is imperative that the
Pablo and therefore returned the writ of court must first have jurisdiction over the
execution unsatisfied. What remedy, if any, is corporation.
available to the plaintiff? (1994 Bar)
Two-fold Implication:
A: The plaintiff can avail himself of the doctrine of 1. The court must first acquire jurisdiction over
piercing the veil of corporate fiction which can be the corporation or corporations involved
invoked when a corporation is formed or used in before its or their separate personalities are
avoiding a just obligation. While it is true that a disregarded; and
family corporation may be organized to pursue an 2. The doctrine of piercing the veil of corporate
estate tax planning of which is not per se illegal or entity can only be raised during a full-blown
unlawful (Delpher Trades Corp. v. IAC, G.R. No L- trial over a cause of action duly commenced
69259, January 26, 1988). The factual settings, involving parties duly brought under the
however, indicate the existence of a lawful suit that authority of the court by way of service of
could subject Pablo to a substantial amount of summons or what passes as such service
damages. It would thus be difficult for Pablo to (Kukan International Corp v. Reyes, G.R. No.
convincingly assert that the incorporation of the 182729, September 29, 2010).
family corporation was intended merely as a case of
“estate tax planning” (Tan Boon Bee v. Jarencio, G.R. Q: Ma. Concepcion Lacsa was riding a Goldline
No. 41337, June 30, 1988). passenger bus owned and operated by Travel &
Tours Advisers, Inc. (TTAI) when the bus collided
Q: Romeo Morales was able to obtain a favorable with a passenger jeepney, which resulted to her
judgment for a sum of money against Kukan, Inc. instant death. The Heirs of Concepcion instituted
With the judgment attaining finality, the sheriff a suit in the RTC for damages due to breach of
levied on execution various personal properties contract, with the complaint set against “Travel &
found at what was supposed to be Kukan’s office. Tours Advisers, Inc. (Goldline)” and the bus driver.

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The RTC ruled in favor of the Heirs, holding TTAI alter ego or that CBB and Binswanger are one and
liable to pay the heirs damages and expenses. A the same corporation. There are also indications of
writ of execution was served upon TTAI and badges of fraud in Binswanger’s incorporation. It
Cheng, operator of the Goldline bus. Cheng failed was a business strategy to evade CBB’s financial
to settle the judgment, thus a tourist bus was liabilities, including its outstanding obligation to
levied. Livesey (Livesey v. Binswanger Philippines, Inc. and
Keith Elliot, G.R. No. 177493, March 19, 2014).
Gold Line filed a third-party claim, claiming that
the levied tourist bus be returned to it because it NOTE: There appears to be a lack of conclusive
was its owner and that it had not been made a yardstick as to when the court may pierce the veil
party to the case, and it was a corporation of corporate fiction of a corporation which has not
entirely different from TTAI. Is Gold Line’s been brought to its jurisdiction by summons,
contention correct? voluntary appearance, or other recognized modes
of acquiring jurisdiction. To be safe, any bar
A: NO. There is sufficient factual basis to find that question should be answered based on similarity
Goldline and TTAI were one and the same entity, with the facts of each case (Divina, 2014).
specifically: (a) documents submitted showing that
Cheng, who claimed to be the operator of TTAI,is also Circumstances which do not warrant the
the President/Manager and an incorporator of Gold piercing of the corporate veil
Line; and (b) Travel and Tours Advisers, Inc. had
been known in Sorsogon as Goldline (Gold Line Tours, The mere fact that: (FiCoS)
Inc. v. Heirs of Maria Concepcion Lacsa, G.R. No.
159108, June 18, 2012). 1. A corporation owns Fifty (50%) of the capital
stock of another corporation, or the majority
Q: Eric Livesey filed a complaint for illegal ownership of the stocks of a corporation is not
dismissal with money claims against CBB per se a cause for piercing the veil.
Philippines Strategic Property Services, Inc. 2. Two corporations have Common directors or
(CBB) and Paul Dwyer, its president. Livesey and same or single stockholder who has all or nearly
CBB entered into a compromise agreement all of the capital stock of both corporations is
Unless and until the agreement is fully satisfied, not in itself sufficient ground to disregard
CBB shall not sell, alienate, or otherwise dispose separate corporate entities.
of all or substantially all of its assets or business; 3. There is a Substantial identity of the
suspend its business operations; substantially incorporators of the 2 corporations does not
change the nature of its business; and declare necessarily imply fraud and does not warrant
bankruptcy or insolvency. piercing the corporate veil.

CBB failed to pay the rest of the amount as the Q: Land Bank of the Philippines (LBP) extended
company ceased operations. Livesey moved for a series of credit accommodations to ECO using
the issuance of an alias writ of execution, the trust funds of PVTA. The proceeds of the
alleging that CBB and Keith Elliot have credit accommodations were received on behalf
organized another corporation, “Binswanger of ECO by Emmanuel Oñate. Upon maturity of
Philippines, Inc.” He claimed that there was the loans, ECO failed to pay the same. ECO then
evidence showing that CBB and Binswanger submitted a Plan of Payment to LBP, however,
Philippines, Inc. are one and the same the latter rejected the same. LBP filed a
corporation, pointing out that CBB stands for complaint for collection of sum of money against
Chesterton Blumenauer Binswanger. ECO and Oñate. LBP contends that the
personalities of Oñate and of ECO should be
Is the doctrine of piercing the veil of corporate treated as one holding Oñate liable for the loans
fiction applicable? incurred by ECO from Land Bank. Is Oñate
jointly and severally liable with ECO for the
A: YES. Shortly after Elliot forged the compromise loans incurred from LBP?
agreement with Livesey, CBB ceased operations.
There was an indubitable link between CBB’s A: NO. Oñate should not be held jointly and
closure and Binswanger’s incorporation. CBB severally liable with ECO. A corporation, upon
ceased to exist only in name; it re–emerged — to coming into existence, is invested by law with a
avoid payment by CBB of the last two installments personality separate and distinct from those
of its monetary obligation to Livesey, as well as its persons composing it as well as from any other legal
other financial liabilities. A reasonable mind would entity to which it may be related. By this attribute, a
arrive at the conclusion that Binswanger is CBB’s stockholder may not, generally, be made to answer

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183 FACULTY OF CIVIL LAW
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for acts or liabilities of the said corporation, and vice 2. Such control must have been used by the
versa. The mere fact that Oñate owned the majority defendant to commit fraud or wrong, to
of the shares of ECO is not a ground to conclude that perpetuate the violation of a statutory or other
Oñate and ECO are one and the same. Mere positive legal duty, or dishonest and unjust act
ownership by a single stockholder of all or nearly all in contravention of plaintiff’s legal right (Fraud
of the capital stock of a corporation is not by itself test); and
sufficient reason for disregarding the fiction of 3. The aforesaid control and breach of duty must
separate corporate personalities. Neither is the fact have proximately caused the injury or unjust
that the name “ECO” represents the first three loss complained of (Harm test).
letters of Oñate’s name sufficient reason to pierce
the veil. Even if it did, it does not mean that the said 1. Instrumentality or Control Test
corporation is merely a dummy of Oñate. A
corporation may assume any name provided it is This test requires that the subsidiary be completely
lawful. There is nothing illegal in a corporation under the control and domination of the parent. It
acquiring the name or as in this case, the initials of examines the parent corporation’s relationship with
one of its shareholders (Land Bank ofthe Philippines the subsidiary. It inquires whether a subsidiary
v. CA, et al., G.R. No. 127181, September 4, 2001). corporation is so organized and controlled and its
affairs are so conducted as to make it a mere
TEST IN DETERMINING APPLICABILITY instrumentality or agent of the parent corporation
such that its separate existence as a distinct
The following are the tests in determining the corporate entity will be ignored. It seeks to establish
applicability of the doctrine of piercing the whether the subsidiary corporation has no
corporate veil (ECAO) autonomy and the parent corporation, though
acting through the subsidiary in form and
1. When the corporation is used to defeat public appearance, “is operating the business directly for
convenience as when the corporate fiction is itself.
used as a vehicle for the evasion of an existing
obligation (Equity Cases) 2. Fraud Test
2. In fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend This test requires that the parent corporation’s
a crime (Control Test) conduct in using the subsidiary corporation be
3. In Alter ego cases, where a corporation is unjust, fraudulent or wrongful. It examines the
merely a farce since it is a mere alter ego or relationship of the plaintiff to the corporation. It
business conduit of a person, or where the recognizes that piercing is appropriate only if the
corporation is so organized and controlled and parent corporation uses the subsidiary in a way that
its affairs are so conducted as to make it merely harms the plaintiff creditor. As such, it requires a
an instrumentality, agency, conduit or adjunct showing of “an element of injustice or fundamental
of another corporation (Sarona vs. NLRC, Royale unfairness.”
Security Agency, et al., G.R. No. 185280, January
18, 2012). 3. Harm Test
4. The Objective test where the end result in
piercing the veil of corporate fiction is to make This test requires the plaintiff to show that the
the stockholders liable for debts and defendant’s control, exerted in a fraudulent, illegal
obligations of the Corporation not to make the or otherwise unfair manner toward it, caused the
Corporation liable for the debts and obligations harm suffered. A causal connection between the
of the stockholders (Umali v CA, G.R. No. 89561, fraudulent conduct committed through the
September 13, 1990). instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
Three-pronged test to determine the should be established. The plaintiff must prove that,
application of the alter ego/ instrumentality unless the corporate veil is pierced, it would have
theory: been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and,
1. Control, not mere majority or complete stock thereby, suffer damages.
control, but complete domination, not only of
finances but of policy and business practice in NOTE: Piercing the corporate veil based on the alter
respect to the transaction attacked so that the ego theory requires the concurrence of the three
corporate entity as to this transaction had at the elements – control(1), fraud or fundamental
time no separate mind, will or existence of its unfairness(2), and harm or damage(3). The absence
own (Instrumentality or Control test); of any of these elements prevents piercing the

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corporate veil (DBP v. Hydro Resources Contractors 11. The formal legal requirements of the subsidiary
Corp., G.R. Nos. 167603, 167561, & 167530, March 13, are not observed (PNB v. Ritratto Group, G.R. No.
2013). 142616, July 31, 2001).

Piercing the veil of corporate fiction on the basis Piercing the Corporate Veil may Apply to
of equity Natural Persons

Equity cases applying the piercing doctrine are 1. When the Corporation is the Alter Ego of a
what are termed the "dumping ground", where no Natural Person. The piercing of the corporate veil
fraud or alter ego circumstances can be culled by the may apply to corporations as well as natural
Court to warrant piercing. persons involved with corporations. The "corporate
mask may be lifted and the corporate veil may be
The main feature of equity cases is the need to pierced when a corporation is just but the alter ego
render justice in the situation at hand or to brush of a person or of another corporation."
aside merely technical defenses. Often, equity cases
of piercing appear in combination with other types 2. Reverse Piercing of the Corporate Veil. From
of piercing (Villanueva, 2010). American parlance of what is called reverse piercing
or reverse corporate piercing or piercing the
Specifically, the equity test can be applied when: corporate veil "in reverse." As held in the U.S. Case,
C.F. Trust, Inc., v. First Flight Limited Partnership,
1. The corporate personality would be 50 "in a traditional veil-piercing action, a court
inconsistent with the business purpose of the disregards the existence of the corporate entity so a
legal fiction; claimant can reach the assets of a corporate insider.
2. The piercing the corporate fiction is necessary In a reverse piercing action, however, the plaintiff
to achieve justice or equity for those who deal seeks to reach the assets of a corporation to satisfy
in good faith with the corporation; or claims against a corporate insider." "Reverse-
3. When the use of the separate juridical piercing flows in the opposite direction (of
personality is used to confuse legitimate issues. traditional corporate veil-piercing) and makes the
corporation liable for the debt of the shareholders."
Indications that a subsidiary corporation is a
mere instrumentality of its parent corporation It has two (2) types:
a. Outsider reverse piercing occurs when a party with
1. The parent corporation owns all or most of the a claim against an individual or corporation
capital stock of the subsidiary. attempts to be repaid with assets of a corporation
2. The parent and subsidiary corporations have owned or substantially controlled by the defendant.
common directors or officers. b. Insider reverse piercing, the controlling members
3. The parent corporation finances the subsidiary. will attempt to ignore the corporate fiction in order
4. The parent corporation subscribes to all the to take advantage of a benefit available to the
capital stock of the subsidiary or otherwise corporation, such as an interest in a lawsuit or
causes its incorporation. protection of personal assets. (IAM/Es vs. Litton and
5. The subsidiary has grossly inadequate capital. Company Inc. December 13, 2017, G.R. No. 191525)
6. The parent corporation pays the salaries and
other expenses or losses of the subsidiary. Q: Plaintiffs filed a collection action against X
7. The subsidiary has substantially no business Corporation. Upon execution of the court's
except with the parent corporation or no assets decision, X Corporation was found to be without
except those conveyed to or by the parent assets. Thereafter, the plaintiffs filed an action
corporation. against its present and past stockholder, Y
8. In the papers of the parent corporation or in the Corporation, which owned substantially all of
statements of its officers, the subsidiary is the stocks of X corporation. The two
described as a department or division of the corporations have the same board of directors
parent corporation, or its business or financial and Y Corporation financed the operations of X
responsibility is referred to as the parent corporation. May Y Corporation be held liable
corporation’s own. for the debts of X Corporation? Why? (2001 Bar)
9. The parent corporation uses the property of the
subsidiary as its own. A: YES. Y Corporation may be held liable for the
10. The directors or executives of the subsidiary do debts of X Corporation. The doctrine of piercing the
not act independently in the interest of the veil of corporation fiction applies to this case. The
subsidiary but take their orders from the parent two corporations have the same board of directors
corporation. and Y Corporation owned substantially all of the

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stocks of X Corporation, which facts justify the 8. Subscribers – persons who have agreed to take
conclusion that the latter is merely an extension of and pay for original, unissued shares of a
the personality of the former, and that the former corporation formed or to be formed.
controls the policies of the latter. Added to this is the 9. Underwriter – a person who guarantees on a
fact that Y Corporation controls the finances of X firm commitment and/or declared best effort
Corporation which is merely an adjunct, business basis the distribution and sale of securities of
conduit or alter ego of Y Corporation (CIR v. Norton any kind by another (Securities and Regulation
& Harrison Company, G.R. No. L‐17618, August 31, Code [SRC], Sec. 3.15).
1964).
Kinds of Underwriting Agreement

INCORPORATION a. English – the underwriter sells what the

AND ORGANIZATION corporation cannot sell.
b. Firm Commitment – the underwriter purchases
outright the securities and then resells the
Incorporation same.
Best Efforts – the underwriter merely sells for
It is the performance of conditions, acts, deeds, and commission.
writings by incorporators, and the official acts,
certification or records, which give the corporation NUMBER AND QUALIFICATIONS OF
its existence. INCORPORATORS

Steps in the creation of a corporation Number and the qualifications of incorporators

in a stock corporation (NILaRO)
1. Promotion
2. Incorporation (Sec. 10, CC) 1. GR: Natural person
3. Formal organization and commencement of
business operations (Sec. 22, CC) XPN: Under the Rural Banks Act of 1992,
incorporated cooperatives are allowed to be
Components of a corporation (DUMP-ISCO) incorporators of rural banks.

1. Corporators – Those who compose a Note: Under the Revised Corporation Code,
corporation, whether as stockholders or partnership, association or corporation, singly or
members jointly with others may now form a corporation
2. Incorporators –Those mentioned in the Articles
of Incorporation as originally forming and 2. GR: Incorporators must not be less than 5 but
composing the corporation and who are not more than 15
signatories thereof.
3. Directors and trustees – The Board of Directors XPNS: (SEC)
is the governing body in a stock corporation
while the Board of Trustees is the governing 1. Corporation sole
body in a non-stock corporation. 2. Educational institutions
4. Corporate Officers – Officers who are identified 3. Close corporations
as such in the Corporation Code, the Articles of
Incorporation, or the By-laws of the Note: The Revised Corporation Code is silent as to
corporation. the minimum number of incorporators. However, it
5. Stockholders – Owners of shares of stock in a retained the maximum number of incorporators
stock corporation. which must not be more than 15.
6. Members – Corporators of a non-stock
corporation. They are not owners of shares of 3. An incorporator must be of Legal age
stocks, and their membership depends on 4. Majority of the incorporators must be
terms provided in the articles of incorporation Residents of the Philippines (2006 Bar)
or by-laws (CC, Sec. 91,CC). 5. Each must own or subscribe to at least one
7. Promoter – A person who, acting alone or with share (Sec.10, CC)
others, takes initiative in founding and
organizing the business or enterprise of the Note:
issuer and receives consideration therefor
(Securites and Regulation Code [SRC], Sec. 3.10). Q: What is the minimum and maximum number
of incorporators required to incorporate a stock

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corporation? Is this also the same minimum and number of directors shall not be more than 15 while
maximum number of directors required in a the number of trustees may be more than 15
stock corporation? (2006, 2010 Bar)
Q: Must all incorporators and directors be
A: Any number of natural persons not less than five residents of the Philippines? (2006 Bar)
(5) but not more than fifteen (15) may form a
private corporation (CC, Section 10). Likewise, the A: NO. The Corporation Code only provides that
number of directors must not be less than five (5) majority of incorporators and directors of a
nor more than fifteen (15) as indicated in the AOI corporation must be residents of the Philippines
(CC, Sec. 14). (CC, Secs. 10 and 23).

Note: No required minimum number of

incorporators under the RCC. Under the RCC, the

Corporator vs. Incorporator

BASIS INCORPORATOR CORPORATOR

Those stockholders or members
Those who compose a corporation,
mentioned in the AOI as originally
Who are they whether as stockholders or as
forming and composing the corporation
members.
and who are signatories thereof.
Signatory of the AOI A signatory of the AOI May or may not be signatory of the AOI
Ceases to be a corporator by sale of his
shares in case of stock corporation.
Effect upon the sale of Does not cease to be an incorporator
his shares upon sale of his shares
In case of non-stock corporation, the
corporator ceases to be a member.
GR: 5 to 15 GR: No limit

XPN: Corporation sole – only 1 XPN: Close corporations – not more

Number
incorporator than a specified number of persons,
ofincorporators/
usually not exceeding 20 (CC, Sec. 96)
corproator
NOTE: An incorporator must be a
natural person, except in case of rural NOTE: A juridical person may be a
banks. corporator.
GR: Filipino citizenship is not a requirement.
Filipino Citizenship
XPN: When engaged in a business which is partly or wholly nationalized where
majority must be citizens.

Incorporator vs. Subscriber (2012 Bar)

BASIS INCORPORATORS SUBSCRIBER

Those stockholders or members They are persons who have agreed to
mentioned in the AOI as originally take and pay for original, unissued
Who are they
forming and composing the shares of a corporation formed or to be
corporation. formed.
Signatory of the AOI A signatory of the AOI May or may not be signatory of the AOI
GR: 5 to 15 GR: No limit

XPN: Corporation sole – only 1 XPN: Close corporations – not more

Number of
incorporator than a specified number of persons,
incorporators/
usually not exceeding 20 (CC, Sec. 96)
subscriber
NOTE: An incorporator must be a
natural person, except in case of rural NOTE: A juridical person may be a
banks. corporator

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GR: Filipino citizenship is not a requirement.

Filipino Citizenship
XPN: When engaged in a business which is partly or wholly nationalized where
majority must be Filipino citizens.
Residence Majority of the incorporators must be Residency requirement is not
requirement residents of the Philippines. applicable.

NOTE: Non-residents may be incorporators that already reserved or registered for the use of
because the law only requires that the majority of another corporation, or if such name is already
incorporators be residents of the Philippines. protected by law, or when its use is contrary to
existing law, rules and regulations.
Q: X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino residing in A name is not distinguishable even if it contains
Quezon City, Philippines. Z is a resident alien one or more of the following:
residing in Makati City. GGG Corporation is a
domestic corporation – 40% owned by (a) The word “corporation”, “company”,
foreigners and 60% owned by Filipinos, with T “incorporated”,“limited”, “limited liability”,
as authorized representative. CCC Corporation or an abbreviation of one of such words; and
is a foreign corporation registered with the (b) Punctuations, articles, conjunctions,
Philippine Securities and Exchange contractions, prepositions, abbreviations,
Commission. KKK Corporation is a domestic different tenses, spacing, or number of the
corporation (100%) Filipino owned. S is a same word or phrase.
Filipino, 16 years of age, and the daughter of Y.
Who can be incorporators? Who can be 3. If the name applied for is similar to the name of
subscribers? a registered firm, the applicant shall at least
contain one or more distinctive words to the
A: X, Y, and Z can be incorporators. Sec. 10 of the CC proposed name to remove the similarity or
merely requires majority of the incorporators to be differentiate it from the registered name.
residents (not necessarily citizens) of the However, the addition of these distinctive
Philippines. Further, said incorporators must be words shall not be allowed if the registered
natural persons, of legal age and must own or name is coined or unique unless the board of
subscribe to at least 1 share. directors of the subject corporation gives its
consent to the applied name (De Leon, 2010,
Meanwhile, X, Y, Z, GGG, CCC, KKK can be citing SEC Memo, Cir. No. 5, Series of 2008).
subscribers. Residency requirement is immaterial in 4. The corporate name shall contain the word
subscription contracts. However, the citizenship “Corporation” or its abbreviation “Corp.” or
requirement is material in subscription contracts Incorporated”, or “Inc.”.“The corporate name of
if the corporation is engaged in nationalized a foundation shall use the word “Foundation”.
activities requiring at least majority Filipino This is to distinguish the corporation from a
citizenship as a requirement. partnership and other business organizations
(SEC Memo. Circ. No. 5, Series of 2008).
CORPORATE NAME; LIMITATION ON USE OF 5. A person’s full name or surname may be used in
CORPORATE NAME a corporate name:
a. If he is a stockholder of the corporation and
1. No corporate name may be allowed by the SEC has consented to such use;
if the proposed name is identical or deceptively b. If the person is already deceased, the
or confusingly similar to that of any existing consent shall be given by his estate;
corporation or to any other name already c. The Commission may require a registrant
protected by law (CC, Sec. 18). to explain to its satisfaction the reason for
the use of a person’s name;
d. The meaning of initials used in a name shall
2. The proposed name is patently deceptive, be stated by the registration the articles of
confusing or contrary to existing laws (Sec. 18, incorporation in a separate document
CC). signed by an incorporator or director (SEC
Memo. Circ. No. 5, Series of 2008).
Note: Sec. 17 of the Revised Corporation Code
provides that no corporate name shall be allowed by 6. The name of a dissolved firm shall not be
the Commission if it is not distinguishable from allowed to be used by other firms within 3 years

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after the approval of the dissolution of the corporate name, the corporate names must be
corporation by SEC, unless allowed by the last evaluated in their entirety (Lyceum of the
stockholders representing at least majority of Philippines v. CA, G.R. No. 101897, March 5, 1993).
the outstanding capital stock of the dissolved
firm (SEC Memo. Circ. 14, Series of 2000). Q: Refractories Corporation of the Philippines
7. For as long as a corporation is existing (RCP) is a corporation engaged in the business
regardless of whether or not it is in operation, of manufacturing, producing, selling, exporting
its corporate name cannot be used by any other and otherwise dealing in any and all refractory
group or corporation (SEC Opinion, Sept. 2, bricks, its by-products and derivatives. On June
1993). 22, 1977, it registered its corporate and
8. The practice of a profession regulated by business name with the Bureau of Domestic
special law which among others provides for Trade. On the other hand, Synclaire
the permissible use of the profession’s name in Manufacturing Corporation amended its AOI on
a firm, partnership or association shall govern August 23, 1985 to change its corporate name to
the use of the name e.g. “Engineer” or Industrial Refractories Corp. of the Philippines
“Engineering”. (RA 1582) (IRCP). Both companies are the only local
9. Unless otherwise authorized by the Commision, suppliers of monolithic gunning mix.
the following words and phrases can only be Discovering that IRCP was using such corporate
used by the entities mentioned: name, RCP filed with SEC a petition to compel
a. “Investment or Capital” – IRCP to change its corporate name on the
investment houses, investment or ground that its corporate name is confusingly
holding company similar with that of RCP’s such that the public
b. “Asset/Fund/Financial/Financial may be confused or deceived into believing that
Management or Adviser” – they are one and the same corporation. Is
licensed by BSP to hold investment Industrial Refractories Corporation of the
management activities Philippines confusingly similar with
c. “National, Bureau, Commision, Refractories Corporation of the Philippines?
State and other words acronyms
that have gained wide acceptance A: YES. To fall within the prohibition of the law, two
in the Philippines” – by entities requisites must be proven, to wit: (1) that the
performing governmental complainant corporation acquired a prior right over
functions. the use of such corporate name; and (2) the
Note: These names are already proposed name is either: (a) identical, or (b)
preserved for governmental use. deceptively or confusingly similar to that of any
existing corporation or to any other name already
XPNs: IF there is a Vested Right, protected by law; or (c) patently deceptive,
(i.e. National Bookstore) or IF confusing or contrary to existing law. In this case,
Authorized by the Commission. RCP was incorporated on October 13, 1976 and
since then has been using the corporate name
d. Association, Organization – non “Refractories Corp. of the Philippines”. Meanwhile,
stock corporations. IRCP was incorporated on August 23, 1979
e. “Stock/Futures/Derivatives originally under the name “Synclaire Manufacturing
Exchange or Broker, Plans, Corporation”. It only started using the name
Securities/Stock Clearing Agency “Industrial Refractories Corp. of the Philippines”
or any similar words or phrases – when it amended its Articles of Incorporation on
by entities organized as an August 23, 1985, or nine (9) years after respondent
exchange, broker dealer, RCP started using its name. Thus, being the prior
commodity futures broker, registrant, respondent RCP has acquired the right to
clearing agency, or pre-need use the word “Refractories” as part of its corporate
company under RA 8799 or name (Industrial Refractories Corporation of the
Securities and Regulation Code. Philippines v. CA, et al., G.R. No. 122174, October 3,
(SEC Memo Circ. No. 21, Dec. 4, 2002).
2013)
Doctrine of Secondary Meaning
NOTE: Priority of adoption determines the right to
the exclusive use of a corporate name with freedom It is the doctrine which states that a word or phrase
from infringement. Further, to determine whether a originally incapable of exclusive appropriation with
given corporate name is “identical” or “confusingly reference to an article on the market, because
or deceptively similar” with another entity’s geographically or otherwise descriptive, might

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nevertheless have been used so long and so and delineated the different modes of dissolving a
exclusively by one producer with reference to his corporation, and amendment of the articles of
article that, in that trade and to that branch of the incorporation was not one of such modes. The effect
purchasing public, the word or phrase has come to of the change of name was not a change of the
mean that the article was his product (Philippine corporate being. In short, Zeta and Zuellig remained
Nut Industry, Inc. vs. Standard Brands. Inc. G.R. No.L- one and the same corporation. The change of name
23035, July 31, 1975). did not give Zuelligthe license to terminate
employees of Zeta like San Miguel without just or
The doctrine of secondary meaning requires that authorized cause. The situation was not similar to
the word or phrase used in the corporate name has that of an enterprise buying the business of another
been for such length of time with such exclusivity as company where the purchasing company had no
to have associated or identified the corporation in obligation to rehire terminated employees of the
the mind of the general public (or at least that latter. Zuellig, despite its new name, was the mere
portion of the general public to do with the continuation of Zeta's corporate being, and still held
corporation’s market) (Lyceum of the Philippines vs. the obligation to honor all of Zeta's obligations, one
CA, supra). of which was to respect San Miguel's security of
tenure. The dismissal of San Miguel from
NOTE: The application of this Trademark Law employment on the pretext that Zuellig, being a
doctrine has been extended to corporate names different corporation, had no obligation to accept
since the right to use a corporate name to the him as its employee was illegal and ineffectual
exclusion of others is based upon the same principle (Zuellig Freight and Cargo Systems vs. NLRC, et al.,
which underlies the right to use a particular G.R. No. 157900, July 22, 2013).
trademark or trade name (De Leon, 2010).
Q: P.C. Javier and Sons Services, Inc., (PC) applied
A corporation that changes its corporate name is with First Summa Savings and Mortgage Bank,
not considered as a new corporation later on renamed as PAIC Savings and Mortgage
Bank (The Bank) for a loan accommodation
A corporation that changes its corporate name is under the Industrial Guarantee Loan Fund
not considered as a new corporation. It is the same (IGLF). Upon maturity, PC failed to pay, hence,
corporation with a different name, and its character the Bank initiated an extrajudicial foreclosure
is in no respect changed (Republic Planters Bank v. of the real estate mortgage. The instant
CA, G.R. No. 93073, December 21, 1992). complaint was filed to forestall the extrajudicial
foreclosure sale of a piece of land mortgaged by
Q: San Miguel brought a complaint for unfair PC in favor of PAIC Savings and Mortgage Bank,
labor practice, illegal dismissal, non-payment of Inc. PC argues that they are legally justified to
salaries and moral damages against Zuellig withhold their amortized payments to the bank
Freight and Cargo Systems, formerly known as until such time they would have been properly
Zeta. He alleged that he had been a notified of the change in the corporate
checker/customs representative of Zeta since name. They claim that they have never received
December 16, 1985; that in January 1994, he and any formal notice of the alleged change of
other employees of Zeta were informed that corporate name of First Summa Savings and
Zeta would cease operations, and that all Mortgage Bank to PAIC Savings & Mortgage
affected employees, including him, would be Bank, Inc. Is the Bank required to notify PC
separated. Javier & Sons, Inc., of the change in its corporate
San Miguel contended that the amendments of name?
the articles of incorporation of Zeta were for the
purpose of changing the corporate name, A: NO. Supreme Court held that the bank is not
broadening the primary functions, and required to notify PC of its change of name as it is
increasing the capital stock; and that such not required under the Corporation Code and
amendments could not mean that Zeta had been Banking Laws. Therefore, the Court cannot impose
thereby dissolved. Did the change of corporate on a bank that changes its corporate name to notify
name result in the dissolution of the a debtor of such change absent any law, circular or
corporation? regulation requiring it. Such act would be judicial
legislation. The formal notification is, therefore,
A: NO. The amendments of the articles of discretionary on the bank and remains to be a mere
incorporation of Zeta to change the corporate name internal policy that banks may or may not adopt.
to Zuellig Freight and Cargo Systems, Inc. did not The corporation, upon such change in its name, is in
produce the dissolution of the former as a no sense a new corporation, nor the successor of the
corporation. For sure, the Corporation Code defined original corporation. It is the same corporation with

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a different name, and its character is in no respect GR: The filing and recording of a certificate of
changed (P.C. Javier & Sons, Inc., v. CA et al., G.R. No. extension after the term cannot relate back to the
129552, June 29, 2005). date of the passage of the resolution of the
stockholders to extend the life of the corporation.
CORPORATE TERM
XPNs: The doctrine of relation applies if the failure
Term of corporate existence to file the application for extension within the term
of the corporation is due to:
GR: The period stated in the AOI, provided it does 1. The neglect of the SEC officer with whom the
not exceed 50 years. certificate is required to be filed; or
2. A wrongful refusal on his part to receive it.
XPN: Unless sooner dissolved or unless said period (Aquino, 2006)
is extended (CC, Sec. 11)
Q: The term of GGG Corporation in accordance
NOTE: Extension may be made for periods not with its Articles of Incorporation ended last
exceeding 50 years in any single instance by an January 30, 2012. The term was not extended.
amendment of the articles of incorporation. What will happen to the corporation? (2012
However, extension must be made within 5 years Bar)
before the expiry date of the corporate term, unless
there are justifiable reasons for an earlier extension A: The corporation ceases to exist and is dissolved
as may be determined by the SEC (CC, Sec. 11). ipso facto upon the expiration of the period fixed in
the original AOI, in the absence of compliance with
NOTE: The Revised Corporation Code introduced the legal requisites of extension of period (PNB vs.
substantial changes with respect to the term of CFI, G.R. No. 63201, May 27, 1992).
corporate existence. Sec. 11 provides that a
corporation shall have perpetual existence unless MINIMUM CAPITAL STOCK AND SUBSCRIPTION
its Articles of Incorporation provides otherwise. REQUIREMENTS
Also, the Code mandates that corporations with
certificates of incorporation issued prior to this Capital stock requirements
code and which continue to exist shall likewise have
perpetual existence unless the corporation elects to GR: There is no minimum authorized capital stock
retain its specific corporate term. as long as the paid-up capital is not less than
P5,000.00.
Under the RCC, if a corporation wishes to change its
corporate term, it may amend its AOI at least 3 years XPN: As provided by special law
prior to the expiration of its term. Previously, such
change should be made at least 5 years prior to the Minimum stock subscription and paid-up
expiration. capital requirements

If the term has already expired, the corporation may At least 25% of the authorized capital stock as
now ask the SEC to revive their corporate existence, stated in the AOI must be subscribed at the time of
which option was not present in the old code. Upon incorporation, and at least 25% of the total
approval by the SEC, it will then issue a certificate of subscription must be paid upon subscription (Sec
revival giving it perpetual existence, unless it 13, CC).
requests for a limited term. NOTE: It is not required that each subscriber pay
25% of each subscribed share. It is only required
XPN: No revival is allowed for companies under the that at least 25% of the total subscribed capital
supervision of other government agencies, such as must be paid.
banks, insurance and trust companies.
Note: Sec. 13 has no counterpart in the RCC
XPN to XPN: Unless, Revival is first approved by the
appropriate government agency. Paid-up capital

Extension must also comply with procedural Paid-up capital forms part of the authorized capital
requirements for amendment of AOI. stock of the corporation, subscribed and then
actually paid for. The assets transferred and the
Doctrine of Relation or Relating Back Doctrine loans extended to a corporation should not be
considered in computing the paid-up capital of the

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corporation (MISCI-NACUSIP Local Chapter v. NWPC, 1. NAme of corporation;
G.R. No. 125198, March 3, 1997). 2. Purpose/s, indicating the primary and
secondary purposes (Purpose Clause);
NOTE: The term “capital” in Section 11, Article XII 3. PLAce of principal office;
of the Constitution refers only to shares of stock that 4. Term of existence;
can vote in the election of directors. To construe 5. Names, nationalities and residences of
broadly the term “capital” as the total outstanding Incorporators;
capital stock, including both common and non- 6. NUMber of directors or trustees, which shall
voting preferred shares, grossly contravenes the not be less than 5 nor more than 15, except for
intent and letter of the Constitution. A broad corporation sole;
definition unjustifiably disregards who owns the all-
important voting stock, which necessarily equates Note: Under the Revised Corporation Code, the
to control of the public utility (Wilson Gamboa vs. number of directors shall not be more than
Finance Secretary Margarito Teves, et. al., G.R. No. fifteen (15) while the number of trustees which
176579, October 9, 2012). may be more than fifteen (15) and the term of
existence is generally perpetual;
Time when the unpaid subscription is payable
7. Names, nationalities, and residences of the
The balance or the unpaid subscription shall be persons who shall Act as directors or trustees
payable: until the first regular ones are elected and
qualified;
1. On a date or dates fixed in the contract of 8. If a Stock corporation, the amount of its
subscription without need of call; or authorized capital stock, number of shares and
2. In the absence of a fixed date or dates, upon call in case the shares are par value shares, the par
for payment by the BOD (Sec. 13, CC). value of each share;
9. Names, nationalities, number of shares, and the
ARTICLES OF INCORPORATION (AOI) amounts subscribed and paid by each of the
Original subscribers which shall not be less
NATURE AND FUNCTION OF ARTICLES than 25% of authorized capital stock;
10. If Non-stock, the amount of capital, the names,
Articles of Incorporation residences, and amount paid by each
contributor, which shall not be less than 25% of
The Articles of Incorporation (AOI) is one that total subscription; name of treasurer elected by
defines the charter of the corporation and the subscribers; and
contractual relationships between the State and the 11. Other matters as are not inconsistent with law
corporation, the stockholders and the State, and and which the incorporators may deem
between the corporation and its stockholders necessary and convenient (Sec. 14, CC).
(Government of the Philippine Islands v. Manila
Railroad Co., G.R. No. L-30646, January 30, 1929). Note: An arbitration agreement may be provided in
the articles of incorporation pursuant to Section
Three-fold nature of AOI 181 of the RCC.

An AOI, which stands as the corporate charter, is a Incorporator may delegate the signing of the AOI
contract of three-fold nature because it is a contract
between: An incorporator may delegate to an attorney-in-fact
1. The State and the corporation; the signing of the AOI in a special power of attorney
2. The corporation and the stockholders; and to such effect. However, the acknowledgment
3. The stockholders inter se. required under Sec. 15 of the CC must reflect this
fact (De Leon, 2010, citing SEC Opinion, Dec. 26,
CONTENTS 1972).

All corporations organized under the Code shall file Reason for the statement of the purpose clause
with the SEC an AOI in any of the official languages in the AOI
duly signed and acknowledged by all of the
incorporators, containing substantially the The purpose clause determines whether the acts
following matters, except as otherwise prescribed performed by the corporation are authorized or
by the Code or by special law: (NaP- PlaTINum- beyond its powers. Acts beyond the corporation’s
ASONO) powers are called ultra vires acts.

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Rules in the statement of the purpose clause The SEC’s discretion can only be exercised on
matters of form and does not extend to the merits of
1. If there is more than one stated purpose, specify an application for incorporation.
which the is main or primary purpose and
which is or are the secondary or subsidiary NOTE: If the SEC refuses to file the AOI, which
purpose/s. substantially complied with the statute, the
remedy of the applicant is to file a petition for
NOTE: This specification is important in the mandamus.
application of the prohibition under Sec. 42 CC
which states that the corporation is prohibited XPN: However, SEC has authority to pass upon the
from investing corporate funds “for any lawfulness of the object or purpose of the
purpose other than the primary purpose for corporation as expressed in the AOI. Such
which it was organized” unless such investment determination is an exercise of judgment, that is,
is approved by both majority of the BOD or BOT judicial function on a question of law.
and ratified by the stockholders representing at
least 2/3 of the outstanding capital stock or by NOTE: If the SEC errs in the determination of
at least 2/3 of the members in the case of a non- the lawfulness of the purpose of the corporation
stock corporation. stated in the AOI and refuses to file the said AOI,
its decision is subject to review and correction
2. The purposes must be capable of being lawfully by the court (Asuncion vs. De Yriarte, GR No.
combined. 9321, Sepember 24, 1914).
3. A non-stock corporation may not include a
purpose which would change or contradict its AMENDMENT
nature as such (Sec. 14[2], CC).
Limitations in the amendment of AOI (LAV-
Requirements of the SEC as regards the address ProCSA)
specification of the corporation in the AOI
1. The amendment must be for legitimate
SEC requires that the applicant corporation must purposes and must not be contrary to other
state in its AOI the: provisions of the CC and special laws
1. Specific address of their principal office, which 2. Approved by majority of BOD/BOT
shall include, if feasible, the street name, 3. Vote or written assent of stockholders
barangay, city or municipality; and representing 2/3 of the outstanding capital
2. Specific residence address of each incorporator, stock or 2/3 of members
stockholder, director, trustee, or partner. 4. The original and amended articles together
shall contain all provisions required by law to
NOTE: SEC likewise prohibits the use of be set out in the AOI. Such articles, as amended,
“Metro Manila” as address of the principal office. shall be indicated by underscoring the change/s
made
Residence of the corporation 5. Certification under oath by corporate secretary
and a majority of the BOD/BOT stating the fact
The corporation is “in a metaphysical sense a that said amendment/s have been duly
resident of the place where its principal office is approved by the required vote of the
located as stated in the AOI” (Golden Arches Dev’t stockholders or members, shall be submitted to
Corp. vs. St. Francis Square Holdings, Inc., GR 183843, the SEC
January 19, 2011). 6. Must be approved by SEC (Sec. 16, CC)
This ruling regarding the residence of the 7. Must be accompanied by a favorable
corporation holds true even though the corporation recommendation of the appropriate
has closed its office therein and relocated to another government agency in cases of:
place (Hyatt Elevators and Escalators Corp. vs. a. Banks
Goldstar Elevators Phils., Inc., GR 161026, Oct. 24, b. Banking and quasi-banking institutions
2005). c. Building and loan associations
d. Trust companies and other financial
Duty of the SEC to file the AOI and to issue a intermediaries
certificate of incorporation e. Insurance companies
f. Public utilities
GR: The duty of the SEC to file the AOI and to issue a g. Educational institutions
certificate of incorporation is ministerial provided h. Other corporations governed by special
that the AOI substantially comply with the statute. laws (Sec. 17 [2], CC)

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Time when the amendment of the AOI takes 1. If such is not substantially in accordance with
effect the form prescribed by the CC.
2. The purpose/s of the corporation is/are
The amendment of the AOI takes effect either: patently unconstitutional, illegal, immoral, or
1. Upon approval by the SEC, that is, upon contrary to government rules and regulations.
issuance of amended certificate of 3. The treasurer’s affidavit concerning the amount
incorporation; or of capital stock subscribed and/or paid is false.
2. From the date of filing with the SEC: 4. The required percentage of ownership of the
a. If not acted upon within 6 months from the capital stock to be owned by Filipino citizens
date of filing; and has not been complied with (CC, Sec. 17).
b. For a cause not attributable to the
corporation. NOTE: The above grounds are not exclusive.

NOTE: The provision on automatic approval in Sec. Other grounds as provided by PD No. 902‐A are:
16 does not apply to the dissolution of the
corporations in light of Sec. 120, CC (SEC Opinion, 1. Fraud in procuring its certificate of
March 30, 1982). incorporation;
2. Serious misrepresentation as to what the
Conversion of a stock corporation into a non- corporation can do or is doing to the great
stock corporation (2001 Bar) prejudice of, or damage to, the general
A stock corporation may be converted into a non- public;
stock corporation by mere amendment, provided all 3. Refusal to comply with, or defiance or a
the requirements are complied with. Its rights and lawful order of the SEC restraining the
liabilities will remain (CC, Sec. 16). commission of acts which would amount to
a grave violation of its franchise;
NOTE: A non-stock corporation cannot be 4. Continuous inoperation for a period of at
converted into a stock corporation through mere least five (5) years after commencing the
amendment of its Articles of Incorporation. This transaction of its business (CC, Sec. 22);
would violate Section 87 CC, which prohibits 5. Failure to file the by‐laws within the
distribution of income as dividends to members. required period; or
Giving the members shares, is tantamount to 6. Failure to file required reports.
distribution of its assets or income (SEC Opinion,
March 20, 1995). No automatic rejection of the AOI or any
amendment thereto
Under Section 122 of the Corporation Code, the non-
stock corporation must be dissolved first. There is no automatic rejection of the AOI or any
amendment thereto. The SEC shall give the
NON-AMENDABLE ITEMS incorporators a reasonable time within which to
correct or modify the objectionable portions of the
Non-amendable items in the AOI AOI or amendment (Sec. 17[1], CC).

Those matters referring to accomplished facts, Effect of non-use of corporate charter and
except to correct mistakes, such as: continuous inoperation of a corporation

1. Names of incorporators; 1. Failure to organize and commence business

2. Names of original subscribers to the capital within 2 years from incorporation – its corporate
stock of the corporation and their powers ceases and the corporation shall be
subscribed and paid up capital; deemed dissolved.
3. Names of the original directors;
4. Treasurer elected by the original Note: The 2 year period is now modified by the RCC
subscribers; Under such law, the failure of a corporation to
5. Members who contributed to the initial organize and commence its business should be
capital of the non‐stock corporation; or within five (5) years from the date of its
6. Witnesses to and acknowledgment with incorporation. In effect, its certificate of
AOI. incorporation shall be deemed revoked as of the day
following the end of the five (5)-year period.
Grounds for the rejection or disapproval of the
AOI or amendment thereto 2. Continuous inoperation for at least 5 years –
ground for the suspension or revocation of

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corporate franchise or certificate of a. Articles of Incorporation
incorporation (Sec. 22, CC). b. Treasurer’s Affidavit
c. Certificate of Authority by the Monetary Board
Note: Sec. 21 of the Revised Corporation Code of BSP
provides that continuous inoperation for at least 5 d. Verification slip from the records of the SEC
years allows the Commission, after due notice and whether or not the proposed name has already
hearing, to place the corporation under delinquent been registered under a different entity
status e. An undertaking stating the proposed name
shall be changed in case another entity has been
NOTE: The above shall not be applicable if it is due registered under the proposed name
to causes beyond the control of the corporation as f. Registration sheet
determined by SEC. g. Bank certificate of deposit covering the paid-up
capital
Suspension or revocation of the certificate of h. Letter containing authorization to the SEC or
registration due to failure to operate or Monetary Board or any of its duly authorized
continuous inoperation is not automatic representative to inspect bank records
concerning the paid-up capital
Under PD No. 902-A, SEC should afford due process i. Favorable endorsement from proper
or proper notice and hearing before the suspension government agency in case of special
or revocation of certificate of registration. The corporations
suspension or revocation of the certificate of
registration due to failure to operate or continuous Doctrine of corporate entity
inoperation is not automatic.
GR: A corporation comes into existence upon the
REGISTRATION AND ISSUANCE OF issuance of the certificate of incorporation by the
CERTIFICATE OF INCORPORATION SEC under its official seal. Then and only then will it
acquire a juridical personality (CC, Sec. 19).
Basic requirements for the registration and
issuance of a certificate of incorporation of a XPN: In case of a corporation sole, the corporation
stock corporation sole commences existence upon the filing of the
articles of incorporation.
1. Name verification slip
2. AOI and by-laws ADOPTION OF BY-LAWS
3. Treasurer’s affidavit
By-laws are rules and regulations or private laws
Note; The articles of incorporation and applications enacted by the corporation to regulate, govern and
for amendments thereto may be filed with the control its own actions, affairs and concerns and of
Commission in the form of an electronic document, its stockholders or members and directors and
in accordance with the Commission’s rules and officers in relation thereto and among themselves in
regulations on electronic filing. their relation to it (Valley Golf & Country Club, Inc. vs.
Vda. De Caram, GR 158805, April 16, 2009).
Contents of a treasurer’s affidavit
By-laws are relatively permanent and continuing
That at least 25% of the authorized capital stock of rules of action adopted by the corporation for its for
the corporation has been subscribed, and at least its own government and that of individuals
25% of the total subscription has been fully paid in composing of it and those having the direction,
actual cash and/or property; such paid-up capital management, and control of its affairs, in whole or
being not less than P5,000 (Sec. 14, 15, CC). in part, in the management and control of its
affairs and activities (China Banking Corporation v.
Q: You are asked to incorporate a new company CA, G.R. No. 117604, March 26, 1997).
to be called FSB Savings & Mortgage Bank, Inc.
List the documents that you must submit to the NATURE AND FUNCTIONS OF BY-LAWS
Securities and Exchange Commission(SEC) to
obtain a Certificate of Incorporation for FSB The corporate power to adopt by-laws is inherent in
Savings & Mortgage Bank, Inc. (2002 Bar) every corporation. To give emphasis to such
necessary corporate incident, said power is
A: The documents to be submitted for the issuance expressed in Sec. 36(5) and Sec. 46 of the CC.
of a certificate of incorporation in favor of FSB
Savings & Mortgage Bank, Inc. are the following:

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The by-laws supplement the AOI. The function of 7. Manner of election or appointment and the
by-laws is to define the rights and duties of term of office of all officers other than
corporate officers and directors or trustees, and of directors or trustees.
stockholders or members towards the corporation 8. Penalties for violation of the by-laws.
and among themselves with reference to the 9. In case of stock corporations, the manner of
management of corporate affairs and to regulate issuing certificates.
transaction of the business of the corporation in a 10. Such other matters as may be necessary for
particular way (De Leon, 2010). the proper or convenient transaction of its
corporate business and affairs for the
A corporation sole is not governed by by-laws promotion of good governance and anti-
graft and corruption measures. (CC, Sec.
A corporation sole is not governed by by-laws. It is 47).
instead governed by Rules, Regulations and
Discipline of its religious denomination which Note: There are additional contents mentioned
already contain the provisions embodied in the by- under the Revised Corporation Code:
laws of ordinary corporations.
1. The modes by which a stockholder, member,
REQUISITES OF VALID BY-LAWS director, or trustee may attend meetings and cast
(2000, 2001 BAR) their votes;
2. The directors’ or trustees’ qualifications, duties
The following are the requisites for the validity of and responsibilities, the guidelines for setting the
by-laws: (CoMorO-RAG) compensation of directors or trustees and officers,
and the maximum number of other board
1. Must be consistent with the COrporation Code, representations that an independent director or
other pertinent laws and regulations; trustee may have which shall, in no case, be more
2. Must not be contrary to MORals and public than the number prescribed by the Commission;
policy;
3. Must not impair Obligations and contracts or Also, an arbitration agreement may be provided in
property rights of stockholders; the bylaws pursuant to Section 181 of this Code.
4. Must be Reasonable;
5. Must be consistent with the charter or AOI; and Adoption of the Original By-laws

NOTE: In case of conflict between the by-laws GR: It must be filed within one (1) month from
and the AOI, the AOI prevails because the by- notice of issuance of certificate of incorporation.
laws are intended merely to supplement the
former. XPN: By- laws may be adopted and filed prior to the
incorporation. Such shall be approved and signed by
6. Must be of General application and not directed all the incorporators and submitted to the SEC
against a particular individual. together with the AOI.

Contents of by-laws Note: The one month period to adopt by-laws was
deleted in RCC.
1. Time, place and manner of calling and
conducting regular or special meetings of Procedures in adopting by-laws
directors or trustees.
2. Time and manner of calling and conducting The by-laws may be adopted before or after
regular or special meetings of the incorporation. In all cases, the by-laws shall be
stockholder or members. effective only upon the issuance by the SEC of a
3. The required quorum in meeting of certification that the by-laws are not inconsistent
stockholders or members and the manner with the AOI.
of voting therein.
4. The form for proxies of stockholders and 1. Pre - incorporation – It shall be approved
members and the manner of voting them. and signed by all the incorporators and
5. The qualification, duties and compensation submitted to the SEC, together with AOI.
of directors or trustees, officers and 2. Post – incorporation:
employees. a. Vote of the majority of the stockholders
6. Time for holding the annual election of representing the outstanding capital stock
directors or trustees and the mode or or members;
manner of giving notice thereof.

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b. By-laws shall be signed by the succeeding rendition of services. Despite
stockholders or members voting for them repeated demands, PMI failed to pay and hence,
c. It shall be kept in the principal office of the Galvan filed a complaint seeking payment for
corporation and subject to the inspection of salaries earned. PMI sought to avoid liability on
the stockholders or members during office the ground that under PMI’s by-laws only the
hours. Chairman is authorized to sign any contract.
d. Copy thereof, duly certified by the BOD or Hence, according to PMI, the employment
BOT countersigned by the secretary of the contract of Galman, which was not signed by the
corporation, shall be filed with the SEC and Chairman, is not binding upon PMI.
shall be attached with the original AOI (Sec.
46, CC). Is the employment contract invalid because it
violated PMI’s by-laws stating that the Chairman
BINDING EFFECTS of the BOD should be the signatory thereon?

The following are the binding effects of by-laws: A: NO. The employment contract is not invalidated
by the failure of the Chairman to sign such. Since by-
1. As to members/ stockholders, officers, laws operate merely as internal rules among the
trustees/ directors and corporation stockholders, they cannot affect or prejudice third
They are bound by and must comply with it. persons who deal with the corporation, unless they
They are presumed to know the provisions of have knowledge of the same. No proof appears on
the by-laws. record that Galvan ever knew anything about the
provisions of said by-laws (PMI Colleges v. NLRC, et
2. As to third persons al., supra)
GR: They are not bound.
Effect of non-filing of the by-laws within the
XPN: They have knowledge or notice of the by- required period
laws at the time the contract was executed
(China Banking Corp. v. CA, G.R. No. 117604, Failure to submit the by-laws within 30 days from
March 26, 1997). incorporation does not automatically dissolve the
corporation. It is merely a ground for suspension or
Q: PMI Colleges (PMI) an educational institution, revocation of its charter after proper notice and
it hiredGalvan as contractual hearing, under Section 6(I) of PD 902-A. The
instructor. Initially, Galvan and other corporation is, at the very least, a de facto
instructors were compensated for services corporation whose existence may not be collaterally
rendered. However, for unknown reasons, attacked (Sawadjaan v. CA, G.R. No. 142284, June 8,
Galvan stopped receiving payment for the 2005).

Articles of incorporation vs. By-laws

BASIS AOI BY-LAWS

Condition subsequent; its absence merely
Requirement for Condition precedent in the
furnishes a ground for the revocation of the
corporate existence acquisition of corporate existence
franchise
For the internal government of the
Essentially a contract between the:
corporation but has the force of a contract
1. corporation and SH/M;
Essence between the:
2. SH/M inter se; and
1. corporation and the SH/M and
3. corporation and the State;
2. between the SH/M inter se;
May be executed after incorporation. Sec. 46
allows the filing of the by-laws
Time of execution Executed before incorporation
simultaneously with the Articles of
Incorporation
Amended by a majority of the
May be amended by a majority vote of the
directors/ trustees and stockholders
Manner of BOD and majority vote of outstanding
representing 2/3 of the outstanding
amendment capital stock or a majority of the member in
capital stock, or 2/3 of the members
non-stock corporation
in case of non-stock corporations

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AMENDMENT OR REVISION Q: Sea Lion International Port Terminal
Services, Inc. filed a complaint for prohibition
Ways of amending, repealing or adopting new and mandamus against National Power
by-laws: Corporation (NPC) and Philippine Ports
Authority (PPA), wherein Sea Lion alleged that
1. Amendment may be made by stockholders NPC had acted in bad faith and with grave abuse
together with the Board – by majority vote of discretion in not renewing its contract for
of directors and owners of at least a stevedoring services for coal-handling
majority of the outstanding capital operations at NPC's plant, and in taking over its
stock/members; or stevedoring [Link] seeks to annul the
2. By the board only after due delegation by the order of the RTC in issuing a writ of preliminary
stockholders owning 2/3 of the outstanding injunction which enjoined NPC from further
capital stock/members. Provided, that such undertaking stevedoring and arrastre services
power delegated to the board shall be in its pier and directing it either to enter into a
considered as revoked whenever stockholders contract for stevedoring and arrastre services
owning at least majority of the outstanding or to conduct a public bidding therefor. Does
capital stock or members, shall vote at a regular NPC have the power to undertake stevedoring
or special meeting (CC, Sec. 48) and arrastre services in its pier?

A: YES. NPC has the power to undertake stevedoring

CORPORATE POWERS and arrastre services. To carry out the national
policy of total electrification of the country, the NPC
was created and empowered not only to construct,
1. Express powers – granted by law, the operate and maintain power plants, reservoirs,
Corporation Code, and its Articles of transmission lines, and other works, but also to
Incorporation or Charter, and administrative exercise such powers and do such things as may be
regulations; reasonably necessary to carry out the business and
2. Inherent/incidental powers – not expressly purposes for which it was organized, or which, from
stated but are deemed to be within the capacity time to time, may be declared by the Board to be
of corporate entities; necessary, useful, incidental or auxiliary to
3. Implied/necessary powers – exists as a accomplish said purpose. If that act is one which is
necessary consequence of the exercise of the lawful in itself and not otherwise prohibited, and is
express powers of the corporation or the done for the purpose of serving corporate ends, and
pursuit of its purposes as provided for in the reasonably contributes to the promotion of those
Charter. ends in a substantial and not in a remote and
fanciful sense, it may be fairly considered within the
Q: The board of directors of Lopez Realty, Inc. corporation's charter powers. The rule is that a
passed a resolution providing gratuity pay for corporation is not restricted to the exercise of
its employees in a special meeting called for the powers expressly conferred upon it by its charter,
purpose. At the time, however, Asuncion Lopez but has the power to do what is reasonably
Gonzales (a member of the board), was still out necessary or proper to promote the interest or
of the country. Asuncion assailed the validity of welfare of the corporation. The stevedoring services
the said board resolution contending that the which involve the unloading of the coal shipments
same was ultra vires on the ground that she was into the NPC pier for its eventual conveyance to the
not duly notified of the special meeting in which power plant are incidental and indispensable to the
it was passed. Is the disputed board resolution operation of the plant (NPC, v. Vera, et al., G.R. No.
ultra vires as urged by Asuncion? 83558, February 17, 1989).

A: NO. The assailed resolution covers a subject Exercise of corporate powers

which concerns the benefit and welfare of the
company’s employees. To stress, providing gratuity The Corporation Code of the Philippines vests in the
pay for its employees is one of the express powers of board of directors the exercise of the corporate
the corporation under the Corporation Code, hence, powers of a (stock) corporation, save in those
Asuncion cannot invoke the doctrine of ultra vires to instances where the Code requires stockholders’
avoid any liability arising from the issuance of the approval for certain specific acts (Great Asian Sales
subject resolution (Lopez Realty, Inc. v. Fontecha, Center Corp. v CA, G.R. No. 105774, April 25, 2002).
G.R. No. 76801, August 11, 1995). Note: The CC vestes in the Board of Trustees the
exercise of the corporate powers of a Non-stock
Corporation.

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Q: Eliodoro C. Cruz was the former president of often have wide latitude in determining the
Filport. During the general stockholders’ course of business operations;
meeting, he wrote a letter to the corporation’s 3. The stockholders - have the residual power
Board of Directors questioning the board’s over fundamental corporate changes, like
creation of certain positions and their amendments of the articles of incorporation
corresponding monthly renumeration. Because (City Bank NA vs. Chua, G.R. No. 102300, March
his letter was not heeded favorably, Cruz, 17, 1993).
purportedly in representation of Filport and its
stockholders, filed with SEC a petition which he GENERAL POWERS, THEORY OF
describes as a derivative suit against the the GENERAL CAPACITY
incumbent members of Filport’s BOD, for
alleged acts of mismanagement detrimental to Theory of General Capacity
the interest of the corporation and its
shareholders at large. Did Filport’s BOD act The general powers of a corporation also called
within its powers in creating the executive Theory of General Capacity are the following:
committee and the positions of AVPs for
Corporate Planning, Operations, Finance and (SuSuCo-ABS-PEDRO)
Administration, and those of the Special
Assistants to the President and the Board 1. To Sue and be sued;
Chairman, each with corresponding 2. Of Succession (To have perpetual existence
remuneration? unless the certificate of incorporation provides
otherwise;);
A: YES. The governing body of a corporation is its 3. To adopt and use of Corporate seal;
board of directors. Section 23 of the Corporation 4. To amend its Articles of Incorporation;
Code explicitly provides that unless otherwise 5. To adopt its By-laws;
provided therein, the corporate powers of all 6. For Stock corporations: issue and sell stocks to
corporations formed under the Code shall be subscribers and treasury stocks; for non-stock
exercised, all business conducted and all property of corporations: admit members;
the corporation shall be controlled and held by a 7. To Purchase, receive, take or grant, hold,
board of directors. Thus, with the exception only of convey, sell, lease, pledge, mortgage and deal
some powers expressly granted by law to with real and personal property, securities and
stockholders (or members, in case of non-stock bonds subject to the Constitution and existing
corporations), the board of directors (or trustees, in laws;
case of non-stock corporations) has the sole 8. To Enter into merger or consolidation, (To
authority to determine policies, enter into contracts, enter into a partnership, joint venture, merger,
and conduct the ordinary business of the consolidation, or any other commercial
corporation within the scope of its charter, i.e., its agreement with natural and juridical persons);
articles of incorporation, by-laws and relevant 9. To make reasonable Donations for public
provisions of law. Verily, the authority of the board welfare, hospital, charitable, cultural, scientific,
of directors is restricted to the management of the civic or similar purposes, provided that no
regular business affairs of the corporation, unless donation is given to any:
more extensive power is expressly conferred. In the a. Political party,
present case, the board’s creation of the subject b. Candidate and
positions was in accordance with the regular c. Partisan political activity.
business operations of Filport as it is authorized to 10. To establish pension, Retirement, and other
do so by the corporation’s by-laws, pursuant to the plans for the benefit of its directors, trustees,
Corporation Code (Filipinas Port Services, Inc., v. Go, officers and employees – basis of which is the
et al., G.R. No. 161886, March 16, 2007). Labor code; and
11. To exercise Other powers essential or
Three levels of control in the corporate necessary to carry out its purposes (CC, Sec. 36)
hierarchy
Commencement of the power to sue and be sued
1. The board of directors - responsible for
corporate policies and the general The power to sue and be sued commences upon
management of the business affairs of the issuance by SEC of Certificate of Incorporation.
corporation;
2. The officers of the corporation - execution of the The power of the corporation to sue and be sued
policies laid down by the board, but in practice is exercised by the board of directors.

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The power of the corporation to sue and be sued is Limitations of the corporation in dealing with
exercised by the board of directors. The physical property
acts of the corporation, like the signing of
documents, can be performed only by natural 1. It must be in the furtherance of the purpose for
persons duly authorized for the purpose by which the corporation was organized.
corporate bylaws or by a specific act of the board. 2. Constitutional limitations – cannot acquire
Absent the said board resolution, a petition may not public lands except by lease.
be given due course (Ligaya Esguerra, et al. vs
Holcim Philippines, Inc., G.R. No. 182571, September With regard to private land, 60% of the
2, 2013). corporation must be owned by the Filipinos,
same with the acquisition of a condominium
If the real party in interest is a corporate body, an unit.
officer of the corporation can sign the verification
against forum shopping so long as he has been duly NOTE: No law disqualifies a person from
authorized by a resolution of its board of directors. purchasing shares in a landholding corporation
The court did not commit grave abuse of discretion even if the latter will exceed the allowed foreign
in dismissing the petition for lack of authority of the equity, what the law disqualifies is the corporation
officer who signed the certification of forum from owning land (JG Summit Holdings, Inc. vs. CA,
shopping in representation of corporation (San G.R. No. 124293, January 31, 2005).
Miguel Bukid Homeowners Association, Inc. v. City of
Mandaluyong, et al, G.R. No. 153653, October 2, 2009; 3. Special law – subject to the provisions of the
Republic of the Philippines v. Coalbrine International Bulk Sales Law and law against monopoly,
Philippines, et al, G.R. No. 161838, April 7, 2010). illegal combination or restraint of trade.

GR: The verification and certification against forum Requisites for a valid donation (RPAI)
shopping must be signed on behalf of the
corporation pursuant to a valid board resolution. 1. Donation must be Reasonable.
2. Must be for valid Purposes including public
XPN: The following officers may sign even in the welfare, hospital, charitable, cultural, scientific,
absence of a board resolution: civic or similar purposes.
3. Must not be an Aid in any:
a. Chairperson of the Board of Directors; a. Political party;
b. President; b. Candidate; or
c. General Manager; c. Partisan political activity.
d. Personnel Officer; or
e. Employment Specialist in labor case. 4. Donation must bear a reasonable relation to the
corporation’s Interest and not be so remote and
These officers are in the position to verify the fanciful.
truthfulness and correctness of the allegations in
the petition (Mid Pasig Land and Development Corporation as surety or guarantor
Corporation v. Tablante, G.R. No. 162924, February 4,
2010; Skyway Traffic Management and Security GR: A corporation cannot act as a surety or
Division Workers Organization v. PNCC Skyway Corp., guarantor because it will be contrary to the primary
G.R. No. 171231, February 17, 2010). purpose for which the corporation was created.

An unregistered corporation has no right to sue XPN: Such guaranty may be given in the
or be sued for want of corporate personality. accomplishment of any object for which the
corporation was created, or when the particular
“Lideco Corporation” had no personality to transaction is reasonably necessary or proper in the
intervene since it had not been duly registered as a conduct of its business.
coporation. If petitioner “Laureano Investment &
Devlopment Corporation” legally and truly wanted Implied powers of a corporation
to intervene, it should have used its corporate name
as the law requires and not another name which it A corporation is not restricted to the exercise of
had not registered (Laureano Investment & powers expressly conferred upon it by its charter
Development Corp. v. CA., GR No. 100468, May 6, but has the power to do what is reasonably
1997). necessary or proper to promote the interest or
welfare of the corporation (NAPOCOR v. Vera, G.R.
No. 83558, February 27, 1989).

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SPECIFIC POWERS, THEORY OF SPECIFIC 7. Entering into management contract
CAPACITY
POWER TO EXTEND OR SHORTEN
Theory of Specific Capacity CORPORATE TERM

The specific powers of a corporation, also called Procedural requirements in extending/

Theory of Specific Capacity, are the following: shortening corporate term
(ESB-PA-SIDE-A)
1. Majority vote of the BOD or BOT
1. Power to Extend or shorten corporate term (CC, 2. Ratification by 2/3 of the SH representing
Sec. 37) outstanding capital stock or by at least 2/3 of
2. Increase or decrease corporate Stock (CC, Sec. the members in case of non-stock corporation.
38) 3. Written notice of the proposed action and of the
Note: Now, Section 36 RCC, in addition to the time and place of the meeting shall be
provision, ALLOWANCE OF SENDING OF addressed to each stockholder or member at his
NOTICE OF MEETING REGARDING PROPOSED place of residence as shown on the books of the
ACTION THRU ELECTRONIC MEANS SUCH AS corporation and deposited to the addressee in
ELECTRONIC DATA MESSAGES IF ALLOWED the post office with postage prepaid, or served
BY THE BY-LAWS IN ACCORDANCE WITH E- personally or when allowed in the bylaws or
COMMERCE ACT) done with the consent of the stockholder, sent
3. Incur, create, or increase Bonded indebtedness electronically in accordance with the rules and
(CC, Sec. 38) regulations of the Commission on the use of
4. Deny Pre-emptive right (CC, Sec. 39) electronic data messages.
5. Sell, dispose, lease, encumber all or 4. Copy of the amended AOI shall be submitted to
substantially all of corporate Assets (CC, Sec. 40) the SEC for its approval;
6. Purchase or acquire Shares (CC, Sec. 41) 5. In case of Special Corporation, a favorable
7. Invest corporate funds in another corporation recommendation of appropriate government
or business for other purpose other than agency (CC, Sec. 37)
primary purpose (CC, Sec. 42) 6. The extension must be done during the lifetime
8. Declare Dividends out of unrestricted retained of the corporation not earlier than 5 years prior
earnings (CC, Sec. 43) to the expiry date unless exempted. The
9. Enter into management contract with another extension must not exceed 50 years (CC, Sec 16).
corporation (not with an individual or a
partnership – within general powers) whereby NOTE: After the term had expired without
one corporation undertakes to manage all or extension, the corporation is deemed ipso facto
substantially all of the business of the other dissolved. The remedy of the stockholders is
corporation for a period not longer than five (5) reincorporation. Any dissenting stockholder may
years for any one term (CC, Sec. 44) exercise his appraisal right in case of shortening or
10. Amend Articles of Incorporation (CC, Sec. 16) extending corporate term (CC, Sec. 37). (THERE IS A
NEW PROVISION REGARDING THE REVIVAL OF
Authority to enter into contract (1996 Bar) THE CORPORATION)

The Board of Directors or Trustees must act Q: T Corp. has a corporate term of 20 years
together as a body in order to bind the corporation under its Articles of Incorporation or from June
by their acts (Yao KaSinTrading v. CA, et. al. G.R. No. 1, 1980 to June 1, 2000. On June 1, 1991 it
53820, June 15, 1992). amended its AOI to extend its life by 15 years
from June 1, 1980 to June 1, 2015. On June 1,
Corporate powers which are exercised by the 2011, however, T Corp decided to shorten its
BOD and stockholders jointly (ASIA-FuSE) term by 1 year or until June 1, 2014. Both the
1991 and 2011 amendments were approved by
1. Amendments to by-laws majority vote of its Board of Directors and
2. Extending or Shortening the corporate term ratified in a special meeting by its stockholders
3. Increase or decrease of capital stock representing at least 2/3 of its outstanding
4. The sale or other disposition of All or capital stock. The SEC, however, disapproved
substantially all of the corporate assets the 2011 amendment on the ground that it
5. Investment of corporate funds in another cannot be made earlier than 5 years prior to the
corporation or business or for any other expiration date of the corporate term, which is
purpose; June 1, 2014. Is this SEC disapproval correct?
6. Issuance of stock dividends (2011 Bar)

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A: NO. The 5-year rule on amendment of corporate incurring, creating or increasing of any
term applies only to extension, not to shortening, of bonded indebtedness.
term.
NOTE: The increase or decrease in the capital stock
POWER TO INCREASE OR DECREASE CAPITAL or the incurring, creating or increasing bonded
STOCK OR INCUR, CREATE, INCREASE BONDED indebtedness shall require prior approval of the SEC.
INDEBTEDNESS
Prior to the approval of the SEC of the increase in
Procedural requirements in increasing or the authorized capital stock, such payments cannot
decreasing capital stock yet be deemed part of the corporation’s paid-up
capital, technically speaking, because its capital
1. Majority vote of the BOD stock has not yet been legally increased. Such
2. Ratification by stockholders representing 2/3 payments constitute deposits on future
of the outstanding capital stock subscriptions, money which the corporation will
3. Written notice of the proposed increase or hold in trust for the subscribers until it files a
diminution of the capital stock and of the time petition to increase its capitalization and a
and place of the stockholder’s meeting at which certificate of filing of increase of capital stock is
the proposed increase or diminution of the approved and issued by the SEC (Central Textile
capital stock must be addressed to each Mills, Inc. v. NWPC, et al., GR No. 104102, August 7,
stockholder at his place of residence as shown 1996).
on the books of the corporation and deposited
to the addressee in the post office with postage Additional requirement with respect to increase
prepaid, or served personally or through of capital stock – Treasurer’s Affidavit
electronic means recognized in the
corporation’s bylaws and/or the Commission’s The application to be filed with the SEC shall be
rules as a valid mode for service of notices. accompanied by the sworn statement of the
4. A certificate in duplicate must be signed by a treasurer of the corporation, showing that at least
majority vote of the directors of the corporation 25% of the increase in the capital stock was
and countersigned by the subscribed and 25% of the said amount has been
chairman(chairperson) and the secretary of the paid either in actual cash to the corporation or that
stockholder’s meeting, setting forth: there has been transferred to the corporation
a. That the foregoing requirements have been property the valuation of which is equal to 25% of
complied with; the subscription.
b. The amount of increase or diminution of
the capital stock; NOTE: A corporation is not prohibited from
c. If an increase of the capital stock, the increasing its authorized capital stock even if the
amount of capital stock or number of same has not yet been fully subscribed. Once an
shares of no par stock actually subscribed, increase in authorized capital stock is effected, it
the names, nationalities and residences of may be necessarily accompanied by an actual
the persons subscribing, the amount of increase in the assets and additional subscriptions
capital stock or number of no par stock in order to comply with the 25% subscription
subscribed by each, and the amount paid by requirement. However, if such increase is for the
each on his subscription in cash or purpose of effecting a stock dividend previously
property, or the amount of capital stock or authorized, then additional subscriptions are NOT
number of shares of no par stock allotted to urgent.
each stockholder if such increase is for the
purpose of making effective stock dividend Reason: The actual capital is increased by
authorized (and the amount paid by each accumulated profits and such profits are distributed
on the subscription in cash or property, or to the stockholders in the form of stock dividends,
the amount of capital stock or number of the capital stock is increased, for the profits are
shares of no-par stock allotted to each reinvested in the corporation by transferring the
stockholder if such increase is for the same from surplus account to a capital account. The
purpose of making effective stock dividend amount corresponding to the stock dividends
therefor authorized); declared may be used to cover the required 25%
d. The amount of stock represented at the subscription to increase the authorized capital stock
meeting; and and, if sufficient, will obviate the necessity of taking
e. The vote authorizing the increase or in new subscription (De Leon, supra).
diminution of the capital stock, or the
Basis of the required 25% subscription

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The 25% subscription shall be based on the NOTE: The distribution stated above is not
additional amount by which the capital stock mandatory, notwithstanding the authority granted
increased and not on the total capital stock as by the CC for the same under Sec. 122, last par.
increased.
Over-issue of shares is not allowed
NOTE: Treasurer’s affidavit is required in
increasing capital stock, NOT in decreasing capital An issue of stock by a corporation in excess of the
stock. amount prescribed or limited by its AOI is ultra vires
and the stock so issued is void even in the hands of
Additional requirement with respect to the a bona fide purchaser for value.
decrease of capital stock
An over-issued stock is a spurious stock (De Leon,
In case of decrease in capital stock, the same must 2010).
not prejudice the right of the creditors.
NOTE: Over-issue of stock does not avoid the
Ways of increasing or decreasing the capital original issue
stock
There is no over-issue in the case of shares, which
By increasing or decreasing the: were surrendered and new shares issued in their
1. Number of shares and retaining the par value; stead. The new issue in such case merely takes the
2. Par value of existing shares and retaining the place of the shares surrendered.
number of shares;
3. Number of shares and increasing or decreasing Effects of an attempted unauthorized increase of
the par value. capital stock

NOTE: In decreasing the capital stock, resorting to An attempted unauthorized increase of capital stock
reduction of number of shares may also be done amounts to an over-issue and such stock is,
through: therefore, absolutely void and cannot be validated
by application of the doctrine of estoppel.
1. Redeeming redeemable shares (CC, Sec. 8);
2. Purchasing of own shares (CC, Sec. 41); Thus, the following are the effects of such
3. Cancelling or retiring the shares, including the unauthorized increase:
treasury shares (CC, Sec. 9); 1. Subscriptions for such stock are likewise void
4. The corporation may accept a surrender of both on the ground of illegality and for want of
shares and give the holders in exchange consideration;
therefor a proportionate amount of its assets, 2. Subscribers for or purchasers of such stock
provided no rights of creditors are involved; acquire none of the rights of stockholders;
5. Issue bonds for that purpose; 3. Subscribers for or purchasers of such shares do
6. Exchange another class of stock for that retired; not become liable to creditors of the
7. Exchange the corporation’s outstanding shares corporation or on a winding up as stockholders
for a smaller number of shares; or for unpaid subscriptions, and are not subject to
8. Cancelling shares which have not yet been a statutory liability to creditors imposed upon
issued (De Leon, 2010). stockholders; and
4. Subscribers for or purchasers of such shares
Q: Can there be a distribution of surplus on from the corporation may recover from it,
reduction? money paid to it under their subscription or
purchase as upon a failure of consideration, or
A: It depends whether there is an impairment of breach of warranty for the existence of the thing
capital. sold, unless they are precluded from such relief
as parties in pari delicto.
1. If there is no impairment of capital - the surplus
may be equitably distributed by the directors or The board of directors may issue additional
so much thereof as may not be required in issuances of shares of stock without approval of
carrying on the business for the best interests the stockholders.
of the stockholders: Provided the rights of
creditors will not be affected nor the capital A stock corporation is expressly granted the power
impaired. to issue or sell stocks. The power to issue stocks is
2. If there is reduction to meet an impairment – lodged with the Board of Directors and no
there will be no distribution. stockholder’s meeting is required to consider it

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because additional issuance of stock (unlike persons, or for a short extends over a period
increase in capital stock) does not need approval of time. of years.
the stockholders. What is only required is the board
resolution approving the additional issuance of the Bonded indebtedness
shares. The corporation shall also file the necessary
application with the SEC to exempt these from the It is a long-term indebtedness secured by real or
registration requirements under the SRC (Majority personal property (corporate assets).
Stockholders of Ruby Industrial Corp v. Lim &
MinorityStockholders of Ruby Industrial Corp, supra). NOTE: The requirements for the power to incur,
create or increase bonded indebtedness is also the
Q: The stockholders of People Power, Inc. (PPI) same with the power to increase or decrease capital
approved two resolutions in a special stock.
stockholders' meeting:
Registration of the bonds issued by the
1. Resolution increasing the authorized capital corporation
stock of PPI; and
2. Resolution authorizing the Board of Bonds issued by a corporation shall be registered
Directors to issue, for cash payment, the new with the SEC which shall have the authority to
shares from the proposed capital stock determine the sufficiency of the terms thereof (CC,
increase in favor of outside investors who Sec. 38).
are non‐stockholders.
Stockholders’ approval is not required for all
The foregoing resolutions were approved by borrowings of the corporation
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter Not all borrowings of the corporation need
was Jimmy Morato who owned 1% of the stock. stockholders’ approval. Only bonded indebtedness
requires such approval.
a. Are the resolutions binding on the
corporation and its stockholders including POWER TO DENY PRE-EMPTIVE RIGHTS
Jimmy Morato, the dissenting stockholder?
b. What remedies, if any, are available to Pre-emptive right
Morato? (1998 Bar)
It is the preferential right of shareholders to
A: subscribe to all issues or disposition of shares of any
a. NO. The resolutions are not binding on the class in proportion to their present shareholdings
corporation and its stockholders including (CC, Sec. 39). (now sec. 38)
Jimmy Morato. While these resolutions were
approved by the stockholders, the directors' NOTE: The stockholder must exercise his pre-
approval, which is required by law in such case, emptive right within the time fixed in the resolution
does not exist. authorizing the increase of capital stock.
b. Jimmy Morato can petition the Securities and Purpose of pre-emptive right
Exchange Commission to declare the two (2)
resolutions, as well as any and all actions taken The purpose of pre-emptive right is to enable the
by the Board of Directors thereunder, null and shareholder to retain his proportionate control in
void. the corporation and to retain his equity in the
surplus.
Evidence of the corporation’s indebtedness Exercise of pre-emptive right

When a corporation borrows money, its Pre-emptive right must be exercised within the
indebtedness may be evidenced by notes or bonds period stated in the AOI or the By-Laws. When the
as its primary security (De Leon, 2010). AOI and the By-Laws are silent, the Board may fix a
reasonable time within which the stockholders may
Difference between a note and a bond exercise the right.

NOTE BOND NOTE: Pre-emptive right can only be exercised to

Amount borrowed is Amount is large and the same class of shares issued or disposed with that
small and it is obtained from a owned by the stockholder (Share-a-like basis).
borrowed in a single number of people and
sum, or from a few

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Pre-emptive right is available on the re-issuance The corporation can deny pre-emptive right if the
of treasury shares AOI or any amendment thereto denies such right
(Sec. 39, CC).
When a corporation reacquires its own shares
which thereby become treasury shares, all NOTE: A stockholder whose pre-emptive right is
shareholders are entitled to pre-emptive right when violated may maintain an action to compel the
the corporation reissues or sells these treasury corporation to give him that right. If the denial is by
shares. The re-issuance of treasury shares is not amendment to the AOI, he may exercise his
among the exception provided by Sec. 39 when pre- appraisal right under Sec. 81(1).
emptive right does not exist.
Instances when pre-emptive right is not
Pre-emptive right may be waived available

1. Preemptive right may be waived by the stockholder. 1. Shares to be issued to comply with laws
However, the waiver should be given individually requiring stock offering or minimum stock
by the stockholder concerned or by another by way ownership by the public.
of Special Power of Attorney. Being a personal right, 2. Shares issued in good faith with the approval of
the waiver cannot be waived by the corporation the stockholders representing 2/3 of the
itself through a stockholders’ resolution (SEC outstanding capital stock in exchange for
Opinion, Dec. 12, 1994). property needed for corporate purposes.
2. 3. Shares issued in payment of previously
3. A stockholder cannot be forced to waive the right contracted debts.
even if the majority of the stockholders opt to waive 4. In case the right is denied in the AOI.
it (SEC Opinion No. 08-08, March 31, 2008). 5. Waiver of the right by the stockholder.

NOTE: Pre-emptive right may be waived impliedly The validity of issuance of additional shares may
as when the stockholder fails to exercise his pre- be questioned if done in breach of trust by the
emptive right after being notified and given an controlling stockholders notwithstanding the
opportunity to avail of such right. non-existence of the pre-emptive right.

Transferability of pre-emptive right of a Even if pre-emptive right does not exist either
stockholder because the issue comes within the exceptions in
Sec. 39 of the CC or because it is denied in the AOI,
The pre-emptive right of a stockholder is an issue of shares may still be objectionable if the
transferable unless there is an express restriction in directors acted in breach of trust and their primary
the AOI. purpose is to perpetuate or shift control of the
corporation or to “freeze out” the minority interest.
Q: X Corporation has already issued the 1000 The issuance of unissued shares out of the original
originally authorized shares of the corporation authorized capital stock pursuant to a rehabilitation
so that its Board of Directors and stockholders plan the propriety or validity of which was on
wish to increase X's authorized capital stock. question by the minority stockholders and
After complying with the requirements of the subsequently disapproved by the Supreme Court
law on increase of capital stock, X issued an amounts to unlawful dilution of the minority
additional 1000 shares of the same value. shareholdings (Majority Stockholders of Ruby
Assume that stockholder A presently holds 200 Industrial Corp. vs. Miguel Lim and Minority
out of the 1000 original shares. Would A have a Stockholders of Ruby Industrial Corp., G.R. Nos.
pre‐emptive right to 200 of the new issue of 165887 & 165929, June 6, 2011, in Divina, 2014).
1000 shares? Why?
Pre-emptive right vs. Right of first refusal
A: YES, A would have a pre‐emptive right to 200 of
the new issue of 1000 shares. A is a stockholder of BASIS RIGHT OF
PRE-EMPTIVE
record holding 200 shares in X Corporation. FIRST
RIGHT
According to the Corporation Code, each REFUSAL
stockholder has the pre‐emptive right to all issues Right to
of shares made by the corporation in proportion to Right to
subscribe to all
the number of shares he holds on record in the purchase
issuance or
corporation. Description shares of a
dispositions of
stockholder.
shares of the
Denial by the corporation of pre-emptive right corporation

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even to the as shown on the books of the corporation and
subsequent sale deposited to the addressee in the post office
of treasury with postage prepaid, or served personally
stocks. (ALLOWANCE OF ELECTRONIC NOTICE IN
ACCORDANCE WITH E-COMMERCE AND
WHEN ALLOWED BY THE BY-LAWS)
Pertains to Pertains to
To what unsubscribed the sale of the NOTE: The sale of the assets shall be subject to the
does it portion of the stocks by provisions of existing laws on illegal combinations
pertain authorized another and monopolies.
capital stock. stockholder
Right Further, in case of non-stock corporations, where
Against Right exercised
exercised there are no members with voting rights, the vote of
who is it against the
against a co- at least a majority of the trustees in office will be
exercised corporation.
stockholder. sufficient authorization for the corporation to enter
Can only be into any transaction authorized by this section (Sec.
May be
exercised 40, CC).
exercised even
Effect of the when so
when there is no
absence of provided in Instances when the corporation may forego the
express
express the AOI, by- ratification by stockholders / members:
provision in the
provision laws and
AOI or
in the AOI printed in the 1. If sale is necessary in the usual and regular
amendment
stock course of business;
thereto.
certificate. 2. If the proceeds of the sale or other disposition
Does not of such property and assets are to be
Treasury It includes include appropriated for the conduct of the remaining
shares treasury shares. treasury business; or
shares 3. If the transaction does not cover all or
substantially all of the assets.
POWER TO SELL OR DISPOSE OF CORPORATE
ASSETS (SLEMPAD) Remedy of a stockholder who disagrees with the
plan of SLEMPAD of all or substantially all of
Substantially all of corporate assets corporate assets

There is a sale, lease, exchange, mortgage, pledge, Any dissenting stockholder shall have the option to
and any other disposition (SLEMPAD) of exercise his appraisal right.
substantially all of corporate asset if in the
SLEMPAD thereof, the corporation would be Abandonment of the plan for SLEMPAD even
rendered: after the vote of the stockholders or members

1. Incapable of continuing the business; or The BOD, in its discretion, may abandon the plan for
2. Incapable of accomplishing the purpose for SLEMPAD even after such authorization or approval
which it was incorporated (Sec 40, CC). (now by the stockholders, subject to the rights of third
Sec, 39) parties under any contract relating thereto, without
Note: This is subject to the provisions of Republic further action or approval by the stockholders or
Act No. 10667, otherwise known as the “Philippine members (Sec. 40, CC).
Competition Act.”
Effect of sale of all or substantially all of assets of
Procedural requirements for SLEMPAD of all or one corporation to another corporation (1996,
substantially all of corporate assets 2005 Bar)

1. Majority vote of the BOD or BOT GR: The corporation who acquired all or
2. Ratification by stockholders representing at substantially all of the assets of the selling
least 2/3 of the outstanding capital stock or by corporation shall not be liable for the debts of the
at least 2/3 of the members in case of non-stock latter.
corporation
3. Written notice of the proposed action and of the XPNs:
time and place of the meeting addressed to each 1. Express or implied assumption of liabilities;
stockholder or member at his place of residence 2. Merger or consolidation;

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3. If the purchase was in fraud of creditors; Where an asset constitutes the only property of the
4. If the purchaser becomes a continuation of the corporation, its sale to a 3rd party is a sale or
seller; disposition of all the corporate property and assets
5. If there is violation of the Bulk Sales Law of the corporation falling squarely within the
contemplation of Sec. 40 of the Corporation Code.
Q: Divine Corporation, engaged in the Hence, for the sale to be valid, the majority vote of
manufacture of garments for export, was able to the legitimate Board of Trustees, concurred in by
obtain loans from individuals and financing the vote of at least 2/3 of the bona fide members of
institutions. However, due to the drop in the the corporation should have been obtained (Islamic
demand for garments in the international Directorate of the Philippines, et al., v. CA, G.R. No.
market, Divine Corporation could not meet its 117897, May 14, 1997).
obligations. It decided to sell all its equipment
such as sewing machines, permapress machines, POWER TO ACQUIRE OWN SHARES
high-speed sewers, cutting tables, ironing
tables, etc., as well as its supplies and materials Instances when a corporation may acquire its
to Top Grade Fashion Corporation, its own shares (1991, 1992, 2005 Bar)
competitor.
1. To eliminate fractional shares out of stock
a. How would you classify the transaction? dividends (CC, Sec. 41)
b. Can Divine Corporation sell aforesaid items 2. To collect or compromise an indebtedness to
to its competitor, Top Grade Fashion the corporation, arising out of unpaid
Corporation? What are the requirements to subscription, in a delinquency sale and to
validly sell the items? Explain. (Bar 2005) purchase delinquent shares sold during said
sale (Ibid.)
A: 3. To pay dissenting or withdrawing stockholders
a. The transaction is deemed classified as a sale of (in the exercise of the stockholder’s appraisal
all or substantially all of the corporate assets right) (Ibid.)
because the corporation would be rendered 4. To acquire treasury shares (CC, Sec. 9)
incapable of continuing the business or 5. To acquire Redeemable shares regardless of
accomplishing the purpose for which it was existence of retained earnings (CC, Sec 8)
incorporated. 6. To effect a decrease of capital stock (CC, Sec. 38)
b. YES. The law does not prohibit sale of all or 7. In close corporations, when there is a deadlock
substantially all of corporate assets to in the management of the business, the SEC may
competitor-company provided said sale is order the purchase at their fair value of the
subject to laws against illegal combination, shares of any stockholder by a corporation
monopoly, or restraint of trade and Bulk Sales regardless of the availability of unrestricted
Law. Nowhere in the facts state that the retained earnings (URE’s) in its books (CC, Sec.
competitor-company lies within the 104, par. 1 [4]).
restrictions provided for by law. For the
transaction to be valid, it needs a majority vote NOTE: Where a corporation reacquires its own
of its board of directors and stockholder’s shares, it does not thereby become a subscriber
approval representing at least 2/3 of thereof.
outstanding capital stock. Further, since bulk Rule in order that a corporation may acquire its
sales apply to sale of all or substantially all of own shares
corporate assets, it also requires the following:
GR: The corporation may only acquire its own
a. list of creditors under oath must be given stocks in the presence of unrestricted retained
by the seller to the buyer 10 days before earnings (URE).
the sale containing the lists of their
respective names, addresses, due dates XPNs: (RDC)
and amount owing each; 1. Redeemable shares may be acquired even
b. inventory of goods or properties to be without surplus profit for as long as it will not
sold, cost price and the amount for which result to the insolvency of the Corporation
it has been sold; and 2. In cases that the corporation conveys its stocks
c. the list of inventory is filed with the DTI, in payment of a Debt
otherwise, it will be null and void for being 3. In a Close corporation, a stockholder may
in fraud of creditors. demand the payment of the fair value of shares
regardless of existence of retained earnings for

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as long as it will not result to the insolvency of XPN: The purpose will be amended to include the
the corporation. desired business activity among its secondary
purpose.
Unrestricted retained earnings (URE)
NOTE: However, in the case of pawnshops
It represents the surplus profits of the corporation. organized as corporations and partnerships, they
It is determined by subtracting the liabilities (L), the may be allowed to engage in ancillary activity of
Capital Stock (CS) and the Restricted Retained directly purchasing or selling goods or articles. The
Earnings (RRE) from the assets (A) of the Pawnshop Regulation Act contains no prohibition to
corporation (URE = A – (L + CS+ RRE)). engage in ancillary activities. Hence, by implication,
their scope may be extended to other unrelated
Unrestricted Retained Earnings shall include business unless clearly prohibited by the said Act.
accumulated profits and gains realized out of the
normal and continuous operations of the company The only requirement is that the person or entity
after deducting therefrom distributions of engaged at the same time in other business not
stockholders and transfers to capital stock or other directly related or not incidental to pawnshop
accounts. It does NOT include: business, shall keep such business distinct and
separate from his pawnshop operations (De Leon,
1. Funds appropriated by its BOD for corporate 2010 citing SEC Opinion, March 28, 1985).
expansion projects or programs;
2. Funds covered by a restriction for dividend Rule in case a corporation wants to invest in an
declaration under a loan agreement; and undertaking
3. Funds required to be retained under special
circumstances obtaining in the corporation such GR: Investment of a corporation in a business which
as when there is a need for a special reserve for is in line with its primary purpose requires only the
probable circumstances. approval of the board.

Guidelines for the acquisition of its own shares XPN: Where the corporation undertakes to invest in
another corporation or business or for any purpose
1. The capital of the corporation must not be other than a primary purpose, it has to comply with
impaired. There shall be URE’s to purchase the the statutory requirements before it can do so (Sec.
shares. 42, CC).
2. Legitimate or proper corporate objective is
advanced. Statutory requirements that the corporation
3. Condition of the corporate affairs warrants it. needs to comply with to invest in another
4. Transaction is designed and carried out in good corporation or business or for any purpose
faith. other than a primary purpose (1995, 1996 Bar)
5. Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine 1. Approval by the majority vote of the BOD or
(Sec. 41, SEC Opinions, October. 12, 1992, BOT
September 11, 1985, and April 11, 1994). 2. Ratification by stockholders representing at
least 2/3 of the outstanding capital stock or by
The requirement of unrestricted retained earnings at least 2/3 of the members in case of non-stock
to cover the share is based on the trust fund doctrine corporations
which means that the capital stock, property and 3. Ratification must be made at a meeting duly
other assets of a corporation are regarded as equity called for the purposes
in trust for the payment of corporate creditors. The 4. Prior written notice of the proposed investment
reason is that the creditors of a corporation are and the time and place of the meeting shall be
preferred over the stockholders in the distribution made addressed to each stockholder or
of corporate assets (Boman Environmental member by mail or by personal service
Development Corp v. CA, GR No. 77860, November 22,
1988). NOTE: Investment of a corporation in a business
which is in line with its primary purpose requires
POWER TO INVEST CORPORATE FUNDS IN only the approval of the board. Any dissenting
ANOTHER CORPORATION OR BUSINESS stockholder shall have appraisal right.

GR: The corporation is not allowed to engage in a Q: Stikki Cement Co. was organized primarily for
business different from those enumerated in its AOI. cement manufacturing. Anticipating substantial
profits, its President proposed that Stikki invest

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in: a) a powerplant project; b) a concrete road stock dividends, a ratification of the stockholders
project; and c) quarry operations for limestone representing two-thirds (2/3) of the outstanding
in the manufacture of cement. capital stock.

a. What corporate approvals or votes are Q: At least 2/3 of the stockholders of Solar
needed for the proposed investments? Corporation, upon the recommendation of the
Explain. BOD, declared a 50% stock dividend during
b. Describe the procedure in securing these their annual meeting. The notice of the annual
approvals (1992 Bar) stockholders’ meeting did not mention anything
about a stock dividend declaration. The matter
A: was taken up only under the item “other
a. Since a powerplant project and a concrete road business” in the agenda of the meeting. C.K.
project are neither primary purposes nor Senwa, a stockholder, who received his copy of
reasonably necessary for the accomplishment the notice but did not attend the meeting,
thereof, majority votes of the board of directors subsequently learned about the 50% stock
plus the ratification of the stockholders dividend declaration. He desires to have the
representing 2/3 of the outstanding capital stock dividend declaration cancelled and set
stock are needed. aside, and wishes to retain your services as a
lawyer for the purpose. Will you accept the case?
On the other hand, quarry operations for Discuss with reasons. (1990 Bar)
limestone are reasonably necessary or
incidental to attain the primary purpose of the A: NO, I will not accept the case. Sec 43 of the CC
corporation, i.e. the manufacture of cement. states that no stock dividend shall be issued without
Hence, only the majority approval of the board the approval of the stockholders representing not
of directors is needed. The ratification by the less than 2/3 of the outstanding capital stock at a
stockholders is no longer necessary. regular or special meeting duly called for that
purpose. Conformably with Sec 50 of the CC, a
b. To secure the aforementioned approvals, there written notice of the holding of the regular meeting
must be a written notice of the proposed sent to the shareholders will suffice. The notice
investment and the time and place of the itself specified the said subject matter.
meeting shall be addressed to each stockholder
or member at his place of residence as shown Alternative answer:
on the books of the corporation and deposited
to the addressee in the post office with postage YES, I will accept the case. The problem does not
prepaid, or served personally (CC, Sec. 42). indicate that there is action by the BOD which is also
necessary for the declaration of 50% stock dividend.
POWER TO DECLARE DIVIDENDS
Q: During the annual stockholders meeting,
Requirements for the declaration of dividends Riza, a stockholder proposed that a part of the
corporation’s unreserved earned surplus be
1. Existence of URE’s. (Unrestricted Retained capitalized and stock dividends be distributed
Earnings) to the stockholders, arguing that as owners of
2. Resolution of the board. the company, the stockholders, by a majority
vote, can do anything. As chairman of the
NOTE: In case stock dividend is to be declared, an meeting, how would you rule on the motion to
additional requirement of: declare stock dividends? (1991, 2001 Bar)

a. A vote representing 2/3 of outstanding A: As the chairman of the meeting, I would rule
capital. (Sec. 43, CC) against the motion considering that a declaration of
b. A corporation must have also a sufficient stock dividends should initially be taken by the BOD
number of authorized unissued shares for and thereafter to be concurred in by a 2/3 vote of
distribution to stockholders. the stockholders (CC, Sec. 43). There is no
prohibition, however, against the stockholders’
Q: Under what circumstances may a corporation resolving to recommend to the BOD that it consider
declare dividends? (2005 Bar) a declaration of stock dividends for concurrence
thereafter by the stockholders. A stockholder
A: A corporation may declare dividends when there cannot compel the corporation to declare either
are unrestricted retained earnings, a resolution of cash or stock dividends as it rests with the sound
the Board of Directors and in case of declaration of discretion of the board.

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Forms of dividends Note: The declaration of cash dividends cannot be
recalled, because it can affect the market for the
1. Cash shares of stock. Stock Dividends can be revoked
before their issuance, because they do not give
Cash dividends due on delinquent stock shall any additional assets to the stockholders.
first be applied to the unpaid balance on the (Ballante p. 559)
subscription plus cost and expenses (Sec. 43,
CC). Q: From what funds are cash and stock
dividends sourced? Explain why (Bar 2005)
2. Stock
A: Dividends either cash or stock dividend must be
Stock dividends are withheld from the declared out of unrestricted retained earnings
delinquent stockholder until his unpaid because of the Trust Fund Doctrine. The Trust Fund
subscription is fully paid(Ibid). Doctrine provides that subscriptions to the capital
stock of a corporation constitute a fund to which the
3. Property creditors have the right to look for the satisfaction
of their claims (Ong v. Tiu, G.R. No. 144476, April 8,
Stockholders are entitled to dividends PRO‐ 2003). Thus, dividends must never impair the
RATA based on the total number of shares and subscribed capital stock.
not on the amount paid on shares.
Scrip dividend
Cash dividends vs. Stock dividends
A scrip dividend is dividend issued by the
CASH DIVIDENDS STOCK DIVIDENDS corporation when the obligation to pay becomes
Part of general fund Part of capital absolute. Thus, it becomes a debt absolutely due to
Results in cash outlay No cash outlay the stockholders although payment is postponed to
Once issued, can be a future date (De Leon, supra).
Not subject to levy by levied by corporate
corporate creditors creditors because they’re Stock split
part of corporate capital
Declared only by the Declared by the board It is merely a dividing up of the outstanding shares
board of directors at with the concurrence of of a corporation into a greater number of units,
its discretion the stockholders without disturbing the stockholder’s original
(majority of the representing at least 2/3 proportional participating interest in the
quorum only, not of the outstanding corporation.
majority of all the capital stock at a
board) regular/special meeting STOCK SPLIT STOCK DIVIDENDS
Does not increase the Corporate capital is A mere increase in the Capitalization of
corporate capital increased number of shares earnings or profits,
Its declaration which evidence together with a
creates a debt from ownership without distribution of the
No debt is created by its altering the amount of added shares which
the corporation to
declaration the capital, surplus, or evidence the assets
each of its
stockholders segregated earnings. transferred to capital
If received by
individual: subject to Sources of retained earnings
Not subject to tax either
tax;
received by individual or 1. Paid-in surplus – It is the difference between the
If received by
a corporation par value and the issued value or selling price of
corporation: not
subject to tax the shares. It cannot be declared as dividend
Can be revoked despite because it is a part of the capital.
Cannot be revoked
announcement but
after announcement Exception: The SEC allows the distribution of paid-
before issuance
Can be withheld until in surplus in exceptional cases when the following
Applied to the unpaid are present:
payment of unpaid
balance of a. that they be declared only as
balance of delinquent
delinquent shares stock dividends and not as
shares
cash dividends

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b. no creditor shall be prejudiced Planters Bank v. Agana, G.R. No. 51765. March 3,
therefrom 1997).
c. there is no resulting
impairment of capital Prohibition imposed by law on URE's of a stock
corporation
2. Operational Income - The amount of profit
realized from a business's operations after GR: Stock corporations are prohibited from
taking out operating expenses. It is available for retaining surplus profits in excess of one hundred
both cash and stock dividends (100%) percent of their paid-in capital stock.
3. Revaluation surplus – Increase in the value of a
fixed asset as a result of its appreciation. They XPNs: (2001 Bar)
are by nature subject to fluctuations. 1. When justified by definite corporate
expansion projects or programs approved by
GR: It cannot be declared as dividends because the board of directors;
there is no actual gain. 2. When the corporation is prohibited under any
loan agreement with any financial institution
XPN: It can be used in the declaration of or creditor, whether local or foreign, from
dividends provided the following conditions declaring dividends without its/his consent,
exist: and such consent has not yet been secured; or
3. When it can be clearly shown that such
a. The corporation has sufficient income from retention is necessary under special
operations from which the depreciation on circumstances obtaining in the corporation,
the appraisal increase was charged; such as when there is need for special reserve
b. It has no deficit at the time the depreciation for probable contingencies (CC, Sec. 43).
on the appraisal increase was charged to
operations; and Q: For the past three years of its commercial
c. Such depreciation on appraisal increase operation, X, an oil company, has been earning
previously charged to operations has not tremendously in excess of 100% of the
been erased or impaired by subsequent corporation’s paid-in capital. All of the
losses; otherwise, only that portion not stockholders have been claiming that they share
impaired by subsequent losses is available in the profits of the corporation by way of
for dividend (SEC Opinions, Oct. 2, 1981 and dividends but the Board of Directors failed to lift
March 19, 1992). its finger. Is Corporation X guilty of violating a
law? If in the affirmative, state the basis. (2001
4. Reduction surplus – the surplus arises from the Bar)
reduction of the par value of the issued shares A: YES. Corporation X is guilty of violating Section
of stocks. It cannot be declared as cash dividend 43 of the CC. This provision prohibits stock
but can be declared only as stock dividend corporations from retaining surplus profits in
provided that: excess of 100% of their paid-in capital.
a. No creditor is prejudiced
b. There is no resulting impairment of Penalty in case of unjustifiable retention of
capital surplus profits

5. Gain from Sale of Real Property - Available as The penalty in case a corporation unjustifiably
dividends. retains surplus profits in excess of one hundred
6. Treasury Shares – Gain realized from reissuance (100%) percent of the paid-in accumulated capital
of treasury shares. It cannot be declared as is the payment of Improperly Accumulated
stock or cash dividends but it may be declared Earnings Tax equal to 10% of the improperly
as property dividend. accumulated taxable income (NIRC OF 1997, Sec.
29 [A]).
Q: Can the board be compelled to declare
dividends every year? Sources of dividends

A: NO. Declaration of dividends is discretionary GR: Dividends can only be declared out of actual and
upon the board. Dividends are payable only when bona fide unrestricted retained earnings
there are profits earned by the corporation and as a
general rule, even if there are existing profits, the XPN: Dividends can be declared out of capital in the
Board of Directors has the discretion to determine following instances:
whether or not dividends are declared (Republic

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1. Dividends from investments wasting assets distribution may properly be treated as incomplete
corporation or engage in “wasting business” or partial liquidation and as payment by the
(e.g. timber cutting or mining); or corporation to the stockholder for his stock or as
2. Liquidating a business. return of the capital invested by him(Wise & Co., Inc.
3. Utilization of lease or patent. v. Meer,G.R. No. 48231, June 30, 1947).

Wrongful or illegal declaration of dividends POWER TO ENTER INTO

MANAGEMENT CONTRACT
The Board of Director is liable in case of wrongful or
illegal declaration of dividends. The stockholders Management Contract is any contract whereby a
should return the dividends to the corporation corporation undertakes to manage or operate all or
based on the principle of solution indebiti. substantially all of the business of another
corporation, whether such contracts are called
Persons entitled to receive dividends service contracts, operating agreements or
otherwise (CC, Sec. 44).
Dividends are payable to the stockholders of record
as of the date of the declaration of dividends or NOTE: Sec. 44 refers only to a management contract
holders of record. (Cojuanco and Prime Holdings, with another corporation. Hence, it does not apply
Inc., v. Sandiganbayan G.R. No. 183278, April 24, to management contracts entered into by a
2009). corporation with natural persons. Corollary to this,
management contract with a natural person need
Rule on transfer of shares which is not recorded not comply with the requisites of Sec. 44.
in the books of the corporation
Requirements for a management contract to be
Such transfer is valid only as between the parties valid
(CC, Sec. 63); hence, the transferor has the right to
dividends as against the corporation without notice 1. Contract must be approved by the majority of
of the transfer but he is the trustee of the real owner the BOD or BOT of both managing and managed
of the dividends subject to the contract between the corporation.
transferor and transferee as to who is entitled to 2. Ratified by the stockholders owning at least the
receive the dividends (De Leon, supra). majority of the outstanding capital stock, or
members in case of a non-stock corporation, of
Rule on the receipt of dividends in case of both the managing and the managed
mortgaged or pledged shares corporation, at a meeting duly called for the
GR: The mortgagor or the pledgor has the right to purpose.
receive the dividends. 3. Contract must be approved by the stockholders
of the managed corporation owning at least 2/3
XPN: When the mortgagor or pledgor defaults and of the outstanding capital stock entitled to vote
the mortgagee or pledgee acquires the pledged or 2/3 of the members when:
stocks and the transfer is recorded in the books of a. Stockholders representing the same
the corporation, the mortgagee or pledgee is interest in both of the managing and the
entitled to receive the dividends. managed corporation own or control more
than 1/3 of the total outstanding capital
Q: May stock dividends be issued to a person stock entitled to vote of the managing
who is not a stockholder in payment of services corporation (Interlocking stockholders);
rendered? b. Majority of the members of the BOD of the
managing corporation also constitute a
A: NO. Only stockholders are entitled to payment of majority of the BOD of the managed
stock dividends (Nielson & Co., Inc. v. Lepanto corporation. (Interlocking Directors)(CC,
Consolidated Mining Co., G.R. No. 21763, December Sec. 44)
17, 1966).
Q: ABC Management Inc. presented to the DEF
Distinction between distribution in liquidation Mining Co, the draft of its proposed Management
and ordinary dividend Contract. As an incentive, ABC included in the
terms of compensation that ABC would be
If the distribution is in the nature of a recurring entitled to 10% of any stock dividend which DEF
return on stock, it is an ordinary dividend. However, may declare during the lifetime of the
if the corporation is really winding up its business Management Contract. Would you approve of
or recapitalizing and narrowing its activities, the

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such provision? If not, what would you suggest or public duty, and are void, ultra vires acts are not
as an alternative? (1991 Bar) illegal but not merely within the scope of the articles
of incorporation and the by-laws. They are merely
A: NO. I would not approve a proposed stipulation voidable and may become binding and enforceable
in the management contract that the managing when ratified by the stockholders (Maria Clara
corporation, as an additional compensation to it, Pirovana, et al. v. the De La Rama Steamship Co., G.R.
should be entitled to 10% of any stock dividend that No. L-5377, December 29, 1954).
may be declared. Stockholders are the only ones
entitled to receive stock dividends. (Nielson & Co v. Types of UVA
Lepanto Mining G.R. No. L-21601, December 17,
1966). 1. Acts done beyond the powers of the corporation
(through BOD)
I would add that the unsubscribed capital stock of a 2. Ultra vires acts by corporate officers
corporation may only be issued for cash or property 3. Acts or contracts which are per se illegal as being
or for services already rendered constituting a contrary to law
demandable debt. (CC, Sec. 62) As an alternative, I
would suggest that the managing corporation Ultra vires acts by reason of lack of authority vs.
should instead be given a net profit participation Ultra vires acts by reason of illegality (illegal
and, if it later so desires, to then convert the amount acts)
that may be due thereby to equity or shares of stock
at no less than the par value thereof. ULTRA ILLEGAL
BASIS
VIRES ACT ACTS
Period for every management contract entered Not
into by the corporation Unlawful;
necessarily
against law,
unlawful, but
GR: Management contract shall be entered into for Lawfulness morals, public
outside the
a period not longer than 5 years for any one term. policy, and
powers of the
public order
corporation
XPN: In cases of service contracts or operating Merely
agreements which relate to the exploitation, voidable and
development, exploration or utilization of natural may be Cannot be
resources, it may be entered for such periods as may Enforceability enforced by validated.
be provided by the pertinent laws or regulations. performance, VOID
ratification or
ULTRA VIRES ACTS (UVA) estoppel
Can be Cannot be
No corporation shall possess or exercise any Ratification
ratified ratified
corporate powers except those conferred by this Can bind the
Code or by its articles of incorporation and except parties if
such as are necessary or incidental to the exercise of Cannot bind
Binding effect wholly or
the powers so conferred (CC, Sec. 45). the parties
partly
executed
An ultra vires act refers to an act outside or beyond
express, implied and incidental corporate powers. Distinguished from acts that do not comply with
The concept also includes those acts that may formalities and unauthorized acts
ostensibly be within such powers but are, by
general or special laws, either proscribed or ACTS THAT DO NOT
declared illegal. (Rural Bank of Milaor v. Ocefemia, COMPLY WITH UNAUTHORIZED ACTS
G.R. No. 137686, February 8, 2000). FORMALITIES
If certain procedures The act may be within
It is one committed outside the object for which a or formalities are the powers of the
corporation is created as defined by the law of its prescribed in the AOI corporation but not
organization and therefore beyond the power or BL and the same within the powers of the
conferred upon it by law. (Atrium Management are not complied particular officer. The
Corporation vs. CA, G.R. No. 109491, February 28, with, the resulting act latter is sometimes
2001). is not an ultra vires referred to as ultra vires
act of the act of the officer. The law
Unlike illegal acts which contemplate the doing of an corporation. on agency applies.
act that is contrary to law, morals, or public policy

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Instances when the acts of the officers bind the Where the practice of the corporation has been to
corporation(PRADa) allow its general manager to negotiate and execute
contracts in its copra trading activities for and in
1. If it is provided in the by-laws behalf of the corporation without board approval,
2. When the act was ratified the board itself, by its acts through acquiescence,
3. If authorized by the board practically laid aside the by-law requirement of
4. Under the doctrine of apparent authority prior approval. Settled is the rule that where similar
acts have been approved by the directors as a
Doctrine of apparent authority matter of general practice, custom, and policy, the
general manager may bind the company without
If a corporation knowingly permits one of its formal authorization from the board of
officers, or any other agent, to act within the scope directors(The Board of Liquidators, representing the
of an apparent authority, it holds him out to the Government of the Philippines v. Heirs of Maximo M.
public possessing the power to do those acts; and Kalaw, et al., G.R. No. L-18805, August 14, 1967).
thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be A corporation cannot deny the authority of a lawyer
estopped from denying the agent’s authority. when they clothed him with apparent authority to
act in their behalf such as when he entered his
Its existence may be ascertained through: appearance accompanied by the corporation’s
general manager and the corporation never
1. The general manner in which the corporation questioned his acts and even took time and effort to
holds out an officer or agent as having the forward all the court’s documents to him. The
power to act, or in other words, the apparent lawyer may not have been armed with a board
authority to act in general, with which it clothes resolution but the doctrine of apparent authority
him; or imposes liability not as a result of contractual
2. The acquiescence in his acts of a particular relationship but rather because of the actions of the
nature, with actual or constructive notice principal or an employer in somehow misleading
thereof, within or beyond the scope of his the public that the relationship or authority exists
ordinary powers. (Megan Sugar Corporation v. RTC Iloilo Br. 68, G.R.
NO. 170352, June 1, 2011).
It is not the quantity of similar acts which
establishes apparent authority but the vesting of a Q: May the board of directors of a rural banking
corporate officer with the power to bind the corporation be compelled to confirm a deed of
corporation (Advance Paper Corp. v. Arma Traders absolute sale of real property owned by the
Corp., GR No. 176897, December 11, 2013). corporation which deed of sale was executed by
the bank manager without prior authority of the
Instances when the corporation is estopped to board of directors of the rural banking
deny ratification of contracts or acts entered by corporation?
its officers or agents
A: YES, the corporation may be compelled. A bank is
Generally, when the corporation has knowledge liable to innocent third persons where
that its officers or agents exceed their power, it must representation is made in the course of its normal
promptly disaffirm the contract or act, and allow the business by an agent like the bank manager, even
other party or third person to act in the belief that it though such agent is abusing her authority. Clearly,
was authorized or has been ratified. Otherwise, if it persons dealing with her could not be blamed for
acquiesces, with knowledge of the facts, or if it fails believing that she was authorized to transact
to disaffirm, ratification will be implied. (Premiere business for and on behalf of the bank. The bank is
Development Bank v. CA, G.R. No. 159352, April 14, estopped from questioning the authority of the bank
2004). manager to enter into the contract of sale. If a
corporation knowingly permits one of its officers or
So settled is the precept that ratification can be any other agent to act within the scope of an
made by the corporate board either expressly or apparent authority, it holds the agent out to the
impliedly. Implied ratification may take various public as possessing the power to do those acts;
forms - like silence or acquiescence; by acts showing thus, the corporation will, as against anyone who
approval or adoption of the contract; or by has in good faith dealt with it through such agent, be
acceptance and retention of benefits flowing estopped from denying the agent’s
therefrom (MWSS v. CA, G.R. No. 126000, Oct. 7, authority. Unquestionably, the bank has authorized
1998). its manager to enter into the Deed of Sale.
Accordingly, it has a clear legal duty to issue the

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board resolution sought by. Having authorized her thereon owned by the Sps. Cortel. Sps.
to sell the property, it behooves the bank to confirm Magsalang and Sps. Cortel asked permission
the Deed of Sale so that the buyers may enjoy its full from PCRB to sell the subject properties.
use. (Rural Bank of Milaor v. Ocfemia, et al., G.R. No. Mondigo, Branch Manager of PCRB, verbally
137686, February 8, 2000). agreed to their request but first required full
payment of the loan. The subject properties
Q: Associated Bank (the Bank) purchased in a were later sold to Banate. The title issued to
foreclosure sale the real properties of Sps. Vaca Banate, however, carried over the mortgage lien
mortgaged in its favor. The Sps. Vaca, however, in PCRB’s favor. PCRB refused to release the
prayed for the nullification of the mortgage and property from the lien.
foreclosure sale. In the meantime, the Bank
advertised for sale the subject properties, and Did the purported agreement between Banate
the Sps. Pronstroller offered to buy the same. and Mondigo novate the mortgage contract over
The offer was made through Atty. Soluta, the the subject properties and is thus binding upon
Bank’s Vice-President, Corporate Secretary and PCRB?
a member of its BOD. The Bank accepted the Sps.
Pronstroller’s offer. A: NO. The Court would be unduly stretching the
doctrine of apparent authority if the Court would
Sps. Pronstroller and Atty. Soluta executed two consider the power to undo or nullify solemn
Letters-Agreement wherein the balance of the agreements validly entered into as within the
purchase price will be paid upon receipt of a doctrine’s ambit. Although a branch manager,
final order from the Supreme Court in the Vaca within his field and as to third persons, is the
case and the delivery of the property to the Sps. general agent and is in general charge of the
Pronstroller free from occupants. corporation, with apparent authority
commensurate with the ordinary business
The Bank was later on reorganized, and Atty. entrusted him and the usual course and conduct
Soluta was relieved from his duties. The Bank, thereof, yet the power to modify or nullify corporate
through its Assistant Vice-President, Atty. contracts remains generally in the board of
Dayday, informed Sps. Pronstroller that their directors. Being a mere branch manager alone is
request for extension was disapproved and, in insufficient to support the conclusion that Mondigo
view of their breach of the contract, the Bank has been clothed with “apparent authority” to
was rescinding the same and forfeiting their verbally alter terms of written contracts, especially
deposit. when viewed against the telling circumstances of
this case: the unequivocal provision in the mortgage
Is the Associated Bank bound by the Letter- contract; PCRB’s vigorous denial that any
Agreement signed by Atty. Soluta under the agreement to release the mortgage was ever
doctrine of apparent authority? entered into by it; and, the fact that the purported
agreement was not even reduced into writing
A: YES. The authority of a corporate officer or agent considering its legal effects on the parties’
in dealing with third persons may be actual or interests. To put it simply, the burden of proving
apparent. Accordingly, the authority to act for and the authority of Mondigo to alter or novate the
to bind a corporation may be presumed from acts of mortgage contract has not been established
recognition in other instances, wherein the power (Banate,et al., v. Philippine Countryside Rural Bank,
was exercised without any objection from its board Inc., et al., G.R. No. 163825, July 13, 2010).
or shareholders. Undoubtedly, Associated Bank
had previously allowed Atty. Soluta to enter into the Q: PPI, a fertilizer manufacturer, entered into an
first agreement without a board resolution arrangement with Janet Layson for the delivery
expressly authorizing him; thus, it had clothed him of fertilizers to her, payable from the proceeds
with apparent authority to modify the same via the of the loan that UCPB extended to her. Layson
second letter-agreement. It is not the quantity of executed a document called “pagares,” written
similar acts which establishes apparent authority, on the dorsal side of a UCPB promissory
but the vesting of a corporate officer with the power note. The pagares stated that Layson had an
to bind the corporation. (Associated Bank v. approved loan with UCPB-Iloilo Branch. The
SpousesPronstroller, G.R. No. 148444, July 14, 2008). second portion of the pagares, signed by that
branch’s manager Gregory Grey, stated that the
Q: Sps. Magsalang obtained a loan from assignment has been duly accepted and
Philippine Countryside Rural Bank (PCRB), payment duly guaranteed within 60 days from
secured by a real estate mortgage over their PPI’s Invoice. But contrary to her undertakings,
property, including the house constructed Layson withdrew with branch manager Grey’s

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connivance, the loan that UCPB granted her. On A. YES. Apparent authority is derived not merely
the strength of the three documents, PPI from practice. Its existence may be ascertained
delivered quantities of fertilizers to through (1) the general manner in which the
Layson. When PPI presented the documents of corporation holds out an officer or agent as having
the financed transactions to UCPB for collection, the power to act or, in other words the apparent
the bank denied the claim on the ground that it authority to act in general, with which it clothes
neither authorized the transactions nor the him; or (2) the acquiescence in his acts of a
execution of the documents which were not part particular nature, with actual or constructive
of its usual banking transactions. UCPB claimed knowledge thereof, within or beyond the scope of
that branch manager Grey exceeded his his ordinary powers. It requires presentation of
authority in guaranteeing payment of Layson’s evidence of similar act(s) executed either in its favor
purchases on credit. UCPB contends that the or in favor of other parties. It is not the quantity of
pagares were illegal and void since banking laws similar acts which establishes apparent authority,
prohibit bank officers from guaranteeing loans but the vesting of a corporate officer with the power
of bank clients. Is UCPB bound by Grey’s to bind the corporation.
undertaking on its behalf to deliver to PPI the
proceeds of the bank’s loan in payment of the The Court held that Arma Traders is liable to pay the
fertilizers Laysonbought? loans. To begin with, Arma Traders’ Articles of
Incorporation provides that the corporation may
A: NO, UCPB is not bound. A corporation like UCPB borrow or raise money to meet the financial
is liable to innocent third persons where it requirements of its business by the issuance of
knowingly permits its officer, or any other agent, to bonds, promissory notes and other evidence of
perform acts within the scope of his general or indebtedness. Likewise, it states that Tan and Uy are
apparent authority, holding him out to the public as not just ordinary corporate officers and authorized
possessing power to do those acts. But, here, it is bank signatories because they are also Arma
plain from the guarantee Grey executed that he was Traders’ incorporators. Furthermore, Arma
acting for himself, not in representation of UCPB. Traders, et al., through Ng who is Arma Traders’
The latter cannot be bound by Grey’s above corporate secretary, incorporator, stockholder and
undertaking since he appears to have made it in his director, testified that the sole management of Arma
personal capacity. He signed it under his own name, Traders was left to Tan and Uy and that he and the
not in UCPB’s name or as its branch other officers never dealt with the business and
manager. Indeed, the wordings of the undertaking management of Arma Traders for 14 years
do not at all make any allusion to UCPB(UCPB v.
Planters Products, Inc., et al., G.R. No. 179015, June Thus, Arma Traders bestowed upon Tan and Uy
13, 2012). broad powers by allowing them to transact with
third persons without the necessary written
Q:. Tan was formerly the President of Arma authority from its non-performing board of
Traders while Uy is the Treasurer. They directors. Arma Traders failed to take precautions
represented Arma Traders when dealing with to prevent its own corporate officers from abusing
its supplier, Advance Paper, for about 14 years. their powers. Because of its own laxity in its
business dealings, Arma Traders is now estopped
Upon the representation of Tan and Uy, Arma from denying Tan and Uy’s authority to obtain loan
Traders was able to obtain a loan from Advance from Advance Paper. (Advance Paper Corporation vs.
Paper, which the latter granted due to its good Arma Traders Corporation, G.R. No 176897,
business relations with Arma Traders. December 11, 2013).

Arma Traders issued postdated checks signed Consequences of Ultra Vires Acts
by Tan and Yu, who were its authorized bank
signatories. Thechecks were dishonored due to Ultra vires acts entered into by the board of
insufficient balance. Arma Traders failed to directors bind the corporation, and the courts will
settle the loan despite several demands, not interfere unless terms are oppressive and
claiming thatthe purchase on credit and the loan unconscionable. (Gamboa vs. Victoriano, G.R. No. L-
were spurious as the Board of Arma Traders did 43324. May 5, 1979).
not issue a resolution authorizing the same.
These are the effects for the specific acts:
Is the Doctrine of Apparent Authority
applicable? 1. Executed contract – courts will not set aside or
interfere with such contracts;

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2. Executory contracts – no enforcement even at corporation(CC, Sec. 32). Such contract can be
the suit of either party (void and ratified by the vote of the stockholders
unenforceable); representing at least two-thirds of the
3. Partly executed and partly executory – outstanding capital stock in a meeting called for
principle of “no unjust enrichment at expense of the purpose: Provided, that full disclosure of the
another” shall apply; adverse interest of the directors or trustees
4. Executory contracts apparently authorized involved is made at such meeting: Provided,
but ultra vires – the principle of estoppel shall however, That the contract is fair and
apply. reasonable under the circumstances.
b. Valid – Approval of the stockholders is not
Remedies in case of ultra vires act required in declaring cash dividends
c. Void – This is an ultra vires act on part of XL
1. State Foods Corporation, and is not one of the powers
a. Obtain a judgment of forfeiture; or provided for in Sec. 36 of the Corporation Code.
b. The SEC may suspend or revoke the It can be ratified provided it is not illegal per se
certificate of registration but merely beyond the powers of the
corporation by the approval of the majority of
2. Stockholders the board and vote of the stockholders
a. Injunction; or representing at least two thirds of the
b. Derivative suit outstanding capital stock. Where the contract
or act is not illegal per se but merely beyond the
3. Creditors- Nullification of contract in fraud of power of the corporation, the same is merely
creditors. voidable and may be enforced by performance,
ratification, or estoppels, or on equitable
Q: X Corp., whose business purpose is to grounds (Republic v. Acoje Mining Co., Inc.)
manufacture and sell vehicles, invested its funds especially if no creditors are prejudiced thereby
in Y Corp., an investment firm, through a and no rights of the state or the public are
resolution of its Board of Directors. The involved(Flecher, p.585).
investment grew tremendously on account of Y
Corp.'s excellent business judgment. But a HOW EXERCISED
minority stockholder in X Corp. assails the
investment as ultra vires. Is he right and, if so, BY THE SHAREHOLDERS
what is the status of the investment? (2011 Bar)
The shareholders participate in controlling the
A: YES, it is an ultra vires act of its Board of Directors affairs of the corporation by exercising their right to
but voidable only, subject to stockholders’ vote. They can elect the directors who will actually
ratification. govern the corporation and they can also vote on
important matters that are still reserved to them by
Q: Which of the following corporate acts is valid, the Corporation Code(Aquino, 2006).
void or voidabe?
BY THE BOARD OF DIRECTORS
a. XL Food Corporation, which is engaged in
the fast-food business, entered into a The Board of Directors is primarily responsible for
contract with its President, Jose Cruz, the governance of the corporation. Their primary
whereby the latter would supply the duty is to set the policies for the accomplishment of
corporation with its meat and poultry the corporate objectives. (Revised Code of Corporate
requirements. Governance, Art. 3).
b. The Board of Drectors of XL Foods
Corporation declared and paid cash They elect the officers who carry out the policies
dividends without approval of the that they have established.
stockholders.
c. XL Foods Corporation guaranteed the loan The general rule is that a corporation, through its
of its sister company XL Meat Products, Inc. Board of Directors, should act in a manner and
(2002 Bar) within the formalities, if any, prescribed by its
charter or by the general law. Directors must act as
A: a body in a meeting called for the pursuant to the
a. Voidable – A contract of the corporation with law or the corporation’s by laws, otherwise, any
one or more of its directors or trustees or action taken therein may be questioned by any
officers is voidable, at the option of such objecting director or shareholder; but an action of

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the Board of Directors during a meeting, which was NOTE: Court has recognized the authority of some
illegal for lack of notice, may be ratified expressly, corporate officers to sign the verification and
by the action of directors in a subsequent legal certification against forum shopping. In sum, the
meeting, or impliedly, by the corporation’s following officials or employees of the company can
subsequent course of conduct(Lopez Realty, Inc., v. sign the verification and certification without need
Fontecha, et al., GR No. 76801, August 11, 1995). of a board resolution: (1) the Chairperson of the
Board of Directors, (2) the President of a
Q: Sheryl Oabel was initially hired by Maranaw corporation, (3) the General Manager or Acting
Hotel as an extra beverage attendant. Oabel General Manager, (4) Personnel Officer, and (5) an
worked in Century Park Hotel, an establishment Employment Specialist in a labor case. The rationale
owned by the Maranaw Hotels. The latter applied in the foregoing cases is to justify the
contracted with Manila Resource Development authority of corporate officers or representatives of
Corporation (MANRED). Subsequently, Oabel the corporation to sign the verification or certificate
was transferred to MANRED, with the latter against forum shopping, being in a position to verify
deporting itself as her employer. After the truthfulness and correctness of the allegations
sometime, Oabel filed before the Labor Arbiter a in the petition. (Mid-Pasig Land
petition for regularization of employment DevelopmentCorporation v. Tablante, G.R. No.
against the Maranaw Hotels. However, Oabel 162924, February 4, 2010).
was dismissed from employment. Oabel
converted her petition for regularization into a Power of directors or trustees to delegate
complaint for illegal dismissal. The NLRC found authority
that Oabel was illegally dismissed. Maranaw
Hotels subsequently appealed before the CA. GR: The board may validly delegate, either
The CA dismissed the petition on account of the expressly or impliedly, some of its powers and
failure of the Maranaw Hotels to append the functions to other officers or agents of the
board resolution authorizing the counsel for corporation appointed by it. (Yu Chuck v. Kong Li Po,
Maranaw Hotels to file the petition before the G.R. No. L-22450, December 3, 1924).
CA. Maranaw Hotels invokes substantial justice
as justification for a reversal of the resolution of XPNS:
the CA. It contends that the filing of a motion for 1. Discretionary powers which, by provisions of
reconsideration with the certificate of non- law or the by-laws or by the vote of the
forum shopping attached constitutes stockholders, are vested exclusively in the
substantial compliance with the requirement. board of directors. (Bliss v. Kaweah Canal, etc.,
Did the petition before the CA comply with the 65 Cal. 502, August 18, 1884);
procedural requirements under the law and the 2. They cannot delegate entire supervision and
rules? control of the corporation to others for this is
not only unnecessary and contrary to usage, but
A: NO. Well-settled is the rule that the certificate of it is inconsistent with Section 23 of the
non-forum shopping is a mandatory requirement. Corporation Code; and
Substantial compliance applies only with respect to 3. Neither can the board delegate special powers
the contents of the certificate but not as to its especially conferred upon it by a resolution of
presence in the pleading wherein it is required. the stockholders or members of the
Furthermore, the lawyer acting for the corporation corporation.
must be specifically authorized to sign pleadings for
the corporation. Specific authorization, the Court BY THE OFFICERS
held, could only come in the form of a board
resolution issued by the Board of Directors that After the election of directors, the latter must
specifically authorizes the counsel to institute the formally organize by electing the corporate officers.
petition and execute the certification, to make his (Sec. 25, CC).
actions binding on his principal, i.e., the corporation.
The SC has not wavered in stressing the need for The corporate officers are tasked to carry out the
strict adherence to procedural requirements. The policies laid down by the Board, the AOI and the by-
rules of procedure exist to ensure the orderly laws.
administration of justice. They are not to be trifled
with lightly. (Maranaw Hotels and Resort Corporate officer’s position
Corporation v. CA, et al., G.R. No. 149660, January 20,
2009). 1. An “office” that is created by the charter of the
corporation; and

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2. The officer is elected by the directors or B. Who can be appointed Corporate Secretary?
stockholders (Easycall Communications Phils., (Bar 2012)
Inc. v. King, G.R. No.145901, December 15, 2005).
A: A. The Corporation Code does not impose any
Limitations on the holding of a corporate nationality or residency requirement in respect of
officer’s position the Treasurer. Any such requirement or any other
reasonable requirement may be adopted by the
Any two or more positions may be held corporation and reflected in its by-laws, or required
concurrently by the same person, except that no one by the law(s) governing the business of the
shall act as president and secretary or as president corporation or a law of general application (e.g., the
and treasurer at the same time. (CC, Sec. 25). AntiDummy Law which applies to all nationalized
businesses). Accordingly, anybody with the
Q: X is a Filipino immigrant residing in qualifications required under the by-laws of the
Sacramento, California. Y is a Filipino residing corporation or under the law(s) governing the
Quezon City. Z is a resident alien residing in business of the corporation, could be elected
Makati City. GGG Corporation is a domestic Treasurer by the Board of Directors. However, the
corporation—40% owned by foreigners and Treasurer could not be President at the same time.
60% owned by Filipinos, with T as authorized
representative. CCC Corporation is a foreign NOTE: the treasurer must be a resident of the
corporation registered with the Philippines SEC, Philippines (section 24 of the Revised Corporation
KKK Corporation is a domestic corporation Code)
(100%) Filipino owned. S is a Filipino, 16 years
of age, and daughter of Y. B. The Secretary is required to be both a resident
and a citizen of the Philippines.
A. Who are qualified to act as Treasurer of the
company?

Positions of corporate officers to be filled up by the Directors

CORP. OFFICER MEMBERSHIP REQUIREMENT CITIZENSHIP RESIDENCY

1. Must be a director at the time he
assumes office Need NOT be a Need NOT be a Philippine
President
2. Must be the stockholder on record Filipino Citizen Resident
of at least 1 share of stock
May or may not be a director, unless Must be a Filipino Must be a Philippine
Secretary required by the by-laws Citizen Resident
Need NOT be a Must be a Philippine
Treasurer May or may not be a director
Filipino Citizen Resident
Such other
officers as may
Qualifications may be provided for in the by-laws
be provided in
the by-laws

Corporate officer [Link] employee

CORPORATE OFFICER CORPORATE EMPLOYEE

Position is provided for in the by-laws or under the Employed by the action of the managing officer of
Corporation Code. the corporation.
RTC acting as a special commercial court has Labor Arbiter has jurisdiction in case of labor
jurisdiction over intra-corporate controversies. disputes.
Power to amend or repeal by-laws or adopt new by-
Power to amend/repeal articles cannot be delegated
laws may be delegated by the 2/3 of the outstanding
by the stockholders/ members to the board of
capital stock or 2/3 of the members in the case of
directors/ trustees
non-stock corporation

A party in a suit against a corporation cannot interrogatories upon the latter, as said officers
compel the latter’s officers to appear as are also considered as adverse parties
witnesses without first serving written

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In a complaint for nullification of mortgage and d. Among the stockholders, partners or associates,
foreclosure with damages against the mortgagee- themselves.
bank, the plaintiff cannot compel the officers of the
bank to appear and testify as plaintiff’s initial Settled jurisprudence, however, qualifies that when
witnesses unless written interrogatories are first the dispute involves a charge of illegal dismissal, the
served upon the bank officers. This is in line with action may fall under the jurisdiction of the LA’s
upon whose jurisdiction, as a rule, falls termination
the Rules of Court provision that calling the adverse disputes and claims for damages arising from
party to the witness stand is not allowed unless employer-employee relations as provided in Article
written interrogatories are first served upon the 217 of the Labor Code. Consistent with this
latter. This is because the officers of a corporation jurisprudence, the mere fact that Cosare was a
are considered adverse parties as well in a case stockholder and an officer of Broadcom at the time
against the corporation itself based on the principle the subject controversy developed failed to
that corporations act only through their officers and necessarily make the case an intra-corporate
duly authorized agents (Spouses Afulugencia v. dispute. Applying the case of Matling Industrial and
Metropolitan Bank and Trust Co., G.R. No. 185145, Commercial Corporation v. Coros, to the present
February 5, 2014, in Divina, 2014). case, the LA had the original jurisdiction over the
complaint for illegal dismissal because Cosare,
Q: Arevalo set up Broadcom with Cosare, his although an officer of Broadcom for being its AVP
former employee, as an incorporator. Cosare for Sales, was not a “corporate officer” as the term is
was later promoted to the position of Assistant defined by law(Raul C. Cosare v. Broadcom Asia, Inc.,
Vice-President for Sales and Head of the et al., G.R. No. 201298, February 5, 2014).
Technical Coordination. Abiog was appointed as
Broadcom’s VP for Sales and thus, became Q: Respondents filed a motion to dismiss the
Cosare’s immediate superior. Later, Cosare sent complaint filed against them where some of the
a confidential memo to Arevalo to inform him of issues include whether the withdrawals and
the anomalies which were allegedly being disbursements are in accordance with the By-
committed by Abiog against the company. Laws and whether there was a complete, audited
Subsequently, Cosare was totally barred from report and accounting of all the corporate funds.
entering the company premises. Cosare The RTC dismissed the case. Is the RTC correct?
attempted to furnish the company with a memo
by which he addressed and denied the A: No. Based on Section 8, Rule 1 of the Interim
accusations cited in Arevalo’s memo. Soon after, Rules of Procedure for Intra-Corporate
Cosare filed a labor complaint, claiming that he Controversies, in cases involving an intra-corporate
was constructively dismissed from employment dispute, a motion to dismiss is a prohibited
by Broadcom and Arevalo. CA ruled that the case pleading. (ALDERSGATE v. JUNIFEN GR No. 192951
is an intra-corporate controversy and is under Nov 14, 2012)
the RTC’s jurisdiction.
Awards for damages in Intra-Corporate
Is the CA correct? Controversies

A: NO. The Court has determined that contrary to As can be gleaned from the title of A.M. No. 01-2-04-
the ruling of the CA, it is the LA, and not the regular SC, the amendment of Section 4, Rule 1 of the
courts, which has the original jurisdiction over the Interim Rules of Procedure Governing Intra-
subject controversy. An intra-corporate Corporate Controversies was crafted precisely to
controversy, which falls within the jurisdiction of clarify the previous rule that decisions on intra-
regular courts, has been regarded in its broad sense corporate disputes are immediately executory, by
to pertain to disputes that involve any of the specifically providing for an exception. Thus, the
following relationships: prevailing rule now categorically provides that
awards for moral damages, exemplary damages,
a. Between the corporation, partnership or and attorney’s fees in intra-corporate controversies
association and the public; are not immediately executor. (Heirs of Santiago
b. Between the corporation, partnership or Divinagracia, v. Ruiz, G.R. No. 172508, Janaury 12,
association and the state in so far as its 2011).
franchise, permit or license to operate is
concerned; TRUST FUND DOCTRINE
c. Between the corporation, partnership or
association and its stockholders, partners, The subscribed capital stock of the corporation is a
members or officers; and trust fund for the payment of debts of the

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corporation which the creditors have the right to The Code allows distribution of corporate capital
look up to satisfy their credits, and which the only in instances of:
corporation may not dissipate. The creditors may
sue the stockholders directly for the latter’s unpaid 1. Amendment of the AOI to reduce authorized
subscription. (2015 Bar) capital stock;
2. Purchase of redeemable shares by the
Effects of the trust fund doctrine corporation regardless of existence of
unrestricted retained earnings; or
1. Dividends must never impair the subscribed 3. Dissolution and eventual liquidation of the
capital stock and must only be declared out of corporation.
unrestricted retained earnings (URE).
2. Subscription commitments cannot be condoned Proper scope of the Trust Fund doctrine
or remitted
3. GR: The corporation cannot buy its own shares Insolvent
Solvent Corporation
using the subscribed capital as the Corporation
consideration therefore (NTC v. CA, G.R. No. Encompasses only the Encompasses not only
127937. July 28, 1999). capital stock of the the capital stock, but
corporation. It does also other property
XPN: (ReDeC) NOT cover and assets (Divina,
unrestricted retained 2015)
a. Redeemable shares may be acquired even earnings (Villanueva,
without surplus profit for as long as it will 2018)
not result to the insolvency of the
Corporation; The trust fund doctrine covers not only capital
b. In cases that the corporation conveys its stock but also unpaid subscriptions, and other
stocks in payment of a Debt; or corporate property and assets.
c. In a Close corporation, a stockholder may
demand the payment of the fair value of The scope of the doctrine when the corporation is
shares regardless of existence of retained insolvent encompasses not only the capital stock,
earnings for as long as it will not result to but also other property and assets generally
the insolvency of the corporation regarded in equity as a trust fund for the payment of
corporate debts. The creditor is allowed to maintain
4. Rescission of a subscription agreement is not an action upon any unpaid subscriptions and
allowed since it will effectively result in the thereby steps into the shoes of the corporation for
unauthorized distribution of the capital assets the satisfaction of the debt. Subscriptions to the
and property of the corporation (Ong v Tiu, ibid) capital stock of a corporation constitute a fund to
which creditors have the right to look for
NOTE: Rescission of a subscription agreement is not satisfaction of their claims (Halley v. Printwell, Inc.,
one of the instances when distribution of capital G.R. No. 157549, May 30, 2011, in Divina, 2014).
assets and property of the corporation is allowed
(Ibid). Q: A corporation executed a promissory note
binding itself to pay its President/ Director, who
When negotiations ensued in the light of a planned had tendered his resignation, a certain sum in
takeover of a company and the counsel of the buyer payment of the latter’s shares and interests in
advised the stockholder through a letter that he may the company. The corporation defaulted in
take the machineries he brought to the corporation paying the full amount so that the said former
out with him for his own use and sale, the previous President filed suit for collection of the balance
stockholder cannot recover said machineries and before the SEC. Is the arrangement between the
equipment because these properties remained part corporation and its President covered by the
of the capital property of the corporation. Under the trust fund doctrine? (Bar 1992)
trust fund doctrine, the capital stock, property, and
other assets of a corporation are regarded as equity A: The arrangement between the corporation and
in trust for the payment of corporate creditors its President to the extent that it calls for the
which are preferred over the stockholders in the payment of the latter’s shares is covered by the trust
distribution of corporate assets (Yamamoto v. fund doctrine. The only exceptions from the trust
Nishino Leather Industries, Inc., G.R. No. 150283, fund doctrine are the redemption of redeemable
April 16, 2008). shares and, in the case of close corporation, when
there should be a deadlock and the SEC orders the
Exceptions to the trust fund doctrine

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221 FACULTY OF CIVIL LAW
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payment of the appraised value of a stockholder’s The board of the following corporations vested with
share. public interest shall have independent directors
constituting at least twenty percent (20%) of the
board: (Co-BO)
BOARD OF DIRECTORS
AND TRUSTEES 1. Corporations whose: (Re-Li-Ass)
a. Securities are registered with the
Commission
DOCTRINE OF CENTRALIZED MANAGEMENT b. Corporations listed with an exchange
c. Corporations with:
GR: The Doctrine of Centralized Management states c.1. assets of at least 50 Million Pesos;
that all corporate powers are exercised by the BOD c.2. having 200 or more shareholders;
or BOT. (CC, Sec. 23) c.3. each shareholder holding at least 100
shares of a class of its equity shares
The Board is the body which: (ExBuCo)
2. (B-PIN-PEF): Banks, quasi-banks, preneed,
(1) Exercises all powers provided for under the insurance and trust companies, nonstock savings
Corporation Code; and loan associations, pawnshops, corporations
(2) Conducts all Business of the corporation; and (3) engaged in money service business and other
Controls and holds all the properties od the financial intermediaries; and
corporation (CC, Sec 23 [RCC, Sec 22])
3. Other corporations engaged in business vested
XPN: The doctrine is not applicable to the following with public interest similar to the above, as may be
instances: determined by the Commission, after taking into
account relevant factors which are germane to the
1. In case of delegation to the Executive objective and purpose of requiring the election of
Committee duly authorized in the by-laws; independent director
2. Authorization pursuant to a contracted
manager which may be an individual, a [New provision in RCC]
partnership, or another corporation; and Factors to consider by the Commission in
3. In case of close corporations, the stockholders determining a coporation engaged in business with
may manage the business of the corporation public interest: ExTyPO
instead of a board of directors, if the articles of 1. Extent of minority ownership
incorporation so provide. 2. Type of financial products or securities issued or
offered to investors
Independent director 3. Public interest involved in the nature of business
operations
An independent director is a person who apart from 4. Other analogous factors
shareholdings and fees received from the
corporation, is independent of management and Required number of independent directors for
free from any business or other relationship which the corporations covered by the Revised Code of
could, or could reasonably be perceived to Corporate Governance (RCCG)
materially interfere with the exercise of
independent judgment in carrying out the At least two (2) or such number of independent
responsibilities as a director. (RCC, Sec 22) directors that constitute 20% of the members of the
board, whichever is lesser, but in no case less than
Cases where independent directors are two (2) (RCCG, Art. 3 [A]).
required
Q: May the composition of the board of directors
At least two (2) independent directors are required of the National Power Corporation be validly
in the following companies: reduced to three (3)? (2008 Bar)

1. Any corporation with a class of equity securities A: YES. NPC is a government owned and controlled
listed for trading on an Exchange (Publicly corporation created by a special charter. Its charter
traded companies); allows composition of its board of directors to be
2. Banks; and reduced. As clearly enunciated in Section 16, Article
3. Corporations with secondary franchise. XII, 1987 Constitution: Congress shall not, except by
general law, provide for the formation,
[New provision in RCC:] organization, or regulation of private corporations.

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 Mercantile Law
The prohibition under the Corporation Code only become liable, whether civilly or otherwise, for
applies to private corporations. Since NPC is not the consequences of their acts, which are
governed by the Corporation Code, the standard properly attributed to the corporation alone
number of directors is not required. (Benguet Electric Cooperative, Inc. v. NLRC,GR
89070, May 18, 1992).
BUSINESS JUDGMENT RULE 6. The power to elect corporate officers was a
discretionary power that the law exclusively
Questions of policy or management are left solely to vested in the Board of Directors and could not
the honest decision of officers and directors of a be delegated to subordinate officers or agents
corporation and the courts are without authority to (Matling Industrial and Commercial
substitute their judgment for the judgment of the Corporation, et al. v. Coros, G.R. No. 157802,
board of directors; the board is the business October 13, 2010).
manager of the corporation and so long as it acts in
good faith, its orders are not reviewable by the Requirement for the Business Judgment Rule to
courts or the SEC. (Montelibano v. Bacolod-Murica apply:
Milling Co., G.R. No. L-15092, May 18, 1962; Phil.
Stock Exchange, Inc. v. Ca, G.R. No. 125469, October 1. Presence of a business decision including
27, 1997). decisions on policy management and
administration;
GR: Contracts intra vires entered into by the board 2. The decision must be intra vires and must comply
of directors are binding upon the corporation with the procedural and substantive requirements
beyond the interference of courts. The courts are of law;
barred from intruding into business judgments of 3. Good faith
corporations, when the same are made in good faith 4. Due care in making the decision;
(Ong v Tiu, G.R. No. 144476. April 8, 2003). 5. The director must not have personal interest or
nor self-dealing or otherwise on breach of the duty
XPNs: Courts can inquire unto contracts which are: of loyalty. (Villanueva, 2018)

1. Unconscionable and oppressive as to amount to Q: PALI sought to offer its shares to the public in
wanton destruction to the rights of the minority order to raise funds for development of
(Ong v Tiu, ibid); or properties and pay its loans with several banks.
2. When there is bad faith or gross negligence by To facilitate the trading of its shares, PALI
the directors (Republic Communications Inc v applied for a listing in the Philippine Stock
CA, G.R. No. 135074, January 29, 1999). Exchange Inc. (PSE), a non-profit corporation.
Subsequently, PSE received a letter from the
Consequences of Business Judgment Rule Heirs of Marcos, requesting PSE to defer PALI’s
registration, contending that certain properties
1. Resolutions and transactions entered into by of PALI are owned by Marcos. Consequently, PSE
the Board within the powers of the corporation rejected PALI’s application. The SEC reversed
cannot be reversed by the courts not even on the ruling of the PSE. Is the SEC correct?
the behest of the stockholders.
2. Directors and officers acting within such A: NO. In applying the business judgment rule, the
business judgment cannot be held personally SEC and the courts are barred from intruding into
liable for such acts. business judgments of corporations, when the same
3. If the cause of the losses is merely error in are made in good faith. The said rule precludes the
business judgment, not amounting to bad faith reversal of the decision of the PSE to deny PALI's
or negligence, directors and/or officers are not listing application, absent a showing of bad faith on
liable (Filipinas Port Services v. Go, G.R. No. the part of the PSE.
161886, March 16, 2007).
4. The Board of Directors has the power to create Under the listing rules of the PSE, to which PALI had
positions not provided for in the corporation's previously agreed to comply, the PSE retains the
by-laws since the board is the corporation’s discretion to accept or reject applications for listing
governing body, clearly upholding the power of (PSE v. CA, G.R. No. 125469, October 27, 1997).
its board to exercise its prerogatives in
managing the business affairs of the TENURE, QUALIFICATIONS AND
corporation (Filipinas Port Services v. Go, supra). DISQUALIFICATIONS OF DIRECTORS OR
5. Directors and officers who purport to act for the TRUSTEES
corporation, keep within the lawful scope of
their authority and act in good faith, do not Term of office of BOD/BOT

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GR: The regular director shall hold office for 1 year. 1. Majority of the directors/trustees must be
residents of the Philippines (CC, Sec. 23).
[Amendment in RCC, Sec 22: a trustee may be 2. He must not have been convicted by final
elected for a period not exceeding 3 years judgment of an offense punishable by
imprisonment for period exceeding 6 years or a
For a director, the rule remains the same {1 year}]. violation of the Corporation Code, committed
within 5 years prior to the date of his election
XPN: If no election is held, the directors and officers (CC, Sec. 27).
will continue to occupy position even after the lapse 3. He must be of legal age
of 1 year under a hold-over capacity until their 4. Other qualifications as may be prescribed in
successors are elected and qualified. special laws or regulations or in the by-laws of
the corporation.
NOTE: This is applicable to a going concern where
there is no break in the exercise of the duties of the A director cannot be elected without owning any
officers and directors (SEC Opinion, Dec. 15, 1989). stock in the corporation

Term, Tenure, and Holdover Period A person who does not own a stock at the time of his
election or appointment does not disqualify him as
Term – time during which the officer may claim to director if he becomes a shareholder before
hold the office as a matter of right, and fixes the assuming the duties of his office (SEC Opinions,
interval after which the several incumbents shall November 9, 1987 & April 5, 1990).
succeed one another. The term of office is not
affected by the holdover. It is fixed by statute and Sec. 30 of the Corporation Code requires directors
does not change simply because the office may have to own the shares of stock in their own right.. To be
become vacant, nor because the incumbent holds eligible to be a director, it is not required that he
office beyond his term when a successor has not owns legal title to the share of stock. It suffices that
been elected. he posseses a beneficial ownership in the books
of the corporation. A trustee is a stockholder of
Tenure – represents the term during which the record. (Lee v. CA, G.R. No. 93695, February 4, 1992).
incumbent actually holds office. The tenure may be Consequently, The omission of the phrase “in his
shorter (or, in case of holdover, longer) than the own right” in Section 23 of the Revised
term for reasons within or beyond the power of the Corporation Code means that in order to be
incumbent. eligible to be elected to the Board and to remain a
member thereof, what is material is lega title
Holdover Period – the time from the lapse of one thereto, beneficial ownership being insufficient.
year from a member’s election to the Board and (RCC Annotated Aquino, Cruz 2019)
until his successor’s election and qualification. It is
not part of the director’s original term of office, nor Both under the old and the new Corporation Codes,
is it a new term; the holdover period, however, there is no dispute as to the most immediate effect
constitutes part of his tenure (Valle Verde Country of a Voting Trust Agreement (VTA) on the status of
Club v. Africa, G.R. No. 151969, September 4, 2009). a stockholder who is a party to its execution - from
legal titleholder or owner of shares subject of the
Duties of Directors/Trustees: (OLD) VTA, he becomes equitable or beneficial owner. Any
director who executes a VTA over all his shares
1) Duty of Obedience – the directors should direct ceases to be a stockholder of record in the books of
the affairs of the corporations only in the corporation and therefore ceases to be a
accordance with the purposes for which it was director (Lee v. CA, G.R. No. 93695, February 4, 1992)
organized.
2) Duty of Diligence – The directors should not Q: Grace Christian High School is an educational
willfully and knowingly vote for or assent to institution at the Grace Village in Quezon City
patently unlawful acts of the corporation or act while Grace Village Association, Inc., is an
in bad faith or with gross negligence in directing organization of lot and/or building owners,
the affairs of the corporation. lessees and residents at Grace Village. From
3) Duty of Loyalty – The directors should not 1975 up to 1990, Grace Christian High School
acquire any personal or pecuniary interest in was given a permanent seat in the board of
conflict with their duty as directors directors of the association. After some time,
the association’s committee on election
Common qualifications of a director and trustee informed James Tan, the principal of the school
that all directors should be elected by members

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of the association. Tan was told that the the decision of the SEC is final and executory unless
proposal to make the Grace Christian High appealed in CA and a TRO is obtained
School representative as a permanent director
of the association, although previously tolerated [Amendment in RCC, Sec 26:]
in the past elections should be reexamined. A person shall be disqualified from being a director,
Grace Christian High School argues that it had trustee or officer of any corporation if, within 5
acquired a vested right to a permanent seat in years prior to election or appointment of such, the
the board of directors. Did Grace Christian High person was: (ConFoFo)
School acquire vested right to a permanent seat
in the board of directors? (a) Convicted by final judgment: (ICS)
(1) of an offense punishable by imprisonment for a
A: NO. The board of directors of corporations must period exceeding 6 years;
be elected from among the stockholders or (2) violation of the Corporation Code;
members. Sec 23 of the CC [Sec 22, RCC] provides (3) Violation of RA 8799 (SRC)
that unless otherwise provided, the corporate
powers of all corporations formed under this Act (b) Found administratively liable for any offense
shall be exercised, all business conducted and all involving fraudulent acts; and
property of such corporations controlled and held
by a board of not less than five nor more than eleven (c) By a foreign court or equivalent foreign
directors to be elected from among the holders of regulatory authority for acts, violations or
stock or, where there is no stock, from the members misconduct similar to those enumerated in
of the corporation paragraphs (a) and (b) above

Since the provision in question is contrary to law, Q: John Gokongwei Jr., as stockholder of San
the fact that for fifteen years it has not been Miguel Corporation, filed with SEC a petition for
questioned or challenged but, on the contrary, declaration of nullity of amended by-laws
appears to have been implemented by the members against the majority of the members of the
of the association cannot forestall a later challenge Board of Directors and San Miguel Corporation.
to its validity. Neither can it attain validity through Gokongwei claimed that prior to the questioned
acquiescence because, if it is contrary to law, it is amendment, he had all the qualifications to be a
beyond the power of the members of the association director of the corporation, being a substantial
to waive its invalidity (Grace Christian High School v. stockholder thereof, Gokongwei had acquired
CA, et al., G.R. No. 108905, October 23, 1997). rights inherent in stock ownership, such as the
rights to vote and to be voted upon in the
Additional qualifications provided by the election of directors, and that in amending the
Revised Code of Corporate Governance by-laws, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him
A director should have the following: of his vested right as aforementioned, hence the
amended by-laws are null and void. Is a
1. College education or equivalent academic provision on the by-laws disqualifying a person
degree; for a position in the board of directors on the
2. Practical understanding of the business of the ground that he is engaged in a business which
corporation; competes with that of the Corporation valid?
3. Membership in good standing in relevant
industry, business or professional A: YES. A corporation is authorized to prescribe the
organizations; and qualifications of its directors. A provision in the by-
4. Previous business experience (RCCG, Art. 3 [D]) laws of the corporation that no person shall qualify
or be eligible for nomination for elections to the
Grounds for disqualification of a board of directors if he is engaged in any business
director/trustee which compete with that of the Corporation is valid;
provided, however, that before such nominee is
1. Conviction by final judgment of an offense disqualified, he should be given due process to show
punishable by imprisonment exceeding 6 that he is covered by the disqualification. A director
years;or stands in fiduciary relation to the corporation and
2. Violation of the Corporation Code committed its stockholders. The disqualification of a
within 5 years prior to his election or competitor from being elected to the board of
appointment (CC, Sec. 27). directors is a reasonable exercise of corporate
NOTE: Disqualification by reason of violation of the authority. Sound principles of corporate
CC does not require conviction for the reason that management counsel against sharing sensitive

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information with a director whose fiduciary duty to of age, and daughter of Y. Who are qualified to
loyalty may well require that he discloses this become members of the board of directors of the
information to a competitive rival. When a person corporation? (2012 Bar)
buys stock in a corporation, he does so with the
knowledge that its affairs are dominated by a A: X, Y, Z and T could be directors (subject to the
majority of the stockholders (Gokongwei v. SEC, et residency requirement mentioned in (a) above and
al., G.R. No. L-45911, April 11, 1979). any nationality requirement under the law
governing the business of the corporation) but not
Foreigners are not disqualified from being GGG Corporation, CCC Corporation, and KKK
elected/ appointed as members of the BOD Corporation as they are not natural persons.
However, the aforementioned corporations could
While foreigners are disqualified from being have their respective representatives nominated
elected/ appointed as corporate officers in wholly and possibly elected as directors by the
or partially nationalized business activities, they are stockholders. Each director must own at least one
allowed representation in the BOD or governing share of the capital stock of the corporation.
body of said entities in proportion to their
shareholding (Anti-Dummy Law, Sec. 2-A; ELECTIONS
1987Constitution, Art. XII, Sec. 11).
Requirements and limitations for the election of
REASON: The BOD/ governing body performs directors or trustees
specific duties as a “body”. Unlike corporate officers,
each member of the BOD/ governing body has no 1. Presence of Stockholders representing a
individual power or authority to perform majority of the outstanding capital stock of the
management functions (De Leon, supra). corporation or majority of the members, either
in person or by proxy.
Q: A Korean national joined a corporation and
was elected to the Board of Directors. To [New ways to vote in RCC, Sec 24]:
complement its furniture manufacturing Through remote communication or in absentia
business, the corporation also engaged in the
logging business. With the additional logging GR: it must be provided in the by-laws
activity, can the Korean national still be a XPN: the right to vote through such modes may
member of the Board of Directors? Explain be exercised in corporations vested with public
(2005 Bar) interest notwithstanding the absence of a
provision in the bylaws of such corporations
A: YES. The Korean national can still be a member
of the Board of Directors as long as sixty percent 2. The election must be by ballot, if requested by
(60%) of the Board of Directors are Filipinos. any voting stockholder or member.
Corporations that are sixty percent (60%) owned by 3. The total number of votes cast by him must not
Filipinos can engage in the business of exploration, exceed the number of shares owned by him as
development and utilization of natural resources shown in the books of the corporation
(1987 Constitution, Art. XII, Sec. 2). The election of multiplied by the whole number of directors to
aliens as members of the Board of Directors be elected.
engaging in partially-nationalized activities is 4. No delinquent stock shall vote or be voted for.
allowed in proportion to their allowable 5. A stockholder cannot be deprived in the articles
participation or share in the capital of such entities of incorporation or in the by-laws of his statutory
(Anti-Dummy Law, Sec. 2-A). Nothing in the facts right to use any of the methods of voting in the
shows that more than forty percent (40%) of the election of directors.
Board of Directors are foreigners. 6. The candidates receiving the highest number of
votes shall be declared elected (CC, Sec. 24 [RCC, Sec
Q: X is a Filipino immigrant residing in 23]).
Sacramento, California. Y is a Filipino residing in
Quezon City. Z is a resident alien residing in Reportorial requirement
Makati City. GGG Corporation is a domestic
corporation—40% owned by foreigners and Within 30 days after the election of directors,
60% owned by Filipinos, with T as authorized trustees and officers of the corporation, the
representative. CCC Corporation is a foreign secretary or any other officer of the corporation,
corporation registered with the Philippines SEC, shall submit to the Commission, the names,
KKK Corporation is a domestic corporation shareholdings, and residence addresses of the
(100%) Filipino owned. S is a Filipino, 16 years directors, trustees and officers elected.

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Permanent representation is not allowed in the elected as a director at the stockholders’ meeting.
BOD Only the candidates receiving the highest number of
The board of directors of corporations must be votes shall be declared elected.
elected from among the stockholders or
members directors every year. Estoppel does not set METHODS OF VOTING
in to legitimize what is wrongful (Grace Christian
High School v. CA, G.R. No. 108905, October 23, 1997). Different methods of voting

Jurisdiction over election contests in stock and 1. Straight voting – every stockholdermay vote
non-stock corporations such number of shares for as many persons as
there are directors to be elected.
As amended by R.A. 8799 (The Securities Regulation 2. Cumulative voting for one candidate – a
Code), the jurisdiction of the SEC under Sec. 5 P.D. stockholder is allowed to concentrate his votes
No. 902‐A (SEC Reorganization Act) is now and give one candidate, as many votes as the
transferred to Courts of General Jurisdiction number of directors to be elected multiplied by
(Regional Trial Court). Thus, RTC now has the number of his shares shall equal.
jurisdiction over election contest. 3. Cumulative voting by distribution – a
stockholder may cumulate his shares by
Q: In case where there are 2 lists of BOD multiplying the number of his shares by the
submitted to SEC, which one is controlling? number of directors to be elected and distribute
the same among as many candidates as he shall
A: It is the list of directors in the latest general see fit.
information sheet as filed with the SEC which is
controlling (Premium Marble Resources, Inc. v. CA, Cumulative voting in stock v nonstock
G.R. No. 96551, Nov. 4, 1996).
Cumulative voting in case of non-stock corporations
Q: At the annual meeting of ABC Corporation for is allowed only if it is provided in the AOI. The
the election of five directors as provided for in members of non-stock corporations may cast as
its articles of incorporation, A, B, C, D, E, F and G many votes as there are trustees to be elected but
were nominated. A, B, C, D and E received the may cast not more than one vote for one candidate.
highest number of votes and were proclaimed Cumulative voting is mandatory in stock
elected. F received ten votes less than E. corporations to protect the rights of minority
stockholders
Subsequently, E sold all his shares to F. In the
next Board of Directors’ meeting following the NON-HOLDING OF ELECTIONS
transfer of the shares in the books of the
corporation, both E and F appeared. E claimed Report
that notwithstanding the sale of his shares to F,
he remained a director since the Corporation Within 30 days from the date of the scheduled of
Code provides that directors “shall hold office election. The report shall specify a new date for the
for 1 year and until their successors are elected election, which shall not be later than 60 days from
and qualified.” On the other hand, F claimed that the scheduled date (Sec 25, RCC)
since he would have been elected as a director
had it not been for E’s nomination and election, Summary order of Commission
then he (F) should now be considered a director If:
as he had acquired all the shares of E. Decide (1) No new date has been designated; or
with reasons. (1984 Bar) (2) If the rescheduled election is likewise not
held;
A: Neither E nor F are directors of ABC Corporation.
E automatically ceased to be a director upon the The Commission, may, upon the application of the
transfer of all his shares to F in the books of the stockholder, member, director, or trustee, and after
corporation. Every director must own at least one verification of the unjustified non-holding of the
share of the capital stock of the corporation of which election, summarily order that an election be held.
he is a director, which share shall stand in his name
on the books of the corporation. Any director who The Commission shall have power the power to
ceases to be the owner of at least 1 share of the issue orders as may be appropriate , including:
capital stock of the corporation of which he is a
director shall thereby cease to be a director. F’s (1) Orders directing the issuance of a notice
claims are without merit since he was not duly stating the time and place of election;

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(2) The designated presiding officer; and 1. It must take place either at a regular meeting or
(3) The record date or dates for the special meeting of the stockholders or members
determination fo stockholders or members called for the purpose;
entitled to vote (Sec 25, RCC).
A special meeting for the purpose of removing
QUORUM directors or trustees may be called by:

Quorum required in a stock or non-stock (1) The secretary, on order of the president; or
corporation (2) The secretary, upon written demand of the
stockholders representing or holding at
Unless otherwise provided for in the by-laws, a least a MAJORITY of the capital stock or
quorum shall consist of the stockholders MAJORITY of the members entitled to vote;
representing a majority of the outstanding capital
stock entitled to vote or a majority of the members 2. Previous notice to the stockholders or members
in the case of non-stock corporations (CC, Sec. 52). of the intention to remove a director;and
3. A vote of the stockholders representing 2/3 of
When the stock and transfer book is inaccurate outstanding capital stock or 2/3 of members.
and deficient, it cannot be the sole basis of the
quorum. The AOI may be used as the basis of the Remedy for refusal to call a meeting
quorum.
If there is:
To base the computation of quorum solely on the (1) No secretary; or
obviously deficient, if not inaccurate stock and (2) If the secretary, despite demand, fails or
transfer book, and completely disregarding the refuses to call the special meeting or to give
issued and outstanding shares as indicated in the notice thereof
articles of incorporation would work injustice to the
owners and/or successors in interest of the said The stockholder or member signing the demand
shares. This case is one instance where resort to may call for the meeting by directly addressing the
documents other than the stock and transfer books stockholders or members
is necessary. The stock and transfer book of PMMSI
cannot be used as the sole basis for determining the New Power of SEC under the Revised
quorum as it does not reflect the totality of shares Corporation Code (Sec 27, RCC)
which have been subscribed, more so when the
articles of incorporation show a significantly larger The Commission shall, motu propio or upon verified
amount of shares issued and outstanding as complaint, and after due notice and hearing, order
compared to that listed in the stock and transfer the removal of a director or trustee elected despited
book (Lanuza, et al. v. CA, et al., G.R. No. 131394, the disqualification or whose disqualification arose
March 28, 2005). is discovered subsequent to an election.

REMOVAL NOTE: The removal of a disqualified director shall

be without prejudice to other sanctions that the
Power to remove directors or trustees Commission may impose on the board of directors
or trustees who, with knowledge of the
The power to remove belongs to the stockholders disqualification, failed to remove such director or
exclusively (Sec. 28, CC). trustee.

GR: Removal may be with or without cause Q: Henry is a board director in XYZ Corporation.
For being a fiscalizer in the Board, the majority
XPN: If the director was elected by the minority, of the directors want him removed and his
there must be cause for removal because the shares be sold at auction, so he can no longer
minority may not be deprived of the right to participate even in the stockholder’s meetings.
representation to which they may be entitled under Henry approaches you for advice on whether he
Sec. 24 of the Code (Sec. 28, CC). can be removed as board of director and
stockholder without cause. What is your advice?
NOTE: The right of representation referred to is the Explain “amotion” and the procedure in
right to cumulative voting for one candidate under removing a director. (2016 Bar)
Sec. 24 of the Code.
A: Henry cannot be removed by his fellow directors.
Requisites for removal of directors or trustees The power to remove belongs to the stocjholders.

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He can only be removed by the stockholders owning the remaining directors constituting a quorum is
at least 2/3 of the outstanding capital stock in a merely permissive. Corporations may choose how
meeting called for that purpose. The removal may vacancies in their boards may be filled up, either by
be with or without cause except that in this case, the the remaining directors or trustees constituting a
removal must be with cause because it is intended quorum or by all stockholders or members.
to deprive the minority of the right of
representation. However, if the by-laws prescribe the specific mode
of filling up existing vacancies, the provisions of the
Amotion is the premature ousting of a director or by-laws should be followed (De Leon, supra).
officer from his post in the corporation.
Duration of the term of a replacement director
Q: In 1999, Corporation A passed a board
resolution removing X from his position as A director elected to fill vacancy shall serve the
manager of said corporation. The by‐laws of A unexpired term of the predecessor in office (CC, Sec.
corporation provide that the officers are the 29).
president, vice‐president, treasurer and
secretary. Upon complaint filed with the SEC, it Filling-up a vacancy caused by resignation of a
held that a manager could be removed by mere director in a hold-over position
resolution of the board of directors. On motion
for reconsideration, X alleged that he could only The vacancy caused by resignation of a director in a
be removed by the affirmative vote of the hold-over position can only be filled up by the
stockholders representing 2/3 of the stockholders or members, for the cause of vacancy
outstanding capital stock. Is X's contention is not resignation but by expiration of term because
legally tenable. Why? (2001 Bar) the hold-over period is not a part of the director’s
original term of office, nor is it a new term (De Leon,
A: N0. Stockholders' approval is necessary only for supra).
the removal of the members of the Board. For the
removal of a corporate officer or employee, the vote Emergency Board (Sec 28, RCC)
of the Board of Directors is sufficient for the
purpose. When to call for an Emergency Board
When the vancacy prevents the remaining directors
FILLING OF VACANCIES from constituting a quorum and emergency action
is required to prevent grave, substantial, and
Ways of filling up the vacancies in the board irreparable loss or damage to the corporation

1. Vacancies to be filled up by stockholders or Who who fill the vacancy

members: (ERORI) It may be temporarily filled from among the officers
a. Expiration of term; of the corporation
b. Removal;
c. Grounds Other than removal or expiration Voting requirement
of term, where the remaining directors do He will be elected by a UNANIMOUS vote of the
not constitute a quorum for the purpose of remaining directors or trustees
filling the vacancy;
d. If the vacancy may be filled by the Limitations and Cessation
remaining directors or trustees but the It shall be limited to the emergency action necessary
board Refers the matter to stockholders or and term shall cease within:
members; or (a) Reasonable time from the termination of
e. Increase in the number of directors results the emergency action; or
to vacancy. (b) Upon election of the replacement director
or trustee,
2. Vacancies filled up by members of the board Whichever comes earlier
-If still constituting a quorum, at least a majority
of the members are empowered to fill any Reportorial requirement
vacancy occurring in the board other than by The corporation must notify the Commission within
removal by the stockholders or members or by 3 DAYS from the creation of the emergency board,
expiration of term (CC, Sec. 29. RCC, Sec 28). stating therein the reason for its creation

NOTE: The phrase “may be filled” in Sec. 29 Period of election to fill a vacancy
indicates that the filling of vacancies in the board by

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Grounds: not change the nature of the vacancy; the vacancy
(1) Tem expiration- No later than the day of such due to the expiration of Makalintal’s term had been
expiration at a meeting called for the purpose; created long before his resignation (Valle Verde
(2) Result of removal by the stockholders or Country Club, Inc., et al., v. Africa, G.R. No. 151969,
members – on the same day the meeting authorizing September 4, 2009; 2013 Bar).
the removal and this fact must be stated in the
agenda and motice of said meeting The derivative suit was improper. In a derivative
(3) In all other cases -45 days from the time the suit, the corporation, not the individual stockholder,
vacancy arose (Sec 28, RCC) must be the aggrieved party and that the
stockholder is suing on behalf of the corporation.
Q: Dinglasan and Makalintal were elected as What stockholder X is asserting is his individual
new members of the board of directors of Valle right as a stockholder to elect the two directors. The
Verde Country Club, Inc. (VVCC). In the case partake more of an election contest under the
succeeding years however, the requisite rules on intra-corporate controversy (Legaspi
quorum for the holding of the stockholders’ Towers 300, Inc. v. Muer, G.R. No. 170783, June 18,
meeting could not be obtained. Consequently, 2012).
Dinglasan and Makalintal continued to serve in
the VVCC Board in a hold-over capacity. COMPENSATION
Subsequently, Dinglasan resigned from his
position as member of the VVCC Board. In a Compensation of directors/trustees
meeting, the remaining directors, still
constituting a quorum of VVCC’s nine-member GR: Directors, in their capacity as such, are not
board, elected Eric Roxas to fill in the vacancy entitled to receive any compensation except for
created by the resignation of Dinglasan. A year reasonable per diems.
later, Makalintal also resigned as member of the
VVCC Board. He was replaced by Jose Ramirez, NOTE: Directors or trustees shall not participate in
who was elected by the remaining members of the determination of their own per dierms or
the VVCC Board. Victor Africa, a member of compensation (Sec 29, RCC)
VVCC, questioned the election of Roxas and
Ramirez as members of the VVCC Board with the XPNs:
SEC and the RTC. May the remaining directors of 1. When their compensation is fixed in the by-
the corporation’s Board, still constituting a laws;
quorum, elect another director to fill in a 2. When granted by the vote of stockholders
vacancy caused by the resignation of a hold-over representing at least a majority of the
director? outstanding capital stock at a regular or special
meeting; or
A: NO. The remaining directors of the corporation’s 3. If they perform services other than as directors
Board, even if still constituting a quorum, cannot of the corporation (i.e. where directors are also
elect another director to fill in a vacancy caused by corporate officers or employees of the
the resignation of a hold-over director. Section 23 of corporation) (Sec. 30, CC).
the CC means that the term of the members of the
board of directors shall be only for one year; their NOTE: Per diems are paid attendance in board
term expires one year after election to the meetings. Other benefits and emoluments of
office. The holdover period – that time from the directors fall within the term “compensation.”
lapse of one year from a member’s election to the
Board and until his successor’s election and BOD is not prohibited from securing an
qualification – is not part of the director’s insurance policy for the life of its members and
original term of office, nor is it a new term; the making the directors the beneficiaries instead of
holdover period, however, constitutes part of the corporation
his tenure. Corollary, when an incumbent member
of the board of directors continues to serve in a The Insurance Code does not contain any
holdover capacity, it implies that the office has a prohibition as to such. However, the premium paid
fixed term, which has expired, and the incumbent is thereon is analogous to a continuing bonus and gift
holding the succeeding term. With the expiration of and thus falls within the context of additional
Makalintal’s term of office, a vacancy resulted compensation. A corporation may not be used by its
which, by the terms of Section 29 of the Corporation officers or stockholders as a means of diverting
Code, must be filled by the stockholders of VVCC in profits or proceeds to the payment of premium on
a regular or special meeting called for the insurance policies to the enrichment of its
purpose. His resignation as a hold-over director did

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 Mercantile Law
beneficiaries at the expense of, or to the detriment compensation in favor of the board members of
of, its creditors (SEC Opinion, December 8, 1987). WIT. They maintain that this grant of
compensation is proscribed under Section 30 of
Limitation on the amount of compensation to be the Corporation Code. Is the resolution granting
received by the directors Salas, et al., compensation for services rendered
as officers of WIT valid?
In no case shall the total yearly compensation of
directors exceed 10% of the net income before A: YES. The resolution is valid. There is no argument
income tax of the corporation during the preceding that directors or trustees, as the case may be, are not
year (CC, Sec. 30). entitled to salary or other compensation when they
perform nothing more than the usual and ordinary
Remedy of the stockholders if there was no duties of their office. This rule is founded upon a
proper authorization for the grant of presumption that directors /trustees render service
compensation to the directors gratuitously and that the return upon their shares
adequately furnishes the motives for service,
Compensation to the directors of a corporation without compensation. Under Section 30, there are
without proper authorization in the by-laws or by only two (2) ways by which members of the board
the vote of the stockholders may be recovered in a can be granted compensation apart from reasonable
stockholders’ suit (De Leon, supra). per diems: (1) when there is a provision in the by-
laws fixing their compensation; and (2) when the
Reportorial requirement for corporations stockholders representing a majority of the
vested with public interest outstanding capital stock at a regular or special
Corporations vested with public interest shall stockholders’ meeting agree to give it to them. This
submit to their shareholders and the Commission, proscription, however, against granting
an annual report of the total compensation of each compensation to directors/trustees of a
of their directors or trustees (RCC, Sec 29) corporation is not a sweeping rule. Section 30 states
that the directors shall not receive any
Q: Is the general rule that directors are not compensation, as such directors. The phrase “as
entitled to compensation applicable to such directors” is not without significance for it
corporate officers, who are not directors? delimits the scope of the prohibition to
compensation given to them for services performed
A: NO. Such officers, not being directors and having purely in their capacity as directors or trustees. The
no control over the funds and property of the unambiguous implication is that members of the
corporation, even though they may be stockholders, board may receive compensation, in addition to
do not occupy the relation of trustees to the reasonable per diems, when they render services to
corporation (De Leon, supra, citing Cheeney vs. the corporation in a capacity other than as
Lafayette, BOR Co., 61 III. 570). directors/trustees. In the case at bench, the
resolution granted monthly compensation to Salas,
For Services other than as directors/Trustees: et al., not in their capacity as members of the board,
but rather as officers of the corporation, more
Illustrative case: particularly as Chairman, Vice-Chairman, Treasurer
Q: Ricardo T. Salas, et al., are the majority and and Secretary of Western Institute of Technology
controlling members of the Board of Trustees of (Western Institute of Technology, Inc., v. Salas, et al.,
Western Institute of Technology, Inc. (WIT), a G.R. No. 113032, August 21, 1997).
stock corporation engaged in the operation of an
educational institution. According to Homero FIDUCIARY DUTIES AND LIABILITY RULES
Villasis, et al., the minority stockholders of WIT,
a special board meeting was held whereby the Nature of the obligation of the directors to the
the Board of Trustees passed resolution corporation
granting monthly compensation to Salas, et al.,
as corporate officers. Villasis, et al., filed an The directors’ character is that of a fiduciary insofar
affidavit-complaint against Salas, et al., for as the corporation and the stockholders as a body
falsification of a public document and are concerned. As agents entrusted with the
estafa. Villasis, et al., would like to hold Salas, et management of the corporation for the collective
al., civilly liable despite their acquittal in the benefit of the stockholders, they occupy a fiduciary
criminal cases. They base their claim on the relation, and in this sense the relation is one of trust.
alleged illegal issuance by Salas, et al., of the
resolution ordering the disbursement of The ordinary trust relationship of directors of a
corporate funds representing the retroactive corporation and stockholders springs from the fact

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that directors have the control and guidance of In the following instances, the directors/ trustees
corporate affairs and property and hence of the may be held personally liable for damages:
property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of 1. When they willfully and knowingly vote for or
the corporate interests and are ultimately the only assent to patently unlawful acts of the
beneficiaries thereof (Gokongwei v. SEC, supra). corporation;
2. When they are guilty of gross negligence or bad
Majority Rule Doctrine in the dealings of faith in directing the affairs of the corporation;
directors with stockholders
NOTE: Bad faith or negligence is a question of
The majority rule states that a director has a fact. Bad faith does not simply mean bad
fiduciary duty with respect to the corporation as an judgment or negligence. It imparts a dishonest
entity, and notto the stockholders as individuals. purpose or some moral obliquity and conscious
Consequently, he is subject to the duty to disclose all doing of wrong. It means breach of a known
material facts only to the corporation and not to the duty through some motive or interest or ill-will;
stockholders (American T. Co. v. California etc. Ins. it partakes of the nature of fraud (Ford Phils.,
Co., 15 Cal.2d 42, 1940). Inc., et al. vs. CA, GR 99039, Feb. 3, 1997).

Special Fact Doctrine 3. When they acquire any personal or pecuniary

interest in conflict with their duty as such
The special fact doctrine is an exception to the directors or trustees (CC, Sec. 31);
majority rule doctrine. It states that where special 4. When they consent to the issuance of watered
circumstances or facts are present which make it stocks or who, having knowledge thereof, does
inequitable for the director to withhold information not forthwith file with the corporate secretary
from the stockholder, the duty to disclose arises, his written objection thereto (CC, Sec. 65);
and concealment is fraud (Ibid). 5. When they are made, by a specific provision of
law, to personally answer for their corporate
Instances where the Special Fact Doctrine has action (CC, Sec. 144; PD 115, Sec.13; Uichico v.
been applied NLRC, G.R. No. 121434, June 2, 1997);
6. When they agree to hold themselves personally
In foreign US jurisprudence, the special fact doctrine and solidarily liable with the corporation
was applied in the following cases: (Tramat Mercantile, Inc. vs. CA, G.R. No. 111008,
November 7, 1994); or
1. Where a director actively participates in the 7. When the corporate fiction is used to defeat
negotiations for a transfer of the corporate public convenience, justify wrong, protect
property (Strong v. Repide, 213 U.S. 419, 29 [Link]. fraud, or defend crime (Carag v. NLRC, GR No.
521, 53 [Link]. 853). 147590, April 2, 2007)
2. Where a director undertakes to speak or
become active in inducing the sale, he must NOTE: When the officers of the corporation
speak fully, frankly, and honestly, and conceal exceeded their authority, their actions are not
nothing to the disadvantage of the selling binding upon the corporation unless ratified by the
stockholder (Poole v. Camden, 79 W. Va. 310). corporation or is estopped from disclaiming them
3. Where a director personally seeks a (Reyes v. RCPI Credit Employees Union, G.R. No.
stockholder for the purpose of buying his 146535, August 18, 2006).
shares without making disclosure of material
facts within his peculiar knowledge and not Q: BF Corporation, in a collection complaint filed
within reach of the stockholders, the against Shangri-La and its Board of Directors,
transaction will be closely scrutinized and relief alleged that Shangri-La induced BF Corporation
may be granted in appropriate instances to continue with the construction of the
(Strong v. Repide, Ibid). buildings using its own funds and credit despite
Shangri-La’s default. It claims that Shangri-La
Liability of the directors/ trustees or officers of misrepresented that it had funds to pay for its
a corporation for their official acts obligations with BF Corporation. The latter
eventually completed the construction of the
GR: The officers of a corporation are not personally buildings. Shangri-La took possession of the
liable for their official acts. same while still owing BF Corporation an
outstanding balance. Shangri-La’s BoD based
XPNs: If it is shown that they exceeded their their defense on the separate personality given
authority. to juridical persons vis-à-vis their directors,

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 Mercantile Law
officers, stockholders, and agents. Since they did Rubber Corp. v. Ang, G.R. No. 185160, July 24,
not sign the arbitration agreement in any 2013, in Divina, 2014).
capacity, they cannot be forced to submit to the
jurisdiction of the Arbitration Tribunal in Q: Rana and Burgos are the President and
accordance with the arbitration agreement. The General Manager of SKILLEX. The latter entered
Arbitral Tribunal rendered a decision, finding into a service contract with Robinsons Land
that BF Corporation failed to prove the existence Corporation. Halfway through the service
of circumstances that render Shangri-La and the contract, Skillex asked the respondents-
other directors solidarily liable. It ruled that employees Seva, et al. to execute individual
Shangri-La’s Board of Directors is not liable for contracts which stipulated that their respective
the contractual obligations of Shangri-La to BF employments shall end at the last day of the
Corporation. year. Skillex and Robinsons no longer extended
their contract of janitorial services.
Are Shangri-La’s directors liable for the Consequently, the Skillex dismissed Seva, et al.
contractual obligations of Shangri-La to BF as they were project employees whose duration
Corporation? of employment was dependent on the former's
service contract with Robinsons. Seva, et al. filed
A: NO. Indeed, as petitioners point out, their a complaint for illegal dismissal with the NLRC.
personalities as directors of Shangri-La are separate
and distinct from Shangri-La. A corporation is an Should Rana and Burgos be held solidarily liable
artificial entity created by fiction of law. This means with the corporation for respondents-
that while it is not a person, naturally, the law gives employees’ monetary claims against the
it a distinct personality and treats it as such. A corporation?
corporation, in the legal sense, is an individual with
a personality that is distinct and separate from A: NO. Seva, et al. failed to show the existence of the
other persons including its stockholders, officers, first requisite. They did not specifically allege in
directors, representatives, and other juridical their complaint that Rana and Burgos willfully and
entities. As a general rule, therefore, a corporation’s knowingly assented to petitioner’s patently
representative who did not personally bind himself unlawful act of forcing the respondents to sign the
or herself to an arbitration agreement cannot be dubious employment contracts in exchange for their
forced to participate in arbitration proceedings salaries. The respondents also failed to prove that
made pursuant to an agreement entered into by the Rana and Burgos had been guilty of gross negligence
corporation. He or she is generally not considered a or bad faith in directing the affairs of the
party to that agreement. corporation.
To hold an officer personally liable for the debts of
Requisites before a Director or Officer of a the corporation, and thus pierce the veil of
Corporation can be held personally liable for corporate fiction, it is necessary to clearly and
corporate obligations: convincingly establish the bad faith or wrongdoing
of such officer, since bad faith is never presumed
Before a director or officer of a corporation can be (FVR Skills and Services Exponents, Inc. [SKILLEX], et.
held personally liable for corporate obligations, the Al. v. Seva, et. Al., G.R. No. 200857, October 22, 2014).
following requisites must concur:
Liability of a director for termination of
1. The complainant must allege in the complaint employees
that the director or officer assented to patently
unlawful acts of the corporation, or that the Without any evidence of bad faith or malice,
officer was guilty of gross negligence or bad directors may not be held personally liable. Only
faith; and when the termination is done with malice or in bad
2. The complainant must clearly and convincingly faith on the part of the director may the director be
prove such unlawful acts, negligence or bad held solidarily liable with the corporation
faith (Heirs of Fe Tan Uy vs. International (Equitable Banking Corporation vs. NLRC, GR No.
Exchange Bank, G.R. No. 166282, G.R. No. 02467, June 13, 1997; Rolando DS Torres v. Rural
166283, February 13, 2013). Bank of San Juan, Inc., et al., GR No. 184520, March
13, 2013).
NOTE: The fact that the corporation ceased
operations the day after the promulgation of the Q: Jacob and Fernandez are STI officers, the
SC resolution finding the corporation liable former being the President and CEO and the
does not prove bad faith on the part of the latter as the Senior VP. Ico was hired as Faculty
incorporator of the corporation (Polymer Member by STI College Makati, Inc., a wholly-

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233 FACULTY OF CIVIL LAW
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owned subsidiary of STI. Ico was subsequently difference between the value received at the
promoted as Dean of STI College-Parañaque issuance of the stoch and the par or issued value of
and, thereafter, as COO of STI-Makati. However, the same.
after the merger between STI and STI College
Makati (Inc.), Ico received a memorandum NOTE: The prohibition to issue “watered stock”
cancelling her COO assignment, citing the refers only to the original issue of stocks but not
management’s decision to undertake an to a subsequent transfer of such stocks by the
"organizational restructuring" in line with the corporation, for then it would no longer be an
merger, and further ordering Ico to turn over “issue” but a sale thereof (Rochelle Roofing Co v.
her work to one Victoria Luz, who shall function Burley as cited in De Leon, Corporation Code of the
as STI-Makati’s School Administrator. Based on Philippines Annotated).
a report, it was recommended that an
investigation committee be formed to Liability of the director, trustee or officer who
investigate Ico for grave abuse of authority, attempts to acquire or acquires any interest
falsification, gross dishonesty, maligning and adverse to the corporation in respect of any
causing intrigues, and other charges. The LA matter which has been reposed in him in
found Ico to have been illegally, constructively confidence
and in bad faith, dismissed by STI, Jacob and
Fernandez. On appeal, the NLRC reversed the When a director, trustee, or officer attempts to
ruling of the LA. CA affirmed the ruling of the acquire or acquires, in violation of his duty, any
NLRC. interest adverse to the corporation in respect of any
matter which has been reposed in him in
Is Jacob solidarily liable with STI? confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable
A: NO. The Court fails to discern any bad faith or as a trustee for the corporation and must account
negligence on the part of respondent Jacob. The for the profits which otherwise would have accrued
principal character that figures prominently in this to the corporation (CC, Sec. 31).
case is Fernandez; he alone relentlessly caused
petitioner’s hardships and suffering. He alone is NOTE: Private or secret profits obtained must be
guilty of persecuting petitioner. His superior, Jacob, accounted for, even though the transaction on
may have been, for the most part, clueless of what which they are made is advantageous or is not
Fernandez was doing to petitioner. A corporation, harmful to the corporation, or even though the
as a juridical entity, may act only through its director/ trustee or officer acted without intent to
directors, officers and employees. Obligations injure the corporation.
incurred as a result of the directors’ and officers’
acts as corporate agents, are not their personal Q: Is the above rule changed by the fact that the
liability but the direct responsibility of the agreement whereby the director/ trustee or
corporation they represent. As a rule, they are only officer is to receive a secret profit is made prior
solidarily liable with the corporation for the illegal to the time he becomes as such director/ trustee
termination of services of employees if they acted or officer?
with malice or bad faith (Girly G. Ico v. STI, Inc., et. Al,
G.R. No. 185100, July 9, 2014) A: NO. Even though the agreement to receive a
secret profit is made prior to the time the recipient
Liability of directors for the issuance of watered becomes a director/ trustee or officer, he is still
stocks liable under the above rule (De Leon, supra).

A director or trustee who: Q: Is the above rule changed by the fact that the
(1) Consents to the issuance of stocks for a secret profits were obtained from ultra vires
consideration less than its par or issued transactions?
value;
(2) Consents to the issuance of stocks for a A: NO. Notwithstanding the fact that the profits
consideration other than cash, valued in were derived from transaction ultra vires, the
excess of its fair value; or director/ trustee or officer is still liable (Ibid).
(3) Having knowledge of the inssuficient NOTE: The members of the board of directors who
consideration, does not file a written approved the payment of the cash dividends despite
objection with corporate secretary. the insolvency of the corporation and the
stockholders who received the payment should
Shall be liable to the corporation or its creditors, make good the losses. (Steinberg vs. Velasco 53 Phil
solidarily with the stockholder concerned for the 953)

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Doctrine of Corporate Opportunity Q: Malyn, Schiera and Jaz are the directors of
Patio Investments, a close corporation formed
Where a director, by virtue of his office, acquires for to run the Patio Cafe, an al fresco coffee shop in
himself a business opportunity which should belong Makati City. In 2000, Patio Cafe began
to the corporation, thereby obtaining profits to the experiencing financial reverses, consequently,
prejudice of such corporation, thereby obtaining some of the checks it issued to its beverage
profits to the prejudice of such corporation, is guilty distributors and employees bounced.
of disloyalty and should, therefore, account to the
latter for all such profits by refunding the same, In October 2003, Schiera informed Malyn that
notwithstanding that he risked his funds in the she found a location for a second cafe in Taguig
venture (CC, Sec. 34). City. Malyn objected because of the dire
financial condition of the corporation.
A director shall refund to the corporation all the
profits he realizes on a business opportunity which: Sometime in April 2004, Malyn learned about
Fort Patio Cafe located in Taguig City and that its
1. The corporation is financially able to development was undertaken by a new
undertake; corporation known as Fort Patio, Inc., where
2. From its nature, is in line with corporations both Schiera and Jaz are directors. Malyn also
business and is of practical advantage to it; and found that Schiera and Jaz, on behalf of Patio
3. The corporation has an interest or a reasonable Investments, had obtained a loan of P500,000,
expectancy (Ibid). from PBCom Bank, for the purpose of opening
Fort Patio Cafe. This loan was secured by the
The rule shall be applied notwithstanding the fact assets of Patio Investments and personally
that the director risked his own funds in the venture guaranteed by Schiera and Jaz.
(Ibid).
Malyn then filed a corporate derivative action
NOTE: If such act is ratified by a vote of the before the Regional Trial Court of Makati City
stockholders representing at least 2/3 of the against Schiera and Jaz, alleging that the two
outstanding capital stock, the director is excused directors had breached their fiduciary duties by
from remitting the profit realized (Ibid). misappropriating money and assets of Patio
Investments in the operation of Fort Patio Cafe.
Non-applicability of the Doctrine of Corporate Did Schiera and Jaz violate the principle of
Opportunity corporate opportunity? Explain. (2005 Bar)

The doctrine is not applicable to the following A: YES, Schiera and Jaz violated the Principle of
instances: Corporate Opportunity, because they used Patio
Investments to obtain a loan, mortgaged its assets
1. When a director engages in a distinct enterprise and used the proceeds of the loan to acquire a coffee
of the same general class of business as that shop through a corporation they formed (CC, Sec.
which his corporation is engaged in, so long as 34).
he acts in good faith;
2. The opportunity is one which is not essential to RESPONSIBILITY FOR CRIMES
the corporation’s business, or employment of
company’s resources, or where the director or Where a law requires a corporation to do a
officer embracing opportunity personally is not particular act, failure of which on the part of the
brought into direct competition with the responsible officer to do so constitutes an offense,
corporation; or the responsible officer is criminally liable therefore.
3. When the property or business opportunity has The reason is that a corporation can act through its
ceased to be a “corporate opportunity” and has officers and agents and where the business itself
transformed into a “personal opportunity”. In involves a violation of law all who participate in it
such a case the corporation is definitely no are liable. While the corporation may be fined for
longer able to avail itself of the opportunity, such criminal offense if the law so provides, only the
which may “arise from financial insolvency”, or responsible corporate officer can be imprisoned
from legal restrictions, or from any other factor (People vs. Tan Boon Kong, GR L-35262, March 15,
which prevents it from acting upon the 1930).
opportunity for its own advantage (SEC Opinion,
March 4, 1982). However, a director or officer can be held liable for
a criminal offense only when there is a specific
provision of law making a particular officer liable

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because being a corporate officer by itself is not Dealings of directors, trustees or officers with
enough to hold him criminally liable. the corporation

Trust Receipts Law makes the officers of a RCC: Prohibition now covers directors’, trustees’ or
corporation criminally liable officers’:
(1) Spouses
The Trust Receipts Law recognizes the impossibility (2) Relatives within the fourth civil degree of
of imposing the penalty of imprisonment on a consanguinity or affinity (RCC, Sec 31)
corporation. Hence, if the entrustee is a corporation,
the law makes the officers or employees or other A contract of the corporation with one or more of its
persons responsible for the offense liable to suffer directors or trustees or officers is voidable, at the
the penalty of imprisonment (Ong v. the Court of option of the corporation unless all the following
Appeals, G.R. No. 119858, April 29, 2003). conditions are present:

Though the entrustee is a corporation, nevertheless, 1. That the presence of such director or trustee in
the law specifically makes the officers, employees or the board meeting in which the contract was
other persons responsible for the offense, without approved was not necessary to constitute a
prejudice to the civil liabilities of such corporation quorum for such meeting;
and or board of directors, officers, or other officials 2. That the vote of such director or trustee was not
or employees responsible for the offense. The necessary for the approval of the contract;
rationale is that such officers or employees are 3. That the contract is fair and reasonable under
vested with the authority and responsibility to the circumstances;
devise means necessary to ensure compliance with 4. In case of corporations vested with public
the law and, if they fail to do so, are held criminally interest, material contracts are approved by at
accountable; thus, they have a responsible share in least 2/3 of the entire membership of the board,
the violations of the law (Ching v. the Secretary of with at least a majority of the independent
Justice, et al., G.R. No. 164317, February 6, 2006). directors voting to approve the material
contract; and
INSIDE INFORMATION 5. That in the case of an officer, the contract with
the officer has been previously authorized by
Any material non-public information about the the board of directors (CC, Sec. 32, par. 1).
issuer of the securities (corporation) or the security
obtained by being an insider, which includes: NOTE: Sec. 32 (RCC, SEC 31) does not require that
(ID-ReGoL) the corporation suffers injury or damage as a result
of the contract.
1. The Issuer;
2. A Director or officer (or any person performing Contract entered with a director or trustee may
similar functions) of, or a person controlling the be ratified by the vote of stockholders
issuer;
3. A person whose Relationship or former A contract of the corporation with one or more of its
relationship to the issuer gives or gave him directors or trustees or officers may be ratified by
access to material information about the issuer the vote of the stockholders representing at least
or the security that is not generally available to 2/3 of the outstanding capital stock or 2/3 of the
the public; members in a meeting called for the purpose.
4. A Government employee, director, or officer of However, the following should concur:
an exchange, clearing agency and/or self-
regulatory organization who has access to 1. Any of the first 2 conditions set forth in the 1st
material information about an issuer or a paragraph of Sec. 32, CC is absent;
security that is not generally available to the 2. Contract is with a director or trustee;
public; or
5. A person who Learns such information by a NOTE: If the contract is with an officer of the
communication from any forgoing insiders corporation, there must be a prior board
(SRC, Sec. 3.8). resolution authorizing the same.

CONTRACTS 3. Full disclosure of the adverse interest of the

directors or trustees involved is made at the
BY SELF-DEALING DIRECTORS stockholders’ meeting called for the purpose;
WITH THE CORPORATION and

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4. The contract is fair and reasonable under the it formed to manage the foreclosed assets, the
circumstances (CC, Sec. 32, par. 2). unpaid seller of the debtor cannot complain that the
assignment is invalid simply because the mortgagee
NOTE: Hence, in all such instances, the element that and the assignee have interlocking directors. There
the contract is fair and reasonable cannot be is no bad faith on the part of DBP by its creation of
dispensed with for the transaction is to be valid and Nonoc Mining, Maricalum and Island Cement as the
enforceable. creation of these three corporations was necessary
to manage and operate the assets acquired in the
Q: Suppose that the by-laws of X Corporation, a foreclosure sale lest they deteriorate from non-use
mining firm, provides that "The directors shall and lose their value (DBP v. CA, G.R. No. 126200,
be relieved from all liability for any contract August 16, 2001).
entered into by the corporation with any firm in
which the directors may be interested." Thus, EXECUTIVE COMMITTEE
director A acquired claims which overlapped
with X's claims and were necessary for the An executive committee is a body created by the by-
development and operation of X's mining laws and composed of not less than three (3)
properties. Is the by-law provision valid? Why? members of the board which, subject to the
(2001 Bar) statutory limitations, has all the authority of the
board to the extent provided in the board resolution
A: NO. It is in violation of Sec. 32 of the Corporation or by-laws. The committee may act by a majority
Code (RCC, Sec 31). vote of all of its members (CC, Sec. 35).

Q: What happens if director “A” is able to NOTE: An executive committee can only be created
consummate his mining claims over and above by virtue of a provision in the by-laws and that in
that of the corporation’s claims?(2001 Bar) the absence of such by-law provision, the board of
directors cannot simply create or appoint an
A: “A” should account to the corporation for the executive committee to perform some of its
profits which he realized from the transaction. He functions.
grabbed the business opportunity from the In such a case where there was an unauthorized
corporation (CC, Sec. 34). creation of executive committee by the board, the
principle of de facto officers may be applied insofar
BETWEEN CORPORATIONS WITH as third persons are concerned. However, insofar as
INTERLOCKING DIRECTORS the corporation is concerned, the unauthorized act
of appointment of an executive committee may be
Contracts between corporations with subject to Sec. 144, which provides for penalties in
interlocking directors violation of the Code (SEC Opinion, Sept. 27, 1993).

A contract between two or more corporations Non-members of the board may be appointed as
having interlocking directors shall not be members of the executive committee
invalidated on that ground alone. Provided that:
Non-members of the board may be appointed as
1. Contract is not fraudulent; members of the executive committee provided that
2. Contract is fair and reasonable under the there are at least three (3) members of the board
circumstances; and who are members of the committee (SEC Opinion,
3. If the interest of the interlocking director in one Sept. 16, 1986).
corporation or corporations is merely nominal
(not exceeding 20% of the outstanding capital NOTE: A person not a director can be a member of
stock), he shall be subject to the provisions of the executive committee but only in a
Sec. 32 insofar as the latter corporation or recommendatory or advisory capacity.
corporations are concerned. (CC, Sec. 33)
A foreigner is allowed to be a member of the
NOTE: Stockholdings exceeding 20% of the executive committee
outstanding capital stock shall be considered
substantial for purposes of interlocking A foreigner can be allowed representation in the
directors. executive committee since he can be allowed in the
BOD. An Executive Committee is a governing body
When a mortgagee bank foreclosed the mortgage on which functions as the board itself. Thus,
the real and personal property of the debtor and membership therein shall be governed by the same
thereafter assigned the properties to a corporation

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237 FACULTY OF CIVIL LAW
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law/ rules applicable to the BOD as provided in Sec. corporation in between board meetings. The
35 (SEC Opinion, June 3, 1998). Board of Directors appointed the following
members of the Executive Committee: the
Executive committees provided in the Revised President, Sarah L; the Vice-President, Jane L;
Code of Corporate Governance and a third member from the board, Juan Riles.
On December 1, 2013, the Executive Committee,
1. Audit Committee with Sarah L and Jane L present, met and
2. Nomination Committee decided on the following matters:
3. Compensation and Remuneration Committee
1. Purchase of a delivery van for use in the
Limitations on the powers of the executive corporation’s retail business;
committee 2. Declaration and approval of the 13th month
bonus;
The executive committee cannot act on the 3. Purchase of an office condominium unit at
following: the Fort; and
4. Declaration of P10.00 per share cash
1. Matters needing stockholder approval; dividend.
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws; Are the actions of the Executive Committee
4. Amendment or repeal of any resolution of the valid? (2014 Bar)
Board which by its express terms is not
amendable or repealable; and A: NO. All the actions taken by the Executive
5. Cash dividend declaration (CC, Sec. 35) Committee in the problem are not valid. The
Executive Committee was not properly created and,
Quorum required of the executive committee therefore, its acts are invalid. Sec. 35 of the
The quorum requirement for executive committee Corporation Code requires that at least three
is the same as that of the BOD. members of an Executive Committee be directors of
the corporation. In the problem, only Member Sarah
Creation of special Committees L (who is a director as she is the president) and
The Board of directors may create special Member Juan Riles (who is clearly identified in the
committees of temporary of permanent nature and problem as a director) are directors of Soei
determine the members’ term, composition, Corporation. Member Jane L is not identified as a
powers, and responsibilities (RCC, Sec. 34). director. As the Executive Committee in the problem
was not properly created, it could not act at all as the
Decisions of the executive committee are not minimum quorum would be three. As stated earlier,
subject to appeal to the board the Executive Committee lacks one qualified
member.
Decisions of the executive committee are not
subject to appeal to the board. However, if the If the Executive Committee were properly
resolution of the Executive Committee is invalid, i.e. organized and a quorum was present, all the actions
not one of the powers conferred to it, it may be taken by the Executive Committee in the problem,
ratified by the board (SEC Opinion, July 29, 1995). except the declaration of P10.00 per share cash
dividend, would have been valid. The distribution of
Q: Pursuant to its By-Laws, Soei Corporation’s cash dividends to the shareholders may not be
Board of Directors created an Executive delegated by the Board of Directors to the Executive
Committee to manage the affairs of the Committee pursuant to Sec. 35 of the CC.

MEETING
REGULAR SPECIAL
WHEN: The date fixed in the by-laws; or WHEN: At any time deemed necessary or as may be
provided in the bylaws.
If there is no date in the by-laws – shall be held
monthly.
NOTICE REQUIREMENT:

A. State the date, time and place of the meeting;

B. Be sent to every director or trustee
i. Within the period provided in the by- laws.

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ii. In the absence of provision in the by-laws, at least 1 day prior to the scheduled meeting. (2 days
in RCC)

A director or trustee may waive this requirement, either expressly or impliedly.

VENUE:

A. Venue fixed by the by-laws; or

B. If venue is not provided by the by-laws, anywhere in or outside of the Philippines.

Q: Lopez Realty, Inc. issued a Board Resolution Hence, Juanito, as the administrator of Teresita’s
authorizing Arturo, a member of the Board of estate even though not a director, is entitled to vote
Directors of the corporation, to negotiate with on behalf of Teresita’s estate as the administrator
the Tanjanco spouses for the sale of the ½ thereof (Lopez Realty, Inc. et. al. v. Tanjangco, G.R.
shares of Lopez Realty Corporation. Because of No. 154291, November 12, 2014).
this, Arturo and the spouses executed a Deed of
Sale for the shares for Php3.6M. However, Meeting held in the absence of some of the
Asuncion, another Board of Director of the said directors and without any notice given to them
corporation, submitted a letter requesting the is illegal
Board to defer any transaction with Tanjanco as
she was not apprised and given notice of the said It is illegal, and the action at such meeting although
transaction. Despite this, the execution of the by a majority of the directors, is invalid unless:
Deed of Absolute Sale between Arturo and
spouses Tanjanco proceeded. Asuncion then 1. Subsequently ratified or waived, expressly or
filed a complaint for the Annulment of the Deed impliedly, by the absent directors or
of Sale with a prayer for a writ of preliminary 2. Rights have been acquired by innocent third
injuction in the RTC. Asuncion alleges that she persons, as against whom the corporation must
was neither notified nor apprised of the on- be held estopped to set up the failure to observe
going sale of the shares of LRI. Is Asuncion’s formalities (De Leon, supra).
contention correct?
Directors or trustees cannot attend or vote by
A: NO. The general rule is that a corporation, proxy at board meetings
through its board of directors, should act in the
manner and within the formalities, if any, Directors or trustees cannot attend or vote by proxy
prescribed by its charter or by the general law. at board meetings (CC, Sec. 25).
Thus, directors must act as a body in a meeting
called pursuant to the law or the corporation's by- The members of the BOD are required to exercise
laws, otherwise, any action taken therein may be their judgment and discretion in running the affairs
questioned by any objecting director or of the corporation and they cannot be substituted by
shareholder. However, the actions taken in such a others (SEC Opinion, May 27, 1970).
meeting by the directors or trustees may be ratified
expressly or impliedly. In the present case, the Requisites for a valid tele/videoconferencing
ratification was expressed through the July 30, 1982
Board Resolution. Asuncion claims that the July 30, R.A. 8792, as implemented by SEC Memo. Circular
1982 Board Resolution did not ratify the Board No. 15 on November 30, 2001, provides that:
Resolution dated August 17, 1981 for lack of the
required number of votes because Juanito is not 1. Directors must express their intent on
entitled to vote while Leo voted "no" to the teleconferencing;
ratification of the sale even if the minutes stated 2. Proper identification of those attending; and
otherwise. The Court takes into account that 3. The corporate secretary must safeguard the
majority of the board of directors except for integrity of the meeting by recording it.
Asuncion, had already approved of the sale to the
spouses Tanjangco prior to this meeting. As a NOTE: There is no violation of the Anti-Wire
consequence, the power to ratify the previous Tapping Act (R.A. 4200) because all the parties to
resolutions and actions of the board of directors in the board meeting are aware that all the
this case lies in the stockholders, not in the board of communications are recorded.
directors. It would be absurd to require the board
of directors to ratify their own acts—acts which the The basic types of teleconferencing are:
same directors already approved of beforehand.

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1. Video conferencing; Makati, Metro Manila. The by-laws are silent as
2. Computer conferencing; to the place of meeting of the stockholders and
3. Audio conferencing. directors.

Contents of the notice, which should be sent to a. Who shall preside at the meeting of the
every director in case of a directors?
tele/videoconferencing b. Can Ting, a stockholder, who did not attend
the stockholders’ annual meeting in Manila,
The Corporate Secretary shall send out the notices question the validity of the corporate
of the meeting to all directors in accordance with resolutions passed at such meeting?
the manner of giving notice as stated in the c. Can the same stockholder question the
corporate by-laws. validity of the resolutions adopted by the
BOD at the meeting held in Makati? (1993
The notice shall include the following: Bar)

1. Inquiry on whether the director will attend A:

physically or through tele/videoconferencing; a. Section 54 of the Code provides that it is the
2. Contact number/s of the Secretary and office President who shall preside over the directors’
staff whom the director may call to notify and meeting, unless the by-laws provide otherwise.
state whether he shall be physically present or However, in practice, it is the Chairman who
attend through tele/videoconferencing; presides because the President only reports to
3. Agenda of the meeting; and the Chairman. Only in the absence of a
4. All documents to be discussed in the meeting, Chairman can a President preside over
including attachments, shall be numbered and directors’ meetings.
duly marked by the Secretary in such a way that b. NO. Section 51 provides that the annual
all the directors, physically or electronically stockholders’ meeting shall be held in the city
present, can easily follow, refer to the or municipality where the principal office is
documents and participate in the meeting (SEC located. For this purpose, the law also provides
Memo Circ. No. 15, Series of 2001). that Metro Manila is considered a city or
municipality. Since the principal office or
If the director chooses tele/videoconferencing, he business of MIC is Pasig, Metro Manila, the
shall give notice of at least five (5) days prior to the holding of the annual stockholders’ meeting in
scheduled meeting to the Secretary. The latter shall Manila is proper.
be informed of his contact number/s. In the same c. NO. Ting cannot question the validity of
way, the Secretary shall inform the director corporate resolutions passed in the BOD meeting
concerned of the contact number/s he will call to because Section 53 of the Code does not require
join the meeting. The Secretary shall keep the that the meeting must be held within the city or
records of the details, and on the date of the municipality where the principal office of the
scheduled meeting, confirm and NOTE such details corporation is located. The directors’ meeting
as part of the minutes of the meeting (ibid). In the can be held anywhere in or outside the
absence of an arrangement, it is presumed that the Philippines.
director will physically attend the Board meeting
(Ibid). QUORUM

WHO PRESIDES Quorum in board meetings

The president shall preside at all meetings of the GR: Majority of the number of directors or trustees.
directors or trustees as well as of stockholders or
members unless the by-laws provide otherwise (CC, XPN: If AOI or the by-laws provide for a greater
Sec. 54). number (CC, Sec. 25)

Q: Under the articles of incorporation of Manila NOTE: The quorum is the same even if there is
Industrial Corp., its principal place of business vacancy in the board.
shall be in Pasig, Metro Manila. The principal
corporate offices are at Ortigas Center, Pasig, Rule as to the decision of the quorum
Metro Manila, while factory processing leather
products is in Manila. The corporation holds its GR: Every decision of at least a majority of the
annual stockholders’ meeting at the Manila directors or trustees present at a meeting at which
Hotel in Manila and its BOD meeting at a hotel in there is quorum shall be valid as a corporate act.

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XPNs: 1. The existence of a relationship giving access,
directly or indirectly, to information intended
1. The election of officers which shall require the to be available only for a corporate purpose and
vote of a majority of all the members of the not for the personal benefit of anyone; and
board. 2. The inherent unfairness involved when a party
2. No board approval is necessary where there is takes advantage of such information knowing it
custom, usage and practice in the corporation is unavailable to those with whom he is dealing
not requiring prior board approval or where (SEC v. Interport Resources Corporation, G.R.
subsequent approval is sufficient (Board of No. 135808, October 6, 2008).
Liquidators v. Kalaw, G.R. No. L‐18805, August
14, 1967).
STOCKHOLDERS AND MEMBERS
Three out of five directors of the board of directors
present in a special meeting do not constitute a
quorum to validly transact business when its by- A person becomes a shareholder the moment he:
laws requires at least four members to constitute a
quorum. Under Section 25 of the CC, the articles of 1. Enters into a subscription contract with an
incorporation or by-laws may fix a greater number existing corporation (he is a stockholder upon
than the majority of the number of directors to acceptance of the corporation of his offer to
constitute a quorum. Any number less than the subscribe whether the consideration is fully
number provided in the articles or by-laws cannot paid or not);
constitute a quorum; any act therein would not bind 2. Purchase treasury shares from the corporation;
the corporation; all that the attending directors or
could do is to adjourn (Pena vs. CA, G.R. No. 91478, 3. Acquires shares from existing shareholders by
February 7, 1991, in Divina, 2014). sale or any other contract, or acquires shares by
operation of law like succession (Sundiang Sr. &
RULE ON ABSTENTION Aquino, 2009).

Effect of Abstention RIGHTS OF A STOCKHOLDER AND MEMBER

No inference can be drawn in a vote of abstention. 1. Management Right

When a director or trustee abstains, it cannot be a. To attend and vote in person or by proxy at
said that he intended to acquiesce in the action a stockholders’ meetings (CC, Secs. 50, 58);
taken by those who voted affirmatively. Neither, for b. To elect and remove directors (CC, Secs. 24,
that matter, can such inference be drawn from the 28);
abstention that he was abstaining because he was c. To approve certain corporate acts (CC, Sec.
not then ready to make a decision (Lopez v. Ercita, 58);
G.R. No. L-32991, June 29, 1972). d. To adopt and amend or repeal the by-laws
of adopt new by-laws (CC, Secs. 46, 48);
Instances when a director is required to abstain e. To compel the calling of the meetings (CC,
in voting Sec. 50);
f. To enter into a voting trust agreement (CC,
Whenever a director believes he/she has a conflict Sec. 59); and
of interest, the director should abstain from voting g. To have the corporation voluntarily
on the issue and make sure his/her abstention is dissolved (CC, Secs. 118, 119).
noted in the minutes (Robert's Rules, 10th ed.).
The other reason a director might abstain is that 2. Proprietary rights
he/she believes there was insufficient information a. To transfer stock in the corporate book (CC,
for making a decision. Otherwise, directors should Sec. 63);
cast votes on all issues put before them. Failure to b. To receive dividends when declared (CC,
do so could be deemed a breach of their fiduciary Sec. 43);
duties. c. To the issuance of certificate of stock or
other evidence of stock ownership (CC, Sec.
Example where a director needs to abstain 64);
d. To participate in the distribution of
To avoid “Insider Trading”, Insiders are obligated to corporate assets upon dissolution (CC, Sec.
abstain from trading the shares of his 118, 119); and
corporation. This duty to abstain is based on two e. To pre-emption in the issue of shares (CC,
factors: Sec. 39).

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3. Remedial rights It is also used to apply to the holder of the authority
a. To inspect corporate books (CC, Sec. 74); or person authorized by an absent stockholder or
b. To recover stock unlawfully sold for member to vote for him at a stockholders’ or
delinquent payment of subscription (CC, members’ meeting.
Sec. 69);
c. To be furnished with most recent financial It also refers to the instrument which evidences the
statements or reports of the corporation’s authority of the agent (De Leon, supra).
operation (CC, Sec. 74, 75);
d. To bring suits (derivative suit, individual NOTE: A proxy is a special form of agency. A proxy
suit, and representative suit); and holder is an agent and as such a fiduciary (De Leon,
e. To demand payment in the exercise of supra).
appraisal right (CC, Secs. 41, 81).
Since a proxy acts for another, he may act as such
DOCTRINE OF EQUALITY OF SHARES although he himself is disqualified to vote his
shares. A proxy-stockholder disqualified to vote
Where the articles of incorporation do not provide because his stock has been declared delinquent may
for any distinction of the shares of stock, all shares vote the stocks of his principal which is not
issued by the corporation are presumed to be equal delinquent.
and enjoy the same rights and privileges and are
also subject to the same liabilities (CC, Sec. 6). Purposes of proxies

PARTICIPATION IN MANAGEMENT The purposes and use of proxies are as follows:

Under the CC, stockholders or members periodically 1. Assures the presence of a quorum in meetings
elect the board of directors or trustees, who are of stockholders of large corporations;
charged with the management of the corporation. 2. Enables those who do not wish to attend a
The board, in turn, periodically elects officers to stockholders’/ members’ meeting to protect
carry out management functions on a day-to-day their interest by exercising their right to vote
basis. As owners, though, the stockholders or through a representative; and
members have residual powers over fundamental 3. One of the devices in securing voting control or
and major corporate changes. management control in the corporation (Ibid.).

While stockholders and members (in some Who may be a proxy

instances) are entitled to receive profits, the
management and direction of the corporation are Any person whom the stockholder or member sees
lodged with their representatives and agents -- the fit to represent him.
board of directors or trustees. In other words, acts
of management pertain to the board; and those of NOTE: By-laws restricting the stockholder’s or
ownership, to the stockholders or members. In the member’s right in this respect are void (De Leon,
latter case, the board cannot act alone, but must supra).
seek approval of the stockholders or members (Tan
v. Sycip, G.R. No. 153468, August 17, 2006). Further, same person may act as proxy for one or
several stockholders or members.
PROXY
Duration of proxy
Stockholders and members may vote in person or
by proxy in all meetings of stockholders or members 1. Specific proxy – authority granted to the proxy
(Sec. 58, CC). holder to vote only for a particular meeting on
a specific date.
However the right of members to vote by proxy may 2. Continuing proxy – authority granted a proxy to
be denied under the articles of incorporation or by- appear and vote for and in behalf of a
laws of a non-stock corporation (Sec. 89. CC.) shareholder for a continuing period which
should not be more than 5 years at any one
The term “proxy” designates the formal written time. By-laws may provide for a shorter
authority given by the owner or holder of the stock, duration of a continuing proxy.
who has a right to vote it, or by a member, as
principal, to another person, as agent, to exercise Extent of authority of a proxy
the voting rights of the former.

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1. General proxy – A general discretionary power 4. Voting by members in non-stock corps (CC, Sec.
to attend and vote at an annual meeting, with all 89, par. 2)
the powers the undersigned would possess if
personally present, to vote for directors and all NOTE: In non-stock corporations the right to
ordinary matters that may properly come vote by proxy, or even the right to vote may be
before a regular meeting. denied to members in the articles of
incorporation or the by-laws as long as the
NOTE: A holder of a general proxy has no denial is not discriminatory.
authority to vote for a fundamental change in
the corporate charter or other unusual 5. In considering other matters:
transactions such as merger or consolidation. a. Pledge or mortgage of shares (CC, par. 2,
Sec. 55);
2. Limited proxy – Restrict the authority to vote to b. In all other matters as may be provided in
specified matters only and may direct the the by-laws (CC, Sec. 47[4]);and
manner in which the vote shall be cast (Ibid.). c. In all meetings of stockholders or members
(CC, Sec. 58).
Requirements of a valid proxy
Power to appoint a proxy is a personal right
1. Proxies shall be in writing and shall be signed
by the stockholder or member concerned. Oral The right to vote is inseparable from the right of
proxies are NOT valid; ownership of stock. The appointment of proxy is,
2. The proxy shall be filed before the scheduled therefore, purely personal and to be valid, a proxy to
meeting with the corporate secretary; vote stock must have been given by the person who
3. Unless otherwise provided (continuing in is the legal owner of the stock entitled to vote the
nature) in the proxy, it shall be valid only for the same at the time it is be voted (SEC Opinion, Dec. 3,
meeting for which it is intended. The authority 1993, citing 5 Fletcher, Sec. 2053).
may be general or limited; and
4. No proxy shall be valid and effective for a period Unless the stockholder or member who executed a
longer than 5 years at any one time (CC, Sec. 58, proxy gives his consent in writing, a designated
as amended by SRC, Sec. 20). proxy may not further re-designate another under
the same proxy. An alternate proxy can only act as
Instances when the right to vote by proxy may proxy in case of non-attendance of the other
be exercised designated proxy (De Leon, supra).

1. Election of the BOD/BOT (CC, Sec. 24) Revocation of proxy

NOTE: When proxies are solicited in relation to A proxy may be revoked in writing, orally or by
the election of corporate directors, the resulting conduct.
controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, GR: One who has given a proxy the right to vote may
should be properly seen as an election revoke the same at anytime.
controversy within the original and exclusive
jurisdiction of the trial courts by virtue of XPN: Said proxy is coupled with interest, even if it
Section 5.2 of the SRC in relation to Section 5(c) may appear by its terms to be revocable (De Leon,
of Presidential Decree No. 902-A. From the supra).
language of Section 5(c) of Presidential Decree
No. 902-A, it is indubitable that controversies as Last proxy given revokes all previous proxies (SEC
to the qualification of voting shares, or the Opinion, October 14, 1991).
validity of votes cast in favor of a candidate for
election to the board of directors are properly SEC may pass upon the validity of the issuance
cognizable and adjudicable by the regular and use of proxies
courts exercising original and exclusive
jurisdiction over election cases. (GSIS v. CA, G.R. PD 902-A empowers the SEC, among others, “to pass
No. 183905, April 6, 2009) upon the validity of the issuance and use of proxies
and voting trust agreements for absent
2. Voting in case of joint ownership of stock (CC, stockholders or members” (Sec. 6[g]).
Sec. 56)
3. Voting by trustee under VTA (CC, Sec. 59, last Procedural Matters Relating to Proxies
par.)

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1. “Proxy Solicitation” involves the securing and 3. To enable the owners of the majority of the
submission of proxies, while “Proxy Validation” stock of the corporation to control the
concerns the validation of such secured and corporation.
submitted proxies; 4. To vest and retain the management of the
2. The SEC’s power to pass upon the validity of corporation in the persons originally promoting
proxies in relation to election controversies has it.
effectively been withdrawn, tied as it is to its 5. To prevent a rival concern from acquiring
abrogated jurisdictional powers and has been control of the corporation.
transferred to the RTC Special Commercial 6. To carry out a proposed sale of the
Courts pursuant to the terms of Sec. 5.2 of the corporation’s assets and to facilitate its
Securities Regulation Code; dissolution.
3. However, although an intra-corporate 7. To enable two holding companies to operate
controversy may animate a disgruntled jointly a corporation controlled by them.
shareholder to complain to the SEC a 8. To effect a plan for reorganization of a
corporations violations of SEC rules and corporation in financial difficulty or in
regulations, but that motive alone should not be bankruptcy proceedings.
sufficient to deprive the SEC of its investigatory 9. To aid a financially embarrassed corporation to
and regulatory powers, especially so since such obtain a loan and protect its creditors (De Leon,
powers are exercisable on a motu proprio basis. supra).

The fact that the jurisdiction of the regular courts Procedural requirements and limitations
under Section 5(c) is confined to the voting on imposed on VTA’s
election of officers, and not on all matters which
may be voted upon by stockholders, elucidates that 1. The agreement must be in writing and
the power of the SEC to regulate proxies remains notarized and specify the terms and conditions
extant and could very well be exercised when thereof.
stockholders vote on matters other than the 2. A certified copy of such agreement shall be filed
election of directors (GSIS v. CA, G.R. No. 183905, with the corporation and with the SEC,
April 16, 2009). otherwise, it is ineffective and unenforceable.
3. The certificate/s of stock covered by the VTA
Note: It must be noted however that directors or shall be cancelled.
trustees cannot vote by proxy at board meetings. 4. A new certificate shall be issued in the name of
(Par.3, Sec. 5, CC) the trustee/s stating that they are issued
pursuant to the VTA.
VOTING TRUST 5. The transfer shall be noted in the books of the
corporation, that it is made pursuant to said
A voting trust agreement (VTA) is an agreement VTA.
whereby one or more stockholders transfer their 6. The trustee/s shall execute and deliver to the
shares of stocks to a trustee, who thereby acquires transferors voting trust certificates, which shall
for a period of time the voting rights (and/or any be transferable in the same manner and with
other specific rights) over such shares; and in the same effect as certificates of stock.
return, trust certificates are given to the 7. GR: No VTA shall be entered into for a period
stockholder/s, which are transferable like stock exceeding 5 years at any one time (i.e., for every
certificates, subject, to the trust agreement. voting trust)

Note: The voting trust agreement filed with the XPN: In case of a voting trust specifically
requiring a longer period as a condition in a
Principal purpose: acquire control of the loan agreement, the period may exceed 5 years
corporation. but shall automatically expire upon full
payment of the loan.
Other purposes of a VTA
8. No VTA shall be entered into for the purpose of
1. VTA makes possible a unified control of the circumventing the law against monopolies and
affairs of the corporation and a consistent illegal combinations in restraint of trade.
policy by binding stockholders to vote as a unit. 9. The agreement must not be used for purposes
2. To assure continuity of policy and management of fraud (CC, Sec. 59).
especially of a new corporation desirous of
attracting investors. NOTE: Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically

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expire at the end of the agreed period, and the includes the right to receive dividends (Lee v. CA,
voting trust certificates as well as the certificates of G.R. No. 93695, February 4, 1992).
stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of Note: The voting trust agreement filed with the
stock shall be reissued in the name of the corporation shall be subject to examination by any
transferors (CC, Sec. 59). stockholder in the same manner as any other
corporate book or record. Both the transferor and
Effect of a voting trust agreement with respect to the trustee may exercise the right of inspection of all
the rights of the trustor and the trustee corporate books and records (Villanueva,
Commercial Law Reviewer, p. 741, 2017.
It is the trustee of the shares who acquires legal title
to the shares under the voting trust agreement. Trustor has the right to terminate voting trust
agreement when the trustee has committed a
And thus entitled to the right to vote and the right to breach of trust (Everett v. Asia Banking Corp., G.R.
be elected in the board of directors while the No. L-25241, November 3, 1926).
trustor-stockholder has the beneficial title which

Voting trust agreement vs. Proxy

VOTING TRUST PROXY

If validly executed, VTA is intended to be A proxy, unless coupled with interest, is revocable at
irrevocable for a definite and limited period of time. anytime.
Trustee acquires legal title to the shares of the
Proxy has no legal title to the shares of the principal
transferring stockholder
Right to vote as well as other rights may be given
except the right to receive dividends. The trustee Only right to vote is given. The proxy must vote in
may vote in person or by proxy unless the person.
agreement provides otherwise
The agreement must be notarized Proxy need not be notarized
Trustee is not limited to act at any particular Proxy can only act at a specified stockholder’s meeting
meeting (if not continuing)
The stock certificate shall be cancelled and a new
one in the name of the trustee shall be issued stating No cancellation of the certificate shall be made
that they are issued pursuant to a VTA.
A trustee can vote and exercise all the rights of the A proxy can only vote in the absence of the owner of the
stockholder even when the latter is present. stocks
An agreement must not exceed 5 years at any one
A proxy is usually of shorter duration although under
time except when the same is made a condition of a
Sec. 58 it cannot exceed 5 years at any one time
loan.
Governed by the law on trust Governed by the law on agency
A proxy does not have a right of inspection of corporate
A trustee has the right to inspect corporate books.
books.

Pooling agreement e.g. Shareholders A,B,C,D,E, hold 50% of the

outstanding capital stock, entered into a pooling
Pooling or voting agreements are agreements by agreement to vote for F as a member of the board of
which two or more stockholders agree that their director.
shares shall be voted as a unit. They are usually Validity of pooling agreements
concerned with the election of directors to gain
control of the management. The parties remain the Pooling agreements are valid as long as they do not
legal owners of their stocks with the right to vote limit the discretion of the BOD in the management
them (De Leon). of corporate affairs or work any fraud against
stockholders not party to the contract.
NOTE: This does not involve a transfer of stocks but
is merely a private agreement (CC, Sec. 100). Test: the validity and legality of such pooling
agreements depend upon the objects sought to be
attained and the acts which are done under them,

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and the other circumstances. There is some of all its assets and properties, including the
authority for holding pooling agreements to be management and operation of the company,
invalid if the consideration for entering into the claiming that under the Voting Trust Agreement,
same gives a private benefit to the stockholder. the bank was constituted as trustee of the
management and operations of the Company. Is
Pooling agreement [Link] Trust Agreement the company correct? (1992 Bar)

In Pooling Agreement, the stockholders themselves A: NO. The company’s demand does not tally with
exercise their right to vote. On the other hand, the the concept of a VTA because such agreement
trustees are the ones who exercise the right to vote merely conveys to the trustee the right to vote the
under the Voting Trust Agreement. shares of the grantor. The consequence of the
foreclosure of the mortgaged properties would not
Q: A distressed corporation executed a VTA for a be in consonance with the VTA and its effects
period of three years over 60% of its
outstanding paid up shares in favor of a bank to CASES WHEN STOCKHOLDERS’ ACTION IS
which it was indebted, naming the the Bank as REQUIRED
trustee. The Company mortgaged all its
properties to the [Link] Bank foreclosed the Under Section 6 of the Corporation Code, each share
mortgaged properties, and as the highest of stock is entitled to vote, unless otherwise
bidder, acquired said properties and assets of provided in the articles of incorporation or declared
the Company. delinquent under Section 67 of the Corporation
Code (Tan v. Sycip, G.R. No. 153468, August 17, 2006).
The three-year period having expired, the
company demanded the turn-over and transfer

Corporate powers exercised jointly by the BOD and stockholders (I.4PA.2G.E2-SMAV)

VOTE REQUIREMENT
CORPORATE ACT
BOARD OF DIRECTORS STOCKHOLDERS
GR: Majority vote of the outstanding capital stock
Amendments, repeal, or
Majority vote of the BOD
adoption of new by-laws
XPN: If delegated by the stockholders to the board
GR: Vote of the majority of the outstanding shares
of stock or members of both the managing and the
managed corporation.

XPN: The vote required for the managed

corporation is not merely majority but 2/3 of the
outstanding capital stock in cases where:

1) A stockholder or stockholders representing

Entering into Majority of the quorum of
the same interest of both the managing and
management contract the BOD
the managed corporations own or control
more than one-third (1/3) of the total
outstanding capital stock entitled to vote of
the managing corporation; or
2) Majority of the members of the board of
directors of the managing corporation also
constitute a majority of the members of the
board of directors of the managed
corporation.
Issuance of stock Majority of the quorum of Vote representing 2/3 of the outstanding capital
dividends the BOD stock
Amendment to articles of Vote representing 2/3 of the outstanding capital
Majority vote of the BOD
incorporation stock

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Grant of compensation to
Approval of the Board Majority vote of the outstanding capital stock
directors
Extending or shortening Vote representing 2/3 of the outstanding capital
Majority vote of the BOD
the corporate term stock
Increase or decrease of Vote representing 2/3 of the outstanding capital
Majority vote of the BOD
capital stock stock
To incur, create, or
Vote representing 2/3 of the outstanding capital
increase bonded Majority vote of the BOD
stock
indebtedness
Deny Pre-emptive Right Vote representing 2/3 of the outstanding capital
Majority vote of the BOD
(CC, Sec. 39) stock
Investment of corporate
funds in another
corporation or business or Vote representing 2/3 of the outstanding capital
Majority vote of the BOD
for any other purpose stock
other than the primary
purpose
The sale or other
disposition of all or Vote representing 2/3 of the outstanding capital
Majority vote of the board
substantially all of the stock
corporate assets
Vote representing 2/3 of the outstanding capital
Merger or consolidation Majority vote of the BOD
stock
Vote representing 2/3 of the outstanding capital
Voluntary dissolution Majority vote of the BOD
stock
To adopt a plan of
Majority vote of the
distribution of assets of a 2/3 of the members having voting rights
Trustees
non-stock corporation

Corporate powers exercised solely by the stockholders

CORPORATE ACT APPROVAL OF STOCKHOLDERS

Election of directors or trustees; filling up
of vacancies by the stockholders due to Candidates receiving the highest number of votes from the
the expiration of term, removal from outstanding capital stock or members entitled to vote (plurality,
office or increase in the number of board NOT majority)
seats
Plurality vote of the BOD listed in the AOI, not merely those
To elect officers of the corporation
present constituting a quorum
Majority of the quorum of the BOD if authorized by the AOI or in
Fixing the issued price of no-par value
the absence of such authority, by a majority of the outstanding
shares
capital stock
Declaration of cash and other dividends
Majority of the quorum of the board
other than stock dividends
To adopt by laws Majority of the outstanding capital stock or of the members
To revoke the power delegated to the
BOD to amend or repeal the by-laws or Majority of the outstanding capital stock or of the members
adopt new by laws
To call a special meeting to remove Majority of the outstanding capital stock or of the members
directors or trustees entitled to vote
Vote representing 2/3 of the outstanding capital stock or of
Removal of directors
members entitled to vote
Delegation of the power to amend by-
Vote representing 2/3 of the outstanding capital stock
laws to the board of directors
Ratification of corporate contract with a
director Vote representing 2/3 of the outstanding capital stock

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To delegate to the BOD the power to
amend or repeal the by-laws or adopt 2/3 of the outstanding capital stock or of the members
new by laws

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PROPRIETARY RIGHTS A record date is the date fixed in the
resolution declaring dividends, when the
The following are the proprietary rights of the dividend shall be payable to those who are
stockholders: stockholders of record on a specified future
date or as of the date of the meeting
1. Right to Dividends declaring said dividend. (De Leon, supra)
2. Right of Appraisal Holders of shares not fully paid which are
3. Right to Inspect not delinquent shall have all the rights of a
4. Pre-emptive Right stock holder.
5. Right to Vote
6. Right of First Refusal GR: Prior to the declaration of a dividend, a
stockholder cannot maintain an action at
RIGHT TO DIVIDENDS law to recover his share of the accumulated
profits because such stockholder has no
Right to dividend of a stockholder individual interest in the profits of a
corporation until a dividend has been
It is the right of the stockholder to demand payment declared.
of dividends after the board’s declaration.
Stockholders are entitled to dividends pro rata XPN: An action at law may be maintained
based on the total number of shares that they own where it is alleged that sufficient net profits
and not on the amount paid for the shares (SEC have been earned to obligate the
Opinion, October 10, 1992 and July 16, 1996). corporation to pay, however, there must be
a prior application with the directors for
G.R. Stock corporations are prohibited from the relief sought. If it appears that the
retaining surplus profits in excess of 100% of their directors have wantonly violated their
paid-in capital stock duty, and such application would be
inefficacious, such application need not be
XPN: made.
a) When justified by definite corporate
expansion projects or programs approved No dividends can be declared out of capital, except
by the board of directors; or when liquidating dividends distributed at
b) When the corporation is prohibited under dissolution (Sec. 122, CC).
any loan agreement with any financial
institution or creditor, whether local or Rule in applying dividends in delinquent shares
foreign, from declaring dividends without
its/his consent, and such consent has not Cash dividends due on delinquent
yet been secured; or stock shall first be applied to the
Cash
c) When it can be clearly shown that such unpaid balance on the subscription
retention is necessary under special plus cost and expenses.
circumstances obtaining in the corporation, Stock dividends are withheld from
such as when there is need for special Stock the delinquent stockholder until his
reserve for probable contingencies (Sec. 43, unpaid subscription is fully paid.
CC)
RIGHT OF APPRAISAL
Entitlement to receive dividends
It refers to the right of the stockholder to demand
GR: Those stockholders at the time of declaration payment of the fair value of his shares, after
are entitled to dividends (Sundiang Sundiang Sr. & dissenting from a proposed corporate action
Aquino, 2009, citing SEC Opinion, July 15, 1994). involving a fundamental change in the charter or
articles of incorporation in the cases provided by
NOTE: Dividends declared before the transfer of law (De Leon, 2010).
shares belong to the transferor and those
declared after the transfer, belong to the Requisites: (GWAFU)
transferee (Ibid).
1. Any Ground for appraisal must be present.
XPN: 2. A written demand on the corporation must
1. In case a record date is provided for. be made within 30 days after the date when the
vote was taken

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3. The dissenting stockholders attend the NOTE: Failure to make the demand within such
meeting of the stockholders and voted against period shall be deemed a waiver of the appraisal
the proposed action. right.
4. The price of the Fair Market Value of the
shares on the day before the date of voting. 4. The price must be based on the fair value of the
Note: In case of disagreement, the value will shares as of the day prior to the date on which
be determined by appraisal of 3 disinterested the vote was taken. If the proposed corporate
persons (Sec 82. CC) action is implemented or effected, the payment
5. The corporation has sufficient unrestricted shall be made upon surrender of the certificates
retained earnings to pay (Turner vs. Lorenzo of stock representing his shares.
636 scra 137) 5. Such fair value must be determined as provided
in Sec. [Link] fair value shall exclude any
Instances where a stockholder may exercise his appreciation or depreciation in anticipation of
appraisal right such corporate action.
6. Payment of the shares must be made only out of
Any stockholder of a corporation shall have the the unrestricted earnings of the corporation.
right to dissent and demand payment of the fair
value of his shares in the following instances: NOTE: No payment shall be made to any
dissenting stockholder unless the corporation
1. In case any amendment to the articles of has unrestricted retained earnings in its books
incorporation has the effect of changing or to cover the payment. The trust fund
restricting the rights of any stockholder or class doctrine backstops the requirement of
of shares, or of authorizing preferences in any unrestricted retained earnings to fund the
respect superior to those of outstanding shares payment of the shares of stocks of the
of any class, or of extending or shortening the withdrawing stockholders (Philip Turner, et al.,
term of corporate existence; v. Lorenzo Shipping Corp., G.R. No. 157479,
2. In case of sale, lease, exchange, transfer, November 24, 2010).
mortgage, pledge or other disposition of all or
substantially all of the corporate property and 7. Upon such payment, the stockholder must
assets as provided in the Code; transfer his shares to the corporation (CC, Secs.
3. In case of merger or consolidation (CC, Sec. 81); 81, 42).
4. In case the corporation decides to invest its
funds in another corporation or business for Q: Assuming a stockholder disagrees with the
any purpose other than its primary purpose as issuance of new shares and the pricing for the
provided in Sec. 42 of the CC; shares; may the stockholder invoke his
5. Under Sec. 105, any stockholder of a close appraisal rights and demand payment for his
corporation may, for any reason, compel said shareholdings? (1999 Bar)
corporation to purchase his shares at their fair
value, which shall not be less than their par or A: NO, the stockholder may not invoke his appraisal
issued value, when the corporation has right because disagreement with the issuance of
sufficient assets in its books to cover its debts new shares and its pricing do not fall under any of
and liabilities exclusive of capital stock. the instances where the appraisal right is available.

Limitations on the exercise of appraisal right Effects of the exercise of the right of appraisal

1. Any of the instances provided by law for the 1. Once the dissenting stockholder demands
exercise of the right by a dissenting stockholder payment of the fair value of his shares:
must be present. a. All rights accruing to such shares including
voting and dividend rights shall be
2. The dissenting stockholder must have voted suspended; and
against the proposed corporate action. The b. He shall be entitled to receive payment of
right is not available to a stockholder who was the fair value of his shares as agreed upon
either absent at the meeting where the between him and the corporation or as
corporate action was approved, or was present determined by the appraisers chosen by
at such meeting but abstained from casting his him;
vote. c. GR: He is not allowed to withdraw his
3. A written demand on the corporation for demand for payment of his shares
payment of his shares must be made by him
within 30 days after the date the vote was taken.

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XPN: Unless the corporation consents a. Where the price offered by the corporation
thereto. is approximately the same as the fair value
ascertained by the appraisers;
2. If the dissenting stockholder was not paid the b. Where the same action is filed by the
value of his shares within 30 days after the dissenting stockholder and his refusal to
award, his voting and dividend rights shall be accept payment is found by the court to be
immediately restored until payment of his unjustified (De Leon, 2010).
shares (CC , Sec. 83);
Q: In case of disagreement between the
NOTE: Even if his rights as stockholder are corporation and a withdrawing stockholder
suspended after his demand in writing is made, who exercises his appraisal right regarding the
he cannot be considered as an ordinary creditor fair value of his shares, a three-member group
of the corporation (SEC Opinion, Jan. 11, 1982); shall by majority vote resolve the issue with
finality. May the wife of the withdrawing
3. Upon payment of the stockholder’s shares, all stockholder be named to the three member
his rights as stockholders are terminated, not group? (2011 Bar)
merely suspended (CC, Sec. 82); and
A: NO, the wife of the withdrawing shareholder is
4. If before the stockholder is paid, the proposed not a disinterested person.
corporate action is abandoned, his rights and
status as a stockholder shall thereupon be Q: When does the right to payment cease?
permanently restored (CC, Sec. 84).
A: The right of the dissenting stockholder to be paid
Rule if there is a disagreement between the the fair value of his shares shall cease, his status as
withdrawing stockholder and the corporation a stockholder shall thereupon be restored, and all
as to the fair value of the shares dividend distributions which would have accrued
on his shares shall be paid to him if:
If within a period of 60 days from the date the
corporate action was approved by the stockholders, 1. Demand for payment is withdrawn with the
the withdrawing stockholder and the corporation consent of the corporation;
cannot agree on the fair value of the shares, it shall 2. The proposed corporate action is abandoned by
be determined and appraised by three (3) the corporation;
disinterested persons, one of whom shall be named 3. The proposed corporate action is rescinded by
by the stockholder, another by the corporation, and the corporation;
the third by the two thus chosen. 4. The proposed corporate action is disapproved
by the SEC where such approval is necessary; or
The findings of the majority of the appraisers shall 5. The SEC determines that the dissenting
be final, and their award shall be paid by the stockholder is not entitled to the appraisal right
corporation within 30 days after such award is (CC, Sec. 84).
made (CC, Sec. 82).
NOTE: A dissenting stockholder who demands
Cost of appraisal payment of his shares is no longer allowed to
withdraw from his decision unless the corporation
The costs and expenses of appraisal shall be borne consents thereto.
as follows:
RIGHT TO INSPECT
1. By the corporation—
a. Where the price which the corporation The stockholder’s right of inspection of the
offered to pay the dissenting stockholder is corporation’s book and records is based upon his
lower than the fair value as determined by ownership of shares in the corporation and the
the appraisers named by them; necessity for self-protection (Puno v. Puno, G.R. No,
b. Where an action is filed by the dissenting 177066, September 11, 2009)
stockholder to recover such fair value and The mere fact that the shareholdings of a
the refusal of the stockholder to receive stockholder is merely .001 per cent of the issued
payment is found by the court to be shares of stock does not justify the denial of the
justified. request of inspection of the corporate records.
(Terelay v Yulo 765 SCRA 1)
2. By the dissenting stockholder—
Valid purposes for inspection:

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1. Ascertainment of financial condition of 1. The right must be exercised during reasonable
corporation or propriety of dividends hours on business days;
2. Value of the shares of stock for sale or 2. The person demanding the right has not
investment. improperly used any information obtained
3. Existence of mismanagement. through any previous examination of the books
4. Obtainment of list of stockholders to solicit and records of the corporation;
proxies or influence voting. 3. The demand is made in good faith or for
5. Obtainment of information in aid of litigation legitimate purpose germane to his interest as a
with the corporation or its officers regarding stockholder (CC, Sec. 74).
corporate transactions.
Good purposes may be:
Books and records required to be kept by the (a) To investigate acts of management;
corporation (b) To investigate financial conditions; fix
value of shares;
The following are the books and records required to (c) Mailing list for proxies; or
be kept by private corporations: (d) Information for litigation (Villanueva)

1. A record of all business transactions, which 4. It should follow the formalities that may be
shall include contract, memoranda, journals, required in the by-laws;
ledgers, etc; 5. The right does not extend to trade secrets; and
2. Minutes of all meetings of stockholders or 6. It is subject to limitations under special laws,
members; e.g. Secrecy of Bank Deposits and FCDA or the
3. Minutes of all meetings of directors or trustees; Foreign Currency Deposits Act.
and
4. Stock and transfer book, in case of stock NOTE: The right extends, in compliance with equity,
corporations (CC, Sec. 74). good faith, and fair dealing, to a foreign subsidiary
wholly-owned by the corporation.
NOTE: The duty to keep these books is imperative
and mandatory. The stockholder can likewise However, this right does not apply where the
inspect the financial statements of the corporation corporation is not organized under the Philippine
(CC, Sec. 75). law as in such a case, the right of the stockholder is
governed by the inspection requirements in the
Place where the books and records shall be kept jurisdiction in which the corporation was organized
(De Leon, 2010).
GR: All the above books and records must be kept at
the principal office of the corporation. The right to inspect extends to the books and
records of the wholly-owned subsidiary of the
XPN: The stock and transfer book may be kept in the corporation.
principal office of the corporation or in the office of
its stock transfer agent, if one has been appointed by It would be more in accord with equity, good faith
the corporation (CC, Sec. 75). and fair dealing to construe the statutory right of the
stockholder to inspect the books and records of the
Requirement in order for the minutes of the corporation as extending to books and records of its
board meetings be given probative value wholly-owned subsidiary which are in the
corporation’s possession and control (Gokongwei v.
The minutes of board meetings should be signed by SEC, supra).
the corporate secretary. Without such signature, Rationale behind the right of inspection of a
neither probative value nor credibility could be corporation
accorded such minutes (Union of Supervisors [RB]-
NATU v. Sec. of Labor, G.R. No. L- 39889, November The stockholder's right of inspection of the
12, 1981). corporation's books and records is based upon their
ownership of the assets and property of the
Minutes of meetings without the signature of the corporation. It is, therefore, an incident of
corporate secretary have no probative value, and ownership of the corporate property (Republic v.
therefore cannot be demanded for inspection or Sandiganbayan, G.R. No. 88809, July 10, 1991).
examination (Villanueva).
Persons entitled to inspect corporate books
Requirements for the Exercise of the Right of
Inspection

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The following are entitled to inspect the corporate legal title to the stock (Puno v. Puno Enterprises, Inc.,
books: G.R. No. 177066, September 11, 2009).

1. Any director, trustee, or stockholder or member Q: Who are the persons who may be held liable
of the corporation at reasonable hours on under Section 74?
business day (CC, Sec. 74);
2. Voting trust certificate holder – The term A: The first, second and fourth paragraphs of
“stockholder”, as used in Sec. 74 means not only Section 74 are provisions that enumerates the
a stockholder of record; it includes a voting obligations of a corporation, such as what books or
trust certificate holder who has become merely records required to be kept, where it shall be kept,
an equitable owner of the shares transferred and other obligations of the corporation to its
(CC, Sec. 59 [3]); stockholders or members in relation to such books
3. Stockholder of a sequestered company and records. Hence, by parity of reasoning, such
(Republic vs. Sandiganbayan, supra); and provisions can only be violated by a corporation.
4. Beneficial owner of shares- pledgee, judgment
debtor, buyer from record owner. This is It is clear that a criminal action based on the
provided that his interest is clearly established violation of the second or fourth paragraphs of
by evidence. Section 74 can only be maintained against corporate
officers or such other persons that are acting on
Q: The deceased Carlos L. Puno, was an behalf of the corporation. Violations of the second
incorporator of Puno Enterprises, Inc. (Puno, and fourth paragraphs of Section 74 contemplates a
Inc). Joselito Musni Puno, claiming to be an heir situation wherein a corporation, acting thru one of
of Carlos L. Puno, initiated a complaint for its officers or agents, denies the right of any of its
specific performance against Puno, Inc. Joselito stockholders to inspect the records, minutes and the
averred that he is the son of the deceased with stock and transfer book of such corporation (Aderito
the latter’s common-law wife, Amelia Puno. As Z. Yujuico and Bonifacio C. Sumbilla v. Cezar T.
surviving heir, he claimed entitlement to the Quiambao and Eric C. Pilapil, G.R. No. 180416, June 2,
rights and privileges of his late father as 2014).
stockholder of Puno, Inc. The complaint thus
prayed that Joselito be allowed to inspect its Remedies for enforcement of right to inspect
corporate book, and be given an accounting and
all the profits pertaining to the shares of Puno.. 1. Action for mandamus or damages
2. Civil and criminal liability
May an heir of a stockholder can automatically
exercise the rights (inspection, accounting, Liability of a corporate officer or agent in case he
dividends) pertaining to the deceased? violates the stockholder’s right to inspection

A: [Link] stockholder’s right of inspection of the Any officer or agent of the corporation who shall
corporation’s books and records is based upon his refuse to allow any director, trustees, stockholder or
ownership of shares in the corporation and the member of the corporation to examine and copy
necessity for self-protection. After all, a shareholder excerpts from its records or minutes, shall be liable
has the right to be intelligently informed about to such director, trustee, stockholder or member for
corporate affairs. Such right rests upon the damages, and in addition, shall be liable for by a fine
stockholder’s underlying ownership of the of not less than one thousand (P1,000.00) pesos but
corporation’s assets and property. Similarly, only not more than ten thousand (P10,000.00) pesos or
stockholders of record are entitled to receive by imprisonment for not less than thirty (30) days
dividends declared by the corporation, a right but not more than five (5) years, or both, in the
inherent in the ownership of the shares. Upon the discretion of the court (CC, Sec 75 and Sec 144).
death of a shareholder, the heirs do not
automatically become stockholders of the Requisites for existence of probable cause to file
corporation and acquire the rights and privileges of a criminal case of violation of a stockholder’s
the deceased as shareholder of the corporation. The right to inspect corporate books
stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be 1. A director, etc. has made a prior demand in
recorded in the books of the corporation. During writing for a copy or excerpts from the
such interim period, the heirs stand as the equitable corporation’s records or minutes;
owners of the stocks, the executor or administrator 2. Any officer or agent of the concerned
duly appointed by the court being vested with the corporation shall refuse to allow the said

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director, etc., to examine and copy said Pre-emptive right must be exercised in accordance
excerpts; with the AOI or the By-Laws. When the AOI and the
3. If such refusal is made pursuant to a resolution By-Laws are silent, the Board may fix a reasonable
or order of the BOD’s the liability for such action time within which the stockholders may exercise
shall be imposed upon the directors or trustees the right.
who voted such refusal; and
4. Where the officer or agent of the corporation Stock Transactions covered includes:
sets up the defense that the person demanding
to examine and copy excerpts from the records a) The re-issuance of treasury shares which would
and minutes has improperly used any cover the increase in the authorized capital
information secured through any prior stock;
examination of the same or was not acting in b) Opening for subscription the unissued portion
good faith or for a legitimate purpose in making of existing capital stock; and
his demand, the contrary must be shown or c) Disposition of treasury shares.
proved (De Leon, supra, citing Ang-Abaya v. Ang,
G.R. No. 178511, December 4, 2008). Pre-emptive right on the re-issuance of treasury
shares
The Corporation Code has granted to all
stockholders the right to inspect the corporate When a corporation reacquires its own shares
books and records, and in so doing has not required which thereby become treasury shares, all
any specific amount of interest for the exercise of shareholders are entitled to pre-emptive right when
the to inspect (Terelay Investment and Development the corporation reissues or sells these treasury
Corp. v. Yulo, G.R. No. 160924, August 05, 2015). shares. The re-issuance of treasury shares is not
among the exception provided by Sec. 39 when pre-
Refusal to allow inspection is a criminal offense emptive right does not exist.

We find inaccurate the pronouncement of the RTC Transferability of pre-emptive right

that the act of refusing to allow inspection of the
stock and transfer book is not a punishable offense Pre-emptive right is transferable unless there is an
under the Corporation Code. Such refusal, when express restriction in the AOI.
done in violation of Section 7 4(4) of the
Corporation Code, properly falls within the purview Waiver of pre-emptive right by the stockholder
of Section 144 of the same code and thus may be
penalized as an offense (Yujuico and v. Quiambao, The stockholder may waive his pre-emptive right
supra). either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right
Defenses that can be set up: after being notified and given an opportunity to
1. Improper use of the information obtained in the avail of such right.
past;
2. There was bad faith; Denial by the corporation of the pre-emptive
3. Use the information for an illegitimate purpose right
(Villanueva).
The corporation can deny pre-emptive right if the
PRE-EMPTIVE RIGHT articles of incorporation or amendment thereto
denies such right.
It is the preferential right of shareholders to The stockholder must be given a reasonable time
subscribe to all issues or disposition of shares of any within which to exercise their preemptive rights.
class in proportion to their present shareholdings Upon the expiration of said period, any stockholder
(CC, Sec. 39). who has not exercised such right is deemed to have
waived it (Majority Stockholders of Ruby Industrial
Purpose of pre-emptive right Corp. vs. Lim and the Minority Stockholders of Ruby
Industrial Corp., G.R. Nos. 165887 & 165929, June 6,
To enable the shareholder to retain his 2011).
proportionate control in the corporation and to
retain his equity in the surplus RIGHT TO VOTE

Exercise of pre-emptive right The stockholders can exercise their right to vote
through the election, replacement and removal of
Board of Directors or Trustees and on other

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corporate acts which require stockholders’ capacity by the holders thereof, any one of the joint
approval. owners can vote said shares or appoint a proxy
therefor (CC, Sec. 56).
Nature of the right to vote
Rule in case of pledged or mortgaged shares
One of the rights of a stockholder is the right to
participate in the control and management of the GR: The pledgor or mortgagor shall have the right
corporation that is exercised through his vote. The to attend and vote at meetings of stockholders even
right to vote is a right inherent in and incidental to though their shares are pledged or mortgaged.
the ownership of corporate stock, and such is a
property right (Castillo v. Balinghasay, 440 SCRA XPN: The pledgee or mortgagee has the right to vote
442, 2004). and attend meetings if he is expressly given by the
pledger or mortgagor such right in writing which is
Conditions for the issuance of non-voting shares recorded on the appropriate corporate books (CC,
Sec. 55).
The issuance of non- voting shares is subject to the
following conditions under Section 6 of the CC: RIGHT OF FIRST REFUSAL

1. Only preferred or redeemable shares may be A right that grants to the corporation or another
made non-voting shares; and stockholder the right to buy the shares of stock of
2. There must remain other shares with full voting another stockholder at a fixed price and only valid if
rights. made on reasonable terms and consideration.

Instances when non-voting shares are entitled Provisions in articles of incorporation requiring
to vote (AASI-IMID) stockholders desiring to sell their stocks to offer
them first to the corporation or to the existing
The non-voting shares may still vote in the following stockholders at a given reasonable date before
matters: disposing of them to third persons may be
considered valid and enforceable (SEC Opinion, Feb.
1. Amendment of the articles of incorporation; 23, 1993).
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other Right of first refusal is not a substantive right
disposition of all or substantially all of the under the Corporation Code
corporate property;
4. Incurring, creating or increasing bonded GR: The right of first refusal can only arise by means
indebtedness; of a contractual stipulation, or when it is provided
5. Increase or decrease of capital stock; for in the AOI
6. Merger or consolidation of the corporation with
another corporation or other corporations; XPN: In the case of a close corporation, the right of
7. Investment of corporate funds in another first refusal is required to be found in the AOI.
corporation or business in accordance with the
corporation code; and When only the by-laws provide a right of first
8. Dissolution of the corporation (CC, Sec 6) refusal without the corresponding provision in the
AOI and not printed in the stock certificate, it is null
Treasury shares are not entitled to vote and void. There is no authority to create property
restrictions in by-laws provisions (Hodges v.
Treasury shares shall have no voting right as long as Lezama, G.R. No. L-17327, August 30, 1963).
such shares remain in treasury.
AOI may validly grant a right of first refusal in
Rule in case of joint ownership of stock favor of other stockholders

GR: In case of shares of stock owned jointly by two The SEC, as a matter of policy, allows restrictions on
or more persons, in order to vote the same, the transfer of shares in the AOI if the same is necessary
consent of all the co-owners shall be necessary. and convenient to the attainment of the objective for
which the company was incorporated, unless
XPN: If there is a written proxy, signed by all the co- palpably unreasonable under the circumstances
owners, authorizing one or some of them or any (SEC Opinion, Feb. 20, 1995).
other person to vote such share or shares. Provided,
that when the shares are owned in an “and/or” Pre-emptive right vs. Right of first refusal

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REPRESENTATIVE SUIT
RIGHT OF FIRST
PRE-EMPTIVE RIGHT
REFUSAL A representative suit is one filed by the shareholder
Arises only by virtue individually, or on behalf of a class of shareholders
of contractual to which he or she belongs, for injury to his or her
May be exercised even
stipulations but is interest as a shareholder (Cua v. Tan, GR 182008,
when there is no express
also granted under December 4, 2009).
provision of law
the provisions on
close corporation It is proper where the wrong is done to a group of
Pertains to stockholders, as where preferred stockholders’
unsubscribed portion of rights are violated, a class or representative suit will
Exercisable against
the authorized capital be proper for the protection of all stockholders
another stockholder
stock. A right that may belonging to the same group (Ibid).
of the corporation of
be claimed against the
his shares of stock
corporation. It includes NOTE: Right of pre-emption is personal to each
treasury shares. stockholder. While a stockholder may maintain a
suit to compel the issuance of his proportionate
share of stock, it has been ruled, nevertheless, that
REMEDIAL RIGHTS he may not maintain a representative action on
behalf of other stockholders who are similarly
Actions that the stockholders or members can situated.
bring
Remedies of representative suit and derivative
1. Derivative suit – one brought by one or more suit are mutually exclusive
stockholders or members in the name and on
behalf of the corporation to redress wrongs The two actions are mutually exclusive: i.e., the right
committed against it or to protect or vindicate of action and recovery belongs to either the
corporate rights, whenever the officials of the shareholders (direct action) or the corporation
corporation refuse to sue or are the ones to be (derivative action) (Ibid.).
sued or hold control of the corporation.
DERIVATIVE SUIT
2. Individual suit – an action brought by a
stockholder against the corporation for direct Neither the Corporation Code nor the Securities
violation of his contractual rights as such Regulation Code expressly grant the stockholder the
individual stockholder, such as the right to vote right to institute a derivative suit. It is impliedly
and be voted for, the right to share in the recognized when the said laws make corporate
declared dividends, the right to inspect directors or officers liable for damages suffered by
corporate books and records, and others. the corporation and its stockholders for violation of
their fiduciary duties (Yu v. Yukayguan, 607 Phil.
3. Representative suit – one brought by a person in 581, 610, 2009).
his own behalf and on behalf of all similarly
situated. Requisites for the existence of a derivative suit
(C-SENA)
INDIVIDUAL SUIT
1. Corporate cause of action: the cause of action
When the injury is suffered directly by an individual must devolve upon the corporation itself; the
shareholder as to affect his proprietary rights, as wrongdoing or harm having been caused to the
when his right to vote is unlawfully withheld or his corporation and not to the particular
right to inspect corporate books arbitrarily denied, stockholder brining the suit (Reyes v. Hon. RTC
an action may be brought by the injured stockholder of Makati Br. 142, G.R. No. 165744, August 11,
in his own name and for his own benefit against the 2008).
corporation (Salonga, 1968). 2. Stockholder: the party bringing the suit must be
a stockholder
NOTE: Authorization from the board of directors is a. At the time the acts or transactions subject
not necessary. Since the wrong is done to him of the action occurred; and
personally and not to the other stockholder or the b. at the time the action was filed
corporation, the cause of action belongs to him
alone. NOTE: if the cause of action is continuing in
nature, the only requisite is that the party is a

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stockholder at the time the action was filed payment of the arrearages will be prejudicial to
(Dean Divina’s Lecture, April 29, 2015). the Club as the mortgage on its assets will be
foreclosed and the sale at a lower price is the
3. Exhaustion of all intra-corporate remedies best solution to the problem. Decide the suit and
available under the AOI, By-Laws, laws or rules explain. (2016 Bar)
governing the corporation or partnership to
obtain the relief he desires. A: The derivative suit will not prosper. While it was
4. Not a Nuisance or Harassment suit. filed by a stockholder on behalf of the corporation,
5. Appraisal right is not available (Rule 8 of the the complainant did not allege the other elements of
Interim Rules of Procedure Governing Intra- derivative suit namely:
Corporate Controversies, cited in Yu, et al., v.
Yukayguan, et al., G.R. No. 177549, June 18, 2009) A) Exhaustion of intra- corporate remedies
available under the articles of
Representative Suit V. Derivative Suit incorporation, by- laws, rules and
regulations governing the corporation to
REPRESENTATIVE DERIVATIVE SUIT obtain relief stockholders desires;
SUIT B) It is not a nuisance suit; and
Initiated by the Initiated by the C) Appraisal right is not available.
stockholder under his stockholder on behalf of
own name or on the corporation Q: Ranier Madrid, a shareholder, wrote the
behalf of other Board of Directors of FHGCCI two demand
stockholders letters because of the delay in construction and
Seeks to recover for the asked them to initiate legal actions against
benefit of the FEGDI and FEDI. The Board of Directors,
corporation and its however, failed and/or refused to act on the
whole body of demand [Link], in a derivative capacity
Seeks vindication for on behalf of petitioner FHGCCI, filed with the
shareholders when
injury to his or her RTC a Complaint for Specific Performance with
injury is caused to the
interest as a Damages. FEGDI argued that there is no cause of
corporation that may
shareholder action and it is not a proper derivative suit as
not otherwise be
redressed because of Madrid on behalf of FHGCCI failed to exhaust all
failure of the remedies available under the articles of
corporation to act incorporation and by-laws and failed to implead
Deals with individual its Board of Directors as indispensable parties.
stockholders or a Deals with corporate Is there compliance with requirements of
class of stockholder’s rights (Ibid.). derivative suit?
rights
A: NO. Madrid, as a shareholder of FHGCCI, failed to
Q: Royal Links Golf Club obtained a loan from a allege with particularity in the Complaint, and even
bank which is secured by a mortgage on a titled in the Amended Complaint, that he exerted all
lot where holes 1, 2, 3 and 4 are located. The reasonable efforts to exhaust all remedies available
bank informed the Board of Directors (Board) under the articles of incorporation, by-laws, or rules
that if the arrearages are not paid within thirty governing the corporation; that no appraisal rights
(30) days, it will extra-judicially foreclose the are available for the acts or acts complained of; and
mortgage. The Board decided to offer to the that the suit is not a nuisance or a harassment suit.
members 200 proprietary membership shares,
which are treasury shares, at the price of For a derivative suit to prosper, the following must
P175,000.00 per share even when the current be present:
market value is P200,000.00.
a) It is minority stockholder suing for and on behalf
In behalf and for the benefit of the corporation, of the corporation must allege in his complaint that
Peter, a stockholder, filed a derivative suit he is suing on a derivative cause of action on behalf
against the members of the Board for breach of of the corporation and all other stockholders
trust for selling the shares at P25,000.00, lower similarly situated who may wish to join him in the
than its market value, and asked for the suit;
nullification of the sales and the removal of the b) Stockholder should have exerted all reasonable
board members. Peter claims the Club incurred efforts to exhaust all remedies available under the
a loss of PS million. The Board presented the articles of incorporation, by-laws, laws or rules
defense that in its honest belief any delay in the governing the corporation or partnership to obtain

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the relief he desires and that such fact is alleged with meeting but he continued to be a registered
particularity in the complaint; and shareholder of PREC.
c) The stockholder is also required to allege,
explicitly or otherwise, the fact that there were no When he was still a director, A discovered that
appraisal rights available for the acts complained of, on Jan 5, 1991, PREC issued free of charge
as well as a categorical statement that the suit is not 10,000 shares to X a lawyer who assisted in a
a nuisance or a harassment suit (Forest Hills Golf and court case involving PREC.
Country Club, Inc. v. Fil- Estate Properties, Inc. G.R.
No. 206649, July 20, 2016, Del Castillo, J.). a. Can A now bring an action in the name
of the corporation to question the issuance
Rationale for a derivative suit of the shares to X without receiving any
payment?
Under the CC, where a corporation is an injured b. Can X question the right of A to sue him in
party, its power to sue is lodged with its board of behalf of the corporation on the ground that
directors or trustees. However, an individual A has only one share in his name?
stockholder may be permitted to institute a c. Can the shares issued to X be considered as
derivative suit on behalf of the corporation in order watered stock? (1993 Bar)
to protect or vindicate corporate rights whenever
the officials of the corporation refuse to sue, or are A:
the ones to be sued, or hold control of the a. As a general rule, A cannot bring a derivative
corporation (Hi-Yield Realty v. CA, G.R. No. 168863, suit in the name of the corporation concerning
June 23, 2009). an act that took place before he became a
stockholder. However, if the act complained of
Stockholder is not a real party in interest in a is a continuing one, A may do so.
derivative suit b. NO. In a derivative suit, the action is
instituted/ brought in the name of a
The corporation is the real party-in-interest while corporation and reliefs are prayed for therein
the suing stockholder, on behalf of the corporation, for the corporation, by a minority stockholder.
is only a nominal party (Ibid). The law does not qualify the term
“minority” in terms of the number of shares
Time when a person must be a stockholder for owned by a stockholder bringing the action in
him to be justified in filing a derivative suit behalf of the corporation (SMC v. Khan, G.R. No.
85339, August 11, 1989).
He must be a stockholder at the time the cause of c. NO. Watered shares are those sold by the
action accrued. If the cause of action is general and corporation for less than the par/book value. In
continuing, said person must be a stockholder at the the instant case, it will depend upon the value of
time of filing of the suit and at the time the cause of services rendered in relation to the total par
action accrued. value of the shares.

The implicit argument — that a stockholder, to be Allegation of tort can co-exist with a derivative
considered as qualified to bring a derivative suit, suit in the same petition
must hold a substantial or significant block of stock
— finds no support whatever in the law. The bona Personal injury suffered by a stockholder cannot
fide ownership by a stockholder of stock in his own disqualify him from filing a derivative suit on behalf
right suffices to invest him with standing to bring a of the corporation. It merely gives rise to an
derivative action for the benefit of the corporation. additional cause of action for damages against the
The number of his shares is immaterial since he is erring directors (Goachan v. Young, G.R. No. 131889,
not suing in his own behalf, or for the protection or March 12, 2001).
vindication of his own particular right, or the
redress of a wrong committed against him, Jurisdiction over a derivative suit
individually, but in behalf and for the benefit of the
corporation (San Miguel Corporation v. Khan, G.R. A derivative suit is an intra-corporate controversy
No. 85339, August 11, 1989). hence under the jurisdiction of the RTC acting as a
special commercial court.
Q: A became a stockholder of Prime Real
Estate Corporation (PREC) on July 10, 1991, Q: AA, a minority stockholder, filed a suit against
when he was given one share by another BB, CC, DD, and EE, the holders of majority
stockholder to qualify him as a director. A was shares of MOP Corporation, for alleged
not re-elected director in the July 1, 1992 annual misappropriation of corporate funds. The

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complaint averred, inter alia, that MOP Oscar claimed that the suit is not a bona
Corporation is the corporation in whose behalf fide derivative suit because the requisites
and for whose benefit the derivative suit is therefor have not been complied with. Is the
brought. In their capacity as members of the complaint filed by Rodrigo a derivative suit?
Board of Directors, the majority stockholders
adopted a resolution authorizing MOP A: NO. First, Rodrigo is not a shareholder with
Corporation to withdraw the suit. Pursuant to respect to the shareholdings originally belonging to
said resolution, the corporate counsel filed a Anastacia; he only stands as a transferee-heir whose
Motion to Dismiss in the name of the MOP rights to the share are inchoate and unrecorded.
Corporation. Should the motion be granted or Second, in order that a stockholder may show a right
denied? Reason briefly. to sue on behalf of the corporation, he must allege
with some particularity in his complaint that he has
A: The motion to dismiss should be denied. The exhausted his remedies within the corporation by
requisites for a valid derivative suit exist in this making a sufficient demand upon the directors or
case. First, AA was exempt from exhausting his other officers for appropriate relief with the
remedies within the corporation and did not have a expressed intent to sue if relief is denied. Lastly, the
demand on the Board of Directors for the latter to Court finds no injury, actual or threatened, alleged
sue. Here, such a demand would be futile, since the to have been done to the corporation due to Oscar’s
directors who comprise the majority (namely BB, acts. If indeed he illegally and fraudulently
CC, DD and EE are the ones guilty of the wrong transferred Anastacia’s shares in his own name,
complained of. Second, AA appears to be a then the damage is not to the corporation but to his
stockholder at the time of the alleged co-heirs; the wrongful transfer did not affect the
misappropriation of corporate funds. Third, the suit capital stock or the assets of Zenith (Oscar C. Reyes
is brought on behalf and for the benefit of MOP v. RTCof Makati, Branch 142, et al., G.R. No. 165744,
Corporation. In this connection, it was held in August 11, 2008).
Commart (Phils.) Inc. v. SEC, (G.R. No. 85318, June 3,
1991) that to grant to the corporation concerned the Q: Pursuant to the by-laws of Legaspi Towers
right of withdrawing or dismissing the suit, at the 300, Inc. (Legaspi), petitioners Lilia Marquinez
instance of the majority stockholders and directors Palanca,et al., the incumbent Board of Directors,
who themselves are the persons alleged to have fixed the annual meeting of the members of the
committed the breach of trust against the interests condominium corporation and the election of
of the corporation would be to emasculate the right the new Board of Directors. Out of a total
of the minority stockholders to seek redress for the number of 5,723 members who were entitled to
corporation. Filing such action as a derivative suit vote, 1,358 were supposed to vote through their
even by a lone stockholder is one of the protections respective proxies and their votes were critical
extended by law to minority stockholders against in determining the existence of a quorum. The
abuses of the majority. Committee on Elections of Legaspi, however,
found most of the proxy votes, at its face value,
Q: Oscar and Rodrigo C. Reyes are two of the four irregular, thus, questionable; and for lack of
children of the spouses Pedro and Anastacia time to authenticate the same, Palanca, et al.,
Reyes. Pedro, Anastacia, Oscar, and Rodrigo adjourned the meeting for lack of quorum.
each owned shares of stock of Zenith Insurance Despite Palanca et al.'s insistence that no
Corporation (Zenith), a domestic corporation quorum was obtained during the annual
established by their family. Pedro and Anastacia meeting, Muer, et al.,pushed through with the
died. Pedro’s estate was judicially partitioned scheduled election and were elected as the new
among his heirs, however, no similar settlement Board of Directors and officers of Legaspi.
and partition appear to have been made with Subsequently, they submitted a General
Anastacia’s estate, which included her Information Sheet to the Securities and
shareholdings in Zenith. Zenith and Rodrigo Exchange Commission (SEC) with the new set of
filed a complaint with the SEC against Oscar. The officers. Palanca, et al., filed a complaint for the
complaint stated that it is a derivative suit declaration of nullity of elections against Muer,
initiated and filed by the complainant Rodrigo to et al., in a form of a derivative suit. Is the
obtain an accounting of the funds and assets of derivative suit proper?
Zenith which are now or formerly in the control,
custody, and/or possession of Oscar and to A: NO. The derivative suit is not proper. The
determine the shares of stock of deceased complaint for nullification of the election is a direct
spouses Pedro and Anastacia Reyes that were action by Palanca, et al., who were the members of
arbitrarily and fraudulently appropriated by the Board of Directors of the corporation before the
Oscar. Oscar denied the charge. Furthermore, election, against Muer, et al., who are the newly-

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elected Board of Directors. The cause of action 3. Liability to the creditors of the corporation for
devolves on Palanca, et al., not the condominium unpaid subscription (CC, Sec. 60);
corporation, which did not have the right to vote. 4. Liability for watered stock (CC, Sec. 65);
Hence, the same is improper for derivative suit 5. Liability for dividends unlawfully paid (CC, Sec.
(Legaspi Towers 300, Inc., et al., v. Amelia P. Muer, et 43); and
al., G.R. No. 170783, June 18, 2012). 6. Liability for failure to create corporation (CC,
Sec. 10) (Sundiang Sr. & Aquino, 2014)
OBLIGATIONS OF A STOCKHOLDER
While a stockholder has no personal liability for the
The following are the obligations of the stockholder: debts of the corporation beyond the amount of his
capital investment, he is personally liable for the
1. Liability to the corporation for unpaid above obligations. In addition, he may become
subscription (CC, Sec. 67-70); personally liable for damages or otherwise for any
2. Liability to the corporation for interest on wrongful disposition of corporate assets, breaches
unpaid subscription if so required by the by of fiduciary duties, fraud, gross negligence,
laws (CC, Sec. 66); unauthorized acts, violations of law, or improper us
of the corporate form.

STOCKHOLDERS’ MEETINGS
DATE AND PLACE REQUIRED WRITTEN NOTICE
Regular meeting
The notice of meetings shall be in writing, and the
time and place thereof stated therein.
1. Annually on date fixed in the by-laws; or
2. If there is no date in the by-laws – any date in April NOTE: Under the Revised Corporation Code, the
as determined by the board. written notice of regular meetings may be sent
through electronic mail or such other manner as the
NOTE: Under the Revised Corporation Code, if the by- commission shall allow under its guidelines. (Sec.
laws does not fix the date of the meeting, it shall be on 49).
any date after April 15 of every year as may be
determined by the board (Sec. 49). The notice shall be sent to the stockholder:
1. Within the period provided in the by-laws
Venue: In the city or municipality where the principal 2. In the absence of provision in the by-laws – at least
office is located, and if practicable in the principal 2 weeks prior to the meeting.
office of the corporation: Provided, that Metro Manila
shall be considered a city or municipality. Notice may be waived, expressly or impliedly, by any
stockholder or member.
NOTE: Under the Revised Corporation Code, any city
or municipality in Metro Manila, Metro Cebu, Metro NOTE: Under the Revised Corporation Code, the
Davao, and other Metropolitan areas shall be written notice of regular meetings shall be sent to all
considered a city or municipality (Sec. 50). stockholders or members of record at least twenty-
one (21) days prior to the meeting unless otherwise
provided in the bylaws, law, or regulation (Sec. 49).
Special meeting
1. Any time deemed necessary; or
2. As provided in the by-laws The notice of meetings shall be in writing, and the
time and place thereof stated therein.
Venue: In the city or municipality where the principal
office is located, and if practicable in the principal The notice shall be sent to the stockholder:
office of the corporation: Provided, that Metro Manila 1. Within the period provided in the by-laws
shall be considered a city or municipality. 2. If no provision in the by-laws – at least 1 week
prior to the meeting
NOTE: Under the Revised Corporation Code, any city
or municipality in Metro Manila, Metro Cebu, Metro Notice may be waived, expressly or impliedly, by any
Davao, and other Metropolitan areas shall be stockholder or member.
considered a city or municipality (Sec. 50).

Requirements for a valid meeting whether

stockholders/members or the board 1. It must be held in the proper place.

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2. It must be held at the stated date and at the before the Sandiganbayan (Trans Middle
appointed time or at a reasonable time East [Phils.] v. Sandiganbayan, GR 172556,
thereafter. June 9, 2006).
3. It must be called by the proper person:
a. The person or persons designated in the Under the two-tiered test, the government,
by-laws have authority to call stockholders’ through PCGG, may vote sequestered shares if
or members’ meeting; there is a prima facie evidence that the shares
b. In the absence of such provision in the by- are ill-gotten wealth and there is imminent
laws it may be called by a director or danger of dissipation of assets while the case is
trustee or by an officer entrusted with the pending. However, the two-tiered test
management of the corporation; contemplates a situation where the registered
c. A stockholder or member may make the stockholders were in control and had been
call on order of the SEC whenever for any dissipating company assets and the PCGG
cause there is no person authorized to call wanted to vote the sequestered shares to save
a meeting. the company. It does not apply when the PCGG
had voted the shares and is in control of the
4. The special meeting for the removal of directors sequestered corporation (Africa v.
or trustees may be called by the secretary or by Sandiganbayan, G.R. Nos. 172222, 174493 &
stockholder or member: 184636, November 11, 2013, in Divina, 2014).
a. There must be a previous notice;
b. There must be a quorum. XPN to the XPN: The two-tiered test does not
apply in cases involving funds of public
Rules on meeting or voting which are applicable character (public character exception). In such
to certain kinds of shares cases, the government is granted the authority
to vote said shares, namely:
1. Delinquent shares- shall not be entitled to vote.
2. Treasury shares - have no voting rights while a. Where the government shares are taken
they remain in the treasury (CC, Sec. 57). over by private persons or entities who
3. Fractional shares- shall not be entitled to vote. or which registered them in their own
4. Escrow shares - shall not be entitled to vote names; and
before the fulfillment of the condition imposed b. Where the capitalization of shares that
thereon. were acquired with public funds
5. Unpaid shares - if not delinquent, are entitled to somehow landed in private hands
all the rights of a stockholder including the right (Republic vs. Sandiganbayan, G.R. No.
to vote. 107789, April 30, 2003).
6. Sequestered shares
7. Pledgor, mortgagor, or administrator shares (CC,
GR: The registered owner of the shares of a Sec. 55) – pledger or mortgagor has the right to
corporation, even if they are sequestered by the attend and vote at meetings unless pledge or
government through the PCGG, exercises the mortgagee is expressly given such right in
right and the privilege of voting on them. writing, as recorded on the books.
The PCGG as a mere conservator cannot, as a
rule, exercise acts of dominion by voting these Executor, administrators, receivers, and other
shares. legal representatives may attend and vote in
behalf of the stockholder or members without
XPN: Two-tiered test: The registered owner of need of any written proxy. In Gochan v. Young,
sequestered shares may only be deprived of G.R. No. 131889, Mar. 12, 2001, it was held that
these voting rights, and the PCGG authorized to heirs are not prohibited from representing the
exercise the same, only if it is able to establish deceased with regard to shares of stock
that: registered in the name of the latter, especially
when no administrator has been appointed.
a. There is prima facie evidence showing
that the said shares are ill-gotten and 8. Shares jointly owned (CC, Sec. 56) – consent of all
thus belong to the State; and the co-owners is necessary, unless there is a
b. There is an imminent danger of written proxy signed by all the co-owners. If
dissipation, thus necessitating the shares are owned in an “and/or” capacity by the
continued sequestration of the shares holders thereof, any one of the joint owners can
and authority to vote thereupon by the vote or appoint a proxy thereof.
PCGG while the main issue is pending

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WHO CALLS THE MEETING meeting (People v. Dumlao, GR 168918, March 2,
2009).
The “call” for a meeting is exercised by the person
who has the power to call the meeting. To have probative value and credibility, the minutes
must be signed by the corporate secretary,
The following persons may exercise the power to notwithstanding that the one taking the minutes
“call” for a meeting: was a mere clerk (Union of Supervisors [RB]-NATU v.
Sec. of Labor, supra).
1. The person or persons designated in the by-
laws to have the authority to call stockholders’/
members’ meeting; CAPITAL STRUCTURE
2. In the absence of such provision in the by-laws,
the director/trustee or officer entrusted with
the management of the corporation unless SUBSCRIPTION AGREEMENTS
otherwise provided by law;
3. A stockholder/ member may make the call on It is a contract for the acquisition of unissued stock
order of the SEC whenever for any cause, there in an existing corporation or a corporation still to be
is no person authorized to call a meeting (CC, formed. It is considered as such notwithstanding the
Sec. 50) or the officers authorized fail or refuse fact that the parties refer to it as purchase or some
to call a meeting; and other contract (CC,Sec. 60).

NOTE: SEC may compel the officers of any Nature of a subscription contract
corporation registered by it to call meetings of A subscription contract is indivisible. Consequently,
stockholders/members thereof under its where stocks were subscribed and part of the
supervision (PD No. 902-A, Sec. 6 [f]) subscription contract price was not paid, the whole
4. Corporate Secretary or a stockholder/member subscription shall be considered delinquent and not
for a special meeting intended for the removal only the shares which correspond to the amount not
of directors or trustees (CC, Sec. 28). paid.

QUORUM NOTE: This is called the Doctrine of Individuality

(Indivisibility) of Subscription. A subscription is
GR: Shall consist of the stockholders representing one entire and indivisible whole contract. It cannot
majority of the outstanding capital stock or a be divided into portions (CC, Sec. 64).
majority of the actual and living members with
voting rights, in the case of non-stock corporation Subscription and purchase of stock
(Tan v. Sycip, G.R. No. 153468, Aug. 17, 2006).
The CC, under sec. 60 in defining subscription,
XPNs: abolished the distinction between subscription and
1. A different quorum may be provided for in the purchase of shares from an existing corporation by
by-laws; and making all such acquisitions a subscription
2. The corporation code provides for certain notwithstanding that the parties denominate it as a
resolutions that must be approved by at least purchase or sale or some other contract.
2/3 of the outstanding capital stock, in which
case, majority of the outstanding capital stock is Subscription vs. Purchase
insufficient to constitute a quorum, presence of
the stockholders representing 2/3 of the SUBSCRIPTION PURCHASE
outstanding capital stock is necessary for such May be made before May be made only after
purpose. or after incorporation incorporation
Buyer does not become
MINUTES OF THE MEETINGS
a stockholder until the
Subscriber becomes a
fulfillment of the terms
The minutes are a brief statement not only of what stockholder even if he
of the sale and
transpired at a meeting, usually of stockholders/ has not fully paid the
registration thereof in
members or directors/ trustees, but also at meeting subscription
the books of the
of an executive committee.
corporation
The minutes are usually kept in a book especially
Cannot be released The corporation may
designed for that purpose, but they may also be kept
from his subscription rescind or cancel the
in the form of memoranda or in any other manner
unless all contract for non-
in which they can be identified as minutes of a

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stockholders agree fulfillment of the Kinds of subscription
thereto and no contract by the buyer
creditor is thereby 1. Pre-incorporation subscription – entered into
prejudiced before incorporation (CC, Sec. 61); and
Corporate creditors 2. Post-incorporation subscription – entered into
may proceed against Creditors may not after incorporation (Sundiang Sr. & Aquino,
the subscriber for his proceed against the 2009).
unpaid subscription buyer for the unpaid
in case the assets of price as there is no Rules governing pre-incorporation contracts
the corporation are privity of contract
not sufficient to pay between them GR: A pre-incorporation subscription agreement is
their claims irrevocable for a period of six (6) months from the
In purchase amounting date of subscription.
Not covered by the to more than 500 pesos,
Statute of Frauds the Statute of Frauds XPNs:
shall apply 1. If all of the other subscribers consent to the
Subscription price are revocation,
Purchase price does not 2. If the incorporation of said corporation fails to
considered assets of
become assets of the materialize within said period or within a
the corporation,
corporation unless fully longer period as may be stipulated in the
hence, creditors may
paid contract of subscription.
go after them
Stock option vs. Warrant
XPN to XPN: No pre-incorporation subscription
STOCK OPTION WARRANT may be revoked after the submission of the AOI to
A type of security the Securities and Exchange Commission (CC, Sec.
which entitles the 61).
holder the right to
subscribe to a pre- Payment of a subscription contract cannot be
determined number of condoned by a corporation
unissued capital stock
of a corporation A corporation has no power to release an original
(subscription warrant), subscriber to its capital stock from the obligation of
or to purchase a pre- paying for his shares, without a valuable
A privilege granted to a determined number of consideration for such release. This is in violation of
party to subscribe to a issued or existing the trust fund doctrine (PNB v Bitulok Sawmill Inc,
certain portion of the shares in the future G.R. Nos. L-24177-85, June 29, 1968).
unissued capital stock (covered warrant).
of a corporation within NOTE: A warrant is Stockholder is entitled to the rights pertaining
a certain period and detachable if it may be to shares of stock subscribed although not fully
under the terms and sold, transferred or paid
conditions of the grant assigned to any person
exercisable by the by the warrant holder As long as the shares are not considered delinquent,
grantee at anytime separate from and stockholders are entitled to all rights granted to it
within the period independent of the whether or not the subscribed capital stocks are
granted. corresponding fully paid.
beneficiary securities,
or shares of stock or Q: FLADC, which was owned by the Tius,
other securities of the encountered dire financial difficulties. It was
issuer which form the heavily indebted to PNB for P190 million. Thus,
basis of the the construction of the Masagana Citimall was
entitlement in a threatened with stoppage and incompletion. To
warrant. It is non- prevent foreclosure of the mortgage on the two
detachableif it may not lots where the mall was being built, the Tius
be sold etc. invited the Ongs to invest in FLADC. Under the
(SEC Rules, in De Leon, 2010) Pre-Subscription Agreement they entered into,
the Ongs and the Tius agreed to maintain equal
Subscription is an offer to acquire a specified shareholdings in FLADC. Accordingly, the Ongs
number of unissued shares of an existing paid P100 million in cash for their subscription
corporation or one still to be formed. to 1,000,000 shares of stock while the Tius

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committed to contribute to FLADC a four-storey requirements are complied with (Ong, et al. v. Tiu, et
building and two parcels of land respectively to al., G.R. Nos. 144476 & 144629, Apri 8, 2003).
cover their additional 549,800 stock
subscription therein. The business harmony CONSIDERATION FOR SHARES OF STOCK
between the Ongs and the Tius in FLADC,
however, was short-lived because the Tius, Valid considerations in a subscription
rescinded the Pre-Subscription Agreement. The agreement
Tius accused the Ongs of violation of the terms
of their agreement. Because of this, the Tius filed 1. Actual cash paid to the corporation;.
a case at SEC, seeking confirmation of their 2. Property, tangible or intangible (i.e. patents or
rescission of the Pre-Subscription Agreement. copyrights), provided:
The SEC granted the same. Could the Tius legally a. The property is actually received by the
rescind the Pre-Subscription Agreement? corporation
b. The property is necessary or convenient for
A: NO. When a subscriber assigned properties and its use and lawful purposes
infused capital to the corporation upon invitation of c. It must be subject to a fair valuation equal
a majority stockholder and in exchange for shares of to the par or issued value of the stock
stocks under a pre-subscription agreement, the issued
agreement cannot be rescinded since the subject d. The valuation thereof shall initially be
matter of the contract was the unissued shares of determined by the incorporators; and
the Corporation allocated to the subscriber. Since e. The valuation is subject to the approval by
these were unissued shares, the Pre-Subscription the SEC.
Agreement was in fact a subscription contract as
defined under Section 60, Title VII of the 3. Labor or services actually rendered to the
Corporation Code: “Any contract for the acquisition corporation.
of unissued stock in an existing corporation or a 4. Prior corporate obligations or indebtedness.
corporation still to be formed shall be deemed a 5. Amounts transferred from unrestricted
subscription within the meaning of this Title, retained earnings to stated capital (in case of
notwithstanding the fact the parties refer to it as a declaration of stock dividends).
purchase or some other contract.” A subscription 6. Outstanding shares in exchange for stocks in
contract necessarily involves the corporation as one the event of reclassification or conversion. (CC,
of the contracting parties since the subject matter of Sec. 6)
the transaction is property owned by the
corporation - its shares of stock. Thus, the NOTE: Promissory notes or future services are not
subscription contract was one between the valid considerations.
subscriber and the corporation and not between the
stockholders. In view of nos. 1 and 2 of sec 62, payment of shares
of stock must be actually received by the
The trust fund doctrine provides that subscriptions corporation. Hence, receivables cannot be treated as
to the capital stock of a corporation constitute a cash actually received. They may, however, be
fund to which the creditors have a right to look for considered as property payment subject to
the satisfaction of the claims. This doctrine is the verification by SEC and the condition that it be held
underlying principle in the procedure for the in escrow until actual payment of the amount.
distribution of corporate capital only in three
instances: NOTE: Under the Revised Corporation Code, shares
of stock in another corporation and/or other
1. Amendment of the articles of incorporation to generally accepted form of consideration are valid
reduce the authorized capital stock; considerations (Sec. 61, par. (g) and (h))
2. Purchase of redeemable shares by the
corporation regardless of the existence of Amount of consideration
unrestricted retained earnings; and
3. Dissolution and eventual liquidation of the Shares of stock shall not be issued for a
corporation. consideration less than the par or issued price
thereof, except treasury shares so long as the price
Furthermore, the doctrine is articulated in Section is reasonable.
41 of the Corporation Code on the power of the
corporation to acquire its own shares and in Section Persons required to pay in full their
122 on the prohibition against the distribution of subscription upon incorporation
corporate assets and property unless the stringent

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1. Non‐resident foreign subscribers upon capital stock must rest in the hands of Filipino
incorporation must pay in full their nationals in accordance with the constitutional
subscriptions unless their unpaid subscriptions mandate. Otherwise, the corporation is “considered
are guaranteed by a surety bond or by an as non-Philippine nationals. Full beneficial
assumption by a resident stockholder through ownership of the stocks, coupled with appropriate
an affidavit of liability. voting rights, is essential”.
2. In case of no‐par value shares, they are deemed
fully paid and non‐assessable (CC, Sec. 6). NOTE: Since the constitutional requirement of at
least 60% Filipino ownership applies not only to
NOTE: The issued price of no-par value shares may voting control of the corporation but also to the
be fixed in the AOI or by the BOD pursuant to beneficial ownership of the corporation, it is
authority conferred upon it by the AOI or the by- therefore imperative that such requirement apply
laws, or in the absence thereof, by the stockholders uniformly and across the board to all classes of
representing at least a majority of the outstanding shares, regardless of nomenclature and category,
capital stock at a meeting duly called for the purpose comprising the capital of a corporation.
(CC, Sec. 62).
Under the Corporation Code, capital stock consists
SHARES OF STOCK of all classes of shares issued to stockholders, that
is, common shares as well as preferred shares,
Stock or share of stock is one of the units in which which may have different rights, privileges or
the capital stock is divided. It represents the interest restrictions as stated in the articles of
or right which the owner has — incorporation. The Corporation Code allows denial
of the right to vote to preferred and redeemable
1. In the management of the corporation in which shares, but disallows denial of the right to vote in
he takes part through his right to vote (if voting specific corporate matters. Thus, common shares
rights are permitted for that class of stock by have the right to vote in the election of directors,
the AOI); while preferred shares may be denied such right.
2. In a portion of the corporate earnings, if and Nonetheless, preferred shares, even if denied the
when segregated in the form of dividends; and right to vote in the election of directors, are entitled
3. Upon its dissolution land winding up, in the to vote on certain corporate matters.
property and assets of the corporation
remaining after the payment of corporate debts Since a specific class of shares may have rights and
and liabilities to creditors (De Leon, 2010, citing privileges or restrictions different from the rest of
11 Fletcher, 1971). the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section
Q: In order to comply with the 60% capital 11, Article XII of the Constitution must apply not
requirement for ownership by Filipinos of only to shares with voting rights but also to shares
certain corporations, what does the term capital without voting rights (This is because when only
refer to? preferred shares without voting rights are issued,
the requirement of full beneficial ownership will be
A. The term “capital” refers to shares with voting used as the standard). Preferred shares, denied the
rights, and with full beneficial ownership, which right to vote in the election of directors are anyway
must be owned and held by citizens of the still entitled to vote on the eight specific corporate
Philippines. matters under Sec, 6. Thus, if a corporation, engaged
in a partially nationalized industry, issues a mixture
Rationale: The right to vote in the election of of common and preferred non-voting shares, at
directors, coupled with full beneficial ownership of least 60 percent of the common shares and at least
stocks, translates to effective control of a 60 percent of the preferred non-voting shares must
corporation. be owned by Filipinos. Of course, if a corporation
issues only a single class of shares, at least 60
Legal title without beneficial title of stocks is not percent of such shares must necessarily be owned
sufficient to meet the ownership requirement by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply
Mere legal title is insufficient to meet the 60% separately to each class of shares, whether common,
Filipino-owned “capital” required in the preferred non-voting, preferred voting or any other
Constitution. Full beneficial ownership of 60% of class of shares. This uniform application of the 60-
the outstanding capital stock, coupled with 60% of 40 ownership requirement in favor of Filipino
the voting rights, is required. The legal and citizens clearly breathes life to the constitutional
beneficial ownership of 60% of the outstanding command that the ownership and operation of

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public utilities shall be reserved exclusively to A stock corporation is expressly granted the power
corporations at least 60 percent of whose capital is to issue or sell stocks. The power to issue shares of
Filipino-owned. stock in a corporation is lodged in the board of
directors and no stockholders’ meeting is required
Applying uniformly the 60-40 ownership to consider it because additional issuances of shares
requirement in favor of Filipino citizens to each of stock do not need approval of the stockholders.
class of shares, regardless of differences in voting
rights, privileges and restrictions, guarantees The only requirement is the board resolution
effective Filipino control of public utilities, as approving the additional issuance of shares. The
mandated by the Constitution. Moreover, such corporation shall also file the necessary application
uniform application to each class of shares insures with the SEC to exempt these from the registration
that the “controlling interest” in public utilities requirements under the Revised Securities Act
always lies in the hands of Filipino citizens. This (now the Securities Regulation Code) (Majority
addresses and extinguishes Pangilinan’s worry that Stockholders of Ruby Industrial Corp. v. Lim and the
foreigners, owning most of the non-voting shares, Minority Stockholders of Ruby Industrial Corp.,
will exercise greater control over fundamental supra).
corporate matters requiring two-thirds or majority
vote of all shareholders (Heirs of Gamboa v. Teves, WATERED STOCK
G.R. No. 176579, October 9, 2012).
A watered stock is a stock issued in exchange for
NATURE OF SHARES OF STOCK cash, property, share, stock dividends, or services
lesser than its par value or issued value (CC, Sec. 65).
The ownership of share of stock confers no
immediate legal right or title to any of the property Watered Stocks include stocks:
of the corporation. Each share merely represents a
distinct undivided share or interest in the common 1. Issued without consideration (bonus share);
property of the corporation. 2. Issued for a consideration other than cash, the
fair valuation of which is less than its par or
The interest over the share is purely inchoate, or a issued value;
mere expectancy of a right in the management of the 3. Issued as stock dividend when there are no
corporation and to share in the profits thereof and sufficient retained earnings to justify it; and
in the properties and assets thereof on dissolution, 4. Issued as fully paid when the corporation has
after payment of the corporate debts and received a lesser sum of money than its par or
obligations. Further, the stockholder’s interest in issued value (discount share).
the corporate property is merely equitable or
beneficial in nature; hence he cannot be said to be a NOTE: Watered stocks can either be par or no par
co-owner of the corporate property (De Leon, 2006). value shares.

Shares of stocks are personal property Reason behind the prohibition on the issuance
of watered stocks
Shares of stock are personal property. They are
incorporeal in nature. Except treasury stock which It is to protect persons who may acquire stock and
belongs to the Corporation (NCC, Art. 417 and 2095). the creditors of the corporation particularly those
who may become such on the faith of its outstanding
Share of stock does not constitute an capital stock being fully paid. The prohibition
indebtedness of the corporation to the secures equality among subscribers and prevents
shareholder discriminations against those who have paid in full
the par or issued value of their shares (De Leon,
They are in the nature of choses in action but are not supra).
in a strict sense. They do not constitute an
indebtedness of the corporation to the shareholder Not all exchanges of stocks worth less than their
and are therefore, not credits as to make the value are considered watered stock
stockholder a creditor of the corporation (De Leon,
2010). The watered stocks refer only to original issue of
stocks but not to a subsequent transfer of such
The board of directors may issue additional stocks by the corporation, for then it would no
shares of stock without approval of the longer be an “issue” but a sale thereof (De
stockholders. Leon,2010, citing Rochelle Roofing Co. vs. Burley, 115
NE 478).

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Treasury shares are not subject to the a. Objection must be directed to the issuance
prohibition on the issuance of watered stocks of the watered stocks;
b. In writing;
Treasury shares are not original issuances. They are c. File the same with the corporate secretary;
shares of stocks which have been issued and fully and
paid for, but subsequently reacquired by the issuing d. Such objection must be done before the sale
corporation by purchase, redemption, donation, or of stocks (CC, Sec. 65).
through some other lawful means (CC, Sec. 9). Since
they do not lose their status as issued shares, they Trust fund doctrine for liability for watered
cannot be treated as new issues when disposed of or stock
reissued.
The subscribed capital stock of the corporation is a
Limitation on the re-disposal of treasury shares trust fund for the payment of debts of the
corporation which the creditors have the right to
Treasury shares may again be disposed of for a look up to satisfy their credits, and which the
reasonable price fixed by the BOD. Since they are corporation may not dissipate. The creditors may
not subject to the prohibition on the issuance of sue the stockholders directly for the latter’s unpaid
watered stock, they may be sold for less than their subscription.
par or issued value as long as the price for re-
disposal is reasonable. There is a violation of the trust fund doctrine
when stocks of the corporation are issued less
The issuance of watered stock cannot be ratified than the par value
by the stockholders
GR: The trust fund doctrine is violated where stocks
It is not merely ultra vires, but is illegal per se as it is are issued by the corporation for a consideration
a violation of Sec. 62, CC. which is less than its par value.

Liability of directors for watered stocks XPN: Trust fund doctrine is not violated in case
treasury shares are reacquired and subsequently
Any director or officer of a corporation shall be re-issued for a lesser consideration by the
solidarily liable with stockholder concerned to the corporation. The only limitation for the reissuance
corporation and its creditors for difference between of treasury shares is that their price must be
the fair value received at the time of the issuance of reasonable.
the stock and the par or issued value of the same, if:
SITUS OF SHARES OF STOCK
1. He consents to the issuance of stocks for
consideration less than its par or issued value; GR: The situs of shares of stock is the country where
2. He consents to the issuance of stocks for a the corporation is domiciled (Wells Fargo Bank v.
consideration in any form other than cash, CIR, G.R. No. L-46720, June 28, 1940).
valued in excess of its fair value; or
3. Who, having knowledge thereof, does not The residence of the corporation is the place
forthwith express his objection in writing and where the principal office of the corporation is
file the same with the corporate secretary. (CC, located as stated in its AOI even though the
Sec. 65) corporation has closed its office therein and
relocated to another place (Hyatt Elevators and
NOTE: The solidary liability of the directors Escalators Corp. v. Goldstar Elevator Phils., Inc.,
emanates from the fiduciary character of the supra.).
position of director or corporate officer.
XPN: In property taxation –the situs of intangible
Defenses that can be invoked in order that a property, such as shares of stocks, is at the domicile
director or an officer can escape liability for the or residence of the owner.
issuance of watered stocks
XPN to the XPN:
1. The director or officer did not consent and did 1. When a nonresident alien has shares of stock in
not have knowledge in the issuance of the a domestic corporation, then the situs will be in
watered stock. the Philippines; and
2. The director or officer objected to its issuance, 2. For purposes of the estate tax, the gross estate
provided: of a resident decedent, whether citizen or alien,
or a citizen decedent, whether resident or

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nonresident, includes his intangible personal Limitations on no par value shares (5DP - B2tip -
property wherever situated (De Leon, 2010). AP)

CLASSES OF SHARES OF STOCK 1. Shares which have no par value, cannot have an
issued price of less than P5.00.
Kinds or classifications of shares 2. The entire consideration for its issuance
constitutes capital so that no part of it should be
1. Par value shares Distributed as dividends.
2. No par value shares 3. They cannot be issued as Preferred stocks.
3. Common shares 4. They cannot be issued by Banks, Building and
4. Preferred shares loan association, Trust companies, Insurance
5. Redeemable shares companies, and Public utilities.
6. Treasury shares 5. The Articles of incorporation must state the fact
7. Founder’s share that it issued no par value shares as well as the
8. Voting shares number of said shares
9. Non-voting shares 6. Once issued, they are deemed fully Paid and
10. Convertible shares non-assessable (CC, Sec. 6).
11. Watered stock
12. Fractional share 3. Common shares
13. Shares in escrow
14. Over-issued stock These are ordinarily and usually issued stocks
15. Street certificate without extraordinary rights and privileges, and
16. Promotion share entitle the shareholder to a pro rata division of
profits. It represents the residual ownership
Who may classify shares interest in the corporation. The holders of this kind
of share have complete voting rights and they
1. Incorporators – the classes and number of cannot be deprived of the said rights except as
shares which a corporation shall issue are first provided by law.
determined by the incorporators as stated in
the articles of incorporation filed with the SEC. 4. Preferred shares
2. Board of directors and stockholders – after the
corporation comes into existence, classification These entitle the shareholder to some priority on
of shares may be altered by the board of distribution of dividends and assets over those
directors and the stockholders by amending the holders of common shares. Preferred shares may be
articles of incorporation pursuant to Sec. 16. issued only with a stated par value (CC, Sec. 6).

1. Par value shares Kinds of preferred shares

Shares with a value fixed in the articles of 1. Preferred shares as to assets –gives the holder
incorporation and the certificates of stock. The par preference in the distribution of the assets of
value fixes the minimum issue price of the shares the corporation in case of liquidation.
(CC, Sec. 62). 2. Participating preferred shares – Entitled to
participate with the common shares in excess
Rule on the issuance of shares less than its par distribution
value 3. Non-participating preferred shares – Not
entitled to participate with the common shares
GR: A corporation cannot issue shares at less than in excess distribution.
its par value. 4. Preferred shares as to dividends–entitled to
receive dividends on said share to the extent
XPN: The prohibition applies only to original agreed upon before any dividends at all are paid
issuance of shares and not to the subsequent sale of to the holders of common stock.
treasury shares and sale of shares made by 5. Cumulative preferred shares – If a dividend is
stockholders. omitted in any year, it must be made up in a
later year before any dividend may be paid on
2. No par value shares the common shares in the later year.
6. Non-cumulative preferred shares – There is no
These are shares having no stated value in AOI. need to make up for undeclared dividends

Holders of preferred shares are not creditors

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Holders of preferred shares cannot compel the condition, one of the stockholders holding the
corporation to give them dividends. The preference preferred shares filed an action against the
only applies once dividends are declared. corporation to redeem his shares and pay the
dividends due. Will the suit prosper?
Preferred cumulative participating share of
stock A: NO. While redeemable shares may be redeemed
regardless of the existence of unrestricted retained
This is a kind of share which gives the holder earnings, this is subject to the condition that the
preference in the payment of dividends ahead of corporation has, after such redemption, assets in its
common stockholders and to be paid the dividends books to cover debts and liabilities inclusive of
due for prior years and to participate further with capital stock. Redemption, therefore, may not be
common stockholders in dividend declaration. made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the
5. Redeemable shares corporation to meet its debts as they mature.

These are shares of stocks issued by a corporation Furthermore, the declaration of dividends is
which said corporation can purchase or take up dependent upon the availability of surplus profit or
from their holders upon expiry of the period stated unrestricted retained earnings, as the case may be.
in certificates of stock representing said shares (CC, Shareholders, both common and preferred, are
Sec. 8). considered risk takers who invest capital in the
business and who can look only to what is left after
NOTE: Under the Revised Corporation Code for corporate debts and liabilities are fully paid
Redeemable shares, their redemption shall now be (Republic Planters Bank v. Judge Agana, G.R. No.
subject to the rules and regulations that may be 51765. March 3, 1997).
issued by SEC, in addition to what may be stipulated
in the AOI and Certificate of Stock. 6. Treasury shares

Kinds of redeemable shares Shares that have been earlier issued as fully paid
and have thereafter been acquired by the
1. Compulsory - the corporation is required to corporation by purchase, donation, and redemption
redeem the shares. or through some lawful means (CC, Sec. 9).
2. Optional - the corporation is not mandated to
redeem the shares. NOTE: Treasury shares are not retired shares. They
do not revert to the unissued shares of the
Limitations on redeemable shares (ATVI) corporation but are regarded as property acquired
by the corporation which may be reissued or resold
1. Issuance of redeemable shares must be at a price to be fixed by the Board of Directors (SEC
expressly provided in the Articles of Rules Governing Redeemable and Treasury Shares,
incorporation; CCP No. 1-1982).
2. The Terms and conditions affecting said shares
must be stated both in the articles of Other means in which a corporation may
incorporation and in the certificates of stock acquire its own shares
3. Redeemable shares may be deprived of Voting
rights in the articles of incorporation, unless 1. To collect or compromise unpaid indebtedness
otherwise provided in the Code (CC, Sec. 6 [6]) to the corporation;
4. Redemption cannot be made if it will cause 2. To eliminate fractional shares;
Insolvency of the corporation. 3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares;
Reissuance of redeemed shares 4. Redemption
5. Close corporation.
Redeemable shares, once redeemed are retired
unless reissuance is expressly allowed in the AOI. Limitations on treasury shares

Q: Planters Bank issued preferred redeemable 1. They may be re-issued or sold again as long as
shares with a feature that entitles them to be it is for a reasonable price fixed by the BOD.
preferred in the payment of dividends. 2. Cannot participate in dividends.
Subsequently, the bank experienced liquidity 3. It has no voting right.
problems. The Central Bank ruled that the bank 4. It cannot be represented during stockholder’s
has a reserve deficiency. Despite of the meetings.

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5. The amount of URE equivalent to the cost of of the
treasury shares being held shall be restricted Corporation.
from being declared and issued as dividends. Applicability
Must comply Is an exception
of the trust
NOTE: When treasury shares are sold below its par with the trust to the trust
fund
or issued value, there can be no watering of stock fund doctrine fund doctrine
doctrine
because such watering of stock contemplates an
original issuance of shares. 7. Founders' shares

Treasury shares distributed by way of dividends Shares classified as such in the articles of
incorporation and which may be given special
They can be distributed only as property dividends. preference in voting rights and dividend payments.
They cannot be declared as stock or cash dividends
because they are not considered part of earned or NOTE: Where the exclusive right to vote and be
surplus profits. The distribution of cash or stock voted for in the election of directors is granted, such
dividends out of treasury shares would be right must be for a limited period not exceeding 5
converting the corporation into both a debtor and years subject to approval of the SEC, the period to
creditor for the same amount at the same time, or commence from the date of said approval (CC, Sec.
requiring it to take money or stock from one of its 7).
pockets and putting it in another, which is absurd.
Treasury shares may be declared as property NOTE: Under the Revised Corporation Code,
divided to be issued out of the retained earnings Founder’s shares given the exclusive right to vote
previously used to support their acquisition and be voted for are not allowed to exercise that
provided that the amount of the said retained right in violation of the Anti-Dummy Law and the
earnings has not been subsequently impaired by Foreign Investment Act.
losses (SEC Opinion, July 17, 1984).
8. Voting shares
Note: Since a treasury share is a fully paid share re-
acquired by the corporation, it is not outstanding Shares with a right to vote. If the stock is originally
and may be re-issued and resold. It cannot receive issued as voting stock, it may not thereafter be
dividends before the resale, because the deprived of the right to vote without the consent of
corporation cannot grant dividends to itself. the holder.
(CIR vs Manning 66 SCRA 14.)
9. Non-voting shares
Treasury shares vs. Redeemable shares
Shares without right to vote. The law only
BASIS TREASURY REDEEMABLE authorizes the denial of voting rights in the case of
SHARES SHARES redeemable shares and preferred shares, provided
Shares so that there shall always be a class or series of shares
acquired by which have complete voting rights (CC, Sec. 6).
the Issued by the
corporation corporation Instances when holders of non-voting shares are
through when allowed to vote
Description
purchase, expressly so
donation, provided in These redeemable and preferred shares, when such
redemption or the AoI. voting rights are denied, shall nevertheless be
any other entitled to vote on the following fundamental
lawful means. matters:
Redeemable
shares may be 1. Amendment of articles of incorporation;
Can only be
acquired even 2. Adoption and amendment of by-laws;
acquired in
without 3. Sale, lease, exchange, mortgage, pledge or other
the presence
Manner of unrestricted disposition of all or substantially all of the
of
acquisition retained corporate property;
Unrestricted
earnings for as 4. Incurring, creating or increasing bonded
retained
long as it will indebtedness;
earnings
not result to 5. Increase or decrease of capital stock;
the insolvency 6. Merger or consolidation of the corporation with
another corporation or other corporations;

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7. Investment of corporate funds in another the company, or for services rendered in launching
corporation or business in accordance with this or promoting the welfare of the company.
Code; and
8. Dissolution of the corporation (CC, Sec. 6). 16. Watered stock

10. Convertible shares Shares issued below its par value or issued value.

Shares which are changeable by the stockholder NOTE: Watered stocks pertain only to original
from one class to another (such as from preferred to issuance of shares.
common) at a certain price and within a certain
period. A corporation can designate other classes of
stocks
GR: Stockholder may demand conversion at his
pleasure. There can be other classifications as long as they are
indicated in the AOI, stock certificate and not
XPN: Otherwise when restricted by the articles of contrary to law.
incorporation.
PAYMENT OF BALANCE OF SUBSCRIPTION
NOTE: In the absence of express provision in the
AOI as to their convertibility feature, preferred Time when the balance of the subscription
shares cannot be converted into common. The should be paid:
terms of the preferred share contract cannot be
changed without the consent of the stockholders. 1. On the date specified in the subscription
contract, without need of demand or call;
The conversion of no par value shares to par value 2. If no date of payment has been specified, on the
is allowed by SEC provided there would be no date specified on the call made by the BOD (CC,
change in the stockholder’s percentage interest in Sec. 67);
the total assets of the corporation. 3. If no date of payment has been specified on the
call made, within 30 days from the date of call;
11. Fractional share and
4. When insolvency supervenes upon a
A fractional share is a share of equity that is less corporation and the court assumes jurisdiction
than one full share. to wind it up, all unpaid subscriptions become
payable on demand, and are at once
12. Shares in escrow recoverable, without necessity of any prior call.

Subject to an agreement by virtue of which the share Accrual of interest on unpaid balance
is deposited by the grantor or his agent with a third
person to be kept by the depositary until the Unpaid balance will accrue interest if so required by
performance of certain condition or the happening the by‐laws and at the rate of interest fixed in the
of a certain event contained in the agreement. by‐laws. If no rate of interest is fixed in the by‐laws,
such rate shall be deemed to be the legal rate (CC,
13. Over-issued stock Sec. 66).

It is a stock issued in excess of the authorized capital The above interest is different from the interest
stock. Stocks which are issued in this manner are contemplated by Sec. 67, the unpaid balance
null and void. involved in which, will only accrue interest, by way
of penalty, on the date specified in the contract of
14. Street certificate subscription or on the date stated in the call made
by the board.
It is a stock certificate endorsed by the registered
holder in blank and the transferee can command its NOTE: Interest contemplated in Sec. 66 pertains to
transfer to his name from issuing corporation. moratory interest which is the interest on account of
subscription in an installment basis, while Sec. 67
15. Promotional share speaks of compensatory interest which is the
interest on account of delay
This is a share issued to promoters or those in some
way interested in the company, for incorporating Moratory vs. Compensatory interest

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Compensatory SEC opined on July 21, 1976 that the following are
Moratory Interest
interest the requisites for a valid call:
(CC, Sec. 66)
(CC, Sec. 67)
Interest which accrues Interest on unpaid 1. It must be made in the manner prescribed by
by way of penalty, on subscription by reason law;
the date specified in of amortization/ 2. It must be made by the BOD; and
the contract of installments. It can be 3. It must operate uniformly upon all the
subscription or on the collected only if shareholders.
date stated in the call stipulated and for the
made by the board. The rate specified in the The call of the board of directors is not always
stockholder liable for contract and fixed by necessary to collect payment for unpaid
interest at the legal the by-laws. If the rate subscription
rate on such balance, is silent the legal rate
unless a different rate shall be followed. The necessity for calls depends upon the provisions
of interest is provided of the contract of subscription. When no time is
in the by-laws, fixed for payment, the subscription is payable only
computed from such upon call by the BOD which may be made at any
date until full payment. time the board may decide (De Leon, supra).

Effect of failure to pay the subscription on the However, a call is not necessary where:
date it is due 1. The subscription contract specifies the date of
payment; or
It shall render the entire balance due and payable 2. The corporation becomes insolvent (Sundiang
and shall make the shareholder liable for Sr. & Aquino, 2009)
compensatory interest at the legal rate on such 3. The subscriber becomes insolvent (De Leon,
balance, unless a different rate of interest is supra)
provided in the by‐laws.
NOTICE REQUIREMENT
Remedies of corporations to enforce payment of
stocks The notice of the call must be served on the
stockholders concerned in the manner prescribed
1. Extra-judicial sale at public auction (CC, Sec. 67) in the call, which may either be by registered mail
2. Judicial action (CC, Sec. 70) and/or personal delivery and publication.

CALL BY BOARD OF DIRECTORS Notice of call is necessary to bind the stockholders

(Ibid., citing Baltazar v. Lingayen Gulf Electric Power,
Call for the payment by the board of directors G.R. No. L-16236, June 30, 1965).
for unpaid subscription
SALE OF DELINQUENT SHARES
A call is made in a form of board resolution that
unpaid subscription to the capital stock are due and If within 30 days from expiry of the date of payment
payable and the same or such percentage thereof or from the date stated in the call made by the board,
shall be collected, together with all accrued interest, and no payment is made, all stocks covered by said
on a specified date and that if no payment is made subscription shall thereupon become delinquent
within 30 days from said date, all stocks covered by and shall be subject to delinquency sale unless the
said subscription shall thereupon become BOD orders otherwise (CC, Sec. 67).
delinquent and shall be subject to public auction
sale. Effects of stock delinquency

Unpaid claim 1. Upon the stockholder

a. Accelerates the entire amount of the unpaid
It refers to any unpaid subscription, and not to any subscription
indebtedness which a subscriber or stockholder b. Subjects the shares to interest expenses
may owe the corporation arising from any other and costs
transaction (Sundiang Sr. & Aquino, 2009, citing c. Disenfranchises the shares from any right
China Bank v. CA, G.R. No. 117604, March 26, 1997). that inheres to a stockholder, except the
right to dividends (CC, Sec. 71) .
Requisites for a valid call

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NOTE: Dividends shall be applied to any b. NO. No certificate of stock shall be issued to a
amount due on said shares, or, in the case subscriber until the full amount of subscription
of stock dividends, to be withheld by the together with interest and expenses (in case of
corporation until full payment of the delinquent shares), if any is due, has been paid.
delinquent shares (CC, Sec. 43). (Sec 64) Clearly, since Ace Cruz did not pay the
full subscription yet, the certificate of stock
2. Upon the director owning delinquent shares shall not be issued to him.
a. If the delinquent stockholder is a director,
the director shall continue to be a director Call by resolution of the Board of Directors
but he cannot run for re-election (Sundiang
Sr. & Aquino, 2009). Stocks become delinquent when the unpaid
b. A delinquent stockholder seeking to be subscription and accrued interests thereon are not
elected as director may not be a candidate paid within 30 days from their due date as specified
for, not be duly elected to, the board. in the subscription contract or in the call by the
board of directors.
Status of the stockholder from delinquency date
before auction sale The delinquency is automatic after said 30 day
period and does not need a declaration by the board
GR: All the rights of the stockholder are suspended. making the stock delinquent.

XPN: Right to dividends. Notice of sale

With respect to dividends, Section 43 states that
cash dividends should be applied against unpaid The notice of sale and copy of the board resolution
subscription while stock dividends should be ordering the sale shall be:
withheld until full payment of the subscription.
1. Sent to every delinquent stockholder either
Q: Ace Cruz subscribed to 100,000 shares of personally or by registered mail or;
stock of JP Development Corporation, which has 2. Published once a week for 2 consecutive weeks
a par value of P 1 per share. He paid P25,000.00 in a newspaper of general circulation in the
and promised to pay the balance before province or city where the principal office of the
December 31, 2008. JP Development corporation is located (CC, Sec. 68).
Corporation declared cash dividends on October
15, 2008 payable on December 1, 2008. Procedure for the sale of delinquent stocks

a. For how many shares is Ace Cruz entitled to 1. Resolution – the board shall issue resolution
be paid cash dividends? Explain. ordering the sale of delinquent stock.
b. On December 1, 2008, can Ace Cruz compel 2. Notice – notice of said sale, with a copy of the
JP Development Corporation to issue to him resolution, shall be sent to every delinquent
the stock certificate corresponding to the stockholder either personally or by registered
P25,000 paid by him? (2008 Bar) mail.
3. Publication – the notice shall furthermore be
A: published once a week for two consecutive
a. Ace is entitled to the whole amount of his shares weeks in a newspaper of general circulation in
which is 100,000. A contract of subscription is the province or city where the principal office of
an indivisible contract. If only partial payment the corporation is located
for the subscription was made, it cannot be the 4. Sale – the delinquent stock shall be sold at the
basis for the amount of cash dividend in favor of public auction to be held not less than 30 days
the stockholder. Cash dividends due on nor more than 60 days from the date stocks
delinquent stocks shall first be applied to the become delinquent.
unpaid balance on the subscription plus cost 5. Transfer – the stock so purchased shall be
and expenses. (Sec. 43) Stocks become transferred to such purchaser in the books of
delinquent 30 days from the due date specified the corporation and a certificate for such stock
in the contract of subscription or in the date shall be issued in his favor.
stated in the call made by the board. (Sec 67) In 6. Credit remainder – the remaining shares, if any,
this case, the cash dividend is not yet shall be credited in favor of the delinquent
delinquent. Ace Cruz, therefore can claim the stockholder who shall likewise be entitled to
entire cash dividend payable on December 1, the issuance of a certificate of stock covering
2008. the same (CC, Sec. 68; Aquino, 2014).

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Discontinuance or cancellation of delinquency Prescription period of the action to question a
sale delinquency sale

Delinquency sale may be discontinued or cancelled For stock corporations, the action prescribes 6
if the delinquent stockholder pays the unpaid months from such sale. However, in case of non-
balance plus interest, costs and expenses on or stock corporations, the applicable period is 4 years
before the date specified for the sale or when the under the Civil Code.
BOD orders otherwise (CC, Sec. 68).
CERTIFICATE OF STOCK
Winning bidder in a delinquency sale
A certificate of stock is a written instrument signed
1. The person participating in the delinquency by the proper officer of a corporation stating or
sale who offers to pay the full amount of the acknowledging that the person named therein is the
balance of the subscription together with the owner of a designated number of shares of its stock.
accrued interest, costs of advertisement and It indicates the name of the holder, the number, kind
expenses of sale, for the smallest number of and class of shares represented, and the date of
shares;. issuance.
2. If there is no bidder as mentioned above, the
corporation, subject to the provisions of Sec. 68 It is not stock in the corporation but is merely
of CC, may bid for the same, and the total evidence of the holder’s interest and status in the
amount due shall be credited as paid in full in corporation.
the books of the corporation. The purchase by
the corporation must be made out of net NOTE: Under the Revised Corporation Code, the SEC
earnings in view of the trust fund doctrine. may require corporations whose securities are
Thereafter, the reacquired shares shall be traded in trading markets and which can reasonably
considered as treasury shares (CC, Sec. 41; De demonstrate their ability to do so, to issue their
Leon, 2010). securities or shares of stock in uncertified or in
scripless form in accordance with the rules imposed
NOTE: The board is not bound to accept the highest by SEC.
bid unless the contrary appears. The bidder is the
one making the offer to purchase, which the Shares of stock vs. Certificates of stock
corporation is free to accept or reject (Ibid.)
CERTIFICATE OF
SHARE OF STOCK
Q: What happens to the remaining shares, if any, STOCK
were not sold? Evidence of the holder’s
ownership of the stock
A: The remaining shares, if any, shall be credited in Unit of interest in a
and of his right as a
favor of the delinquent stockholder who shall corporation
shareholder and of his
likewise be entitled to the issuance of a certificate of extent specified therein.
stock covering such shares (CC, Sec. 68). It is an incorporeal or It is concrete and
intangible property tangible
Rule on questioning the sale of delinquent share It may be recognized
in public auction by the corporation It may be issued only if
even if the the subscription is fully
GR: The sale at public auction of delinquent share is subscription is not paid.
absolute and not subject to redemption. fully paid.

XPN: An action may be filed to question the sale, the NATURE OF THE CERTIFICATE
requisites for which are:
1. There should be allegation and proof of A certificate of stock is a prima facie evidence of
irregularity or defect in the notice of sale or ownership and evidence can be presented to
in the sale itself. determine the real owner of the shares (Bitong vs.
2. The party filing the action must first pay the CA, supra).
party holding the stock the sum for which
the stock was sold with legal interest from It is not essential to the existence of a share of stock
the date of sale. or the creation of the relation of the shareholder
3. The action is filed within 6 months from the with the corporation (Tan v. SEC, G.R. No. 95696,
date of sale (CC, Sec. 69). March 3, 1992).

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A certificate of stock has a value separate and Q: A is the registered owner of Stock Certificate
distinct from the value of the shares represented. No. 000011. He entrusted the possession of said
certificate to his best friend B who borrowed the
UNCERTIFICATED SHARES said endorsed certificate to support B's
application for passport (or for a purpose other
An uncertificated share is a subscription duly than transfer). But B sold the certificate to X, a
recorded in the corporate books but has no bona fide purchaser who relied on the endorsed
corresponding certificate of stock yet issued. certificates and believed him to be the owner
thereof. Can A claim the shares of stocks from X?
Stockholder may alienate his shares even if Explain. (2001 Bar)
there is no certificate of stock issued by the
corporation A: NO. Since the shares were already transferred to
"B", "A" cannot claim the shares of stock from "X".
The absence of a certificate of stock does not The certificate of stock covering said shares have
preclude the stock holder from alienating or been duly endorsed by "A" and entrusted by him to
transferring his shares of stock. "B". By his said acts, "A" is now estopped from
claiming said shares from "X", a bona fide purchaser
Transfers of fully paid subscription but the who relied on the endorsement by “A” of the
corporations has not yet issued a certificate of certificate of stock.
stock
Requirements for valid transfer of stocks
In case of a fully paid subscription, without the
corporation having issued a certificate of stock, the The following are the requirements for valid
transfer may be effected by the subscriber or transfer of stocks:
stockholder executing a contract of sale or deed of
assignment covering the number of shares sold and 1. If represented by a certificate, the following
submitting said contract or deed to the corporate must be strictly complied with:
secretary for recording. a. Indorsement by the owner and his agent
b. Delivery of the certificate
Transfers of subscription not fully paid c. To be valid to third parties and to the
corporation, the transfer must be recorded
In case of subscription not fully paid, the in the books of the corporation (Rural Bank
corporation may record such transfer, provided that of Lipa v. CA, G.R. No. 124535, Sepember 28,
the transfer is approved by the board of directors 2001).
and the transferee executes a verified assumption of
obligation to pay the unpaid balance of the 2. If NOT represented by a certificate (such as
subscription. when the certificate has not yet been issued or
where for some reason is not in the possession
NEGOTIABILITY of the stockholder):
a. By means of deed of assignment; and
Stock certificate is not negotiable b. Such is duly recorded in the books of the
corporation. (Sundiang Sr. & Aquino, 2009)
Although a stock certificate is sometimes regarded
as quasi-negotiable, in the sense that it may be Effect of the non-payment of Documentary
transferred by delivery, it is well-settled that the Stamp Tax
instrument is NON-NEGOTIABLE, because the
holder thereof takes it without prejudice to such No sale, exchange, transfer or similar transaction
rights or defenses as the registered owner or intended to convey ownership of, or title to any
creditor may have under the law, except insofar as share of stock shall be registered in the books of the
such rights or defenses are subject to the limitations corporation unless the receipts of payment of the
imposed by the principles governing estoppels tax herein imposed is filed with and recorded by the
(Republic v. Sandiganbayan,G.R. Nos. 107789 & stock transfer agent or secretary of the corporation
147214, April 30, 2003). (Revenue Regulations No. 6-2008, Sec. 11).

Certificates of stock may be issued only to Stockholder may bring suit to compel the
registered owners of stock. The issuance of “bearer” corporate secretary to register valid transfer of
stock certificates is not allowed under the law (SEC stocks
Opinion No. 05-02, Jan. 31, 2005).

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It is the corporate secretary’s ministerial duty and NOTE: If the contract of subscription is still not fully
obligation to register transfers of stocks provided paid, the consent of the corporation must be
all the requirements for a valid transfer had been obtained first since there would be a change of
complied with. debtor. Hence, the consent of the creditor
(corporation) is necessary.
Remedies where corporation refuses to transfer
certificate of stocks Kind of transfer that requires registration in the
books of the corporation
1. Petition for mandamus
Only absolute transfers are required to be
In case of wrongful refusal of the corporate registered in the books of the corporation. Hence,
secretary to record the transfer, specific registration in the stock and transfer book is not
performance and mandamus are the common necessary if the conveyance is by way of chattel
remedies. Remedy of mandamus is available if mortgage. However, registration must be had with
the following requisites are present: the Register of Deeds (Chua Guan v. Samahan,
a. Due application therefor has been made; supra.).
b. Said application has been denied;
c. There are no unpaid claims against the Validity of a transfer that is not recorded
stock by the corporation;
d. An ordinary action for damages against If the transfer is not recorded, it is valid but only
the corporation would be inadequate; insofar as the parties to the transfer are concerned.
and To bind the corporation, the deed affecting the
e. An action in the nature of a suit in equity transfer must be duly recorded in the corporate
to secure a decree ordering the transfer books (CC, Sec. 63).
would also be inadequate [Hager v.
Bryan, 19 Phil. 138 (1912)]. Q: Nemesio Garcia filed an action for injunction
against spouses Jose and Sally Atinon and
NOTE: However, by the weight of authority, it is Nicolas Jomouad, ex-officio sheriff. Said action
held that mandamus will not lie in ordinary stemmed from an earlier case for collection of
cases to compel a corporation or its officers to sum of money, filed by the spouses Atinon
transfer stock on its books and issue new against Jaime Dico. In that case the trial court
certificates to the transferee. rendered judgment ordering Dico to pay the
spouses Atinon. After said judgment became
2. Suit for specific performance of an express or final and executory, the sheriff proceeded with
implied contract its execution. In the course thereof, the
3. May sue for damages where specific Proprietary Ownership Certificate (POC) in the
performance cannot be granted Cebu Country Club, which was in the name of
Dico, was levied on and scheduled for public
NOTE: There must be a special power of attorney auction. Claiming ownership over the subject
executed by the registered owner of the share certificate, Garcia filed the action for injunction
authorizing transferor to demand transfer in the to enjoin the spouses Antinon from proceeding
stock and transfer book (Ponce v. Alsons Cement, G.R. with the [Link] contends that the
No. 139802, December 10, 2002). subject stock of certificate, albeit in the name of
Dico, cannot be levied upon the execution to
The law does not prescribe a period within which satisfy his judgment debt because even prior to
the registration of the transfer of shares should be the institution of the case for collection of sum of
effected. Hence, the action to enforce the right does money against him, the spouses Atinon had
not accrue until there has been a demand and a knowledge that Dico already conveyed back the
refusal concerning the transfer. ownership of the subject certificate to Garcia
and that Dico executed a deed of transfer
Valid refusal by the corporation to register the covering the subject certificate in favor of
transfer of shares Garcia.

The corporation may refuse to register the transfer Is a bona fide transfer of the shares of a
of shares if it has an existing unpaid claim over the corporation, not registered or noted in the
shares to be transferred. The “unpaid claim” refers books of the corporation, valid as against a
to the unpaid subscription on the shares transferred subsequent lawful attachment of said shares,
and not to any other indebtedness that the regardless of whether the attaching creditor had
transferor may have to the corporation (CC, Sec. 63). actual notice of said transfer or not?

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A: NO. A transfer of shares not registered in the In this case, Vertex fully paid the purchase price by
books of the corporation is not valid as against February 11, 1999 but the stock certificate was only
subsequent attachment of the shares. All transfers delivered on January 23, 2002 after Vertex filed an
of shares not so entered in the books of the action for rescission against FEGDI.
corporation are invalid as to attaching or execution
creditors of the assignors, as well as to the Under these facts, considered in relation to the
corporation and to subsequent purchasers in good governing law, FEGDI clearly failed to deliver the
faith, and, indeed, as to all persons interested, stock certificates, representing the shares of stock
except the parties to such transfers. Hence, the purchased by Vertex, within a reasonable time from
transfer of the subject certificate made by Dico to the point the shares should have been delivered.
Garcia was not valid as to the spouses Atinon, the This was a substantial breach of their contract that
judgment creditors, as the same still stood in the entitles Vertex the right to rescind the sale under
name of Dico, the judgment debtor, at the time of the Article 1191 of the Civil Code. It is not entirely
levy on execution (Nemesio Garcia v. Nicolas correct to say that a sale had already been
Jomouad, et al., G.R. No. 133969, January 26, 2000). consummated as Vertex already enjoyed the rights
a shareholder can exercise. The enjoyment of these
Q: Fil-Estate Golf and Development, Inc. (FEGDI) rights cannot suffice where the law, by its express
is a stock corporation whose primary business terms, requires a specific form to transfer
is the development of golf courses. Fil-Estate ownership.
Land, Inc. (FELI) is also a stock corporation, but
is engaged in real estate development. Mutual restitution is required in cases involving
FEGDIwas the developer of the Forest Hills Golf rescission under Article 1191 of the Civil Code; such
and Country Club (Forest Hills) and, in restitution is necessary to bring back the parties to
consideration for its financing support and their original situation prior to the inception of the
construction efforts, was issued several shares contract. Accordingly, the amount paid to FEGDI by
of stock of Forest Hills. reason of the sale should be returned to Vertex (Fil-
Estate Golf and Development, Inc. and Fil-Estate
FEGDI sold on installment, to RS Asuncion Land, Inc. v. Vertex Sales and Trading, Inc., G.R. No.
Construction Corporation (RSACC) one common 202079, June 10, 2013).
share of Forest Hills. Prior to the full payment of
the purchase price, RSACC sold the share to Q: May Forest Hills appeal the CA decision which
Vertex Sales and Trading, Inc. (Vertex). RSACC ordered the recisision of the sale?
advised FEGDI of the sale to Vertex and FEGDI, in
turn, instructed Forest Hills to recognize Vertex A: NO. It was not a party to the sale even though the
as a shareholder. For this reason, Vertex subject of the sale was its share of stock. The
enjoyed membership privileges in Forest Hills. corporation whose shares of stock are the subject
of a transfer transaction (through sale, assignment,
Despite Vertex’s full payment, the share donation, or any other mode of conveyance) need
remained in the name of [Link] the demands not be a party to the transaction, as may be inferred
to issue certificate in its name went unheeded, from the terms of Section 63 of the Corporation
Vertex filed a Complaint for Rescission with Code. However, to bind the corporation as well as
Damages and Attachment against FEGDI, FELI third parties, it is necessary that the transfer is
and Forest Hills. It averred that the petitioners recorded in the books of the corporation. In the
defaulted in their obligation as sellers when present case, the parties to the sale of the share
they failed and refused to issue the stock were FEGDI as the seller and Vertex as the buyer
certificate covering the subject share despite (after it succeeded RSACC). As party to the sale,
repeated demands. FEGDI is the one who may appeal the ruling
Is the delay in the issuance of the stock rescinding the sale.
certificate a substantial breach of the sale which
entitles Vertex entitled to the rescission The remedy of appeal is available to a party who
thereof? has "a present interest in the subject matter of the
litigation and is aggrieved or prejudiced by the
A: YES. Section 63 of the Corporation Code provides, judgment. A party, in turn, is deemed aggrieved or
among others, that shares of stock may be prejudiced when his interest, recognized by law in
transferred by delivery of the certificate or the subject matter of the lawsuit, is injuriously
certificates indorsed by the owner or his attorney- affected by the judgment, order or decree." The
in-fact or other person legally authorized to make rescission of the sale does not in any way prejudice
the transfer. Forest Hills in such a manner that its interest in the
subject matter – the share of stock – is injuriously

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affected (Forest Hills Golf & Country Club v. Vertex fully paid, the basis of which is the doctrine of
Sales and Trading, Inc., G.R. No. 202205, March 6, indivisibility of subscription.
2013). 6. The original certificate must be surrendered
where the person requesting the issuance of a
Validity of stock transfer certificate is a transferee from the stockholder
(CC, Sec. 64).
1. As between the parties, the requisite for a valid
transfer is merely the delivery of the certificate Full payment
indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the Rule: Sec 64 prohibits the issuance of certificate of
transfer. stock to a subscriber who has not paid “the full
2. As against third persons and the corporation, the amount of his subscription together with interest
transfer of shares must be entered and noted and expenses (in case of delinquent shares), if any is
upon the books of the corporation so as to show due.
the names of the parties to the transaction, the
date of the transfer, the number of the NOTE: The provision enunciates the doctrine that a
certificate, and the number of shares subscription is one, entire and indivisible contract,
transferred. and therefore, it cannot be divided into portions so
that the stockholder shall not be entitled to the
Effects of an unregistered transfer of shares certificate of stock until he has paid the full amount
of his subscription together with interest and
1. It is valid and binding as between the transferor expenses, if any is due.
and the transferee.
2. It is invalid or ineffective, as to the corporation, Payment pro-rata
as against corporate creditors, as to the
attaching or executing creditors of the In the case of Baltazar v. Lingayen Gulf Electric Co.,
transferor, subsequent purchasers in good faith 14 SCRA 522 (1965), the Court ruled that, unless
without notice of the transfer, and as to all prohibited by the by-laws, certificates of stock may
persons interested except the parties to such be issued for less than the number of shares
transfers. subscribed provided the par value of each of the
stocks represented by said certificate has been fully
ISSUANCE paid.

Issuance of certificate of stock NOTE: This provides a contrary view that a

subscription is one, entire and indivisible contract.
It may only be issued until the full amount of the
stockholder’s subscription together with the In other words, in the absence of provisions in the
interest and expenses (in case of delinquent shares) by-laws to the contrary, a corporation may apply
if due has been paid (CC, Sec. 64). payments made by subscribers on account of their
subscriptions, either as: (a) full payment for the
Requisites for the issuance of the certificate of corresponding number of shares, the par value of
stock which is covered by such payment, or (b) as
payment pro rata to each and all the entire number
1. The certificate must be signed by the president of shares subscribed for. This rule applies to all
or vice-president, countersigned by the kinds and classes of stock corporations. The two
corporate secretary or assistant secretary alternatives cannot be availed of at the same time
(Bitong v. CA, G.R. No. 123553, July 13, 1998). (SEC Opinion, Feb. 7, 1968).

NOTE: Unless it complies with the foregoing, it LOST OR DESTROYED CERTIFICATES

is not deemed issued.
Procedure for the issuance of a new stock
2. The certificate must be sealed with the seal of certificate in lieu of those which have been lost,
the corporation. stolen or destroyed
3. The certificate shall be issued in accordance
with the by-laws. 1. The registered owner of a certificate of stock in
4. The certificate must be delivered. a corporation or his legal representative shall
5. The par value as to par value shares, or full file with the corporation an affidavit in
subscription as to no par value shares must be triplicate setting forth:

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a. If possible, the circumstances as to how the If there are oppositions on the issuance of new
certificate was lost, stolen or destroyed; certificates, the corporation may file an interpleader
b. The number of shares represented by such proceeding to compel the parties to litigate among
certificate; themselves.
c. The serial number of the certificate and the
name of the corporation which issued the Liability of the corporation for the issuance of
same. new certificates of stock in case of lost or
destroyed certificate
He shall also submit such other information and
evidence which he may deem necessary. GR: No action may be brought against any
corporation which shall have issued certificate of
2. After verifying the affidavit and other stock in lieu of those lost, stolen or destroyed
information and evidence with the books of the pursuant to the procedure above-described (safe
corporation, the latter shall publish a notice in a harbor provision).
newspaper of general circulation published in
the place where the corporation has its XPN: Where there is fraud, bad faith, or negligence
principal office, once a week for three (3) on the part of the corporation and its officers. (ibid)
consecutive weeks at the expense of the
registered owner of the Certificate of Stock. Q: A stockholder claimed that his stock
certificate was lost. After going through with the
Contents of notice: procedure for the issuance of lost certificate,
a. Name of the corporation; and no contest was presented within 1 year from
b. Name of the registered owner; the last publication, the corporation issued a
c. Serial number of the certificate of stock; new certificate of stock in lieu of the supposed
and lost certificate. The stockholder immediately
d. Number of share represented by the sold his shares and endorsed the replacement
certificate of stock. certificate to a buyer. It turned out that the
original certificate was not lost, but sold and
3. After the expiration of one (1) year from the endorsed to another person.
date of the last publication, if no contest has
been presented to said corporation regarding a. May the corporation be made liable by the
said certificate of stock, the corporation shall aggrieved party?
cancel in its books the certificate of stock which b. Who will have a better right over the shares,
has been lost, stolen or destroyed and issue in the endorsee of the original certificate or the
lieu thereof new certificate of stock. endorsee of the replacement certificate?

After the expiration of the 1 year period to A:

contest, such right shall be barred unless the a. NO. The corporation cannot be made liable.
registered owner files a bond or other security Except in cases of fraud, bad faith, or negligence
in lieu thereof as may be required, effective for on the part of the corporation and its officers,
a period of 1 year, for such amount and in such no action may be brought against any
form and with such sureties as may be corporation which has issued certificates of
satisfactory to the BOD, in which case, a new stock in lieu of those lost, stolen, or destroyed
certificate may be issued even before the pursuant to the procedure prescribed by law.
expiration of the 1 year period provided herein. b. The endorsee of the replacement certificate has
a better right to the shares. After expiration of 1
4. Provided that if a contest has been presented to year from the date of the last publication, and
said corporation or if an action is pending in no contest has been presented to said
court regarding the ownership of said corporation regarding said certificate, the right
certificate of stock which has been lost, stolen to make such contest has been barred and said
or destroyed, the issuance of the new certificate corporation already cancelled in its books the
of stock in lieu thereof shall be suspended until certificate which have been lost, stolen, or
the final decision by the court regarding the destroyed and issued in lieu thereof new
ownership of said certificate of stock which has certificate.
been lost, stolen or destroyed (CC, Sec. 73).
Q: Juan was a stockholder of X Co. He owned a
Oppositions on the issuance of new certificates total of 500 shares evidenced by Cert of Stock No
1001. He sold the shares to Pedro. After getting
paid, Juan indorsed and delivered said

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Certificate of Stock No 1001 to Pedro. The compel performance. The stockholder cannot take
following day, Juan went to the offices of the the law on to his hands; otherwise such entry shall
corporation and claimed that his Certificate of be void (Torres, Jr. v. CA, G.R. No. 120138, Sept. 5,
Stock No 1001 was lost and that, despite diligent 1997).
efforts, the certificate could not be located. The
formalities prescribed by law for the Probative value of the stock and transfer book
replacement of the lost certificate were
complied with. Eventually X Co issued in The stock and transfer book is the best evidence of
substitution of the lost certificate, Cert of Stock the transactions that must be entered or stated
No 2002. Juan forthwith transferred for valuable therein. However, the entries are considered prima
consideration the new certificate to Jose who facie evidence only and may be subject to proof to
knew nothing of the previous sale to Pedro. In the contrary (Bitong vs. CA, supra).
time, the corporation was confronted with the
conflicting claims of Jose and Pedro. The BOD of DISPOSITION AND ENCUMBRANCE OF SHARES
X Co invited you to enlighten them on these
questions; viz: SALE OF SHARES

a. If a suit were to be initiated in order to Registration by the corporation of the transfer

resolve the controversy between Pedro and of shares in case of alienation
Jose, should the matter be submitted to the
SEC or to the regular courts? As between the parties to the contract of sale,
b. Between Jose and Pedro, whom should the registration of the transfer of shares is not required.
corporation so recognize as the rightful However, until the shares are fully paid, such
stockholder? How would you respond to the transfer cannot be recorded in the books of the
above queries? (1997 Bar) corporation. Consequently, the transferee will not
be considered as a stockholder.
A:
a. The jurisdiction of the matter belongs to the Reasons for the recording of the alienation of
regular courts. Under section 5.2 of the SRC as shares
amended, the jurisdiction for intra-corporate
controversies was transferred from the SEC to 1. To enable the corporation to know at all times
the regular courts. their actual stock holders;
b. The corporation should recognize both Pedro 2. To afford the corporation the opportunity to
and Jose as rightful stockholders if there is no object or refuse its consent to the transfer in
over-issuance of shares resulting from the two case it has any claim against the stock; and
transactions without prejudice to the right of 3. To avoid fictitious and fraudulent transfer.
the corporation to claim against Juan for the
value of the shares sold to Jose. ALLOWABLE RESTRICTIONS ON
THE SALE OF SHARES
STOCK AND TRANSFER BOOK
Requisites for a restriction to be valid
CONTENTS
1. Restrictions are provided in the articles of
1. All stocks in the name of the stockholders incorporation;
alphabetically arranged 2. It must be printed at the back of the certificate
2. Amount paid and unpaid on all stocks and the of stock; and
date of payment of any installment 3. Must not be more onerous than the right of first
3. Alienation, sale or transfer of stocks refusal
4. Other entries as the by-laws may prescribe
(Sundiang Sr. & Aquino, 2009) Corporation can provide regulations to the
sale/transfer of the shares of stockholders
WHO MAY MAKE VALID ENTRIES
Corporation can provide regulations to the
Entries in stock and transfer books sale/transfer of the shares of stockholders but the
authority granted to a corporation to regulate the
The obligation and duty to make proper entries in transfer of its stock does not empower it to restrict
stock and transfer books falls on the corporate the right of a stockholder to transfer his shares, but
secretary. If the corporate secretary refuses to merely authorizes the adoption of regulations as to
comply, the stockholder may rightfully bring suit to the formalities and procedure to be followed in

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effecting transfer (Thomson v. CA, G.R. No. 116631, subscription. Can Nava compel the corporation
October 28, 1998). to register the sale?

A stockholder can transfer his shares without A: NO. The corporation has a claim on the said
being fully paid shares for the unpaid balance of Po's subscription. A
stock subscription is a subsisting liability from the
The incomplete payment of the subscription does time the subscription is made. The subscriber is as
not preclude the subscriber from alienating his much bound to pay his subscription as he would be
shares of stock. However, the transfer shall be valid to pay any other debt (Ibid).
only between the parties. The corporation has the
right to refuse from recording the sale in its books. Sale of full paid shares

A transferee of the partially paid shares cannot Sale of fully paid shares is allowed even without the
compel the corporation to record the transfer of consent of the corporation as long as the requisites
shares in its books, even though he has no for the valid transfer of shares are complied.
knowledge that they are not fully paid
Q: Four months before his death, PX assigned
Shares of stock against which the corporation holds 100 shares of stock registered in his name in
any unpaid claim shall not be transferable in the favor of his wife and his children. They then
books of the corporation. Hence, a transferee of the brought the deed of assignment to the proper
partially paid shares cannot compel the corporation corporate officers for registration with the
to record the transfer of shares in its books, even request for the transfer in the corporation's
though he has no knowledge that they are not fully stock and transfer books of the assigned shares,
paid (CC, Sec. 63). the cancellation of the stock certificates in PX's
name, and the issuance of new stock certificates
Stockholder cannot sell a portion of the shares in the names of his wife and his children as the
not fully paid new owners. The officers of the Corporation
denied the request on the ground that another
A stockholder who has not paid the full amount of heir is contesting the validity of the deed of
his subscription cannot transfer a portion of his assignment. May the Corporation be compelled
subscription in view of the indivisible nature of the by mandamus to register the shares of stock in
subscription contract (Villanueva, 2009). the names of the assignees? (2004 Bar)

Liability of the transferee for the balance of the A: YES. The corporation may be compelled by
purchase price in case the stockholder on record mandamus to register the shares of stock in the
fails to pay the same name of the assignee. The only legal limitation
imposed by Section 63 of the Corporation Code is
In case the stockholder on record fails to pay the pay when the Corporation holds any unpaid claim
the balance of the purchase price, he is still liable for against the shares intended to be transferred. The
the balance of the purchase price. Unless the alleged claim of another heir of PX is not sufficient
transfer of the shares is recorded, the stockholder is to deny the issuance of new certificates of stock to
still the owners of the shares as far as the his wife and children. It would be otherwise if the
corporation is concerned. transferee's title to the shares has no prima facie
validity or is uncertain.
REASON: The subscriber is as much bound to pay
his subscription as he would be to pay any other Recording of a deed of assignment with the SEC
debt (Nava v. Peers Marketing Corp., G.R. No. L-28120 without the transfer of shares does not bind the
November 25, 1976). corporation and third persons

Q: Po subscribed to 80 shares of Peers The recording of a deed of assignment does not give
Marketing Corporation at one hundred pesos a rise to any legal benefit to the corporation or any
share with a total value of 8,000 pesos. Po person (Sec Memo Circular No. 17, Series of 2004).
initially paid 2,000 pesos (25% of the amount of
subscription). Without paying the full REQUISITES OF A VALID TRANSFER
subscription price, Po sold to Nava 20 of his 80
shares. Nava requested the officers of the If represented by a certificate, the following must be
corporation to register the sale in the books of strictly complied with:
the corporation. The request was denied
because Po has not paid fully the amount of his 1. Indorsement by the owner and his agent;

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2. Delivery of the certificate; It is the extinguishment of the franchise of a
3. To be valid to third parties and to the corporation and the termination of its corporate
corporation, the transfer must be recorded existence (Sundiang Sr. & Aquino, 2009).
in the books of the corporation (Rural Bank
of Lipa v. CA, G.R. No. 124535, Sepember 28, De jure and de facto dissolution
2001); and
4. No shares of stock against which the De jure dissolution –dissolution in law adjudged
corporation holds any unpaid claim shall be and determined by judicial sentence or brought
transferrable (CC, Sec. 63). about by an act of or with the consent of the
sovereign power or which results from the
NOTE: Unpaid claim refers to claim arising from expiration of the charter period of corporate life.
unpaid sunscription, and not to any indebtedness
which a stockholder or subscriber may owe to the De facto dissolution- takes place in substance and
corporation arising from any other transaction in fact when the corporation by reason of
(China Banking Corp. v. CA and Valley Golf and insolvency, cessation of business, or otherwise
Country Club, G.R. No. 117604, March 26, 1997). suspends all its operations and goes into liquidation
still retaining its primary franchise to be a
If NOT represented by a certificate (such as when corporation.
the certificate has not yet been issued or where for
some reason is not in the possession of the Two legal steps in corporate dissolution
stockholder):
1. The termination of the corporate existence at
1. By means of deed of assignment; and least as far as the right to go on doing ordinary
2. Such is duly recorded in the books of the business is concerned;
corporation (Sundiang Sr. & Aquino, 2009) 2. The winding up of its affairs, the payment of its
debts, and the distribution of its assets among
INVOLUNTARY DEALINGS WITH SHARES the shareholders or members and other
persons interested. After winding up, the
It refers to such writ, order or process issued by a existence of the corporation is terminated for
court of record affecting shares of stocks which by all purposes.
law should be registered to be effective, and also to
such instruments which are not the willful acts of Effects of the dissolution of a corporation
the registered owner and which may have been
executed even without his knowledge or against his 1. Corporation ceases as a body corporate to
consent. continue the business for which it was
established (CC, Sec. 122).
Examples of involuntary dealings of a share 2. The assets of the corporation will then be
1. Attachment liquidated and legal title to the remaining
2. Sale on execution of judgment or sales for taxes corporate properties are transferred to the
3. Adverse claims stockholders who become co-owners thereof
4. Foreclosure of mortgage of stocks 3. The Corporation continues as a body corporate
for 3 years only for the purpose of winding up
Involuntary dealings must be registered or liquidation.
4. A dissolved corporation cannot be revived.
It is the act of registration which creates a However, those interested may reincorporate
constructive notice to the whole world of such by refilling a new AOI and by-laws (Rebollido vs.
instrument or court writ or process and is the CA, G.R. No. 81123, February 28, 1989).
operative act that conveys ownership (Aquino,
2007). Q: Vitaliano Aguirre, II, one of the original
subscribers of FQB+7, filed a complaint for
intra-corporate dispute against Nathaniel et. al
DISSOLUTION upon learning that they have filed, as corporate
AND LIQUIDATION officers of FQB+7, a GIS which showed a different
set of Directors and Subscribers from that of the
AoI. In response, Nathaniel, et al. filed a petition
Dissolution for certiorari with the CA for the annulment of
the proceedings in the RTC claiming that the SEC
had already revoked FQB+7’s certificate of

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registration almost a year before Aguirre filed A: NO. In the instant case, there is no dispute that
his complaint with the RTC. ADC's corporate registration was revoked on May
26, 2003. Based on Section 122 of the Corporation
The CA dismissed the complaintbecause the Code, it had three years, or until May 26, 2006, to
corporation has lost its juridical personality. As prosecute or defend any suit by or against it. The
such the trial court does not have jurisdiction to subject complaint, however, was filed only on
entertain an intra-corporate dispute when the October 19, 2006, more than three years after such
corporation is already dissolved. revocation.

Is the case an intra-corporate dispute and is thus In the present case, ADC filed its complaint not only
under the jurisdiction of the RTC? after its corporate existence was terminated but
also beyond the three-year period allowed by
A: YES. The Court finds and so holds that the case is Section 122 of the Corporation Code. Thus, it is clear
essentially an intra-corporate dispute. It obviously that at the time of the filing of the subject complaint
arose from the intra-corporate relations between ADC lacks the capacity to sue as a corporation. To
the parties, and the questions involved pertain to allow ADC to initiate the subject complaint and
their rights and obligations under the Corporation pursue it until final judgment, on the ground that
Code and matters relating to the regulation of the such complaint was filed for the sole purpose of
corporation. The Court further holds that the nature liquidating its assets, would be to circumvent the
of the case as an intra-corporate dispute was not provisions of Section 122 of the Corporation Code
affected by the subsequent dissolution of the (Alabang Development Corp. v. Alabang Hills Village
corporation. Section 145 preserves a corporate Association and Rafael Tinio, G.R. No. 187456, June 2,
actor’s cause of action and remedy against another 2014).
corporate actor. In so doing, Section 145 also
preserves the nature of the controversy between Procedure for dissolution of a corporation sole
the parties as an intra-corporate dispute.
In case of a corporation sole, by submitting to the
The dissolution of the corporation simply prohibits SEC for approval, a verified declaration of
it from continuing its business. However, despite dissolution which will set forth the following:
such dissolution, the parties involved in the
litigation are still corporate actors. The dissolution 1. The name of the corporation;
does not automatically convert the parties into total 2. The reason for dissolution and winding up;
strangers or change their intra-corporate 3. The authorization for the dissolution of the
relationships. Neither does it change or terminate corporation by the particular religious
existing causes of action, which arose because of the denomination, sect or church; and
corporate ties between the parties. Thus, a cause of 4. The names and addresses of the persons who
action involving an intra-corporate controversy are to supervise the winding up of the affairs of
remains and must be filed as an intra-corporate the corporation.
dispute despite the subsequent dissolution of the
corporation (Aguirre v. FQB+7 Inc., GR No. 170770, Upon approval of such declaration of dissolution by
January 9 2013, Del Castillo, J.). the Securities and Exchange Commission, the
corporation shall cease to carry on its operations
Q: Alabang Development Corporation (ADC), except for the purpose of winding up its affairs (CC,
developer of Alabang Hills Village, filed with the Sec. 115).
RTC a complaint for injunction against Alabang
Hills Village Association, Inc. (AHVAI) and its Dissolution by merger or consolidation
president, Rafael Tino, alleging that AHVAI
started the construction of a multi-purpose hall Upon issuance of SEC of a Certificate of Merger or
and a swimming pool on one of the parcels of Consolidation, the corporate existence of the
land still owned by ADC, without the latter’s absorbed corporation and the constituent
consent and approval. corporations in case of consolidation shall
automatically cease. No liquidation proceedings will
AHVAI claimed that ADC had no legal capacity to thereafter be conducted (CC, Sec. 80).
sue since its existence as a registered corporate
entity was revoked by the SEC on May 26, 2003. MODES OF DISSOLUTION
Does the ADC has the capacity to file the
complaint? The following are the modes of dissolution of the
corporation:

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1. Voluntary A:
a. By the vote of the BOD/ BOT and the a. NO. AAA Corporation is an artificial being
stockholders/ members where no created by law and has a legal personality of its
creditors are affected (CC, Sec. 118); own. A corporation does not owe its existence
b. By the judgment of the SEC after hearing of upon the presence of assets and properties. It
petition for voluntary dissolution, where can only be dissolved in cases provided for by
creditors are affected (CC, Sec. 119); law. As such, AAA Corporation will subsist
c. By amending the AOI to shorten the regardless of the sale of all of its assets and
corporate term (CC, Sec. 120); liabilities to another corporation.
d. In case of a corporation sole, by submitting b. A corporation may be dissolved voluntarily, by
to the SEC a verified declaration of the shortening of the corporate term and through
dissolution for approval (CC, Sec. 115); and involuntary dissolution. In voluntary
e. Merger or consolidation dissolution, the action for dissolution must be
approved by majority of the directors or
2. Involuntary trustees and 2/3 of the stockholders
a. By expiration of corporate term provided representing the outstanding capital stock or
for in the AOI (CC, Sec. 11) members, publication requirement and filed
b. By legislative enactment with SEC which will issue certificate of
c. By failure to formally organize and dissolution. If there are creditors affected, there
commence the transaction of its business must be a hearing to hear the objections and
within 2 years from the date of claims of the creditors. In case of shortening of
incorporation (CC, Sec. 22) corporate term, through amendment of the AOI.
d. By order of the SEC on grounds under In involuntary dissolution, through filing of a
existing laws (CC, Sec. 121) verified complaint with the SEC based on any
e. Judicial decree on Quo Warranto ground provided by law or rules.
Proceeding (CC, Sec. 20)
VOLUNTARY
NOTE: Methods effecting dissolution as prescribed
by statute are exclusive, and a corporation cannot Procedure of dissolution of a corporation where
be dissolved except in the manner prescribed by law no creditors are affected (Meet-NAC-PA)
(De Leon, 2010).
1. A MEETing must be held on the call of directors
The requirements for dissolution mandated by the or trustees
CC should be strictly complied with (Vesaga vs. CA, 2. Notice of the meeting
G.R. No. 142924, December 5, 2001). a. Given to each stockholder or member
either by registered mail or by personal
NOTE: Piercing the veil of corporate fiction is not delivery at least thirty (30) days prior to
one of the causes by which a corporation may be the said meeting.
dissolved. b. Published for three (3) consecutive weeks
in a newspaper published in the place
Q: AAA Corporation is a bank. The operations of where the principal office of said
AAA Corporation as a bank were not doing well. corporation is located and if no newspaper
So, to avert any bank run, AAA Corporation, with is published in such place, then in a
the approval of the Monetary Board, sold all its newspaper of general circulation in the
assets and liabilities to BBB Banking Philippines.
Corporation which includes all deposit
accounts. In effect then, BBB Corporation will 3. Resolution to dissolve must be Approved by
service all deposits of all depositors of AAA majority vote of the board of directors or
Corporation. trustees and adopted by the affirmative vote of
stockholders representing at least 2/3 of the
a. Will the sale of all assets and liabilities of outstanding capital stock or 2/3 of members.
AAA Corporation to BBB Banking 4. Copy of the resolution is then certified by the
Corporation automatically dissolve or majority of Board of directors or trustees and
terminate the corporate existence of AAA countersigned by the secretary of the
Corporation? Explain your answer. Corporation.
b. What are the legal requirements in order 5. Petition for dissolution together with the
that a corporation may be dissolved? (2012 signed and countersigned copy of the resolution
Bar) is then filed with the SEC.

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6. Approval of SEC of the petition and issuance of objections, SEC shall proceed to hear the
certificate of dissolution. (CC, Sec. 118) petition and try any issue made by the
Objections file.
NOTE: Under the RCC, it is now required that 6. If no objection is sufficient and the material
majority vote of the board, and majority vote of the allegations of the petition are true, it shall
stockholders, member to approve the dissolution. render Judgment dissolving the corporation
The New Code now likewise provides that a verified and directing such disposition of its assets as
request for dissolution to be filed with the SEC justice requires, and may appoint a receiver to
providing details of dissolution and submit certial collect such assets and pay the debts of the
documents showing compliance with the corporation.
requirements. The request shall be approved by the
the SEC within 15 days from receipt, and dissolution NOTE: Under the RCC, only majority of the board are
shall take effect only upon issuance of a certificate qualified to sign. And the new code includes
of dissolution. Banks, preneed, insurance and trust additional matters to be included in the petition.
companies, and other similar financial Specifically, it should state the reason for the
intermediaries require favorable recommendation dissolution the form, manner and time of the
of the appropriate government agency prior to the metting when votes were cast. The corporation
filing. must submit to the SEC, a copy of the resolution
authorizing dissolution certified by the majority of
Procedure of dissolution of a corporation where the board and countersigned by the secretary, and
creditors are affected (APSIVECSO – CPUPOOJ) list of all creditors. To do away with confusion, the
new code states that dissolution takes effects upon
1. Approval of the stockholders representing at issuance of a certificate of dissolution by the SEC
least 2/3 of the outstanding capital stock or by
at least two-thirds (2/3) of the members at a Creditor’s consent is not necessary for
meeting of its stockholders or members called dissolution
for that purpose.
2. Filing of Petition for dissolution with SEC, Consent of creditors is not necessary to approve
petition must be: (SiVeCS) dissolution for the reason that liquidation
a. SIgned by a majority of its board of proceedings will be conducted to protect their
directors or trustees or other officers interest.
having the management of its affairs;
b. VErified by its president or secretary or one Procedure for dissolving the corporation by
of its directors or trustees; shortening of the corporate term (ASAF)
c. Set forth all Claims and demands against it;
d. State that its dissolution was approved by 1. Amending the Articles of Incorporation
the required votes of Stockholders or pursuant to Sec. 16:
members. a. Approved by majority vote of the board of
directors or trustees
3. SEC shall issue an Order reciting the purpose of b. Ratified at a meeting by the stockholders
the petition and fix a date when objections representing at least 2/3 of the outstanding
thereto may be filed by any person. Said date capital stock or by at least two-thirds (2/3)
must not be less than thirty (30) days nor more of the members in case of non-stock
than sixty (60) days after the entry of the order. corporations.
4. Copy of the order shall be:
a. PUblished at least once a week for three (3) 2. Copy of the amended AOI shall be submitted
consecutive weeks in a newspaper of with the SEC.
general circulation published in the 3. Approval of SEC of the amended AOI.
municipality or city where the principal 4. As an additional requirement, the SEC requires
office of the corporation is situated, or if to submit the final audited Financial statement
there be no such newspaper, then in a not older than 60 days before the application
newspaper of general circulation in the for shortening the corporate term (CC, Sec. 120
Philippines, and in relation to Sec. 16)
b. POsted for three (3) consecutive weeks in
three (3) public places in such municipality NOTE: Under the RCC the dissolution now takes
or city. effect from the expiration of the shortened terms
stated in the approved articles, without any further
5. After expiration of the time to file objections proceedings, And to prevent confusion, the new
and upon prior 5-day notice to hear the code now specifically provides that in case of

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expiration of corporate term dissolution INVOLUNTARY
automatically takes effect in the day following the
last day of the corporate term as stated in the Expiration of corporate term
aritcles without need for issuance by the SEC of a
certificate of dissolution. The corporation shall exist within the period stated
in the AOI not exceeding 50 years unless sooner
Q: The Securities and Exchange Commission legally dissolved (CC, Secs. 19, 22, 117-122, 144, 145)
approved the amendment of the articles of or unless its registration is revoked upon any of the
incorporation of GHQ Corporation shortening grounds provided by law (CC, Sec. 6, PD 902-A & Sec.
its corporate life to only 25 years in accordance 22). In the absence of any express stipulation, it shall
with Sec. 120 of the Corporation Code. As exist for a period not exceeding fifty (50) years from
shortened, the corporation continued its the date of incorporation. After the term had
business operations until May 30, 1997, the last expired without extension, the corporation is
day of its corporate existence. Prior to said date, dissolved.
there were a number of pending civil actions, of
varying nature but mostly money claims filed by NOTE: UNDER THE RCC, A corporation shall have
creditors, none of which was expected to be perpetual existence unless its articles of
completed or resolved within five years from incorporation provides otherwise or unless the
May 30, 1997. If the creditors had sought your corporation, upon a vote of its stockholders
professional help at that time about whether or representing a majority of its outstanding capital
not their cases could be pursued beyond May 30, stock, notifies the Commission that it elects to retain
1997, what would have been your advice? (2000 its specific corporate term pursuant to its articles of
Bar) incorporation (Sec. 10 of R.A. 11232) or unless its
registration is revoked upon any of the grounds
A: The cases can be pursued even beyond May 30, provided by law.
1997, the last day of the corporate existence of GHQ
Corporation. The corporation is not actually Q: XYZ Corporation entered into a contract of
dissolved upon the expiration of its corporate term. lease with ABC, Inc., over a piece of real estate
There is still the period for liquidation or winding for a term of 20 years, renewable for another 20
up. years, provided that XYZ's corporate term is
extended in accordance with law. Four years
Q: X Corporation shortened its corporate life by after the term of XYZ Corporation expired, but
amending its articles of incorporation. It has no still within the period allowed by the lease
debts but owns a prime property located in contract for the extension of the lease period,
Quezon City. How would the said property be XYZ Corp. notified ABC, Inc., that it is exercising
liquidated among the five stockholders of said the option to extend the lease. ABC, Inc., objected
corporation? Discuss two methods of to the proposed extension, arguing that since
liquidation. (2001 Bar) the corporate life of XYZ Corp. had expired, it
could no longer opt to renew the lease. XYZ Corp.
A: The prime property of X Corporation can be countered that withstanding the lapse of its
liquidated among the five stockholders after the corporate term it still has the right to renew the
property has been conveyed by the corporation to lease because no quo warranto proceedings for
the five stockholders, by dividing or partitioning it involuntary dissolution of XYZ Corp. has been
among themselves in any two of the following ways: instituted by the Office of the Solicitor General.
Is the contention of XYZ Corp. meritorious?
1. By physical division or partition based on the Explain briefly. (2004 Bar)
proportion of the values of their stockholdings;
or A: NO. XYZ Corporation’s contention is not
2. By selling the property to a third person and meritorious XYZ Corp. was dissolved ipso facto upon
dividing the proceeds among the five the expiration of its original term. It ceased to be a
stockholders in proportion to their body corporate for the purpose of continuing the
stockholdings; or business for which it was organized, except only for
3. After the determination of the value of the purposes connected with its winding up or
property, by assigning or transferring the liquidation. Extending the lease is not an act to wind
property to one stockholder with the obligation up or litigate XYZ’s affairs. It is contrary to the idea
on the part of said stockholder to pay the other of winding up the affairs of the corporation (PNB v.
four stockholders the amount/s in proportion CFI of Rizal, G.R. No. 63201, May 27, 1992).
to the value of the stockholding of each.

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NOTE: (UNDER THE REVISED CORPO) Provided If a corporation does not formally organize and
that the original corporate term was retained by the commence the transaction of its business or the
corporation despite the fact the law now provides construction of its works within two (2) years from
for a perpetual existence, the doctrine still stands. the date of its incorporation, its corporate powers
cease and the corporation shall be deemed
Remedy in case the stockholders want to still dissolved (CC, Sec 22).
continue the business of the corporation after
its term expired NOTE: UNDER THE REVISED CORPO If a
corporation does not formally organize and
The remedy of the stockholders is reincorporation. commence its business within five (5) years from
Amending the articles of the incorporation to the date of its incorporation, its certificate of
extend the corporate term is not an available incorporation shall be deemed revoked as of the day
remedy as the corporation has ceased to exist. following the end of the five (5)-year period. (Sec.
21 R.A. No. 11232)
There is nothing to prevent the stockholders from
conveying their shareholdings toward the creation Effect of continuous inoperation for a period of
of a new corporation to continue the business of the ar least five (5) years
old. Winding up is the sole activity of a dissolved
corporation that does not intend to incorporate If a corporation has commenced the transaction of
anew. its business but subsequently becomes
continuously inoperative for a period of at least five
It is not unlawful for the old board of directors to (5) years, the same shall be a ground for the
negotiate and transfer the assets of the dissolved suspension or revocation of its corporate franchise
corporation to the new corporation intended to be or certificate of incorporation (CC, Sec. 22).
created as long as the stockholders have given their
consent (Chung Ka Bio v IAC, G.R. No. 71837, July 26, NOTE: The provision shall not apply if the failure to
1988). organize, commence the transaction of its business
or the construction of its works, or to continuously
NOTE: UNDER THE RCC A corporation whose term operate is due to causes beyond the control of the
has expired may apply for a revival of its corporate corporation as may be determined by the Securities
existence, together with all the rights and privileges and Exchange Commission.
under its certificate of incorporation and subject to
all of its duties, debts and liabilities existing prior to NOTE: UNDER THE RCC However, if a corporation
its revival. Upon approval by the Commission, the has commenced its business but subsequently
corporation shall be deemed revived and a becomes inoperative for a period of at least five (5)
certificate of revival of corporate existence shall be consecutive years, the Commission may, after due
issued, giving it perpetual existence, unless its notice and hearing, place the corporation under
application for revival provides otherwise. delinquent status.

Non-use of corporate charter or continuous Legislative dissolution

inoperation of a corporation
A corporation created by special law can be
To “formally organize” as used in reference to dissolved by an enactment of special law or
corporations means: expiration of its charter.

1. Election of officers, providing for the Limitations:

subscription;
2. Payment of the capital stock; 1. Under the constitution, the amendment,
3. Adoption of by-laws; and alteration or repeal of the corporate franchise
4. Such other similar steps as are necessary to of a public utility shall be made only “when the
endow the legal entity with the capacity to common good so requires.”
transact the legitimate business for which it 2. Section 145.
was created (Benguet Consolidated Mining Co. v 3. It cannot impair the obligations of existing
Pineda, G.R. No. L-7231, March 28, 1956). contracts between the corporation and third
persons, or take away vested rights of its
Effect of failure of a corporation to formally creditors. However, if effected because the
organize common good so requires, there is no
impairment.

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Dissolution by the SEC on grounds underexisting Process by which all the assets of the corporation
laws are converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors and
A corporation may be dissolved by the Securities the remaining balance if any is to be distributed to
and Exchange Commission upon filing of a verified the stockholders (Sundiang Sr. & Aquino, 2014).
complaint and after proper notice and hearing on
the grounds provided by existing laws, rules and Method of liquidation
regulations (CC, Sec. 121).
1. By the corporation itself or its board of
The following are some of the grounds, which may directors or trustees (CC , Sec. 122 [1])
result to the issuance of a dissolution order by the 2. By conveyance to a trustee within a three-year
SEC after conduct of appropriate proceedings: period (CC, Sec. 122[2]; Board of Liquidators v.
Kalaw, G.R. No. L-18805, Aug. 14, 1967)
1. Violations of the Corporation committed by the 3. By a management committee or rehabilitation
corporation. Such violations are generally receiver appointed by SEC (CC, Sec. 119)
penalized by Sec. 144 as the Code did not 4. By liquidation after three years
specifically penalize the same.
2. Deadlocks in a close corporation (CC, Sec. 104) Approval of the SEC is not required in order to
3. Mismanagement of a close corporation (CC, Sec. liquidate and distribute the assets of a dissolved
105) corporation
4. On any of the following grounds, wherein the
SEC retains its power to suspend or revoke, The liquidation and distribution of the assets of a
after proper notice and hearing, the franchise or dissolved corporation is a matter of internal
certificate of registration of the corporations, concern of the corporation and falls within the
partnerships or associations: (FMI-DBR) power of the directors and stockholders or duly
appointed liquidation trustee (SEC Opinion, July 23,
a. Fraud or misrepresentation in 1996).
procuring its Certificate of
Registration; Q: Lucia prayed before the RTC-Iriga to annul
b. Serious Misrepresentation as to what the extrajudicial partition and deed of mortgage
the corporation can do or is doing to executed by her childrenover the estate of her
the great prejudice of or damage to the deceased husband, having been executed
general public; without her knowledge and consent. She also
c. continuous Inoperation for a period of prayed for damages.
at least 5 years (Sec. 22, CC);
d. Refusal to comply or Defiance with any After the case was set for pre-trial, RBCI filed a
lawful order, rules or regulations of motion to withdraw after being informed that
SEC restraining commission of acts the PDIC would handle the case as RBCI had
which would amount to a grave already been closed and placed under the
violation of its franchise; receivership of the former. Consequently, the
e. Failure to file By-laws within the lawyers of PDIC took over the case of RBCI.
required period. However, SEC must
give the corporation the opportunity to May Lucia’s petition proceed independently of
explain such failure; the liquidation proceedings of RBCI?
f. Failure within the prescribed period to
submit required Reports in A: NO. After the Monetary Board has declared that a
appropriate forms as determined by bank is insolvent and has ordered it to cease
the SEC (e.g. General Information operations, the Board becomes the trustee of its
Sheet, Financial Statements) (De Leon, assets for the equal benefit of all the creditors,
2010). including depositors. The assets of the insolvent
banking institution are held in trust for the equal
NOTE: All actions filed with the SEC must be benefit of all creditors, and after its insolvency, one
prosecuted and defended in the name of the real cannot obtain an advantage or a preference over
party-in-interest (SEC Rules of Procedure, Rule III, another by an attachment, execution or otherwise.
Sec. 2).
Thus, to allow Lucia’s case to proceed
METHODS OF LIQUIDATION independently of the liquidation case, a possibility
of favorable judgment and execution thereof against
Liquidation the assets of RBCI would not only prejudice the

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other creditors and depositors but would defeat the the right to appeal (Paramount Insurance Corp. v.
very purpose for which a liquidation court was A.C. Ordonez Corp., G.R. No. 175109, August 6, 2008).
constituted as well. It would be more in keeping
with law and equity if Lucia’s case is consolidated Liquidation is not necessary in case a
with the liquidation case in order to expeditiously corporation is dissolved by merger and
determine whether she is entitled to recover the consolidation
property subject of mortgage from RBCI and, if so,
how much she is entitled to receive from the In case of merger or consolidation, the surviving or
remaining assets of the bank (Barrameda v. Rural the consolidated corporation shall thereupon and
Bank of Canaman, Inc., G.R. No. 176260, November, thereafter possess all the rights, privileges,
24 2010, in Divina 2014). immunities and franchises of each of the constituent
corporations; and all property, real or personal, and
Period of Liquidation all receivables due on whatever account, including
subscriptions to shares and other choses in action,
The period of liquidation is three (3) years. and all and every other interest of, or belonging to,
or due to each constituent corporation, shall be
Corporation in the process of liquidation does deemed transferred to and vested in such surviving
not have legal authority to engage in any new or consolidated corporation without further act or
business deed (CC, Sec 80).

A corporation in the process of liquidation has no Distribution of the corporation’s assets prior to
legal authority to engage in any new business, even dissolution
if the same is in accordance with the primary
purpose stated in its article of incorporation. GR: A corporation cannot distribute its assets prior
to dissolution. This will violate the trust fund
Suits brought against the corporation within the doctrine (CC,Sec. 122).
3-year period but remained pending beyond
said period XPNs:
1. Decrease of Capital Stock (CC,Sec. 38)
Pending actions against the corporation are not 2. Redemption of Redeemable Shares (CC, Sec. 8)
extinguished. They may still be prosecuted against 4. Reacquisition of shares which are considered as
the corporation even beyond said period. treasury shares (CC, Sec. 9)
5. Acquisition of own shares (CC, Sec. 41)
The creditors of the corporation who were not paid 6. Declaration of dividends (CC, Sec. 43)
within the 3-year period may follow the property of 7. Purchase of shares of any stockholder in case of
the corporation that may have passed to its deadlocks in a close corporation (CC, Sec. 10)
stockholders unless barred by prescription or 8. Withdrawal of a stockholder in a close
laches or disposition of said property in favor of a corporation (CC, Sec 105)
purchaser in good faith. 9. Upon lawful dissolution and after payment of all
debts and liabilities (CC, Sec. 122)
Suits not brought against the corporation within
the 3-year period Order of distribution of assets in case of
liquidation (CreSt-PreComE)
Suits not brought against the corporation within the
3-year period may still be prosecuted against the 1. Payment of claims of CREditors who are not
corporation, since there is nothing in Sec. 122, par. stockholders (based on preference or
1 which bars action for the recovery of the debts of concurrence of credits).
the corporation against the liquidator thereof after 2. Payment of claims of STockholders who are
the lapse of the winding up period of 3 years creditors of the corporation, as to the amount of
(Republic of the Philippines vs. Marsman Dev. Co., G.R. their claim as creditors.
No. L-175109, April 27, 1972). 3. Residual Balance shall be distributed
proportionately:
Right of the corporation to appeal a judgment is a. Holders of PREferred stock, if any; then
not extinguished by the expiration of the 3-year to the
period b. Holders of COMmon stock
4. If the creditor or stockholder cannot be found,
Corporations whose certificate of registration was their claims or shares shall be Escheated in
revoked by the SEC may still maintain actions in favor of the city or municipality where the asset
court for the protection of its rights which includes is located.

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BY THE CORPORATION ITSELF dissolution is more for the protection of its creditors
and stockholders. The appointment of said counsel
Every corporation whose charter expires by its own can be considered a substantial compliance [Gelano
limitation or is annulled by forfeiture or otherwise, v. CA, 103 SCRA 90 (1981)].
or whose corporate existence for other purposes is
terminated in any other manner: Period of existence of the trusteeship

1. Shall nevertheless be continued as a body Where no time limit has been fixed with respect to
corporate for 3 years after the time when it the existence of the trusteeship, the trustee has
would have been so dissolved; authority to close the affairs of the corporation even
2. For the purpose of after the expiration of the statutory 3-year period
a. Prosecuting and defending suits by or and claims not barred by the statute of limitations
against it; can be presented and allowed until the liquidation
b. Enabling it to settle and close its affairs; is terminated (National Abaca & Other Fibers Corp.
c. To dispose of and convey its property; v. Pore, G.R. No. L-16779, August 16, 1979).
and
d. to distribute its assets Suits brought by the corporation within the 3-
3. But NOT for the purpose of continuing the year period but remained pending beyond said
business for which it was established (CC, Sec. period
122 [1]).
A corporation that has a pending action and which
NOTE: Sec 122 authorizes the dissolved cannot be terminated within the 3 year period after
corporation’s board of directors to conduct its its dissolution is authorized under Sec. 122 of the CC
liquidation within 3 years from its dissolution. to convey all its property to a trustee to enable it to
Jurisprudence has even recognized the board’s prosecute and defend suits by or against the
authority to act as trustee for persons in interest corporation beyond the 3-year period. The trustee
beyond the said 3 year period [Aguirre v. FQB+7 Inc., may commence a suit which can proceed to final
688 SCRA 242 (2013)]. judgment even beyond the 3-year period. The
director may be permitted to continue as trustees to
BY CONVEYANCE TO A TRUSTEE complete the liquidation (Clemente v. CA, G.R. No.
WITHIN A 3-YEAR PERIOD 82407, March 27, 1995).

At anytime during the 3-year period for liquidation, Suits brought by the corporation beyond the 3-
said corporation is authorized and empowered to year period are not barred
convey all of its property to trustees for the benefit
of its stockholders, members, creditors and other The trustee of a dissolved corporation may
persons in interest. commence a suit which can proceed to final
judgment even beyond the 3-year period. The
From and after any such conveyance by the expiration of 3 years after the dissolution of a
corporation of its property in trust for the benefit of corporation does not affect its right to enforce a
its stockholders, members, creditors and others in favorable judgment, because under Sec. 145 of the
interest, all interest which the corporation had in CC, no right or remedy in favor or against any
the property terminates, the legal interest vests in corporation shall be removed or impaired either by
the trustees, and the beneficial interest in the subsequent dissolution of said corporation or by
stockholders, members, creditors or other persons any subsequent amendment or repeal of the CC or
in interest (par. [2], Sec. 122, CC). any part thereof (Knecht v. United Cigarette Corp.,
G.R. No. 139370, July 4, 2002).
Meaning of trustee
Q: The corporation, once dissolved, thereafter
The word “trustee” as used in the law must be continues to be a body corporate for three years
understood in its general concept. It has been held for purposes of prosecuting and defending suits
that a counsel who prosecuted and defended the by and against it and of enabling it to settle and
interest of a corporation and who in fact appeared close its affairs, culminating in the final
in behalf of the corporation before and after its disposition and distribution of its remaining
dissolution by amendment of its articles of assets. If the 3 year extended life expires
incorporation may be considered a trustee of the without a trustee or receiver being designated
corporation at least with respect to the matter in by the corporation within that period and by
litigation only. The purpose in the transfer of the that time (expiry of the 3 year extended term),
assets of the corporation to a trustee upon its the corporate liquidation is not yet over, how, if

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at all, can a final settlement of the corporate preserve its properties for the use and benefit of its
affairs be made? (1997 Bar) creditors and others who may have similar interests
in the property as where there is already a final and
A: The liquidation can continue with the winding up. executory judgment against the corporation, which
The members of the BOD can continue with the is in a precarious financial condition [Central
winding of the corporate affairs until final Sawmills, Inc. v Alto Surety and Ins. Co., 27 SCRA 247
liquidation. They can act as trustees or receivers for (1969)].
this purpose.
Where corporate directors are guilty of breach of
Where no receiver or trustee has been designated trust, minority stockholders may ask for
after dissolution: receivership [Chase v. CFI, 18 SCRA 602 (1966)].

1. The board of directors or trustees itself may be The corporation, through its president cannot
permitted to so continue as “trustees” by legal condone penalties and charges after it had been
implication. placed under receivership
2. In the absence of the BoD or BoT, those having
a pecuniary interest in the corporate assets, The appointment of a receiver operates to suspend
stockholders or creditors, may make a proper the authority of a corporation and of its directors
representations with SEC for working out a final and officers over its property and effects, such
settlement of the corporate concerns [Clemente authority being reposed in the receiver (Yam v. CA,
v CA, 242 SCRA 717 (1995)]. G.R. No. 104726, February 11, 1999).
3. The only surviving stockholder or director (SEC
Opinion No. 10-96, Jan 29 2010) Q: ASB Realty, being the owner of the property
4. The counsel who prosecuted and defended the by virtue of a Deed of Assignment, entered a
interest of the corporation (Reburiano v CA, G.R. Contract of Lease with Leonardo Umale. Upon
No. 102965, January 21, 1999). expiration of the contract, Umale continued
occupying the premises. ASB Realty served
BY MANAGEMENT COMMITTEE OR Umale a Notice of Termination of Lease and
REHABILITATION RECEIVER Demand to Vacate. Umale failed to comply with
the demand of vacating the premises and paying
Liquidation by a receiver his arrears. ASB Realty filed an unlawful
detainer case. Umale admitted occupying the
In the case of a dissolution order where creditors property but challenged the personality of ASB
are affected, the SEC may appoint a receiver to take Realty to sue and recover the property. He
charge of the liquidation of the corporation (CC, Sec. claimed that ASB Realty being placed under
119). receivership, it is the rehabilitation receiver
that has the power to take possession, control,
NOTE: Thus, the appointment of receiver is and custody of the assets under the Interim
addressed to the sound discretion of the court or the Rules of Procedure on Corporate Rehabilitation.
SEC. Can ASB Realty, a corporation under
rehabilitation, sue in its own name and recover
Appointment of receiver for a going corporation property unlawfully withheld?

The appointment of a receiver for a going A: YES. Being placed under corporate rehabilitation
corporation is a last resort remedy, and should not and having a receiver appointed to carry out the
be employed when another remedy is rehabilitation plan do not ipso facto deprive a
available. Relief by receivership is an extraordinary corporation and its corporate officers of the power
remedy and is never exercised if there is an to recover its unlawfully detained property.
adequate remedy at law or if the harm can be Rehabilitation is for effecting a feasible and viable
prevented by an injunction or a restraining rehabilitation by preserving a floundering business
order. Bad judgment by directors, or even as a going concern. This concept of preserving the
unauthorized use and misapplication of the corporation’s business as a going concern while it is
company’s funds, will not justify the appointment of undergoing rehabilitation is called debtor-in-
a receiver for the corporation if appropriate relief possession or debtor-in-place wherein the debtor
can otherwise be had (Rev. Ao-As v. CA, G.R. No. corporation remains in control of its business and
128464, June 20, 2006). properties, subject only to the monitoring of the
appointed rehabilitation receiver. The receiver
Even without dissolution, the court has authority to does not take over the control and management of
appoint a receiver for a corporation to protect and the debtor corporation being tasked only to monitor

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the successful implementation of the rehabilitation initial hearing before it can give due course to or
plan (Umale v. ASB Realty Corporation, G.R. No. dismiss a petition. Nevertheless, while the Interim
181126, June 15, 2011, Del Castillo, J.). Rules does not require the holding of a hearing
before the issuance of a stay order, neither does it
Corporate Rehabilitation prohibit the holding of one. Thus, the trial court has
ample discretion to call a hearing when it is not
It refers to the restoration of the debtor to a confident that the allegations in the petition are
condition of successful operation and solvency, if it sufficient in form and substance, for so long as this
is shown that its continuance of operation is hearing is held within the five (5)-day period from
economically feasible and its creditors can recover the filing of the petition — the period within which
by way of the present value of payments projected a stay order may issue as provided in the Interim
in the plan, more if the debtor continues as a going Rules (Pryce Corp. v. China Banking Corp., G.R. No.
concern than if it is immediately liquidated [Sec. 172302, February 18, 2014, in Divina, 2014).
4(gg), FRIA].
FRIA is prospective in application
Nature of Rehabilitation proceedings
Sec. 146 of the FRIA, which makes it applicable to
Rehabilitation proceedings are summary and non- “all further proceedings in insolvency, suspension of
adversarial in nature, and do not contemplate payments and rehabilitation cases x x x except to the
adjudication of claims that must be threshed out in extent that in the opinion of the court their
ordinary court proceedings. application would not be feasible or would work
injustice,” still presupposes a prospective
The jurisdiction of the rehabilitation court is over application. The wording of the law clearly shows
claims against the debtor that is under that it is applicable to all further proceedings. In no
rehabilitation, not over claims by the debtor against way could it be made retrospectively applicable to
its own debtors or against third parties. The the Stay Order issued by the rehabilitation court in
corporation under rehabilitation must file a 2002. At the time of the issuance of the Stay Order,
separate action against its debtors/insurers to the rules in force were the 2000 Interim Rules of
recover whatever claim it may have against them Procedure on Corporate Rehabilitation. Under those
(Steel Corp. v. Mapfre Insular Insurance Corp., G.R. rules, one of the effects of a Stay Order is the stay of
No. 201199, October 16, 2013, in Divina, 2014). the "enforcement of all claims, whether for money
or otherwise and whether such enforcement is by
Stay order and appointment of rehabilitation court action or otherwise, against the debtor, its
receiver guarantors and sureties not solidarily liable with
the debtor. Nowhere in the Interim Rules is the
Under Section 6(c) of PD 902-A, receivers may be rehabilitation court authorized to suspend
appointed whenever: foreclosure proceedings against properties of third-
party mortgagors (Situs Development Corp., et al. v.
1) Necessary in order to preserve the rights of Asiatrust Bank, et al., G.R. No. 180036, January 16,
the parties-litigants; and/or 2013).
2) Protect the interest of the investing public
and creditors. NOTE: FRIA took effect on July 18, 2010.

The stay order and appointment of a Execution of rehabilitation plan

rehabilitation receiver is an "extraordinary,
preliminary, ex parte remedy." The effectivity The Interim Rules on Corporate Rehabilitation
period of a stay order is only "from the date of its provides for means of execution of the
issuance until dismissal of the petition or rehabilitation plan, which may include, among
termination of the rehabilitation proceedings." It is others, the conversion of the debts or any portion
not a final disposition of the case. It is an thereof to equity, restructuring of the debts, dacion
interlocutory order defined as one that "does not en pago, or sale of assets or of the controlling
finally dispose of the case, and does not end the interest. The restructuring of the debts of PALI is
Court’s task of adjudicating the parties’ contentions part and parcel of its rehabilitation (Puerto Azul
and determining their rights and liabilities as Land, Inc. v. Pacific Wide Realty Development Corp.,
regards each other, but obviously indicates that G.R. No. 184000, September 17, 2014).
other things remain to be done by the Court."
Q: Spouses Rodil are the owners and sole
The Interim Rules does not require a hearing before proprietors of St. Michael Diagnostic and Skin
the issuance of a stay order. What it requires is an Care Laboratory Services and Hospital. With a

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vision to upgrade the hospital, Sps. Rodil upstart corporations under the prevailing economic
purchased two (2) parcels of land adjoining climate, it must nonetheless remain forthright in
their existing property and incorporated limiting the remedy of rehabilitation only to
SMMCI, with which entity they planned to meritorious cases.
eventually consolidate St. Michael Hospital’s 2. NO. SMMCI’s Rehabilitation Plan which is an
operations. To finance the construction, they indispensable requisite in corporate rehabilitation
obtained a loan from BPI secured by their proceedings failed to comply with the fundamental
personal assets. Due to mismanagement in the requisites outlined in Section 18, Rule 3 of the Rules,
construction, loan was not paid and debt particularly, that of a material financial
became due. Nevertheless, using hospital- commitment to support the rehabilitation and an
generated revenues, Sps. Rodil were still able to accompanying liquidation analysis. In this case,
purchase new equipment and machinery for St. aside from the harped on merger of St. Michael
Michael Hospital. Later on, BPI Family Hospital with SMMCI, the only proposed source of
demanded immediate payment of the entire revenue the Rehabilitation Plan suggests is the
loan obligation and, soon after, filed a petition capital which would come from SMMCI’s potential
for extrajudicial foreclosure of the real investors, which negotiations are merely pending.
properties covered by the mortgage. On the Further, SMMCI likewise failed to include any
other hand, SMMCI filed a Petition for Corporate liquidation analysis in its Rehabilitation Plan thus,
Rehabilitation. It was averred that St. Michael prevents the Court from ascertaining if the
Hospital was operating profitably. Further, petitioning debtor’s creditors can recover by way of
there are several persons who approached Sps. the present value of payments projected in the plan,
Rodil signifying their interest to invest in the more if the debtor continues as a going concern than
corporation. Moreover there are group of if it is immediately liquidated. Accordingly, it is
medical doctors are willing to infuse capital to insufficient to decree SMMCI’s rehabilitation. It is
the corporation for SMMCI to conclude pending well to emphasize that the remedy of rehabilitation
negotiations for investments. This was should be denied to corporations that do not qualify
supported by a feasibility study conducted by a under the Rules. (BPI FAMILY SAVINGS BANK, INC. V
CPA in that upon merging St. Michael and SMMCI, ST. MICHAEL MEDICAL CENTER, INC.G.R. No.
the company will attain operational feasibility 205469, March 25, 2015)
and profitability
Rules of Court applies in cases of appeals and
1. Will the petition for rehabilitation be reviews
granted
2. Whether the CA correctly affirmed SMMCI’s Under Rule 3, Section 5 of the Rules of Procedure on
Rehabilitation Plan as approved by the RTC. Corporate Rehabilitation, the review of any order or
A: decision of the rehabilitation court or on appeal
1. No. Restoration is the central idea behind the therefrom shall be in accordance with the Rules of
remedy of corporate rehabilitation. In common Court, unless otherwise provided (Robinson's Bank
parlance, to “restore” means “to bring back to or put Corp v. Gaerlan, et al., G.R. No. 195289, September 24,
back into a former or original state.” Rehabilitation 2014).
assumes that the corporation has been operational
but for some reasons like economic crisis or Cram-down clause
mismanagement had become distressed or
insolvent, i.e., that it is generally unable to pay its Section [Link] of the Rehabilitation Plan.– The
debts as they fall due in the ordinary course of court may approve a rehabilitation plan over the
business or has liability that are greater than its opposition of creditors, holding a majority of the
assets. In this case, it cannot be said that the total liabilities of the debtor if, in its judgment, the
petitioning corporation, SMMCI, had been in a rehabilitation of the debtor is feasible and the
position of successful operation and solvency at the opposition of the creditors is manifestly
time the Rehabilitation Petition was filed on August unreasonable (Sec. 23, Rule 4, Interim Rules of
11, 2010. While it had indeed “commenced Procedure on Corporate Rehabilitation).
business” through the preparatory act of opening a
credit line with BPI Family to finance the This provision, which is currently incorporated in
construction of a new hospital building for its future the FRIA, is necessary to curb the majority creditors’
operations, SMMCI itself admits that it has not natural tendency to dictate their own terms and
formally operated nor earned any income since its conditions to the rehabilitation, absent due regard
incorporation. This simply means that there exists to the greater long-term benefit of all stakeholders.
no viable business concern to be restored. While the Otherwise stated, it forces the creditors to accept
Court recognizes the financial predicaments of the terms and conditions of the rehabilitation plan,

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preferring long-term viability over immediate but Notwithstanding the rejection of the Rehabilitation
incomplete recovery (BPI v. Sarabia Manor Hotel, Plan by the creditors, the court may confirm the
G.R. no. 175844, July 29, 2013). Rehabilitation Plan if all of the following
circumstances are present:
Q: APECfiled a Petition for Corporate
Rehabilitation. Marcelo, the rehabilitation 1. The Rehabilitation Plan complies with the
receiver, submitted an Alternative requirements specified in this Act;
Rehabilitation Plan (ARP) which provides for 2. The rehabilitation receiver recommends the
the implementation of “swap” of open-ended confirmation of the Rehabilitation Plan;
education plans to a fixed-value pre-need plan 3. The shareholders, owners or partners of the
as well as tuition support depending on the juridical debtor lose at least their controlling
prevailing market rate of the NAPOCOR Bonds interest as a result of the Rehabilitation Plan;
and Peso-Dollar exchange rates. The plan was and
approved. In the meantime, the value of the 4. The Rehabilitation Plan would likely provide
Philippine Peso strengthened and appreciated. the objecting class of creditors with
Because of this, Marcelo filed a Modified compensation which has a net present value
Rehabilitation Plan (MRP) which includes the greater than that which they would have
suspension of the tuition support and received if the debtor were under liquidation
converting Philippine Peso Liabilities to U.S. (Sec. 64, FRIA).
Dollar liabilities by assigning to each planholder
a share of the remaining asset. The A corporation’s material financial commitment
Rehabilitation Court approved the MRP despite is significant for purposes of rehabilitation
opposition, in view of the “cram down” power of
the Rehabilitation Court. Marilyn Victorio- A material financial commitment becomes
Aquino, a planholder, questioned this approval significant in gauging the resolve, determination,
before the Court of Appeals for the MRP forced earnestness and good faith of the distressed
the creditors to reduce their claims against corporation in financing the proposed
APEC and it reduces the original amount which rehabilitation plan. This commitment may include
she was to receive under the ARP. The CA the voluntary undertakings of the stockholders or
dismissed the petition. Was the Court correct in the would-be investors of the debtor-corporation
approving the MRP? indicating their readiness, willingness and ability to
contribute funds or property to guarantee the
A: YES. The “cram-down” power of the continued successful operation of the debtor
Rehabilitation Court has long been established and corporation during the period of rehabilitation
even codified under Section 23, Rule 4 of the Interim (Philippine Bank of Communications v. Basic
Rules. Such prerogative was carried over in the Polyprinters and Packaging Corp., G.R. No. 187581,
Rehabilitation Rules, which maintains that the court October 20, 2014).
may approve a rehabilitation plan over the
objection of the creditors if, in its judgment, the Claims against the corporation are suspended
rehabilitation of the debtors is feasible and the during rehabilitation
opposition of the creditors is manifestly
unreasonable. The required number of creditors The suspension of all actions and/or claims against
opposing such plan under the Interim Rules (i.e., a corporation under rehabilitation does not only
those holding the majority of the total liabilities of cover cases which are pending in court. The
the debtor) was, in fact, removed. Petitioner’s automatic suspension of an action for claims
outright censure of the concept of the cram-down embraces all phases of the suit, that is, the entire
power of the rehabilitation court cannot be proceedings of an action or suit and not just the
countenanced. To adhere to the reasoning of payment of the claims.
petitioner would be a step backward — a futile
attempt to address an outdated set of challenges. It The actions that were suspended cover all claims
is undeniable that there is a need to move to a against a distressed corporation whether for
regime of modern restructuring, cram-down and damages founded on a breach of contract of
court supervision in the matter of corporation carriage, labor cases, collection suits or any other
rehabilitation in order to address the greater claims of a pecuniary nature. A claim arising from
interest of the public (Victorio-Aquino v. Pacific illegal dismissal is a claim covered by the
Plans Inc., G.R. No. 193108, December 10, 2014). suspension order issued by the SEC, as it is one for
pecuniary consideration.
Confirmation of Rehabilitation Plan by the court

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Furthermore, jurisprudence is settled that the The prevailing rule now categorically provides that
suspension of proceedings referred to in the law awards for moral damages, exemplary damages,
uniformly applies to “all actions for claims” filed and attorney’s fees in intra-corporate controversies
against a corporation xxx under management or are not immediately executor (Heirs of Santiago
receivership, without distinction, except only those Divinagracia v. Ruiz, G.R. No. 172023, July 7, 2010, in
expenses incurred in the ordinary course of Divina, 2014).
business (Molina v. Pacific Plans, Inc., G.R.
No. 165476, August 15, 2011, in Divina, 2014). Qualifications under the Rules must be strictly
complied with
The stay order is effective on all creditors of the
corporation without distinction, whether secured It is well to emphasize that the remedy of
or unsecured (Veterans Philippine Scout Security rehabilitation should be denied to corporations that
Agency, Inc. v. First Dominion Prime Holdings, Inc., do not qualify under the Rules. Neither should it be
G.R. No. 190907, August 23, 2012, in Divina, 2014). allowed to corporations whose sole purpose is to
delay the enforcement of any of the rights of the
Claims which are not suspended during creditors, which is rendered obvious by: (a) the
rehabilitation absence of a sound and workable business plan; (b)
baseless and unexplained assumptions, targets, and
a. Criminal actions goals; and (c) speculative capital infusion or
complete lack thereof for the execution of the
The suspension of claims in corporate rehabilitation business plan. Unfortunately, these negative
does not extend to criminal actions against the indicators have all surfaced to the fore, much to
distressed corporations or its directors and officers. SMMCI’s chagrin. In one case, not only has SMMCI
It would be absurd for one who has engaged in failed to show that it has formally began its
criminal conduct to escape punishment simply operations which would warrant restoration, but
because the corporation of which he is director or also it has failed to show compliance with the key
officer filed a petition for rehabilitation. The requirements under the Rules, the purpose of which
prosecution of the officers of the corporation has no are vital in determining the propriety of
bearing on the pending rehabilitation of the rehabilitation. Thus, for all the reasons hereinabove
corporation (Panlilio v. RTC, Branch 51, City of explained, the Court is constrained to rule in favor
Manila, GR No. 173846, February 2, 2011, in Divina, of BPI Family and hereby dismiss SMMCI’s
2014). Rehabilitation Petition (BPI Family Savings Bank,
Inc. v. St. Michael Medical Center, Inc., G.R. No.
b. Return of the subject of writ of replevin 205469, March 25, 2015).

The return of the car subject of the writ of replevin Right of the creditor-mortgagee to foreclose
is correct notwithstanding the pendency of the corporate property
rehabilitation proceedings. This is the necessary
consequence of the dismissal of the replevin case for The court has already settled and upheld the right of
failure to prosecute without prejudice. Upon the the secured creditor to foreclose the mortgages in
dismissal of the replevin case, the writ of seizure, its favor during the liquidation of a debtor
which is merely ancillary in nature, became functus corporation.
officio and should have been lifted. There was no
adjudication on the merits, which means that there The creditor-mortgagee has the right to foreclose
was no determination of the issue who has the the mortgage over a specific real property whether
better right to possess the subject car. Returning or not the debtor-mortgagor is under insolvency or
the seized vehicle is not an enforcement of a claim liquidation proceedings. The right to foreclose such
against the distressed corporation which must be mortgage is merely suspended upon the
suspended by virtue of the stay order issued by the appointment of a management committee or
rehabilitation court. The issue in a replevin case is rehabilitation receiver or upon the issuance of a stay
who has a better right of possession. So long as the order by the trial court. However, the creditor-
respondent is not interposing a monetary claim, mortgagee may exercise his right to foreclose the
respondent’s prayer for the return of the car subject mortgage upon the termination of the rehabilitation
of the replevin suit is not in any way violative of the proceedings or upon the lifting of the stay order
Rules on Corporate Rehabilitation (Advent Capital (Yngson, Jr. [in his capacity as Liquidator of Arcam &
and Medical Corp. v. Young, G.R. No. 183018, August Company, Inc.] v. Philippine National Bank, G.R. No.
3, 2011, in Divina, 2014). 171132, August 15, 2012, in Divina, 2014).

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The Stay Order cannot suspend foreclosure On September 8, 2005, PA filed a Petition for
proceedings already commenced over properties Corporate Rehabilitation before the RTC of
belonging to third party mortgagors. The Stay Order Makati City. On October 17, 2005, ten (10) plan
can only cover those claims directed against holders filed an Opposition and Motion to
petitioner corporations or their properties, against Exclude Planholders from Stay Order on the
petitioners’ guarantors, or against petitioners’ ground that planholders are not creditors as
sureties who are not solidarily liable with them. they (planholders) have a trust relationship
with PA. Are the planholders correct? (2014
Likewise, the enforcement of the mortgage lien Bar)
cannot be considered as a claim against a guarantor A: NO. Under the 2000 Interim Rules of Corporate
or a surety not solidarily liable with the debtor Rehabilitation, claim shall include all claims or
corporations. While the third party mortgagors also demands of whatever nature or character against a
executed Continuing Guaranty and Comprehensive debtor or its property, whether for money or
Surety undertakings in favor of the bank, the latter otherwise. Creditor shall mean any holder of a
did not proceed against them as individual claim. Hence, the claim of the policyholders for
guarantors or sureties. Rather, by initiating payment of tuition fees from (PA Assurance) CAP is
extrajudicial foreclosure proceedings, the bank was included in the definition of “claims” under the
directly proceeding against the property mortgaged Interim Rules.
to them by the spouses as security (Situs What is to be determined at this point is whether or
Development Corporation, et al. v. Asiatrust Bank, et not claims arising from the pre-need contracts
al., G.R. No. 180036, July 25, 2012). between the policyholders and (PA Assurance) CAP
can be stayed under Section 6, Rule 4 of the Interim
Considering that Metrobank acquired ownership Rules or Section 6(c) of P.D. No. 902-A.
over the mortgaged properties upon the expiration It does not provide that a claim arising from a pre-
of the redemption period on 6 February 2002, TCEI need contract is an exception to the power of the
is also out on a limb in invoking the Stay Order trial court to stay enforcement of all claims upon the
issued by the Rehabilitation Court on 8 October finding that the petition for rehabilitation is
2002 and the approval of its rehabilitation plan. An sufficient in form and substance.
essential function of corporate rehabilitation is, The foregoing provision echoes the provision in
admittedly, the Stay Order which is a mechanism of Section 6(c) of the governing law, P.D. No. 602-A, as
suspension of all actions and claims against the amended by P.D. No. 1758, which mandates that
distressed corporation upon the due appointment upon appointment of a management committee,
of a management committee or rehabilitation rehabilitation receiver, board or body, x x x all
receiver. The Stay Order issued by the actions for claims against corporations,
Rehabilitation Court cannot, however, apply to the partnerships or associations under management or
mortgage obligations owing to Metrobank which receivership pending before any court, tribunal,
had already been enforced even before TCEI’s filing board or body shall be suspended accordingly.
of its petition for corporate rehabilitation on 1 The Interim Rules of Procedure on Corporate
October 2002. In Equitable PCI Bank, Inc v. DNG Rehabilitation of 2000 has been amended by the
Realty and Development Corporation, the Court Rules of Procedure on Corporate Rehabilitation of
upheld the validity of the writ of 2009, which took effect on January 16, 2009. Under
possessionprocured by the creditor despite the the 2009 Rules of Procedure, the power of the RTC
subsequent issuance of a stay order inthe to issue a Stay Order when it finds the petition for
rehabilitation proceedings instituted by the debtor rehabilitation to be sufficient in form and substance
(Town and Country Enterprises Inc v. Quisumbing, is contained in Section 7, Rule 3, [17] which likewise
G.R. No. 173610, October 1, 2012, in Divina, 2014). does not exempt claims arising from pre-need
contracts from the Stay Order (Abrera, et al., v. Hon.
Q: PA Assurance (PA) was incorporated in 1980 Barza and College Assurance Plan, G.R. No. 171681,
to engage in the sale of pre-need educational September 11, 2009).
plans. It sold open-ended educational plans
which guaranteed the payment of tuition and Q: DNG Realty And Development Corporation
other fees to planholders irrespective of the cost (DNG) obtained a loan from petitioner Equitable
at the time of availment. It also engaged in the PCI Bank (EPCIB) secured by a real estate
sale of fixed value plans which guaranteed the mortgage over DNG’s property. When DNG
payment of a pre-determined amount to defaulted payment, EPCIB foreclosed the
planholders. In 1982, PA was among the mortgage and bought the property at public
country’s top corporations. However, it auction. The sheriff issued a certificate of sale in
subsequently suffered financial difficulties. favor of EPCIB.

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Months later, DNG filed a petition for considered a trustee of the corporation at least
rehabilitation with the SEC, and SEC issued a with respect to the matter in litigation only (De
stay order. Afterwards, the Registry of Deeds Leon, supra, pgs. 768-769, citing: Sec. 145, CC;
issued a title in favor of EPCIB, prompting DNG Clemente vs. CA, supra; SEC Opinion No. 10-96,
to seek the annulment of the foreclosure January 29, 2010, Reburiano vs. CA, G.R. No.
proceedings. To gain possession of the property, 102965, January 21, 1999).
PCIB filed an Ex-Parte Petition for Issuance of
Writ of Possession before the RTC, which later
directed the issuance of a writ of possession. OTHER CORPORATIONS

Did the foreclosure sale and writ of possession

in favor of EPCIB affect the Stay Order? (2014 CLOSE CORPORATION
Bar)
A close corporation is one which AOI provides that:
A: NO. Since the foreclosure of respondent DNG's
mortgage and the issuance of the certificate of sale 1. All of the corporation’s issued stock of all
in petitioner EPCIB's favor were done prior to the classes, exclusive of treasury shares, shall be
appointment of a Rehabilitation Receiver and the held of record by not more than a specified
Stay Order, all the actions taken with respect to the number of persons, not exceeding 20;
foreclosed mortgage property which were 2. All of the issued stock of all classes shall be
subsequent to the issuance of the Stay Order were subject to one or more specified restrictions on
not affected by the Stay Order. After the redemption transfer permitted by the provisions on close
period expired without DNG redeeming the corporations; and
foreclosed property, EPCIB becomes the absolute 3. The corporation shall not list in any stock
owner of the property and it was within its right to exchange or make any public offering of any of
ask for the consolidation of title and the issuance of its stock of any class.
new title in its name as a consequence of ownership; 4. Notwithstanding the foregoing, a corporation
thus, it is entitled to the possession and enjoyment shall be deemed NOT a close corporation when
of the property (Equitable PCI Bank, Inc. v. DNG at least 2/3 of its voting stock or voting rights is
Realty and Development Corp., G.R. No. 168672, owned or controlled by another corporation
August 8, 2010). which is not a close corporation within the
meaning of this Code.
LIQUIDATION AFTER 3 YEARS
Note: Stockholders of close corporations are
If the 3-year extended life has expired without a personally liable for corporate torts unless the
receiver or trustee having been expressly corporation has obtained adequate liability
designated by the corporation within that period: insurance (sec. 100 (5) CC)

1. The BOD/BOT itself may be permitted to so NON-STOCK CORPORATION

continue as ‘trustees” by legal implication to
complete the liquidation; DEFINITION
2. Still, in the absence of BOD/BOT, those having a
pecuniary interest in the corporate assets, It is one where no part of its income is distributable
including not only the stockholders but likewise as dividends to its members, trustees or officers.
the creditors of the corporation, acting for and Any profit which it may obtain as an incident to its
in its behalf, may make proper representations operations shall whenever necessary or proper, be
with the SEC which has primary and sufficiently used in furtherance of the purpose or purposes for
broad jurisdiction in matters of this nature, for which it was organized (CC, Sec. 87).
working out a final settlement of the corporate
concerns; Foundation
3. The only surviving stockholder or director of a
corporation whose term of existence has A foundation is a non-stock, non-profit corporations
expired may act as trustee-in-liquidation after with funds established to maintain or aid charitable,
the 3-year period to liquidate has expired religious, educational, athletic, cultural, literary,
without the appointment of a trustee-in- scientific, social welfare or similar activities
liquidation; or primarily through extending grants or endowments.
4. The counsel who prosecuted and defended the A foundation, as distinguished from an ordinary
interest of the corporation and who, in fact, non-stock corporation requires a minimum capital
appeared in behalf of the corporation, may be

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of 1 million Pesos (SEC Memo. Circular No. 1 Series of the election of the Board of Trustees every two
2004). years.
In 2003, the Board voted to remove Barayuga as
Characteristics of a non-stock corporation president. This prompted Barayuga to file a
petition for injunction with damages against
1. It does not have capital stock divided into AUP, contending among others, that the Board
shares. relieved him of the presidency without valid
2. No part of its income during its existence is grounds despite his five-year term. The RTC
distributable as dividends to its members, ruled in favor of Barayuga. The CA, on the other
trustees, or officers. hand, ruled in favor of AUP.
3. As a general rule, it is not empowered to engage
in business with the object of making income or Can an officer-elect of a non-stock educational
profits directly or indirectly. However, it is not corporation occupying a hold-over capacity be
prohibited to make income or profits as an removed without cause upon the appointment
incident to its operation (CC, Sec. 87). of his or her successor?
4. There is non-transferability of membership (CC,
Sec. 90). A: YES. Although setting the term of the members of
5. The right to vote of members may be limited, the Board of Trustees at five years, Sec. 108, par 2
broadened, or even denied in the AOI or the by- contains a proviso expressly subjecting the duration
laws (CC, Sec. 89). to what is otherwise providedin the AOI or by-laws
6. Non-stock corporations may, through their of the educational corporation. That contrary
articles of incorporation or their by-laws provision controls on the term of office.
designate their governing boards by any name
other than as BOT (CC, Sec. 138). In light of the amended By-Laws of AUP the
7. By-laws may provide that the members may members of the Board of Trustees were to serve a
hold their meetings at any place even outside term of office of only two years; and the officers,
the place where the principal office of the who included the President, were to be elected from
corporation is located, provided that such place among the members of the Board of Trustees during
is within the Philippines (CC, Sec. 93). their organizational meeting, which was held during
A non-stock corporation is not allowed to the election of the Board of Trustees every two
distribute any of its assets or any incidental years. Naturally, the officers, including the
income or profit made by the corporation President, were to exercise the powers vested by
during its existence. Section 2 of the amended By-Laws for a term of only
8. Non-availability of conversion into stock two years, not five years.
corporation (SEC Opinion, February 24, 1989).
Ineluctably, Barayuga, having assumed as President
Q: Adventist University of the Philippines (AUP) of AUP on January 23, 2001, could serve for only two
is a non-stock, non-profit educational years, or until January 22, 2003. By the time of his
institution. Petonillo Barayuga was appointed removal for cause as President on January 27, 2003,
by the AUP’s Board of Trustees as its President he was already occupying the office in a hold-over
in 2001. AUP subsequently amended its By-Laws capacity, and could be removed at any time, without
to state that members of the Board of Trustees cause, upon the election or appointment of his
were to serve a term of office of only two years; successor. His insistence on holding on to the office
and the officers, who included the President, was untenable, therefore, and with more reason
were to be elected from among the members of when one considers that his removal was due to the
the Board of Trustees during their loss of confidence on the part of the Board of
organizational meeting, which was held during Trustees (Barayuga v. Adventist University of the
Philippines, G.R. No. 168008, August 17, 2011).

Stock Corporation vs. Non-stock Corporation

STOCK- CORPORATION NON-STOCK CORPORATION

No capital stock.
Existence of Has capital stock divided into shares (CC,
Capital Stock Sec. 3) Non-stock corporations has capital is in the
form of contributions or donations.
Purpose Organized for profit. Not organized for profit.

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Profits are not distributed to members. Any
Profits are distributed to the
Distribution of profit earned by the non-stock corporation is
stockholders through dividends (CC, Sec.
Profit used for the furtherance of the purpose or
3)
purposes for which it is organized. (CC, Sec. 87)
Not less than 5 but not more than 15.
Number of Not less than 5 and may be more than 15 except
Directors or Except corporation sole and banks (in Non-stock educational institutions (maximum
Trustees case of merger or consolidation) which of 15 trustees).
can have a maximum of 21 directors
Term of one year until their successors
Term of Office Subject to the provision in AOI and By-laws, 3
are elected and qualified, subject to the
of Directors years on a staggered basis.
provisions of AOI and By-laws
Election of Officers are elected by the BOD and not Members may directly elect officers. (CC,Sec.
Officers by the stockholders 92)
Stockholders meeting shall be held in city
May be held at any place outside the principal
or municipality where the principal
Place of place of business of the corporation provided it
office of the corporation is located or at
meeting shall be within the Philippines. (CC, Sec. 93)
the principal office of the corporation.
(CC,Sec. 51)
Stockholders can resort to cumulative
voting.
No cumulative voting unless allowed by AOI.
Only preferred and redeemable shares
Right to vote may be limited, broadened or
can be denied the right to vote except
Right to vote denied by the AOI and by-laws. (CC, Sec. 89)
those matters in Sec. 6.
Regional or district voting of trustees is
Voting of directors may be made only
allowed.
through general voting. Regional or
district voting of directors is not allowed.
Transferability Shares may be transferred by the Membership is personal in character and is not
of Shares/ stockholder with or without the consent transferable unless allowed by the AOI or by-
Membership of the corporation. laws. (CC, Sec. 90)
Membership shall be terminated in the manner
Right to expel Stockholders may be expelled only for
and for the causes provided in the articles of
members grounds provided by law.
incorporation or the by-laws. (CC, Sec. 91)
Assets of stock corporation shall be
Assets of non-stock corporation shall be
distributed in the following order:
distributed as follows:
1. Payment of claims of creditors
[Link] of claims of creditors who are
2. Assets held on condition of return or
Distribution of not stockholders (based on preference of
subject to limitation of use shall be
Assets in case credit)
returned, transferred or conveyed.
of dissolution [Link] of claims of stockholders as
3. Distribution to member based on
creditors
distributive rights stated in AOI or by-law.
[Link] balance is distributed
4. In case of default, distribution pursuant to
proportionately to preferred shares, if
Plan of Distribution of Assets.
any, then to common stock.

Conversion 2. A non-stock corporation can be converted into

a stock corporation only if the members
1. A non-stock corporation cannot be converted dissolve it first and then organize a stock
into a stock corporation through mere corporation. However, there is a resulting new
amendment of its AOI. This would violate corporation (Sundiang Sr. & Aquino, 2014 citing
Section 87 which prohibits distribution of SEC Opinion, May 13, 1992).
income as dividends to members. Giving the 3. A stock corporation may be converted into a
members shares is tantamount to distribution non-stock corporation by mere amendment
of its assets or income (Sundiang Sr. & Aquino, provided all the requirements are complied
2014 citing SEC Opinion, March 1995). with. Its rights and liabilities will remain
(Sundiang Sr. & Aquino, 2014).

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Termination of Membership 8. Scientific,
9. Social,
The power to admit members pertains to the Board 10. Civic service, or
in the absence of any contrary provisions on the AOI 11. Similar purposes, like trade, industry,
and by-laws. Consistently, it is also the Board who agriculture and like chambers, or any
has the power to terminate membership. combination thereof. (CC, Sec. 88) (RCC, Sec. 87)

1. Standards - A non-stock corporation is NOTE: A non-stock corporation organized to

authorized to terminate the membership in promote educational objectives may not be an
accordance with the standards fixed in the AIO educational corporation as contemplated in Secs.
or the by-laws (CC, Sec. 91). 106 to 108, CC.
2. When property rights are involved - Membership
may involve property rights. Example: The formation of a non-stock corporation for
Membership in a golf club where the purchase political purpose is not allowed
of the share is a sine qua non (Valley Golf &
Country Club Inc. v. Caram, G.R. No. 158805, April Political purpose is not included on the purposes for
16, 2009). which a non-stock corporation may be established.
3. Lien – Non-payment of dues may be a ground SEC may reject the AOI if the purpose of the
for termination or suspension of membership. corporation is to engage in election campaign or
The AOI or the by-laws of a non-stock partisan political activity (SEC Opinion, April 10,
corporation may provide that unpaid dues shall 1985).
constitute a lien on the member’s share.
However, Section 68 of the Corporation Code TREATMENT OF PROFITS
does not apply if the membership shares are
sold under the provisions that provide for the Non-stock corporationmay earn profit
constitution of lien (Calatagan Golf & Country
Club Inc. V. Caram, G.R. No. 165443, April 16, Mere intangible or pecuniary benefit to the
2009); members does not change the nature of the
4. Notice - For the termination of membership to corporation. The fact that a non‐stock corporation
be valid, there should be reasonable notice to earns a profit does not make it a profit‐making
the member concerned and he must be given a corporation where such profit or income is used for
fair opportunity to be heard in his defense; purposes set forth in its articles of incorporation
5. Effect of death of a member - Membership in and and is not distributed to its incorporators, members
all rights arising from a non-stock corporation or officers.
are personal and non-transferable, unless the
AOI or the by-laws of the corporation provide DISTRIBUTION OF ASSETS UPON DISSOLUTION
otherwise. Deceased members who are
dropped from the membership roster in the Order of distribution of assets on dissolution of
manner and for the cause provided for in the non-stock corporations
by-laws are not to be counted in determining
the requisite vote in corporate matters or the 1. All liabilities of the corporation shall be paid or
requisite quorum for the annual member’s adequate provision thereof shall be made;
meeting (Tan v. Sycip, G.R. No. 153468, August 2. Assets held upon a condition requiring return,
17, 2006). transfer or conveyance upon, and which
condition occurs by reason of the dissolution,
PURPOSES shall be returned, transferred or conveyed;
3. Assets received and held by the corporation
Purposes for which a non-stock corporation subject to limitations permitting their use only
may be organized for charitable, religious, benevolent,
educational or similar purposes shall be
Non-stock corporations may be formed or transferred or conveyed to one or more
organized for: (CREP-CFLSS-CS) corporations, societies or organizations
1. Charitable, engaged in activities in the Philippines
2. Religious, substantially similar to those of the dissolving
3. Educational, corporation.
4. Professional, 4. All other assets shall be distributed to the
5. Cultural, members as provided by the articles of
6. Fraternal, incorporation or the by-laws.
7. Literary,

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5. In the absence of provision in the AOI or by- 2. Principle of reciprocity - It allows Filipino
laws, distribution may be made in accordance citizens to do business in the foreign state or
to a plan of distribution adopted by the board of country. This is merely prescribed as a
trustees by majority vote and by at least 2/3 of requirement to secure a license and not an
the members (CC, Sec. 94). essential element of being a foreign corporation
(De Leon, 2010).
The assets of a non-stock corporation undergoing
the process of dissolution for reasons other than Jurisdiction over a foreign corporation
those set forth in Section 139 of this Code shall
be applied and distributed to such enumeration. IF THE FOREIGN IF THE FOREIGN
(Revised Corporation Code, Sec. 93) CORPORATION IS CORPORATION IS
THE PLAINTIFF THE DEFENDANT
A non-stock corporation cannot offset unused [Link]: Voluntary
contributions of members against the balance of appearance of the
receivables from the same members corporation by
interposing a
The unused contributions of members cannot be defense
offset against the balance of receivables because 1. Voluntary
this would amount to distribution of the capital of appearance before the
XPN: A special
the corporation. Members of non-stock corporation local courts by the
appearance to file a
are not entitled to distribution of capital. They are filing of an action by a
motion to dismiss
only entitled to distribution of capital upon licensed corporation
based on lack of
dissolution when it is provided for in the articles of jurisdiction
incorporation or by-laws (SEC Opinion, November 2. If the foreign
27, 1985). corporation is a co-
2. Service of summons
plaintiff with a
to a foreign
FOREIGN CORPORATIONS domestic corporation
corporation which has
and latter filed a suit
transacted business in
A foreign corporation is done, formed, organized or here in the Philippines.
the Philippines
existing under any laws other than those of the whether licensed or
Philippines and whose laws allow Filipino citizens registered
and corporations to do business in its own country 3. Service of summons
or State (CC, Sec. 123). to its resident agent in
an isolated transaction.
Features that make a foreign corporation within
the coverage of the law BASES OF AUTHORITY OVER FOREIGN
CORPORATION
1. Place of incorporation - The corporation must
be formed, organized, or existing under foreign The following are the two bases of authority
law. (jurisdiction) over foreign corporations:

Due to the enactment of RA 7042, the control 1. A corporation may give actual consent to
test is now used in the determination of judicial jurisdiction manifested normally by
nationality of the corporation in case of compliance with the State’s foreign corporation
nationalized or partly nationalized activities. qualification requirements (licensing
However, this does not preclude the use of requirements and other requisites to lawfully
other tests in determining the nationality of the transact business in the Philippines); and
corporation. In fact, as per SEC Opinion on Nov. 2. A corporation, even though not qualified (not
28, 2009, the SEC opined that the grandfather licensed), by engaging in sufficient activity
rule can be useful when a corporation’s (doing business) within the State, established
economic activity is strictly limited by law to judicial jurisdiction over the foreign
Filipino citizens, such as certain types of retail corporation (Foreign Corporations: The
trading and mass media. Further, according to Interrelation of Jurisdiction and Qualification,
the commission, the control test, which is more Indiana Law Journal, Article 4, Vol. 33, Issue 3,
liberal, is applied for corporations intending to retrieved on April 29, 2013).
engage in commerce where 60%-40% equity
ratio is allowed by law. Consent

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Through compliance with the Philippines’ legal 2. Contract Test - Whether the contracts entered
requirements to lawfully engage in business within into by the foreign corporation, or by an agent
the country’s territory, the foreign corporation acting under the control and direction of the
gives its actual consent to be subjected to the foreign corporation, are consummated in the
jurisdiction of the Philippines (Ibid). Philippines.

By securing a license, which is a legal requirement NOTE: Actual transaction of business within the
to lawfully engage in business in the Philippines, the Philippine territory is an essential requisite for the
foreign entity would be giving assurance that it will Philippines to acquire jurisdiction over a foreign
abide by the decisions of our courts, even if adverse corporation and thus require the foreign
to it (Eriks PTE, Ltd. v. CA, GR 118843, February 6, corporation to secure a Philippine business license
1997). (B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing
Industries, Inc., G.R. No. 147905, May 28, 2007).
Foreign corporations shall not be permitted to
transact or do business in the Philippines until they Q: What is the legal test for determining if an
have secured a license for that purpose from the unlicensed foreign corporation is doing
SEC and certificate of authority from the business in the Philippines? (2002 Bar)
appropriate government agency (CC, Sec. 123).
XPN: Isolated Transactions – where a foreign A: The test is whether or not the unlicensed foreign
corporation had no intention to engange corporation has performed an act or acts that imply
continuously in the transaction is not doing in the a continuity of commercial dealings or
Philippines and need not get a license. arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of
Doctrine of “Doing Business” in the Philippines some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of
Q: When is a foreign corporation deemed to be the purpose and object of the business corporation.
“doing business in the Philippines?” (1998, 2016
Bar) Q: Steelcase is a foreign corporation existing
under the laws of Michigan, USA, and engaged in
A: Under the Foreign Investment Act (R.A. No. the manufacture of office furniture with dealers
7402),a foreign corporation is “deemed doing worldwide. DISI is a corporation existing under
business in the Philippines” if it is continuing the Philippine Laws and engaged in the furniture
body or substance of the business or enterprise for business, including the distribution of furniture.
which it was organized. It is the intention of an Steelcase and DISI orally entered into a
entity to continue the body of its business in the dealership agreement whereby Steelcase
country. The grant and extension of 90-day credit granted DISI the right to market, sell, distribute,
terms of a foreign corporation to a domestic install, and service its products to end-user
corporation for every purchase shows an intention customers within the Philippines. The business
to continue transacting with the latter. relationship continued smoothly until it was
terminated after the agreement was breached
Jurisdictional tests of “doing or transacting with neither party admitting any fault. Steelcase
business” in the Philippines for foreign filed a complaint for sum of money against DISI
corporations alleging, among others, that DISI had an unpaid
account of US$600,000.00.
1. Twin Characterization Test
a. Continuity Test –implies a continuity of DISI alleged that the complaint failed to state a
commercial dealings and arrangements, cause of action and to contain the required
and contemplates to some extent the allegations on Steelcase’s capacity to sue in
performance of acts or works or the the Philippines despite the fact that Steelcase
exercise of some functions normally was doing business in the Philippines without
incident to and in progressive prosecution the required license to do so. Consequently, it
of, the purpose and object of its posited that the complaint should be dismissed
organization. because of Steelcase’s lack of legal capacity to
b. Subsequent Test – a foreign corporation is sue in Philippine courts. Is Steelcase doing
doing business in the country if it is business in the Philippines without the required
continuing the body or substance of the license?
enterprise of business for which it was
organized (Sundiang Sr. & Aquino, 2009). A: NO. The appointment of a distributor in
the Philippines is not sufficient to constitute “doing

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business” unless it is under the full control of the b. Under Section 32 of BP 68, the law provides that
foreign corporation. If the distributor is an where any of the first two conditions set forth
independent entity which buys and distributes in the preceding paragraph is absent, in the case
products, other than those of the foreign of a contract with a director or trustee, such
corporation, for its own name and its own account, contract may be ratified by the vote of the
the latter cannot be considered to be doing business stockholders representing at least 2/3 of the
in the Philippines. It should be kept in mind that the outstanding capital stock or of at least 2/3 of
determination of whether a foreign corporation is the members in a meeting called for the
doing business in the Philippines must be judged in purpose. Provided, that full disclosure of the
light of the attendant circumstances. adverse interest of the directors or trustees
involved is made at such meeting. Provided,
It is undisputed that DISI was founded in 1979 and however, that the contract is fair and
is independently owned and managed by the reasonable under the circumstances.
spouses Leandro and Josephine Bantug. In addition
to Steelcase products, DISI also distributed products NOTE: See Section 33 on interlocking directors.
of other companies including carpet tiles,
relocatable walls and theater settings. The NECESSITY OF A LICENSE TO DO BUSINESS
dealership agreement between Steelcase and DISI
had been described by the owner himself a buy and The purpose of the law in requiring that a foreign
sell arrangement. This clearly belies DISI’s assertion corporation doing business in the Philippines be
that it was a mere conduit through which Steelcase licensed to do so is to subject such corporation to
conducted its business in the country. From the the jurisdiction of the courts. The object is not to
preceding facts, the only reasonable conclusion that prevent foreign corporation from performing single
can be reached is that DISI was an independent acts but to prevent it from acquiring a domicile for
contractor, distributing various products of the purpose of business without taking steps
Steelcase and of other companies, acting in its own necessary to render it amenable to suits in local
name and for its own account (Steelcase, Inc., v. courts (Marshall-Wells Co. vs. Elser & Co, G. R. No.
Design InternationalSelections, Inc., G.R. No. 171995, 22015, September 1, 1924).
April 18, 2012).
Further, the following are considered objectives of
Q: Chito Santos is a director of both Platinum the statutory provisions prescribing regulation of
Corporation and Kwik Silver Corporation. He foreign corporations:
owns 1% of the outstanding capital stock of
Platinum and 40% of Kwik. Platinum plans to 1. To place the foreign corporations under the
enter into a contract with Kwik that will make jurisdiction of the court;
both companies earn very substantial profits. 2. To place them in the same footing as domestic
The contract is presented at the respective corporation; and
board meetings of Platinum and Kwik. 3. To protect the public in dealing with the said
corporation.
a. In order that the contract will not be
voidable, what conditions will have to be A corporation engaged in exporting goods to the
complied with? Explain. Philippines is not required to obtain a license
b. If these conditions are not met, how may this
contract be ratified? Explain (1995 Bar) If a foreign corporation does not transact such kind
of business in the Philippines, even if it exports its
A: products to the Philippines, the Philippines has no
a. Under Section 32 of BP 68, the law provides jurisdiction to require such foreign corporation to
that: 1) the presence of such director or trustee secure a Philippine business license. Actual
in the board meeting in which the contract ws transaction of business within the Philippine
approved was not necessary to constitute a territory is an essential requisite for the Philippines
quorum for such meeting; 2) the vote of such to acquire jurisdiction over a foreign corporation
director or trustee was not necessary for the and thus require the foreign corporation to secure a
approval of the contract; 3) the contract is fair Philippine business license (B. Van Zuiden Bros., Ltd.
and reasonable under the circumstances; and v. GTVL Manufacturing Industries, Inc., G.R. No.
4) in case of an officer, the contract has been 147905, May 28, 2007).
previously authorized by the board of directors.
In the case at bar, Chito must make sure that the Q: Cargill is a corporation organized and existing
following conditions be met for in order that the under the laws of the State of Delaware, United
contract will not be voidable. States of America. Cargill and Northern

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Mindanao Corporation (NMC) executed a
contract whereby NMC agreed to sell to Cargill
molasses provided that Cargill would open a
Letter of Credit with the BPI. The amended
contract required NMC to put up a performance
bond which represents the value of 10,500
metric tons of molasses. The performance bond
was intended to guarantee NMC’s performance
to deliver the molasses during the
prescribedshipment periods according to the
terms of the amended contract. In compliance
with the terms of the third amendment of the
contract, respondent Intra Strata Assurance
Corporation (Intra Strata) issued a performance
bond to

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guarantee NMC’s delivery of the 10,500 tons of under Sec. 123, CC, which defines a
molasses, and a surety bond. NMC was only able foreign corporation.
todeliver 219.551 metric tons of molasses out of
the agreed 10,500 metric tons. Thus, Cargill sent b. The applicant is an existing corporation
demand letters to NMC claiming payment under in good standing.
the performance and surety bonds. When NMC c. If such certificate is in a foreign language,
refused to pay, Cargill filed a complaint for sum a translation thereof in English under
of money against NMC and Intra Strata. Does oath of the translator shall be attached
Cargill, an unlicensed foreign corporation, has thereto.
legal capacity to sue before Philippine courts?
4. Statement under oath by the President or other
A: YES, it has the capacity to sue. In this case, Cargill person authorized by the Corporation showing
and NMC amended their contract three times to give to the satisfaction of the SEC and other
a chance to NMC to deliver to Cargill the molasses, governmental agency in the proper cases that
considering that NMC already received the the:
minimum price of the contract. There is no showing a. applicant is solvent and in sound financial
that the transactions between Cargill and NMC condition
signify the intent of Cargill to establish a continuous b. the assets and liabilities of the corporation
business or extend its operations in the Philippines. as of the date not exceeding one (1) year
An exporter in one country may export its products immediately prior to the filing of the
to many foreign importing countries without application.
performing in the importing countries specific
commercial acts that would constitute doing 5. An agreement or stipulation stating the
business in the importing countries. The mere act of designated resident agent who will receive
exporting from one’s own country, without doing summons and other legal processes for the
any specific commercial act within the territory of corporation together with a Special Power of
the importing country, cannot be deemed as doing Attorney;
business in the importing country. The importing 6. An agreement that if it ceases to transact
country does not require jurisdiction over the business or if there is no more resident agent,
foreign exporter who has not yet performed any summons shall then be served through SEC; and
specific commercial act within the territory of the 7. Deposit securities for the benefit of present and
importing country. Without jurisdiction over the future creditors, within 60 days after the
foreign exporter, the importing country cannot issuance of license.
compel the foreign exporter to secure a license to do NOTE: Foreign banking, financial and insurance
business in the importing country (Cargill, Inc., v. corporations shall, in addition to the above
Intra Strata Assurance Corp., G.R. No. 168266, March requirements, comply with the provisions of
15, 2010). existing laws applicable to them.

Requisites for issuance of a license The AOI and by-laws of a licensed and registered
foreign corporation is valid despite the fact that
The foreign corporation must submit to SEC the said AOI and by-laws are not approved by SEC
following:
Since the SEC will grant a license only when the
1. Copy of its articles of incorporation and by- foreign corporation has complied with all the
laws, certified in accordance with law and their requirements of law, it follows that when it decides
translation to an official language of the to issue such license, it is satisfied that the
Philippines, if necessary; applicant's by-laws, among the other documents,
2. The application, which shall be under oath.; meet the legal requirements. This, in effect, is an
3. Attached to the application for license shall be a approval of the foreign corporation’s by-laws
duly executed certificate under oath by the (Citibank v. Chua, G.R. no. 102300, March 17, 1993).
authorized official or officials of the jurisdiction
of its incorporation, attesting to the fact that: Resident Agent
a. The laws of the country or state of the
applicant allow Filipino citizens and 1. An individual, who must be of good moral
corporations to do business therein. character and of sound financial standing,
residing in the Philippines; or
NOTE: This oath of reciprocity is one of 2. A domestic corporation lawfully transacting
the requirements to secure a license business in the Philippines (CC, Sec. 127).

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A resident agent may be either an individual SEC requires the submission of:
residing in the Philippines or a domestic
corporation lawfully transacting business in the 1. A duly authenticated copy of board resolution
Philippines: Provided, That an individual resident or a certification from the authorized officer of
agent must be of good moral character and of sound the company formally revoking his
financial standing: Provided, further, That in case appointment as a resident agent of the
of a domestic corporation who will act as a corporation; and
resident agent, it must likewise be of sound 2. Accompanied by a duly authenticated written
financial standing and must show proof that it is power of attorney designating the substitute or
in good standing as certified by the Commission. the new resident agent.
(RCC, Sec. 144)
NOTE: The appointment of a resident agent of a
Purpose of appointing a resident agent foreign corporation is revocable at any time at the
instance of the corporation (SEC Opinion, Sept. 4,
The appointment of a resident agent is required for 1990).
the purpose of accepting and receiving, on behalf of
the foreign corporation: Duty of the resident agent in case it changes its
address
1. Notice affecting the corporation pending the
establishment of its local office and It shall be his or its duty to immediately notify in
2. Summons and other legal processes in all writing the SEC of the new address (CC, Sec. 128).
proceedings for or against the corporation.
Instances when service of summons or other
Effect of service of summons and notices to the legal processes made upon the SEC instead of a
resident agent resident agent

Service upon any agent of a foreign corporation, 1. If a foreign corporation, previously granted a
whether or not engaged in business in the license, ceases to transact business in the
Philippines, constitutes personal service upon the Philippines.
corporation (CC, Sec. 128; Facilities Management 2. A foreign corporation without any resident
Corp. v. Dela Rosa, G.R. No. L-38649, March 26, 1979). agent in the Philippines on whom any summons
or other legal processes may be served (CC, Sec.
As a condition to the issuance of the license for a 128).
foreign corporation to transact business in the
Philippines, such corporation shall file with the Effect of service made upon the SEC
Commission a written power of attorney
designating a person who must be a resident of Such service made upon the SEC shall have the same
the Philippines, on whom summons and other force and effect as if made upon the duly authorized
legal processes may be served in all actions or officers of the corporation at its home office (CC, Sec.
other legal proceedings against such 128).
corporation, and consenting that service upon such
resident agent shall be admitted and held as valid as Whenever such service shall be made upon the SEC,
if served upon the duly authorized officers of the it must, within 10 days thereafter, transmit by mail
foreign corporation at its home office. (RCC, Sec. a copy of such summons or other legal process to the
145) corporation at its home or principal office. The
sending of such copy by the Commission shall be a
Resident agent cannot sign the certificate of necessary part of and shall complete such service.
non-forum shopping
PERSONALITY TO SUE
While a resident agent may be aware of the actions
filed against the principal, he may not be aware of GR: Only foreign corporations that have been issued
the actions initiated by the principal, therefore he a license to operate a business in the Philippines
cannot sign the certificate of non-forum shopping have the personality to sue (CC, Sec.133).
that is a requirement for filing of an initiatory
pleading in court (Expert Travel & Tours Inc. v. CA, No foreign corporation transacting business in the
G.R. No. 152392, May 26, 2005). Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
Replacement of a resident agent in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such

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corporation may be sued or proceeded against Philippines (Columbia Pictures v. CA, G.R. No.
before Philippine courts or administrative tribunals 110318, August 28, 1996).
on any valid cause of action recognized under
Philippine laws. (RCC, Sec. 150) A foreign corporation, although not licensed to do
business in the Philippines, may seek recognition
XPN: Under the rule on estoppel, a party is estopped and enforcement of the foreign arbitral award in
to challenge the personality of a foreign corporation accordance with the provisions of the Alternative
to sue, even if it has no license, after having Dispute Resolution Act of 2004. A foreign
acknowledged the same by entering to a contract corporation‘s capacity to sue in the Philippines is
with it. not material insofar as the recognition and
enforcement of a foreign arbitral award is
One who has dealt with a corporation of foreign concerned (Tuna Processing Inc., v. Philippine
origin as a corporate entity is estopped to deny its Kingford Inc., G.R. No. 185582, February 29, 2012).
corporate existence.
SUABILITY OF FOREIGN CORPORATIONS
A foreign corporation which is not licensed to do
business in the Philippines is not absolutely A foreign corporation, which was granted a
incapacitated from filing a suit in local courts license to transact business in the Philippines, is
suable before local courts or administrative
Only when that foreign corporation is “transacting” agencies
or “doing business” in the country will a license be
necessary before it can institute suits. It may, It is suable since any foreign corporation lawfully
however, bring suits on isolated business doing business in the Philippines shall be bound by
transactions, which is not prohibited under all laws, rules and regulations applicable to
Philippine law. Thus, a foreign insurance company domestic corporations of the same class, save and
may sue in Philippine courts upon the marine except:
insurance policies issued by it abroad to cover 1. Such only as provided for the creation,
international-bound cargoes shipped by a formation, organization or dissolution of the
Philippine carrier, even if it has no license to do corporations or
business in this country. It is the act of engaging in Those which fix the relations, liabilities,
business without the prescribed license which bars responsibilities, or duties of stockholders, members
a foreign corporation from access to our courts or officers of corporations to each other or to the
(Aboitiz Shipping Corp. vs. Insurance Co. of NA, G.R. corporation (CC, Sec. 129). (RCC, Sec. 146)
No. 168402, August 6, 2008, in Divina, 2010).
NOTE: Matters relating to the organization or
The obtainment of a license prescribed by the internal affairs of the corporation are governed by
Corporation Code is not a condition precedent to the the laws of the home or incorporating State unless
maintenance of any kind of action in Philippine they offend any public policy of the Philippines.
courts by a foreign corporation. However, no
foreign corporation shall be permitted to transact A foreign corporation doing business in the
business in the Philippines, as this phrase is Philippines without license may be sued in the
understood under the Corporation Code, unless it country
shall have the license required by law, and until it While an unlicensed foreign corporation doing
complies with the law in transacting business here, business in the country cannot maintain any action,
it shall not be permitted to maintain any suit in local said corporation can be sued in the country, under
courts. As thus interpreted, any foreign corporation the doctrine of quasi-estoppel by acceptance of
not doing business in the Philippines may maintain benefits. It shall not be allowed to invoke its lack of
an action in our courts upon any cause of action, license to impugn the jurisdiction of the courts
provided that the subject matter and the defendant (Marubeni Nedeland BV v. Tensuan, G.R. No. 61950,
are within the jurisdiction of the court. It is not the September 28, 1990; SEC Opinion, Jan. 10, 1995).
absence of the prescribed license but "doing
business" in the Philippines without such license INSTANCES WHERE AN UNLICENSED FOREIGN
which debars the foreign corporation from access to CORPORATION BE ALLOWED TO SUE
our courts. In other words, although a foreign
corporation is without license to transact business 1. Isolated transactions.
in the Philippines, it does not follow that it has no 2. A license subsequently granted enables the
capacity to bring an action. Such license is not foreign corporation to sue on contracts
necessary if it is not engaged in business in the executed before the grant of the license.

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3. In an action for infringement of patent or other In its complaint, Surecomp alleged that it is a
intellectual property rights, provided that the foreign corporation not doing business in
country of the foreign corporation is a party to the Philippines and is suing on an isolated
the Paris Convention. transaction. Pursuant to the agreement, it
4. If the foreign corporation is co-plaintiff with a installed the System in ABC’s computers for a
domestic corporation and the domestic consideration of US$298,000.00 as license fee.
corporation is the one who instituted the suit in Global filed a motion to dismiss on the ground
the Philippines; -or that Surecomp had no capacity to sue because it
5. By reason of the doctrine of estoppel. was doing business in the Philippines without a
license. Is Global estopped from questioning
Isolated transaction Surecomp’s capacity to sue?

The Court has not construed the term “isolated A: YES, Global is estopped. As a rule, unlicensed
transaction” to literally mean “one” or a mere single foreign non-resident corporations doing business in
act. The phrase “isolated transaction” has a definite the Philippines cannot file suits in the Philippines.
and fixed meaning, i.e., a transaction or series of This is mandated under Section 133 of the
transaction set apart from the common business of Corporation Code. A corporation has a legal status
a foreign enterprise in the sense that there is no only within the state or territory in which it was
intention to engage in progressive pursuit of the organized. For this reason, a corporation organized
purpose and object of the business organization in another country has no personality to file suits in
(Lorenzo Shipping Corp., v. Chubb and Sons, G.R. No. the Philippines. In order to subject a foreign
147724, June 8, 2004). corporation doing business in the country to the
jurisdiction of our courts, it must acquire a license
Q: May a foreign corporation not engaged in from the Securities and Exchange Commission and
business in the Philippines and a national of a appoint an agent for service of process. Without
country which is a party to any convention, such license, it cannot institute a suit in
treaty, or agreement relating to intellectual the Philippines.
property rights or the repression of unfair
competition, to which the Philippines is also a The exception to this rule is the doctrine of estoppel.
party or extend reciprocal rights sue in Global is estopped from challenging Surecomp’s
trademark or service mark enforcement action? capacity to sue. A foreign corporation doing
business in the Philippines without license may sue
A: YES. The foreign corporation mentioned above in Philippine courts a Filipino citizen or a Philippine
may sue in trademark or service mark enforcement entity that had contracted with and benefited from
action. This is in accordance with Section 160, in it. A party is estopped from challenging the
relation to Section 3 of R.A. No. 8393, The personality of a corporation after having
Intellectual Property Code (Sehwani Inc. v. In-n-Out acknowledged the same by entering into a contract
Burger, G.R. No. 171053, Oct. 15, 2007). with it. The principle is applied to prevent a person
contracting with a foreign corporation from later
Q: Surecomp, a foreign corporation duly taking advantage of its non-compliance with the
organized and existing under the laws of the statutes, chiefly in cases where such person has
Netherlands, entered into a software license received the benefits of the contract (Global
agreement with ABC, a domestic corporation, Business Holdings, Inc., v. Surecomp Software, B.V.,
for the use of its IMEX Software System (System) G.R. No. 173463, October 13, 2010).
in the bank’s computer system for a period of
twenty (20) years. ABC merged with Global GROUNDS FOR REVOCATION OF LICENSE
Business Holdings, Inc. (Global), with Global as
the surviving corporation. Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to
When Global took over the operations of ABC, it transact business in the Philippines may be revoked
found the System unworkable for its operations, or suspended by the SEC upon any of the following
and informed Surecomp of its decision to grounds:
discontinue with the agreement and to stop
further payments thereon. Consequently, for 1. Failure to file its annual report or pay any fees
failure of Global to pay its obligations under the as required by the Code;
agreement despite demands, Surecomp filed a 2. Failure to appoint and maintain a resident
complaint for breach of contract with damages agent in the Philippines;
before the RTC. 3. Failure, after change of its resident agent or of
his address, to submit to the Securities and

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Exchange Commission a statement of such Withdrawal by foreign corporation licensed to
change; transact business in the Philippines from said
4. Failure to submit to the SEC an authenticated license
copy of any amendment to its articles of
incorporation or by-laws or of any articles of A foreign corporation licensed to transact business
merger or consolidation within the time in the Philippines may be allowed to withdraw from
prescribed by the Corporation Code; the Philippines by filing a petition for withdrawal of
5. A misrepresentation of any material matter in license. However, no certificate of withdrawal shall
any application, report, affidavit or other be issued by the SEC unless all the following
document submitted by such corporation requirements are met:
pursuant to this Title;
6. Failure to pay any and all taxes, imposts, 1. All claims which have accrued in the Philippines
assessments or penalties, if any, lawfully due to have been paid, compromised or settled;
the Philippine Government or any of its 2. All taxes, imposts, assessments, and penalties, if
agencies or political subdivisions; any, lawfully due to the Philippine Government
7. Transacting business in the Philippines outside or any of its agencies or political subdivisions
of the purpose or purposes for which such have been paid; and
corporation is authorized under its license; 3. The petition for withdrawal of license has been
8. Transacting business in the Philippines as agent published once a week for three (3) consecutive
of or acting for and in behalf of any foreign weeks in a newspaper of general circulation in
corporation or entity not duly licensed to do the Philippines (CC, Sec. 136). (Now Sec. 153
business in the Philippines; or under the RCC)
9. Any other ground as would render it unfit to
transact business in the Philippines (CC, Sec
134). (Now Sec. 151 of the RCC) MERGERS
AND CONSOLIDATIONS
A certificate of revocation shall be issued by the SEC.
A copy thereof shall be furnished to the appropriate
government agency in the proper cases. The SEC DEFINITION AND CONCEPT
shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation Common forms of corporate combinations
accompanied by a copy of the certificate of
revocation (CC, Sec. 135). 1. Sale of assets – One corporation sells all or
substantially all of its assets to another. Such
Effects of revocation of license of a foreign sale, usually, though not necessarily made in the
corporation course of the dissolution of the vendor
corporation.
The following are the effects of such revocation: 2. Lease of assets – A corporation, without being
dissolved, leases its property to another
1. The revocation cannot affect the validity of corporation for which the lessor merely
contracts entered into by it before the receives rental paid by the lessee. This is similar
revocation nor its right to maintain an action to to the sale of assets, except that under a lease,
enforce them(Billmeyer Lumber Co. vs. nothing passes, except the right to use the
Merchants’ Coal Co., 69 SE 1073); property leased.
2. The revocation shall not affect the validity of 3. Sale of stock – The purpose of a holding
contracts entered into by a foreign corporation corporation is to acquire a sufficient amount of
after revocation. The only effect of the the stock of another corporation for the
revocation is that the foreign corporation purpose of acquiring control. The acquiring
cannot seek redress from the courts to enforce corporation is called the parent/ holding
such contracts. It simply removes its legal company. The corporation whose stocks were
standing to sue (SEC Opinion No. 10-07, Feb. 5, acquired is the subsidiary.
2010); and 4. Merger – One where a corporation absorbs
3. Innocent parties can enforce such contracts another corporation and remains in existence
whether the same are considered valid or not. while others are dissolved.
However, the foreign corporation can no longer 5. Consolidation - One where a new corporation is
transact business in the Philippines, and it created and consolidating corporations are
cannot maintain any suit or action in any court extinguished.
or administrative agency (CC, Sec. 133).
Merger

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The seller in good faith Notwithstanding the
Two or more corporations unite, one corporation is authorized to stock sale, the
which retains its corporate existence absorbing or dismiss the affected corporation continues
merging in itself the other which disappears as a employees, but is liable to be the employer of
separate corporation. It is the absorption of one for the payment of its people and
corporation by another which survives (De Leon, separation pay under continues to be liable
2010). the law. The buyer in for the payment of
good faith, on the other their just claims.
Merger vs. De Facto Merger hand, is not obliged to Furthermore, the
absorb the employees corporation or its new
De Facto Merger affected by the sale, majority shareholders
Merger
(2016 Bar) nor is it liable for the are not entitled to
Merger is a re- payment of their lawfully dismiss
organization of two claims. The most that it corporate employees
or more corporations may do, for reasons of absent a just or
that results in their public policy and social authorized cause. (SME
consolidating into a justice, is to give Bank, Inc., et al., v.
single corporation, preference to the Gaspar, et al., G.R. Nos.
which is one of the qualified separated 184517 & 186641,
constituent personnel of the selling October 8, 2013)
corporations, one firm.
Can be pursued by one
disappearing or
corporation acquiring all
dissolving and the Q: One of the stipulations in the sale of SME Bank
or substantially all of the
other surviving. To to Abelardo Samson was that Agustin and De
properties of another
put it another way, Guzman, the majority stockholders and
corporation in exchange
merger is the corporate directors of SME, shall
of shares of stock of the
absorption of one or terminate/retire its employees. At the behest of
acquiring corporation.
more corporations by Samson’s wife, SME’s general manager urged its
The acquiring
another existing employees, respondents Gaspar, et al., to tender
corporation would end
corporation, which their resignations on the promise that they will
up with the business
retains its identity be rehired. The majority shares of SME were
enterprise of the target
and takes over the then sold to the Sps. Samson, and SME did not
corporation; whereas,
rights, privileges, rehire De Guzman, et al.
the target corporation
franchises,
would end up with
properties, claims, Gaspar, et al. filed a complaint for illegal
basically its only
liabilities and dismissal against SME, Samson, Agustin and De
remaining assets being
obligations of the Guzman. The LA ruled that the labor buyer of an
the shares of stock of the
absorbed enterprise is not bound to absorb its employees,
acquiring corporation.
corporation(s). The unless there is an express stipulation to the
absorbing contrary. The NLRC found that there was only a
corporation mere transfer of shares – and therefore, a mere
continues its change of management – from Agustin and De
existence while the Guzman to the Samson Group. As the change of
life or lives of the management was not a valid ground to
other corporation(s) terminate respondent bank employees, the
is or are terminated. NLRC ruled that they had indeed been illegally
dismissed.
(Bank of Commerce v. Radio Philippines Network, Was there a transfer of business such that
Inc., et al., G.R. No. 195615, April 21, 2014) Samson, being an innocent transferee, has no
obligation to retain the employment of Gaspar,
Asset sale vs. Stock sale et al. ?

ASSET SALE STOCK SALE A: NO. There was no transfer of the business
The individual or establishment to speak of, but merely a change in
The corporate entity corporate the new majority shareholders of the corporation.
sells all or substantially shareholders sell a
all of its assets to controlling block of There are two types of corporate acquisitions: asset
another entity. stock to new or sales and stock sales. In contrast with asset sales,
existing shareholders. in which the assets of the selling corporation are

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transferred to another entity, the transaction in judicial actions which were covered by a BSP-
stock sales takes place at the shareholder level. mandated escrow fund of P50 million. Shortly
Because the corporation possesses a personality after, the Supreme Court, in TRB v. RPN, ordered
separate and distinct from that of its shareholders, TRB to pay respondents Radio Philippines
a shift in the composition of its shareholders will not Network, Intercontinental Broadcasting
affect its existence and continuity. Thus, Corporation, and Banahaw Broadcasting
notwithstanding the stock sale, the corporation Corporation (RPN, et al.) actual damages with
continues to be the employer of its people and legal interest. RPN, et al. filed a motion for
continues to be liable for the payment of their just execution against TRB before the RTC. But
claims. Furthermore, the corporation or its new rather than pursue a levy in execution of the
majority shareholders are not entitled to lawfully corresponding amounts on escrow, RPN, et al.
dismiss corporate employees absent a just or filed a Supplemental Motion for Execution
authorized cause. where they described TRB as “now BOC” based
on the assumption that TRB had been merged
In the case at bar, the Letter Agreements show that into BOC.
their main object is the acquisition by the Samson
Group of 86.365% of the shares of stock of SME BOC opposed RPN, et al.’s motion and denied
Bank. Hence, this case involves a stock sale, that there was a merger between itself and TRB.
whereby the transferee acquires the controlling The RTC granted the writ of execution to cover
shares of stock of the corporation. Thus, following all assets of TRB, including those subject of the P
the rule in stock sales, respondent employees may & A agreement. The RTC held that the P &A
not be dismissed except for just or authorized agreement was a mere tool to effectuate merger.
causes under the Labor Code.
BOC appealed to the CA, which affirmed with
The transfer only involved a change in the equity modification the RTC decision, by declaring that
composition of the corporation. To reiterate, the no merger existed between BOC and TRB and
employees are not transferred to a new employer, deleting the phrase that the P & A agreement
but remain with the original corporate employer, was a farce or a mere tool to effectuate a merger
notwithstanding an equity shift in its majority or consolidation between TRB and BOC. The CA
shareholders. This being so, the employment status limited the execution to TRB’s properties found
of the employees should not have been affected by in BOC’s possession.
the stock sale. A change in the equity composition of
the corporate shareholders should not result in the The RTC issued an alias writ of execution against
automatic termination of the employment of the BOC, and BOC sought reconsideration of the
corporation’s employees. Neither should it give the same considering that the CA declared that no
new majority shareholders the right to legally merger existed between BOC and TRB. The RTC
dismiss the corporation’s employees, absent a just denied BOC’s motion.
or authorized cause.
a. Was there a merger between BOC and TRB?
It is thus erroneous on the part of the corporation to b. Should BOC be considered as RPN, et al.’s
consider the employees as terminated from their judgment debtor?
employment when the sole reason for so doing is a
change of management by reason of the stock sale. A:
The conformity of the employees to the a. [Link] happened is that TRB sold and BOC
corporation’s act of considering them as terminated purchased identified recorded assets of TRB in
and their subsequent acceptance of separation pay consideration of BOC’s assumption of identified
does not remove the taint of illegal dismissal. recorded liabilities of TRB including booked
Acceptance of separation pay does not bar the contingent accounts. There is no law that
employees from subsequently contesting the prohibits this kind of transaction especially
legality of their dismissal, nor does it estop them when it is done openly and with appropriate
from challenging the legality of their separation government approval. In a strict sense, no
from the service (SME Bank, Inc., et al., v. Gaspar, et merger or consolidation took place as the
al., G.R. Nos. 184517 & 186641, October 8, 2013). records do not show any plan or articles of
merger or consolidation.
Q: Petitioner Bank of Commerce (BOC) and
Traders Royal Bank (TRB) executed a Purchase In his book, Philippine Corporate Law, Dean
and Assumption agreement, where the former Cesar Villanueva explained that under the
acquired the latter’s specified assets and Corporation Code, “a de facto merger can be
liabilities, excluding liabilities arising from pursued by one corporation acquiring all or

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substantially all of the properties of another Since there had been no merger, BOC cannot be
corporation in exchange of shares of stock of considered as TRB’s successor-in-interest and
the acquiring corporation. The acquiring against which the Court’s Decision in TRB v. RPN
corporation would end up with the business may be enforced. BOC did not hold the former
enterprise of the target corporation; whereas, TRBs assets in trust for it as to subject them to
the target corporation would end up with garnishment for the satisfaction of the latter’s
basically its only remaining assets being the liabilities to RPN, et al. BOC bought and
shares of stock of the acquiring corporation.” acquired those assets and thus, became their
(Emphasis supplied) absolute owner.

No de facto merger took place in the present The enforcement, therefore, of the decision in
case simply because the TRB owners did not get the main case should not include the assets and
an equivalent value in BOC shares of stock in properties that BOC acquired from TRB. These
exchange for the bank’s assets and liabilities. have ceased to be assets and properties of TRB
BOC and TRB agreed with BSP’s approval to under the terms of the BSP-approved P & A
exclude from the sale the TRB’s contingent Agreement between them. They are not TRB
judicial liabilities, including those owing to assets and properties in the possession of BOC
RPN, et al. (Bank of Commerce v. Radio Philippines
Network, Inc., et al., G.R. No. 195615, April 21,
The Bureau of Internal Revenue (BIR) treated 2014).
the transaction between the two banks purely
as a sale of specified assets and liabilities when Consolidation
it rendered its opinion on the tax consequences
of the transaction given that there is a Two or more corporations unite, giving rise to a new
difference in tax treatment between a sale and corporate body and dissolving the constituent
a merger or consolidation. corporations which cease to exist as separate
corporations (De Leon, 2010).
b. NO. First, BOC agreed to assume those liabilities
of TRB that are specified in their P & A Merger [Link]
Agreement. That agreement specifically
excluded TRB’s contingent liabilities that the BASIS CONSOLIDATIO
MERGER
latter might have arising from pending N
litigations in court, including the claims of RPN, One where a
et al. corporation
absorbs One where a new
Second, as already pointed out above, the sale another corporation is
did not amount to merger or de facto merger of corporation created and
Bancommerce and TRB since the elements Definition and remains consolidating
required of both were not present. in existence corporations are
while others extinguished. (CC,
Third, the evidence in this case fails to show that are Sec. 76)
BOC was a mere continuation of TRB. TRB dissolved.
retained its separate and distinct identity after (CC, Sec. 76)
the purchase. Although it subsequently changed Consequent All of the
its name to Traders Royal Holding’s, Inc. such dissolution constituent
change did not result in its dissolution. All consolidated
of a corporation
corporations are
corporation s involved
Fourth, to protect contingent claims, the BSP dissolved without
or are
directed BOC and TRB to put up P50 million in exception
corporation dissolved
escrow with another bank. It was the BSP, not s except one
BOC that fixed the amount of the escrow. Consequent
Consequently, it cannot be said that the latter No new A new
creation of a
bank acted in bad faith with respect to the corporation corporation
new
excluded liabilities. They did not enter into the is created emerges
corporation
P & A Agreement to enable TRB to escape from Acquisition The All assets,
its liability to creditors with pending court of Assets, surviving liabilities, and
cases. Liabilities, corporation capital stock of all
Capital acquires all consolidated
Stock the assets, corporations are

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liabilities, transferred to the transferor corporation. Given that the transferee
and capital new corporation corporation acquired not only the assets but also
stock of all the business of the transferor corporation, then the
constituent liabilities of the latter are inevitably assigned to the
corporation former. Section 40 refers to the sale, lease, exchange
s or disposition of all or substantially all of the
corporation's assets, including its goodwill. The sale
A partnership cannot merge or to consolidate under this provision does not contemplate an
with a corporation ordinary sale of all corporate assets; the transfer
must be of such degree that the transferor
Only corporations can merge or consolidate into a corporation is rendered incapable of continuing its
single corporation. Hence, a partnership may NOT business or its corporate purpose.
be allowed to merge with a corporation but the
partnership may transfer all its assets and liabilities The purpose of the business-enterprise transfer is
to the corporation which will issue its shares of to protect the creditors of the business by allowing
stock to be distributed to the partners in proportion them a remedy against the new owner of the assets
to their respective interest in the partnership, and business enterprise. Otherwise, creditors
provided the partnership shall be dissolved in would be left “holding the bag,” because they may
accordance with the Civil Code (De Leon, 2010, citing not be able to recover from the transferor who has
SEC Opinion, Jan 3, 1984). “disappeared with the loot,” or against the
transferee who can claim that he is a purchaser in
Q: Where one corporation sells or otherwise good faith and for value. Based on the foregoing, as
transfers all of its assets to another corporation, the exception of the Nell doctrine relates to the
is the latter liable for the debts and liabilities of protection of the creditors of the transferor
the transferor? corporation, and does not depend on any deceit
committed by the transferee corporation, then
A: GR: NO. fraud is certainly not an element of the business
enterprise doctrine. Indeed, the transferee
XPNs: corporation may inherit the liabilities of the
1. Where the purchaser expressly or impliedly transferor despite the lack of fraud due to the
agrees to assume such debts; continuity of the latter’s business (Y-I Leisure
2. Where the transaction amounts to a Philippines, Inc. v. Yu, G.R. No. 207161, September 18,
consolidation or merger of the corporations; 2015).
3. Where the purchasing corporation is merely a
continuation of the selling corporation; and Q: E Co. sold its assets to M Inc. after complying
4. Where the transaction is entered into with the requirements of the Bulk Sales Law.
fraudulently to escape liability for such debts Subsequently, one of the creditors of E Co. tried
(Edward J. Nell Co. vs. Pacific Farms, Inc., G.R. No. to collect the amount due it, but found out that E
L-20850, November 29, 1965). Co. has no more assets left. The creditors sued M
Inc. on the theory that M Inc. is a mere alter ego
NOTE: The Nell Doctrine states the general rule of E Co. Will the suit prosper? (1996 Bar)
that the transfer of all the assets of a corporation to
another shall not render the latter liable to the A: NO. The suit will not prosper. The sale by E Co. of
liabilities of the transferor. If any of the above-cited its assets to M Inc. did not result in the transfer of
exceptions are present, then the transferee liabilities of the latter to, nor in the assumption
corporation shall assume the liabilities of the therefore by, the former. The facts given do not
transferor. (2017 Bar) indicate that such transfer or assumption took place
or was stipulated upon by the parties in their
Business- Enterprise Transfer agreement. Furthermore, the sale by E Co. of its
assets is a sale of its property. It does not involve the
The transferee corporation’s interest goes beyond sale of the shares of stock of the corporation
the assets of the transferor’s assets and its desires belonging to its stockholders. There is therefore no
to acquire the latter’s business enterprise, including merger or consolidation that took place. E Co.
its goodwill. continues to exist and remains liable to the creditor.

Section 40 suitably reflects the business-enterprise Constituent Corporation vs. Consolidated

transfer under the exception of the Nell Doctrine Corporation
because the purchasing or transferee corporation
necessarily continued the business of the selling or

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Constituent Consolidated Any amendment may be made, provided such
Corporation Corporation amendment is approved by majority vote of the
One of the parties to a A completely new respective BOD / BOT of all the constituent
merger or corporation formed corporations and ratified by the affirmative vote of
consolidation when two or more stockholders representing at least 2/3 of the
corporations outstanding capital stock or 2/3 of the members of
combined each of the constituent corporations (CC, Sec. 77).

PLAN OF MERGER OR CONSOLIDATION NOTE: Such plan, together with any amendment,
shall be considered as the agreement of merger or
Plan of merger or consolidation consolidation.
Appraisal right is available to a dissenting
The plan of merger or consolidation is a plan stockholder to a plan of merger or consolidation
created by the representatives of the constituent
corporations, providing for the details of such Any dissenting stockholder in stock corporations
merger. may exercise his appraisal right in accordance with
this Code: Provided, that if after the approval by the
Contents of a plan of merger or consolidation stockholders of such plan, the BOD should decide to
abandon the plan, the appraisal right shall be
The BOD/ BOT of each corporation party to the extinguished (CC, Sec. 77).
merger or consolidation must set forth the following
in their plan of merger or consolidation: ARTICLES OF MERGER OR CONSOLIDATION

1. The names of the corporations proposing to After approval of the plan of merger or
merge or consolidate, hereinafter referred to as consolidation, an article of merger or consolidation
the constituent corporations; is executed by each of the constituent corporations
2. The terms of the merger or consolidation and to be signed by the president or vice-president of
the mode of carrying the same into effect; the each corporation and signed by their secretary
3. A statement of the changes, if any, in the AOI of or assistant secretary setting forth:
the surviving corporation in case of a merger;
and, with respect to the consolidated 1. The plan of the merger or the plan of
corporation in case of consolidation, all the consolidation;
statements required to be set forth in the AOI 2. As to stock corporations, the number of shares
for corporations organized under the CC; and outstanding, or in the case of non-stock
4. Such other provisions with respect to the corporations, the number of members; and
proposed merger or consolidation as are 3. As to each corporation, the number of shares or
deemed necessary or desirable (CC, Sec. 76). members voting for and against such plan,
respectively (CC, Sec. 78).
Approvals required for an effective plan of
merger or consolidation After the approval by the stockholders or members
as required by the preceding section, articles of
The plan of merger or consolidation must be merger or articles of consolidation shall be executed
approved by: by each of the constituent corporations, to be signed
by the president or vice president and certified by
1. Majority vote of each of the BOD/ BOT of the the secretary or assistant secretary of each
constituent corporation; and corporation setting forth:
2. Submitted for approval by the stockholders or
members of each of such corporations at (a) The plan of the merger or the plan of
separate corporate meetings duly called for the consolidation;
purpose. The affirmative vote of the (b) As to stock corporations, the number of shares
stockholders representing at least 2/3 of the outstanding, or in the case of nonstock corporations,
outstanding capital stock of each the number of members;
corporation in the case of stock corporations (c) As to each corporation, the number of shares or
or at least 2/3 of the members in the case of members voting for or against such plan,
non-stock corporations, shall be necessary for respectively;
the approval of such plan (CC, Sec. 77). (d) The carrying amounts and fair values of the
assets and liabilities of the respective
Amendment of a plan of merger or consolidation companies as of the agreed cut-off date;

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(e) The method to be used in the merger or the Certificate of Incorporation, as the case may
consolidation of accounts of the companies; be.
(f) The provisional or pro-forma values, as 10. If, upon investigation, the SEC has reason/s to
merged or consolidated, using the accounting believe that the proposed merger or
method; and consolidation is contrary to or inconsistent with
(g) Such other information as may be prescribed the Corporation Code or other existing laws, it
by the Commission. (RCC, Sec. 77) shall set a hearing to give the corporations the
opportunity to be heard and written notice of
PROCEDURE said hearing shall be given to each constituent
corporation at least two weeks prior to the said
1. The Board of each corporation shall draw up a hearing (CC, Secs. 76-79).
plan of merger or consolidation.
2. The plan of merger or consolidation shall be EFFECTIVITY
approved by majority vote of each board of the
concerned corporations at separate meetings. The merger or consolidation shall become effective
3. The plan of merger or consolidation shall be upon issuance by the SEC of the certificate of merger
submitted for approval by the stockholders or and consolidation.
members of each such corporation at separate
corporate meetings duly called for the purpose. In the case of merger or consolidation of banks or
Notice should be given to all stockholders or banking institutions, building and loan associations,
members at least two (2) weeks prior to date of trust companies, insurance companies, public
meeting, either personally or by registered utilities, educational institutions and other special
mail. corporations governed by special laws, the
4. Affirmative vote of 2/3 of the outstanding favorable recommendation of the appropriate
capital stock in case of stock corporations, or government agency shall first be obtained (CC, Sec.
2/3 of the members of a non-stock corporation 79).
shall be required.
5. Dissenting stockholders may exercise the right The articles of merger or of consolidation, signed
of appraisal. But if the Board abandons the plan and certified as required by this Code, shall be
to merge or consolidate, such right is submitted to the Commission for its approval:
extinguished. Provided, That in the case of merger or
6. The plan may still be amended before the same consolidation of banks or banking institutions,
is filed with the SEC; however, any amendment loan associations, trust companies, insurance
to the plan must be approved by the same votes companies, public utilities, educational
of the board members of trustees and institutions, and other special corporations
stockholders or members required for the governed by special laws, the favorable
original plan. recommendation of the appropriate government
7. After such approval, Articles of Merger or agency shall first be obtained. If the Commission is
Articles of Consolidation shall be executed by satisfied that the merger or consolidation of the
each of the constituent corporations, signed by corporations concerned is consistent with the
president or VP and certified by secretary or provisions of this Code and existing laws, it shall
assistant secretary, setting forth: issue a certificate approving the articles and plan of
a. Plan of merger or consolidation; merger or of consolidation, at which time the
b. In stock corporation, the number of shares merger or consolidation shall be effective. If, upon
outstanding; in non-stock, the number of investigation, the Commission has reason to believe
members; and that the proposed merger or consolidation is
c. As to each corporation, number of shares or contrary to or inconsistent with the provisions of
members voting for and against such plan, this Code or existing laws, it shall set a hearing to
respectively. give the corporations concerned the opportunity to
8. Four copies of the Articles of Merger or be heard. Written notice of the date, time, and place
Consolidation shall be submitted to the SEC for of hearing shall be given to each constituent
approval. Special corporations like banks, corporation at least two (2) weeks before said
insurance companies, building and loan hearing. The Commission shall thereafter, proceed
associations, etc., need the prior approval of the as provided in this Code. (RCC, Sec. 78)
respective government agency concerned.
9. If SEC is satisfied that the merger or Q: FISLAI and DSLAI entered into a merger, with
consolidation is not inconsistent with the DSLAI as the surviving corporation. The articles
provisions of the Corporation Code and existing of merger were not registered with the SEC due
laws, it shall issue the Certificate of Merger or to incomplete documentation. DSLAI changed its

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corporate name to MSLAI. The business of EFFECTS AND LIMITATIONS
MSLAI, however, failed.
Effects of a merger or consolidation
Prior to the closure of MSLAI, Remedios Uy filed
an action for collection of sum of money against 1. The constituent corporations shall become a
FISLAI. The RTC ruled in favor of Uy and hence, single corporation which:
six (6) parcels of land owned by FISLAI were sold a. In case of merger, shall be the surviving
to Willkom, the highest bidder. corporation designated in the plan of
MSLAI filed a complaint for annulment of merger.
sheriff’s sale. Willkom, et al., averred that MSLAI b. In case of consolidation, shall be the
had no cause of action against them or the right consolidated corporation designated in the
to recover the subject properties because MSLAI plan of consolidation.
is a separate and distinct entity from FISLAI.
They further contended that the “unofficial 2. The separate existence of the constituent
merger” between FISLAI and DSLAI (now MSLAI) corporations shall cease, except that of the
did not take effect considering that the merging surviving or the consolidated corporation.
companies did not comply with the formalities 3. The surviving or the consolidated corporation
and procedure for merger or consolidation as shall possess all the rights, privileges,
prescribed by the Corporation Code of immunities and powers and shall be subject to
the Philippines. Was the merger between FISLAI all the duties and liabilities of a corporation
and DSLAI (now MSLAI) valid and effective? organized under this Code.
4. The surviving or the consolidated corporation
A: NO. The merger was not valid. Merger does not shall thereupon and thereafter possess:
become effective upon the mere agreement of the a. All the rights, privileges, immunities and
constituent corporations. Since a merger or franchises of each of the constituent
consolidation involves fundamental changes in the corporations;
corporation, as well as in the rights of stockholders b. All property, real or personal, and all
and creditors, there must be an express provision of receivables due on whatever account,
law authorizing them. including subscriptions to shares and other
choses in action, and all and every other
The merger shall only be effective upon the issuance interest of, or belonging to, or due to each
of a certificate of merger by the SEC, subject to its constituent corporation.
prior determination that the merger is not
inconsistent with the Corporation Code or existing 5. These shall be deemed transferred to and
laws. vested in such surviving or consolidated
corporation without further act or deed.
In this case, it is undisputed that the articles of 6. The surviving or consolidated corporation
merger between FISLAI and DSLAI were not shall:
registered with the SEC due to incomplete a. Be responsible and liable for all the
documentation. Consequently, the SEC did not issue liabilities and obligations of each of the
the required certificate of merger. Even if it is true constituent corporations in the same
that the Monetary Board of the Central Bank of manner as if such surviving or consolidated
the Philippines recognized such merger, the fact corporation had itself incurred such
remains that no certificate was issued by the SEC. liabilities or obligations;
Such merger is still incomplete without b. Any pending claim, action or proceeding
the certification. brought by or against any of such
constituent corporations may be
The issuance of the certificate of merger is crucial prosecuted by or against the surviving or
because not only does it bear out SEC’s approval but consolidated corporation
it also marks the moment when the consequences of c. The rights of creditors or liens upon the
a merger take place. By operation of law, upon the property of any of such constituent
effectivity of the merger, the absorbed corporation corporations shall not be impaired by such
ceases to exist but its rights and properties, as well merger or consolidation (CC, Sec. 80; BPI v.
as liabilities, shall be taken and deemed transferred Lee, G.R. No. 190144, August 1, 2012).
to and vested in the surviving corporation
(Mindanao Savings and Loan Association, Inc., et al., SECTION 80
v. Edward Willkom, et al., G.R. No. 178618, October
11, 2010). Garnishment upon the surviving corporation for
the liabilities of the absorbed corporation

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Citytrust was dissolved, no winding up of its affairs NOTE: On motion for reconsideration, however, the
or liquidation of assets, privileges, powers and Supreme Court ruled that it is more in keeping with
liabilities took place. As the surviving corporation, social justice that the employees of the absorbed
BPI simply continued the combined businesses of corporation be considered employees of the
the two banks and absorbed all the rights, surviving corporation without break in the
privileges, assets, liabilities and obligations of City continuity of their employment even without
Trust, including the latter’s obligation over the express stipulation in the Articles of Merger (Bank
garnished deposits of the defendants. of the Philippine Islands v. BPI Employees Union –
Davao Chapter, supra).
Through the service of the writ of garnishment, the
garnishee becomes a “virtual party” to, or a “forced Q: Associated Banking Corporation and Citizens
intervenor” in the case and the trial court thereby Bank and Trust Company (CBTC) merged to
acquires jurisdiction to bind him to compliance with form just one banking corporation known as
all orders and processes of the trial court with a Associated Citizens Bank, the surviving
view to the complete satisfaction of the judgment of bank. The Associated Citizens Bank changed its
the court. corporate name to Associated Bank by virtue of
the Amended Articles of Incorporation.
Citytrust, therefore, upon service of the notice of
garnishment and its acknowledgment that it was in Lorenzo Sarmiento executed in favor of CBTC a
possession of defendants’ deposit accounts became promissory note. Upon maturity and despite
a “virtual party” to or “forced intervenor” in the civil repeated demands Sarmiento failed to pay the
case. As such, it became bound by the orders and amount due. Associated Bank filed a collection
processes issued by the trial court despite not suit against Sarmiento. Sarmiento contends that
having been properly impleaded therein. Associated Bank is not the proper party in
Consequently, by virtue of its merger with BPI, the interest because the promissory note was
latter, as the surviving corporation, effectively executed in favor of Associated Citizens Bank.
became the garnishee, thus the “virtual party” to the
civil case (BPI v. Lee, G.R. No. 190144, August 1, The trial court ordered Sarmiento to pay. The CA
2012). however, held that the Associated Bank had no
cause of action against Lorenzo Sarmiento Jr.,
Transfer of employees of the absorbed since said bank was not privy to the promissory
corporation to the surviving corporation. note executed by Sarmiento in favor of Citizens
Bank and Trust Company (CBTC). The court
It is contrary to public policy to declare the former ruled that the earlier merger between the two
employees of the absorbed corporation as forming banks could not have vested Associated Bank
part of its assets or liabilities that were transferred with any interest arising from the promissory
to and absorbed by the surviving corporation in the note executed in favor of CBTC after such
Articles of Merger. Assets and liabilities, in this merger.
instance, should be deemed to refer only to property
rights and obligations and do not include the May Associated Bank, the surviving corporation,
employment contracts of its personnel. A enforce the promissory note made by Sarmiento
corporation cannot unilaterally transfer its in favor of CBTC, the absorbed company, after
employees to another employer like the merger agreement had been signed?
chattel. Certainly, if the surviving corporation as an
employer had the right to choose who to retain A: YES. Associated Bank may enforce the
among the employees of the absorbed corporation, promissory note. Ordinarily, in the merger of two or
the latter employees had the concomitant right to more existing corporations, one of the combining
choose not to be absorbed by the corporation. Even corporations survives and continues the combined
though the employees of the absorbed corporation business, while the rest are dissolved and all their
had no choice or control over the merger of their rights, properties and liabilities are acquired by the
employer, they had a choice whether or not they surviving corporation. Although there is dissolution
would allow themselves to be absorbed by the of the absorbed corporations, there is no winding up
surviving corporation. Certainly nothing prevented of their affairs or liquidation of their assets, because
the employees of the absorbed corporation from the surviving corporation automatically acquires all
resigning or retiring and seeking employment their rights, privileges and powers, as well as their
elsewhere instead of going along with the proposed liabilities. All contracts of the absorbed
absorption (BPI v. BPI Employees Union – Davao corporations, regardless of the date of execution
Chapter, G.R. No. 164301, October 19, 2011). shall pertain to the surviving corporation

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(Associated Bank v. CA, G.R. No. 123793, June 29, Securities are shares, participation or interests in a
1998). corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate,
contract, instrument, whether written or electronic
SECURITIES REGULATION CODE in character.

KINDS OF SECURITIES

STATE POLICY, PURPOSE

(DO DIET)

Nature of the Securities Regulation Code (SRC) 1. Debt instruments – bonds, debentures,
notes, evidence of indebtedness, asset-
The SRC is the law that regulates securities (its backed securities.
issuance, distribution and sale) and the person who Asset-backed securities (ABS) - These are
deals with such securities. It is enacted to protect financial securities the value of which
the public from unscrupulous promoters, who stake depends on the assets underlying it. For
business or venture claims which have really no investors, ABS are alternative to investing
basis, and sell shares or interests therein to in corporate debt. An ABS is essentially the
investors. It also serves to protect investors, same thing as a mortgage-backed security,
promote investor confidence, and stabilize the except that the securities backing it are
financial markets. assets such as loans, leases, credit card
debt, a company’s receivables, royalty and
The law does not guarantee that a person who so on, and not mortgaged-based securities,
invests in securities will make money. The law only hence, the risk involved in ABS is greater.
ensures that there will be a fair and full disclosure 2. Other instruments as may in the future be
of information regarding securities so that the determined by the SEC.
investor could make an informed judgment (Divina, 3. Derivatives– options and warrants
2014).
Options– are contracts that give the buyer
State policy with regard to the SRC the right, but not the obligation, to buy or
sell an underlying security at a
1. Establish a socially-conscious free market that predetermined price called the exercise or
regulates itself. strike price, on or before a predetermined
2. Encourage widest participation of ownership in date, called the expiry date, which can only
enterprises. be extended in accordance with Exchange
3. Enhance democratization of wealth. rules (Sundiang Sr. & Aquino, 2014).
4. Promote development of the capital market.
5. Protect investors. Kinds of Options
6. Ensure full and fair disclosure about securities. a. Call option – option to buy
7. Minimze, if not totally eliminate, insider trading b. Put option – option to sell
and other fraudulent or manipulative devices c. Straddle – combination of both call and put
and practices which creates distortion in the option.
free market.
Warrants - are rights to subscribe or
The Securities Regulation Code is called a “ truth in purchase new shares or existing shares in a
securities law “ because it requires the issuer to company, on or before a predetermined
make full and fair disclosure of information about date called the expiry date, which can only
securities being sold or offered to be sold within the be extended in accordance with Exchange
Philippines and penalizes manipulative and rules. Warrants generally have a longer
fraudulent acts, devices and schemes exercise period than options.
Investments instruments – Investment
DEFINITION OF SECURITIES contracts, fractional undivided interests in
oil, gas, or other mineral rights.

Securities (1996 Bar) Investment contract – is a contract,

transaction or scheme whereby a person
invests his money in a common enterprise

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and is led to expect profits primarily from Code, Estafa under PD No. 1689, violation of the
the efforts of others. Revised Securities Act and violation of the
General Banking Act.
Howey Test
The DOJ concluded that ASHBHI, et al., are liable
For an investment contract to exist, the for violating such prohibition against the sale of
following elements must concur: unregistered securities. However, the CA
a. A contract, transaction or scheme; reversed the DOJ holding that the postdated
b. An investment of money; checks issued by ASBHI did not constitute a
c. Investment is made in a common security under the Revised Securities Act. Are
enterprise; the checks issued by ASHBHI “securities”?
d. Expectation of profits; and
e. Profits arising primarily from the effort of A: YES. The checks issued constitute securities;
others. hence, the non-registration thereof is a violation of
the Revised Securities Act. It is one thing for a
Network marketing,- a scheme adopted by corporation to issue checks to satisfy isolated
companies to get people to buy their individual obligations, and another for a
products outside the usual retail system corporation to execute an elaborate scheme where
where products are brought from the it would portray itself to the public as a pseudo-
store’s shelf and where the buyer can investment house and issue postdated checks
become a down-line seller, earning instead of stocks or traditional securities to
commissions from purchases made by new evidence the investments of its patrons. The
buyers whom he refers to the person who Revised Securities Act is geared towards the
sold the product to him, is not an maintainance of the stability of the national
investment contract. The commissions are investment market against activities such as those
incentives to down-line sellers to bring in apparently engaged in by ASBHI. ASBHI adopted
other customers. These can hardly be this scheme in an attempt to circumvent the Revised
regarded as profits from investment of Securities Act, which requires a prior license to sell
money under the Howey Test (SEC v. or deal in securities.
[Link], Inc., G.R. No. 164197,
January 25, 2012). It bears pointing out that the definition of
“securities” set forth in Section 2 of the Revised
4. Equity instruments – Shares of stock, Securities Act includes “commercial papers
certificates of interest or participation in a evidencing indebtedness of any person, financial or
profit sharing agreement, certificates of non-financial entity, irrespective of maturity,
deposit for a future subscription, issued, endorsed, sold, transferred or in any manner
proprietary or non-proprietary conveyed to another. A check is a commercial paper
membership certificates in corporations. evidencing indebtedness of any person, financial or
non-financial entity. Since the checks in this case
5. Trust instruments – Certificates of were generally rolled over to augment the creditor’s
assignments, certificates of participation, existing investment with ASBHI, they most
trust certificates, voting trust certificates or definitely take on the attributes of traditional
similar instruments [SRC, Sec. 3.1 (e)]. stocks. A different rule would open the floodgates
for a similar scheme, by companies without prior
Q: Betty Go Gabionza and other investors lent, license or authority from the SEC. This cannot be
invested or deposited money with ASBHI. For countenanced (Gabionza v. CA, G.R. No. 161057,
this, ASBHI issued two (2) postdated checks to September 12, 2008).
its lenders, one representing the principal
amount and the other covering the interest Test on determining whether or not it is a
thereon. On the maturity of the checks, the security
individual lenders renewed the loans, either Does it represent a share, participation, or interest
collecting only the interest earnings or rolling in a commercial enterprise or any profit making
over the same with the principal amounts. venture? If yes, then, it is a security. If it is a security,
then, it cannot be sold, or offered for sale or
After sometime, DBS Bank refused to pay for the distribution within the Philippines without a
checks by virtue of “stop payment” orders from registration statement duly filed with and approved
ASBHI. The series of events led to the filing of the by the SEC (Divina, 2014).
complaints by Gabionza, et al., for Estafa under
Article 315(2)(a) and (2)(d) of the Revised Penal

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Requirement before securities are sold or registration statement filed with and approved by
offered for sale or distribution within the the Securities and Exchange Commission.
Philippines
Q: Timeshare Corp. sold to Spouses Cortez one
They are required to be registered with and timeshare of Laguna de Boracay. After
approved by the SEC. Registration also includes the sometime, the SEC issued a resolution to the
disclosure to SEC of all material and relevant effect that Timeshare Corp. was without
information about the issuer of the security. Prior to authority to sell securities, like timeshares. It
the sale, the information on the securities, in such held therefore that the purchaser may exercise
form and with such substance as the SEC may the option to unilaterally rescind the purchase
prescribe, shall be made available to each agreement and receive the refund of money paid
prospective purchaser (SRC, Sec. 8.1). applies to all purchase agreements entered into
by Timeshare Corp. prior to the effectivity of the
GR: Securities must be registered with and Registration Statement. Hence, Spouses Cortez
approved by SEC. demanded their right to cancel their contract, as
it appears that Laguna de Boracay is selling said
REASON: To protect the public from fraud. shares without license or authority from the
SEC.
XPNs: The following need not be registered: Despite repeated demands, Timeshare Corp.
1. Exempt securities; and failed and refused to refund the same.
2. Securities sold in exempt transactions. Timeshare Corp. contends that its mere
registration as a corporation already authorized
XPN TO XPN: SRC provides that the resale of it to deal with unregistered timeshares. Does the
securities previously sold in an exempt transaction registration of Timeshare Corp. as a corporation
must be registered. authorize it to deal with unregistered
timeshares?
Effect of non-registration
A: NO. Mere registration as a corporation does not
The issuer would be penalized. Issuers of securities authorize it to deal with unregistered timeshares.
not registered shall be subjected to criminal, civil Corporate registration is just one of several
and administrative charges. (i.e., upon conviction, a requirements before it may deal with timeshares.
fine P50,000 to P5 M and/or imprisonment of 7-12 Prior to fulfillment of all the other requirements of
years). It carries also civil liabilities in that the Section 8, Timeshare Corp. is absolutely proscribed
purchaser can recover from the seller (i) the from dealing with unregistered timeshares. No
consideration paid with interest thereon, less the securities, except of a class exempt under the SRC or
amount of any income received on the purchased unless sold in any transaction exempt under the
securities, upon the tender of such securities, or (ii) same, shall be sold or offered for sale or distribution
damages if the purchaser no longer owns such to the public within the Philippines unless such
securities. Furthermore, the SEC may issue a cease securities shall have been registered and permitted
and desist order. to be sold as provided by the SRC (Timeshare Realty
Corporation v. Cesar Lao, G.R. No. 158941, February
Q. ABC Corp. is engaged in the pawnshop 11, 2008).
business involving cellphones, laptops and
other gadgets of value. In order to expand its Q: Petitioners filed before the RTC a
business and attract investors, it offered to any Complaint for declaration of nullity of contract
person who invests at least P100,000.00 a and sums of money with damages against
“promissory note” where it obligated itself to respondent, Citibank. They discovered that the
pay the holder a 50% return on investment securities sold to them were not registered with
withing one month. Due to the attractive offer, the Securities and Exchange Commission (SEC)
many individuals invested in the company but in violation of the "Securities Regulation Code"
not one of them was able to realize any profit (SRC). Respondent invoked Doctrine of Primary
after one month. Jurisdiction and contended the complaint
should be first filed with the SEC and not directly
Has ABC Corp. violated any law with its scheme? before the RTC. Should the complaint be
Explain. dismissed for lack of jurisdiction of the RTC?

A: YES. ABC Corp. violated the provisions of the A: NO. petitioners’ complaint constitutes a civil suit
Securities Regulation Code that prohibits sale of for declaration of nullity of contract and sums of
securities to the public, like promissory, without a money with damages, which stemmed from

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respondent’s alleged sale of unregistered securities, NOTE: Since a brokerage relationship is essentially
in violation of the various provisions of the SRC. a contract for the employment of an agent, the law
Civil suits falling under the SRC are under the on contractsgoverns the broker-principal
exclusive original jurisdiction of the regional trial relationship.
courts and hence, need not be first filed before the
SEC, unlike criminal cases wherein the latter body Registration of security market professionals
exercises primary jurisdiction. (PUA V. CITIBANK
G.R. No. 1980064, September 16, 2013) Security market professionals are required to be
registered. No broker shall sell any securities unless
Validity of the sale of shares acquired 12 months he is registered with the SEC (Revised Securities Act,
after the approval of the Registration Statement Sec. 1,) (Nicolas v. CA, et al., G.R. No. 12285, March 27,
1998).
If the person who acquired the security sued any of
the enumerated persons under Sec. 56.1 for Q: Can a stock broker without license from the
recovery of damages after the issuer has made SEC, recover management fees allegedly earned
generally available to its security holders an income from handling the securities transactions of a
statement covering a period of at least twelve (12) client?
months beginning from the effective date of the
registration statement, then the right of recovery A: NO. An unlicensed person may not recover
shall be conditioned on proof that such person who compensation for services as a broker where a
acquired the security relying upon such untrue statute or ordinance is applicable and such is of a
statement in the registration statement or relying regulatory nature.
upon the registration statement and not knowing of
such income statement, but such reliance may be EXEMPT SECURITIES
established without proof of the reading of the
registration statement by such person (SRC, Sec. (PC-RIBO)
56.2). 1. Any security issued or guaranteed by the
Government of the Philippines, or by any
Securities market professionals (persons who political subdivision or agency thereof, or by
deal with securities) any person controlled or supervised by, and
acting as an instrumentality of said
1. Broker – A person engaged in the business of government.
buying and selling securities for the account of 2. Any security issued or guaranteed by the
others (SRC, Sec.3.3). government of any Country with which the
2. Dealer– Any person who buys and sells Philippines maintains diplomatic relations, or
securities for his/her own account in the by any state, province or political subdivision
ordinary course of business (SRC, Sec. 3.4). thereof on the basis of reciprocity. Provided,
3. Associated person of a broker or dealer – He that the SEC may require compliance with the
is an employee of a broker or dealer who form and content of disclosures the
directly exercises control of supervisory Commission may prescribe.
authority, but does not include a salesman, or 3. Certificates issued by a Receiver or by a trustee
an agent, or a person, whose functions are in bankruptcy duly approved by the proper
solely clerical or ministerial (SRC, Sec. 3.5). adjudicatory body.
4. Salesman – He is a natural person, employed as 4. Any security or its derivatives the sale or
such, or as an agent, by a dealer, issuer or transfer of which, by law, is under the
broker to buy and sell securities; but for the supervision and regulation of the Office of
purpose of registration, shall not include any Insurance Commission, Housing and Land Use
employee of an issuer whose compensation is Regulatory Board, or the Bureau of Internal
not determined directly or indirectly on sales of Revenue.
securities of the issuer (SRC, Sec 3.13). 5. Any security issued by a Bank except its own
shares of stock (which serves to promote the
Obligation of the broker to his client sale of securities issued by heavily regulated
banks).
The primary obligation of the broker is to ensure his 6. Other securities as determined by the SEC by
account’s compliance with the law (Abacus rule or regulation, after public hearing (SRC, Sec.
Securities Corp. v. Ampil, G.R. No. 160922, February 9).
27, 2006).
Being an issuer of an exempt security does NOT
exempt such issuer from the requirement of

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submission of reports under the regime of full and which should be subscribed before it can be
fair disclosure. registered and duly incorporated, or its
authorized capital increased.
RATIONALE: The listed securities are exempted 10. EXchange of securities by the issuer with its
because they are either guaranteed by the existing security holders exclusively, when no
government or they are already regulated by commission or other remuneration is paid or
another government agency or body other than the given directly or indirectly for soliciting such
SEC. exchange.
11. Sale by issuer to fewer than 20 persons in the
EXEMPT TRANSACTIONS Philippines during any 12 month period,
otherwise known as private placement
(JuDe ISCaRIOT’S Ex-20-QB’s) transactions (19 Lender Rule).

1. Any JUdicial sale, or sale by an executor, Requisites:

administrator, guardian, receiver or trustee in 1. Sale to not more than 19 non-
insolvency or bankruptcy. institutional retail investors;
2. Those sold by a pledge holder, mortgagee, or 2. The security is made payable to a
any other similar lien holder, to liquidate a bona specific person;
fide debt a security pledged in good faith as 3. Security is non-negotiable and non-
security for such Debt. assignable; and
3. Those sold or offered for sale in an Isolated 4. It is in an amount not exceeding fifty
transaction for the owner’s account and the (50) million pesos.
owner not being an underwriter.
4. Distribution by the corporation of Securities to 12. Sale of securities to any number of the following
its stock holders or other security holders as Qualified Buyers:
stock dividends or distribution out of surplus.
5. Sale of CApital stock of a corporation to its own a. banks;
stockholders exclusively wherein no b. registered investment houses;
commission or remuneration is paid or given c. insurance companies;
directly or indirectly in connection with the sale d. pension funds or retirement plans
of such capital stock. maintained by the Government of the
Philippines or any political subdivision
NOTE: Also, this sale must not involve an thereof or managed by a bank or other
underwriter or financial advisor. persons authorized by the Bangko Sentral
to engage in trust functions,
6. Bonds or notes secured by a mortgage upon investment companies;
Real estate or tangible personal property, e. investment companies; and
where the entire mortgage together with all the f. other persons or entities ruled qualified by
bonds or notes secured thereby are sold to a the SEC on the basis of such factors such as
single purchaser at a single sale. financial sophistication, net worth,
7. Issue and delivery of any security in exchange knowledge, and experience in financial and
for any other security of the same Issuer business matters, or amount of assets
pursuant to the right of conversion entitling the under management (SRC, Sec. 10.1).
holder of the security surrendered in exchange
to make such conversion. RATIONALE: Although the securities themselves
8. Broker’s transactions executed upon must still be registered, the sale or issue need not be
customer’s Orders, on any registered Exchange registered because the investors involved herein
or other Trading market. are considered as highly sophisticated investors or
9. Share Subscriptions in capital stock prior to specialized investors and as such, have a greater
incorporation or in pursuance of an increase in risk tolerance or do not need strict protection from
its authorized capital stock under the the Commission.
Corporation Code when no expense is incurred,
or no commission, compensation or List of exempt transactions under SRC is NOT
remuneration is paid or given in connection exclusive
with the sale or disposition of such securities,
and only when the purpose for soliciting, giving The list is not exclusive. The Commission may
or taking of such subscriptions is to comply exempt other transactions, if it finds that the
with the requirements of such law as to the requirements of registration under the Code is not
percentage of the capital stock of a corporation necessary in the public interest or for the protection

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of the investors such as by reason of the small of the registration statement or any document
amount involved or the limited character of the used in connection therewith shall also be filed.
public offering (SRC, Sec. 10.02). 6. Certification by Selling stockholders– Where the
registration statement includes shares to be
NON-EXEMPT sold by the selling shareholders, a written
certification by such selling shareholders as to
All securities, unless specifically exempted by law, the accuracy of any part of the registration
shall not be sold or offered for sale or distribution statement contributed by such selling
within the Philippines, without a registration shareholders shall also be filed.
statement duly filed with and approved by the 7. Fees – Upon filing of the registration statement,
Commission (SRC, Sec. 8.1). the issuer shall pay to the SEC a fee of not more
(subject to consultation) than one tenth of one percent (1/10 of 1%) of
the maximum aggregate price at which such
securities are proposed to be offered; the SEC
PROCEDURE FOR REGISTRATION shall prescribe by rule, diminishing the fees in
OF SECURITIES inverse proportion, the value of the aggregate
price of the offering.

Purpose for registration of securities NOTE: This fee paid to the SEC is called a
diminishing fee.
Registration of securities allows the subsequent
release of these securities to the investing public 8. Notice and Publication – Notice of the filing of
and serves to protect investors. the registration statement shall be immediately
published by the issuer, at its own expense, in
Procedure for registration of securities two newspapers of general circulation in the
(A- POSE- CsFP- RulE) Philippines; once a week for two consecutive
weeks, or in such other manner as the
1. Application – All securities required to be Commission by rule shall prescribe, reciting
registered shall be registered through the filing that:
by issuer with SEC, of a sworn registration a. A registration statement for the sale of such
statement with respect to such securities in security has been filed;
such form and containing such information or b. The aforesaid registration statement as
documents as the Commission shall prescribe. well as the papers attached thereto is open
2. Prospectus – The registration statement shall to inspection at the Commission during
include any prospectus required or permitted business hours; and
to be delivered. c. Copies thereof, photo static or otherwise,
3. Other information– The information required shall be furnished to interested parties at
for the registration of any kind and all securities such reasonable charges as the
shall include, among others, the effect of the Commission may prescribe.
securities’ issue on ownership, on the mix of
ownership, especially foreign and local 9. RULing – Within 45 days after the date of the
ownership. filing of the registration statement, or by such
4. Signatories to registration statement– The later date to which the issuer has consented, the
registration statement shall be signed by the SEC shall declare the registration statement
issuer’s: effective or rejected, unless the applicant is
a. Executive officer allowed to amend the registration statement.
b. Principal operating officer The Commission shall enter an order declaring
c. Principal financial officer the registration statement to be effective if it
d. Comptroller finds that the registration statement together
e. Principal accounting officer with all the other papers and documents
f. Corporate secretary or persons performing attached thereto is on its face complete and that
similar functions the requirements have been complied with. The
Commission may also impose such terms and
NOTE: It shall be accompanied by a duly conditions as may be necessary or appropriate
verified resolution of the Board of Directors of for the protection of the investors.
the issuer corporation. 10. Effectivity – Upon effectivity of the registration
statement, the issuer shall state under oath in
5. Written consent of Expert – The written consent every prospectus that all registration
of the expert named as having certified any part requirements have been met and that all

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information are true and correct as represented NOTE: The Commission may compel the production
by the issuer or the one making the statement of all the books and papers of the issuer, and may
(SRC, Sec. 12). administer oaths to, and examine the officers of
such issuer or any other person connected
NOTE: Any untrue statement or fact of omission to therewith as to its business and affairs.
state a material fact required to be stated therein or
necessary to make the statement therein not Grounds for suspension of registration (I-FIRe)
misleading shall constitute fraud.
1. If any time, the Information contained in the
Grounds for rejection of a registration registration statement filed is or has become
statement and revocation of the effectivity of a misleading, incorrect, inadequate or incomplete
registration statement and the registration of a in any material respect.
security [I-ICE] 2. The sale or offering for sale of the security
registered thereunder may work or tend to
After due notice and hearing by issuing an order to work a Fraud.
such effect, the Commission may reject the 3. Pending Investigation of the security
registration statement or revoke the registration of registered, if the Commission deems it
a security based on the following grounds: necessary, to ascertain whether the registration
of such security should be revoked on any
1. The Issuer: [REFaCo] ground specified the SRC.
a. Has been judicially declared Insolvent; 4. Refusal to furnish information required by the
b. Has violated any of the provisions of the Commission (SRC, Sec. 15).
Code, the Rules promulgated pursuant
thereto, or any order of the SEC of which Grounds for suspension or cancellation of
the issuer has notice in connection with the certificate of registration (ROSe Co BRO)
offering for which a registration statement
has been filed; 1. Fraud in procuring Registration.
c. Has been or is Engaged or is about to 2. Serious misrepresentation as to Objectives of
engage in fraudulent transactions; corporation.
d. Has made any False or misleading 3. Refusal to comply with lawful order of SEC.
representation of material facts in any 4. COntinuous non-operation for at least 5 years.
prospectus concerning the issuer or its 5. Failure to file By-laws within required period.
securities; or 6. Failure to file Reports.
e. Has failed to comply with any requirement 7. Other similar grounds (SRC, Sec. 6 [L])
that the Commission may impose as a
condition for registration of the security for Order of suspension by the SEC requires a
which registration statement has been subsequent hearing
filed.
An order of suspension must be followed by a
2. The registration statement is on its face hearing to be conducted by the Commission. If the
Incomplete or inaccurate in any material Commission determines that the sale of any security
respect or includes any untrue statement of a should be revoked, it shall issue an order
material fact or omits to state a material fact prohibiting the sale of such security. Until the
required to be stated therein or necessary to issuance of a final order, the suspension of the right
make the statements therein not misleading; to sell, though binding upon the persons notified
3. The issuer, any officer, director or Controlling thereof, shall be deemed confidential, and shall not
person of the issuer, or any person performing be published, unless it shall appear that the order of
similar functions, or any underwriter has been suspension has been violated after notice.
convicted by a competent judicial or
administrative body, upon plea of guilty, or However, if the Commission finds that the sale of the
otherwise, of an offense involving moral security will neither be fraudulent nor result in
turpitude and/or fraud or is enjoined or fraud, it shall forthwith issue an order revoking the
restrained by the SEC or other competent order of suspension, and such security shall be
judicial or administrative body for violations of restored to its status as a registered security as of
securities, commodities and other related laws; the date of such order of suspension.
and
4. Any issuer who refuses to permit the Q: Philippine Chromite, Inc., after registration of
Examination to be made by the Commission its securities, sold P10 M worth of common
(SRC, Sec. 13). stocks to the public at P.01 per share. In its

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registration statement, it alleged that it holds a c. Similar transactions where there is no
perfected mining claim on 100 hectares of change of beneficial ownership.
chromite land in Botolan, Zamabales. X, a
Botolan resident, bought P50,000 worth of 2. Effecting a series of transactions that will raise
stocks of the corporation from the stock or depress the price of securities to induce the
exchange. After its public offering, the value of purchase or sale of securities respectively, or
the stock dropped to half its price. X made some creating active trading to induce transactions
investigations and discovered that the mining through manipulative devices:
claims of the corporation had not been a. Marking the close – buying and selling of
perfected at the time of the issuance of its securities at the close of the market in an
securities. The stock, however, rallied and after effort to alter the closing price of these
2 years, commanded a price of 1 ½centavo per securities;
share. On its third year, the company collapsed b. Painting the tape – engaging in a series of
and its stocks became totally valueles s. What is transactions effected by brokers in
the remedy of X? securities that are reported publicly to give
the impression or illusion of activity or
A: The remedy of X for damages is lost by price movement in a security, which may
prescription. Any suit therefore must be filed trick investors into trading in these
within 2 years after the discovery of the facts securities because of the alleged trading
constituting the cause of action (but not beyond 5 volume or indications of interest;
years after such cause of action accrued). 2 years c. Squeezing the float – refers to taking
having already elapsed since the time that X had advantage of a shortage of securities in the
discovered the misrepresentation in the market by controlling the demand side and
registration statement of the corporation, the exploiting market congestion during such
latter’s civil liability has prescribed. X, however, is shortages in a way to create artificial
not prevented from invoking SEC’s regulatory prices. This prevents the actual market
powers against the corporation. from determining the price of these
securities;
d. Hype and dump – engaging in buying
PROHIBITIONS ON FRAUD, activity at increasingly higher prices and
MANIPULATIONS AND INSIDER TRADING then selling securities in the market at the
higher prices;
e. Boiler room operations – refers to activities
MANIPULATION OF SECURITY PRICES that involve the use of high pressure sale
tactics such as direct mail offers or
Acts which are considered as manipulation of telephone follow-ups to investors to
security prices (2001 Bar) promote purchase and sale of securities
wherein there is misrepresentation in
The price of securities should be dictated by market these securities. This is a fraudulent
forces. It cannot be pegged or stabilized. The transaction that tricks investors into
following acts are considered as manipulation of trading in a fake market;
security prices and are therefore prohibited: f. Daisy chain – refers to a series of purchase
and sales of the same issue at successively
1. Transactions intended to create a false or higher prices by the same group of people
misleading appearance of active trading in any with the purpose of manipulating prices are
listed security traded in an Exchange or any drawing unsuspecting investors into the
other trading market: market leaving them defrauded of their
a. Wash Sale – is a transaction in which there money and securities;
is no genuine change in the beneficial (or g. Front-Running – is the prohibited practice
actual) ownership of a security; of a broker-dealer executing its proprietary
b. Matched Sale – is a change of ownership in order before the customer’s order for the
the securities by entering an order for the same security. This violates the fiduciary
purchase or sale of a security with the responsibility by the broker-dealer to its
knowledge that a simultaneous order of customer accounts as well as placing the
substantially the same size, time, and price, customer’s order first; or
for the sale or purchase of any such h. Churning – involves the excessive trading of
security, has or will be entered by or for the securities by a broker-dealer in a
same or different parties; or customer’s discretionary account in order

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to generate commissions, without regard to rules find specific application to Section 5(a) of P.D.
the customer’s investment objective. No. 902-A which speaks of corporate devices or
schemes that amount to fraud or misrepresentation
3. Circulating or disseminating information that detrimental to the public and/or to the
the price of any security listed in an Exchange stockholders.
will or is likely to rise or fall because of
manipulative market operations of any one or INSIDER TRADING
more persons conducted for the purpose of
raising or depressing the price of that security A purchase or sale made by an insider, or such
for the purpose of inducing the purchase or sale insider’s spouse or his relative by affinity or
of such security. consanguinity within the second degree, legitimate
4. To make false or misleading statement with or common-law, shall be presumed to be effected
respect to any material fact, which he knew or while in possession of material non-public
had reasonable ground to believe was so false information if transacted after such information
or misleading, for the purpose of inducing the came into existence but prior to the public
purchase or sale of any security listed or traded dissemination of such information, and lapse of
in an Exchange. reasonable time for the market to absorb such
5. To effect, either alone or with others, any series information. (2015 Bar)
of transactions for the purchase and/or sale of
any security traded in an exchange for the Insider
purpose of pegging, fixing or stabilizing the
price of such security, unless otherwise allowed A person who is in possession of corporate material
by the Code or by rules of the Commission (SRC, information not generally available to the public.
Sec. 24).
Who may be an insider:
Short sales
1. The issuer;
It is the selling of shares which the seller does not 2. A director or officer (or person performing
actually own or possess and therefore he cannot, similar functions) of, or a person controlling the
himself, supply the delivery. Short selling leads to issuer;
speculation of price of securities. 3. A person whose relationship or former
relationship to the issuer gives or gave him
Short swing transaction access to material information about the issuer
or the security that is not generally available to
It is a transaction by the director, issuer or any the public;
person controlling the issuer (stockholder owning 4. A government employee, or director , or officer
10% of the stocks), whereby such person buys and of an exchange, clearing agency and/or self-
sells securities within six (6) months. regulatory organization who has access to
material information about an issuer or a
FRAUDULENT TRANSACTIONS security that is not generally available to the
public; or
The following are considered as fraudulent 5. Constructive Insider – A person who learns
transactions: such information by a communication from any
of the foregoing insiders (SRC, Sec. 3.8).
1. Employment of any device, scheme or artifice to
defraud investors; Other prohibited acts in an insider trading
2. Obtaining money or property by means of any
untrue statement of a material fact or any 1. For an insider to communicate material non-
omission to state a material fact necessary in public information about the issuer or the
order to make the statement made not security to any person who by virtue of the
misleading; and communication thereby becomes an insider,
3. Engaging in any act, transaction, practice or where the original insider communicating the
course of business, which operates as a fraud or information knows or has reason to believe that
deceit upon any person. such person will likely buy or sell a security of
the issuer while in possession of such
NOTE: Section 5, Rule 8 of the Revised Rules of information (SRC, Sec. 27.3).
Court provides that in all averments of fraud or 2. When a tender offer has commenced or is about
mistake, the circumstances constituting fraud or to commence, it is unlawful for any person,
mistake must be stated with particularity. These other than the tender offeror, who is in

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possession of material non-public information huge profits. Will they be liable for violation
relating to such tender offer to buy or sell the of the SRC? Why? (2008 Bar)
securities of the issuer that are sought or to be
sought by such tender offer, if such person A:
knows or has reason to believe that the a. The directors and officers of the corporation
information is non-public and has been violated Sec. 27 of the Securities and Regulation
acquired directly or indirectly from the tender Code on the prohibition on insider’s trading.
offer, or those acting on its behalf, the issuer of Sec. 27.1 of the Securities and Regulation Code
the securities sought or to be sought by such provides that it shall be unlawful for an insider
tender offer, or any insider of such issuer (SRC, to sell or buy a security of the issuer, while in
Sec. 27.4 [a][i]). possession of material information with respect
3. When a tender offer has commenced or is about to the issuer or the security that is not generally
to commence, it is also unlawful for any tender available to the public. In this case, the directors
offeror, or those acting on its behalf, the issuer and officers fall squarely into the definition of
of securities covered by such tender offer, and an insider under Sec. 3.8 of the Securities and
any insider, to communicate material non- Regulation Code. Thus, the directors and
public information to any person relating to the officers are liable for violating the prohibition
tender offer which would likely result in on Insider trading.
violation of prohibition of the insider from b. The said employees will also be liable for
trading (SRC, Sec. 27.4 [a][ii]). engaging in insider trading. Sec. 3.8 of the
Securities and Regulation Code, an insider is
Material non-public information (1995 Bar) also a person whose relationship or former
relationship to the issuer gives or gave him
1. Information about the issuer or the security has access to material information about the issuer
not been generally disclosed to the public and or security that is not generally available to the
would likely affect the market price of the public. The said employees because of their
security after being disseminated to the public relationship with the issuer, Grand Gas
and the lapse of a reasonable time for the Corporation as their printer, where able to
market to absorb the information; or obtain material information. They too became
2. Would be considered by a reasonable person liable for insider trading when they bought the
important under the circumstances in shares in the company and at the same time
determining his course of action whether to possessing undisclosed material information.
buy, sell or hold a security (SRC, Sec. 27.2).
Q: In insider trading, what is a fact of special
Q: Grand Gas Corporation, a publicly listed significance? (1991 Bar)
company, discovered after extensive drilling a
rich deposit of natural gas along the coast of A: It is, in addition to being material, such fact as
Antique. For five (5) months, the company did would likely, on being made generally available, to
not disclose the discovery so that it could quietly affect the market price of a security to a significant
and cheaply acquire neighboring land and extent, or which a reasonable person would
secure mining rights to the land. Between the consider as especially important under the
discovery and its disclosure of the information circumstances in determining his course of action in
to the Securities and Exchange Commission, all the light of such factors as the degree of its
the directors and key officers of the company specificity, the extent of its difference from
bought shares in the company at very low prices. information generally available previously, and its
After disclosure, the price of the shares went up. nature and reliability (SRC, Sec. 30 [c]).
The directors and officers sold their shares at
huge profits. Q: You are a member of the legal staff of a law
firm doing corporate and securities work for
a. What provision of the Securities Regulation Coco Products Inc., a company with unique
Code (SRC) did they violate, if any? Explain. products derived from coconuts and whose
b. Assuming that the employees of the shares are traded in the Philippine Stock
establishment handling the printing work of Exchange. A partner in the law firm, Atty.
Grand Gas Corporation saw the exploration Buenexito, to whom you report, is the Corporate
reports which were mistakenly sent to their Secretary. You have long been investing in Coco
establishment together with other materials Products stocks even before you became a
to be printed. They too bought shares in the lawyer.
company at low prices and later sold them at

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While working with Atty. Buenexito on another 1. That the information was acquired not on
file, he accidentally gave you the Coco Products account of his relationship with the issuer.
file containing the company's planned corporate 2. That he disclosed the information to the other
financial rehabilitation. While you knew you party who knew or had the reason to believe he
had the wrong file, your curiosity prevailed and knew the material information.
you browsed through the file before returning it. 3. That the purchaser or seller was not aware of
Thus, you learned that a petition for financial the material, non-public information at the time
rehabilitation is imminent, as the company of the purchase or the sale.
could no longer meet its obligations as they fell
[Link] after, your mother is rushed to the
hospital for an emergency operation, and you PROTECTION OF INVESTORS
have to raise money for her hospital bills. An
immediate option for you is to sell your Coco
Products shares. The sale would be very timely Provisions in the SRC intended to protect the
because the price of the company's stocks are investors
still high. Would you sell the shares to raise the
needed funds for your mother's hospitalization? 1. Tender Offer Rule
Take into account legal and ethical 2. Rules on Proxy Solicitation
considerations (2013 Bar) 3. Disclosure Rule

A: The sale of the shares does not constitute insider TENDER OFFER RULE (2002, 2010, 2016 BAR)
trading. Although Atty. Buenexito, as corporate
secretary of Coco Products, Inc., was an insider, it Tender offer means a publicly announced intention
did not obtain the information regarding the by a person acting alone or in concert with other
planned corporate rehabilitation by communication persons to acquire equity securities of a public
from him. He just accidentally gave the wrong file company. It is also an offer by the acquiring person
(SRC, Sec. 3.8). to stockholders of a public company for them to
tender their shares therein on the terms specified in
the offer (Cemco Holdings, Inc. v. National Life
It would be unethical to sell the shares. Rule 1.01 of Insurance Co, Inc. G.R. No. 171815, August 7, 2007).
the Code of Professional Responsibility provides, “A
lawyer shall not engage in unlawful, dishonest, It is an invitation by the acquirer of shares of a
immoral or deceitful conduct.” company for other stockholders to tender their
shares to the acquirer so that they may sell their
He should desist from engaging in unfair deceitful shares in the same price and conditions as the
conduct to conceal form the buyer of the shares of previously acquired shares.
the planned corporate rehabilitation.
It is given to all stockholders by:
Q: Suppose “A” is the owner of several inactive 1. Filing with the SEC a declaration to that effect,
securities. To create an appearance of active and paying the filing fee;
trading for such securities, “A” connives with “B” 2. Furnishing the issuer a statement containing
by which “A” will offer for sale some of his the information required of the issuers as SEC
securities and “B” will buy them at certain fixed may prescribe, including subsequent or
price, with the understanding that although additional materials; or
there would be an apparent sale, “A” will retain 3. Publishing all requests or invitations for tender,
the beneficial ownership thereof. or materials making a tender offer or
requesting or inviting letters of such security.
A. Is the arrangement lawful?
B. If the sale materializes, what is it called? Purpose of tender offer

A: Tender offer is in place to protect the interest of

A. No. the arrangement is not lawful. It is an artificial minority stockholders of a target company against
manipulation of the price of securities. This is any scheme that dilutes the share value of their
prohibited by the Securities Regulation Code. investments. It affords such minority shareholders
B. If the sale materializes, it is called a wash sale or the opportunity to withdraw or exit from the
simulated sale. (BAR 2001) company under reasonable terms or a chance to sell
their shares at the same price as those of the
Possible defenses against insider trading majority stockholders.

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Public company The sale of shares pursuant to the private
transaction or block sale shall not be
1. Those listed on an exchange; completed prior to the closing and
2. Those with assets of at least PHP 50M and completion of the tender offer.
having 200 shareholders owning at least 100
shares each; or 4. Any acquisition that would result in
3. Those companies that have an effective ownership of over fifty percent (50%) of
registration statement under Section 12 of the the total outstanding equity securities of a
SRC. public company.

Mandatory tender offer (2002 Bar) NOTE: Tender offer shall be made at a price
supported by a fairness opinion provided
Tender offer is required to be made when: by an independent financial advisor or
equivalent third party. The acquirer in such
1. Any person or group of persons acting in a tender offer shall be required to accept all
concert, who intends to acquire fifteen securities tendered (2015 SRC Rules, Sec.
percent (15%) of equity securities in a 19.2).
public company in one or more
transactions within a period of twelve (12) Q: C Corp. is the direct holder of 10% of the
months. shareholdings in U Corp., a non-listed (not
public) firm, which in turn owns 62% of the
2. Any person or group of persons acting in shareholdings in H Corp., a publicly listed
concert, who intends to acquire thirty five company. The other principal stockholder in H
percent (35%) of the outstanding voting Corp. is C Corp. which owns 18% of its shares.
shares or such outstanding voting shares Meanwhile, the majority stocks in U Corp. are
that are sufficient to gain control of the owned by B Corp. and V Corp. at 22% and 30%
board in a public company in one or more respectively. B Corp. and V Corp. later sold their
transactions within a period of twelve (12) respective shares in U Corp. to C Corp., thereby
months. resulting in the increase of C Corp’s. interest in U
Corp., whether direct or indirect, to more than
If the tender offer is oversubscribed, the 50%
aggregate amount of securities to be
acquired at the close of such tender offer Does the Tender Offer Rule apply in this case
shall be proportionately distributed across where there has been an indirect acquisition of
selling shareholders with whom the the shareholdings in H Corp. by C. Corp.? Discuss.
acquirer may have been in private (2016 Bar)
negotiations and other shareholders. For
purposes of SRC Rule 19.2.2, the last sale A: Yes, the mandatory tender offer is still applicable
that meets the threshold shall not be even if the acquisition, direct or indirect, is less than
consummated until the closing and 35% when then purchase would result in direct or
completion of the tender offer indirect of over 50% of the total outstanding equity
securities of a public company (Cemco Holdings v.
NOTE: If the acquisition is made through National Life Insurance Co., G.R. No. 171815, August
the Exchange trading system tender offer is 7, 2007).
not required provided after acquisition
through the Exchange trading system, they Coverage of the application of tender offer
fail to acquire their target of thirty five
percent (35%) or such outstanding voting The mandatory tender offer rule covers not only
shares that is sufficient to gain control of direct acquisition but also indirect acquisition or
the board. “any type of acquisition.”

3. Any person or group of persons acting in The legislative intent of Section 19 of the Securities
concert, who intends to acquire thirty five Regulation Code is to regulate activities relating to
percent (35%) of the outstanding voting acquisition of control of the listed company and for
shares or such outstanding voting shares the protection of the minority stockholders of a
that are sufficient to gain control of the listed corporation. Whatever may be the method by
board in a public company directly from which control of a public company is obtained,
one or more stockholders. either through the direct purchase of its stocks or
through an indirect means, mandatory tender offer

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329 FACULTY OF CIVIL LAW
 Securities Regulation Code
applies. What is decisive is the determination of the copies of the final amendments to the form.
power of control. The legislative intent makes clear (Sundiang Sr. & Aquino, 2014)
that the type of activity intended to be regulated is
the acquisition of control of the listed company Unlawful and prohibited acts relating to tender
through the purchase of shares. Control may be offers
effected through a direct and indirect acquisition of
stock, and when this takes place, irrespective of the It shall be unlawful for any person to:
means, a tender offer must occur (Cemco Holdings
Inc. v. National Life Insurance [Link]., G.R. No. 1. Make any untrue statement of a material fact or
171815, August 7, 2007). omit to state any material fact necessary in
order to make statements made, in the light of
Illustration of the application of tender offer in the circumstances under which they are made,
direct acquisition: not misleading; or
2. Engage in any fraudulent, deceptive, or
The shares of stock of X company are owned by A manipulative acts or practices, in connection
(19%), B (16%), C (20%), D (14%), E (31%). If Aljon with any tender offer or request or invitation
buys the shares of A (19%), the transaction is not for tenders, or any solicitation of security
subject to mandatory tender offer. However, if Aljon holders in opposition to or in favor of any such
buys the shares of A (19%) and the shares of B offer, request, or invitation.
(16%), then tender offer must be made because the
total shares bought by Aljon is 35%. Margin trading (2009 Bar)

Illustration of the application of tender offer in A kind of trading that allows a broker to advance for
indirect acquisition: the customer/investor part of the purchase price of
the security and to keep the same security as
The shares of stock of X company are owned by A collateral for such advance.
(16%), B (19%), C (15%), D (18%), and Corporation
E (32%) respectively. The shares of Corporation E Margin allowance standard
are owned by Kenneth (50%), King (25%) and Jacq
(25%). If Aljon acquires the shares of B (19%), the GR: The credit extended must be for an amount not
transaction is not subject to mandatory tender offer greater than, whichever is higher of:
because it did not reach the 35% threshold limit
required by law. However, if Aljon acquires the 1. 65% of the current market price of the security;
shares of B (19%) and the shares of Kenneth in or
Corporation E (50% of 32 is 16%), then, tender offer 2. 100% of the lowest market price during the
must be made because the total shares bought by preceding 36 calendar months, but not more
Aljon directly and indirectly is 35%. than 75% of the current market price.

Obligations of person making a tender offer XPN: The Monetary Board may increase or decrease
the above percentages, in order to achieve the
1. Make an announcement of his intention in a objectives of the Government with due regard for
newspaper of general circulation, prior to the promotion of the economy and prevention of the
commencement of the offer. use of excessive credit.
2. At least (2) business days prior to the date of the
commencement of the tender offer: Purposes of the margin requirements
a. File with the SEC a required form for tender
offer including all exhibits thereto (and any They are primarily intended to achieve a
amendments thereto), with the prescribed macroeconomic purpose – the protection of the
filing fees; and overall economy from excessive speculation in
b. Hand deliver a copy of such form including securities. Their recognized secondary purpose is to
all exhibits (and amendments thereto) to protect small investors.
the target company and its principal
executive office and to each Exchange Burden of compliance with margin
where such class of target company’s requirements
securities are listed for trading.
The brokers and dealers have the burden of
3. Report the results of the tender offer by filing compliance with margin requirements.
with the SEC, not later than ten (10) calendar
days after the termination of the tender offer,

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NOTE: In securities trading, the brokers are properly seen as an election controversy within the
essentially the counterparties to the stock jurisdiction of the RTC special commercial court
transactions at the Exchange. Since the principals of (GSIS vs. CA, G.R. Nos. 183905 and 184275, April 16,
the broker are generally undisclosed, the broker is 2009).
personally liable for the contracts thus made.
Brokers have a right to be reimbursed for sums DISCLOSURE RULE
advanced by them with the express or implied
authorization of the principal (Abacus Securities Beginning of disclosure requirement
Corp.v. Ampil, G.R. No. 160016, February 27, 2006).
It begins at registration and continues periodically
RULES ON PROXY SOLICITATION through the regular filing of periodic report.

Requisites for valid proxy solicitation Suspension of disclosure

1. It must be in writing. It may be suspended for any fiscal year after the
2. It must be signed by the stockholder or his duly year such registration became effective if such
authorized representative. issuer as of the first day of any such fiscal year, has
3. It must be filed before the scheduled meeting less than 100 shareholders of such class of
with the corporate secretary (SRC, Sec. 20.2). securities and it notifies the Commission of such
(SRC IRR, Rule 17.1).
NOTE: For public companies, the period to submit
proxy solicitation should not be later than five (5) End of disclosure requirement
days before the meeting unless the by-laws
provides for a longer period. GR: Disclosure does not end because once an issuer
Unless otherwise provided in the proxy, the proxy becomes a reporting company, it remains as such
shall be valid only for the meeting for which it is even when the registration of securities has been
intended. No proxy shall be valid and effective for a revoked (SRC IRR, Rule 13).
period longer than five (5) years at one time.
XPN: If the primary license is revoked.
Rules on proxy solicitation with regard to
broker or dealer XPN to the XPN: In the case of hospitals and
educational institutions if the primary license is
1. No broker or dealer shall give any proxy, revoked, the disclosure requirement still continues
consent or authorization, in respect of any because of public interest.
security carried for the account of a customer,
to a person other than the customer, without Reportorial requirements
the express written authorization of such
customer. 1. Issuers:
2. A broker or dealer who holds or acquires the a. Shall file with the Commission within 135
proxy for at least 10% or such percentage as the days, after the end of the issuer’s fiscal year,
Commission may prescribe of the outstanding or such other time as the Commission may
share of the issuer, shall submit a report prescribe, an annual report which shall
identifying the beneficial owner within 10 days include among others, a balance sheet,
after such acquisition, for its own account or profit and loss statement and statement of
customer, to the issuer of the security, to the cash flows, for such last fiscal year, certified
Exchange where the security is traded and to by an independent certified public
the Commission (SRC, Sec. 20.4, 20.5). accountant, and a management discussion
and analysis of results of operations;
Jurisdiction over violations of the SEC rules on and
proxy solicitation b. Such other periodical reports for interim
fiscal periods and current reports on
The power of the SEC to investigate violations of its significant developments of the issuer as
rules on proxy solicitation is unquestioned when the Commission may prescribe as
proxies are obtained to vote on matters unrelated to necessary to keep current information on
the cases enumerated under Section 5 of PD 902-A. the operation of the business and financial
However, when proxies are solicited in relation to condition of the issuer (SRC, Sec. 17).
the election of corporate directors, the resulting 2. Types of issuers required to file reports:
controversy, even if it ostensibly raised the violation
of the SEC rules on proxy solicitation, should be

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331 FACULTY OF CIVIL LAW
 Securities Regulation Code
a. An issuer which has sold a class of its which exempts securities issued or guaranteed
securities pursuant to a registration by banking institutions from the registration
statement under Section 12 of the SRC; requirement. The SEC, informed Union Bank
b. An issuer with a class of securities listed for that while the requirements of registration do
trading in an Exchange; not apply to securities of banks which are
c. An issuer with assets of at least PHP 50M exempt under Section 5(a) (3) of the Revised
and having 200 or more holders each Securities Act, however, banks with a class of
holding at least 100 shares securities listed for trading on the Philippine
Stock Exchange, Inc. are covered by certain
3. Persons acquiring securities - If the issuer is one Revised Securities Act Rules governing the filing
that has to make a report, any person who of various reports with SEC. The Is Union Bank
acquires directly or indirectly the beneficial required tocomply with SEC’s full disclosure
ownership of more than 5% of such class, or in rules?
excess of such lesser per centum as the
Commission by rule may prescribe, shall, within A: YES. Union Bank is required to comply with SEC’s
10 days after such acquisition or such full disclosure rule. The exemption from the
reasonable time as fixed by the Commission, registration requirement enjoyed by Union Bank
submit to the issuer of the security, to the does not necessarily connote that it is exempted
Exchange where the security is traded, and to from the other reportorial requirements. Having
the Commission a sworn statement containing: confined the exemption enjoyed by Union Bank
a. His personal circumstances merely to the initial requirement of registration of
b. The nature of such beneficial ownership securities for public offering, and not to the
c. If the purpose was to acquire control of the subsequent filing of various periodic reports, the
business, any plans the recipient may have SEC, as the regulatory agency, is able to exercise its
affecting a major change in the power of supervision and control over corporations
business and over the securities market as a whole.
d. The number of shares beneficially owned, Otherwise, the objectives of the “Full Material
and the number of shares for which there is Disclosure” policy would be defeated since Union
a right to acquire Bank and its dealings would be totally beyond the
e. granted to such person or his associates reach of respondent Commission and the investing
f. Information as to any agreement with a public (Union Bank of the Philippines v. SEC, G.R. No.
third person regarding the securities (SRC, 138949, June 6, 2001).
Sec. 18).

4. Persons that has beneficial ownership of 10% or CIVIL LIABILITY

more - Every person who is directly or
indirectly the beneficial owner of more than
10% of any class of any equity security, or who Grounds for civil liability to arise
is director or an officer of the issuer of such
security, shall file: 1. False Registration Statement (SRC, Sec. 56)
a. Statement with the SEC and, if such security 2. Fraud in connection with prospectus,
is listed for trading on an Exchange, also communications and reports (SRC, Sec. 57)
with the Exchange, of the amount of all 3. Fraud in connection with security transactions
equity securities of such issuer of which he (SRC, Sec. 58)
is the beneficial owner; 4. Manipulation of security prices (SRC , Sec. 60)
b. Within 10 days after the close of each 5. Insider trading (SRC, Sec. 61)
calendar month, if there is a change in
ownership during such month, a statement Persons that may be liable in case of false
indicating his ownership at the close of the registration statement
calendar month and such changes in his
ownership as have occurred during such 1. The issuer and every person who signed the
calendar month (SRC, Sec. 23). registration statement.
2. Every person who was a director of, or any
Q: Union Bank, through its General Counsel and other person performing similar functions, or a
Corporate Secretary, sought the opinion of the partner in, the issuer at the time of the filing of
SEC as to the applicability and coverage of the the registration statement or any part,
Full Material Disclosure Rule on banks, supplement or amendment thereof with
contending that said rules, in effect, amend respect to which his liability is asserted.
Section 5 (a) (3) of the Revised Securities Act

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3. Every person who is named in the registration 1. Purchases or sells a security while in
statement as being or about to become a possession of material information not
director of, or a person performing similar generally available to the public;
functions, or a partner in, the issuer and whose 2. Communicates material non-public
written consent thereto is filed with the information.
registration statement.
4. Every auditor or auditing firm named as having NOTE: The liability of the persons enumerated shall
certified any financial statements used in be jointly and severally.
connection with the registration statement or
prospectus. Prescriptive period for filing of action
5. Every person who, with his written consent,
which shall be filed with the registration Two (2) years after the discovery of the facts
statement, has been named as having prepared constituting the cause of action and within five (5)
or certified any part of the registration years after such cause of action accrued.
statement, or as having prepared or certified
any report or valuation which is used in Jurisdiction over civil liabilities
connection with the registration statement,
with respect to the statement, report, or The court which has jurisdiction over cases
valuation, which purports to have been involving civil liabilities is the Regional Trial Court.
prepared or certified by him. Q: In civil liabilities, is it required that the action
6. Every selling shareholder who contributed to be filed first with the SEC before filing the same
and certified as to the accuracy of a portion of with the RTC?
the registration statement, with respect to that
portion of the registration statement which A: NO. As ruled by the Court that “all complaints for
purports to have been contributed by him. any violation of the [SRC] x x x should be filed with
7. Every underwriter with respect to such security the SEC,” it should be construed as to apply only to
(SRC, Sec. 56). criminal and not to civil suits such as petitioners’
complaint. It is apparent that the SRC provisions
Persons liable for fraud in connection with governing criminal suits are separate and distinct
prospectus, communications and reports from those which pertain to civil suits (Pua v.
Citibank, N. A., G.R. No. 180064, September 16, 2013).
Any person who offers to sells or sells:
Limitation for awarding damages
1. In violation any provisions on registration
of securities; or 1. The court can award not exceeding triple
2. By the use of any means or instruments of the amount of the transaction plus actual
transportation or communication, by damage.
means of a prospectus or other written or 2. The court is also authorized to award attorney’s
oral communication (SRC, Sec. 57.1). fees not exceeding 30% of the award.

Persons liable for fraud in connection with Award of exemplary damages

security transactions
The court may award exemplary damages in cases
Any person who engages in any act or transaction in of:
violation of Sections 19.2, 20 or 26 of SRC.
1. Bad Faith;
Persons liable for the manipulation of security 2. Fraud;
prices 3. Malevolence; or
4. Wantonness in the violation of SRC or the Rules
Any person who willfully participates in any act or and Regulations promulgated by the
transaction in violation of Section 24 of SRC shall be Commission.
liable to any person who shall purchase or sell any
security at a price which was affected by such act or Q: Mr. and Mrs. Reyes invested their hard-
transaction. earned savings in securities issued by LEAD
Bank. After discovering that the securities sold
Persons liable with regard to insider trading to them were not registered with the SEC in
violation of the Securities Regulation Code, the
Any person in case of legal tender who: spouses Reyes filed a complaint for nullity of
contract and for recovery of a sum of money

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333 FACULTY OF CIVIL LAW
 Banking Laws
with the RTC. LEAD Bank moved to dismiss the Administrative – being the regulatory agency in
case on the ground that it is the SEC that has accordance with its policy directions.
primary jurisdiction over actions involving
violations of the Securities Regulation Code. If Salient considerations on the creation of Bangko
you were the judge, how would you rule on the Sentral ng Pilipinas
motion to dismiss? (2015)
1. It is established as an independent central
A: The motion should be denied. Civil suits falling monetary authority.
under the SRC (like liability for selling unregistered 2. Its capital shall be P50,000,000,000,
securities) are under the exclusive original P200,000,000,000 to be fully subscribed by the
jurisdiction of the RTC and hence, need not be first Philippine Government.
filed before the SEC unlike criminal cases, wherein 3. The increase in capitalization shall be funded
the latter body exercises primary jurisdiction (Pua solely from the declared dividends of the
vs Citibank, GR no. 180064, September 16, Bangko Sentral in favor of the National
2013). Government.
4. Any declared dividends of the Bangko Sentral in
favor of the National Government shall be
deposited in a special account in the General
BANKING LAWS
Fund, and earmarked for the payment of
Bangko Sentral’s increase in capitalization.
Such payment shall be released and disbursed
immediately and shall continue until the
THE NEW CENTRAL BANK ACT increase in capitalization is fully paid.
(NCBA, R.A. 7653) as amended by R.A. 11211
RESPONSIBILITY AND
PRIMARY OBJECTIVE OF THE BSP
Bangko Sentral ng Pilipinas (BSP)
Responsibilities of BSP (P-S-R) (1992, 1998 Bar)
It is the State’s central monetary authority. It is the
government agency charged with the responsibility 1. To provide policy directions in the areas of
of administering the monetary, banking and credit money, banking, and credit.
system of the country and is granted the power of 2. To supervise bank operations.
supervision and examination over bank and non- 3. To exercise regulatory and examination powers
bank financial institutions performing quasi- over quasi-banking operations of non-bank
banking functions, including savings and loan financial institutions, money service
associations (Busuego v. CA, G.R. No. L-48955, June businesses, credit granting businesses and
30, 1987). payment system operators.

Bangko Sentral ng Pilipinas as an institution Primary objectives of BSP

The BSP is a government-owned corporation which 1. To maintain price stability conducive to a

enjoys fiscal and administrative autonomy. balanced and sustainable growth of the
economy; and
STATE POLICIES 2. To promote and maintain monetary stability
and the convertibility of the peso (NCBA, Sec. 3).
Policy of the state with respect to the creation of
the Bangko Sentral ng Pilipinas Functions of BSP(BRAGS-CHoBE)

The State shall maintain a central monetary 1. Banker of the government – the BSP shall be the
authority that shall function and operate as an official depository of the Government and shall
independent and accountable body corporate in the represent it in all monetary fund dealings
discharge of its mandated responsibilities (NCBA, Secs. 110- 116).
concerning money, banking and credit (NCBA, Sec 2). 2. Custodian of Reserves (NCBA, Secs. 64-66, 94,
103)
While it is a government owned corporation it 3. Financial Advisor of the government (NCBA,
enjoys fiscal and administrative autonomy. Secs. 123-124) – Under Article VII, Sec. 20 of the
1987 Constitution, the President may contract
Fiscal – relating to treasury as in the monetary or guarantee foreign loans but with the prior
board. concurrence of the Monetary Board.

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4. Government agent (NCBA, Secs. 117-122) connection with any civil or criminal action
5. Source of credit (NCBA, Secs. 61-63, 81-89, 109) (NCBA, Sec 15).
6. Issuer of Currency (NCBA, Sec. 49-60)
7. Clearing channel or House; especially where NOTE: In the event of a settlement or compromise,
the PCHC does not operate (NCBA, Sec. 102) indemnification shall be provided only in
8. Supervisor of the Banking system (NCBA, Sec. connection with such matters covered by the
25) – shall include the power to: settlement as to which the BSP is advised by
external counsel that the person to be indemnified
a. Examine, which power extends to did not commit any negligence or misconduct. The
enterprises wholly or majority-owned or costs and expenses incurred in defending the
controlled by the bank (GBL, Sec. 7); this aforementioned action, suit or proceeding may be
power may not be restrained by a writ of paid by the BSP in advance of the final disposition of
injunction unless there is convincing proof such action, suit or proceeding upon receipt of an
that the action of the BSP is plainly undertaking by or on behalf of the member, officer,
arbitrary (NCBA, Sec. 25) or employee to repay the amount advanced should
b. Place a bank under receivership or it ultimately be determined by the Monetary Board
liquidation (NCBA, Sec. 30) that he is not entitled to be indemnified as provided
c. Initiate criminal prosecution of erring in this subsection (Ibid.).
officers of banks.
Composition of the Monetary Board
9. Extends discounts, loans and advances to
banking institutions in order to influence The MB shall be composed of 7 members appointed
the volume of credit consistent with by the President with a 6-year [Link] member of
objective of price stability. the MB may be reappointed more than once(NCBA,
Note: When availing of the loan facilities of Sec. 6).
the BSP, private banks assign to BSP their
receivables including the collaterals Members
1. The BSP Governor or his designated alternate (a
MONETARY BOARD; deputy governor);
POWERS AND FUNCTIONS OF THE 2. A Cabinet member to be designated by the
President or his designated alternate (an
Monetary Board undersecretary in his department);
3. 5 members from the private sector
It is the body through which the powers and
functions of the BSP are exercised (NCBA, Sec 6). Qualifications

Powers and functions of the Monetary Board 1. Citizenship- natural-born citizens of the
(RASBI) Philippines
2. Age GR: at least 35 years old
1. Issue Rules and regulations it considers XPN: Governor must be at least 40
necessary for the effective discharge of the years old;
responsibilities and exercise of its powers.
2. Direct the management, operations, and 3. Of good moral character
Administration of the BSP, reorganize its 4. Of unquestionable integrity
personnel, and issue such rules and regulations 5. Of known probity and patriotism;
as it may deem necessary or convenient for this 6. With recognized competence in social and
purpose. economic disciplines (NCBA, Sec. 8).
3. Establish a human resource management
System. Powers of the Governor
4. Adopt an annual Budget for and authorize such
expenditures by the BSP as are in the interest of The Governor shall be the chief executive officer of
the effective administration and operations of the Bangko Sentral. His powers and duties shall be
the BSP in accordance with applicable laws and to: (PEDARE)
regulations.
5. Indemnify its members and other officials of the a. prepare the agenda for the meetings of the
BSP, including personnel of the departments Monetary Board and to submit for the
performing supervision and examination consideration of the Board the policies and
functions against all costs and expenses measures which he believes to be
reasonably incurred by such persons in

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necessary to carry out the purposes and Insolvency
provisions of this Act;
b. execute and administer the policies and This occurs when the actual market value of assets
measures approved by the Monetary is insufficient to pay its liabilities, not considering
Board; capital stock and surplus which are not liabilities for
c. direct and supervise the operations and such purpose. An entity is insolvent when it is
internal administration of the Bangko unable to meet current and long-term obligations. It
Sentral. The Governor may delegate certain is handled by receivership or closure.
of his administrative responsibilities to
other officers subject to such rules and The duration of conservatorship shall not exceed 1
regulations as the Monetary Board may year (NCBA, Sec. 29)
prescribe;
d. appoint and fix the remunerations and CONSERVATORSHIP
other emoluments of personnel below the
rank of a department head, as well as to Conservator (2006 Bar)
impose disciplinary measures upon
personnel of the Bangko Sentral. One appointed if the bank is in the state of illiquidity
e. render opinions, decisions, or rulings, or the bank fails or refuses to maintain a state of
which shall be final and executory until liquidity adequate to protect its depositors and
reversed or modified by the Monetary creditors. The bank still has more assets than its
Board, on matters regarding application or liabilities but its assets are not liquid or not in cash
enforcement of pertinent banking laws. thus it cannot pay its obligation when it falls due.
f. exercise such other powers as may be The bank, not the BSP, pays for fees.
vested in him by the Monetary Board.
Powers of a conservator (CARe BEAr)
Liabilities of the members of the Monetary
Board 1. Collect all monies and debts due to the said
bank
Members of the Monetary Board, officials, 2. To take charge of the Assets, liabilities, and
examiners, and employees of the BSP who: the management thereof
3. REorganize, the management thereof
1. Willfully violate RA 7653; 4. And such other powers as the monetary
2. Are guilty of negligence, abuses or acts of Board deems necessary
malfeasance or misfeasance; or 5. Exercise all powers necessary to restore its
3. Fail to exercise extraordinary diligence in the viability, with the power to overrule or
performance of his duties revoke the actions of the previous
management and board of directors of the
Shall be held liable for any loss or injury suffered by bank or quasi-bank
the BSP or other banking institutions as a result of 6. To bring court actions to Assail or
such violation, negligence, abuse, malfeasance, Repudiate contracts entered into by the
misfeasance or failure to exercise extraordinary bank (First Philippine International Bank v.
diligence (NCBA, Sec 16). CA, G.R. No. 115849, Jan. 24, 1996).

THE BSP AND BANKS IN DISTRESS Powers of a conservator do not extend to the
revocation of valid and perfected contracts
In case of a distressed bank, the BSP appoints a
conservator or receiver for closure of the bank. The powers of a conservator cannot extend to post
facto repudiation of valid and perfected
Illiquidity transactions. Thus, the law merely gives the
conservator power to revoke contracts that are
This occurs when the bank is not liquid. It means deemed to be defective- void, voidable,
that the bank cannot meet its current liabilities. It is unenforceable or rescissible. Hence, the
handled by conservatorship. conservator merely takes the place of the bank’s
board (First Philippine International Bank v. CA,
Liquidity supra.).

It is the ability of an asset to be converted into cash. Termination of conservatorship

An entity is liquid when it is able to pay its liabilities
when they fall due.

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1. Conservatorship is terminated when the
Monetary Board is satisfied that the bank can Under R.A. No. 7653, the power of the Monetary
operate on its own and the conservatorship is no Board (MB) over banks, including rural banks, was
longer necessary; or increased and expanded. The Court, in several cases,
upheld the power of the MB to take over banks
2. When the Monetary Board, on the basis of the without need for prior hearing. It is not necessary
report of the conservator or of its own findings, inasmuch as the law entrusts to the MB the
determine that the continuance in business of the appreciation and determination of whether any or
institution would involve probable losses to its all of the statutory grounds for the closure and
depositors or creditors (effect: the bank or quasi- receiver-ship of the erring bank are present. The
bank would then be place under receivership) MB, under R.A. No. 7653, has been invested with
more power of closure and placement of a bank
CLOSURE under receivership for insolvency or illiquidity, or
because the bank’s continuance in business would
Grounds for closure of a bank or a quasi-bank probably result in the loss to depositors or
(1997 Bar) creditors.

1. Cash Flow test - Inability to pay liabilities BSP may order the closure of the bank even without
as they become due in the ordinary course prior hearing. BSP may rely on the report of either
of business (NCBA, Sec. 30 [a]). the conservator, receiver or the head of the
2. Balance sheet test – Insufficiency of supervising and examining department. It is not
realizable assets to meet its liabilities required to conduct a thorough audit of the bank
(NCBA, Sec 30 [b]). before ordering its closure. The "close now, hear
3. Inability to continue business without later’’ doctrine justifies BSP in ordering bank
involving probable losses to its depositors closures even without prior hearing. Thus,
and creditors (NCBA, Sec 30 [c]). injunction does not lie against BSP in the exercise of
4. Willful violation of a cease and desist order the power and function. A contrary rule may lead to
under Section 37 that has become final, dissipation of assets and trigger bank run. Judicial
involving acts or transactions which review comes only after action of the Monetary
amount to fraud or a dissipation of the Board if the same was attended with bad faith and
assets (NCBA, Sec 30 [d]). grave abuse of discretion (BSP v. Valenzuela, G.R. No.
5. Notification to the BSP or public 184778, October 2, 2009).
announcement of a bank holiday (GBL, Sec
53). Note: The probability of bank runs may give rise to
6. Suspension of payment of its deposit the right to invoke borrowing of emergency loans
liabilities continuously for more than 30 and advancements under Sec. 84 of NCBA
days (GBL, Sec 53).
7. Persisting in conducting its business in an The closure and liquidation of a bank, which is
unsafe or unsound manner (GBL, Sec 56). considered an exercise of police power may be
the subject of judicial inquiry
Close now-hear later doctrine
The validity of such exercise of police power is
The doctrine is founded on practical and legal subject to judicial inquiry and could be set aside if it
considerations to obviate unwarranted dissipation is either capricious, discriminatory, whimsical,
of the bank’s assets and as a valid exercise of police arbitrary, unjust or a denial or due process and
power to protect the depositors, creditors, equal protection clauses of the Constitution (Central
stockholders, and the general public. The law does Bank v. CA, G.R. No. L-50031-32, July 27, 1981).
not contemplate prior notice and hearing before the
bank may be directed to stop operations and placed Assailing the order of closure (receivership or
under receivership (Central Bank of the Philippines conservatorship)
v. CA, G.R. No. 76118 Mar. 30, 1993).
a) The order may be assailed by the stockholders
Swift, adequate and determined actions must be representing at least majority of the
taken against financially distressed and outstanding capital stock;
mismanaged banks by government agencies lest the d) within ten days from receipt by the board of
public faith in the banking system deteriorate to the directors of the order; and
prejudice of the national economy (Vivas v. The e) thru a petition for certiorari on the ground that
Monetary Board of the Bangko Sentral ng Pilipinas, the action taken by the BSP was in excess of
G.R. No. 191424, August 07, 2013).

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jurisdiction or with grave abuse of discretion any asset of the institution: Provided that
as to amount to lack of jurisdiction. the receiver may deposit or place the funds
of the institution in non-speculative
No prior hearing is necessary in appointing a investments;
receiver and in closing the bank. It is enough that 4. Within 90 days from the take-over, the
subsequent judicial review is provided for. Indeed, receiver shall determine whether the
to require such previous hearings would not only be institution may be rehabilitated or
impractical but would tend to defeat the very otherwise placed in such a condition that it
purpose of the law (Rural Bank of Lucena v. Arca, may be permitted to resume business with
G.R. No. L-21146, September 20, 1965). safety to its depositors and creditors and
the general public; and
Q: Upon maturity of the time deposit, the bank 5. If the receiver determines that the
failed to remit. By reason of punitive action institution cannot be rehabilitated or
taken by Central Bank, the bank has been permitted to resume business, then the
prevented from performing banking operations. Monetary Board shall notify in writing the
Is the bank still obligated to pay the time board of directors of the institution of its
deposits despite the fact that its operations were findings and direct the receiver to proceed
suspended by the Central Bank? with liquidation of the institution (NCBA,
Sec 30).
A: YES, the suspension of operations of a bank
cannot excuse non-compliance with the obligation The insolvency of a bank and the consequent
to remit the time deposits of depositors which appointment of a receiver restrict the bank's
matured before the bank’s closure (Overseas Bank capacity to act, especially in relation to its
of Manila v. CA, G.R. No. 45886, April 19, 1989). property.

Bank not liable to pay interest when closed Where upon the insolvency of a bank, a receiver
therefor is appointed, the assets of the bank pass
As a general rule, the bank is not liable to pay beyond its control into the possession and control of
interest on DEPOSIT once it is closed and ceased the receiver whose duty it is to administer the assets
operations. for the benefit of the creditors of the bank. Thus, the
appointment of a receiver operates to suspend the
RECEIVERSHIP authority of the bank and of its directors and
officers over its property and effects, such authority
Receiver (2006 Bar) being reposed in the receiver (Villanueva v. CA, G.R.
No. 114870, May 26, 1995).
One appointed if the bank is already insolvent which
means that its liabilities are greater than its assets. The receiver is not authorized to transact
The Court has no authority to appoint a receiver for business in connection with the bank’s assets
a bank if the latter will function as such under BSP and property
law. The power to appoint belongs to BSP.
A receiver can only perform acts of administration
NOTE: For banks, the receiver would be the and not acts of dominion. The receiver cannot
Philippine Deposit Insurance Corporation; for approve an option to purchase real property. He has
quasi-banks, it could be any person of recognized only the authority to administer the same for the
competence in banking or finance (NCBA, Sec. 30). benefit of its creditors (Abacus Real Estate
Development Center, Inc. v. Manila Banking Corp, G.R.
Duties of a receiver No. 162270, Apr. 6, 2005).

The receiver shall: (IAN-WiDE) Nature of order of receivership

1. Immediately gather and take charge of all While resolutions of the Monetary Board
the assets and liabilities of the institution; forbidding a bank to do business on account of a
2. Administer the same for the benefit of the condition of insolvency and appointing a receiver to
creditors, and exercise the general powers take charge of the bank’s assets or determining
of a receiver under the Revised Rules of whether the bank may be rehabilitated or should be
Court; liquidated are by law “final and executory.”
3. Not, with the exception of administrative However, they can be set aside by the court on one
expenditures, pay or commit any act that specific ground - if the action is plainly arbitrary and
will involve the transfer or disposition of made in bad faith. Such contention can be asserted

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as an affirmative defense or a counterclaim in the Liquidation proceedings may be carried out
proceeding for assistance in liquidation (Salud v. with or without tax clearance
Central Bank, G.R. No. L-17630, August 19, 1986).
Unlike in a voluntary dissolution of a corporation
LIQUIDATION under the Corporation Code, BSP can liquidate the
bank with or without tax clearance (GBL).
Liquidation of a bank Banks under liquidation by the PDIC as ordered by
the Monetary Board constitute a special case
Acts of liquidation are those which constitute the governed by the special rules and procedures
conversion of the assets of the banking institution to provided under Section 30 of the New Central Bank
money or the sale, assignment or disposition of the Act, which does not require that a tax clearance be
same to creditors and other parties for the purpose secured from the BIR. Only a final tax return is
of paying debts of such institution (Banco Filipino v. required to satisfy the interest of the BIR in the
Central Bank, G.R. No. 70054, December 11, 1991). liquidation of a closed bank. It is unreasonable for
the liquidation court to require that a tax clearance
Liquidator of a distressed bank can prosecute be first secured as a condition for the approval of
and defend suits against the bank project of distribution of a bank under liquidation
(PDIC v. BIR, G.R. No. 172892, June 13, 2013).
Prosecution of suits, collection and the foreclosure
of mortgages against debtors of the bank by the Filing of the claims against the insolvent bank
liquidator are among the usual and ordinary
transactions pertaining to the administration of a GR: All claims against the insolvent bank should be
bank (Banco Filipino v. Central Bank, ibid). filed in the liquidation proceeding. It is not
necessary that a claim be initially disputed in a court
A liquidator may foreclose mortgages due to a or agency before it is filed with the liquidation court
bank while the issue of receivership is pending (Ong v. CA, G.R. No. 112830, Feb. 1, 1996).

A liquidator can foreclose mortgages for and in XPN: Where it is the bank that files a claim against
behalf of the bank even if the issue on receivership another person or legal entity, the claim should be
and liquidation is still pending (Supra). filed in the regular courts.

Q: An intra-corporate case was filed before RTC. Reason: The judicial liquidation is intended to
On the other hand, another complaint was filed provide an orderly mode for payment of all claims.
before BSP to compel a bank to disclose its In addition, such petition is not in the nature of a
stockholdings invoking the supervisory power disputed claim against the bank.
of the latter. Is there a forum shopping?
Q: Aaron, a well-known architect, is suffering
A: NONE. The two proceedings are of different from financial reverses. He has four creditors
nature praying for different relief. The complaint with a total claim of P 26 million. Despite his
filed with the BSP was an invocation of its intention to pay these obligations, his current
supervisory powers over banking operations which assets are insufficient to cover all of them. His
does not amount to a judicial proceeding (Suan v. creditors are about to sue him. Consequently, he
Monetary Board, A.C. No. 6377, March 12, 2007). was constrained to file a Petition for Insolvency
(Act 1956).
Commencement of liquidation proceedings bar
the filing of a separate action or petition to assail a. Since Aaron was merely forced by
the order of closure circumstances to petition the court to
declare him insolvent, can the judge
Once liquidation proceedings have been initiated, properly treat the petition as one for
the majority stockholders of the bank can no longer involuntary insolvency. Explain.
file a separate action or petition to assail the order b. If Aaron is declared an insolvent by the
of closure. Instead, issues on validity of closure court, what would be the effect, if any, of
should be raised as affirmative defenses in the such declaration on his creditors?
liquidation proceeding. This is necessary to prevent Explain.
multiplicity of suits or conflicting resolutions (Salud c. Assuming that Aaron has guarantors for
v. Central Bank of the Philippines, G.R. No. L-17620, his debts, are the guarantors released
August 19, 1986). from their obligations once Aaron is
discharged from his debts? Explain.

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d. What remedies are available to the Rule of promissory estoppel
guarantors in case they are made to pay
the creditors? Explain. (2005 Bar) The BSP may not thereafter renege on its
representation and liquidate the bank after majority
A: stockholders of the bank complied with the
a. NO. In involuntary insolvency, it is the creditors conditions and parted with value to the profit of CB,
who ask for the declaration of the debtor’s which thus acquired additional security for its own
insolvency. In this case, it is the debtor who filed advances, to the detriment of the bank’s
a petition for insolvency. The fact that Aaron stockholders, depositors and other creditors
has the intention to pay his obligations and was (Ramos v. Central Bank of the Philippines, G.R. No. L-
just constrained to file a petition as one for 29352, Oct. 4, 1971).
involuntary insolvency.
b. A declaration of the court that the debtor is A final and executory judgment against an
insolvent shall have the following effects: (Sec. insolvent bank may be stayed
59 of Insolvency Law):
i. All debtor’s assets placed in sheriff After the Monetary Board has declared that a bank
custody until a receiver or assignee has is insolvent and has ordered it to cease operations,
been appointed; the assets of the insolvent bank are held in trust for
ii. Payment to debtor of any debt due to the equal benefit of all creditors. One cannot obtain
him, or delivery of any property due to an advantage or preference over another by
him, and transfer or conveyance of any attachment, execution or otherwise. The final
property by him, are forbidden; judgment against the bank should be stayed as to
iii. Time and place is fixed for a meeting of execute the judgment would unduly deplete the
creditors to select the assignee in assets of the banks to the obvious prejudice of other
insolvency; and depositors and creditors (Lipana v. Development
iv. And all civil proceedings against Bank of Rizal, G.R. No. L-73884, Sept. 24, 1987).
insolvent are stayed
Q: The Blue Star Corporation filed with the RTC
c. NO. By virtue of the doctrine of excussion a petition for rehabilitation on the ground that it
provided under Art. 2058, the creditor can go foresaw impossibility of paying its obligations
against the guarantor after the former has as they fall due. Finding the petition sufficient in
exhausted all the properties of the principal form and substance, the court issued an Order
debtor and has resorted to all legal remedies appointing a rehabilitation receiver and staying
against such debtor. In this case, Aaron has the enforcement of all claims against the
insufficient property to discharge his corporation. What is the rationale for the Stay
obligations prompting him to file a petition for Order? (2006 Bar)
insolvency which stays claims against him. The
fact that Aaron was declared insolvent permits A: The reason behind the indiscriminate suspension
the creditor to enforce his claim against the or stay order in relation to the creditors’ claim is to
guarantor. expedite the rehabilitation of the distressed
corporation by enabling the management
d. The guarantor is entitled to be reimbursed by committee or the rehabilitation receiver to
the debtor for the following: effectively exercise its/his powers free from any
i. Total amount of the debt paid; judicial or extrajudicial interference that might
ii. Legal interest from the time payment was unduly hinder or prevent the rescue of the debtor
made known to the debtor; company. It also recognizes the assets of a
iii. Expenses incurred after notifying debtor corporation under rehabilitation held under trust
that demand to pay was made upon him; for the equal benefit of all creditors under the
and doctrine equality is equity, whereby all the creditors
iv. Damages in accordance with law. ought to stand on equal footing, and not one of them
should be paid ahead of others.
Bank deposits as a rule not preferred credits
Q: MATAH Bank suffered extreme financial losses
The exception is when the deposits are covered by a for five years since 2009. The BSP, through the
cashier's check purchased from the bank when the Monetary Board, placed MATAH Bank under the
bank officers knew or ought to have known that the receivership of PDIC. After two (2) public sale
bank is insolvent (Miranda v. PDIC, G.R. No. 169334, attempts, PDIC informed BSP that MATAH Bank
September 8, 2006). can hardly be rehabilitated. BSP ordered the
PDIC to commence the liquidation of the bank.

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However, the stockholders representing the A: No. Nothing in Section 30 of RA 7653 requires the
majority stock of MATAH Bank filed a petition for BSP, through the Monetary Board, to make an
certiorari before the CA challenging the order of independent determination of whether a bank may
the Monetary Board to commence the liquidation still be rehabilitated or not. Once the receiver
proceedings. It alleged that the Monetary Board determines that rehabilitation is no longer feasible,
must first conduct its own independent factual the Monetary Board is simply obligated to notify in
determination on the bank's viability before writing the bank's board of directors of the same and
ordering its liquidation. Is their contention direct the PDIC to proceed with liquidation. (APEX
correct? BANCRIGHTS HOLDINGSv. BSP 214866, October 02,
2017)

Conservatorship vs. Receivership vs. Liquidation

CONSERVATORSHIP RECEIVERSHIP LIQUIDATION

1. Inability to pay liabilities as they
fall due e.g: bank run, rumors, etc. 1. Insolvency
2. Assets are less than its liabilities 2. Continuance
1. Continuing inability
3. Cannot continue business would involve
2. Unwillingness to
Grounds 4. without causing damage; probable loss to its
maintain condition of
5. Violation of a cease and desist creditors
liquidity
order 3. Bank cannot be
6. “Bank holiday” for more than 30 rehabilitated
days (NCBA, Sec. 30).
1. Juridical personality is retained
1. Juridical personality is 2. Suspension of operation
retained. /stoppage of business Same with
Effects
2. Perfected transactions 3. Assets deemed in custodia conservatorship
cannot be repudiated legis(Domingo v. NLRC, G.R.
156761, October 17, 2006)
Within 90 days if liquidation is When debts have been
When decided upon; paid in accordance
After 1 year
terminated Until the bank is viable again, if with the liquidation
rehabilitation is decided upon plan

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LEGAL TENDER POWER 1. Take such remedial measures as are
appropriate and within the powers granted to
Legal Tender (2000 Bar) the Monetary Board, and the BSP.
2. Submit to the President of the Philippines and
All notes and coins issued by the BSP are fully the Congress, and make public a detailed report
guaranteed by the Republic and shall be legal tender which shall include, as a minimum, a
in the Philippines for all debts, both public and description and analysis of:
private (NCBA, Sec. 52). a. The nature and causes of the existing or
imminent decline;
Legal tender power of coins b. The remedial measures already taken or to
be taken by the Monetary Board
1. 1-Peso, 5-Peso and 10-Peso coins: c. The monetary, fiscal or administrative
In amounts not exceeding P1,000.00; measures further proposed
2. 25-centavo coin or less: d. The character and extent of the
In amounts not exceeding P100.00 cooperation required from other
(Circular No. 537, 2006). government agencies for the successful
execution of the policies of the Monetary
Notes, regardless of denomination, are legal tender Board (NCBA, Sec. 67).
for any amount.
To ensure sufficiency of foreign exchange resources,
Rules on the authority of the BSP to replace legal convertibility of the peso, and promotion of
tender domestic investment of bank resource, the
Monetary Board may require the banks to sell to the
1. Notes and coins called in for replacement BSP or to other banks all or part of their surplus
shall remain legal tender for a period of one holdings of foreign exchange (NCBA, Sec. 76).
year from the date of call.
2. After that period, they shall cease to be Q: X maintains a savings deposit in the amount
legal tender during the following year or for of Php·1 Million with ABC Bank Corporation. X
such longer period as MB may determine. also has obtained a loan from ABC Bank
3. After the expiration of this latter period, the Corporation in the amount of Php1 Million. In
notes and coins which have not been case of default: (2012 Bar)
exchanged shall cease to be a liability of
BSP and shall be demonetized (NCBA, Sec. A: A. The relationship between a bank and its
57). depositor is that of creditor and debtor. For this
reason, a bank has the right to set-off the deposits in
NOTE: Checks representing demand deposits do not its hands for the payment of a depositor’s
have legal tender power and their acceptance in the indebtedness (Equitable PCI Bank v. Ng Sheung
payment of debts, both public and private, is at the Ngor, et al., 171545, December 19, 2007).
option of the creditor. However, a check which has
been cleared and credited to the account of the FOREIGN EXCHANGE OPERATIONS
creditor shall be equivalent to a delivery to the
creditor of cash in an amount equal to the amount The Monetary Board shall determine the exchange
credited to his account (NCBA, Sec. 60). rate policy of the country.

Period of replacement It shall:

1. Determine the rates at which the Bangko
1. Notes for any series or denomination – Sentral shall buy and sell spot exchange, and
More than 5 years old shall establish deviation limits from the
2. Coins – More than 10 years old effective exchange rate or rates as it may deem
proper. The Bangko Sentral shall not collect any
NOTE: Coins which show signs of filing, clipping or additional commissions or charges of any sort,
perforation and notes which have lost more than other than actual telegraphic or cable costs
2/5s of their surface or all of the signatures incurred by it; and
inscribed therein shall be withdrawn from the 2. Determine the rates for other types of foreign
circulation and demonitized without compensation exchange transactions by the Bangko Sentral,
to the bearer. including purchases and sales of foreign notes
and coins, but the margins between the
Actions taken by the Bangko Sentral when effective exchange rates and the rates thus
international stability of Peso is threatened established may not exceed the corresponding

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margins for spot exchange transactions by NOTE: Foreign currency deposits made under
more than the additional costs or expenses Republic Act No. 6426 shall be exempt from these
involved in each type of transactions (NCBA, requirements (NCBA, Sec. 72).
Sec. 74).

Exercise of the power to determine rates of LAW ON SECRECY OF BANK DEPOSITS

exchange (R.A. 1405, AS AMENDED)

1. The MB shall determine the rates at which the

BSP shall buy and sell spot exchange, and shall PURPOSE
establish deviation limits from the effective
exchange rate or rates as it may deem proper. The purposes of RA 1405 are:
2. The MB shall similarly determine the rates for
other types of foreign exchange transactions by 1. Encourage deposit in banking institutions; and
the BSP, including purchases and sales of 2. Discourage private hoarding so that banks
foreign notes and coins, but the margins may lend such funds and assist in the economic
between the effective exchange rates and the development of the country.
rates thus established may not exceed the
corresponding margins for spot exchange PROHIBITED ACTS
transactions by more than the additional costs
or expenses involved in each type of The following are the prohibited acts in RA 1405:
transactions (NCBA, Sec. 74). 1. Examination/inquiry/looking into all deposits
of whatever nature with banks or banking
Instances where the Banko Sentral may exercise institutions in the Philippines (including
its exchange regulating powers investment in bonds issued by the government)
by any person, government official or office (RA
1. The international reserve of the BSP falls to a 1405, Sec. 2).
level which the Monetary Board considers 2. Disclosure by any official or employee of any
inadequate to meet the prospective demands banking institution to any unauthorized person
2. Whenever the international reserve appears to of any information concerning said deposit (RA
be in imminent danger of falling to such a level 1405, Sec. 3).
3. Whenever the international reserve is falling as
a result of payments or remittances abroad Acts not covered by the prohibition
which, in the opinion of the Monetary Board are
contrary to the national welfare (NCBA, Sec 67). Non-bank official or employee is not covered by the
prohibition. Neither is disclosure by a bank official
How BSP handles exchange crisis or employee of information about bank deposit in
favor of a co-employee in the course of the
To protect the international reserves of the Bangko performance of his duties covered by the
Sentral in the imminence of, or during an exchange prohibition.
crisis, or in time of national emergency and to give
the Monetary Board and the Government time in Q: Manosa, a newspaper columnist, while
which to take constructive measures to forestall, making a deposit in a bank, overheard a pretty
combat, or overcome such a crisis or emergency, the bank teller informing a co-employee that Gigi, a
Monetary Board, with the concurrence of at least well-known public official, has just a few
five (5) of its members and with the approval of the hundred pesos in her bank account and that her
President of the Philippines, may: check will in all probability bounce. Manosa
wrote this information in his newspaper
1. temporarily suspend or restrict sales of column. Thus, Gigi filed a complaint with the City
exchange by the Bangko Sentral, and Fiscal of Manila for unlawfully disclosing
2. may subject all transactions in gold and foreign information about her bank account.
exchange to license by the Bangko Sentral, and
3. may require that any foreign exchange a. Will the said suit prosper? Explain your
thereafter obtained by any person residing or answer.
entity operating in the Philippines be delivered b. Supposing that Gigi is charged with
to the Bangko Sentral or to any bank or agent unlawfully acquiring wealth under R.A.
designated by the Bangko Sentral for the 1379 and that the fiscal issued a subpoena
purpose, at the effective exchange rate or rates: duces tecum for the records of the bank
account of Gigi. May Gigi validly oppose the

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said issuance on the ground that the same A: NO. The contention of X is not correct. Deposits
violated the law on secrecy of bank in the context of the Secrecy of Philippine currency
deposits? Explain your answer. (1990 Bar) deposits include deposits of whatever nature and
kind. They include funds deposited in the bank
A: giving rise to creditor-debtor relationship, as well as
a. NO. The suit will not prosper. It is clear as funds invested in the bank like trust acconts
provided in section 3 of R.A. 1405 that it shall (Ejercito v. Sandiganbayan, G.R. No. 157294-95,
be unlawful for any official or employee of a November 30, 2006).
banking institution to disclose to any person
other than those mentioned in section two of The money deposited under the trust agreement
the said law any information concerning said (“Trust account”) is intended not merely to remain
deposits. Manosa, as a columnist, is not one of with the bank but to be invested by it elsewhere. To
those persons contemplated under the law. hold that this type of account is not protected by R.A.
Furthermore, he merely overheard what 1405 would encourage private hoarding of funds
appeared to be a vague remark of the bank that could otherwise be invested by banks in other
teller therefore is not in a sense an inquiry or a ventures, contrary to the policy behind the law
disclosure. (Ejercito v. Sandiganbayan, G.R. No. 157294-95,
b. NO. Gigi cannot oppose the said issuance November 30, 2006).
because the law provides as an exception from
the coverage of R.A. 1405 that upon order of a NOTE: Despite such pronouncement that trust
competent court in cases of anti-graft and funds are considered deposits, trust funds remain
corruption cases, the examination of the not covered by PDIC.
deposits may be allowed.
Confidentiality granted by RA 1405 does NOT
DEPOSITS COVERED extend to Letters of Credit and Trust Receipts

1. All deposits of whatever nature with banks or The confidentiality granted by the law does NOT
banking institutions found in the Philippines. extend to other documents and records like L/C’s,
2. Investments in bonds issued by the Philippine TR’s, bank drafts and promissory notes (Opinion of
government, its branches, and institutions (R.A. the Secretary of Justice No. 5, Series of 1982;
1405, Sec. 2). Opinion of the Secretary of Justice No. 126,
3. Trust accounts Series of 1989).

Meaning of the phrase "of whatever nature and EXCEPTIONS

kind"
Instances where examination or disclosure of
R.A.1405 is no longer limited to deposits governed information about deposits can be allowed
by the law on loans giving rise to creditor-debtor (1990-1992, 1994, 1995, 1997, 1998, 2000,
relationship but it covers fund of whatever nature 2001, 2004-2006 Bar)
so long as the bank may use and utilize it in
authorized loans. (WICS)
1. Upon written consent of the depositor (RA
Trust funds covered by the term “deposit” 1405, Sec. 2)
2. In cases of impeachment (Ibid)
Q: X, a government official, has a number of bank 3. Upon order of competent court in cases of
accounts in T Bank containing millions of pesos. bribery or dereliction of duty of public officials
He also opened several trust accounts in the (Ibid)
same bank which specifically covered the 4. In cases where the money deposited or invested
placement and/or investment of funds. X was is the subject matter of the litigation (Ibid)
later charged with graft and corruption before
the Sandiganbayan (SB) by the Ombudsman. The Other Instances:
Special Prosecutor filed a motion praying for a
court order authorizing it to look into the a. Upon order of the Commissioner of
savings and trust accounts of X in T Bank. X Internal Revenue in respect of the bank
opposed the motion arguing that the trust deposits of a decedent for the purpose of
accounts are not "deposits" under the Law on determining such decedent’s gross estate
Secrecy of Bank Deposits (Rep. Act No. 1405). Is (NIRC, Sec. 6[F][1])
the contention of X correct? Explain. (2016 Bar) b. Upon the order of the Commissioner of
Internal Revenue in respect of bank

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deposits of a taxpayer who has filed an f. Acts of Terrorism or in violation of
application for compromise of his tax Human Security Act.
liability by reason of financial incapacity to
pay his tax liability (Ibid) k. In case the law is repealed, superseded or
c. The Commissioner of Internal Revenue is modified by any law to the contrary.
authorized to inquire into bank deposits of
a specific taxpayer upon request for tax Q: The Bank Secrecy Law (RA 1405) prohibits
information from a foreign tax authority disclosing any information about deposit
pursuant to an international convention or records of an individual without court order
agreement on tax matters to which the except (2012 Bar)
Philippines is a party (Ibid)
d. In case of dormant accounts/deposits for A: C. In an investigation by the Ombudsman.
at least 10 years under the Unclaimed
Balances Act (Act No. 3936, Sec. 2) Inspection by the Ombudsman
e. The prohibition against examination of
bank deposit does not preclude its In order that the Ombudsman may inspect a bank
garnishment to satisfy a judgment against deposit: (PILA-Ho)
the depositor (Oñate v. Abrogar, G.R. No.
107303, February 21, 1994) 1. There must be a case pending in court;
f. Presidential Commission on Good 2. The account must be clearly identified;
Government (PCGG) may require the 3. The inspection must be limited to the subject
production of bank records material to its matter of the pending case;
investigation (Opinion of the Secretary of 4. The inspection may cover only the account
Justice, February 27, 1987) identified; and
g. The Anti-Money Laundering Council 5. The bank personnel and the account holder
(AMLC) may inquire into any deposit with must be notified to be present during the
any bank in case of violation of the RA inspection (Marquez v. Desierto, G.R. No. 135882,
9160 or the AMLA if there is probable June 27, 2001; Office of the Ombudsman v. Ibay,
cause that it is related to an unlawful G.R. No. 137538, September 3, 2001).
activity (RA 9160, as amended, Sec. 11)
h. The PDIC and the BSP may examine Q: GP is suspected jueteng lord who is rumored
deposit accounts and all information to be enjoying police and military protection.
related to them in case of a finding of The envy of many drug lords who had not
unsafe or unsound banking practices (RA escaped the dragnet of the law, GP was
3591, as amended, Sec. 8) summoned to a hearing of the Committee on
i. With court order: Racketeering and Other Syndicated Crimes of
a. In cases of unexplained wealth the House of Representatives, which was
under Sec. 8 of the Anti-Graft and conducting congressional investigation-in aid of
Corrupt Practices Act (PNB v. legislation on the involvement of police and
Gancayco, L-18343, September 30, military personnel, and possibly even of local
1965) government officials, in the illegal activities of
b. In cases filed by the Ombudsman suspected gambling and drug lords.
and upon the latter’s authority to Subpoenaed to attend the investigation were
examine and have access to bank officers of certain identified banks with a
accounts and records (Marquez v. directive to them to bring the records and
Desierto, GR 138569, September 11, documents of bank deposits of individuals
2003) mentioned in the subpoenas, among them GP.
GP and the banks opposed the production of the
j. Without court order: If the AMLC bank records of deposits on the ground that no
determines that a particular deposit or such inquiry is allowed under the Law on
investment with any banking institution is Secrecy of Bank Deposits (R.A. 1405 as
related to the following (HK-MADS): amended). Is the opposition of GP and the banks
valid? Explain. (2010 Bar)
a. Hijacking,
b. Kidnapping, A: YES. The opposition is valid. GP is not a public
c. Murder, official. The investigation does not involve one of
d. Destructive Arson, and the exceptions to the prohibition against the
e. Violation of the Dangerous Drugs Act. disclosure of any information concerning bank
deposits under the Law on Secrecy of Bank

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345 FACULTY OF CIVIL LAW
 Intellectual Property Code
Deposits. The Committee conducting the deposits are not subject to court order except for
investigation is not a competent court or the violation of the anti-money laundering law (GSIS v.
Ombudsman authorized under the law involving Court of Appeals GR 189206, June 8, 2011, in Divina,
such disclosure. 2014).

Q: An insurance company is deluded into XPNs:

releasing a check to A for P35th o pay for 1. The depositor has given his written permission.
Treasury Bills (T-Bills) which A claims to be en 2. Where the funds deposited in a joint foreign
route on board an armored truck from a currency savings account belonged exclusively
government bank. The check is delivered to A to one of the depositors and were held in trust
who deposits it to his account with XYZ bank for him by the other depositor and the other
before the insurance company realizes it as a depositor unilaterally closed the joint account
scam. Upon such realization, the insurance and transferred the funds to her personal
company files an action against A for recovery account, the latter cannot invoke the exemption
for the amount defrauded and obtains a writ of from court processes under RA 6426 because
preliminary attachment. In addition to the writ, she is not the owner of the deposit in the
the Bank is also served a subpoena to examine account. Consequently, the depositor who
the account records of A. The Bank declines to owned the funds can have her enjoined from
provide any information in response to the writ making withdrawals from her personal account
and moves to quash subpoena in invoking (Van Twest v. Court of Appeals, G.R. No. 106235,
secrecy of bank deposits under R.A. 1405 and a) February 10, 1994).
not respond to the writ b) quash the subpoena 3. A father who sued his daughter for illegally
for examination? (1998 Bar) withdrawing funds from his foreign currency
deposit and transferring to another bank in the
A: YES. Whether the transaction is considered a sale name of her sister, can inquire into the deposit
of money placement does not make the money of the sister, because the money deposited
subject matter of litigation within the meaning of belongs to him (China Banking Corp. v. CA, G.R.
Section 2 of R.A. 1405 which prohibits the No. 140687, December 18, 2006).
disclosure or inquiry into bank deposits except “in 4. The exemption from court process of foreign
cases where the money deposited or invested is the currency deposits under RA 6426 cannot be
subject matter of litigation” nor will it matter invoked by a foreign transient who raped a
whether the money was “swindled”. minor, escaped and was held liable for damages
to the victim. The garnishment of his foreign
Foreign currency deposits currency deposit should be allowed to prevent
an injustice and for equitable grounds. The law
Foreign currency deposits are covered by R.A. 6426 was enacted to encourage foreign currency
otherwise known as the “Foreign Currency deposit and not to benefit a wrongdoer
Deposits Act”. (Salvacion v. Central Bank of the Philippines, G.R.
No. 94723, August 21, 1997).
Secrecy of foreign currency deposits 5. The Commissioner of Internal Revenue is
authorized to inquire into bank deposits of the
GR: Foreign currency deposits cannot be inquired following:
or looked into. All foreign currency deposits are a. A decedent to determine his estate; and
absolutely confidential (RA 6426, Sec. 8). b. Any taxpayer who has filed for an
application for compromise of his tax
RA 6426 is a special law designed especially for liability
foreign currency deposits in the Philippines. RA c. A specific taxpayer upon request for tax
1405 which covers all bank deposits in the information from a foreign tax authority
Philippines is the general law which does not nullify pursuant to an international convention or
the special law on foreign currency deposits. The agreement on tax matters to which the
surety which issued a bond to secure the obligation Philippines is a party (NIRC, Sec. 6 [f]).
of the principal debtor cannot inquire into the
foreign currency deposits of the debtor even if its 6. AMLC may inquire into any deposit with a bank
purpose is to determine whether or not the loan or financial institution in case of violation of RA
proceeds were used for the purpose specified in the 9160 if there is probable cause that it is related
surety agreement. The foreign currency deposits to an unlawful activity (RA 9160, Sec. 11).
cannot be examined without the written consent of 7. Upon ex parte application by a law enforcer
the depositor. The subpoena issued by the bank authorized by the Anti-Terrorism Council, the
should be quashed because foreign currency justices of the CA designated as special court to

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handle anti-terrorism cases may authorize the depositor except in certain situations like violation
examination of deposits in a financial of anti-money laundering law (GSIS v. CA, G.R. No.
institution upon finding probable cause of the 189206, June 8, 2011).
commission of terrorism or conspiracy to
commit terrorism (RA 9372, Sec. 27-28). Q: X, a private individual, maintains a dollar
8. PDIC and BSP may examine deposit accounts deposit with ABC Bank. X is suspected to be the
and all information related to them in case of a leader of a Kidnap for Ransom Gang and he is
finding of unsafe or unsound banking practices suspected of depositing all ransom money in
(RA 3591, as amended, Sec. 8). said deposit account which are all in US Dollars.
9. AMLC can investigate (a) any property of funds The police want to open said account to know if
related to financing terrorism; (b) property or there are really deposits in big amounts. Which
funds of any person if there is probable cause to statement is most accurate? (2012 Bar)
believe he is committing or attempting or
conspiring to commit terrorism or financing A: C. The deposit, being in US Dollars, is covered by
terrorism (RA 10168, Sec. 10). the Foreign Currency Deposit Act which allows
disclosure only upon the written permission of the
Q: Michael withdrew without authority funds of depositor.
the partnership in the amounts of P500th and
US$50th for services he claims rendered for the A bank can be compelled to disclose the records
benefit of the partnership. He deposited the P of the accounts of a depositor under the
500th in his personal peso current account with investigation for unexplained wealth
Prosperity Bank and the US$50th in his personal
foreign currency savings account with Eastern Since cases of unexplained wealth are similar to
Bank. The partnership instituted an action in cases of bribery and dereliction of duty, no reason is
court against Michael, Prosperity, and Eastern to seen why it cannot be excepted from the rule
compel Michael to return the subject funds to making bank deposits confidential. In this
the partnership and pending litigation to order connection, inquiry into illegally acquired property
both banks to disallow any withdrawal from his in anti-graft cases extends to cases where such
accounts. At the initial hearing of the case, the property is concealed by being held or recorded in
court ordered Prosperity to produce the records the name of other persons. This is also because the
of his Michael’s peso current account and Anti-Graft and Corrupt Practices Act, bank deposits
Eastern to produce the records of his foreign shall be taken into consideration in determining
currency savings account. Can the court compel whether or not a public officer has acquired
Prosperity and Eastern to disclose the bank property manifestly out of proportion with his
deposits of Michael? Discuss fully. (1995 Bar) lawful income (PNB v. Gancayco, G.R. No. L-18343,
September 30, 1965).
A: YES, with regard to Michael’s peso current
account. This is pursuant to Section 2 of RA 1405 In an action filed by the bank to recover the
which allows the disclosure of bank deposits in case money transmitted by mistake, the bank is
where the money deposited is the subject matter of allowed to present the accounts which it
litigation. However, with regard to his foreign believed were responsible for the acquisition of
currency savings account, the disclosure cannot be the money
allowed. Pursuant to the Foreign Currency Law, the
exemption to the prohibition against disclosure of RA 1405 allows the disclosure of bank deposits in
information concerning foreign bank deposits is to cases where the money deposited is the subject
acquire the written consent of the depositor. matter of litigation. In an action filed by the bank to
recover the money transmitted by mistake,
Q: A, an individual, secured a loan from XYZ necessarily, an inquiry into the whereabouts of the
Company. C, a surety company, issued a bond to amount extends to whatever is concealed by being
further secure the obligation. A has dollar held or recorded in the name of the persons other
deposits with ABC Bank. Can C inquire to ABC than the one responsible for the illegal acquisition.
Bank about the foreign currency deposits of A to
determine whether or not the loan proceeds Q: Socorro received $10,000 from a foreign bank
were used for the purpose specified in their although she was entitled only to $1,000. In an
surety agreement? apparent plan to conceal erroneously sent
amount, she opened a dollar account with her
A: NO. The surety company which issued the bond local bank, deposited $ 10,000 and issued 4
cannot inquire into the foreign currency deposits. It checks in the amount of $2,000 and 1 check for
cannot be examined without the consent of the $1,000 each payable to different individuals

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347 FACULTY OF CIVIL LAW
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who deposited the same in their respective A: Under Section 6 (F) of the NIRC, the CIR can
dollar accounts with different local banks. The inquire into the deposits of a decedent for the
sender bank then brought a civil suit before the purpose of determining the gross estate of such
RTC for the recovery of erroneously send decedent. Apart from this case, a BIR inquiry into
amount. In the course of trial, the sender bank deposits cannot be made. Thus, exception 3
presented testimonies of bank officials to show may not be always applicable. Turning to exception
that the funds were, in fact, deposited in a bank 4, an inquiry into bank deposits is possible only in
by Socorro and paid out to several persons, who prosecutions for unexplained wealth under the
participated in the concealment and dissipation Anti-Graft and Corrupt Practices Act, according to
of the amount that Socorro had erroneously the Supreme Court in the cases of Philippine
received. Socorro moved to strike out the National Bank v. Gancayco, G.R. No. L-18343,
testimonies from the record invoking the law on September 30, 1965 and Banco Filipino Savings and
secrecy of bank deposits. If you were the Judge, Mortgage Bank v. Purisima, G.R. No. L-56429, May 28,
would you issue and order to strike them out? 1988. However, all other cases of anti-graft and
Why? (1992 Bar) corrupt practices will not warrant an inquiry into
bank deposits. Thus, exception 4 may not always be
A: If I am the judge, I would not issue an order to applicable. Like any other exception, it must be
strike them out. The testimonies of the bank officials interpreted strictly. Exceptions 1, 2 and 5, on the
showing that the funds were in fact deposited in a other hand, are provided expressly in the Law on
bank by Socorro and paid out to several persons, Secrecy of Bank Depositors. They are available to
who participated in the concealment and depositors at all times.
dissipation of the amount that Socorro had
erroneously received, were presented in the course Q: Miguel, a special customs agent is charged
of the trial. Therefore, the said testimonies must be before the Ombudsman with having acquired
considered as involved in the litigation. In the case property out of proportion to his salary, in
of Mellon Bank v. Magsino, G.R. No. 71479, October violation of the Anti-Graft and Corrupt Practices
18, 1990, it was held that R.A. 1405 allows the Act. The Ombudsman issued a subpoena duces
disclosure of bank deposits in cases where the tecum to the Banco De Cinco commanding its
money deposited is the subject matter of litigation. representative to furnish the Ombudsman
In an action filed by a bank to recover money it records of transactions by or in the name of
transmitted by mistake, necessarily, an inquiry to its Miguel, his wife and children. A second
whereabouts of the amount extends to whatever subpoena was issued expanding the first by
concealed by, being held or recorded in the name of including the production of records of friends of
the persons other than the one responsible for Miguel in said bank and in all its branches and
illegal acquisition. Hence, in the case at bar, the extension offices, specifically naming them,
disclosure should be allowed and it should not be Miguel moved to quash the subpoenas arguing
subject to an order to strike out. that they violate the Secrecy of Bank Deposits
Law. In addition, he contends that the
Q: The Law in Secrecy of Bank Deposits provides subpoenas are in the nature of - fishing
that all deposits of whatever nature with banks expedition or general warrants and are
or banking institutions are absolutely constitutionally impermissible with respect to
confidential in nature and may not be examined, private individuals who are not under
inquired or looked into by any person, investigation. Is Miguel’s contention tenable?
government official, bureau or office. However,
the law provides exceptions in certain instances.
Which of the following may not be among the A: NO. The contention of Miguel is not tenable. In the
exceptions: case of Banco Filipino v. Purisima, it was held that
the inquiry into illegally acquired property-or
1. In cases of impeachment property not legitimately acquired- extends to cases
2. In cases involving bribery where such property is concealed by being held or
3. In cases involving BIR inquiry recovered in the name of other persons. This
4. In cases of anti-graft and corrupt practices proposition is made clear by RA 3019 which quite
5. In cases where the money involved is the categorically states that the term “legitimately
subject of litigation. acquired property of a public officer or employee
shall not include property unlawfully acquired by
Explain your answer or choice briefly (2004 the respondent, but its ownership is concealed by its
Bar) being recorded in the name of, or held by,
respondent’s spouse, ascendants, descendants,
relatives or any other persons. To sustain the

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petitioner’s theory, and restrict the inquiry only to and not to benefit a wrongdoer (Salvacion v. Central
property held by or in the name of the government Bank of the Philippines, supra).
official or employee, or his spouse and unmarried
children is unwarranted in the light of the Penalties for violation of R.A. 1405
provisions of the statutes in question, and would
make available to persons in government who 1. Imprisonment of not more than five (5) years
illegally acquire property an easy and fool-proof 2. Fine of not more than P20,000.00
means of evading investigation and prosecution; all 3. Both, in the discretion of the court (RA 1405,
they have to do would be to simply place the Sec. 5)
property in possession or name of persons other
than their spouse and unmarried children. This is an Q: R.A. 6832 creating a Commission to conduct a
absurdity that we will not ascribe to the lawmakers. Thorough Fact-Finding Investigation of the
failed Coup d’etat of December 1989,
GARNISHMENT OF DEPOSITS, recommend measures to prevent the
INCLUDING FOREIGN DEPOSITS occurrence of similar attempts at a violent
seizure of power and for other purposes,
Garnishment of a bank deposit does not violate provides that the Commission may ask the
the law Monetary Board to disclose information on
and/or to grant authority to examine any bank
The prohibition against examination or inquiry does deposits, trust or investment funds, or banking
not preclude its being garnished for satisfaction of transactions in the name of and/or utilized by a
judgment. The disclosure is purely incidental to the persons, natural or juridical, under
execution process and it was not the intention of the investigation by the Commission, in any bank or
legislature to place bank deposits beyond the reach banking institution in the Philippines, when the
of judgment creditor (PCIB v. CA, G.R. No. 84526, Commission has reasonable ground to believe
January 28, 1991). that said deposits, trust or investment funds, or
banking transactions have been used in support
Garnishment of foreign currency deposits or in furtherance of the objectives of the said
coup d’etat. Does the above provision not violate
GR: Foreign currency deposits shall be exempt from the Law on Secrecy of Bank Deposits (R.A. 1405)?
attachment, garnishment, or any other order or (1991 Bar)
process of any court, legislative body, government
agency or any administrative body whatsoever (RA A: The above provision does not violate RA 1405
6426, Sec 8). because the enactment of RA 6832 is valid exercise
of police power. RA 1405 is in itself a statutory
XPN: The application of Sec. 8 of RA 6426 depends enactment which can be validly modified, amended
on the extent of its justice. The garnishment of a or repealed by a subsequent law. The Secrecy of
foreign currency deposit should be allowed to Bank Deposits Act did not amount to a contract
prevent injustice and for equitable grounds, between the depositors and depository banks
otherwise, it would negate Article 10 of the New within the meaning of the non-impairment clause of
Civil Code which provides that “in case of doubt in the Constitution. Even if it did, the police power of
the interpretation or application of laws, it is the State is superior to the non-impairment clause.
presumed that the lawmaking body intended right
and justice to prevail (Salvacion v. Central Bank of
the Philippines, G.R. 94723, August 21, 1997). GENERAL BANKING LAW OF 2000 (RA 8791)

The foreign currency deposit of a transient

foreigner who illegally detained and raped a Policy of the state behind the General Banking
minor Filipina can be garnished to satisfy the Act (RA 8791)
award for damages to the victim
The State recognizes the vital role of banks in
The exemption from garnishment of foreign providing an environment conducive to the
currency deposits under R.A. 6426 cannot be sustained development of the national economy and
invoked to escape liability for the damages to the the fiduciary nature of banking that requires high
victim. The garnishment of the transient foreigner’s standards of integrity and performance. In
foreign currency deposit should be allowed to furtherance thereof, the State shall promote and
prevent injustice and for equitable grounds. The law maintain a stable and efficient banking and financial
was enacted to encourage foreign currency deposit system that is globally competitive, dynamic and

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349 FACULTY OF CIVIL LAW
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responsive to the demands of a developing economy 4. Under Foreign Bank Liberalization Law (RA
(RA 8791, Sec 2). 7721), the Monetary Board may authorize
foreign banks to operate in the Philippines.
DEFINITION AND CLASSIFICATION OF BANKS
Ownership of foreign individuals in a bank
Bank
The percentage of foreign-owned voting stocks in a
A bank is an entity engaged in the lending of funds bank shall be determined by the citizenship of the
obtained from the public in the form of deposits. individual stockholders in that bank. The
citizenship of the corporation which is a
Elements for an entity to be considered doing stockholder in a bank shall follow the citizenship of
business as a bank the controlling stockholders of the corporation,
irrespective of the place of incorporation (GBL, Sec
1. The entity is engaged in the lending of funds 2).
2. Funds obtained from the public with at least 20
depositors Classifications of banks (2002, 2010 Bar)
3. Funds are in the form of deposits
1. Universal banks- Primarily governed by the
NOTE: A transaction involving not a loan but GBL. They can exercise the powers of an
purchase of receivables at a discount within the investment house and invest in non-allied
purview of investing, reinvesting, or trading in enterprises and have the highest capitalization.
securities which an investment company may 2. Commercial banks - Ordinary banks governed
perform is not banking. by the GBL which have a lower capitalization
requirement than universal banks and can
Extent of ownership of foreign individuals and neither exercise the powers of an investment
non-bank corporations in a bank house nor invest in non-allied enterprises.
3. Thrift banks – These are:
Foreign individuals may own or control up to forty a. Savings and mortgage banks;
percent (40%) of the voting stock of a domestic b. Stock savings and loan associations; and
bank (GBL, Sec 2). c. Private development banks, which are
primarily governed by the Thrift Banks Act
Extent of ownership of a non-banking (RA 7906).
corporation in a bank
4. Rural banks – These are mandated to make
GR: A corporation may only own forty percent needed credit available and readily accessible
(40%) of the bank in the rural areas on reasonable terms and
which are primarily governed by the Rural
XPNs: Banks Act of 1992 (RA 7353).
1. A universal bank can own up to 100% of a thrift 5. Cooperative banks – Banks whose majority
bank; shares are owned and controlled by
2. A corporation whose shares are listed in the cooperatives primarily to provide financial and
stock exchange can own up to 60% of the bank; credit services to cooperatives. It shall include
NOTE: This privilege can be exercised only cooperative rural banks. They are governed
once. primarily by the Cooperative Code (RA 6938).
6. Islamic banks – Banks whose business dealings
3. If the corporation is in existence for 10 years it and activities are subject to the basic principles
can own up to 60% of the bank; and and rulings of Islamic Shari’ a, such as the Al
Amanah Islamic Investment Bank of the
NOTE: This privilege can be exercised only Philippines which was created by RA 6848.
once. 7. Other classification of banks as determined by
the Monetary Board of the BSP

Universal banks vs. Commercial banks vs. Thrift banks

UNIVERSAL BANKS COMMERCIAL BANKS THRIFT BANKS

Governing General Banking Law (GBL)
GBL Thrift Banks Act (R.A. 7906)
Laws

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1. Has the authority to To engage in allied
exercise the powers of a undertakings and, in
commercial bank. addition to the general
All the powers of a commercial
2. To act as an investment powers incident to a
bank, except:
house – a corporation that corporation, may exercise
sells and guarantees sale of all such powers as may be
1. To issue imported LC
securities and shares of necessary to carry on the
Powers [Link] accept or open checking
stocks. i.e. Petron will tap an business of commercial
account except with prior
investment house in order banking.
approval by the Monetary
to sell its stocks.
Board (MB requires at least a
3. To engage in a non-allied NOTE: Allied undertakings
net asset worth of 28M)
undertaking – which is not are those activities or
related at all to banking. entities which enhance or
e.g. Realty complement banking.
Head office in NCR
1. Head office only – 500M
2. Up to 10 branches – 750M
1. Head office only – 3B
1. Head office only – 2B 3. 11 to 50 branches – 1B
2. Up to 10 branches – 6B
2. Up to 10 branches – 4B 4. More than 50 branches – 2B
3. 11 – 100 branches – 15B
Capitalization 3. 11 – 100 branches – 10B Head office outside NCR
4. More than 100 branches –
4. More than 100 branches 1. Head office only – 200M
20B
– 15B 2. Up to 10 branches – 300M
(BSP Circular No. 854, Oct. 9,
3. 11 to 50 branches – 400M
2014)
4. More than 50 branches –
800M
Can be a stock holder in
Equity Only allied undertaking Only allied undertaking
both allied and non-allied
Investment
undertaking
Can invest but shall not
Non- Allied
exceed 25% of the investee Cannot invest Cannot invest
Transaction
(receiving) corporation.
Total Amount
Not to exceed 50% of the Not to exceed 35% of Not to exceed 35% of bank’s
of Investment
bank’s net worth. bank’s net worth. net worth.
Equity
Single Equity
Not to exceed 25% of bank’s net worth
Investment

DISTINCTION OF BANKS FROM QUASI-BANKS Financial intermediaries

AND TRUST ENTITIES
Persons or entities whose principal functions
Quasi-bank include the lending, investing, or placement of
funds on pieces of evidence of indebtedness or
These are entities engaged in the assignment with equity deposited with them, acquired by them or
recourse or acceptance of deposit substitutes for otherwise coursed through them, either for their
purposes of re-lending or purchasing of own account or for the account of others.
receivables borrowing of funds through the
issuance, endorsement or and other obligations Pawnshops are non-bank financial
(GBL, Sec 4). Unlike banks, quasi-banks do not intermediaries
accept deposits. Neither are funds obtained
insured with the PDIC. Q: First Planters Pawnshop, Inc. (Pawnshop)
contests the deficiency value-added and
Trust entities documentary stamp taxes imposed upon it by the
Bureau of Internal Revenue (BIR) for the year
These are entities engaged in trust business that 2000. The core of petitioner's argument is that it is
act as a trustee or administer any trust or hold not a lending investor within the purview of Section
property in trust or on deposit for the use, benefit, 108(A) of the National Internal Revenue Code
or behalf of others (GBL, Sec. 79). A bank does not (NIRC), as amended, and therefore not subject to
act as a trustee. value-added tax (VAT). Is Pawnshop’s contention
correct?

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A: NO. The tax treatment of pawnshops as non-bank settlement of a civil liability arising from
financial intermediaries is not without basis. Financial crime.
intermediaries are defined as persons or entities whose 3. A universal and commercial bank can both
principal functions include the lending, investing or invest in equity but only universal bank is
placement of funds or evidences of indebtedness or allowed to invest in equity of non-allied
equity deposited with them, acquired by them, or enterprises.
otherwise coursed through them, either for their own
account or for the account of others. It need not be Q: Banco Filipino entered into a trust
elaborated that pawnshops are non-banks/banking agreement wherein it “warehoused” its
institutions. Moreover, the nature of their business properties with Tala Realty, which is in
activities partakes that of a financial intermediary in that violation of the restriction imposed limiting a
its principal function is lending. bank’s real estate investments to only 50% of
its capital assets. Is the agreement valid?
That pawnshops are to be treated as non-bank
financial intermediaries is further bolstered by the A: No, the agreement is not valid. This
fact that pawnshops are under the regulatory arrangement which the Bank claims to be an
supervision of the Bangko Sentral ng Pilipinas and implied trust is contrary to law being in violation
covered by its Manual of Regulations for Non-Bank of the restriction imposed which it had already
Financial Institutions (First Planters Pawnshop, reached. it “warehoused” its branch site holdings
Inc. v. CIR,G.R. No. 174134, July 30, 2008). to Tala to enable it to pursue its expansion
program and purchase new branch sites including
Deposit substitutes its main branch in Makati, and at the same time
avoid the real property holdings limit under
It is an alternative form of obtaining funds from the Sections 25(a) and 34 of the General Banking Act
public, other than deposits, through the issuance, which it had already reached. (BANCO FILIPINO
endorsement, or acceptance of debt instruments, v. TALA REALTY GR No. 158866 Sept. 09, 2013)
for the borrower's own account, for the purpose of
relending or purchasing of receivables and other BANKING AND INCIDENTAL POWERS
obligations. These instruments may include, but
need not be limited to, banker’s acceptances, Certificate of Authority to Register
promissory notes, participations, certificates of
assignment and similar instruments with This is a requirement before a bank may register
recourse, and repurchase agreements. or amend their articles of incorporation with SEC.
It is issued by the Monetary Board (GBL, Sec. 14).
Q: XYZ Corporation is engaged in lending funds The following must be proven by the bank to
to small vendors in various public markets. To satisfy the Monetary Board and in order for the
fund the lending, XYZ Corporation raised funds latter to grant such certificate:
through borrowings from friends and 1. All requirements of existing laws and
investors. Which statement is most accurate? regulations to engage in the business for
(2012 Bar) which the applicant is proposed to be
incorporated have been complied with;
A: b. XYZ Corporation is a quasi-bank 2. That the public interest and economic
conditions, both general and local, justify the
BANK POWERS AND LIABILITIES authorization; and
3. The amount of capital, the financing,
CORPORATE POWERS organization, direction and administration, as
well as the integrity and responsibility of the
1. All powers provided by the corporation code, organizers and administrators reasonably
like issuance of stocks and entering into assure the safety of deposits and the public
merger or consolidation with other interest (Ibid).
corporation or banks.
2. It can only acquire real property when it is General powers and functions of a bank
needed for business, in settlement of debt
incurred in the course of the business, 1. Accepting drafts and issuing letters of credit
property as may be mortgaged to it to secure a 2. Discounting and negotiating promissory
debt in good faith and property it may acquire notes, drafts, bills of exchange and other
during execution sale to satisfy judgment. instrument evidencing debt
Banks cannot acquire real property in

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3. Accepting or creating demand deposits, corporations or related groups of persons
receiving other types of deposit and deposit with the bank (GBL, Sec 12).
substitutes 6. Two or more corporations owned or
4. Buying and selling FOREX and gold or silver controlled by the same family group or same
bullion group of persons (Corporate Stockholdings)
5. Acquiring marketable bonds and other debt shall be considered related interests and must
securities be fully disclosed in all transactions by such
6. Extending credit corporations or related group of persons with
7. Determination of bonds and other debt the bank (GBL, Sec 13).
securities eligible for investment including
maturities and aggregate amount of such Instances when a bank is prohibited from
investment, subject to such rules as the declaring dividends
Monetary Board may promulgate.
8. And all other powers as may be necessary to 1. Its clearing account with the Bangko Sentral is
carry on the business of a bank (GBL, Sec. 29). overdrawn
2. It is deficient in the required liquidity floor for
Rules regarding the issuance of stocks by a government deposits for five or more
bank consecutive days
3. It does not comply with the liquidity
1. The Monetary Board may prescribe rules and standards/ratios prescribed by the Bangko
regulations on the types of stock a bank may Sentral for purposes of determining funds
issue. available for dividend declaration
2. Banks shall issue par value stocks only (GBL, 4. It has committed a major violation as may be
Sec. 9). determined by the Bangko Sentral (GBL, Sec.
3. GR: No bank shall purchase or acquire shares 57).
of its own capital stock or accept its own
shares as a security for a loan. Independent directors in banks

XPN: When authorized by the Monetary Independent director – a person other than an
Board. officer or employee of the bank, its subsidiaries or
affiliates or related interests.
NOTE: That in every case the stock so
purchased or acquired shall, within six months NOTE: Irrespective of the number of members of
from the time of its purchase or acquisition, be the board, two (2) of them shall be independent
sold or disposed of at a public or private sale directors.
(GBL, Sec. 10).
Effect of merger or consolidation of banks to
4. Foreign individuals and non-bank the number of directors allowed
corporations may own or control up to 40% of
the voting stock of a domestic bank. This rule Q: XXX Bank Corporation and ZZZ Corporation
shall apply to Filipinos and domestic non-bank were merged into XX ZZ Bank Corporation. So
corporations. as not to create any unnecessary conflict, all the
former directors of both banks wanted to be
NOTE: The percentage of foreign-owned appointed /elected as members of the Board of
voting stocks in a bank shall be determined by Directors of the merged bank. Each bank used
the citizenship of the individual stockholders to have eleven (11) members of the board. The
in that bank. The citizenship of the corporation maximum number of directors of the merged
which is a stockholder in a bank shall follow bank is - (2012 Bar)
the citizenship of the controlling stockholders A: C. In case of a merged bank, number of directors
of the corporation, irrespective of the place of may be more than 15 but should not exceed 21
incorporation (GBL, Sec 11). (GBL, Sec. 17).

5. Stockholdings of individuals related to each Limitation on the grant of compensation to the

other within the fourth degree of directors by the Monetary Board
consanguinity or affinity, legitimate or
common-law, shall be considered family The Monetary Board may limit the grant of
groups or related interests and must be fully compensation to the directors of a bank only in
disclosed in all transactions by such exceptional cases and when the circumstances
warrant, such as but not limited to the following:

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1. When a bank is under comptrollership or Degree of diligence required of banks in
conservatorship handling deposits
2. When a bank is found by the Monetary Board to
be conducting business in an unsafe or unsound Banks are expected to exercise extraordinary
manner diligence in its dealings with depositors.
3. When a bank is found by the Monetary Board to Consequently, the diligence required of banks is
be in an unsatisfactory financial condition (GBL, more than that of a Roman pater familias or a good
Sec. 18). father of a family (PCI Bank v Balcameda G.R. No.
158143, September 21, 2011).
DILIGENCE REQUIRED OF BANKS
Q: FFCCI opened a savings/current and dollar
Nature of banking business and responsibility savings account PNB at its Timog Avenue
of banks Branch. Its President Felipe and Secretary-
Treasurer Angelita were the named
The banking system is an indispensable institution signatories for the said accounts. While Felipe
in the modern world and plays a vital role in the and Angelita were thus out of the country,
economic life of every civilized nation. Whether as applications for cashiers and managers checks
mere passive entities for the safekeeping and bearing Felipe’s signature were presented to
saving of money or as active instruments of and both approved by the PNB. When Angelita
business and commerce, banks have become an returned to the country, she noticed the
ubiquitous presence among the people, who have deductions of P9,950,000.00 and
come to regard them with respect and even P3,260,500.31. Claiming that these were
gratitude and, most of all, confidence. Thus, even unauthorized and fraudulently made, FFCCI
the humble wage-earner has not hesitated to requested PNB to credit back and restore to its
entrust his life’s savings to the bank of his choice, account the value of the checks. PNB refused,
knowing that they will be safe in its custody and and thus constrained [FFCCI] filed the instant
will even earn some interest for him. The ordinary suit for damages against the PNB and its own
person, with equal faith, usually maintains a accountant Aurea Caparas. On its part, PNB
modest checking account for security and alleged that it exercised due diligence in
convenience in the settling of his monthly bills and handling the account of FFCCI; that the
the payment of ordinary expenses. As for business applications for managers check have passed
entities, the bank is a trusted and active associate through the standard bank procedures and it
that can help in the running of their affairs, not was only after finding no infirmity that these
only in the form of loans when needed but more were given due course; that In fact, it was no
often in the conduct of their day-to-day less than Caparas, the accountant of FFCCI, who
transactions like the issuance or encashment of confirmed the regularity of the transaction. Is
checks. PNB guilty of negligence in handling FFCCI’s
account?
In every case, the depositor expects the bank to
treat his account with the utmost fidelity, whether A: As between a bank and its depositor, where the
such account consists only of a few hundred pesos bank’s negligence is the proximate cause of the loss
or of millions. The bank must record every single and the depositor is guilty of contributory
transaction accurately, down to the last centavo negligence, the greater proportion of the loss shall
and as promptly as possible. This has to be done if be borne by the bank. The bank was negligent
the account is to reflect at any given time the because it did not properly verify the genuineness
amount of money the depositor can dispose of as of the signatures in the applications for manager’s
he sees fit, confident that the bank will deliver it as checks while the depositor was negligent because
and to whomever he directs. it clothed its accountant/bookkeeper with
apparent authority to transact business with the
The point is that as a business affected with public Bank and it did not examine its monthly statement
interest and because of the nature of its functions, of account and report the discrepancy to the Bank.
the bank is under obligations to treat the accounts The court allocated the damages between the bank
of its depositors with meticulous care, always and the depositor on a 60-40 ratio (Philippine
having in mind the fiduciary nature of their National Bank v. FF Cruz and Company, G.R. No.
relationship (Simex International Inc. v. CA, G.R. No. 173259, July 25, 2011, in Divina, 2014).
88013 March 19, 1990 as cited in the case of Land
Bank of the Philippines vs. Oñate, G.R. No. 192371, Degree of diligence required of banks with its
January 15, 2014). other dealings

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The diligence more than that of a Roman pater return the check within the 24-hour reglementary
familias only applies only to cases where banks act period. The collecting bank which accepted a post-
under their fiduciary capacity, that is, as dated check for deposit and sent it for clearing and
depositary of the deposits of their depositors. The the drawee bank which cleared and honored the
same degree of diligence is not expected to be check are both liable to the drawer for the entire
exerted by banks in commercial transactions face value of the check (Allied Banking Corporation
(Reyes v CA G.R. No. 118492. August 15, 2001). v. Bank of the Philippine Islands, G.R. No. 188363,
February 27, 2013, in Divina, 2014).
Q: On Oct. 10, 2002, a check in the amount of
P1,000,000.00 payable to MMGI was presented Effect when the teller gave the passbook to a
for deposit and accepted at petitioner’s Kawit wrong person
Branch. The check, post-dated “Oct. 9, 2003”,
was drawn against the account of Silva with BPI Banks must exercise a high degree of diligence in
Bel-Air Branch. insuring that they return the passbook only to the
depositor of his authorized representative. For
The check was cleared by BPI and ABC credited failing to return the passbook to authorized
the account of MMGI with P1,000,000.00. On representative of the depositor, the bank
Oct. 22, 2002, MMGI’s account was closed and presumptively failed to observe such high degree of
all the funds therein were withdrawn. A month diligence in safeguarding the passbook and
later, Silva discovered the debit of insuring its return to the party authorized to
P1,000,000.00 from his account. In response to receive the same.
Silva’s complaint, BPI credited his account with
the aforesaid sum. However, a bank’s liability may be mitigated by the
depositor’s contributory negligence such as
On March 21, 2003, respondent returned a allowing a withdrawal slip signed by authorized
photocopy of the check to petitioner for the signatories to fall into the hands of an impostor
reason: “Postdated.” Petitioner, however, (Consolidated Bank and Trust Corporation v. CA, GR
refused to accept and sent back to respondent No, 138569, September 11, 2003).
a photocopy of the check. Thereafter, the check,
or more accurately, the Charge Slip, was tossed The bank is liable when an employee encashed
several times from ABC to BPI, and back to ABC, a check without the required indorsement
until on May 6, 2003, BPI requested the PCHC The fiduciary nature of the relationship between
to take custody of the check. Acting on the the bank and the depositors must always be of
request, PCHC directed BPI to deliver the paramount concern (Philippine Savings Bank v.
original check and informed it of PCHC’s Chowking, G.R. No. 177526, July 4, 2008).
authority under CHOM No. 279 dated 06
September 1996 to split 50/50 the amount of NATURE OF BANK FUNDS AND BANK
the check subject of a “Ping-Pong” controversy DEPOSITS
which shall be implemented thru the issuance
of Debit Adjustment Tickets against the Deposit function of banks
outward demands of the banks involved. PCHC
likewise encouraged respondent to submit the The function of the bank to receive a thing,
controversy for resolution thru the PCHC primarily money, from depositors with the
Arbitration Mechanism. The latter rendered its obligation of safely keeping it and returning the
Decision in favor of ABC and against BPI. same.
Respondent filed a motion for reconsideration
but it was denied by the PCHC Board of Kinds of deposits between a bank and its
Directors. The RTC affirmed with modification depositors
the Arbitration Committee’s decision. By its
Decision, the CA set aside the RTC judgment 1. As debtor-creditor:
and ruled for a 60-40 sharing of the loss as it 2. Special Kinds of Deposits
found petitioner guilty of contributory a. Demand deposits – all those liabilities of
negligence in accepting what is clearly a post- banks which are denominated in the
dated check. Philippine currency and are subject to
payment in legal tender upon demand by
A: A collecting bank is guilty of contributory representation of checks.
negligence when it accepted for deposit a post- b. Savings deposits – the most common type
dated check notwithstanding that said check had of deposit and is usually evidenced by a
been cleared by the drawee bank which failed to passbook.

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NOTE: The requirement of presentation of supervise her business affairs in the
passbooks is required by the Manual of Philippines. Thereafter, she (Evangeline) and
Regulations for Banks. A bank is negligent if it Domindor opened a joint savings account with
allows the withdrawal without requiring the Equitable PCI Bank. However, Dominador
presentation of passbook (BPI v. CA, GR No. withdrew the amount of P980,000.00 from the
112392, February 29, 2000). account and deposited the money to his own
savings account. Evangeline then filed a
c. Negotiable order of withdrawal account complaint after her demand for the return of
(NOWA) – Interest-bearing deposit the money withdrawn from the joint account
accounts that combine the payable on remain unheeded. Evangeline claimed to be the
demand feature of checks and investment sole owner of the money deposited. Dominador
feature of saving accounts. on his part asserted that he was authorized to
d. Time deposit – an account with fixed term; withdraw funds from the subject account to
payment of which cannot be legally answer for the expenses of Evangeline's
required within such a specified number projects, considering: (a) that it was a joint
of days. account, and (b) the general and special
powers of attorney executed by Evangeline in
3. As trustee-trustor: his favor. Is Evangeline is entitled to the return
of the amount of P980,000.00 Dominador
Trust account – a savings account, established withdrew from their joint savings account?
under a trust agreement containing funds
administered by the bank for the benefit of the A: Partly YES. A joint account is one that is held
trustor or another person or persons. jointly by two or more natural persons, or by
two or more juridical persons or entities. The
4. As agent-principal: common banking practice is that regardless of who
a. Deposit of checks for collection puts the money into the account, each of the named
b. Deposit for specific purpose account holder has an undivided right to the entire
c. Deposit for safekeeping balance, and any of them may deposit and/or
withdraw, partially or wholly, the funds without
Types of deposit accounts the need or consent of the other, during their
lifetime. Nevertheless, as between the account
1. Savings holders, their right against each other may depend
2. Current on what they have agreed upon, and the purpose
3. Time for which the account was opened and how it will
be operated.
Deposit accounts may also be classified as:
1. Individual; or In this case, the account opened by Evangeline and
2. Joint: Dominador for the business project of Evangeline
a. “And” account – the signature of both and Domindaor may withdraw therefrom "if"
co-depositors are required for there is a need to meet Evangeline's financial
withdrawals. obligations arising from said projects. Hence, while
b. “And/or” account – either one of the co- Dominador is a co-owner of the subject account as
depositors may deposit and withdraw far as the bank is concerned — and may, thus,
from the account without the validly deposit and/or withdraw funds without the
knowledge consent and signature of consent of his co-depositor, Evangeline — as
the other. between him and Evangeline, his authority to
withdraw, as well as the amount to be withdrawn,
Joint accounts may be subject of a is circumscribed by the purpose for which the
survivorship agreement whereby the co- subject account was opened. Nonetheless, the
depositors agree to permit either of them to initial amount deposited by Dominador should be
withdraw the whole deposit during their deducted from the amount to be returned to
lifetime and transferring the balance to the Evangeline. (DOMINADOR APIQUE V. EVANGELINE
survivor upon the death of one of them (Vitug FAHNENSTICH G.R. No. 205705, August 5, 2015)
v. CA, G.R. No. 82027, March 29, 1990).
Anonymous account
Q: Evangeline executed General and Special
Powers of Attorney constituting her brother GR: Anonymous accounts or those under fictitious
Dominador as her attorney-in-fact to purchase names are prohibited (R.A. 9160 as amended by R.A.
real property for her, and to manage or 9194; BSP Circular No. 251, July 21, 2000).

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XPN: In case where numbered accounts is allowed A: YES, the depositor expects the bank to treat his
such as in foreign currency deposits. However, account with utmost fidelity, whether such
banks/non-bank financial institutions should account consist only of a few hundred pesos or of
ensure that the client is identified in an official or millions. The bank must record every single
other identifying documents (R.A. 6426 as transaction accurately, down to the last centavo,
amended, FCDA, Sec. 8). and as promptly as possible. This has to be done if
the account is to reflect at any given time the
Nature of a bank deposit amount of money the depositor can dispose of as
he sees fit, confident that the bank will deliver it as
All kinds of bank deposits are loan. The bank can and to whomever he directs. A blunder on the part
make use as its own the money deposited. Said of the bank, such as the dishonor of the check
amount is not being held in trust for the depositor without good reason, can cause the depositor not a
nor is it being kept for safekeeping (Tang Tiong little embarrassment if not also financial loss and
Tick v. American Apothecaries, G.R. No. 43682, perhaps even civil and criminal litigation (Simex
March 31, 1938). Intl. v. CA, G.R. No. 88013, March 19, 1990).

Mandamus will not lie in the enforcement of STIPULATION ON INTERESTS

obligations concerning deposit
Rules on stipulation of interests
All kinds of deposit are loans. Thus, the
relationship being contractual in nature, Old rule
mandamus cannot be availed of because 1. Central Bank Circular 416 – 12% per annum in
mandamus will not lie to enforce the performance cases of:
of contractual obligations (Lucman v. Alimatar a. Loans;
Malawi, G.R. No. 159794, Dec. 19, 2006). b. Forbearance of money, goods and credits;
and
Contract between banks and depositors is not c. Judgment involving such loan or
a trust agreement forbearance, in the absence of express
agreement as to such rate of interest
The fiduciary nature of the bank-depositor
relationship does not convert the contract 2. Interest accruing from unpaid interest–
between banks and depositors to a trust interest due shall earn interest from the time
agreement. Thus, failure by the bank to pay the it is judicially demanded although the
depositor is failure to pay simple loan, and not a obligation may be silent upon this point.
breach of trust (Consolidated Bank and Trust Corp.
v. CA, G.R. No. 138569, September 11, 2003). NEW RULE

Nature of safety deposit box Through Circular No. 799, the Monetary Board
declared that effective July 1, 2013 the rate of
The contract for the use of a safety deposit box interest for the loan or forbearance of any money,
should be governed by the law on lease. goods or credits and the rate allowed in judgments,
in the absence of an express contract as to such
In the case of Sia v. CA and Security Bank and Trust rate of interest, shall be 6% per annum (Section 1,
Company and under the old banking law, a safety Circular 799, Series of 2013 amending Section 2 of
deposit box is a special deposit. However, the new Circular No. 905, Series of 1982).
General Banking Law, while retaining the renting
of safe deposit box as one of the services that the This means that if the parties fail to state in writing
bank may render, deleted reference to depository the interest payable on any of the transactions
function (Divina, Handbook on Philippine mentioned, or on account of a court judgment
Commercial Law). involving a related money claim, the imposable
interest is 6% every year.
Q: After procuring a checking account, the
depositor issued several checks. He was Q: B Bank, a large universal bank, regularly
surprised to learn later that they had been extends revolving credit lines to business
dishonored for insufficient funds. Investigation establishments under what it terms as socially
disclosed that deposits made by the depositor responsible banking and private business
were not credited to its account. Is the bank partnership relations. All loans that are extended
liable for damages? to clients have a common "Escalation Clause," to
wit: "B Bank hereby reserves its right to make

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357 FACULTY OF CIVIL LAW
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successive increases in interest rates in The total of the unimpaired paid-in surplus,
accordance with the bank's adopted policies as retained earnings and undivided profit, net of
approved by the Monetary Board; Provided that valuation reserves and other adjustments as may
each successive increase shall be with the written be required by the BSP (GBL, Sec. 24.2).
assent of the depositor."
Risked based capital
[a] X, a regular client of the bank, contends that the
"Escalation Clause" is unfair, unconscionable and The minimum ratio prescribed by the Monetary
contrary to law, morals, public policy and customs. Board which the net worth of a bank must bear to
its total risk assets which may include contingent
Rule on the issue and explain. accounts.

[b] Suppose that the "Escalation Clause" instead NOTE: The Monetary Board may require or
reads: "B Bank hereby reserves the right to make suspend compliance with such ratio whenever
reasonable increases in interest rates in necessary for a maximum period of one year and
accordance with bank policies as approved by the that such ratio shall be applied uniformly to banks
Monetary Board; Provided, there shall be of the same category (GBL,Sec. 34).
corresponding reasonable decreases in interest
rates as approved by the Monetary Board." Would Effect of non-compliance with the ratio
this be valid? Explain. (2016 Bar)
1. Distribution of net profits may be limited or
A: prohibited and MB may require that part or all
[a] The “escalation clause” is valid because eache of the net profits be used to increase the
successive increase shall be with the written capital accounts of the bank until the
assent of the depositor. This stipulation does not minimum requirement has been met; or
violate the principle of mutuality of contracts. The
stipulation would have been void if the supposed 2. GR: Acquisition of major assets and making of
consent is given prior to the increase in the interest new investments may be restricted.
rate.
XPN: Purchases of evidence of indebtedness
[b] An escalation clause with a de-escalation clause guaranteed by the Government can be
is valild provided that the client’s consent is still exempted from restrictions (GBL, Sec. 34).
secured prior to any increase in interest rate;
otherwise, the escalation clause is void. SINGLE BORROWER’S LIMIT

A bank forbidden by Central Bank to do Limitations imposed upon banks with respect
business is NOT obligated to pay interest on to its loan function
deposit
1. GR: Single borrower’s limit – The total amount
A bank lends money, engages in international of loans, credit accommodations and
transactions, acquires foreclosed mortgaged guarantees that the bank could grant should at
properties or their proceeds and generally engages no time exceed 25% of the bank’s net worth
in other banking and financing activities in order (GBL, Sec 35.1, amended by BSP Circular 779 s.
that it can derive income therefrom. Therefore, 2013). (2002 Bar, 2015 Bar)
unless a bank can engage in those activities from
which it can derive income, it is inconceivable how XPN:
it can carry on as a depository obligated to pay a. As the Monetary Board may otherwise
interest on money deposited with it (Fidelity & prescribe for reasons of national interest
Savings and Mortgage Bank v. Cenzon, G.R. No. L- b. Deposits of rural banks with GOCC
46208, April 5, 1990). financial institutions like LBP, DBP, and
PNB.
GRANT OF LOANS AND SECURITY
REQUIREMENTS 2. The total amount of loans, credit
accommodations and guarantees prescribed
RATIO OF NET WORTH TO TOTAL RISK in (a) may be increased by an additional 10%
ASSETS of the net worth of such bank provided that
additional liabilities are adequately secured
Net worth by trust receipt, shipping documents,
warehouse receipts and other similar

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documents which must be fully covered by an RESTRICTIONS ON BANK EXPOSURE TO DOSRI
insurance (GBL, Sec. 35.2). (DIRECTORS, OFFICERS, STOCKHOLDERS AND
3. Loans and other credit accommodations THEIR RELATED INTERESTS)
secured by REM shall not exceed 75% of the
appraised value of the real estate security plus Three restrictions imposed by law on DOSRI
60% of the appraised value of the insured transactions (2017 Bar)
improvements (GBL, Sec. 37) CM/intangible
property such as patents, trademarks, etc. GR: No director or officer of any bank shall,
shall not exceed 75% of the appraised value of directly or indirectly, for himself or as the
the security (GBL, Sec. 38). representative or agent of others:
4. Loans being contractual, the period of
payment may be subject to stipulation by the 1. borrow from such bank;
parties. In the case of amortization, the 2. become a guarantor, endorser or surety
amortization schedule has no fixed period as it for loans from such banks to others; or
depends on the project to be financed such 3. in any manner be an obligor or incur any
that if it was capable of raising revenues, it contractual liability to the bank (GBL, Sec.
should be at least once a year with a grace 36).
period of 3 years if the project to be financed
is not that profitable which could be deferred XPN: There is a written approval of the majority of
up to 5 years if the project was not capable of all the directors of the bank, excluding the director
raising revenues (GBL, Sec. 44). concerned.
5. Loans granted to DOSRI:
a. Director Requirements that must be complied with in
b. Officer case of DOSRI accounts (2002 Bar)
c. Stockholder, having at least 1%
ownership over the bank 1. Procedural requirement - Loan must be
d. Related Interests, such as DOS’s spouses, approved by the majority of all the directors
their relatives within the first degree not including the director concerned. CB
whether by consanguinity or affinity, approval is not necessary; however, there is a
partnership whereby DOS is a partner or a need to inform them prior to the transaction.
corporation where DOS owns at least Loan must be entered in the books of the
20%. corporation (GBL, Sec. 36).

Exclusions from the aforesaid loan limitations 2. Substantive requirement - Loan must not
exceed the paid in contribution and
Non-risk loans, such as: unencumbered deposits. (Not to exceed 15%
of the portfolio or 100% of the net worth,
1. Loans secured by obligations of the BSP or the whichever is lower) (GBL, Sec. 36 [4]).
Philippine Government
2. Loans fully guaranteed by the Government In the case of Go v. Bangko Sentral ng Pilipinas,
3. Loans covered by assignment of deposits G.R. No. 178429, October 23, 2009, it was held
maintained in the lending bank and held in the that the requirements are:
Philippines
4. Loans, credit accommodations and (1) Approval requirement - which means
acceptances under letters of credit to the that the DOSRI transaction must be
extent covered by margin deposits approved by at least majority of the
5. Other loans or credit accommodations which directors excluding the director
the MB may specify as non-risk items. concerned;
(2) Reportorial requirement - means that
Joint and solidary signature (JSS) practice the transaction must be recorder in the
books of the bank and reported to the BSP;
It is a common banking practice requiring as an and
additional security for a loan granted to a (3) Ceiling requirement - which means that
corporation the joint and solidary signature of a the amount of the loan shall not exceed
major stockholder or corporate officer of the the book valued of the paid-in
borrowing corporation (Security Bank v. Cuenca, contribution and the amount of the
G.R. No. 138544, October 3, 2000). unencumbered deposits.

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359 FACULTY OF CIVIL LAW
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Three different offenses are committed by to limit the same in an amount not to exceed its
those who fail to observe the board approval, unencumbered deposits and book value of its paid
reporting and ceiling requirements. in capital contribution in the bank; if the intended
loan should exceed the foregoing limit, the
Effect of non-compliance with the foregoing borrower should have the same secured by a non-
requirement risk assets determined by the Monetary Board,
unless the loan shall be in the form of a fringe
Violation of DOSRI is a crime and carries with it benefit (GBL, Sec. 36).
penal sanction.
A bank officer violates the DOSRI law when he
It does not make the transaction void but only acquires bank funds for his personal benefit, even
renders the responsible officers and directors if such acquisition was facilitated by a fraudulent
criminally liable (Republic v. Sandiganbayan, G.R. loan application. Directors, officers, stockholders,
No. 166859, 169203, 180702, April 12, 2011). and their related interests cannot be allowed to
interpose the fraudulent nature of the loan as a
A loan transaction within the ambit of the DOSRI defense to escape culapability or their
regulation could also be the subject of Estafa under circumvention of the law. The prohibition under
Article 315(1)(b) of the Revised Penal Code the law covers loan by a bank director or officer
(Soriano v. People of the Philippines, G.R. No. which are made directly, indirectly, for himself or
162336, February 1, 2010, Del Castillo, J.). as the representative or agent of others. At the
same time, he is liable for estafa through
Transactions covered by the DOSRI regulation falsification of commercial documents. The bank
money which came to his possession as a result of
The transactions covered are loan and credit the fraudulent loan application was not his. He
accommodation. Not being a loan, the ceiling will remained bank’s fiduciary with respect to that
not apply to lease and sale. However, it should still money, which makes it capable of
comply with the procedural requirement. misappropriation or conversion in his hands
(Soriano v. People of the Philippines, et al., G.R. No.
Arms-length rule 162336, February 1, 2010, in Divina, 2014).

It provides that any dealings of a bank with any of

its DOSRI shall be upon terms not less favorable to
INTELLECTUAL PROPERTY CODE
the bank than those offered to others (GBL, Sec. 36
[2]).

The bank may terminate the loan and demand

immediate payment if the borrower used the INTELLECTUAL PROPERTY RIGHTS IN
funds for purposes other than that agreed upon GENERAL

If the bank finds that the borrower has not

employed the funds borrowed for the purpose Rationale behind the Intellectual Property
agreed upon between the bank and the borrower, Code
the bank may terminate the loan and demand
immediate payment (Banco de Oro v. Bayuga, G.R. The Intellectual Property Code (IPC) gives life to
No. L-49568, Oct. 17, 1979). Sec. 13, Art. XIV of the Constitution which
mandates that the State shall protect and secure
Q: Pio is the president of Western Bank. His the exclusive rights of scientists, investors, artists
wife applied for a loan with the said bank to and other gifted citizens to their intellectual
finance an internet cafe. The loan officer told property and creations, particularly when
her that her application will not be approved beneficial to the people, for such period as may be
because the grant of loand to related interests provided by law.
of bank directors, officers, and stockholders is
prohibited by the General Banking Law. The State recognizes that an effective intellectual
Explain whether the loan officer is correct. and industrial property system is vital to the
(2006 Bar) development of domestic and creative activity,
facilitates transfers of technology and attracts
A: NO. The loan officer should have advised the foreign investments; and ensures market access
wife to ask her husband to secure approval of the for our products (IPC, Sec. 2).
bank’s Board of Directors for the intended loan and

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Basic principles Verily, the protection of industrial secrets is
inextricably linked to the advancement of our
National Treatment - A Member country shall economy and fosters healthy competition in trade
accord to the nationals of other Member countries (Air Philippines Corp. v. Pennswell, Inc., G.R. No.
treatment no less favorable than it accords to its 172835, Dec. 13, 2007).
own national with regard to the protection of
intellectual property. INTELLECTUAL
PROPERTY DEFINITION
Most Favored Nation - Any advantage, favor, RIGHTS
privilege or immunity granted by a Member to the exists over original and
nationals of any other country shall be accorded derivative intellectual
immediately and unconditionally to the nationals Copyright and creations in the literary and
of all other Members. Related Rights artistic domain protected
from the moment of their
Technology transfer arrangement creation.
any visible sign capable of
Contracts or agreements involving the transfer of distinguishing the goods
systematic knowledge for the manufacture of a Trademarks (trademark) or services
product, the application of the process, or and Service (service mark) of an
rendering of a service including management Marks enterprise and shall include
contracts; and the transfer, assignment or a stamped or marked
licensing of all forms of intellectual property container of goods.
rights, including licensing of computer software indications which identify a
except computer software developed for mass good as originating in the
market (IPC, Sec. 4.2). territory of a Member of the
Agreement, or a region or
Nature of technology transfer arrangement locality in that territory,
Geographic
where a given quality,
It is in the nature of a Voluntary License Contract. Indications
reputation or other
It is a contract between an intellectual property characteristic of the good is
right owner (licensor) and a second party essentially attributable to its
(licensee), authorizing the latter to commercially geographical origin. (Article
exploit the same intellectual property right under 22, TRIPS Agreement)
specified terms and conditions (Salao, 2012). any composition of lines or
colors or any three-
Undisclosed information dimensional form, whether
or not associated with lines
1. A secret in the sense that it is not, as a body or or colors, provided that such
in precise configuration and assembly of Industrial
composition or form gives a
components, generally known among, or Designs
special appearance to and
readily accessible to persons within the circles can serve as pattern for an
that normally deal with the kind of industrial product or
information in question; handicraft. It must be new or
2. Has commercial value because it is a secret; or ornamental.
3. Has been subjected to reasonable steps under any technical solution of a
the circumstances, by the person lawfully in problem in any field of
control of the information, to keep it a secret human activity which is new,
(Article 39, TRIPS Agreement). involves an inventive step
Patents and is industrially
Nature of undisclosed information or trade applicable. It may be, or may
secret relate to, a product, or
process, or an improvement
Those trade secrets are of a privileged nature. The of any of the foregoing.
protection of industrial property encourages synonymous with
investments in new ideas and inventions and 'Topography' and means the
stimulates creative efforts for the satisfaction of three-dimensional
human needs. It speeds up transfer of technology Layout Designs
disposition, however
and industrialization, and theresby bring about expressed, of the elements,
social and economic progress. at least one of which is an

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361 FACULTY OF CIVIL LAW
 Intellectual Property Code
active element, and of some person lawfully in control of
or all of the interconnections the information, to keep it
of an integrated circuit, or secret. (Article 39, TRIPS
such a three-dimensional Agreement)
disposition prepared for an a plan or process, tool,
integrated circuit intended mechanism or compound
for manufacture. known only to its owner and
protection of information those of his employees to
lawfully held from being whom it is necessary to
disclosed to, acquired by, or confide it. The definition also
used by others without their extends to: (a) a secret
consent in a manner formula or process not
contrary to honest patented, but known only to
commercial practices so long certain individuals using it in
as such information: (a) is compounding some article
secret in the sense that it is of trade having a commercial
Trade Secrets
not, as a body or in the value; or (b) any formula,
Protection of
precise configuration and pattern, device, or
Undisclosed
assembly of its components, compilation of information
Information
generally known among or that: (1) is used in one's
readily accessible to persons business; and (2) gives the
within the circles that employer an opportunity to
normally deal with the kind obtain an advantage over
of information in question; competitors who do not
(b) has commercial value possess the information. (Air
because it is secret; and (c) Philippines Corporation v.
has been subject to Pennwell, Inc., G.R. No.
reasonable steps under the 172835 December 13, 2007)
circumstances, by the

DIFFERENCES BETWEEN COPYRIGHT, TRADEMARK, AND PATENTS (2015 Bar)

BASIS PATENT TRADEMARK COPYRIGHT
The right granted to an Any visible sign capable Literary and artistic
inventor by a State, or by of distinguishing the works which are original
a regional office acting goods (trademark) or intellectual creations in
for several States, which services (service mark) the literary and artistic
allows the inventor to of an enterprise and shall domain protected from
exclude anyone else from include a stamped or the moment of their
Definition
commercially exploiting marked container of creation. (Pearl and Dean
his invention for a goods. (RA 8293, Sec. (Phil) Inc. v. Shoemart
limited period. 121.1) Inc., G.R. No. 148222,
(Understanding August 15, 2003)
Industrial Property,
WIPO, p.5)
Technical solution of a Any visible sign capable Literary and artistic
problem in any field of of distinguishing the works
human activity which is goods (trademark) or
Registered intellectual
new (novel invention) services (service mark)
rights
and industrially of an enterprise must be
applicable. registered).

a. scientific theories a. generic terms for a. method

b. contrary to public goods or services b. idea
order or morality b. characteristics of c. procedure
Need not be registered c. aesthetic creations goods like quality or d. principle
d. methods for quantity e. operation
treatment of human c. customary sign in f. system
body everyday language

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e. plant varieties d. color itself  format of
television game
show is not
subject to a
copyright.
(Joaquin v.
Drilon, 302 SCRA
225, January 28,
1999)
20 years from filing date 10 years and renewable It depends on the type of
Term of protection of application (RA 8293, upon expiration. (RA work.
Sec. 54) 8293, Secs. 145-146)
1. In general A person may NOT: 1. Performance of a
1. Use a name if the word work, once it has been
a. GR: If put on the is generic (Lyceum of lawfully made
market in the the Philippines v. CA, accessible to the
Philippines by the G.R. No. 101897, March public, if done
owner of the 5, 1993). privately and free of
product, or with his charge or for a
express consent. 2. Use any name charitable or religious
indicating a institution or society.
XPN: Drugs and geographical location
medicines - (Ang Si Heng vs. 2. The Making of
introduced in the Wellington Department quotations from a
Philippines or Store G.R. No. L-4531, published work if they
anywhere else in the January 10, 1953). are compatible with
world by the patent fair use and only to the
owner, or by any 3. Use any name or extent justified for the
party authorized to designation contrary to purpose.
use the invention public order or morals
(Sec. 72.1, as 3. Communication to the
amended by R.A. 4. Use a name if it is liable public by mass media
9502) to deceive trade circles of articles on current
or the public as to the political, social,
b. Where the act is nature of the economic, scientific or
Limitations on the use of
done privately and enterprise identified religious topic,
right
on a non-commercial by that name (IPC, Sec. lectures, addresses
scale or for a non- 165.1). and other works of the
commercial purpose. same nature
(IPC, Sec. 72.2) 5. Subsequently use a
trade name likely to 4. As Part of reports of
c. Exclusively for mislead the public as a current events (e.g.
experimental use of third party (IPC, Sec. music played or tunes
the invention for 165.2 [b]). on the occasion of a
scientific purposes sporting event and
or educational 6. Copy or simulate the such tunes were
purposes name of any domestic picked up during a
(experimental use product (for imported new coverage of the
provision). (IPC, Sec. products). event).
72.3)
7. Copy or simulate a 5. For Teaching
d. Bolar Provision - In mark registered in purposes, provided
the case of drugs and accordance with the that the source and of
medicines, where the provisions of IPC (for the name of the
act includes testing, imported products). author, if appearing in
using, making or the work, are
selling the invention 8. Use mark or trade mentioned.
including any data name calculated to
related thereto, induce the public to

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363 FACULTY OF CIVIL LAW
 Intellectual Property Code
solely for purposes believe that the article
reasonably related to is manufactured in the 6. Recording made in
the development and Philippines, or that it is Educational
submission of manufactured in any institutions of a work
information and foreign country or included in a
issuance of locality other than the broadcast for the use
approvals by country or locality of such educational
government where it is in fact institutions, provided
regulatory agencies manufactured. that such recording
required under any must be deleted within
law of NOTE: Items 4, 5 and 6 a reasonable period
only applies to imported after they were first
e. the Philippines or of products and those broadcast.
another country that imported articles shall
regulates the not be admitted to entry 7. The making of
manufacture, at any customhouse of Ephemeral recordings
construction, use or the Philippines (IPC, Sec. by a broadcasting
sale of any product. 166). organization by means
(IPC, Sec. 72.4) of its own facilities and
for use in its own
f. Where the act broadcast.
consists of the
preparation for 8. The Use made of a
individual cases, in a work by or under the
pharmacy or by a direction or control of
medical professional, the government, by
of a medicine in the National Library or
accordance with a by educational,
medical scientific or
prescription. (IPC, professional
Sec. 72.5) institutions where
such use is in the
g. Where the invention public interest and is
is used in any ship, compatible with fair
vessel, aircraft, or use.
land vehicle of any
other country 9. The Public
entering the performance of a
territory of the work, in a place where
Philippines no admission fee is
temporarily or charged.
accidentally. (IPC,
Sec. 72.5) 10. Public Display of the
original or a copy of
2. Prior user– Person the work not made by
other than the means of a film, slide,
applicant, who in good television image or
faith, started using the otherwise on screen
invention in the or by means of any
Philippines, or other device or
undertaken serious process (e.g. Public
preparations to use the display using posters
same, before the filing mounted on walls and
date or priority date of display boards.
the application shall
have the right to 11. Any use made of a
continue the use work for the purpose
thereof, but this right of any Judicial
shall only be proceedings or for the

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transferred or assigned giving of professional
further with his advice by a legal
enterprise or business. practitioner.
(IPC, Sec. 73)

3. Use by Government– A
government agency or
third person
authorized by the
government may
exploit invention even
without agreement of a
patent owner where:

a. Public interest, as
determined by the
appropriate agency
of the government,
so requires; or
b. A judicial or
administrative body
has determined that
the manner of
exploitation by
owner of patent is
anti-competitive.
(IPC, Sec. 74)

4. Reverse reciprocity of
foreign law– Any
condition, restriction,
limitation, diminution,
requirement, penalty
or any similar burden
imposed by the law of a
foreign country on a
Philippine national
seeking protection of
intellectual property
rights in that country,
shall reciprocally be
enforceable upon
nationals of said
country, within
Philippine jurisdiction.
(IPC, Sec. 231)
Prescriptive period for 4 years from time of 4 years from the time the 4 years from the time the
filing of an action for commission of cause of action arose. cause of action arose.
damages due to infringement (IPC, (IPC, Sec. 226)
infringement Sec.79)
1. Literal infringement 1. That it is duly A person infringes a right
Test – Resort must be registered in the protected under this Act
had, in the first Intellectual Property when one:
Tests or elements which
instance, to words of Office
will establish the
the claim. If the a. Directly commits an
presence of
accused matter clearly 2. The validity of the infringement;
infringement
falls within the claim, mark
infringement is b. Benefits from the
committed. infringing activity of

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365 FACULTY OF CIVIL LAW
 Intellectual Property Code
3. The plaintiff’s another person who
Minor modifications ownership of the mark commits an
are sufficient to put the infringement if the
item beyond literal 4. The use of the mark or person benefiting has
infringement. (Godines its colorable imitation been given notice of
v. CA, G.R. No. L-97343, by the alleged the infringing activity
Sept. 13, 1993) infringer results in and has the right and
“likelihood of ability to control the
2. Doctrine of Equivalents confusion” activities of the other
– There is infringement (McDonald’s Corp v. person;
where a device L.C. Big Mak Burger,
appropriates a prior Inc., G.R. No. c. With knowledge of
invention by 143993, Aug 18, 2004) infringing activity,
incorporating its induces, causes or
innovative concept 5. Used without the materially contributes
and, although with consent of the owner to the infringing
some modification and (Prosource conduct of another
change, performs International Inc.v. (IPC, as amended by
substantially the same Horphag Research R.A. No. 10372, Sec.
function in Management SA G.R. 216).
substantially the same No. 180073, November
way to achieve 25, 2009)
substantially the same
result.(Godines v. CA,
G.R. No. L-97343, Sept.
13, 1993)

3. Economic interest test

– when the process-
discoverer’s economic
interest are
compromised, i.e.,
when others can
import the products
that result from the
process, such an act is
said to be prohibited.
1. Civil action for 1. Civil – i.e. preliminary 1. Injunction
infringement – (IPC, injunction with
Sec 76.3). damages 2. Damages, including
legal costs and other
2. Criminal action for 2. Criminal — remedies expenses, as he may
infringement available shall also have incurred due to
include the seizure, the infringement as
3. Administrative forfeiture and well as the profits the
remedy destruction of the infringer may have
infringing goods and made due to such
Remedies against 4. Destruction of of any materials and infringement
infringers infringing implements the
material(IPC, predominant use of 3. Impounding during
Sec.76.5). which has been in the the pendency of the
commission of the action sales invoices
offense. and other documents
evidencing sales
3. Administrative
4. Destruction without
any compensation all
infringing copies

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 MERCANTILE LAW
5. Moral and Exemplary
damages (IPC, Sec.
216.1); or

6. Seizure and
impounding of any
article, which may
serve as evidence in
the court proceedings.
(IPC, Sec. 216.2)

handicraft; and must be new or ornamental

PATENTS (Sec. 112, 113 IPC).

Generally speaking, an industrial design is

General principles the ornamental or aesthetic aspect of a useful
article (Amador, 2007).
The primary purpose of the patent system is not
the reward of the individual but the advancement An industrial design is not considered new if
of the arts and sciences. The function of a patent it differs from prior designs only in minor
is to add to the sum of useful knowledge and one respects that can be mistaken as such prior
of the purposes of the patent system is to designs by an ordinary observe (World
encourage dissemination of information Intellectual Property Organization, 2004).
concerning discoveries and inventions (Manzano
vs. Court of Appeals, G.R. No. 113388, September 5, Term or duration of a patent
1997).
It shall be twenty (20) years from the filing date
Three-fold purpose of patent law: of the application (Sec. 54, IPC).

1. To foster and reward invention; Right to a patent

2. To promote disclosures of inventions to
stimulate further innovation and to permit The right to a patent belongs to the inventor, his
the public to practice the invention once the heirs, or assigns. When two (2) or more persons
patent expires; and have jointly made an invention, the right to a
3. To ensure that ideas in the public domain patent shall belong to them jointly (Sec. 28, IPC).
remain there for the free use of the
public(Pearl & Dean Inc.v. Shoemart, Inc., G.R. Q: May patent rights be assigned or
No. 148222, August 15, 2003). transferred?

Coverage of patents A: YES. For a valid assignment of patent rights,

the assignment must be in writing and must be
1. Invention – any technical solution of a duly notarized (IPC, Sec. 105).
problem in any field of human activity which
is new, involves an inventive step and is PATENTABLE INVENTIONS
industrially applicable. It may be, or may
relate to, a product, or process, or an A. Patentable inventions
improvement of any of the foregoing (Sec. 21,
IPC). Any technical solution of a problem in any field of
2. Utility Model – An invention qualifies for human activity which is:
registration as a utility model if it is new and a. new;
industrially applicable (Sec. 109, IPC). b. involves an inventive step; and
3. Industrial Design – any composition of lines c. is industrially applicable.
or colors or any three-dimensional form,
whether or not associated with lines or It may be, or may relate to, a product, or process,
colors, provided that such composition or or an
form gives a special appearance to and can
serve as pattern for an industrial product or Improvement

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An enhancement or modification of any of the The disclosure of information contained in the
foregoing subject to patentability criteria. application during the twelve (12) months
preceding the filing date or the priority date of the
For example, an improvement in the tile-making application shall not prejudice the applicant on
process is indeed inventive and goes beyond the the ground of lack of novelty if such disclosure
exercise of mechanical skill. The applicant has was made by:
introduced a new kind of tile for a new purpose.
He has improved the old method of making tiles a. The inventor;
and pre-cast articles which were not satisfactory b. A patent officer and the information was
because of an intolerable number of breakages, contained (a) in another publication filed by
especially if deep engravings are made on the tile. the inventor and should not have been
He has overcome the problem of producing disclosed by the office, or (b) in an
decorative tiles with deep engraving, but with application filed, without the knowledge or
sufficient durability (Aguas v. De Leon, G.R. No. L- consent of the inventor, by a third party who
32160, January 30, 1982). obtained the information directly or
indirectly from the inventor; or
Criteria for Patentability c. A third party who obtained the information
directly or indirectly from the inventor. (IPC,
1. Novelty Sec. 25)
2. Inventive Step
3. Industrially Applicable If the disclosure was made by the designer in the
case of industrial design, the period is 6 months.
1. Novelty In other words, the application must be filed
An invention shall not be considered new if it within 6 months after disclosure for it to be non-
forms part of a prior art (Sec. 23, IPC). prejudicial.

NOTE: The burden of proving want of novelty of Doctrine of Prejudicial Disclosure

an invention is on the person who avers it and the
burden is a heavy one which is met only by clear The right to patent arises from application date. If
and satisfactory proof which overcomes every the inventor voluntarily discloses his creation,
reasonable doubt (Manzano v. CA, G.R. No. such as by offering it for sale, the world is free to
113388, Sept. 5, 1997). copy and use it with impunity. Ideas, once
disclosed to the public without the protection of a
Prior Art valid patent, are subject to appropriation without
significant restraint. (Pearl & Dean, Inc. v.
a. Everything which has been made available to Shoemart, Inc., 409 SCRA 231, August 15, 2003).
the public anywhere in the world, before the
filing date or the priority date of the 2. Inventive step
application claiming the invention; and
b. The whole contents of an earlier published GR: An invention involves an inventive step if,
Philippine application or application with having regard to prior art, it is not obvious to a
earlier priority date of a different inventor. person skilled in the art at the time of the filing
date or priority date of the application claiming
Public disclosure the invention (IPC Sec. 26).

The ultimate goal of a patent system is to bring XPN: In the case of drugs and medicines, there is
new designs and technologies into the public no inventive step if the invention results from the
through disclosure; hence ideas, once disclosed to mere discovery of a new form or new property of
the public without protection of a valid patent, a known substance which does not result in the
are subject to appropriation without significant enhancement of the known efficacy of that
restraint (Pearl & Dean vs. Shoemart Inc., G.R. No. substance (IPC, as amended by R.A. 9502, Sec.
148222, August 15, 2003). 26.2).

GR: When a work has already been made Test of Non-Obviousness

available to the public, it shall be non-patentable
for absence of novelty. If any person possessing ordinary skill in the art
was able to draw the inferences and he constructs
XPN: Doctrine of Non-Prejudicial Disclosure that the supposed inventor drew from prior art,
then the latter did not really invent it.

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Person skilled in the art A name given to inventions in the mechanical
field.
A person skilled in the art is a person with
ordinary skills in a certain art or field, who is Utility models differ from inventions for which
aware of what is a common general knowledge in patents for invention are available mainly in two
the field at the time of the application. “He is respects. First, the technological progress
presumed to have knowledge of all references required is smaller than the technological
that are sufficiently related to one another and to progress (“inventive step”) required in the case of
the pertinent art and to have knowledge of all arts an invention for which a patent for invention is
reasonably pertinent to the particular problems available. Second, the maximum term of
with which the inventor was involved. He is protection provided in the law for a utility model
presumed also to have had at his disposal the is generally much shorter than the maximum
normal means and capacity for routine work and term of protection provided in the law for an
experimentation” (Revised IRR for R.A. No. 8293, invention for which a patent for invention is
Rule 207). available (WIPO Handbook, Chapter 2, “Fields of
Intellectual Property Protection”, WIPO
3. Industrial Applicability Publication No. 489 (E), 2nd Edition, p. 40.).

An invention that can be produced and used in Requisites for an invention to be considered
any industry meets the industrial application as a utility model
requirement of patent registrability. This means
an invention is not merely theoretical, but also It must be new and industrially applicable. A
has a practical purpose. If the invention is a model of implement or tools of any industrial
product, it should be able to produce a product product even if not possessed of the quality of
and if the invention is a process, it should be able invention but which is of practical utility (IPC, Sec.
to lay out a process (WIPO, IP Handbook 2nd 109.1).
Edition, Chapter 2: “Fields of Intellectual Property
Protection” Publication No. 489 (E), p. 18). Term of a utility model

B. Utility model Seven (7) years from date of filing of the

application (IPC, Sec. 109.3).

Invention vs. Utility model vs. Industrial design

ELEMENTS TERM OF PROTECTION GROUNDS FOR

CANCELLATION
-New Twenty (20) years from the date 1. Invention is not new or
-Inventive Step of filing with payment of patentable;
-Industrial annuities. No renewal (IPC, Sec. 2. Patent does not disclose the
Applicability 54). invention in a manner
sufficiently clear and
complete for it to be carried
out by any person skilled in
the art;
3. The patent is contrary to
public order or morality
INVENTION (IPC, Sec. 61.1);
4. The patent is found invalid
in an action for infringement
(IPC, Sec. 82); or
5. The patent includes matters
outside the scope of the
disclosure contained in the
application (IPC, Sec 21,
Regulations on Inter Partes
Proceeding, Sec.1).

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-New Seven (7) years from the date of 1. The invention does not
-Industrial filing without renewal (IPC, Sec. qualify for registration as a
Applicability 109.3). utility model;
2. The description and the
claims do not comply with
the prescribed
requirements;
3. Any drawing which is
UTILITY MODEL necessary for the
understanding of the
invention has not been
furnished; or
4. The owner of the utility
model registration is not the
inventor or his successor in
title (IPC, Sec. 109.4).

-New or Five (5) years from the date of 1. The subject matter of the
Ornamental filing with 2 five year term industrial design is not
renewals upon payment of fees registrable;
(IPC, Sec. 118.2). 2. The subject matter is not
new; or
INDUSTRIAL 3. The subject matter of the
DESIGN industrial design extends
beyond the content of the
application as originally
filed (IPC, Sec. 120).

Other forms of patentable inventions The following are non-patentable inventions

(IPC as amended by R.A. 9502, Sec. 22) (TrAP A
1. Integrated circuit – A product, in its final SAD2)
form, or an intermediate form, in which the
elements, at least one of which is an active 1. Methods for treatment of the human or
elements and some of all of the animal body by surgery or therapy and
interconnections are integrally formed in and diagnostic methods practiced on the
or on a piece of material, and in which is human or animal body. This provision
intended to perform an electronic function. shall not apply to products and
composition for use in any of these
2. Layout design/topography – The three methods;
dimensional disposition, however expressed, 2. Aesthetic creations
of the elements, at least one of which is an 3. Plant varieties or animal breeds or
active element, and of some or all of the essentially biological process for the
interconnections of an integrated circuit, or production of plants or animals. This
such a three-dimensional disposition provision shall not apply to micro-
prepared for an integrated circuit intended for organisms and non-biological and
manufacture. Registration is valid for 10 years microbiological processes
without renewal counted from date of 4. Schemes, rules and methods of
commencement of protection. performing mental acts, playing games or
doing business, and programs for
NON-PATENTABLE INVENTIONS computers
5. Anything which is contrary to public
An invention may not be patentable because it order or morality
does not comply with the elements of 6. In the case of drugs and medicines, mere
patentability or it falls under non-patentable discovery of a new form or new property
inventions enumerated hereunder (Salao, of a known substance which does not
2018) result in the enhancement of the efficacy
of that substance or the new use for a

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known substance, or the mere use of a FIRST-TO-FILE RULE
known process unless such known
process results in a new product that 1. If two (2) or more persons have made the
employs atleast one new reactant invention separately and independently of
7. Discoveries, scientific theories and each other, the right to the patent shall belong
mathematical methods to the person who filed an application for such
invention, or
Patentability of computer programs 2. Where two or more applications are filed for
the same invention, to the applicant which has
GR: Computer programs are not patentable but are the earliest filing date (IPC, Sec. 29).
copyrightable.
INVENTIONS CREATED PURSUANT
XPN: They can be patentable if they are part of a TO A COMMISSION
process (e.g. business process with a step involving
the use of a computer program). Pursuant to a commission: The person who
commissions the work shall own the patent, unless
Q: Supposing Albert Einstein were alive today otherwise provided in the contract.
and he filed with the Intellectual Property
Office (IPO) an application for patent for his Pursuant to employment: In case the employee
theory of relativity expressed in the formula made the invention in the course of his
E=mc2. The IPO disapproved Einstein's employment contract, the patent shall belong to:
application on the ground that his theory of
relativity is not patentable. Is the IPO's action a. The employee, if the inventive activity is not a
correct? (2006 Bar) part of his regular duties even if the employee
uses the time, facilities and materials of the
A: YES, the IPO is correct because under the employer;
Intellectual Property Code, discoveries, scientific b. The employer, if the inventive activity is the
theories and mathematical methods are classified result of the performance of his regularly-
to be as "non-patentable inventions". Einstein's assigned duties, unless there is an agreement,
theory of relativity falls within the category of express or implied, to the contrary (IPC, Sec.
being a non-patentable "scientific theory". 30).

Q: X invented a bogus coin detector which can Q: As between the inventor and the person who
be used exclusively on self-operating gambling commissioned the inventor to create a new
devices otherwise known as one-armed work, who owns the patent?
bandits. Can X apply for a patent?
A: The person who commissions the work shall
A: NO. The law provides that any invention that is own the patent, unless otherwise provided in the
contrary to public order or morality may not be contract (IPC, Sec. 30).
extended patent protection. The bogus coin
detector appears to be a device used to cheat in RIGHT OF PRIORITY
gambling. Therefore, it may not be patented.
Priority date
OWNERSHIP OF A PATENT
An application for patent filed by any person who
RIGHT TO A PATENT has previously applied for the same invention in
another country which by treaty, convention, or
Persons entitled to a patent law affords similar privileges to Filipino citizens,
shall be considered as filed as of the date of filing
1. Inventor, his heirs, or assigns (IPC, Sec 28) the foreign application (IPC, Sec. 31).
2. Joint invention – Jointly by the inventors (IPC,
Sec. 28) Filing Date is accorded only when all the
3. Two or more persons invented separately and requirements provided under Section 40 are
independently of each other – To the person present. Priority Date comes into play when there
who filed an application is an application for patent for the same invention
4. Two or more applications are filed – the that was filed in another country (Salao, 2012).
applicant who has the earliest filing date or,
the earliest priority date. First to file rule (IPC, Conditions in availing of priority date
Sec. 29).

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1. The local application expressly claims inform the Courts as to what they are called upon
priority; to construe, and to convey to competing
2. It is filed within 12 months from the date the manufacturers and dealers information of exactly
earliest foreign application was filed; and what they are bound to avoid.
3. A certified copy of the foreign application
together with an English translation is filed Unity of invention
within 6 months from the date of filing in the
Philippines (Sec. 31, IPC). The application shall relate to one invention only
or to a group of inventions forming a single general
Three (3) main areas of activity in the grant of inventive concept (IPC, Sec. 38.1). If several
invention patent independent inventions which do not form a single
general inventive concept are claimed in one
1. Examination as to form or formality application, the application must be restricted to a
examination; single invention (IPC, Sec. 38.2).
2. Classification, search and first publication;
and Divisional applications
3. Examination as to substance or substantive
examination. Divisional applications come into play when two or
more inventions are claimed in a single application
Steps in the registration of a patent (FAFO but are of such a nature that a single patent may
ClaPS GPI) not be issued for them. The applicant is thus
required to “divide”, that is, to limit the claims to
The procedure for the grant of patent may be whichever invention he may elect, whereas those
summarized as follows: inventions not elected may be made the subject of
separate applications which are called “divisional
1. Filing of the application applications” (Smith-Kline Beckman Corp. v. CA, GR
2. Accordance of the filing date No. 126627, August 14, 2003).
3. Formality examination
4. Classification and Search Q: Leonard and Marvin applied for Letters
5. Publication of application Patent claiming the right of priority granted to
6. Substantive examination foreign applicants. Receipt of petitioners’
7. Grant of Patent application was acknowledged by respondent
8. Publication upon grant Director on March 6, 1954. Their Application
9. Issuance of certificate (Salao, 2008) for Letters Patent in the US for the same
invention indicated that the application in the
Manner of making disclosure US was filed on March 16, 1953. They were
advised that the "Specification" they had
The application shall disclose the invention in a submitted was "incomplete" and that
manner sufficiently clear and complete for it to be responsive action should be filed with them
carried out by a person skilled in the art. four months from date of mailing, which was
August 5, 1959. On July 3, 1962, petitioners
Claim submitted two complete copies of the
Specification. Director of patents held that
Defines the matter for which protection is sought. petitioners' application may not be treated as
Each claim shall be clear and concise, and shall be filed. Is the director correct?
supported by the description. It must point out and
distinctly show the part, improvement, or A: YES, it is imperative that the application be
combination which the applicant regards as his complete in order that it may be accepted. It is
invention. essential to the validity of Letters Patent that the
specifications be full, definite, and specific. To be
Abstract entitled to the filing date of the patent application,
an invention disclosed in a previously filed
A concise summary of the disclosure of the application must be described within the instant
invention as contained in the description claims application in such a manner as to enable one
and merely serves as technical information. skilled in the art to use the same for a legally
adequate utility (Boothe v. Director of Patents, G.R.
The purpose of requiring a definite and accurate No. L-24919, Jan. 28, 1980).
description of the process is to apprise the public
of what the patentee claims as his invention, to First publication

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The applicant shall have all the rights of a patentee its first commercial exploitation anywhere in
against any person who, without his authorization, the world.
exercised any of the rights conferred under Section
71 in relation to the invention claimed in the NOTE: Where the grounds for cancellation are
published patent application, as if a patent had established with respect only to a part of the
been granted for that invention, provided that the layout-design, only the corresponding part of the
said person had: registration shall be cancelled (IPC, Sec. 120.3, as
amended by RA 9150).
1. Actual knowledge that the invention that he
was using was the subject matter of a REMEDY OF THE TRUE AND ACTUAL
published application; or INVENTOR
2. Received written notice that the invention was
the subject matter of a published application Remedies of persons with a right to a patent
being identified in the said notice by its serial
number. If a person other than the applicant is declared by
final court order or decision as having the right to
The action may not be filed until after the grant of a patent, he may within 3 months after such
a patent on the published application and within decision has become final:
four (4) years from the commission of the acts
complained of (IPC, Sec. 46). 1. Prosecute the application as his own
2. File a new patent application
Effectivity of a patent 3. Request the application to be refused; or
4. Seek cancellation of the patent (IPC, Sec. 67.1)
A patent shall take effect on the date of the
publication of the grant of the patent in the IPO Remedies of the true and actual inventor
Gazette (IPC, Sec. 50.3). (1993, 2005 Bar)

GROUNDS FOR CANCELLATION OF A PATENT If a person, who was deprived of the patent
without his consent or through fraud is declared
Any interested party may petition to cancel any by final court order or decision to be the true and
patent or any claim or parts of a claim any of the actual inventor, the court shall order for his
following grounds: substitution as patentee, or at the option of the true
inventor, cancel the patent, and award actual
1. Invention is not new or patentable; damages in his favor if warranted by the
2. Patent does not disclose the invention in a circumstances (IPC, Sec. 68).
manner sufficiently clear and complete for it to
be carried out by any person skilled in the art; In the two circumstances aforementioned, the
3. The patent is contrary to public order or court shall furnish the Office a copy of the order or
morality (IPC, Sec. 61.1); decision which shall be published in the IPO
4. The patent is found invalid in an action for Gazette within three (3) months from the date
infringement (IPC, Sec. 82); or such order or decision became final and executor,
5. The patent includes matters outside the scope and shall be recorded in the register of the Office
of the disclosure contained in the application (IPC, Sec. 69).
(IPC, Sec 21, Regulations on Inter Partes
Proceeding, Sec.1). Time to file action in court

NOTE: If the ground for cancellation relates to The actions indicated in Sections 67 and 68 shall
some of the claims or parts of the claim only, be filed within one (1) year from the date of
cancellation may be effected to such extent only publication made in accordance with Sections 44
(IPC, Sec. 61.2). and 51, respectively (IPC, Sec. 70).

Grounds for Cancellation of Layout-Design of Q: Cezar works in a car manufacturing

Integrated Circuits company owned by Joab. Cezar is quite
innovative and loves to tinker with things. With
1. The layout-design is not protectable; the materials and parts of the car, he was able
2. The right holder is not entitled to protection; to invent a gas-saving device that will enable
or cars to consume less gas. Francis, a co-worker,
3. The application for registration of the layout- saw how Cezar created the device and likewise,
design, was not filed within two (2) years from came up with a similar gadget, also using scrap

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materials and spare parts of the company. The rights conferred by a patent application take
Thereafter, Francis filed an application for effect after publication in the Official Gazette (IPC,
registration of his device with the Bureau of Sec 46).
Patents. Eighteen months later, Cezar filed his
application for the registration of his device LIMITATIONS OF PATENT RIGHTS
with the Bureau of Patents.
The owner of a patent has no right to prevent third
a. Is the gas-saving device patentable? parties from making, using, offering for sale, selling
Explain. or importing a patented product in the following
b. Assuming that it is patentable, who is circumstances:
entitled to the patent? What, if any, is the
remedy of the losing party? (2005 Bar) a. Using a patented product after it has been put
on the market in the Philippines by the owner
A: of the product, or with his express consent.
a. YES. For the gas saving device to be patentable
invention it must be new; must involve an In case of drugs or medicines, the said
inventive step; and must be industrially limitation applies after a drug or medicine has
applicable. In the given case, it shows that the been introduced in the Philippines or
gas saving device is new and with the anywhere else in the world by the patent
innovativeness of Cezar using certain owner, or by any party authorized to use the
materials of the car, it provides a useful invention. This allows parallel importation
application to save on the consumption of gas. for drugs and medicines.
b. Cezar is entitled to the patent because he is the
true and actual inventor. While it is true that The right to import the drugs and medicines
Francis was the first to file the application for shall be available to any government agency or
registration of patent, the same will not work any private third party (IPC, Sec. 72.1, as
in his favor because he was in bad faith. amended by RA No. 9502).
However, considering that under the IP Code,
it adopts the first to file rule, Cezar will have to b. Where the act is done privately and on a non-
take action against Francis within one (1) year commercial scale or for a non-commercial
from the date of publication. If he is declared purpose (IPC, Sec. 72.2) Provided that it does
by final court order or decision as having the not significantly prejudice the economic
right to a patent, he may within 3 months after interest of the owner of the patent
such decision has become final: a) prosecute c. Exclusively for experimental use of the
the application as his own application in place invention for scientific purposes or
of the applicant; b) file a new patent educational purposes (IPC, Sec. 72.3).
application in respect of the same invention; c) d. In the case of drugs and medicines, where the
request the application to be refused; or d) act includes testing, using, making or selling
seek cancellation of the patent, if one has the invention including any data related
already been issued. thereto, solely for purposes reasonably
related to the development and submission of
RIGHTS CONFERRED BY A PATENT information and issuance of approvals by
government regulatory agencies required
1. In case of Product – Right to restrain, prohibit under any law of the Philippines or of another
and prevent any unauthorized person or country that regulates the manufacture,
entity from making, using, offering for sale, construction, use or sale of any product.
selling or importing the product. The data submitted by the original patent
2. In case of Process – Right to restrain prohibit holder may be protected from unfair
and prevent any unauthorized person or commercial use provided in Article 39.3 of the
entity from manufacturing, dealing in, using, TRIPS Agreement (IPC, Sec. 72.4).
offering for sale, selling or importing any e. Where the act consists of the preparation for
product obtained directly or indirectly from individual cases, in a pharmacy or by a medical
such process. (IPC, Sec. 71) professional, of a medicine in accordance with
3. Right to assign the patent, to transfer by a medical prescription (Sec. 72.5, IPC).
succession, and to conclude licensing f. Where the invention is used in any ship, vessel,
contracts. (IPC, Sec. 71.2) aircraft, or land vehicle of any other country
entering the territory of the Philippines
temporarily or accidentally: Provided, That
such invention is used exclusively for the

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needs of the ship, vessel, aircraft, or land The use by the Government, or third person
vehicle and not used for the manufacturing of authorized by the Government, shall be subject,
anything to be sold within the Philippines (IPC, where applicable, to the following provisions:
Sec. 72.5).
1. In situations of national emergency or other
PRIOR USER circumstances of extreme urgency, the right
holder shall be notified as soon as reasonably
Person other than the applicant, who in good faith, practicable;
started using the invention in the Philippines, or 2. In the case of public non-commercial use of the
undertaken serious preparations to use the same, patent by the patentee, without satisfactory
before the filing date or priority date of the reason, the right holder shall be informed
application shall have the right to continue the use promptly;
thereof, but this right shall only be transferred or 3. If the demand for the patented article in the
assigned further with his enterprise or business Philippines is not being met to an adequate
(IPC, Sec. 73). extent and on reasonable terms as determined
by the Secretary of Health, the right holder
Q: X invented a device which, through the use shall be informed promptly;
of noise, can recharge a cellphone battery. He 4. The scope and duration of such use shall be
applied for and was granted a patent on his limited to the purpose for which it was
device, effective within the Philippines. As it authorized;
turns out, a year before the grant of X's patent, 5. Such use shall be non-exclusive;
Y, also an inventor, invented a similar device 6. The right holder shall be paid adequate
which he used in his cellphone business in remuneration in the circumstances of each
Manila. But X files an injunctive suit against Y case, taking into account the economic value of
to stop him from using the device on the the authorization; and
ground of patent infringement. Will the suit 7. The existence of national emergency or other
prosper? (2011 Bar) circumstances of extreme urgency, in the case
of drugs and medicines shall be subject to the
A: NO, since Y is a prior user in good faith. determination of the President of the
Philippines for the purpose of determining the
USE BY GOVERNMENT need for such use or other exploitation, which
shall be immediately executory.
A Government agency or third person authorized
by the Government may exploit the invention even Reverse reciprocity of foreign law
without agreement of the patent owner where
(PiJa NaNo D): Any condition, restriction, limitation, diminution,
requirement, penalty or any similar burden
a. The public interest, in particular, national imposed by the law of a foreign country on a
security, nutrition, health or the development Philippine national seeking protection of
of other sectors, as determined by the intellectual property rights in that country, shall
appropriate agency of the government, so reciprocally be enforceable upon nationals of said
requires; country, within Philippine jurisdiction (Sec. 231,
b. A judicial or administrative body has IPC).
determined that the manner of exploitation, Doctrine of exhaustion
by the owner of the patent or his licensee, is
anti- competitive; Also known as the doctrine of first sale, it provides
c. In the case of drugs and medicines, there is a that the patent holder has control of the first sale
national emergency or other circumstance of of his invention. He has the opportunity to receive
extreme urgency requiring the use of the the full consideration for his invention from his
invention; sale. Hence, he exhausts his rights in the future
d. In the case of drugs and medicines, there is a control of his invention.
public non-commercial use of the patent by
the patentee, without satisfactory reason; or It espouses that the patentee who has already sold
e. In the case of drugs and medicines, the demand his invention and has received all the royalty and
for the patented article in the Philippines is consideration for the same will be deemed to have
not being met to an adequate extent and on released the invention from his monopoly. The
reasonable terms, as determined by the invention thus becomes open to the use of the
Secretary of the Department of Health. purchaser without further restriction (Adams v.
Burke, 84 U.S. 17, 1873).

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GR: Patent rights are exhausted by first sale in the infringement, and second, that the alleged infringer
Philippines (Domestic exhaustion). knowingly induced infringement and possessed of
specific intent to encourage another’s
XPN: On drugs and medicines: first sale in any infringement. (Amador, 2007)
jurisdiction exhausts the rights of the owner
thereof (International exhaustion) (R.A. No. 9502). Criminal Infringement

PATENT INFRINGEMENT If infringement is repeated by the infringer or by

anyone in connivance with him after finality of the
Civil Infringement judgment of the court against the infringer, the
offenders shall, without prejudice to the institution
The making, using, offering for sale, selling, or of a civil action for damages, be criminally liable
importing a patented product or a product (IPC, Sec. 84).
obtained directly or indirectly from a patented
process, or the use of a patented process without The criminal liability will arise only if the
the authorization of the patentee constitutes infringement is repeated, even if after the finality
patent infringement. of judgment of the court in the civil action against
the infringer or anyone in connivance with him,
Exemptions (PaD CUT):
TESTS IN PATENT INFRINGEMENT
a. Parallel importation for patented drugs and
medicines; Literal Infringement

A parallel importeris one who imports, The extent of protection conferred by the patent
distributes, and sells genuine products in the shall be determined by the claims, which are to be
market, independently of an exclusive interpreted in the light of description and
distributorship or agency agreement with the drawings (Sec. 75, IPC).
manufacturer;
In using literal infringement, resort must be had, in
b. In the case of drugs and medicines, where the the first instance, to the words of the claim. If
act includes testing, using, making or selling accused matter clearly falls within the claim,
the invention including any data related infringement is made out and that is the end of it.
thereto, solely for purposes reasonably To determine whether the particular item falls
related to the development and submission of within the literal meaning of the patent claims, the
information and issuance of approvals by Court must juxtapose the claims of the patent and
government regulatory agencies required the accused product within the overall context of
under any law of the Philippines or of another the claims and specifications, to determine
country that regulates the manufacture, whether there is exactly identity of all material
construction, use or sale of any product; elements (Godines v. CA, G.R. No. 97343, September
c. Compulsory licensing; and 13, 1993).
d. Use of Invention by Government;
e. Procedures on Issuance of a Special Doctrine of Equivalents (2015 Bar)
Compulsory License under the TRIPS
Agreement for patented drugs and medicines. Account shall be taken of elements which are
equivalent to the elements expressed in the claims,
Contributory Infringement so that a claim shall be considered to cover not
only all the elements expressed therein, but also
Anyone who actively induces the infringement of a equivalents (Sec. 75, IPC).
patent or provides the infringer with a component
of a patented product or of a product produced According to the doctrine of equivalents, an
because of a patented process knowing it to be infringement also occurs when a device
especially adopted for infringing the patented appropriates a prior invention by incorporating its
invention and not suitable for substantial non- innovative concept and, despite some modification
infringing use shall be liable as a contributory and change, performs substantially the same
infringer and shall be jointly and severally liable function in substantially the same way to achieve
with the infringer (Sec. 76.6, IPC). substantially the same result (Godines v. CA, G.R.
No. 97343, September 13, 1993).
To succeed on a claim of inducement, patentee
must show, first that there has been direct

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The doctrine of equivalents thus requires No damages can be recovered for acts of
satisfaction of the function-means- and-result test, infringement committed more than four (4)
the patentee having the burden to show that all years before the filing of the action for
three components of such equivalency test are met infringement (IPC, Sec. 79).
(Smithkline Beckman Corporation v. CA, G.R. No. If the infringement is a continuing activity,
126627, August 14, 2003). the aggrieved patent holder retains his cause
of action for damages and injunction, but may
Meaning of “equivalent device” not claim damages beyond 4 years counted
back from the institution of the action
It is such as a mechanic of ordinary skill in (Amador, 2007)
construction of similar machinery, having the
forms, specifications and machine before him, 2. Criminal action for infringement – If the
could substitute in the place of the mechanism infringement is repeated, the infringer shall
described without the exercise of the inventive be criminally liable and upon conviction, shall
faculty. suffer imprisonment of not less than six (6)
months but not more than three (3) years
Q: Does the use of a patented process by a third and/or a fine not less than P100,000.00 but
person constitute an infringement when the not more than P300,000.00.
alleged infringer has substituted, in lieu of
some unessential part of the patented process, The criminal action prescribes in three (3)
a well-known mechanical equivalent? years from the commission of the crime (IPC,
Sec. 84).
A: YES, under the doctrine of mechanical
equivalents, the patentee is protected from Note: Infringement entails only civil liability in
colorable invasions of his patent under the guise of the first instance but it becomes a criminal
substitution of some part of his invention by some offense when it is repeated by the infringer
well-known mechanical equivalent. It is an after finality of the judgment of the court
infringement of the patent, if the substitute against the infringer (Amador, 2007).
performs the same function and was well known at
the date of the patent as a proper substitute for the 3. Administrative remedy – Where the amount of
omitted ingredient (Gsell v. Yap-Jue, G.R. No. L- damages claimed is not less than P200,000.00,
4720, Jan. 19, 1909). the patentee may choose to file an
administrative action against the infringer
Doctrine of file wrapper estoppel with the Bureau of Legal Affairs (BLA). The
BLA can issue injunctions, order direct
This doctrine balances the doctrine of equivalents. infringer to pay patentee damages, but unlike
Patentee is precluded from claiming as part of regular courts, the BLA may not issue search
patented product that which he had to excise or and seizure warrants or warrants of arrest.
modify in order to avoid patent office rejection,
and he may omit any additions that he was 4. Destruction of Infringing material- The court
compelled to add by patent office regulations. may, in its discretion, order that the infringing
goods, materials and implements
Remedies of the owner of the patent against predominantly used in the infringement be
infringers disposed of outside the channels of commerce
of destroyed, without compensation (IPC,
1. Civil action for infringement – The owner may Sec.76.5).
bring a civil action with the appropriate
Regional Trial Court to recover from infringer Persons who can file an action for infringement
the damages sustained by the former, plus
attorney’s fees and other litigation 1. The patentee or his successors-in-interest may
expenses, and to secure an injunction for the file an action for infringement (Creser
protection of his rights (IPC, Sec 76.2). If the Precision Systems, Inc. v. CA, G.R. No. 118708,
damages are inadequate or cannot be Feb. 2, 1998).
reasonably ascertained with reasonable
certainty, the court may award by way of A licensee cannot be considered a
damages a sum equivalent to reasonable successor-in-interest
royalty (IPC, Sec 76.3).
GR: A licensee may NOT maintain a suit for
infringement. Only the patentees, his heirs,

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assignee, grantee or personal representatives Rights of a licensor in voluntary licensing
may bring an action for infringement.
In the absence of any provision to the contrary in
XPN: If the licensing agreement provides that the technology transfer arrangement, the grant of
the licensee may bring an action for a license shall not prevent the licensor from
infringement or if he was authorized to do so granting further licenses to third person nor from
by the patentee through a special power of exploiting the subject matter of the technology
attorney. transfer arrangement himself (IPC, Sec. 89).

2. Any foreign national or juridical entity who Licensee shall be entitled to exploit the subject
meets the requirements of Sec. 3 and not matter of the technology transfer arrangement
engaged in business in the Philippines, to during the whole term of the technology transfer
which a patent has been granted or assigned, arrangement (IPC, Sec. 90).
whether or not it is licensed to do business in
the Philippines (IPC, Sec. 77). Prohibited clauses

A patent holder cannot enforce his rights if he has 1. Those which impose upon the licensee the
committed inequitable conduct in the prosecution obligation to acquire from a specific source
of his patent application (Amador, 2007). capital goods, intermediate products, raw
materials, and other technologies, or of
DEFENSES IN ACTION FOR INFRINGEMENT permanently employing personnel indicated
by the licensor;
1. Invalidity of the patent (Sec. 81, IPC); 2. Those pursuant to which the licensor reserves
2. Any of the grounds for cancellation of patents: the right to fix the sale or resale prices of the
a. That what is claimed as the invention is products manufactured on the basis of the
not new or patentable license;
b. That the patent does not disclose the 3. Those that contain restrictions regarding the
invention in a manner sufficiently clear volume and structure of production;
and complete for it to be carried out by 4. Those that prohibit the use of competitive
any person skilled in the art; or technologies in a non-exclusive technology
c. That the patent is contrary to public order transfer agreement;
or morality (Sec. 61, IPC). 5. Those that establish a full or partial purchase
option in favor of the licensor;
3. Prescription 6. Those that obligate the licensee to transfer for
free to the licensor the inventions or
The burden of proof to substantiate a charge of improvements that may be obtained through
infringement is with the plaintiff. But where the the use of the licensed technology;
plaintiff introduces the patent in evidence, and the 7. Those that require payment of royalties to the
same is in due form, there is created a prima facie owners of patents for patents which are not
presumption of its correctness and validity. The used;
decision of the Director of Patent in granting the 8. Those that prohibit the licensee to export the
patent is presumed to be correct. The burden of licensed product unless justified for the
evidence then shifts to the defendant to overcome protection of the legitimate interest of the
by competent evidence this legal presumption licensor such as exports to countries where
(Maguan v. CA, G.R. No.L-45101, November 28, exclusive licenses to manufacture and/or
1986). distribute the licensed product(s) have
already been granted;
LICENSING 9. Those which restrict the use of the technology
supplied after the expiration of the technology
Modes of obtaining license to exploit patent transfer arrangement, except in cases of early
rights termination of the technology transfer
arrangement due to reason(s) attributable to
1. Voluntary licensing (Sec. 85, IPC) the licensee;
2. Compulsory licensing (Sec. 93, IPC) 10. Those which require payments for patents and
other industrial property rights after their
VOLUNTARY LICENSING expiration, termination arrangement;
11. Those which require that the technology
The grant by the patent owner to a third person of recipient shall not contest the validity of any of
the right to exploit a patented invention. the patents of the technology supplier;

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12. Those which restrict the research and 4. Philippine taxes on all payments relating to
development activities of the licensee the technology transfer arrangement shall be
designed to absorb and adapt the transferred borne by the licensor (IPC, Sec. 88).
technology to local conditions or to initiate
research and development programs in Effect of non-conformance with the prohibited
connection with new products, processes or clauses and mandatory provisions
equipment;
13. Those which prevent the licensee from GR: Non-conformance shall automatically render
adapting the imported technology to local the technology transfer arrangement
conditions, or introducing innovation to it, as unenforceable.
long as it does not impair the quality standards
prescribed by the licensor; XPN: Unless said technology transfer arrangement
14. Those which exempt the licensor for liability is approved and registered with the
for non-fulfillment of his responsibilities Documentation, Information and Technology
under the technology transfer arrangement Transfer Bureau under the provisions of Section
and/or liability arising from third party suits 91 on exceptional cases (IPC, Sec. 92).
brought about by the use of the licensed
product or the licensed technology; and COMPULSORY LICENSING
15. Other clauses with equivalent effects (IPC, Sec.
87). Jurisdiction

Exception on prohibited clauses 1. The Director of Legal Affairs may grant a

license to exploit a patented invention, even
In exceptional or meritorious cases where without the agreement of the patent owner, in
substantial benefits will accrue to the economy, favor of any person who has shown his
such as high technology content, increase in capability to exploit the invention (IPC, Sec.
foreign exchange earnings, employment 93).
generation, regional dispersal of industries and/or 2. R.A. No. 9502 (Universally Accessible Cheaper
substitution with or use of local raw materials, or and Quality Medicines Act of 2008) however
in the case of Board of Investments, registered amended Sec. 93 so that it is the Director
companies with pioneer status, exemption from General of the IPO who may grant a license to
any of the above requirements may be allowed by exploit patented invention under the grounds
the Documentation, Information and Technology enumerated therein.
Transfer Bureau after evaluation thereof on a case
by case basis (IPC, Sec. 91). NOTE: Clarification either by legislation or judicial
interpretation as to who has jurisdiction should be
Mandatory provisions made to avoid confusion (Salao, 2012).

1. The laws of the Philippines shall govern the The Director General of the Intellectual Property
interpretation of the same and in the event of Office may grant a license to exploit a patented
litigation; the venue shall be the proper court invention, even without the agreement of the
in the place where the licensee has its patent owner, in favor of any person who has
principal office; shown his capability to exploit the invention,
2. Continued access to improvements in under any of the following circumstances:
techniques and processes related to the
technology shall be made available during the 1. National emergency or other circumstances of
period of the technology transfer extreme urgency;
arrangement; 2. Where the public interest, in particular,
3. In the event the technology transfer national security, nutrition, health or the
arrangement shall provide for arbitration, the development of other vital sectors of the
Procedure of Arbitration of the Arbitration national economy as determined by the
Law of the Philippines or the Arbitration Rules appropriate agency of the Government, so
of the United Nations Commission on requires;
International Trade Law (UNCITRAL) or the 3. Where a judicial or administrative body has
Rules of Conciliation and Arbitration of the determined that the manner of exploitation by
International Chamber of Commerce (ICC) the owner of the patent or his licensee is anti-
shall apply and the venue of arbitration shall competitive;
be the Philippines or any neutral country; and 4. In case of public non-commercial use of the
patent by the patentee, without satisfactory

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reason; rights, obligations and flexibilities provided under
5. If the patented invention is not being worked the TRIPS Agreement and under Philippine laws,
in the Philippines on a commercial scale, particularly Section 72.1 and Section 74 of the
although capable of being worked, without Intellectual Property Code, as amended under this
satisfactory reason: Provided, that the Act. It is also without prejudice to the extent to
importation of the patented article shall which drugs and medicines produced under a
constitute working or using the patent; or compulsory license can be exported as allowed in
6. Where the demand for patented drugs and the TRIPS Agreement and applicable laws (IPC, Sec.
medicines is not being met to an adequate 93-A, as amended by RA 9502).
extent and on reasonable terms, as
determined by the Secretary of the Requirement to obtain authorization from the
Department of Health (IPC, Sec. 93, as amended patent owner on reasonable commercial terms
by RA 9502). and conditions

Procedure on Issuance of a Special Compulsory GR: The license will only be granted after the
License under the TRIPS Agreement petitioner has made efforts to obtain authorization
from the patent owner on reasonable commercial
The Director General of the Intellectual Property terms and conditions but such efforts have not
Office, upon the written recommendation of the been successful within a reasonable period of time
Secretary of the Department of Health, shall, upon (IPC, Sec. 95.1).
filing of a petition, grant a special compulsory
license for the importation of patented drugs and XPNs:
medicines. The special compulsory license for the
importation contemplated under this provision 1. Where the petition for compulsory license
shall be an additional special alternative seeks to remedy a practice determined after
procedure to ensure access to quality affordable judicial or administrative process to be anti-
medicines and shall be primarily for domestic competitive;
consumption: Provided, that adequate 2. In situations of national emergency or other
remuneration shall be paid to the patent owner circumstances of extreme urgency;
either by the exporting or importing country. The 3. In cases of public non-commercial use; and
compulsory license shall also contain a provision 4. In cases where the demand for the patented
directing the grantee the license to exercise drugs and medicines in the Philippines is not
reasonable measures to prevent the re- being met to an adequate extent and on
exportation of the products imported under this reasonable terms, as determined by the
provision. Secretary of the Department of Health (R.A.
8293, Sec. 95 as amended by R.A. 9502).
The grant of a special compulsory license shall be
immediately executory. Compulsory License Based on
Interdependence of Patents
No court, except the Supreme Court of the
Philippines, shall issue any temporary restraining If the invention protected by a patent, hereafter
order or preliminary injunction or such other referred to as the "second patent," within the
provisional remedies that will prevent the grant of country cannot be worked without infringing
the special compulsory license. another patent, hereafter referred to as the "first
patent," granted on a prior application or
A compulsory license shall also be available for the benefiting from an earlier priority, a compulsory
manufacture and export of drugs and medicines to license may be granted to the owner of the second
any country having insufficient or no patent to the extent necessary for the working of
manufacturing capacity in the pharmaceutical his invention, subject to the following conditions:
sector to address public health problems:
Provided, That, a compulsory license has been 1. The invention claimed in the second patent
granted by such country or such country has, by involves an important technical advance of
notification or otherwise, allowed importation into considerable economic significance in relation
its jurisdiction of the patented drugs and to the first patent;
medicines from the Philippines in compliance with 2. The owner of the first patent shall be entitled
the TRIPS Agreement. to a cross-license on reasonable terms to use
the invention claimed in the second patent;
The right to grant a special compulsory license 3. The use authorized in respect of the first
under this section shall not limit or prejudice the patent shall be non- assignable except with the

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assignment of the second patent; and Upon the request of the patentee, the Director may
4. The terms and conditions of Sections 95, 96 cancel the compulsory license:
and 98 to 100 of IP Code.
a. If the ground for the grant of the compulsory
Compulsory Licensing of Patents Involving license no longer exists and is unlikely to
Semi-Conductor Technology recur;
b. If the licensee has neither begun to supply the
In the case of compulsory licensing of patents domestic market nor made serious
involving semi-conductor technology, the license preparation therefor;
may only be granted in case of public non- c. If the licensee has not complied with the
commercial use or to remedy a practice prescribed terms of the license (IPC, Sec.
determined after judicial or administrative 101.2).
process to be anti-competitive (IPC, Sec. 96).
Surrender of compulsory license
Terms and condition of a compulsory license
The licensee may surrender the license by a
1. The scope and duration of such license shall be written declaration submitted to the Intellectual
limited to the purpose for which it was Property Office.
authorized;
2. The license shall be non-exclusive; The Director shall cause the amendment,
3. The license shall be non-assignable, except surrender, or cancellation in the Register, notify
with that part of the enterprise or business the patentee, and/or the licensee, and cause notice
with which the invention is being exploited; thereof to be published in the IPO Gazette (IPC, Sec.
4. Use of the subject matter of the license shall be 101.3 and 101.4).
devoted predominantly for the supply of the
Philippine market: Provided that this Licensee’s exemption from liability
limitation shall not apply where the grant of
the license is based on the ground that the Any person who works a patented product,
patentee's manner of exploiting the patent is substance and/or process under a license granted
determined by judicial or administrative under this Chapter, shall be free from any liability
process, to be anti-competitive. for infringement: Provided however, that in the
5. The license may be terminated upon proper case of voluntary licensing, no collusion with the
showing that circumstances which led to its licensor is proven. This is without prejudice to the
grant have ceased to exist and are unlikely to right of the rightful owner of the patent to recover
recur: Provided, That adequate protection from the licensor whatever he may have received
shall be afforded to the legitimate interest of as royalties under the license (Sec. 102, IPC).
the licensee; and
6. The patentee shall be paid adequate ASSIGNMENT AND TRANSMISSION OF RIGHTS
remuneration taking into account the
economic value of the grant or authorization, Patents or applications for patents and invention
except that in cases where the license was to which they relate, shall be protected in the same
granted to remedy a practice which was way as the rights of other property under the Civil
determined after judicial or administrative Code.
process, to be anti-competitive, the need to
correct the anti-competitive practice may be Inventions and any right, title or interest in and to
taken into account in fixing the amount of patents and inventions covered thereby, may be
remuneration (IPC, Sec. 100). assigned or transmitted by inheritance or bequest
or may be the subject of a license contract (IPC, Sec.
Amendment of compulsory license 103).

Upon the request of the patentee or the licensee, Manner of effecting transfer of rights
the Director of Legal Affairs may amend the
decision granting the compulsory license, upon 1. By inheritance or bequest
proper showing of new facts or circumstances 2. License contract
justifying such amendment. (IPC, Sec. 101.1)
Assignment of Inventions
Cancellation of compulsory license
An assignment may be of the entire right, title or
interest in and to the patent and the invention

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covered thereby, or of an undivided share of the 1. Economic Function- trademarks serve as
entire patent and invention, in which event the an essential means of distinguishing the
parties become joint owners thereof. An products of one manufacturer or dealers
assignment may be limited to a specified territory from those of others
(IPC, Sec. 104). 2. Source-Indicating Function- to indicate
the source or origin of the goods on which
Form of assignment it is used. Its immediate object is to
distinguish the goods of one manufacturer
The assignment must be in writing, acknowledged from those of his competitors through the
before a notary public or other officer authorized association of goods thus marked with a
to administer oath or perform notarial acts, and particular producer
certified under the hand and official seal of the 3. Guarantee Function- trademark serve to
notary or such other officer (Sec. 105, IPC). guarantee that the product to which it is
affixed comes up to a certain standard of
Effect of an assignment of a patent quality
4. Advertisement Function- the more widely
The assignment works as an estoppel by deed, advertised the product is, the more
preventing the assignor from denying the novelty readily may courts concede that it has
and utility of the patented invention when sued by become distinctive of its proprietor’s
the assignee for infringement. goods

Effect if the assignment was not recorded in the Marks which may be registered
IPO
Any word, name, symbol, emblem, device, figure,
A deed of assignment affecting title shall be void as sign, phrase, or any combination thereof except
against any subsequent purchaser or mortgagee those enumerated under Section 123, IPC.
for valuable consideration and without notice
unless, it is so recorded in the Office, within three Requirements for a mark to be registered
(3) months from the date of said instrument, or 1. It is a visible sign (not sounds or scents)
prior to the subsequent purchase or mortgage. 2. Capable of distinguishing one’s goods and
However, even without recording, the instruments services from another.
are binding upon the parties.
Obligations under the Paris Convention

TRADEMARK In view of the obligations under the Paris

Convention, the Philippines is obligated to assure
nationals of the signatory-countries that they are
DEFINITION OF MARKS, COLLECTIVE MARKS, afforded an effective protection against violation
TRADE NAMES of their intellectual property rights in the
Philippines in the same way that their own
MARK countries are obligated to accord similar
protection to Philippine nationals. "Thus, under
Any visible sign capable of distinguishing the Philippine law, a trade name of a national of a State
goods (trademark) or services (service mark) of an that is a party to the Paris Convention, whether or
enterprise and shall include a stamped or marked not the trade name forms part of a trademark, is
container of goods. protected "without the obligation of filing or
registration. Thus, the applicant for registration of
Purpose of trademark trademark is not the lawful owner thereof and is
not entitled to registration if the trademark has
1. To indicate origin or ownership of the been in prior use by a national of a country which
articled to which they are attached is a signatory to the Paris Convention (Ecole De
2. To guarantee that those articles come up Cuisine Manille Inc. v. Renaud Cointreau & Cie and
to a certain standard of quality Le Condron Bleu Int’l B.V., GR 185830, June 5, 2013,
3. To advertise the articles they symbolized in Divina, 2014).
(Mirpuri v. CA, 318 SCRA 516, November 19,
1999) Under Section 2 of R.A. No. 166, in order to register
a trademark, one must be the owner thereof and
Functions of trademark (Amador, 2007) must have actually used the mark in commerce in
the Philippines for 2 months prior to the

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application for registration. Under the same law, it the goods or services concerned (IPC, Sec
is clear that actual use in commerce is also the test 167.3).
of ownership but the provision went further by The registration of a collective mark, or an
saying that the mark must not have been so application therefore shall not be the subject of a
appropriated by another. Thus, one may be an license contract.
owner of a mark due to its actual use but may not
yet have the right to register such ownership here Criminal penalties under the Intellectual
due to the owner’s failure to use the same in the Property Code for unfair competition,
Philippines for 2 months prior to registration. infringement, false designation of origin and
In any case, the present law on trademarks, false representations
Republic Act No. 8293, otherwise known as the
Intellectual Property Code of the Philippines, as A criminal penalty of imprisonment from two (2)
amended, has already dispensed with the years to five (5) years and a fine ranging from Fifty
requirement of prior actual use at the time of thousand pesos (P50,000) to Two hundred
registration. Thus, there is more reason to allow thousand pesos (P200,000), shall be imposed on
the registration of the subject mark under the any person who is found guilty of committing any
name of Cointreau as its true and lawful owner. of the acts. The penalty shall be independent of the
(Ecole De Cuisine Manille Inc. v. Renaud Cointreau & civil and administrative sanctions imposed by law.
Cie and Le Condron Bleu Int’l B.V., GR 185830, June (Sec 170, IPC)
5, 2013, in Divina, 2014).
Transliteration vs. Translation of mark
COLLECTIVE MARK
Transliteration Translation
Any visible sign designated as such in the is an act, process or is an act, process or
application for registration and capable of instances of instance of
distinguishing the origin or any other common representing or translating as
characteristic, including the quality of goods or spelling of words, rendering from one
services of different enterprises which use the sign letters or characters of language or
under the control of the registered owner of the one language in the representational
collective mark. letters and characters system into another.
of another language or
A "collective mark" or “collective trade-name" is a alphabet
mark or trade-name used by the members of a
cooperative, an association or other collective TRADE NAME OR BUSINESS NAME
group or organization (Sec. 40, RA 166,).
Name or designation identifying or distinguishing
Contents of an application for registration of a an enterprise (IPC, Sec. 121.1, 121.2, 121.3).
collective mark
Any individual name or surname, firm name,
1. The application shall designate the mark as a device nor word used by manufacturers,
collective mark; industrialists, merchants, and others to identify
2. Accompanied by a copy of the agreement, if their businesses, vocations or occupants (Converse
any, governing the use of the collective mark Rubber Corp. vs. Universal Rubber Products, GR No.
(Sec. 167.2, IPC) L-27425, L-30505, April 28, 1980).

Grounds for the cancellation of collective IP Code does not provide for registration of trade
marks names

The Court shall cancel the registration of a Limitations on use of trade name or business
collective mark if the person requesting the name
cancellation proves that:
A person may NOT:
1. Only the registered owner uses the mark,
2. He uses or permits its use in contravention of 1. Use a name if the word is generic (Lyceum of
the agreements referred to in Subsection the Philippines v. CA, G.R. No. 101897, March 5,
166.2, 1993)
3. He uses or permits its use in a manner liable to 2. Use any name indicating a geographical
deceive trade circles or the public as to the locations (Ang Si Heng vs. Wellington
origin or any other common characteristics of Department Store, supra)

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3. Use any name or designation contrary to and continuous use of the mark or trade name by
public order or morals. another can overcome the presumptive ownership
4. Use a name if it is liable to deceive trade circles of the registrant and may very well entitle the
or the public as to the nature of the enterprise former to be declared owner in an appropriate
identified by that name (IPC, Sec. 165.1) case.
5. Subsequently use a trade name likely to
mislead the public as a third party (IPC, Sec. Rights over a trademark conferred
165.2 [b])
6. Copy or simulate the name of any domestic The rights in a mark shall be acquired through
product (for imported products) registration made validly in accordance with the
7. Copy or simulate a mark registered in provisions of the IP Code (Sec. 122, IPC). The filing
accordance with the provisions of IPC (for date of application is the operative act to acquire
imported products) trademark rights.
8. Use mark or trade name calculated to induce
the public to believe that the article is Prior use of mark as a requirement
manufactured in the Philippines, or that it is
manufactured in any foreign country or Actual prior use in commerce in the Philippines
locality other than the country or locality has been abolished as a condition for the
where it is in fact manufactured. registration of trademark.

NOTE: Items 4, 5 and 6 only applies to imported Q: S Development Corporation sued Shangrila
products and those imported articles shall not be Corporation for using the “S” logo and the trade
admitted to entry at any customhouse of the name “Shangrila.” The former claims that it
Philippines (Sec. 166, IPC). was the first to register the logo and the trade
Change in the ownership of a trade name is made name in the Philippines and that it had been
with the transfer of the enterprise or part thereof using the same in its restaurant business.
identified by that name (Sec. 165.4, IPC).
Shangrila Corporation counters that it is an
Trademark vs. Trade name affiliate of an international organization which
has been using such logo and trade name
TRADEMARK TRADE NAME “Shangrila” for over 20 years.
Identifies or Identifies or
distinguishes the distinguishes the However, Shangrila Corporation registered the
goods or services business or enterprise trade name and logo in the Philippines only
Registration is Registration is not after the suit was filed.
required required.
a. Which of the two corporations has a better
ACQUISITION OF OWNERSHIP OF MARK right to use the logo and the trade name?
Explain.
The right to register a trademark should be based b. How does the international affiliation of
on ownership. When the applicant is not the owner Shangrila Corporation affect the outcome
of the trademark being applied for, he has no right of the dispute? Explain. (2005 Bar)
to apply for the registration of the same. Under the
Trademark Law, only the owner of the trademark, A:
trade name or service mark used to distinguish his a. S Corporation. Sec. 122 of the Intellectual
goods, business or service from the goods, Property Code provides that the rights in a
business or service of others is entitled to register trademark are acquired through valid
the same. An exclusive distributor does not acquire registration. Actual prior use in commerce in
any proprietary interest in the principal's the Philippines has been abolished as a
trademark and cannot register it in his own name condition for the registration of a trademark
unless it has been validly assigned to him (Superior (Record of the Senate, Vol. II, No. 29, 8 Oct.1996;
Commercial Enterprises, Inc. v. Kunnan Enterprises, Journal of the House of Representatives, No. 35.
G.R. No. 169974, April 20, 2010). 12 Nov. 1996, 34).

Registration does not confer upon the registrant b. Shangrila’s international affiliation shall
an absolute right to the registered mark. The result in a decision favorable to it. The Paris
certificate of registration is merely a prima Convention mandates that protection should
facie proof that the registrant is the owner of the be afforded to internationally known marks as
registered mark or trade name. Evidence of prior signatory to the Paris Convention, without

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 MERCANTILE LAW
regard as to whether the foreign corporation sufficient to maintain the registration of the same.
is registered, licensed or doing business in the WOWOWEE Hotel’s operation of an interactive
Philippines. Shangrila’s separate personalities website is intended to produce a discernable
from their mother corporation cannot be an commercial effect or activity within the
obstacle in the enforcement of their rights as Philippines, or at the very least, seeks to establish
part of the Kuok Group of Companies and as commercial interaction with local consumers.
official repository, manager and operator of Accordingly, WOWOWEE’s use of the "W" mark in
the subject mark and logo. Besides, R.A. No. its reservation services through its website
166 did not require the party seeking relief to constitutes use of the mark sufficient to keep its
be the owner of the mark but "any person who registration in force. (W LAND HOLDINGS, INC. v.
believes that he is or will be damaged by the STARWOOD HOTELS AND RESORTS WORLDWIDE
registration of a mark or trade name" G.R. No. 222366, December 04, 2017)
(Shangri-la International Hotel Management,
LTD., et.a.l v. Developers Group of Companies, Duration or effectivity of trademark
Inc. G.R. No. 159938, March 31, 2006). registration

Rights conferred to the owner of a registered It remains in force for 10 years, subject to
mark indefinite renewals of 10 years each.

The owner of a registered mark shall have the The registrant is required to file a declaration of
exclusive right to: actual use and evidence to that effect, or show valid
a. Use the mark for one’s own goods or services; reasons based on the existence of obstacles to such
b. Prevent third parties from using, without his use, within one (1) year from the fifth anniversary
consent, signs or containers which are of the date of the registration of the mark.
identical or similar to the registered Otherwise, the mark shall be removed from the
trademark where such use would result in a Register by the IPO (IPC, Secs. 145 and 146).
likelihood of confusion.
Filing date of a foreign applicant
In case of the use of an identical sign for identical
goods or services, a likelihood of confusion shall An application for registration of a mark filed in
be presumed (IPC, Secs. 147, 147.1). the Philippines by a foreign national of a country
with whom the Philippines extends reciprocity
Q: WOWOWEE Hotels is the registered owner of rights, and who previously duly filed an
the trademark “W” for its hotel business. In an application for registration of the same mark in
attempt to register the same mark for its own one of those countries, shall be considered as filed
business, WEEWEEWOW Realty filed a Petition as of the day the application was first filed in the
for Cancellation of WOWOWEE Hotel’s mark for foreign country (IPL, Sec. 131.1).
non-use under the IP Code claiming that the
latter has failed to use its mark in the However, the owner of a well-known mark in the
Philippines because it has no hotel or Philippines that is identical with, or confusingly
establishment in the Philippines rendering the similar to, or constitutes a translation of a mark,
services covered by its registration. In although not registered, may oppose the
WOWOWEE Hotel’s defense, it argued that application of a mark of foreign origin, or petition
notwithstanding the absence of any “W” Hotel the cancellation of its registration or sue for unfair
in the Philippines, it was able to maintain a competition (IPC, Sec. 131.3).
Philippine registered domain name and an
interactive website [Link] for its W Q: Birkenstock, applied for various trademark
Hotels which showcases its mark and allows registrations before the IPO. However,
Philippine residents to make reservations and registration proceedings of the subject
bookings, which presuppose clear and applications were suspended in view of an
convincing use of the "W'' mark in the existing registration of the mark
Philippines. Whose contention is correct? "BIRKENSTOCK AND DEVICE" in the name of
STIIC, predecessor-in-interest of PSEMC.
A: WOWOWEE Hotel’s contention is correct. Birkenstock filed a cancellation case on the
Notwithstanding the absence of a WOWOWEE ground that it is the lawful and rightful owner
hotel or establishment in the Philippines, the use of the Birkenstock marks. However,
of a registered mark representing the owner's STIIC/PSEMC’s registration expired, thereby
goods or services by means of an interactive resulting in the cancellation of such mark.
website may constitute proof of actual use that is

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385 FACULTY OF CIVIL LAW
 Intellectual Property Code
Accordingly, the cancellation case was A: E.Y. Industrial is the true owner of the mark.
dismissed for being moot and academic. Under the Intellectual Property Code, the
registration of a mark is prevented with the filing
The aforesaid cancellation paved the way for of an earlier application for registration. This must
the publication of the subject applications in not, however, be interpreted to mean that
the IPO e-Gazette. In response, respondent ownership should be based upon an earlier filing
filed three (3) separate Inter Partes Cases. The date. Notably, the Court has ruled that the prior
BLA-IPO sustained STIIC/PSEMC’s opposition. and continuous use of a mark may even overcome
IPO Director General reversed and set aside the the presumptive ownership of the registrant and
ruling of the BLA. The CA reversed and set aside be held as the owner of the mark. Registration,
the ruling of the IPO Director General and without more, does not confer upon the registrant
reinstated that of the BLA. Did Birkenstock an absolute right to the registered mark. The
acquire ownership over the said marks by certificate of registration is merely a prima facie
mere application or registration? proof that the registrant is the owner of the
registered mark or trade name. Evidence of prior
A: NO. It is not the application or registration of a and continuous use of the mark or trade name by
trademark that vests ownership thereof, but it is another can overcome the presumptive ownership
the ownership of a trademark that confers the of the registrant and may very well entitle the
right to register the same. A trademark is an former to be declared owner in an appropriate
industrial property over which its owner is case.
entitled to property rights which cannot be
appropriated by un-scrupulous entities that, in one E.Y. Industrial’s prior adoption and continuous use
way or another, happen to register such trademark of the mark "VESPA" on air compressors is
ahead of its true and lawful owner. The bolstered by numerous documentary evidences.
presumption of ownership accorded to a The use by E.Y. Industrial in the concept of owner
registrant must then necessarily yield to superior is shown by commercial documents, sales invoices
evidence of actual and real ownership of a unambiguously describing the goods as "VESPA"
trademark (Birkenstock Orthopaedie GMBH and Co. air compressors. E.Y. Industrial have sold the air
KG v. Philippine Shoe Expo Marketing Corporation compressors bearing the "VESPA" to various
G.R. No. 194307, November 20, 2013, in Divina, locations in the Philippines, as far as Mindanao and
2014). the Visayas since the early 1990’s.

Q: E.Y. Industrial is a domestic corporation As such, E.Y. Industrial must be considered as the
engaged in the production, distribution and prior and continuous user of the mark "VESPA"
sale of air compressors and other industrial and its true owner and is entitled to the
tools and equipment. Shen Dar is a Taiwan- registration of the mark in its name (E.Y. Industrial
based foreign corporation engaged in the Sales v. Shen Dar Electricity and Machinery Co., Ltd.,
manufacture of air compressors. Both G.R. No. 184850, October 20, 2010).
companies claimed to have the right to register
the trademark "VESPA" for air compressors. Q: CHEN, Inc., a Taiwanese company, is a
manufacturer of tires with the mark Light Year.
On June 9, 1997, Shen Dar filed Trademark From 2009 to 2014, Clark Enterprises, a
Application with the IPO for the mark "VESPA, Philippine-registered corporation, imported
Chinese Characters and Device" for use on air tires from CHEN, Inc. under several sales
compressors and welding machines. On July contracts and sold them here in the
28, 1999, EYIS filed Trademark Application Philippines. In 2015, CHEN, Inc. filed a
also for the mark "VESPA," for use on air trademark application with the Intellectual
compressors. Property Office (IPO) for the mark Light Year to
be used for tires. The IPO issued CHEN, Inc. a
On June 21, 2004, Shen Dar filed a Petition for certificate of registration (COR) for said mark.
Cancellation of EYIS’ COR. Shen Dar primarily Clark Enterprises sought the cancellation of the
argued that the issuance of the COR in favor of COR and claimed it had a better right to register
EYIS violated Section 123.1 paragraphs (d), (e) the mark Light Year. CHEN, Inc. asserted that it
and (f) of Republic Act No. (RA) 8293, was the owner of the mark and Clark
otherwise known as the Intellectual Property Enterprises was a mere distributor. Clark
Code (IP Code), having first filed an application Enterprises argued that there was no evidence
for the mark. on record that the tires it imported from CHEN,
Inc. bore the mark Light Year and Clark
Who is the true owner of the mark? Enterprises was able to prove that it was the

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first to use the mark here in the Philippines. In particular, any subsequent use of the trade
Decide the case. (2015 Bar) name by a third party, whether as a trade name or
A: Chen’s prior actual use of the trademark even in a mark or collective mark, or any such use of a
another country bars Clark from applying for the similar trade name or mark, likely to mislead the
registration of the same trademark. While R.A. No. public, shall be deemed unlawful (Sec. 165, IPC).
8293 removed the previous requirement of proof
of actual use prior to the filing of an application for Ownership of a mark or trade name may be
registration of a mark, proof of prior and acquired not necessarily by registration but by
continuous use is necessary to establish adoption and use in trade or commerce. As
ownership of trademark. Such ownership of the between actual use of a mark without registration,
trademark confers the right to register the and registration of the mark without actual use
trademark. Since Chen owns the trademark as thereof, the former prevails over the latter. For a
evidenced by its actual and continuous use prior to rule widely accepted and firmly entrenched is that
the Clark Enterprises, then it is the one entitled to actual use in commerce or business is a pre
the registration of the trademark. The fact that requisite to the acquisition of the right of
Clark was the first one to use the mark here in the ownership.
Philippines will not matter.
The two concepts of corporate name or business
Also, a mere distributor does not own the name and trademark or service mark, are not
trademark to the goods he distributes and his mutually exclusive. It is common, indeed likely,
rights over the trademark cannot prevail over the that the name of a corporation or business is also a
owner. trade name, trademark or service mark (Shangri-
La International Hotel Management, Ltd. vs.
Q: Is there an infringement of trademark when Developers Group of Companies, Inc., G.R. No.
two similar goods use the same words, “PALE 159938, March 31, 2006).
PILSEN”?
A trade name of a national of a State that is a party
A: NONE, because “pale pilsen” are generic words to the Paris Convention, whether or not the trade
descriptive of the color (pale) and of a type of beer name forms part of a trademark, is protected
(pilsen), which is a light bohemian beer with “without the obligation of prior filing or
strong hops flavor that originated in the City of registration.” (Fredco Manufacturing Corporation
Pilsen in Czechoslovakia. Pilsen is a primarily vs President and Fellows of Harvard College
geographically descriptive word, hence, non- (Harvard University), G.R. No. 185917, June 1,
registrable and not appropriable by any beer 2011).
manufacturer (Asia Brewery, Inc. v. CA, G.R. No.
103543, July 5, 1993). A trade name need not be registered with the IPO
before an infringement suit may be filed by its
Person who may file an opposition to owner against the owner of an infringing
trademark registration and grounds for filing trademark. All that is required is that the trade
the same name is previously used in trade or commerce in
the Philippines. A corporation has the exclusive
Any person who believes that he would be right to use its name. The right proceeds from the
damaged by the registration of a mark may, upon theory that it is a fraud on the corporation which
payment of the required fee and within thirty (30) has acquired a right to that name and perhaps
days after the publication referred to in Subsection carried on its business thereunder, that another
133.2, file with the Office an opposition to the should attempt to use the same name, or the same
application (IPC, Sec. 134). name with a slight variation in such a way as to
induce persons to deal with it in the belief that they
ACQUISITION OF OWNERSHIP OF TRADE are dealing with the corporation which has given a
NAME reputation to the name (Coffee Partners, Inc. v. San
Francisco Coffee & Roastery, Inc., G.R. No. 169504,
Acquisition of trade names March 3, 2010).

A name or designation may not be used as a trade Q: Jinggy went to Kluwer University (KU) in
name if by its nature or the use to which such name Germany for his doctorate degree (Ph.D.). He
or designation may be put, it is contrary to public completed his degree with the highest honors
order or morals and if, in particular, it is liable to in the shortest time. When he came back, he
deceive trade circles or the public as to the nature decided to set-up his own graduate school in
of the enterprise identified by that name. his hometown in Zamboanga. After seeking

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387 FACULTY OF CIVIL LAW
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free legal advice from his high-flying lawyer- by his written consent, or the name, signature,
friends, he learned that the Philippines follows or portrait of a deceased President of the
the territoriality principle in trademark law, Philippines, during the life of his widow except
i.e., trademark rights are acquired through by written consent of the widow.
valid registration in accordance with the 4. Identical with a registered mark belonging to a
law. Forthwith, Jinggy named his school the different proprietor or a mark with an earlier
Kluwer Graduate School of Business of filing or priority date, in respect of:
Mindanao and immediately secured
registration with the Bureau of a. The same goods or services;
Trademarks. KU did not like the unauthorized b. Closely related goods or services; or
use of its name by its top alumnus no less. KU c. If it nearly resembles such a mark as to be
sought your help. What advice can you give likely to deceive or cause confusion.
KU? (2014 Bar)
5. Is identical with an internationally well-known
A: I can advise KU to file a petition to cancel the mark, whether or not it is registered here, used
registration of the name “Kluwer Graduate School for identical or similar goods or services
of Business of Mindanao” (“KGSBM”) with the Provided, that in determining whether a mark
Bureau of Trademarks. The petition could be is well-known, account shall be taken of;
anchored on the following facts: 6. Is identical with an internationally well-known
mark which is registered in the Philippines with
Kluwer University is the owner of the name respect to non-similar goods or services.
“Kluwer.” registered the trademark in bad faith. He Provided, that the interests of the owner of the
came to know of the trademark because he went to registered mark are likely to be damaged by
Kluwer University in Germany for his doctorate such use.
degree. KU is the owner of the name “Kluwer” and 7. Is likely to mislead the public as to the nature,
has the sole right to register the same. Under the quality, characteristics or geographical origin
Paris Convention for the Protection of Industrial of the goods or services.
Property, to which both the Philippines and 8. Consists exclusively of signs that are generic
Germany are signatories, foreign marks that are for the goods or services that they seek to
still accorded protection against infringement identify.
and/or unfair competition in other countries that 9. Consists exclusively of signs that have become
are also signatories to the Convention without customary or usual to designate the goods or
need of registering the trademark. services in everyday language and established
trade practice.
The petition could also be based on the fact that 10. Consists exclusively that may serve in trade to
“Kluwer” is a well-known mark and entitled to designate the kind, quality, quantity, intended
protection as KU and KGSBM belong to the same purpose, value, geographical origin, time or
class of services, i.e., education and entertainment. production of the goods or rendering of the
services, or other characteristics of the goods
Finally, the petition could also be based on the fact, or services.
that “Kluwer” is a trade name that KU has adopted 11. Consists of shapes that may be necessitated by
and used before its use and registration by Jinggy technical factors or by the nature of the goods
(Ecole de Cuisine Manille, Inc. v. Renaud Cointreau & themselves or factors that affect their intrinsic
Cie, G.R. No. 185830, June 5, 2013). value.
12. Consists of color alone, unless defined by a
NON-REGISTRABLE MARKS given form.
13. Is contrary to public order or morality (IPC, Sec.
Non-registrable marks (Im FLEW RMG CuDeS 123)
CoCon)
Q: Laberge, Inc., manufactures and markets
1. Consists of immoral, deceptive or scandalous after-shave lotion, shaving cream, and
matter or falsely suggest a connection with deodorants using the trademark “PRUT”,
persons, institutions, beliefs, or national which is registered with the Intellectual
symbols Property Office. Laberge does not manufacture
2. Consists of the flag or coat of arms or other briefs and underwear and these items are not
insignia of the Philippines or any of its political specified in the certificate of registration. JG
subdivisions, or of any foreign nation. who manufactures briefs and underwear,
3. Consists of a name, portrait or signature wants to know whether, under our laws, he can
identifying a particular living individual except

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use and register the trademark “PRUTE” for his Roastery, Inc., G.R. No. 169504, March 3, 2010, in
merchandise. Can JG register the trademark? Divina, 2014).

A: YES. The trademark registered in the name of In trademark registration, while both competing
Laberge, Inc. covers only after-shave lotion, marks refer to the word “KOLIN” written in upper
shaving cream, deodorant, talcum powder and case letters and in bold font, but one is italicized
toilet soap. It does not cover briefs and underwear. and colored black while the other is white in
The limit of the trademark is stated in the pantone red color background and there are
certificate issued to Laberge Inc. It does not differing features between the two, registration of
include briefs and underwear which are different the said mark could be granted. It is hornbook
products protected by Larberge’s trademark. JG doctrine that emphasis should be on the similarity
can register the trademark “PRUTE” to cover its of the products involved and not on the arbitrary
briefs and underwear (Faberge Inc. v. IAC, G.R. No. classification or general description of their
71189, November 4, 1992). properties or characteristics. The mere fact that
one person has adopted and used a trademark on
Q: CPI was registered with the SEC in January his goods would not, without more, prevent the
2001. It has a franchise agreement with Coffee adoption and use of the same trademark by others
Partners Ltd. (CPL) for a non-exclusive right to on unrelated articles of a different kind (Taiwan
operate coffee shops in the Philippines using Kolin Corporation, LTD. v. Kolin Electronics Co., Inc.,
trademarks designed by CPL such as SAN G.R. No. 209843, March 25, 2015).
FRANCISCO COFFEE.
Person who may file an opposition to
SFCRI was registered with the SEC in May 1995. application for trademark registration
It registered the business name SAN
FRANCISCO COFFEE & ROASTERY, INC. with the Any person who believes that he would be
DTI in June 1995. damaged by the registration of a mark may, upon
payment of the required fee and within thirty (30)
In June 2001, SFCRI discovered that CPI was days after the publication referred to in Subsection
about to open a coffee shop under the name 133.2 of the IP Code, file with the IP Office an
SAN FRANCISCO COFFEE in Libis, Quezon City. opposition to the application (IPC, Sec. 134).
SFCRI sent a letter to CPI demanding that the
latter stop using the name SAN FRANCISCO Admission of non-compliance with the
COFFEE. Does CPI ‘s use of the trademark SAN requirement of filing a Declaration of Actual Use is
FRANCISCO COFFEE constitutes infringement tantamount to a judicial admission of
of SFCRI ‘s trade name SAN FRANCISCO COFFEE abandonment of trademark (Mattel, Inc. v.
& ROASTERY, INC., even if the trade name is not Francisco, G.R. No. 166886, July 30, 2008).
registered with the Intellectual Property Office
(IPO)? NOTE: Failure to file a Declaration of Actual Use
(DAU) within the required period results in the
A: YES. Petitioner’s argument that “San Francisco” automatic cancellation of registration of a
is just a proper name referring to the famous city trademark. In turn, such failure is tantamount to the
in California and that “coffee” is simply a generic abandonment or withdrawal of any right or interest
term, is untenable. Respondent has acquired an the registrant has over his trademark (Birkenstock
exclusive right to the use of the trade name “SAN Orthopaedie GMBH and Co. KG v. Philippine Shoe
FRANCISCO COFFEE & ROASTERY, INC.” since the Expo Marketing Corporation, G. R. No. 194307,
registration of the business name with the DTI in November 20, 2013).
1995. Thus, respondent’s use of its trade name
from then on must be free from any infringement Periods for the submission of Declaration of
by similarity. Of course, this does not mean that Actual Use and proof of use:
respondent has exclusive use of the geographic
word “San Francisco” or the generic word “coffee.” 1. three (3) years from the filing date of the
Geographic or generic words are not, per se, application; and
subject to exclusive appropriation. It is only the 2. one (1) year from the 5th anniversary of
combination of the words “SAN FRANCISCO the date of registration of the mark.
COFFEE,” which is respondent’s trade name in its
coffee business, that is protected against Instances when non-use of a mark is excused
infringement on matters related to the coffee
business to avoid confusing or deceiving the public
(Coffee Partners, Inc. v. San Francisco Coffee and

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389 FACULTY OF CIVIL LAW
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1. If caused by circumstances arising The question is whether the use of marks involved
independently of the will of the owner. Lack of is likely to cause of confusion or mistake in the
funds is not an excuse. mind of the public or deceive purchasers. (2012
2. A use which does not alter its distinctive Bar)
character though the use is different from the
form in which it is registered. Instances where dominancy test is applied
3. Use of mark in connection with one or more of
the goods/services belonging to the class in 1. NS Northern Organic Fertilizer’s “NS D-10
which the mark is registered. PLUS” vs. Berris’ “D-10 80 WP”
4. Use of a mark by a company related to the
applicant/registrant. Comparing Berris’ mark "D-10 80 WP" with
5. Use of a mark by a person controlled by the Abyadang’s mark "NS D-10 PLUS," as appearing on
registrant (IPC, Section 152). their respective packages, one cannot but notice
that both have a common component which is "D-
SIMILARITY BETWEEN MARKS 10." On Berris’ package, the "D-10" is written with
a bigger font than the "80 WP." Admittedly, the "D-
The likelihood of confusion is a relative concept; to 10" is the dominant feature of the mark. The "D-
be determined only according to the particular and 10," being at the beginning of the mark, is what is
sometimes peculiar circumstances of each case. In most remembered of it. Although it appears in
trademark cases, even more than in any other Berris’ certificate of registration in the same font
litigation, precedent must be studied in light of the size as the "80 WP," its dominancy in the "D-10 80
facts of the particular case. The wisdom of the WP" mark stands since the difference in the form
likelihood of confusion test lies in its recognition does not alter its distinctive character.
that each trademark infringement case presents its
own unique set of facts. Applying the Dominancy Test, the Court finds
Abyadang’s "NS D-10 PLUS" is similar to Berris’ "D-
Two (2) types of confusion 10 80 WP" and that confusion or mistake is more
likely to occur. Undeniably, both marks pertain to
1. Confusion of Goods – The ordinarily prudent the same type of goods – fungicide with 80%
purchaser would be induced to purchase one Mancozeb as an active ingredient and used for the
product in the belief that he was purchasing same group of fruits, crops, vegetables, and
the other. ornamental plants, using the same dosage and
2. Confusion of Origin (Confusion of Business) manner of application. They also belong to the
– The goods of the parties are different, the same classification of goods under R.A. No. 8293.
defendant’s product is such as might Both depictions of "D-10," as found in both marks,
reasonably be assumed to originate from the are similar in size, such that this portion is what
plaintiff, and the public would then be catches the eye of the purchaser. Undeniably, the
deceived either into that belief or into the likelihood of confusion is present (Berris
belief that there is some connection between Agricultural Co., Inc., v. Norvy Abyadang, G.R. No.
the plaintiff and defendant which, in fact, does 183404, October 13, 2010).
not exist.
2. Nestle’s “NAN” vs. 5M Enterprise’ “NANNY”
Two (2) tests to determine colorable imitation
Applying the dominancy test, the Court finds that
1. Dominancy Test NANNY is confusingly similar to NAN. NAN is the
2. Holistic Test prevalent feature of Nestles line of infant
powdered milk products. It is written in bold
DOMINANCY TEST letters and used in all products. The line consists of
PRE-NAN, NAN-H.A., NAN-1, and NAN-2. Clearly,
It focuses on the similarity of the prevalent features NANNY contains the prevalent feature NAN. The
of the competing marks. If the competing first three letters of NANNY are exactly the same as
trademark contains the main, essential or the letters of NAN. When NAN and NANNY are
dominant features of another, and confusion and pronounced, the aural effect is confusingly similar.
deception are likely to result, infringement takes NANNY and NAN have the same classification,
place. Duplication or imitation is not necessary; descriptive properties and physical attributes.
nor is it necessary that the infringing label should Both are classified under Class 6, both are milk
suggest an effort to imitate (C. Neilman Brewing Co. products, and both are in powder form. Also,
v. Independent Brewing Co., 191 F. 489, 495, citing NANNY and NAN are displayed in the same section
Eagle White Lead Co. vs. Pflugh [CC] 180 FED. 579).

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of stores the milk section (Societes Des Products would be less likely for the ordinary purchaser to
Nestle vs. Dy,Jr.,, G.R. No. 172276, August 8, 2010). notice that CFC’s trademark FLAVOR MASTER
carries the colors orange and mocha while that of
3. Sketcher’s “S” rubber shoes vs. Inter Pacific Nestle’s uses red and brown. The application of the
Industrial Trading Corp.’s (PITC) “Strong” totality or holistic test is improper since the
rubber shoes ordinary purchaser would not be inclined to notice
the specific features, similarities or dissimilarities,
Applying the Dominancy Test, the Court finds that considering that the product is an inexpensive and
the use of the stylized "S" by PITC in its Strong common household item.
rubber shoes infringes on the mark already
registered by Sketcher with the IPO. While it is Hence, in applying the dominancy test, it is
undisputed that Sketcher’s stylized "S" is within an sufficiently established that the word MASTER is
oval design, to the Court’s mind, the dominant the dominant feature of opposer's mark. The word
feature of the trademark is the stylized "S," as it is MASTER is printed across the middle portion of
precisely the stylized "S" which catches the eye of the label in bold letters almost twice the size of the
the purchaser. Thus, even if PITC did not use an printed word ROAST. Further, the word MASTER
oval design, the mere fact that it used the same has always been given emphasis in the TV and
stylized "S", the same being the dominant feature radio commercials and other advertisements
of Sketcher’s trademark, already constitutes made in promoting the product. This can be
infringement under the Dominancy Test. gleaned from the fact that Robert Jaworski and
Atty. Ric Puno Jr.., the personalities engaged to
PITC did not simply use the letter "S," but it promote the product, are given the titles Master of
appears that based on the font and the size of the the Game and Master of the Talk Show,
lettering, the stylized "S" utilized by PITC is the respectively. In due time, because of these
very same stylized "S" used by Sketcher; a stylized advertising schemes the mind of the buying public
"S" which is unique and distinguishes Sketcher’s had come to learn to associate the word MASTER
trademark. Indubitably, the likelihood of confusion with the opposer's goods (Societe Des Produits
is present as purchasers will associate the PITC’s Nestle, S.A. and Nestle Phils. v. CA, GR. No. 112012,
use of the stylized "S" as having been authorized by April 4, 2001).
Sketcher or that PITC’s product is connected with
Sketcher’s business. 5. McDonald’s Corp.’s “BIG MAC”vs. L.C. Big
Mak Burger, Inc.’s “BIG MAK”(2016 Bar)
4. Societe Des Produits Nestle’s “MASTER
ROAST” and “MASTER BLEND”vs. CFC Corp’s McDonald's owns the "Big Mac" mark for its
“FLAVOR MASTER” "double-decker hamburger sandwich. Based on
this Home Registration, McDonald's applied for the
CFC Corporation filed an application for the registration of the same mark in the PBPTT (now
registration of the trademark "FLAVOR MASTER" IPO). PBPTT allowed registration of the "Big Mac.
for instant coffee. Societe Des Produits Nestle filed On the other hand, L.C. Big Mak Burger, Inc. is a
an unverified Notice of Opposition, claiming that domestic corporation which operates fast-food
the trademark of CFC Corp.’s product is outlets and snack vans in Metro Manila and nearby
"confusingly similar to its trademarks for coffee provinces. It applied with the PBPTT for the
and coffee extracts, to wit: MASTER ROAST and registration of the "Big Mak" mark for its
MASTER BLEND." Nestle claimed that the use, if hamburger sandwiches, which was opposed by
any, by CFC of the trademark FLAVOR MASTER McDonald's.
and its registration would likely cause confusion in
the trade; or deceive purchasers and would falsely Applying the dominancy test, L.C. Big Mak Burger’s
suggest to the purchasing public a connection in use of the "Big Mak" mark results in likelihood of
the business of Nestle, as the dominant word confusion. Aurally the two marks are the same,
present in the three (3) trademarks is "MASTER"; with the first word of both marks phonetically the
or that the goods of CFC might be mistaken as same, and the second word of both marks also
having originated from the latter. phonetically the same. Visually, the two marks
have both two words and six letters, with the first
If the ordinary purchaser is "undiscerningly rash" word of both marks having the same letters and
in buying such common and inexpensive the second word having the same first two letters
household products as instant coffee, and would (McDonald’s Corp v. L.C. Big Mak Burger, Inc., G.R.
therefore be "less inclined to closely examine No. 143993, August 18, 2004).
specific details of similarities and dissimilarities"
between the two competing products, then it

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6. UFC Philippines (now merged with Nutri- in sound and appearance, even if the last
Asia) “PAPA”vs. Barrio Fiesta syllable of DERMALINE consisted of four (4)
Manufacturing’s “PAPA BOY & DEVICE” letters while DERMALIN consisted only of three
(3).
Barrio Fiesta Manufacturing Corporation filed
application for the mark PAPA BOY & DEVICE” for Dermaline countered that a simple comparison
goods under Class 30, specifically for lechon sauce. of the trademark DERMALINE DERMALINE,
Nutri-Asia opposed the application, contending INC. vis-a-vis Myra’s DERMALIN trademark
that "Papa Boy & Device" is confusingly similar would show that they have entirely different
with its "Papa" marks, considering that its ketchup features and distinctive presentation, thus it
product and Barrio Fiesta’s lechon sauce product cannot result in confusion, mistake or
are related articles that fall under the same Class deception on the part of the purchasing public.
30. Dermaline contended thatthe entirety of the
marks must be considered in relation to the
Applying the dominancy test, it is found that the goods to which they are attached, including the
word "Papa" is the dominant feature of UFC's mark other features appearing in both labels.
"Papa Ketsarap." Contrary to Barrio Fiesta's
contention, "Ketsarap" cannot be the dominant Are the arguments of Dermaline tenable?
feature of the mark as it is merely descriptive of the
product. Furthermore, it is the "Papa" mark that A: NO. Dermaline’s insistence that its applied
has been in commercial use for decades and has trademark DERMALINE DERMALINE, INC. had
established awareness and goodwill among differences too striking to be mistaken from Myra’s
consumers. Also, the word "Papa" is the dominant DERMALIN cannot, therefore, be sustained. While
feature of Barrio Fiesta's "Papa Boy & Device" it is true that the two marks are presented
mark subject of the application, such that the word differently Dermaline’s mark is written with the
"Papa" is written on top of and before the other first DERMALINE in script going diagonally
words such that it is the first word/figure that upwards from left to right, with an upper case D
catches the eyes. The part of Barrio Fiesta's mark followed by the rest of the letters in lower case, and
which appears prominently to the eyes and ears is the portion DERMALINE, INC. is written in upper
the phrase "Papa Boy" and that is what a purchaser case letters, below and smaller than the long-hand
of Barrio Fiesta’s product would immediately portion; while Myra’s mark DERMALIN is written
recall, not the smiling hog in the logo. in an upright font, with a capital D and followed by
lower case letters the likelihood of confusion is still
Since UFC's product, ketchup, is also a household apparent. This is because they are almost spelled
product found on the same grocery aisle, in similar in the same way, except for Dermaline’s mark
packaging, the public could think that UFC had which ends with the letter E, and they are
expanded its product mix to include lechon sauce, pronounced practically in the same manner in
and that the "Papa Boy" lechon sauce is now part three (3) syllables, with the ending letter E in
of the "Papa" family of sauces (UFC Philippines vs. Dermaline’s mark pronounced silently. Thus,
Barrio Fiesta Manufacturing, G.R. No. 198889, when an ordinary purchaser, for example, hears an
January 20, 2016). advertisement of Dermaline’s applied trademark
over the radio, chances are he will associate it with
Q: Dermaline, Inc. filed before the (IPO) an Myra’s registered mark.
application for registration of the trademark
DERMALINE DERMALINE, INC. Myra Further, Dermaline’s stance that its product
Pharmaceuticals, Inc. filed a Verified belongs to a separate and different classification
Opposition alleging that the trademark sought from Myra’s products with the registered
to be registered by Dermaline so resembles its trademark does not eradicate the possibility of
trademark DERMALIN and will likely cause mistake on the part of the purchasing public to
confusion, mistake and deception to the associate the former with the latter, especially
purchasing public. Myra claimed thatthe considering that both classifications pertain to
dominant feature is the term DERMALINE, treatments for the skin.
which is practically identical with its own
DERMALIN, more particularly that the first Thus, the public may mistakenly think that
eight (8) letters of the marks are identical, and Dermaline is connected to or associated with Myra,
that notwithstanding the additional letter E by such that, considering the current proliferation of
Dermaline, the pronunciation for both marks health and beauty products in the market, the
are identical. Further, both marks have three purchasers would likely be misled that Myra has
(3) syllables each, with each syllable identical already expanded its business through Dermaline

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from merely carrying pharmaceutical topical between the two marks become conspicuous in
applications for the skin to health and beauty view of the following variables. First, the products
services (Dermaline, Inc. v. Myra Pharmaceuticals, involved in the case at bar are, in the main, various
Inc., G.R. No. 190065, August 16, 2010). kinds of jeans. These are not your ordinary
household items like catsup, soysauce or soap
TOTALITY OR HOLISTIC TEST which are of minimal cost. Maong pants or jeans
are not inexpensive. Accordingly, the casual buyer
Confusing similarity is to be determined on the is predisposed to be more cautious and
basis of visual, aural, connotative comparisons and discriminating in and would prefer to mull over his
overall impressions engendered by the marks in purchase. Confusion and deception, then, is less
controversy as they are encountered in the likely. Second, like his beer, the average Filipino
marketplace. consumer generally buys his jeans by brand. He
does not ask the sales clerk for generic jeans but
The trademarks in their entirety as they appear in for, say, a Levis, Guess, Wrangler or even an
their respective labels are considered in relation to Armani. He is, therefore, more or less
the goods to which they are attached. The knowledgeable and familiar with his preference
discerning eye of the observer must focus not only and will not easily be distracted. Finally, more
on the predominant words but also on the other credit should be given to the ordinary purchaser
features appearing in both labels in order that he who is not the "completely unwary consumer" but
may draw his conclusion whether one is is the "ordinarily intelligent buyer" considering the
confusingly similar to the other (Bristol Myers Co. type of product involved (Emerald Garment v. CA,
vs. Director of Patents, 17 SCRA 131; See also Fruit G.R. No. 100098, December 29, 1995).
of the Loom Inc. vs. CA, GR No. L-32747, November
29, 1984). 2. Mighty Corp’s “GALLO”for cigarettesvs. E. &
J.’s “GALLO” for wines
The dominancy test only relies on visual
comparisons between two trademarks whereas Mighty Corporation is engaged in the cultivation,
the totality or holistic test relies not only on the manufacture, distribution and sale of tobacco
visual but also on the aural and connotative products for which they have been using the
comparisons and overall impressions between the GALLO trademark for their cigarettes. E. & J. Gallo
two trademarks (Societe Des Produits Nestl, S.A. v. sued Mighty Corporation for trademark
CA, G.R. No. 112012, Apr. 4, 2001). infringement and unfair competition, when one of
their employees saw the Gallo cigarettes displayed
Instances when Holistic test is applied together with Gallo wines in a supermarket.

1. Emerald Garment’s “STYLISTIC MR. LEE”vs. Applying the holistic test, wines and cigarettes are
H.D. Lee’s “LEE” not identical or competing products, neither do
they belong to the same class of goods. Product
H.D. Lee Co. Inc, a foreign corporation, filed a classification alone cannot serve as the decisive
petition to cancel the registration OF the factor to determine if wines and cigarettes are
trademark “STYLISTIC MR. LEE” issued in the related goods. Emphasis should be on the
name of Emerald Garment Manufacturing Corp. similarity of the products involved and not on the
H.D. Lee asserts that Emerald's trademark tends to arbitrary classification or general description of
mislead and confuse the public and thus their properties or characteristics. The mere fact
constitutes an infringement of its own mark, since that one person has adopted and used a particular
the dominant feature therein is the word "LEE." trademark for his goods does not prevent the
Emerald contends that its trademark "STYLISTIC adoption and use of the same trademark by others
MR. LEE" is entirely different from and not on articles of a different description. There is no
confusingly similar to H.D. Lee’s "LEE" trademark. trademark infringement if the public does not
expect the plaintiff to make or sell the same class
The holistic test mandates that the entirety of the of goods as those made or sold by the defendant
marks in question must be considered in (Mighty Corp v. E. & J. Gallo Winery, G.R. No. 154342,
determining confusing similarity. Applying the July 14, 2004).
foregoing, Emerald’s "STYLISTIC MR. LEE" is not
confusingly similar to H.D. Lee’s "LEE" trademark. 3. Philip Morris’ “MARK VII” and “MARK TEN”
Emerald's trademark is the whole "STYLISTIC MR. vs. Fortune Tobacco’s “MARK” for both
LEE." Although on its label the word "LEE" is cigarettes
prominent, the trademark should be considered as
a whole and not piecemeal. The dissimilarities

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Philip Morris, Inc. is the the registered owner of the e. Descriptive properties, physical attributes or
trademark "MARK VII" for cigarettes. Two of its essential characteristics with reference to
subsidiaries are the registered owner of the their form, composition, texture or quality;
trademarks, “MARK TEN” and “LARK”. On the f. Purpose of the goods;
other hand, Fortune Tobacco manufactures and g. Whether the article is bought for immediate
sells cigarettes using the trademark “MARK”. consumption, that is, day- to-day household
Philip Morris filed a Complaint for Infringement of items;
Trademark and Damages against Fortune arguing h. Fields of manufacture;
that the latter’s use of the trademark "MARK" is i. Conditions under which the article is usually
likely to cause confusion or would deceive purchased; and
purchasers and the public in general into buying j. Channels of trade through which the goods
these products under the impression and mistaken flow, how they are distributed, marketed,
belief that they are buying Philip’s products. displayed and sold (Mighty Corporation vs. E. J.
Gallo Winery, G.R. No. 154342, July 14, 2004).
The holistic test entails a consideration of the
entirety of the marks as applied to the products, Non-competing goods
including the labels and packaging, in determining
confusing similarity. In light of the peculiarity of Non-competing goods may be those which, though
this case, there is no likelihood of confusion. After they are not in actual competition, are so related to
comparing the trademarks involved in their each other that it might reasonably be assumed
entirety as they appear on the products, the that they originate from one manufacturer. Non-
striking dissimilarities are significant enough to competing goods may also be those which, being
warn any purchaser that one is different from the entirely unrelated, could not reasonably be
other. Indeed, although the perceived offending assumed to have a common source. In the former
word "MARK" is itself prominent in Philip’s case of related goods, confusion of business could
trademarks "MARK VII" and "MARK TEN," the arise out of the use of similar marks; in the latter
entire marking system should be considered as a case of non-related goods, it could not (Esso
whole and not dissected, because a discerning eye Standard Eastern, Inc. v. CA, G.R. No. L-29971,
would focus not only on the predominant word but August 31, 1982).
also on the other features appearing in the labels.
Only then would such discerning observer draw In defining trademark infringement, Section 22 of
his conclusion whether one mark would be RA 166 deleted the requirement in question and
confusingly similar to the other and whether or not expanded its scope to include such use of the mark
sufficient differences existed between the marks or its colorable imitation that is likely to result in
(Philip Morris v. Fortune Tobacco, Inc., G.R. No. confusion on "the source or origin of such goods or
158589, June 27, 2006). services, or identity of such business." Thus, while
there is confusion of goods when the products are
Principle of related goods competing, confusion of business exists when the
products are non-competing but related enough to
Goods are related when they belong to the same produce confusion of affiliation.
class or have the same descriptive properties;
when they possess the same physical attributes or Extension of protection on normal potential
essential characteristics with reference to their expansion of business
form, composition, texture or quality. They may
also be related because they serve the same Modern law recognizes that the protection to
purpose or are sold in grocery stores (Esso which the owner of a trademark is entitled is not
Standard Eastern, Inc. vs. CA; Canon Kabushiki limited to guarding his goods or business from
Kaisha v. CA, G.R. No. 120900, July 20, 2000). actual market competition with identical or
similar products of the parties, but extends to all
In resolving whether goods are related, several cases in which the use by a junior appropriator of
factors come into play: a trade-mark or trade-name is likely to lead to a
confusion of source, as where prospective
a. Business (and its location) to which the goods purchasers would be misled into thinking that the
belong; complaining party has extended his business into
b. Class of product to which the goods belong; the field or is in any way connected with the
c. the product’s quality, quantity, or size, activities of the infringer; or when it forestalls the
including the nature of the package, wrapper normal potential expansion of his business
or container; (Mcdonald’s Corporation v. L & C Big Mak Burger,
d. Nature and cost of the article; Inc. August 18, 2004).

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Doctrine of Unrelated Goods with reference to an article on the market, because
The mere fact that one person has adopted and geographically or otherwise descriptive, might
used a trademark on his goods does not prevent nevertheless have been used so long and so
the adoption and use of the same trademark by exclusively by one producer with reference to his
others on unrelated articles of a different kind. article that, in that trade and to that branch of the
Since in this case the trademark of petitioner is purchasing public, the word or phrase has come to
used in the sale of leather wallets, key cases, mean that the article was his product (Ang vs.
money folds made of leather, belts, men's briefs, Teodoro, G. R. No. 48226, December 14, 1942).
neckties, handkerchiefs and men's socks, and the
trademark of registrant-appellant is used in the Instances when there is no confusing similarity
sale of shoes, which have different channels of between the trademarks
trade, the Director of Patents ought to have
reached a different conclusion (Hickok 1. Great White Shark’s “GREG NORMAN SHARK
Manufacturing Co., v. CA, G.R. No. L-44707, August LOGO vs. Caralde’s “SHARK & LOGO”
31, 1982).
While both marks use the shape of a shark, the
Generic figure Court noted distinct visual and aural differences
between them. In Great White Shark's “GREG
A trademark device is susceptible to registration if NORMAN LOGO,” there is an outline of a shark
it is crafted fancifully or arbitrarily and is capable formed with the use of green, yellow, blue and red
of identifying and distinguishing the goods of one lines/strokes. In contrast, the shark in Caralde's
manufacturer or seller from those of another. “SHARK & LOGO” mark is illustrated in letters
Apart from its commercial utility, the benchmark outlined in the form of a shark with the letter “S”
of trademark registrability is distinctiveness. Thus, forming the head, the letter “H” forming the fins,
a generic figure as that of a shark, if employed and the letters “A” and “R” forming the body and the
designed in a distinctive manner, can be a letter “K” forming the tail. In addition, the latter
registrable trademark device, subject to the mark includes several more elements such as the
provisions of the IP Code (Great White Shark word “SHARK” in a different font underneath the
Enterprises, Inc. v. Danilo M. Caralde, Jr., G.R. No. shark outline, layers of waves, and a tree on the
192294, November 21, 2012). right side, and liberally used the color blue with
some parts in red, yellow, green and white. The
Idem sonans rule whole design is enclosed in an elliptical shape with
two linings. The visual dissimilarities between the
Two names are said to be "idem sonantes" if the two (2) marks are evident and significant, negating
attentive ear finds difficulty in distinguishing them the possibility or confusion in the minds of the
when pronounced (Martin v. State, 541 S.W. 2d ordinary purchaser, especially considering the
605). distinct aural difference between the marks (Great
White Shark Enterprises v. Caralde, G.R. No. 192294,
Similarity of sound is sufficient to rule that the two November 21, 2012).
marks are confusingly similar when applied to
merchandise of the same descriptive properties 2. “LEVI’s” vs. Diaz’s “LS JEANS”
(Marvex Commercial v. Director of Patent, G.R. No.
L-19297, December 22, 1966). The jeans trademarks of Levi’s Philippines and
Diaz must be considered as a whole in detemining
Colorable imitation the likelihood of confusion between them. The
consuming public could easily discern if the jeans
Such a close or ingenious imitation as to be were original or fake or were manufactured by
calculated to deceive ordinary persons, or such a other brands of jeans. Confusion and deception
resemblance to the original as to deceive an were remote since maong jeans are expensive and
ordinary purchaser giving such attention as a the casual buyer is predisposed to be more
purchaser usually gives, as to cause him to cautious and discriminating in and would prefer to
purchase the one supposing it to be the other mull over his purchase. Further, Diaz used the
(Societe des Produits Nestlé, S.A. v. CA, G.R. No. trade-mark “LS JEANS TAILORING” for the jeans he
112012, April 4, 2001). produced and sold.

Doctrine of Secondary Meaning His trademark was visually and aurally different
from the trademark “LEVI STRAUSS & CO”
This doctrine is to the effect that a word or phrase appearing on the patch of original jeans. Diaz also
originally incapable of exclusive appropriation aptly noted that the design used by LEVIS was an

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image of two horses but the evidence will show entirely unrelated goods or services would
that there was no such design in the seized jeans, result to the likelihood of confusion of origin
instead, what is shown is “buffalo design.” or business or some business connection or
Moreover, based on the certificate issued by the relationship between the registrant and the
Intellectual Property Office, “LS JEANS user of the mark; and
TAILORING” was a registered trademark of Diaz. 3. The interests of the owner of the well-known
He had registered his trademark prior to the filing mark are likely to be damaged (246
of the present cases. The Intellectual Property Corporation, doing business under the name
Office would certainly not have allowed the and style of Rolex Music Lounge v. Hon.
registration had Diaz’s trademark been Reynaldo B. Daway, in his capacity as Presiding
confusingly similar with the registered trademark Judge of RTC Branch 90, Quezon City, G.R. No.
for LEVI’S 501 jeans (Diaz vs People of the 157216, November 20, 2003).
Philippines and Levi Strauss (Phil.), GR N0. 180677,
February 18, 2013, in Divina, 2014). Internationally well-known mark

Trademark Dilution 1. Considered by the competent authority of the

Philippines to be “well-known” internationally
It is the lessening of the capacity of a famous mark and in the Philippines as the mark of a person
to identify and distinguish goods or services, other than the applicant or registrant;
regardless of the presence or absence of (1) 2. Need not be used or registered in the
competition between the owner of the famous Philippines; and
mark and other parties; or (2) likelihood of 3. Need not be known by the public at large but
confusion, mistake or deception. Subject to the only by relevant sector of the public.
principles of equity, the owner of a famous mark
is entitled to an injunction against another Rules regarding internationally-well known
person’s commercial use in commerce of a mark marks
or trade name, if such use begins after the mark
has become famous and causes dilution of the A mark cannot be registered if it is identical with,
distinctive quality of the mark (Levi Strauss & Co., or confusingly similar to, or constitutes a
vs. Clinton Apparelle, Inc., G.R. No. 138900, translation of a mark which is considered by the
September 20, 2005). competent authority of the Philippines to be well-
known internationally and in the Philippines,
TEST TO DETERMINE CONFUSING whether or not it is registered here, as being
WELL-KNOWN MARKS already the mark of a person other than the
applicant for registration, and used for identical
This is used in determining whether an or similar goods or services: Provided, That in
international mark is well-known for the rule on determining whether a mark is well-known,
non-registrable marks under Sec. 123(e) to account shall be taken of the knowledge of the
operate (Gepty, 2018) relevant sector of the public, rather than of the
public at large, including knowledge in the
The scope of protection initially afforded by the Philippines which has been obtained as a result of
Paris Convention has been expanded via a the promotion of the mark.
nonbinding recommendation that a well-known
mark should be protected in a country even if the A mark cannot be registered if it is identical with,
mark is neither registered nor used in that country or confusingly similar to, or constitutes a
(Sehwani, Incorporated vs. In-N-Out Burger, Inc., G. translation of a mark considered well-known in
R. No. 171053, October 15, 2007). accordance with the preceding paragraph, which is
registered in the Philippines with respect to
A junior user of a well-known mark on goods or goods or services which are NOT similar to
services which are not similar to the goods or those with respect to which registration is
services, and are therefore unrelated, to those applied for: Provided, That use of the mark in
specified in the certificate of registration of the relation to those goods or services would indicate
well-known mark is precluded from using the a connection between those goods or services, and
same on the entirely unrelated goods or services, the owner of the registered mark: Provided further,
subject to the following requisites, to wit: That the interests of the owner of the registered
mark are likely to be damaged by such use (Sec.
1. The mark is well-known internationally and in [Link]).
the Philippines;
2. The use of the well-known mark on the

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Factors to be considered in determining well- claimed that the name and mark “Harvard” was
known marks adopted in 1639 as the name of Harvard College of
Cambridge, Massachusetts, USA. The mark had
1. Duration, extent and geographical area of any been used in commerce since 1872, and was
use of the mark; in particular, the duration, registered in more than 50 countries.
extent and geographical area of any promotion
of the mark, including advertising or publicity The Supreme Court ruled that "Harvard" is the
and the presentation, at fairs or exhibitions, of trade name of the world famous Harvard
the goods and/or services to which the mark University, and it is also a trademark of Harvard
applies; University. Under Article 8 of the Paris Convention,
2. Market share, in the Philippines and in other as well as Section 37 of R.A. No. 166, Harvard
countries, of the goods and/or services to University is entitled to protection in the
which the mark applies; Philippines of its trade name "Harvard" even
3. Degree of the inherent or acquired distinction without registration of such trade name in the
of the mark; Philippines. This means that no educational entity
4. Quality image or reputation acquired by the in the Philippines can use the trade name
mark; "Harvard" without the consent of Harvard
5. Extent to which the mark has been registered University. Likewise, no entity in the Philippines
in the world; can claim, expressly or impliedly through the use
6. Exclusivity of registration attained by the of the name and mark "Harvard," that its products
mark in the world; or services are authorized, approved, or licensed
7. Extent to which the mark has been used in the by, or sourced from, Harvard University without
world; the latter's consent.
8. Exclusivity of use attained by the mark in the
world; To be protected under the two directives of the
9. Commercial value attributed to the mark in Ministry of Trade, an internationally well-known
the world; mark need not be registered or used in the
10. Record of successful protection of the rights in Philippines. All that is required is that the mark is
the mark; well-known internationally and in the Philippines
11. Outcome of litigations dealing with the issue of for identical or similar goods, whether or not the
whether the mark is a well-known mark; and mark is registered or used in the Philippines.
12. Presence or absence of identical or similar Section 123.1(e) of R.A. No. 8293 now categorically
marks validly registered for or used on states that "a mark which is considered by the
identical or similar goods or services and competent authority of the Philippines to be well-
owned by persons other than the person known internationally and in the Philippines,
claiming that his mark is a well-known mark. whether or not it is registered here," cannot be
registered by another in the Philippines. Section
Provided, further, that the mark is well-known both 123.1(e) does not require that the well-known
internationally and in the Philippines (Sec. 2, Rule mark be used in commerce in the Philippines but
18, A.M. No. 10-3-10-SC, October 18, 2011). only that it be well-known in the Philippines.

NOTE: Account shall be taken of the knowledge of Division of application

the relevant sector of the public, rather than of the
public at large, including knowledge in the Any application referring to several goods or
Philippines which has been obtained as a result of services, hereafter referred to as the "initial
the promotion of the mark. The following criteria application," may be divided by the applicant into
or any combination thereof may be taken into two (2) or more applications, hereafter referred to
account in determining whether a mark is well- as the "divisional applications," by distributing
known. among the latter the goods or services referred to
in the initial application. The divisional
In Fredco Manufacturing Corp. vs. President and applications shall preserve the filing date of the
Fellows of Harvard College, GR No. 185917, June 1, initial application or the benefit of the right of
2011, Fredco Manufacturing Corp. (Fredco) filed priority (Sec. 129, IPC).
before the IPO a Petition for Cancellation of
Registration issued to Harvard University for the Priority right
mark “Harvard Veritas Shield Symbol”. Fredco
claims that as early as 1982 the mark was already An application for registration of a mark filed in
used in the Philippines by its predecessor-in- the Philippines by a person referred to in Section 3
interest. Harvard University, on the other hand, of the IPC, and who previously duly filed an

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application for registration of the same mark in within three (3) years from the filing date of the
one of those countries, shall be considered as filed application. Otherwise, the application shall be
as of the day the application was first filed in the refused or the mark shall be removed from the
foreign country. No registration of a mark shall be Register by the Director (IPC, Sec. 124.2).
granted until such mark has been registered in the
country of origin of the applicant (Sec. 131, IPC). Effect of failure to file Declaration of Actual Use

The owner of a mark seeking priority right is not The applicant or the registrant shall file a
entitled to sue for acts committed prior to the date declaration of actual use (DAU) of the mark with
on which his mark was registered in the evidence to that effect, within three (3) years from
Philippines: except in the case of an owner of a the filing date of the application. Otherwise, the
well-known mark. application shall be refused or the mark shall be
removed from the Register by the Director (IPC,
RIGHTS CONFERRED BY REGISTRATION Sec. 124.2).

Certificate of registration prima facie evidence A fifth anniversary use is also required. This is
of validity done by filing a declaration of actual use and
evidence to that effect within one year from the
A certificate of registration of a mark shall be fifth anniversary of the registration. The form and
prima facie evidence of the validity of the evidence of use required are similar to the third
registration, the registrant’s ownership of the year DAU. Failure to submit the fifth anniversary
mark, and of the registrant’s exclusive right to use use and evidence to that effect shall merit the
the same in connection with the goods or services cancellation of the mark.
and those that are related thereto specified in the
certificate (IPC, Sec. 138). Renewal of registration

Issuance and publication of certificate A certificate of registration may be renewed for

periods of ten (10) years at its expiration. Each
The certificate of registration shall be issued when request for renewal of registration must be made
the period for filing the opposition has expired, or within 6 months before the expiration of the
when the Director of Legal Affairs shall have registration or within 6 months after such
denied the opposition, and upon payment of the expiration on payment of the additional fee
required fee (IPC,Sec. 136). prescribed (IPC, Sec. 146).

The registered mark shall be published, in the form Rights of a registered mark owner
and within the period fixed by the Regulations.
Marks registered at the Office may be inspected Except in cases of importation of drugs and
free of charge and any person may obtain copies medicines allowed under Section 72.1 of the IP
thereof at his own expense. This provision shall Code and of off- patent drugs and medicines, the
also be applicable to transactions recorded in owner of a registered mark shall have the exclusive
respect of any registered mark (IPC, Sec. 138). right to prevent all third parties not having the
owner’s consent from using in the course of trade
Duration of a certificate of trademark identical or similar signs or containers for goods or
registration services which are identical or similar to those in
respect of which the trademark is registered
A certificate of registration shall remain in force where such use would result in a likelihood of
for ten (10) years, provided that the registrant confusion. In case of the use of an identical sign for
shall file a declaration of actual use and evidence identical goods or services, a likelihood of
to that effect, or shall show valid reasons based on confusion shall be presumed.
the existence of obstacles to such use, as
prescribed by the Regulations, within one (1) year There shall be no infringement of trademarks or
from the fifth anniversary of the date of the trade names of imported or sold patented drugs
registration of the mark. Otherwise, the mark shall and medicines allowed under Section 72.1 of the IP
be removed from the Register by the Office (IPC, Code, as well as imported or sold off-patent drugs
Sec. 145). and medicines; Provided, That said drugs and
medicines bear the registered marks that have not
The applicant or the registrant shall file a been tampered, unlawfully modified, or infringed
declaration of actual use of the mark with evidence upon, under Section 155 of the IP Code (Sec. 147,
to that effect, as prescribed by the Regulations IPC).

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Cancellation of trademark registration A:

A: A trademark registration may be cancelled by a. No. Since YYY is not the owner of the trademark,
any person who believes that he will be damaged it has no right to apply for registration.
by the registration of the mark: Registration of trademark, by itself, is not a mode
of acquiring ownership. It is the ownership of a
1. Within five (5) years from the date of the trademark that confers the right to register the
registration of the mark; or same (Birkenstock Orthopedia GMBH and Co. v.
Philippines Shoe Expo Marketing Corp., G.R. No.
2. At any time; 194307, November 20, 2013).
a. If the registered mark becomes the generic
name for the goods or services, or a portion b. No. Registration merely creates a prima facie
thereof, for which it is registered; presumption of validity of the registration of the
b. If the mark has been abandoned; registrant’s ownership of the trademark and the
c. If its registration was obtained exclusive right to the use thereof. The presumption
fraudulently or contrary to the provisions of ownership accorded to a registrant is rebuttable
of the IPC; and must yield to evidence to the contrary.
d. If the registered mark is being used by, or
with the permission of, the registrant so as Use of indications by third parties for purposes
to misrepresent the source of the goods or other than those for which the mark is used
services on or in connection with which the
mark is used; or Registration of the mark shall not confer on the
e. Non-use of the mark within the Philippines, registered owner the right to preclude third
without legitimate reason, for an parties from using bona fide their names,
uninterrupted period of 3 years. addresses, pseudonyms, a geographical name, or
exact indications concerning the kind, quality,
NOTE: If in a petition for cancellation of a quantity, destination, value, place of origin, or time
trademark, it was established that the petitioner of production or of supply, of their goods or
was not its owner, prior registration can be services.
cancelled without need of filing a separate petition
(E.Y. Industrial Sales, Inc. v. Shen Dar Electricity and INFRINGEMENT AND REMEDIES
Machinery Co. Ltd., G.R. No. 184850, October 20,
2010). TRADEMARK INFRINGEMENT

Q: ABC Appliances Corporation (ABC) is a Use without consent of the trademark owner of
domestic corporation engaged in the any reproduction, counterfeit, copy or colorable
production and sale of televisions and other limitation of any registered mark or trade name.
appliances. YYY Engineers, a Taiwanese Such use is likely to cause confusion or mistake or
company, is the manufacturer of televisions to deceive purchasers or others as to the source or
and other appliances from whom ABC actually origin of such goods or services, or identity of such
purchases appliances. From 2000, when ABC business (Esso Standard Eastern v. CA, supra).
started doing business with YYY, it has been
using the mark "TTubes" in the Philippines for A crucial issue in any trademark infringement case
the television units that were bought from YYY. is the likelihood of confusion, mistake or deceit as
In 2015, YYY filed a trademark application for to the identity, source or origin of the goods or
"TTubes." Later, ABC also filed its application. identity of the business as a consequence of using
Both claim the right over the trademark a certain mark. Likelihood of confusion is
"TTubes" for television products. YYY relies on admittedly a relative term, to be determined
the principle of "first to file" while ABC involves rigidly according to the particular (and some-
the "doctrine of prior use. times peculiar) circumstances of each case. Thus,
in trademark cases, more than in other kinds of
a. Does the fact that YYY filed its application litigation, precedents must be studied in the light
ahead of ABC mean that YYY has the prior right of each particular case (Mighty Corporation vs. E. J.
over the trademark? Explain briefly. Gallo Winery, G.R. No. 154342, 14 July 2004).

b. Does the prior registration also mean a Failure to present proof of actual confusion does
conclusive assumption that YYY Engineers is in not negate their claim of trademark infringement.
fact the owner of the trademark “TTubes?” Trademark infringement requires the less
Briefly explain your answer. (2016 Bar) stringent standard of “likelihood of confusion”

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only. While proof of actual confusion is the best The mere unauthorized use of a container bearing
evidence of infringement, its absence is a registered trademark in connection with the sale,
inconsequential (McDonalds Corporation v. L. C. Big distribution or advertising of goods or services
Mak Burger, Inc., G.R. No. 143993, August 18, 2004). which is likely to cause confusion, mistake or
deception among the buyers or consumers can be
Elements to be established in trademark considered as trademark infringement (Republic
infringement – (RULCo) Gas Corporation v. Petron Corporation, G. R. No.
194062, June 17, 2013).
a. The trademark or trade name is reproduced,
counterfeited, copied, or colorably imitated by Remedies of the owner of the trademark
the infringer; against infringers
b. The infringing mark or trade name is used in
connection with the sale, offering for sale, or 1. Civil — filed with the Regional Trial Courts.
advertising of any goods, business or services; The owner of the registered mark may ask the
or the infringing mark or trade name is applied court to issue a preliminary injunction to
to labels, signs, prints, packages, wrappers, quickly prevent infringer from causing
receptacles or advertisements intended to be damage to his business. Furthermore, the
used upon or in connection with such goods, court will require infringer to pay damages to
business or services; the owner of the mark provided defendant is
c. The use or application of the infringing mark shown to have had notice of the registration of
or trade name is likely to cause confusion or the mark (which is presumed if a letter R
mistake or to deceive purchasers or others as within a circle is appended) and stop him
to the goods or services themselves or as to the permanently from using the mark.
source or origin of such goods or services or
the identity of such business; and 2. Criminal — the owner of the trademark may
d. It is without the consent of the trademark or ask the court to issue a search warrant and in
trade name owner or the assignee thereof appropriate cases, remedies available shall
(Prosource International, Inc. vs. Horphag also include the seizure, forfeiture and
Research Management SA, G.R. No. 180073, destruction of the infringing goods and of any
November 25, 2009; Diaz v. People of the materials and implements the predominant
Philippines and Levi-Strauss (Phil.), G. R. No. use of which has been in the commission of the
180677, February 18, 2013). offense.

Counterfeit Goods vs. Colorable Imitation 3. Administrative — same as in patent

infringement cases. If the amount of damages
COUNTERFEIT COLORABLE claimed is not less than P200,000.00, the
GOODS IMITATION registrant may choose to seek redress
any goods, including "such a close or against the infringer by filing an
packaging, bearing ingenious imitation as administrative action against the infringer
without authorization to be calculated to with the Bureau of Legal Affairs.
a trademark which is deceive ordinary
identical to the purchasers, or such Ascertainment of the amount of damages in a
trademark validly resemblance of the civil action for infringement
registered in respect of infringing mark to the
such goods, or which original as to deceive The owner of a trademark which has been
cannot be an ordinary purchaser infringed is entitled to actual damages:
distinguished in its giving such attention
essential aspects from as a purchaser usually 1. The reasonable profit which the complaining
such a trademark, and gives, and to cause party would have made, had the defendant not
which thereby him to purchase the infringed his said rights; or
infringes the rights of one supposing it to be 2. The profit which the defendant actually made
the owner of the the other (Emerald vs. out of infringement; or
trademark in question CA, G.R. No. 100098, 3. The court may award as damages a reasonable
under the law of the December 29, 1995). percentage based upon the amount of gross
country of importation sales of the defendant or the value of the
(TRIPs Agreement). services in connection with which the mark or
trade name was issued.
Unauthorized use of container bearing a
registered trademark

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In cases where actual intent to mislead the public A.M. 02-1-06-SC (The Rule on Search and Seizure in
or to defraud the complainant is shown, in the Civil Actions for Infringement of Intellectual
discretion of the court, the damages may be Property Rights) governs the issuance of a writ of
doubled (IPC, Sec. 156.3). search and seizure in a civil action for infringement
filed by an intellectual property right owner
Jurisdiction over violations of intellectual against the supposed infringer of his trademark or
property rights name. Under this rule, the claim for damages
should be filed with the same court that issued the
It is properly lodged with the Regional Trial Court writ of search and seizure.
even if the penalty therefore is imprisonment of
less than six years, or from 2 to 5 years and a fine However, Philip Morris, the manufacturer of
ranging from P50,000 to P200,000. Marlboro cigarettes did not go by this route. Philip
Morris did not file a civil action for infringement of
R.A. No. 8293 and R.A. No. 166 are special laws its trademark against the Del Rosarios before the
conferring jurisdiction over violations of RTC of Angeles City. Instead, Philip Morris sought
intellectual property rights to the Regional Trial assistance from the NBI for the apprehension and
Court. They should therefore prevail over R.A. No. criminal prosecution of those reportedly
7691, which is a general law (Samson v. Daway, G.R. appropriating its trademark and selling fake
No. 160054-55, July 21, 2004). Marlboro cigarettes. In turn, the NBI instituted a
police action that included applying for a search
Q: K-9 Corporation, a foreign corporation and seizure warrant under Sections 3, 4, 5 and 6 of
alleging itself to be the registered owner of Rule 126 of the Rules of Criminal Procedure (not
trademark “K-9” and logo “K”, filed an Inter under the provisions of A.M. 02-1-06-SC) against
Partes case with the Intellectual Property the Del Rosarios upon the belief that they were
Office against Kanin Corporation for the storing and selling fake Marlboro cigarettes in
cancellation of the latter’s mark “K-9” and logo violation of the penal provisions of the intellectual
“K.” During the pendency of the case before the property law.
IPO, Kanin Corporation brought suit against K-
9 Corporation before the RTC for infringement The proceeding under Rule 126, a limited criminal
and damages. Could the action before the RTC one, does not provide for the filing of
prosper? Why? (2003 Bar) counterclaims for damages against those who may
have improperly sought the issuance of the search
A: YES, the action before the RTC can prosper. warrant. Consequently, the Del Rosarios had the
According to Section 151.2 of the IPO, the filing of right to seek damages, if the circumstances
a suit to enforce the registered mark with the warranted, by separate civil action for the wrong
proper court or agency shall exclude any other inflicted on them by an improperly obtained or
court or agency from assuming jurisdiction over a enforced search warrant (Del Rosario, et al. v.
subsequently filed petition to cancel the same Doanto, Jr. et al., G.R. No. 180595, March 4, 2010, in
mark. On the other hand, the earlier filing of Divina, 2014).
petition to cancel the mark with the Bureau of
Legal Affairs shall not constitute a prejudicial Limitations on the actions for infringement
question that must be resolved before an action to
enforce the rights to same registered mark may be 1. Right of prior user – registered mark shall be
decided. The issues raised before the different the without affect against any person who, in good
IPO and the RTC are different. The issue raised faith, before filing or priority date, was using
before the IPO is whether or not the cancellation of the mark for purposes of his business (IPC, Sec
the subsequent trademark is proper because of the 159.1).
prior ownership of the disputed mark by K-9. 2. Relief against publisher – injunction against
While the issue raised before the RTC pertains to future printing against an innocent infringer
infringement. Furthermore, an action for who is engaged solely in the business of
infringement or unfair competition, as well as the printing the mark (IPC, Sec. 159.2).
remedy of injunction and relief for damages, is 3. Relief against newspaper – injunction against
explicitly and unquestionably within the the presentation of advertising matter in
competence and jurisdiction of ordinary courts future issues of the newspaper, magazine or in
(Shangri-la International Hotel Management, Ltd., electronic communications in case the
v. Makati Shangri-la Hotel and Resort Inc., G.R. No. infringement complained of is contained in or
111580. June 21, 2001). is part of paid advertisement in such materials
(IPC, Sec. 159.3).
Venue in filing actions for infringement

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UNFAIR COMPETITION A person who has identified in the mind of the
public the goods he manufactures or deals in, his
Employing deception or any other means contrary business or services from those of others, whether
to good faith by which a person passes off his or not a registered mark is employed, has a property
goods or business or services for those of one who right in the goodwill of the said goods, business or
has already established goodwill thereto (IPC, Sec. services so identified, which will be protected in
168.2). the same manner as other property rights (IPC, Sec.
168.1).
It is the passing off (or palming off) or attempting
to pass off upon the public of the goods or business Persons guilty of unfair competition
of one person as the goods or business of another
with the end and probable effect of deceiving the 1. Any person, who is selling his goods and gives
public. Passing off (or palming off) takes place them the general appearance of goods of
where the defendant, by imitative devices on the another manufacturer or dealer, either as to
general appearance of the goods, misleads the goods themselves or in the wrapping of the
prospective purchasers into buying his packages in which they are contained, or the
merchandise under the impression that they are devices or words thereon, or in any other
buying that of his competitors. Thus, the defendant feature of their appearance, which would be
gives his goods the general appearance of the likely to influence purchasers to believe that
goods of his competitor with the intention of the goods offered are those of a manufacturer
deceiving the public that the goods are those of his or dealer, other than the actual manufacturer
competitor (Republic Gas Corporation v. Petron or dealer, or who otherwise clothes the goods
Corporation, G. R. No. 194062, June 17, 2013). with such appearance as shall deceive the
public and defraud another of his legitimate
Infringement of trademark [Link] trade, or any subsequent vendor of such goods
competition (2015 Bar) or any agent of any vendor engaged in selling
such goods with a like purpose;
INFRINGEMENT OF UNFAIR
TRADEMARK COMPETITION 2. Any person who by any artifice, or device, or
The passing off of who employs any other means calculated to
Unauthorized use of a induce the false belief that such person is
one’s goods as those of
trademark. offering the services of another who has
another.
Fraudulent intent is Fraudulent intent is identified such services in the mind of the
unnecessary. essential. public;
GR: Prior registration
of the trademark is a Registration is not 3. Any person who shall make any false
prerequisite to the necessary (Del Monte statement in the course of trade or who shall
action. Corp. v. CA, G.R. No. commit any other act contrary to good faith of
78325, January 23, a nature calculated to discredit the goods,
XPN: Well-known 1990). business or services of another (IPC, Sec.
marks 168.3).
Trademark infringement is more limited but it
NOTE: There can be unfair competition and recognizes a more exclusive right derived from the
infringement at the same time trademark adoption and registration by the person
whose goods or business is first associated with it.
Q: In what way is an infringement of a Hence, even if one fails to establish his exclusive
trademark similar to that which pertains to property right to a trademark, he may still obtain
unfair competition? (2003 Bar) relief on the ground of his competitor’s unfairness
or fraud. Conduct constitutes unfair competition if
A: The similarity lies in both their ability to disrupt the effect is to pass off on the public the goods of
fair competition amongst business enterprises and one man as the goods of another (Mighty
other businesses. They can also create confusion, Corporation v. E. & J. Gallo Winery, G.R. No. 154342,
mistake, and deception as to the minds of the July 14, 2004).
consumers with regard to the source or identity of
their products or services due to its similarity in An action for unfair competition is based on the
appearance or packaging. proposition that no dealer in merchandise should
be allowed to dress his goods in simulation of the
Unfair competition violates property rights goods of another dealer, so that purchasers
desiring to buy the goods of the latter would be

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induced to buy the goods of the former. The most search warrant in any court where any element of
usual devices employed in committing this crime the alleged offense was committed, including any
are the simulation of labels and the reproduction of the courts within Metro Manila and may be
of form, color and general appearance of the validly enforced in Cavite (Sony Computer
package used by the pioneer manufacturer or Entertainment Inc. v. Supergreen Inc. G.R. No.
dealer (Caterpillar, Inc. vs. Samson, G.R. No. 164605, 161823, Mar. 22, 2007).
October 27, 2006).
NOTE: Section 2, Rule 10 of the Rules of Procedure
Jurisprudence also formulated the following “true on IP Cases (A.M. No. 10-3-10 SC, October 18,
test” of unfair competition: whether the acts of the 2011) provides that Special Commercial Courts in
defendant have the intent of deceiving or are Quezon City, Manila, Makati, and Pasig shall have
calculated to deceive the ordinary buyer making authority to act on applications for the issuance of
his purchases under the ordinary conditions of the search warrants involving violations of the
particular trade to which the controversy relates. Intellectual Property Code, which search warrants
One of the essential requisites in an action to shall be enforceable nationwide. Within their
restrain unfair competition is proof of fraud; the respective territorial jurisdictions, the Special
intent to deceive, actual or probable must be Commercial Courts in the judicial regions where
shown before the right to recover can exist the violation of intellectual property rights
(Superior Enterprises, Inc. vs. Kunnan Enterprises occurred shall have concurrent jurisdiction to
Ltd., supra). issue search warrants.

Essential Elements of an action for unfair The "true test" of unfair competition has thus been
competition "whether the acts of the defendant have the intent
of deceiving or are calculated to deceive the
a. Confusing similarity in the general appearance ordinary buyer making his purchases under the
of the goods, and ordinary conditions of the particular trade to
b. Intent to deceive the public and defraud a which the controversy relates." It is therefore
competitor. essential to prove the existence of fraud, or the
intent to deceive, actual or probable, determined
The confusing similarity may or may not result through a judicious scrutiny of the factual
from similarity in the marks, but may result from circumstances attendant to a particular case
other external factors in the packaging or (Shang Properties Realty Corporation (formerly The
presentation of the goods. The intent to deceive Shang Grand Tower Corporation) and Shang
and defraud may be inferred from the similarity of Properties, Inc. (formerly EDSA Properties Holdings,
the appearance of the goods as offered for sale to Inc.) v. St. Francis Development Corporation, G.R.
the public (McDonalds Corporation vs. L. C. Big Mak No. 190706, July 21, 2014).
Burger, Inc., G.R. No. 143993, August 18, 2004).
A distinction should be made between suits for
The element of passing-off trademark infringement and unfair competition:
(a) the former is the unauthorized use of a
In order to prove a case of unfair competition, it is trademark, whereas the latter is the passing off of
sufficient to show that such deception will be the one’s goods as those of another; (b) fraudulent
natural and probable cause of defendants acts. intent is unnecessary in the former, while it is
essential in the latter; and (c) in the former, prior
Q: The NBI found that SG Inc. is engaged in the registration of the trademark is a pre-requisite to
reproduction and distribution of counterfeit the action, while it is not necessary in the latter
"playstation games" and thus applied with the (Roberto Co v. Keng Huan Jerry Yeung and Emma
Manila RTC warrants to search respondent's Yeung, G.R. No. 212705, September 10, 2014).
premises in Cavite. RTC granted such warrants
and thus, the NBI served the search warrants Applicability of Rules on the Issuance of the
on the subject premises. SG Inc. questioned the Search and Seizure Order in Civil Actions for
validity of the warrants due to wrong venue Infringement
since the RTC of Manila had no jurisdiction to
issue a search warrant enforceable in Cavite. Is The Rules on the Issuance of the Search and
the contention of SG Inc. correct? Seizure in Civil Actions for Infringement of
Intellectual Property Rights are not applicable in
A: NO, unfair competition is a transitory or this case as the search warrants were not applied
continuing offense under Section 168 of Republic based thereon, but in anticipation of criminal
Act No. 8293. As such, petitioner may apply for a actions for violation of intellectual property rights

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under RA 8293. It was established that respondent no representation or misrepresentation on the
had asked the NBI for assistance to conduct part of BA that would confuse or tend to confuse its
investigation and search warrant implementation goods with those of MS Lite (Coca Cola Bottlers
for possible apprehension of several drugstore Philippines v. Gomez, G.R. No. 154491, November 14,
owners selling imitation or counterfeit TOP GEL 2008).
T.G. & DEVICE OF A LEAF papaya whitening soap.
What is applicable is Rule 126 of the Rules of DAMAGES
Criminal Procedure. A core requisite before a
warrant shall validly issue is the existence of Actions, and Damages and Injunction for
probable cause. The pendency of a similar action Infringement
for infringement of trademark and unfair
competition against the very person who applied The owner of a registered mark may recover
for search warrant does not bar the issuance of the damages from any person who infringes his rights,
warrant if it is based on probable cause (Century and the measure of the damages suffered shall be
Chinese Medicine Co., [Link]. v. People of the either the reasonable profit which the complaining
Philippines and Ling Na Lau. G.R. No. 188526, party would have made, had the defendant not
November 11, 2013, in Divina, 2014). infringed his rights, or the profit which the
defendant actually made out of the infringement,
Ordinary Purchaser or in the event such measure of damages cannot
be readily ascertained with reasonable certainty,
An ordinary purchaser is one accustomed to buy, then the court may award as damages a reasonable
and therefore to some extent familiar with, the percentage based upon the amount of gross sales
goods in question. The test is not found in the of the defendant or the value of the services in
deception, or the possibility of deception, of the connection with which the mark or trade name
person who knows nothing about the design which was used in the infringement of the rights of the
has been counterfeited, and who must be complaining party.
indifferent between that and the other. The
simulation, in order to be objectionable, must be
such as appears likely to mislead the ordinary COPYRIGHT
intelligent buyer who has a need to supply and is
familiar with the article that he seeks to purchase
(Emerald Garment Manufacturing Corporation v. A right over literary and artistic works which are
Court of Appeals, 251 SCRA 600, December 29, original intellectual creations in the literary and
1995). artistic domain protected from the moment of
creation (Sec. 171.1, IPC).
Q: MS Brewery Corporation (MS) is a
manufacturer and distributor of the popular Duration of the author’s copyright
beer "MS Lite." It faces stiff competition from
BA Brewery Corporation (BA) whose sales of Copyright shall last during the lifetime of the
its own beer product, "BA Lighter," has soared author and 50 years after his death.
to new heights. Meanwhile, sales of the "MS
Lite" decreased considerably. The distribution Copyright is not an absolute right There is no
and marketing personnel of MS later absolute protection unlike the protection in
discovered that BA has stored thousands of tangible properties where one can do anything so
empty bottles of "MS Lite" manufactured by MS long as you will not violate the rights of others. In
in one of its warehouses. MS filed a suit for the case of copyright, there is a limitation on the
unfair competition against BA before the term of protection
Regional Trial Court (RTC). Finding a
connection between the dwindling sales of MS BASIC PRINCIPLES
and the increased sales of BA, the RTC ruled
that BA resorted to acts of unfair competition Elements of copyrightability
to the detriment of MS. Is the RTC correct?
Explain. (2016 Bar) 1. Originality – Must have been created by the
author’s own skill, labor, and judgment
A: No. The RTC is not correct. Hoarding, or the act without directly copying or evasively imitating
of accumulating empty bottles to impede the work of another (Ching Kian Chuan v. CA,
circulation of the bottled product, does not amount G.R. No. 130360, Aug. 15, 2001).
to unfair competition. BA did not fraudulently
“pass off” its product as that of MS Lite. There was

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Note: Minimal degree of creativity suffices. or title upon the registered copyright owner or
automatically put his work under the protective
2. Expression – Must be embodied in a medium mantle of the copyright law. It is not a conclusive
sufficiently permanent or stable to permit it to proof of copyright ownership. As it is, non-
be perceived, reproduced or communicated registration and deposit of the work within the
for a period more than a transitory duration. prescribed period only makes the copyright owner
liable to pay a fine (Manly Sportswear
Copyright, in the strict sense of the term, is purely Manufacturing Inc. v. Dadodette Enterprises and/or
a statutory right. Being a mere statutory grant, the Hermes Sports Center, G.R. No. 165306, September
rights are limited to what the statute confers. It 20, 2005).
may be obtained and enjoyed only with respect to
the subjects and by the persons, and on terms and Copyright and Material Object
conditions specified in the statute. Accordingly, it
can only cover the works falling within the The copyright is distinct from the property in the
statutory enumeration or description. Only the material object subject to it. Consequently, the
expression of an idea is protected by copyright, not transfer, assignment or licensing of the copyright
the idea itself (Pearl & Dean Inc. vs. Shoemart, Inc., shall not itself constitute a transfer of the material
G.R. No. 148222, August 15, 2003; Joaquin, Jr. vs. object. Nor shall a transfer or assignment of the
Drilon, G.R. No. 108946, January 28, 1999; Ching vs. sole copy or of one or several copies of the work
Salinas, G.R. No. 161295, June 29, 2005). imply transfer, assignment or licensing of the
copyright (IPC, as amended by R.A. 10372, Sec. 181).
Functional components of useful articles, no
matter how artistically designed, have generally Copyright as distinct from material object
been denied copyright protection unless they are
separable from the useful article A useful article GR: The copyright is distinct from the property in
may be copyrightable only if and only to the extent the material object subject to it. Consequently, the
that such design incorporates pictorial, graphic, transfer or assignment of the copyright shall not
and sculptural features that can be identified itself constitute a transfer of the material object.
separately from and are capable of existing Nor shall a transfer or assignment of the sole copy
independently of the utilitarian aspects of the or of one or several copies of the work imply
article (Ching v. Salinas, G.R. No. 161295, June 29, transfer or assignment of the copyright.
2005).
XPN: Work of Architecture - Copyright in a work of
Elements of originality architecture shall include the right to control the
erection of any building which reproduces the
1. Independently created by the author; and whole or a substantial part of the work either in its
2. Possesses some minimal degree of creativity original form or in any form recognizably derived
from the original: Provided, That the copyright in
Time when copyright vests any such work shall not include the right to control
the reconstruction or rehabilitation in the same
Principle of automatic protection - Works are style as the original of a building to which that
protected from the time of their creation, copyright relates (IPC, Sec. 186).
irrespective of their mode or form of expression, as
well as of their content, quality and purpose (Sec. COPYRIGHTABLE WORKS
172.2, IPC).
ORIGINAL WORKS (Literary and Artistic
P.D. 49, as amended, does not require registration Works)
and deposit for a creator to be able to file an action
for infringement of his rights. These conditions are (BoL2 DM WaP GASP APCO)
merely pre-requisites to an action for damages. So,
as long as the proscribed acts are shown to exist, a. Books, pamphlets, articles and other
an action for infringement may be initiated writings
(Columbia Pictures, Inc. v. CA, G.R. No. 110318, b. Lectures, sermons, addresses,
August 28, 1996). dissertations prepared for Oral delivery,
whether or not reduced in writing or
The certificates of registration and deposit issued other material form
by the National Library and the Supreme Court c. Letters
Library serve merely as a notice of recording and d. Dramatic, choreographic works
registration of the work but do not confer any right e. Musical compositions

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405 FACULTY OF CIVIL LAW
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f. Works of Art Q: Juan Xavier wrote and published a story
g. Periodicals and Newspapers similar to an unpublished copyrighted story of
h. Works relative to Geography, topography, Manoling Santiago. It was, however,
architecture or science conclusively proven that Juan Xavier was not
i. Works of Applied art aware that the story of Manoling Santiago was
j. Works of a Scientific or technical protected by copyright. Manoling Santiago
character sued Juan Xavier for infringement of copyright.
k. Photographic works Is Juan Xavier liable? (1998 Bar)
l. Audiovisual works and cinematographic
works A: YES. Juan Xavier is liable for infringement of
m. Pictorial illustrations and advertisements copyright. It is not necessary that Juan Xavier is
n. Computer programs; and aware that the story of Manoling Santiago was
o. Other literary, scholarly, scientific and protected by copyright. The work of Manoling
artistic works (IPC, Sec. 172.1). Santiago is protected from the time of its creation.

DERIVATIVE WORKS There will still be originality sufficient to warrant

copyright protection if “the author, through his
a. Dramatizations, translations, adaptations, skill and effort, has contributed a distinguishable
abridgements, arrangements, and other variation from the older works.” In such a case, of
alterations of literary or artistic works; course, only those parts which are new are
b. Collections of literary, scholarly, or artistic protected by the new copyright. Hence, in such a
works and compilations of data and other case, there is no case of infringement. Juan Xavier
materials which are original by reason of is no less an “author” because others have
the selection or coordination or preceded him (Habana v. Robles, G.R. No. 131522,
arrangement of their contents (IPC, Sec. July 19, 1999).
173).
NON-COPYRIGHTABLE WORKS
Derivative works shall be protected as new works,
provided that such new work shall not affect the Non-copyrightable works (IN OP DeG TvS2)
force of any subsisting copyright upon the original
works employed or any part thereof, or be 1. Idea, procedure, system, method or operation,
construed to imply any right to such use of the concept, principle, discovery or mere data as
original works, or to secure or extend copyright in such
such original works (IPC, Sec. 173.2). 2. News of the day and other items of press
information
Q: P&D was granted a copyright on the 3. Any official text of a legislative, administrative
technical drawings of light boxes as or legal nature, as well as any official
"advertising display units". SMI, however, translation thereof
manufactured similar or identical to the light 4. Pleadings
box illustrated in the technical drawings 5. Decisions of courts and tribunals – this refers
copyrighted by P&D for leasing out to different to original decisions and not to annotated
advertisers. Was this an infringement of P&D’s decisions such as the SCRA or SCAD as these
copyright over the technical drawings? already fall under the classification of
derivative works, hence copyrightable
A: NO. P&D’s copyright protection extended only 6. Any work of the government of the Philippines
to the technical drawings and not to the light box
itself. The light box was not a literary or artistic GR: Conditions imposed prior the approval of
piece which could be copyrighted under the the government agency or office wherein the
copyright law. If SMI reprinted P&D’s technical work is created shall be necessary for
drawings for sale to the public without license exploitation of such work for profit. Such
from P&D, then no doubt they would have been agency or office, may, among other things,
guilty of copyright infringement. Only the impose as condition the payment of royalties.
expression of an idea is protected by copyright, not
the idea itself. If what P&D sought was exclusivity XPN: No prior approval or conditions shall be
over the light boxes, it should have instead required for the use of any purpose of statutes,
procured a patent over the light boxes itself (Pearl rules and regulations, and speeches, lectures,
and Dean Inc. v. Shoe Mart Inc., GR No. 148222, sermons, addresses, and dissertations,
August 15, 2003). pronounced, read, or rendered in courts of
justice, before administration agencies, in

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deliberative assemblies and in meetings of A copyrightable work refers to literary and artistic
public character (IPC, Sec. 176). works defined as original intellectual creations in
7. TV programs, format of TV programs (Joaquin the literary and artistic domain. A hatch door, by
v. Drilon, G.R. No. 108946, Jan. 28, 1999) its nature is an object of utility. It is defined as a
8. Systems of bookkeeping; and small door, small gate or an opening that
9. Statutes. resembles a window equipped with an escape for
use in case of fire or emergency. It is thus by
Q: X, an amateur astronomer, stumbled upon nature, functional and utilitarian serving as egress
what appeared to be a massive volcanic access during emergency. It is not primarily an
eruption in Jupiter while peering at the planet artistic creation but rather an object of utility
through his telescope. The following week, X, designed to have aesthetic appeal. It is intrinsically
without notes, presented a lecture on his a useful article, which, as a whole, is not eligible for
findings before the Association of Astronomers copyright.
of the Philippines. To his dismay, he later read
an article in a science journal written by Y, a The only instance when a useful article may be the
professional astronomer, repeating exactly subject of copyright protection is when it
what X discovered without any attribution to incorporates a design element that is physically or
him. Has Y infringed on X's copyright, if any? conceptually separable from the underlying
(2011 Bar) product. This means that the utilitarian article can
function without the design element. In such an
A: NO, because no protection extends to any instance, the design element is eligible for
discovery, even if expressed, explained, illustrated, copyright protection (Sison Olano, et al v. Lim Eng
or embodied in a work. Co, G.R. No. 195835, March 14, 2016).

Q: Rural is a certified public utility providing RIGHTS OF A COPYRIGHT OWNER

telephone service to several communities in
Manila. It obtains data for the directory from Rights of copyright owners (1995 Bar)
subscribers, who must provide their names
and addresses to obtain telephone service. 1. Economic rights – The right to carry out,
Feist Publications, Inc., is a publishing authorize or prevent the following acts (ReCa
company that specializes in area-wide FReP2O):
telephone directories covering a much larger
geographic range than directories such as a. Reproduction of the work or substantial
Rural's. Feist extracted the listings it needed portion thereof
from Rurals’s directory without its consent. b. Carry-out derivative work
Are directories copyrightable? (dramatization, translation, adaptation,
abridgement, arrangement or other
A: NO. Directories are not copyrightable and transformation of the work)
therefore the use of them does not constitute c. First distribution of the original and each
infringement. The IPC mandates originality as a copy of the work by sale or other forms of
prerequisite for copyright protection. This transfer of ownership
requirement necessitates independent creation d. Rental right
plus a modicum of creativity. Since facts do not e. Public display
owe their origin to an act of authorship, they are f. Public performance
not original, and thus are not copyrightable. A g. Other communications to the public.
compilation is not copyrightable per se, but is
copyrightable only if its facts have been "selected, Note: Assignment of rights must be in writing
coordinated, or arranged in such a way that the to be valid.
resulting work as a whole constitutes an original
work of authorship." Nonetheless, a compilation 2. Moral rights – For reasons of professionalism
that is copyrightable receives only limited and propriety, the author has the right :
protection, for the copyright does not extend to
facts contained in the compilation (Feist a. To require that the authorship of the
Publications, Inc. v. Rural Telephone Service Co., 499 works be attributed to him (attribution
U.S. 340). right)
b. To make any alterations of his work prior
An object of utility is not copyrightable to, or to withhold it from publication
c. To preserve integrity of work, object to
any distortion, mutilation or other

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407 FACULTY OF CIVIL LAW
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modification which would be prejudicial listening to the music, but the music provided is for
to his honor or reputation; and the purpose of entertaining and amusing the
d. To restrain the use of his name with customers in order to make the establishment
respect to any work not of his own more attractive and desirable. For the playing and
creation or in a distorted version of his singing the musical compositions involved, the
work (IPC, Sec.193). combo was paid as independent contractors by
Soda Fountain. It is therefore obvious that the
3. Droit de suite or “art proceeds right” is the expenses entailed thereby are added to the
artist’s resale right, which requires that a overhead of the restaurant which are either
percentage of the resale price of an artistic eventually charged in the price of the food and
work is paid to the author. The right is drinks or to the overall total of additional income
exercisable even after the author’s death, produced by the bigger volume of business which
provided the work is still in copyright (David the entertainment was programmed to attract.
Bainbridge, Intellectual Property, 3rd Ed., p. 220 Consequently, it is beyond question that the
1996, also cited in Copyright Law of the playing and singing of the combo in defendant-
Philippines by D. Funa). appellee's restaurant constituted performance for
profit (FILSCAP v. Tan, G.R., No. L-36402, Mar. 16,
In every sale or lease of an original work of 1987).
painting or sculpture or of the original
manuscript of a writer or composer, Performance of a contract
subsequent to the first disposition thereof by
the author, the author or his heirs shall have An author cannot be compelled to perform his
an inalienable right to participate in the gross contract to create a work or for the publication of
proceeds of the sale or lease to the extent of his work already in existence. However, he may be
five percent (5%) (Sec. 200, IPC). held liable for damages for breach of such contract
(IPC, Sec. 195).
Rights which are not covered under a Droit de
suite MORAL RIGHTS

a. Prints Nature of moral rights

b. Etchings
c. Engravings These are personal rights independent from the
d. Works of applied art economic rights. Being a personal right, it can only
e. Similar works wherein the author primarily be given to a natural person. Hence, even if he has
derives gain from the proceeds of licensed or assigned his economic rights, he
reproductions (IPC, Sec. 201). continues to enjoy the above-mentioned moral
rights (Amador, 2007).
Q: ABC is the owner of certain musical
compositions among which are the songs Term of moral rights
entitled: "Dahil Sa Iyo", "Sapagkat Ikaw Ay
Akin," "Sapagkat Kami Ay Tao Lamang" and The rights of an author shall last during the lifetime
"The Nearness Of You.” Soda Fountain of the author and IN PERPETUITY after his death
Restaurant hired a combo with professional while the rights under sections 193.2, 193.3 and
singers to play and sing musical compositions 193.4 shall be coterminous with the economic
to entertain and amuse customers. They rights, the moral rights shall not be assignable or
performed the above-mentioned compositions subject to license. The person or persons to be
without any license or permission from ABC to charged with the posthumous enforcement of
play or sing the same. Accordingly, ABC these rights shall be named in a written instrument
demanded from Soda Fountain payment of the which shall be filed with the National Library. In
necessary license fee for the playing and default of such person or persons, such
singing of aforesaid compositions but the enforcement shall devolve upon either the
demand was ignored. ABC filed an author’s heirs, and in default of the heirs, the
infringement case against Soda Fountain. Does Director of the National Library (IPC, Sec. 198).
the playing and singing of musical
compositions inside an establishment Exceptions to moral rights
constitute public performance for profit?
1. Absent any special contract at the time creator
A: YES. The patrons of the Soda Fountain pay only licenses/permits another to use his work, the
for the food and drinks and apparently not for following are deemed not to contravene

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creator’s moral rights, provided they are done distribution of them by, or pursuant to the
in accordance with reasonable customary authorization by the performer; and
standards or requisites of the medium: 5. Right of authorizing the making available to
a. Editing the public of their performances fixed in sound
b. Arranging recordings or audiovisual works or fixations,
c. Adaptation by wire or wireless means, in such a way that
d. Dramatization members of the public may access them from
e. Mechanical and electric reproduction a place and time individually chosen by them
(IPC as amended by R.A. No. 10372, Sec. 203).
2. Complete destruction of work unconditionally
transferred by creators (IPC, Sec. 197). Loss of performer’s rights

Waiver of moral rights Once the performer has authorized the

broadcasting or fixation of his performance, his
GR: Moral rights can be waived in writing, performer’s rights provided for in Section 203
expressly so stating such waiver. shall have no further application.

XPN: Even in writing, waiver is not valid if: Fair use and limitations to copyrights shall apply
mutatis mutandis to performers (Sec. 205, IPC).
1. Use the name of the author, title of his work, or
his reputation with respect to any Moral rights of performers
version/adaptation of his work, which
because of alterations, substantially tend to The performer, shall, as regards his live aural
injure literary/artistic reputation of another performances or performances fixed in sound
author recordings, have the right to claim to be identified
2. Use name of author in a work that he did not as the performer of his performances, except
create where the omission is dictated by the manner of
the use of the performance, and to object to any
NEIGHBORING RIGHTS distortion, mutilation or other modification of his
performances that would be prejudicial to his
1. Performers rights reputation (IPC, Sec. 204).
2. Producers of sound recordings
3. Broadcasting organizations Additional remuneration for subsequent
communications or broadcasts
1. Performer’s rights
The performer shall be entitled to an additional
Performers shall enjoy the following exclusive remuneration equivalent to at least five percent
rights: (5%) of the original compensation he received for
the first communication or broadcast in every
1. As regards their performances, the right of communication to the public or broadcast of a
authorizing the: performance subsequent to the first
a. Broadcasting and other communication to communication or broadcast, unless otherwise
the public of their performance; and provided in the contract (Sec. 206, IPC).
b. Fixation of their unfixed performance.
2. Producers on sound recordings
2. Right of authorizing the direct or indirect
reproduction of their performances fixed in Producers of sound recordings shall have exclusive
sound recordings or audiovisual works or right to authorize the:
fixations in any manner or form;
3. Right of authorizing the first public distribution 1. Direct or indirect reproduction of their sound
of the original and copies of their performance recordings, in any manner or form; the placing
fixed in sound recordings or audiovisual of these reproductions in the market and the
works or fixations through sale or rental of right of rental or lending
other forms of transfer of ownership; 2. First public distribution of the original and
4. Right of authorizing the commercial rental to copies of their sound recordings through sale
the public of the original and copies of their or rental or other forms of transferring
performances fixed in sound recordings or ownership;
audiovisual works or fixations, even after 3. Commercial rental to the public of the original
and copies of their sound recordings, even

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409 FACULTY OF CIVIL LAW
 Intellectual Property Code
after distribution by them by or pursuant to
authorization by the producer; and This rule mandates that the local television (TV)
4. Making available to the public of their sound broadcast signals of an authorized TV broadcast
recordings in such a way that members of the station, such as the GMA Network, Inc., should be
public may access the sound recording from a carried in full by the cable antenna television
place and at a time individually chosen or (CATV) operator, without alteration or deletion. In
selected by them, as well as other this case, the Central CATV, Inc. was found not to
transmissions of a sound recording with like have violated the must-carry rule when it solicited
effect (IPC, Sec. 208, IPC, as amended by R.A. No. and showed advertisements in its cable television
10372). (CATV) system. Such solicitation and showing of
advertisements did not constitute an infringement
3. Broadcasting organization rights of the “television and broadcast markets” under
Section 2 of E.O. No. 205 (GMA Network, Inc. v.
Broadcasting organizations shall enjoy the Central CATV, Inc., G.R No. 176694, July 18, 2014).
exclusive right to carry out, authorize or prevent
any of the following acts: NOTE: The provisions of IPC shall also apply to
works, performers, producers of sound recordings
1. Rebroadcasting of their broadcasts; and broadcasting organizations that are to be
2. Recording in any manner, including the protected by virtue of and in accordance with any
making of films or the use of video tape, of international convention or other international
their broadcasts for the purpose of agreement to which the Philippines is a party (Sec.
communication to the public of television 221.2 and 224.2, IPC).
broadcasts of the same;
3. Use of such records for fresh transmissions or Applicability of rights
for fresh recording (IPC, Sec. 211).
The provisions of Chapter VIII shall apply mutatis
Broadcasting - transmission by wireless means mutandis to the rights of performers, producers of
for the public reception of sounds or of images or sound recordings and broadcasting organizations,
of representations thereof; such transmission by as an exception to infringement and allowing the
satellite is also broadcasting where the means for following:
decrypting are provided to the public by the
broadcasting organization or with its consent 1. Exclusive use of a natural person for own
(ABS-CBN Broadcasting Corp. vs. Philippine personal purposes;
Multimedia System, Inc., G.R. Nos. 175769-70, 2. Short excerpts for reporting current events;
January 19, 2009). 3. Sole use for the purpose of teaching or for
scientific research;
Rebroadcasting - the simultaneous broadcasting 4. Fair use of the broadcast (Sec. 212, IPC, as
by one broadcasting organization of the broadcast amended by R.A. No. 10372).
of another broadcasting organization. While the
Rome Convention gives broadcasting Term of protection
organizations the right to authorize or prohibit the
rebroadcasting of its broadcast, however, this 1. For performances not incorporated in
protection does not extend to cable retransmission recordings, fifty (50) years from the end of the
(Ibid.). year in which the performance took place
2. For sound or image and sound recordings and
Must carry rule for performances incorporated therein, fifty
(50) years from the end of the year in which
It is limitation on copyright which obligates the recording took place
operators to carry the signals of local channels 3. In case of broadcasts, the term shall be twenty
within their respective systems. This is to give the (20) years from the date the broadcast took
people wider access to more sources of news, place. The extended term shall be applied only
information, education, sports event and to old works with subsisting protection under
entertainment programs other than those the prior law (Sec. 215, IPC).
provided for by mass media and afforded
television programs to attain a well-informed, Persons whom the rights are granted
well-versed and culturally refined citizenry and (copyrightable works applicable)
enhance their socio-economic growth (ABS-CBN
Broadcasting Corp. v. Philippine Multimedia System, 1. For works
G.R. No. 175769-70, Jan. 19, 2009).

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a. Works of authors who are nationals of, or contrary, be presumed to be the maker of said
have their habitual residence in, the work (IPC, Sec. 219.2).
Philippines;
b. Audio-visual works the producer of which RULES ON OWNERSHIP OF COPYRIGHT
has his headquarters or habitual Type of work Owner
residence in the Philippines; Original Author of the work. (IIPC, Sec.
c. Works of architecture erected in the literary and 178.1).
Philippines or other artistic works artistic works
incorporated in a building or other Joint Co-authors – in case of works
structure located in the Philippines; authorship of joint authorship; in the
d. Works first published in the Philippines; absence of agreement, their
e. Works first published in another country rights shall be governed by
but also published in the Philippines the rules on co-ownership.
within thirty days, irrespective of the
nationality or residence of the authors NOTE: If work of joint
(IPC, Sec. 221). authorship consists of parts
that can be used separately,
2. For performers then the author of each part
a. Performers who are nationals of the shall be the original owner of
Philippines; the copyright in the part that
b. Performers who are not nationals of the he has created (IPC, Sec.
Philippines but whose performances: 178.2)
i. Take place in the Philippines; Audiovisual GR: Producer, the author of
ii. Are incorporated in sound work the scenario, the composer of
recordings that are protected under the music, the film director,
IPC; or and the author of the work so
iii. Which has not been fixed in sound adapted
recording but are carried by
broadcast qualifying for protection XPN: Unless otherwise
under IPC (IPC, Sec. 222). provided in an agreement,
the producers shall exercise
3. Of sound recordings the copyright to an extent
a. Sound recordings the producers of which required for the exhibition of
are nationals of the Philippines the work in any manner,
b. Sound recordings that were first except for the right to collect
published in the Philippines (IPC, Sec. performing license fees for
223). the performance of musical
compositions, with or
4. For broadcasts without words, which are
a. Broadcasts of broadcasting organizations incorporated into the
the headquarters of which are situated in work(IPC, Sec. 178.5)
the Philippines; and Anonymous The publishers shall be
b. Broadcasts transmitted from transmitters and deemed to represent the
situated in the Philippines (IPC, Sec. 224). pseudonymous authors of articles and other
works writings published without
Presumption of authorship the names of the authors or
under pseudonyms, unless
The natural person whose name is indicated on a the contrary appears, or the
work in the usual manner as the author shall, in the pseudonyms or adopted
absence of proof to the contrary, presumed to be name leaves no doubt as to
the author of the work. This is applicable even if the author's identity, or if the
the name is a pseudonym, where the pseudonym author of the anonymous
leaves no doubt as to identity of the author (IPC, works discloses his identity
Sec. 219.1). (IPC, Sec. 179).
Commissioned The person who
The person or body corporate, whose name work commissioned the work shall
appears on the audio-visual work in the usual own the work but the
manner shall, in the absence of proof to the copyright thereto shall
remain with the creator,

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411 FACULTY OF CIVIL LAW
 Intellectual Property Code
unless there is a written latter under his own independent parts of
stipulation to the contrary name and that of the the unitary whole.
(IPC, Sec. 178.4). contributions of
Collective When an author contributes natural persons will
works to a collective work, his right NOT be identified
to have his contribution Joint authors shall be
attributed to him is deemed Each author shall enjoy
co-owners. Co-
waived unless he expressly copyright to his own
ownership shall
reserves it. (IPC, Sec. 196) contribution
apply.
In the course of The employee, if not a part of The work will be
employment his regular duties even if the attributed to the
employee uses the time, person under whose Joint authors shall be
facilities and materials of the initiative and direction both entitled to the
employer. it was created unless acknowledgment as
the contributor authors of the work.
The employer, if the work is expressly reserves his
the result of the performance right.
of his regularly-assigned
duties, unless there is an
Q: T, an associate attorney in XYZ Law Office,
agreement, express or
wrote a newspaper publisher a letter disputing
implied, to the contrary. (IPC,
a columnist’s claim about an incident in the
Sec. 178.3)
attorney’s family. T used the law firm’s
Letters In respect of letters, the letterhead and its computer in preparing the
copyright shall belong to the letter. T also requested the firm’s messenger to
writer subject to the deliver the letter to the publisher. Who owns
provisions of Article 723 of the copyright to the letter? (2011 Bar)
the Civil Code. (IPC, Sec.
178.6). A: T, since he is the original creator of the contents
of the letter.
Civil Code of the
Philippines Q: Solid Investment House commissioned Mon
Article 723. Letters and Blanco and his son Steve, both noted artists, to
other private paint a mural for the Main Lobby of the new
communications in writing building of Solid for a contract price of P2M.
are owned by the person to
whom they are addressed a. Who owns the mural? Explain.
and delivered, but they b. Who owns the copyright of the mural?
cannot be published or Explain. (1995 Bar)
disseminated without the
consent of the writer or his A:
heirs. However, the court a. The mural is owned by Solid. It commissioned
may authorize their the work and paid Mon and Steve Blanco P2M
publication or dissemination for the mural.
if the public good or the b. Even though Solid owns the mural, the
interest of justice so requires. copyright of the mural is jointly owned by Mon
and Steve, unless there is a written stipulation
Collective work vs. Joint work to the contrary (Sec. 178.4, IPC).
COLLECTIVE WORK JOINT WORK Q: Rudy is a fine arts student in a university. He
Elements remain Separate elements stays in a boarding house with Bernie as his
unintegrated and merge into a unified roommate. During his free time, Rudy would
disparate. whole. paint and leave his finished works lying around
Work created by 2 or the boarding house. One day, Rudy saw one of
Work prepared by 2
more persons at the his works—an abstract painting entitled
or more authors with
initiative and under the Manila Traffic Jam—on display at the
the intention that
direction of another university cafeteria. The cafeteria operator
their contributions be
with the said he purchased the painting from Bernie
merged into
understanding that it
inseparable or
will be disclosed by the

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who represented himself as its painter and three columns which, after some slight editing,
owner. were printed in the newspaper. However,
Diario de Manila proved unprofitable and
Rudy and the cafeteria operator immediately closed only after two months. Due to the
confronted Bernie. While admitting that he did minimal amounts involved, Eloise chose not to
not do the painting, Bernie claimed ownership pursue any claim for payment from the
of its copyright since he had already registered newspaper, which was owned by New Media
it in his name with the National Library as Enterprises.
provided in the Intellectual Property Code.
Three years later, Eloise was planning to
Who owns the copyright to the painting? publish an anthology of her works, and wanted
Explain. (Bar 2013) to include the three columns that appeared in
the Diario de Manila in her anthology. She asks
A: Rudy owns the copyright to the painting for your legal advice:
because he was one who actually created it. His
rights existed from the moment of its creation. The a. Does Eloise have to secure authorization
registration of the painting by Bernie with the from New Media Enterprises to be able to
National Library did not confer copyright upon publish Diario de Manila columns in her
him. The registration is merely for the purpose of own anthology. Explain fully.
completing the records of the National Library. b. Assume that New Media Enterprises plans
to publish Eloise’s columns in its own
Q: BR and CT are noted artists whose paintings anthology entitled, “The best of Diario de
are highly prized by collectors. Dr. DL Manila.” Eloise wants to prevent the
commissioned them to paint a mural at the publication of her columns in that
main lobby of his new hospital for children. anthology since she was never paid by the
Both agreed to collaborate on the project for a newspaper. Name one irrefutable legal
total fee of 2 million pesos to be equally divided argument Eloise could cite to enjoin New
between them. It was also agreed that Dr. DL Media Enterprises from including her
had to provide all the materials for the painting columns in its anthology. (2008 Bar)
and pay for the wages of technicians and
laborers needed for the work on the project. A:
a. NO. In the case of a work commissioned by a
Assume that the project is completed and both person other than an employer of the author
BR and CT are fully paid the amount of P2M as and who pays for it and the work is made in
artists' fee by DL. Under the law on intellectual pursuance of the commission, the person who
property, who will own the mural? Who will so commissioned the work shall have
own the copyright in the mural? Why? Explain. ownership of work, but the copyright thereto
(2004 Bar) shall remain with the creator, unless there is a
written statement to the contrary. Thus,
A: DL owns the mural, while both BR and CT jointly though Diario de Manila commissioned the
own the copyright thereto. This is so because the work, it cannot be considered as its owner
mural was commissioned by DL and a because it did not pay Eloise. Ownership and
consideration was paid to BR and CT in exchange copyright still belong to Eloise. Authorization
thereof. According to Section 178.4 of the IPC, is no longer needed to publish Diario de
when the work is commissioned by a person other Manila in her anthology because Eloise has
than an employer of the author, the owner of the moral and economic rights over her works.
work shall be the one who commissioned the b. The fact that Eloise was not paid, ownership
work, but the copyright of the work shall be owned over her work, published in the newspaper,
by the person who is responsible for its creation, did not vest upon the latter. She retains full
unless there is a written stipulation to the moral and economic rights over it.
contrary.
LIMITATIONS ON COPYRIGHT
Q: Eloise, an accomplished writer, was hired by
Petong to write a bimonthly newspaper General limitations on copyright
column for Diario de Manila, a newly-
established newspaper of which Petong was The following acts shall not constitute
the Editor-in-chief. Eloise was to be paid infringement of copyright:
P1,000.00 for each column that was published.
In the course of two months, Eloise submitted

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1. Recitation or Performance of a work, once it limitations as may be provided in the
has been lawfully made accessible to the Regulations;
public, if done privately and free of charge or if 10. Public Display of the original or a copy of the
made strictly for a charitable or religious work not made by means of a film, slide,
institution or society; television image or otherwise on screen or by
2. Making of quotations from a published work if means of any other device or process (e.g.
they are compatible with fair use and only to Public display using posters mounted on walls
the extent justified for the purpose, including and display boards), Provided, That either the
quotations from newspaper articles and work has been published, or, that original or
periodicals in the form of press summaries: the copy displayed has been sold, given away
Provided, That the source and the name of the or otherwise transferred to another person by
author, if appearing on the work, are the author or his successor in title;
mentioned; 11. Any use made of a work for the purpose of any
3. Communication to the public by mass media of Judicial proceedings or for the giving of
articles on current political, social, economic, professional advice by a legal practitioner.
scientific or religious topic, lectures, addresses 12. Reproduction or distribution of published
and other works of the same nature, which are articles or materials in a specialized format
delivered in public if such use is for exclusively for the use of the blind, visually-
information purposes and has not been and reading-impaired persons: Provided, that
expressly reserved: Provided, That the source such copies and distribution shall be made on
is clearly indicated; a nonprofit basis and shall indicate the
4. Reproduction and communication to the copyright owner and the date of the original
public of literary, scientific or artistic works as publication (IPC, Sec. 184, as amended by R.A.
Part of reports of current events (e.g. music No. 10372).
played or tunes on the occasion of a sporting
event and such tunes were picked up during a Other limitations on copyright
new coverage of the event) by means of
photography, cinematography or 1. Copyright in a work of architecture shall
broadcasting to the extent necessary for the include the right to control the erection of any
purpose; building which reproduces the whole or a
5. Inclusion of a work in a publication, broadcast, substantial part of the work either in its
or other communication to the public, sound original form or in any form recognizably
recording or film, if such inclusion is made by derived from the original, provided, that the
way of illustration for teaching purposes and copyright in any such work shall not include
is compatible with fair use: Provided, That the the right to control the reconstruction or
source and of the name of the author, if rehabilitation in the same style as the original
appearing in the work, are mentioned; of a building to which that copyright relates
6. Recording made in Educational institutions of (IPC, Sec. 186).
a work included in a broadcast for the use of
such educational institutions, provided that 2. The private reproduction of a published work
such recording must be deleted within a in a single copy, where the reproduction is
reasonable period after they were first made by a natural person exclusively for
broadcast. research and private study, shall be permitted,
7. Making of Ephemeral recordings by a without the authorization of the owner of
broadcasting organization by means of its own copyright in the work but shall not extend to
facilities and for use in its own broadcast. the reproduction of:
8. Use made of a work by or under the direction a. A work of architecture in the form of
or control of the government, by the National building or other construction;
Library or by educational, scientific or b. An entire book, or a substantial part
professional institutions where such use is in thereof, or of a musical work in graphic
the public interest and is compatible with fair form by reprographic means;
use; c. A compilation of data and other materials;
9. Public performance or the communication to d. A computer program except as provided
the public of a work, in a place where no in Section 189; and
admission fee is charged in respect of such e. Any work in cases where reproduction
public performance or communication, by a would unreasonably conflict with a
club or institution for charitable or normal exploitation of the work or would
educational purpose only, whose aim is not otherwise unreasonably prejudice the
profit making, subject to such other

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legitimate interests of the author (IPC, Sec. Original and
During the life of the author
187). derivative
and for fifty (50) years after
works, as well as
his death
3. The reproduction in one back-up copy or posthumous
adaptation of a computer program shall be works.
permitted, without the authorization of the Economic rights shall be
author of, or other owner of copyright in, a protected during the life of
computer program, by the lawful owner of Works of joint
the last surviving author
that computer program, provided, the copy or authorship
and for fifty (50) years after
adaptation is necessary for: his death
Fifty (50) years from the
a. The use of the computer program in date on which the work was
conjunction with a computer for the first lawfully published
purpose, and to the extent, for which the
computer program has been obtained; Published
If the author's identity is
and Anonymous or
revealed or is no longer in
b. Archival purposes, and, for the pseudonymous
doubt before the 50-year
replacement of the lawfully owned copy of works
period, the provisions on
the computer program in the event that original and derivative
the lawfully obtained copy of the works, as well as works of
computer program is lost, destroyed or joint authorship, shall
rendered unusable (IPC, Sec. 187). apply.
Unpublished Fifty (50) years counted
Q: In a written legal opinion for a client on the Anonymous or from the making of the
difference between apprenticeship and pseudonymous work
learnership, Liza qouted without permission a works
labor law expert’s coment appearing in his Work of an
book entitled “Annotations on the Labor Code.” applied art of an
Can the labor law expert hold Liza liable for artistic creation
infringement of copyright for qouting a portion with utilitarian
of his book without his permission? functions or
25 years from the time of
incorporated in
A: NO. Liza cannot be held liable for infringement the making.
a useful article
of copyright. Any use made of a work for the whether made
purpose of judicial proceedings or for giving of by hand or
professional advice by a legal peoceedings or for produced on an
giving of professional advice by a legal practitioner industrial scale
shall not constitute infringement of copyright [Sec. Fifty (50) years from
184 (k), IPC]. Photographic
publication of the work and,
works
if unpublished, fifty (50)
Q: May a person have photocopiies of some years from the making
pages of the book of Professor Rosario made Audio-visual
without violating the copyright law? works including
those produced
A: YES. The private reproduction of a published by process 50 years from date of
work in a single copy, where the reproduction is analogous to publication and, if
made by a natural person exclusively for research photography or unpublished, from the date
and private study, shall be permitted, without the any process for of making
authorization of the owner of copyright in the making audio-
work. This rule contemplates that reproduction of visual
the book shall not extend to an entire book or a recordings
substantial part thereof [Secs. 187.1 to 187.2 (b),
IPC]. The term of protection subsequent to the death of
the author shall run from the date of his death or
Term of protection of copyright of publication, but such terms shall always be
deemed to begin on the first day of January of the
TYPE OF WORK Term of Protection year following the event which gave rise to them
(Sec. 214, IPC).

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DOCTRINE OF FAIR USE Any library or archive whose activities are not for
profit may, without the authorization of the author
“Fair use” permits a secondary use that “serves the or copyright owner, make a limited number of
copyright objective of stimulating productive copies of the work, as may be necessary for such
thought and public instruction without excessively institutions to fulfill their mandate, by
diminishing the incentives for creativity”. reprographic reproduction:

The fair use of a copyrighted work for criticism, a. Where the work by reason of its fragile
comment, news reporting, teaching including character or rarity cannot be lent to user in its
limited number of copies for classroom use, original form;
scholarship, research, and similar purposes is not b. Where the works are isolated articles
an infringement of copyright. contained in composite works or brief
portions of other published works and the
Decompilation may be considered fair use reproduction is necessary to supply them,
when this is considered expedient, to persons
Decompilation, which is the reproduction of the requesting their loan for purposes of research
code and translation of the forms of the computer or study instead of lending the volumes or
program to achieve the inter-operability of an booklets which contain them; and
independently created computer program with c. Where the making of such limited copies is in
other programs, may also constitute fair use under order to preserve and, if necessary in the event
the criteria established Sec. 185, to the extent that that it is lost, destroyed or rendered unusable,
such decompilation is done for the purpose of replace a copy, or to replace, in the permanent
obtaining the information necessary to achieve collection of another similar library or archive,
such interoperability (Sec. 185, IPC). a copy which has been lost, destroyed or
rendered unusable and copies are not
Factors that should be considered in order to available with the publisher.
determine fair use
But it shall not be permissible to produce a volume
1. Purpose and character of the use, including of a work published in several volumes or to
whether such use is of a commercial nature or produce missing tomes or pages of magazines or
is for non-profit educational purpose; similar works, unless the volume, tome or part is
2. Nature of the copyrighted work; out of stock (IPC, Sec. 188, as amended by R.A. No.
3. Amount and substantiality of the portion used 10372).
in relation to the copyrighted work as a whole;
and Public performance vs. Communication to the
4. Effect of the use upon the potential market for public of a performance
or value of the copyrighted work.
COMMUNICATIONS TO
PUBLIC
NOTE: The fact that a work is unpublished shall THE PUBLIC OF A
PERFORMANCE
not by itself bar a finding of fair use if such finding PERFORMANCE
is made upon consideration of all the above factors Performance at a
(IPC, Sec. 182.2). If you copy to the extent that you The transmission to the
place or at places
reduce the marketability of the book, it is no longer public, by any medium,
where persons
fair use. otherwise than by
outside the normal
broadcasting, of sounds
circle of a family and
Published works of a performance or the
that family’s closest
representations of
social
Those works which, with the consent of the sounds fixed in a sound
acquaintances are
authors, are made available to the public by wire recording.
or can be present.
or wireless means in such a way that members of The communication can
the public may access these works from a place It is performed at a be accessed through
and time individually chosen by them: provided, specific time and wired or wireless means
that availability of such copies has been such, as to place. (e.g. The at a time and place
satisfy the reasonable requirement of the public, Pacquiao-Clottey convenient to the viewer
having regard to the nature of the work (IPC, Sec. Match in Dallas (e.g. The Pacquiao-
171.7). Texas Stadium) Clottey Match watched
via YouTube)
Reprographic Reproduction by Libraries
Transfer or assignment of copyright

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The copyright may be assigned or licensed in COPYRIGHT INFRINGEMENT
whole or in part. Within the scope of the
assignment or license, the assignee or licensee is It is the doing by any person, without the consent
entitled to all the rights and remedies which the of the owner of the copyright, of anything the sole
assignor or licensor had with respect to the right to do which is conferred by statute on the
copyright (IPC, Sec. 180.1). owner of the copyright. The act of lifting from
another’s book substantial portions of discussions
Requisites for a transfer of copyright to take and examples and the failure to acknowledge the
effect same is an infringement of copyright.
Copying alone is not what is prohibited. The
1. If inter vivos, there must be a written copying must produce an “injurious effect”. A copy
indication of such intention; and of a piracy is an infringement of the original, and it
2. Filed in National Library upon payment of is no defense that the pirate, in such cases, did not
prescribed fees (IPC,Sec. 182). know whether or not he was infringing any
copyright; he at least knew that what he was
The filing of the assignment or license of copying was not his, and he copied at his peril
copyright is NOT a mandatory requirement. (Habana v. Robles, G.R. No. 131522, July 19, 1999).
The gravamen of copyright infringement is not
Section 182 uses the permissive word “may” in merely the unauthorized "manufacturing" of
reference to the filing of the deed of assignment or intellectual works but rather the unauthorized
transfer of copyright, this filing should not be performance of any of the rights exclusively
understood as mandatory for validity and granted to the copyright owner. Hence, any person
enforceability. The filing is entirely optional for the who performs any of such acts under without
parties and may be useful only for evidentiary and obtaining the copyright owner’s prior consent
notification purposes (Amador, 2007). renders himself civilly and criminally liable for
copyright infringement (NBI-Microsoft Corp. v.
Limitation regarding submission of a literary, Hwang, G.R. No. 147043, June 21, 2005).
photographic or artistic work to a newspaper,
magazine or periodical for publication Infringement

Unless a greater right is expressly granted, such A person infringes a right protected under this Act
submission shall constitute only a license to make when one:
a single publication.
a. Directly commits an infringement;
If two or more persons jointly own a copyright or b. Benefits from the infringing activity of another
any part thereof, neither of the owners shall be person who commits an infringement if the
entitled to grant licenses without the prior written person benefiting has been given notice of the
consent of the other owner or owners (Sec. 180.3, infringing activity and has the right and ability
IPC). to control the activities of the other person;
c. With knowledge of infringing activity,
Q: In a written legal opinion for a client on the induces, causes or materially contributes to
difference between apprenticeship and the infringing conduct of another (IPC,Sec. 216,
learnership, Liza quoted without permission a as amended by R.A. No. 10372).
labor law expert's comment appearing in his
book entitled "Annotations on the Labor Code." Q: Diana and Piolo are famous personalities in
Can the labor law expert hold Liza liable for showbusiness who kept their love affair secret.
infringement of copyright for quoting a portion They use a special instant messaging service
of his book without his permission? (2006 Bar) which allows them to see one another’s typing
on their own screen as each letter key is
A: NO. One of the limitations on copyright is the pressed. When Greg, the controller of the
making of quotations from a published work if they service facility, found out their identities, he
are compatible with fair use, provided that the kept a copy of all the messages Diana and Piolo
source and the name of the author, if appearing on sent each other and published them. Is Greg
the work, are mentioned. The legal opinion made liable for copyright infringement? Reason
by Liza is consistent with fair use since the quoted briefly. (2007 Bar)
part is merely used to explain a concept of law for
the benefit of the client and not to defeat the rights A: YES. The messages which Diana and Pablo sent
of the author over his copyright [Sec. 184.1 (b), each other fall under the category of letters as
IPC]. provided in Sec. 172.1.d which provides that

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417 FACULTY OF CIVIL LAW
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literary and artistic works, hereinafter referred to alleged pirate) raised the defense that he was
as “works,” are original intellectual creations in the unaware that what he had copied was a
literary and artistic domain protected from the copyright material. Would this defense be
moment of their creation and shall include in valid? (1997 Bar)
particular, among others , letters. Infringement of
such consist in the doing by any person, without A: NO. In copyright infringement, intent is
the consent of the owner of the copyright, of irrelevant. A person may consciously or
anything the sole right to do which is conferred by unconsciously copy or infringe a copyrighted
statute on the owner of the copyright . material and still be held liable for such act.
Reproduction and first public distribution of the
work are economic rights of the authors of the Q: KK is from Bangkok, Thailand. She studies
work. Such cannot be done by the person not the medicine in the Pontifical University of Santo
author of the work. In this instance, Greg is not the Tomas (UST). She learned that the same
owner of the messages. He merely copied it foreign books prescribed in UST are 40-50%
without the consent of the authors thereof and cheaper in Bangkok. So she ordered 50 copies
subsequently published the same in violation of of each book for herself and her classmates and
the latter’s economic rights. sold the books at 20% less than the price in the
Philippines. XX, the exclusive licensed
Q: The Victoria Hotel chain reproduces publisher of the books in the Philippines, sued
videotapes, distributes the copies thereof to its KK for copyright infringement. Decide. (2014
hotels and makes them available to hotel Bar)
guests for viewing in the hotel guest rooms. It
charges a separate nominal fee for the use of A: KK did not commit copyright infringement.
the videotape player. Under the “first sale” doctrine, the owner of a
particular copy or phonorecord lawfully made is
a. Can the Victoria Hotel be enjoined for entitled, without the authority of the copyright
infringing copyrights and held liable for owner, to sell or otherwise dispose of the
damages? possession of that copy or phonorecord. Hence,
b. Would it make any difference if Victoria there is no infringement by KK since the said
Hotel does not charge any fee for the use of doctrine permitted importation and resale without
the videotape? (1994 Bar) the publisher’s further permission.

A: Substantial reproduction
a. YES. Victoria Hotel may be held liable for
infringing copyrights of the said videotapes It is not necessarily required that the entire
because the reproduction and distribution copyrighted work, or even a large portion of it, be
thereof are not merely for private viewing. copied. If so much is taken that the value of the
Instead, it was used as a means to gain extra original work is substantially diminished, there is
profit by making it as an extra amenity for its an infringement of copyright and to an injurious
hotel services. However, if such performances extent, the work is appropriated. It is no defense
contained in the videotapes became available that the pirate did not know whether or not he was
to the public even prior to its registration, then infringing any copyright; he at least knew that
there is no copyright infringement because the what he was copying was not his, and he copied at
videotapes are already considered as public his peril. In cases of infringement, copying alone is
property. not what is prohibited. The copying must produce
b. NO. Notwithstanding the non-charging of fee an “injurious effect” (Habana v. Robles, G.R. No.
for the use of the videotapes, Victoria Hotel 131522, July 19, 1999).
still uses the videotapes for business
purposes, serving as an attraction to Copying is demonstrated by:
prospective and current guests, unless the
performances in the videotapes had been long 1. Direct Evidence
before available to the public prior to 2. Circumstantial evidence of access and
registration; hence, it is already public substantial inquiry or the most common test
property (Filipino Society of Composers, (Amador, 2007).
Authors, Publishers, Inc. v. Benjamin Tan, G.R.
No. L-36402, March 16, 1987). Access means having reasonable opportunity to
view or hear the plaintiff’s work. Threshold inquiry
Q: In an action for damages on account of an means whether there is reasonable opportunity to
infringement of a copyright, the defendant (the copy.

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Q: May a person have photocopies of some a work,
pages of the book of Professor Rosario made rewriting a
without violating the copyright law? (1998 piece,
Bar) performing a
written work
A: YES, a person may photocopy some of pages of or doing
Professor Rosario’s book for as long as it is not for anything that
public use or distribution and it does not copy the is normally
substantial text or “heart” of the book. It is considered to
considered as fair use of the copyrighted work. be the
exclusive right
Plagiarism of the
copyright
Plagiarism means the theft of another person’s holder.
language, thoughts, or ideas. To plagiarize is to There is no Public
take (ideas, writings, etc.) from (another) and pass copyright documents can
them off as one’s own. The passing off of the work Public
infringement be plagiarized
of another as one’s own is thus an indispensable Documen
on public so long as it is
element of plagiarism. t
documents. not
acknowledged.
Plagiarism presupposes intent and a deliberate, In copyright
conscious effort to steal another’s work and pass it In plagiarism
Manner infringement,
off as one’s own (In the matter of the charges of the copying
of the copying
plagiarism against Associate Justice Mariano C. Del need not be
copying must be
Castillo, A.M. No. 10-7-17-SC, October 12, 2010). substantial
substantial
In copyright Plagiarism, may
Copyright Infringement vs. Plagiarism infringement, exist even if
Expressi the copying none of the
COPYRIGHT on must refer to same words are
INFRINGEME PLAGIARISM the expression used to express
NT of an idea. an idea.
The The use of
unauthorized another’s Remedies in case of copyright infringement
use of information,
copyrighted language, or 1. Injunction
material in a writing, when 2. Damages, including legal costs and other
manner that done without expenses, as he may have incurred due to the
violates one of proper infringement as well as the profits the
the copyright acknowledgmen infringer may have made due to such
owner’s t of the original infringement
Definitio exclusive source. 3. Impounding during the pendency of the action
n rights, such as sales invoices and other documents
the right to evidencing sales
reproduce or 4. Destruction without any compensation all
perform the infringing copies
copyrighted 5. Moral and Exemplary damages (IPC, Sec.
work, or to 216.1); or
make 6. Seizure and impounding of any article, which
derivative may serve as evidence in the court
works that proceedings (IPC, Sec. 216.2).
build upon it.
Copyright Plagiarism is The copyright owner may elect, at any time before
infringement specific as it final judgment is rendered, to recover instead of
is a very broad refers only to actual damages and profits, an award of statutory
term that using someone damages for all infringements involved in an
Coverage
describes a else’s work action in a sum equivalent to the filing fee of the
variety of acts. without proper infringement action but not less than Fifty
It may be acknowledgeme thousand pesos (P 50,000.00) (IPC, as amended by
duplication of nt. R.A. No. 10372, Sec. 216.1).

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Factors to be considered by the court in Criminal penalties in case of copyright
awarding statutory damages infringement

1. Nature and purpose of the infringing act; 1. Imprisonment of one (1) year to three (3)
2. Flagrancy of the infringement; years plus a fine ranging from Fifty thousand
3. Whether the defendant acted in bad faith; pesos (P50,000) to One hundred fifty
4. Need for deterrence; thousand pesos (P150,000) for the first
5. Any loss that the plaintiff has suffered or is offense.
likely to suffer by reason of the infringement; 2. Imprisonment of three (3) years and one (1)
and day to six (6) years plus a fine ranging from
6. Any benefit shown to have accrued to the One hundred fifty thousand pesos to Five
defendant by reason of the infringement hundred thousand (P500,000) for the second
offense.
Double damages 3. Imprisonment of six (6) years and one day to
nine (9) years plus a fine ranging from Five
The amount of damages to be awarded shall be hundred thousand pesos (P500,000) to
doubled against any person who: P1,500,000 for the third offense.
4. In all cases, subsidiary imprisonment in cases
a. Circumvents effective technological measures; of insolvency (IPC, See Sec. 217).
or
b. Having reasonable grounds to know that it will Determination of penalty
induce, enable, facilitate or conceal the
infringement, remove or alter any electronic The court shall consider the value of the infringing
rights management information from a copy of materials that the defendant has produced or
a work, sound recording, or fixation of a manufactured and the damage that the copyright
performance, or distribute, import for owner has suffered by reason of the infringement:
distribution, broadcast, or communicate to the Provided, that the respective maximum penalty
public works or copies of works without stated in Section 217.1. (a), (b) and (c) herein for
authority, knowing that electronic rights the first, second, third and subsequent offense,
management information has been removed shall be imposed when the infringement is
or altered without authority (IPC, as amended committed by:
by R.A. No. 10372, Sec. 216.1).
a. Circumvention of effective technological
Technological Measure measures;
b. Removal or alteration of any electronic rights
It is any technology, device or component that, in management information from a copy of a
the normal course of its operation, restricts acts in work, sound recording, or fixation of a
respect of a work, performance or sound performance, by a person, knowingly and
recording, which are not authorized by the without authority; or
authors, performers or producers of sound c. Distribution, importation for distribution,
recordings concerned or permitted by law (IPC, broadcast, or communication to the public of
Sec. 171.12, as amended). works or copies of works, by a person without
authority, knowing that electronic rights
Rights Management Information management information has been removed
or altered without authority (IPC, Sec. 217.2, as
It is information which identifies the work, sound amended by R.A. No. 10372).
recording or performance; the author of the work,
producer of the sound recording or performer of Affidavit evidence
the performance; the owner of any right in the
work, sound recording or performance; or It is an affidavit made before the notary public in
information about the terms and conditions of the actions for infringement, reciting the facts
use of the work, sound recording or performance; required to be stated under the Sec. 216.1 of IPC
and any number or code that represent such
information, when any of these items is attached to As a prima facie proof, the affidavit shifts the
a copy of the work, sound recording or fixation of burden of proof to the defendant, to prove the
performance or appears in conjunction with the ownership of the copyrighted work.
communication to the public of a work, sound
recording or performance (IPC, Sec. 171.13). Q: Due to the amendment of the IP Code under
RA 10372 APPROVED ON FEBRUARY 28, 2013,

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deleting the provision entitling importation in The law grants visitorial powers to IPOPHL and
the Philippines of up to three (3) copies of allows it to undertake enforcement functions with
copyrighted works in a personal baggage, can the support of concerned agencies such as PNP,
one still be allowed to import books, DVDs, and NBI, BOC, OMB and LGUs. IPOPHL itself will not be
CDs from abroad? conducting raids or seizures but will be
coordinating with the said agencies. However, as
A: YES. In fact, the amendments to the Intellectual IP rights remain to be private rights, there must be
Property Code have removed the original a complaint from the IP right owner. So, if an
limitation of three copies when bringing author sees pirated copies of his book in a certain
legitimately acquired copies of copyrighted store, he may notify IPOPHL. IPOPHL can now
material into the country. Only the importation of initiate together with any of the said agencies to
pirated or infringed material is illegal. As long as address the problem.
they were legally purchased, you can bring as
many copies you want, subject to Customs 2. Establishment of the Bureau of Copyright
regulations ([Link]). and other related rights (Secs. 1 and 3)

Reproduction of copyrighted material for At present there is no entity performing the more
personal purposes is not punishable by RA substantial function of policy formulation, rule
10372 making, adjudication, research and education,
which is envisioned to be handled by the Bureau of
Infringement in this context refers to the economic Copyright. Although a Copyright Division exists in
rights of the copyright owner. Transferring music the National Library, the function of such office is
from a lawfully acquired CD into a computer, then merely to accept deposits of copyrighted works.
downloading it to a portable device for personal The Copyright Bureau is dedicated to serving the
use, is not infringement. But if, multiple copies of needs of the copyright-based industries and
the CD were reproduced for sale, then stakeholders could give more focus and rally more
infringement occurs ([Link]). resources and support for the creative industry,
which is very important for protection of works by
Possession of a music file procured through an Filipinos both here and abroad.
infringing activity is a violation of the law
3. Accreditation of collective management
The possession of a music file procured through an organizations or CMOs (Sec. 10)
infringing activity is a violation of the law only if it
can be proven that the person benefitting from the CMOs are organizations that enforce the copyright
music file has knowledge of the infringement, and of the copyright holders. Through this mandate,
the power and ability to control the person IPOPHL will be able to monitor and promote good
committing the infringement ([Link]). corporate governance among CMOs, benefitting
not only the rights holders themselves but also the
Liability of mall owners for the infringement users of copyrighted works. Members of the
activities of their tenants Philippine Retailers Association (PRA), mall
owners, restaurants, and other heavy users of
Mall owners are not automatically penalized for music in their establishments will greatly benefit
the infringing acts of their tenants. When a mall from this provision, as they are ensured that only
owner or lessor finds out about an infringement legitimate collecting agencies can collect royalties
activity, he or she must give notice to the tenant, from them on behalf of copyright owners.
then he or she will be afforded time to act upon this
knowledge. The law requires that one must have 4. Clarification of the concept of copyright
both proven knowledge of the infringement, and infringement, including secondary liability
the ability to control the activities of the infringing (Secs. 22 and 23)
person, to be held liable. The mall owner must also
have benefitted from the infringement The provisions on copyright infringement have
([Link]). been refined to include contributory infringement
(secondary liability), circumvention of
Other beneficial provisions brought by RA technological measures and rights management
10372 information as aggravating circumstances, and the
option to collect statutory damages instead of
1. Grant of enforcement powers to IPOPHL actual damages. However, under Sec. 22 of the
(Sec. 2) amendments, to be secondarily liable, a landlord or
mall must: (1) benefit from the infringing activity;

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421 FACULTY OF CIVIL LAW
 Intellectual Property Code
(2) must have been given notice of the infringing cheap prices because copyright protection
activity and a grace period to act on the same; and operates. Now with this amendment, blind and
(3) has the right and ability to control the activities visually impaired Filipinos can have easier access
of the person who is doing the infringement. The to copyrighted works in Braille.
complainant has the burden of proof to provide
evidence that all 3 elements are present. If a 6. Formulation of IP Policies within
landlord or mall owner is not aware of the universities and colleges (Sec. 27)
infringement, he cannot be liable for infringement,
even if he benefits from it (from rental payments) This will ensure that the rights of the academic
or has control over the premises. community (professors, researchers, students)
over their literary, scholarly and artistic works are
5. Fair use for the blind, visually- and clearly delineated and respected. With an IP Policy
reading-impaired (Sec. 11) in existence, these sectors within the academe will
have a clear delineation of their respective rights
This provision would give a special fair use and benefits, thus, avoiding disputes and costly
exemption for the non-commercial reproduction litigation within their ranks which would be
of works for use by visually-impaired persons. detrimental to education, research and
Before this amendment, hundreds of thousands of development.
blind Filipinos could not buy Braille works at

DIFFERENCES BETWEEN COPYRIGHT, TRADEMARK, AND PATENTS (2015 Bar)

BASIS PATENT TRADEMARK COPYRIGHT
The right granted to an Any visible sign capable Literary and artistic
inventor by a State, or by of distinguishing the works which are original
a regional office acting goods (trademark) or intellectual creations in
for several States, which services (service mark) the literary and artistic
allows the inventor to of an enterprise and shall domain protected from
Definition exclude anyone else from include a stamped or the moment of their
commercially exploiting marked container of creation. (Pearl and Dean
his invention for a limited goods. (RA 8293, Sec. (Phil) Inc. v. Shoemart
period. (Understanding 121.1) Inc., G.R. No. 148222,
Industrial Property, August 15, 2003)
WIPO, p.5)
Technical solution of a Any visible sign capable Literary and artistic
problem in any field of of distinguishing the works
human activity which is goods (trademark) or
Registered intellectual
new (novel invention) services (service mark)
rights
and industrially of an enterprise must be
applicable. registered).

f. scientific theories e. generic terms for g. method

g. contrary to public goods or services h. idea
order or morality f. characteristics of i. procedure
h. aesthetic creations goods like quality or j. principle
i. methods for quantity k. operation
treatment of human g. customary sign in l. system
body everyday language  format of
Need not be registered j. plant varieties h. color itself television game
show is not
subject to a
copyright.
(Joaquin v.
Drilon, 302 SCRA
225, January 28,
1999)
20 years from filing date 10 years and renewable It depends on the type of
Term of protection of application (RA 8293, upon expiration. (RA work.
Sec. 54) 8293, Secs. 145-146)

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 MERCANTILE LAW
1. In general A person may NOT: 12. Performance of a
1. Use a name if the word work, once it has been
a. GR: If put on the is generic (Lyceum of lawfully made
market in the the Philippines v. CA, accessible to the
Philippines by the G.R. No. 101897, March public, if done
owner of the 5, 1993). privately and free of
product, or with his charge or for a
express consent. 2. Use any name charitable or religious
indicating a institution or society.
XPN: Drugs and geographical location
medicines - (Ang Si Heng vs. 13. The Making of
introduced in the Wellington Department quotations from a
Philippines or Store G.R. No. L-4531, published work if they
anywhere else in the January 10, 1953). are compatible with
world by the patent fair use and only to the
owner, or by any 3. Use any name or extent justified for the
party authorized to designation contrary to purpose.
use the invention public order or morals
(Sec. 72.1, as 14. Communication
amended by R.A. 4. Use a name if it is liable to the public by mass
9502) to deceive trade circles media of articles on
or the public as to the current political,
b. Where the act is nature of the social, economic,
done privately and enterprise identified scientific or religious
on a non-commercial by that name (IPC, Sec. topic, lectures,
scale or for a non- 165.1). addresses and other
commercial purpose. works of the same
(IPC, Sec. 72.2) 5. Subsequently use a nature
trade name likely to
Limitations on the use of
c. Exclusively for mislead the public as a 15. As Part of
right
experimental use of third party (IPC, Sec. reports of current
the invention for 165.2 [b]). events (e.g. music
scientific purposes played or tunes on the
or educational 6. Copy or simulate the occasion of a sporting
purposes name of any domestic event and such tunes
(experimental use product (for imported were picked up during
provision). (IPC, Sec. products). a new coverage of the
72.3) event).
7. Copy or simulate a
d. Bolar Provision - In mark registered in 16. For Teaching
the case of drugs and accordance with the purposes, provided
medicines, where the provisions of IPC (for that the source and of
act includes testing, imported products). the name of the
using, making or author, if appearing in
selling the invention 8. Use mark or trade the work, are
including any data name calculated to mentioned.
related thereto, induce the public to
solely for purposes believe that the article 17. Recording made
reasonably related to is manufactured in the in Educational
the development and Philippines, or that it is institutions of a work
submission of manufactured in any included in a
information and foreign country or broadcast for the use
issuance of locality other than the of such educational
approvals by country or locality institutions, provided
government where it is in fact that such recording
regulatory agencies manufactured. must be deleted within
required under any a reasonable period
law of NOTE: Items 4, 5 and 6 after they were first
only applies to imported broadcast.

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423 FACULTY OF CIVIL LAW
 Intellectual Property Code
products and those
e. the Philippines or of imported articles shall 18. The making of
another country that not be admitted to entry Ephemeral recordings
regulates the at any customhouse of by a broadcasting
manufacture, the Philippines (IPC, Sec. organization by means
construction, use or 166). of its own facilities and
sale of any product. for use in its own
(IPC, Sec. 72.4) broadcast.

f. Where the act 19. The Use made of a

consists of the work by or under the
preparation for direction or control of
individual cases, in a the government, by
pharmacy or by a the National Library or
medical professional, by educational,
of a medicine in scientific or
accordance with a professional
medical institutions where
prescription. (IPC, such use is in the
Sec. 72.5) public interest and is
compatible with fair
g. Where the invention use.
is used in any ship,
vessel, aircraft, or 20. The Public
land vehicle of any performance of a
other country work, in a place where
entering the no admission fee is
territory of the charged.
Philippines
temporarily or 21. Public Display of the
accidentally. (IPC, original or a copy of
Sec. 72.5) the work not made by
means of a film, slide,
5. Prior user– Person television image or
other than the otherwise on screen or
applicant, who in good by means of any other
faith, started using the device or process (e.g.
invention in the Public display using
Philippines, or posters mounted on
undertaken serious walls and display
preparations to use the boards.
same, before the filing
date or priority date of 22. Any use made of a
the application shall work for the purpose
have the right to of any Judicial
continue the use proceedings or for the
thereof, but this right giving of professional
shall only be advice by a legal
transferred or assigned practitioner.
further with his
enterprise or business.
(IPC, Sec. 73)

6. Use by Government– A
government agency or
third person
authorized by the
government may
exploit invention even

UNIVERSITY OF SANTO TOMAS 424

2019 GOLDEN NOTES
 MERCANTILE LAW
without agreement of a
patent owner where:

a. Public interest, as
determined by the
appropriate agency
of the government,
so requires; or
b. A judicial or
administrative body
has determined that
the manner of
exploitation by
owner of patent is
anti-competitive.
(IPC, Sec. 74)

7. Reverse reciprocity of
foreign law– Any
condition, restriction,
limitation, diminution,
requirement, penalty
or any similar burden
imposed by the law of a
foreign country on a
Philippine national
seeking protection of
intellectual property
rights in that country,
shall reciprocally be
enforceable upon
nationals of said
country, within
Philippine jurisdiction.
(IPC, Sec. 231)
Prescriptive period for 4 years from time of 4 years from the time the 4 years from the time the
filing of an action for commission of cause of action arose. cause of action arose.
damages due to infringement (IPC, (IPC, Sec. 226)
infringement Sec.79)
1. Literal infringement 6. That it is duly A person infringes a right
Test – Resort must be registered in the protected under this Act
had, in the first Intellectual Property when one:
instance, to words of Office
the claim. If the d. Directly commits an
accused matter clearly 7. The validity of the infringement;
falls within the claim, mark
infringement is e. Benefits from the
Tests or elements which committed. 8. The plaintiff’s infringing activity of
will establish the ownership of the mark another person who
presence of Minor modifications commits an
infringement are sufficient to put the 9. The use of the mark or infringement if the
item beyond literal its colorable imitation person benefiting has
infringement. (Godines by the alleged been given notice of
v. CA, G.R. No. L-97343, infringer results in the infringing activity
Sept. 13, 1993) “likelihood of and has the right and
confusion” ability to control the
2. Doctrine of Equivalents (McDonald’s Corp v. activities of the other
– There is infringement L.C. Big Mak Burger, person;
where a device

UNIVERSITY OF SANTO TOMAS

425 FACULTY OF CIVIL LAW
 Intellectual Property Code
appropriates a prior Inc., G.R. No. f. With knowledge of
invention by 143993, Aug 18, 2004) infringing activity,
incorporating its induces, causes or
innovative concept 10. Used without the materially contributes
and, although with consent of the owner to the infringing
some modification and (Prosource conduct of another
change, performs International Inc.v. (IPC, as amended by
substantially the same Horphag Research R.A. No. 10372, Sec.
function in Management SA G.R. 216).
substantially the same No. 180073, November
way to achieve 25, 2009)
substantially the same
result.(Godines v. CA,
G.R. No. L-97343, Sept.
13, 1993)

3. Economic interest test

– when the process-
discoverer’s economic
interest are
compromised, i.e.,
when others can
import the products
that result from the
process, such an act is
said to be prohibited.
5. Civil action for 4. Civil – i.e. preliminary 1. Injunction
infringement – (IPC, injunction with
Sec 76.3). damages 2. Damages, including
legal costs and other
6. Criminal action for 5. Criminal — remedies expenses, as he may
infringement available shall also have incurred due to
include the seizure, the infringement as
7. Administrative forfeiture and well as the profits the
remedy destruction of the infringer may have
infringing goods and made due to such
8. Destruction of of any materials and infringement
infringing implements the
material(IPC, predominant use of 3. Impounding during
Sec.76.5). which has been in the the pendency of the
commission of the action sales invoices
Remedies against offense. and other documents
infringers evidencing sales
6. Administrative
4. Destruction without
any compensation all
infringing copies

5. Moral and Exemplary

damages (IPC, Sec.
216.1); or

6. Seizure and
impounding of any
article, which may
serve as evidence in
the court proceedings.
(IPC, Sec. 216.2)

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 MERCANTILE LAW
transactions in excess of One million pesos
(P1,000,000.00);
SPECIAL LAWS 5. Jewelry dealers in precious stones, who, as a
business, trade in precious stones, for
transactions in excess of One million pesos
(P1,000,000.00);
6. Company service providers which, as a
ANTI-MONEY LAUNDERING ACT OF 2001
business, provide any of the following services
(R.A. 9160, AS AMENDED BY RA 9194,
to third parties:
10167, 10365)
a) Acting as a formation agent of juridical
persons;
b) Acting as (or arranging for another
POLICY OF THE LAW person to act as) a director or
corporate secretary of a company, a
1. To protect and preserve the integrity and partner of a partnership, or a similar
confidentiality of bank accounts and to position in relation to other juridical
ensure that the Philippines shall not be persons;
used as a money laundering site for the c) Providing a registered office, business
proceeds of any unlawful activity. address or accommodation,
2. To pursue the State’s foreign policy to correspondence or administrative
extend cooperation in transnational address for a company, a partnership
investigation and prosecutions of persons or any other legal person or
involved in money laundering activities arrangement; and
wherever committed (RA 9160, Sec. 1). d) Acting as (or arranging for another
person to act as) a nominee
COVERED INSTITUTIONS shareholder for another person; and
NOTE: Covered “Institutions” was changed to 7. Persons who provide any of the following
Covered “Persons” under RA 10365. services:
i. Managing of client money, securities or
Covered persons, natural or juridical, refer to: other assets;
ii. Management of bank, savings or
1. Banks, non-banks, quasi-banks, trust entities, securities accounts;
foreign exchange dealers, pawnshops, money iii. Organization of contributions for the
changers, remittance and transfer companies creation, operation or management of
and other similar entities and all other persons companies; and
and their subsidiaries and affiliates supervised iv. Creation, operation or management of
or regulated by the Bangko Sentral ng Pilipinas juridical persons or arrangements, and
(BSP); buying and selling business entities.
2. Insurance companies, pre-need companies and (RA 10365, Sec. 1, amending RA 9160, Sec. 3[a]).
all other persons supervised or regulated by the
Insurance Commission (IC); The term “covered persons” shall exclude
3. (i) Securities dealers, brokers, salesmen, lawyers and accountants
investment houses and other similar persons
managing securities or rendering services as These persons must be acting as independent legal
investment agent, advisor, or consultant, professionals in relation to information concerning
(ii) Mutual funds, close-end investment their clients or where disclosure of information
companies, common trust funds, and other would compromise client confidences or the
similar persons, and attorney-client relationship (RA 10365, Sec. 1,
(iii) Other entities administering or otherwise amending RA 9160, Sec. 3[a]).
dealing in currency, commodities or financial
derivatives based thereon, valuable objects, Requisites for exclusion:
cash substitutes and other similar monetary
instruments or property supervised or 1. They must be acting as independent legal
regulated by the Securities and Exchange professionals;
Commission (SEC); 2. Authorized to practice in the Philippines;
and
4. Jewelry dealers in precious metals, who, as a 3. Continue to be subject to the provisions of
business, trade in precious metals, for their respective codes of conduct and/or

UNIVERSITY OF SANTO TOMAS

427 FACULTY OF CIVIL LAW
 Special Laws
professional responsibility or any of its NOTE: Should a transaction be determined to
amendments (Ibid). be both a covered transaction and a suspicious
transaction, the covered institution shall be
NOTE: Lawyers and accountants acting as required to report the same as a suspicious
independent legal professionals are not required to transaction.
report covered and suspicious transactions if the
relevant information was obtained in circumstances No liability in reporting covered and suspicious
where they are subject to professional secrecy or transactions
legal professional privilege.
When reporting covered or suspicious transactions
OBLIGATIONS OF COVERED INSTITUTIONS to the AMLC, covered institutions and their officers
and employees shall not be deemed to have
1. Customer Identification - Covered institutions violated:
shall:
a) Establish and record the true identity 1. The Law on Secrecy of Bank Deposits or Ra
of its clients based on official 1405, as amended;
documents. 2. Foreign Currency Deposit Act or RA No.
b) Maintain a system of verifying the true 6426, as amended,
identity of their clients; and 3. General Banking Laws or RA 8791; and
c) In case of corporate clients, require a 4. Other similar laws.
system of verifying their legal existence
and organizational structure, as well as Prohibited communications
the authority and identification of all
persons purporting to act on their Officers and employees of covered institution shall
behalf. not:
1. Communicating, directly or indirectly, in
NOTE: The BSP may conduct annual testing any manner or by an means, to any person,
solely limited to the determination of the the fact that a covered or suspicious
existence and true identity of the owners of transaction report was made, the contents
such accounts. thereof, or any other information in
relation thereto.
Anonymous accounts, accounts under fictitious
names, and all other similar accounts shall be NOTE: If the reporting is done by any
absolutely prohibited. Peso and foreign person in the regular performance of his
currency non-checking numbered accounts duties in good faith, no administrative,
shall be allowed. criminal or civil proceedings shall lie
against said person, whether or not such
2. Record Keeping - All records of all transactions reporting results in any criminal
of covered institutions shall be maintained and prosecution under this Act of any other law
safely stored for five (5) years from the date of (Safe harbor provision).
transactions.
2. Communicating, directly or indirectly, in
NOTE: With respect to closed accounts, the any manner or by any means, to any person
records shall be preserved and safety stored for or entity, the media, the fact that a covered
at least five (5) years from the dates when they or suspicious transaction has been
were closed. reported or is about to be reported, the
contents of the report, or any other
3. Reporting of Covered and Suspicious information in relation thereto.
Transactions. 3. Publishing or airing in any manner or form
by the mass media, electronic mail, or other
GR: Covered persons shall report to the AMLC similar devices.
all covered transactions and suspicious
transactions within five (5) working days from In case of violation of these prohibitions, the
occurrence thereof. concerned officer and employee of the covered
person and media shall be held criminally liable
XPN: The AMLC prescribes a different period (Sec. 7, RA 10365 amending Sec. 9, RA 9160).
not exceeding fifteen (15) working days.
COVERED TRANSACTIONS

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 MERCANTILE LAW
A transaction in cash or other equivalent monetary laundering referred to in paragraphs (a), (b) or
instrument involving a total amount in excess of (c) above.
Five hundred thousand pesos (PhP 500,000.00)
within one (1) banking day (RA 9160, Sec. 3 [b]), as Money laundering is also committed by any covered
amended by RA 9194). person who, knowing that a covered or suspicious
transaction is required under this Act to be reported
SUSPICIOUS TRANSACTIONS to the Anti-Money Laundering Council (AMLC), fails
to do so (Sec. 4, RA 10365, amending Sec. 4, RA 9160).
A transaction with covered institutions, regardless
of the amounts involved, where any of the following UNLAWFUL ACTIVITIES OR PREDICATE CRIMES
circumstances exist:
Unlawful activity refers to any act or omission or
1. There is no underlying legal or trade obligation, series or combination thereof involving or having
purpose or economic justification; direct relation to the following:
2. The client is not properly identified;
3. The amount involved is not commensurate with 1. Kidnapping for ransom under Article 267 of Act
the business or financial capacity of the client; No. 3815, otherwise known as the Revised
4. Taking into account all known circumstances, it Penal Code, as amended;
may be perceived that the client's transaction is 2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16
structured in order to avoid being the subject of of Republic Act No. 9165, otherwise known as
reporting requirements under the Act; the Comprehensive Dangerous Drugs Act of
5. Any circumstances relating to the transaction 2002;
which is observed to deviate from the profile of 3. Section 3 paragraphs B, C, E, G, H and I of
the client and/or the client's past transactions Republic Act No. 3019, as amended, otherwise
with the covered institution; known as the Anti-Graft and Corrupt Practices
6. The transactions is in a way related to an Act;
unlawful activity or offense under this Act that 4. Plunder under Republic Act No. 7080, as
is about to be, is being or has been committed; amended;
or 5. Robbery and extortion under Articles 294, 295,
7. Any transactions that is similar or analogous to 296, 299, 300, 301 and 302 of the Revised Penal
any of the foregoing (RA 9160 as amended by RA Code, as amended;
9194, Sec. 3[b-1]). 6. Jueteng and Masiao punished as illegal
gambling under Presidential Decree No. 1602;
MONEY LAUNDERING; HOW COMMITTED 7. Piracy on the high seas under the Revised Penal
Code, as amended and Presidential Decree No.
Money laundering is committed by any person 532;
who, knowing that any monetary instrument or 8. Qualified theft under Article 310 of the Revised
property represents, involves, or relates to the Penal Code, as amended;
proceeds of any unlawful activity: 9. Swindling under Article 315 and Other Forms of
Swindling under Article 316 of the Revised
a. Transacts said monetary instrument or Penal Code, as amended;
property; 10. Smuggling under Republic Act Nos. 455 and
b. Converts, transfers, disposes of, moves, 1937;
acquires, possesses or uses said monetary 11. Violations of Republic Act No. 8792, otherwise
instrument or property; known as the Electronic Commerce Act of 2000;
c. Conceals or disguises the true nature, source, 12. Hijacking and other violations under Republic
location, disposition, movement or ownership Act No. 6235; destructive arson and murder, as
of or rights with respect to said monetary defined under the Revised Penal Code, as
instrument or property; amended;
d. Attempts or conspires to commit money 13. Terrorism and conspiracy to commit terrorism
laundering offenses referred to in paragraphs as defined and penalized under Sections 3 and 4
(a), (b) or (c); of Republic Act No. 9372;
e. Aids, abets, assists in or counsels the 14. Financing of terrorism under Section 4 and
commission of the money laundering offenses offenses punishable under Sections 5, 6, 7 and 8
referred to in paragraphs (a), (b) or (c) above; of Republic Act No. 10168, otherwise known as
and the Terrorism Financing Prevention and
f. Performs or fails to perform any act as a result Suppression Act of 2012:
of which he facilitates the offense of money 15. Bribery under Articles 210, 211 and 211-A of
the Revised Penal Code, as amended, and

UNIVERSITY OF SANTO TOMAS

429 FACULTY OF CIVIL LAW
 Special Laws
Corruption of Public Officers under Article 212 Children Against Abuse, Exploitation and
of the Revised Penal Code, as amended; Discrimination;
16. Frauds and Illegal Exactions and Transactions 33. Fraudulent practices and other violations under
under Articles 213, 214, 215 and 216 of the Republic Act No. 8799, otherwise known as the
Revised Penal Code, as amended; Securities Regulation Code of 2000; and
17. Malversation of Public Funds and Property 34. Felonies or offenses of a similar nature that are
under Articles 217 and 222 of the Revised Penal punishable under the penal laws of other
Code, as amended; countries [Sec. 2, RA 10365, amending Sec 3(i) of
18. Forgeries and Counterfeiting under Articles RA 9160].
163, 166, 167, 168, 169 and 176 of the Revised
Penal Code, as amended; ANTI-MONEY LAUNDERING COUNCIL (AMLC)
19. Violations of Sections 4 to 6 of Republic Act No.
9208, otherwise known as the Anti-Trafficking The AMLC shall be composed of:
in Persons Act of 2003;
20. Violations of Sections 78 to 79 of Chapter IV, of 1. The Governor of the Bangko Sentral ng Pilipinas
Presidential Decree No. 705, otherwise known (BSP) as Chairman;
as the Revised Forestry Code of the Philippines, 2. The Commissioner of the Insurance
as amended; Commission as member; and
21. Violations of Sections 86 to 106 of Chapter VI, of 3. The Chairman of the Securities and Exchange
Republic Act No. 8550, otherwise known as the Commission (SEC) as member (RA 9160, as
Philippine Fisheries Code of 1998; amended by RA 9194, Sec. 7).
22. Violations of Sections 101 to 107, and 110 of
Republic Act No. 7942, otherwise known as the FUNCTIONS
Philippine Mining Act of 1995;
23. Violations of Section 27(c), (e), (f), (g) and (i), of The AMLC shall act unanimously in the discharge of
Republic Act No. 9147, otherwise known as the its functions as defined hereunder:
Wildlife Resources Conservation and Protection
Act; 1. To require and receive covered or suspicious
24. Violation of Section 7(b) of Republic Act No. transaction reports from covered institutions;
9072, otherwise known as the National Caves 2. To issue orders addressed to the appropriate
and Cave Resources Management Protection Supervising Authority or the covered
Act; institutions to determine the true identity of the
25. Violation of Republic Act No. 6539, otherwise owner of any monetary instrument or property
known as the Anti-Carnapping Act of 2002, as subject of a covered transaction or suspicious
amended; transaction report or request for assistance
26. Violations of Sections 1, 3 and 5 of Presidential from a foreign State, or believed by the Council,
Decree No. 1866, as amended, otherwise known on the basis for substantial evidence, to be, in
as the decree Codifying the Laws on whole or in part, wherever located,
Illegal/Unlawful Possession, Manufacture, representing, involving, or related to directly or
Dealing In, Acquisition or Disposition of indirectly, in any manner or by any means, the
Firearms, Ammunition or Explosives; proceeds of an unlawful activity.
27. Violation of Presidential Decree No. 1612, 3. To institute civil forfeiture proceedings and all
otherwise known as the Anti-Fencing Law; other remedial proceedings through the Office
28. (Violation of Section 6 of Republic Act No. 8042, of the Solicitor General;
otherwise known as the Migrant Workers and 4. To cause the filing of complaints with the
Overseas Filipinos Act of 1995, as amended by Department of Justice or the Ombudsman for
Republic Act No. 10022; the prosecution of money laundering offenses;
29. Violation of Republic Act No. 8293, otherwise 5. To investigate suspicious transactions and
known as the Intellectual Property Code of the covered transactions deemed suspicious after
Philippines; an investigation by AMLC, money laundering
30. Violation of Section 4 of Republic Act No. 9995, activities and other violations of this Act;
otherwise known as the Anti-Photo and Video 6. To apply before the Court of Appeals, ex
Voyeurism Act of 2009; parte, for the freezing of any monetary
31. Violation of Section 4 of Republic Act No. 9775, instrument or property alleged to be laundered,
otherwise known as the Anti-Child proceeds from, or instrumentalities used in or
Pornography Act of 2009; intended for use in any unlawful activity as
32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and defined in Section 3(i) hereof;
(e), 11, 12 and 14 of Republic Act No. 7610,
otherwise known as the Special Protection of

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7. To implement such measures as may be (Republic v. Cabrini Green & Ramos, G.R. No. 154522,
necessary and justified under this Act to May 5, 2006).
counteract money laundering;
8. To receive and take action in respect of, any Probable cause under AMLA
request from foreign states for assistance in
their own anti-money laundering operations It includes such facts and circumstances which
provided in this Act; would lead a reasonably discreet, prudent or
9. To develop educational programs on the cautious man to believe that an unlawful activity
pernicious effects of money laundering, the and/or a money laundering offense is about to be, is
methods and techniques used in the money being or has been committed and that the account
laundering, the viable means of preventing or any monetary instrument or property subject
money laundering and the effective ways of thereof sought to be frozen is in any way related to
prosecuting and punishing offenders; said unlawful activity and/or money laundering
10. To enlist the assistance of any branch, offense (R.A. 9194, as amended, Rule 10.2).
department, bureau, office, agency, or
instrumentality of the government, including Remedy of the person whose account has been
government-owned and -controlled frozen
corporations, in undertaking any and all anti-
money laundering operations, which may A person whose account has been frozen may file a
include the use of its personnel, facilities and motion to lift the freeze order and the court must
resources for the more resolute prevention, resolve this motion before the expiration of the
detection, and investigation of money freeze order.
laundering offenses and prosecution of
offenders; NOTE: No court shall issue a temporary restraining
11. To impose administrative sanctions for the order or a writ of injunction against any freeze
violation of laws, rules, regulations, and orders order, except the Supreme Court (Sec. 8, RA 10365,
and resolutions issued pursuant thereto. amending RA 9160).
12. To require the Land Registration Authority and
all its Registries of Deedsto submit to the AMLC, Nature of a Freeze Order
reports on all real estate transactions involving
an amount in excess of Five hundred thousand A freeze order is an extraordinary and interim relief
pesos (P500,000.00) within fifteen (15) days issued by the Court of Appeals to prevent the
from the date of registration of the transaction, dissipation, removal, or disposal of properties that
in a form to be prescribed by the AMLC. The are suspected to be the proceeds of, or related to
AMLC may also require the Land Registration unlawful activities as defined in Sec. 3(i) of R.A.
Authority and all its Registries of Deeds to 9160, as amended. The primary objective of a freeze
submit copies of relevant documents of all real order is to temporarily preserve monetary
estate transactions. (Sec. 6, RA 10365 amending instruments or property that are in any way related
Sec. 7, RA 9160). to an unlawful activity or money laundering, by
preventing the owner from utilizing them during
FREEZING OF MONETARY INSTRUMENT OR the duration of the freeze order. (Ligot v. Republic
PROPERTY 692 SCRA 509)

When may freeze order be issued Effectivity of Freeze Order

1. The AMLC, thru the OSG, shall file a verified As a rule, the effectivity of a freeze order may be
ex parte petition before the Court of extended by the Court of Appeals for a period not
Appeals. exceeding six (6) months. However, should it
2. The CA should determine if probable cause become completely necessary for the Republic to
exists that any monetary instrument or further extend the duration of the freeze order, it
property is in any way related to an should file the necessary motion before the
unlawful activity as defined in Section 3(i) expiration of the six month period and explain the
hereof. reason or reasons for its failure to file an
appropriate case and justify the period of extension
NOTE: It is solely the CA which has the authority to sought.
issue a freeze order. It also has the exclusive
jurisdiction to extend existing freeze orders While Sec. 10 of AMLA uses specific language to
previously issued by the AMLC vis-à-vis accounts authorize an ex parte application for the provisional
and deposits related to money-laundering activities relief for a freeze order, nothing in Sec. 11 similarly

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authorizes an ex parte application for the issuance 2. No. The AMLC functions solely as an investigative
of an order to examine bank accounts. body in the instances mentioned in Rule 5.b.26
Consequently, courts receiving the application for Thereafter, the next step is for the AMLC to file a
inquiry order cannot simply take AMLC’s word that Complaint with either the DOJ or the Ombudsman
probable cause exists that the deposits or pursuant to Rule 6b. Even in the case of Estrada v.
investments are related to an unlawful activity. Office of the Ombudsman, where the conflict arose
at the preliminary investigation stage by the
Q: SPCMB was most concerned with the article Ombudsman, we ruled that the Ombudsman's
published in the Manila Times on 25 February denial of Senator Estrada's Request to be furnished
2015 which read: “The Anti-Money Laundering copies of the counter-affidavits of his co-
Council (AMLC) asked the Court of Appeals (CA) respondents did not violate Estrada's constitutional
to allow the [C]ouncil to peek into the bank right to due process where the sole issue is the
accounts of the Beenays, their corporations, and existence of probable cause for the purpose of
a law office where a family member was once a determining whether an information should be filed
partner. Also the bank accounts of the law office and does not prevent Estrada from requesting a
linked to the family, the SPCMB, where the Vice copy of the counter-affidavits of his co-respondents
President's daughter Abigail was a former during the pre-trial or even during trial.
partner.
Plainly, the AMLC's investigation of money
By 8 March 2015, the Manila Times published laundering offenses and its determination of
another article reporting that the appellate possible money laundering offenses, specifically
court had issued a Resolution granting the ex- its inquiry into certain bank accounts allowed
parte application of the AMLC to examine the by court order, does not transform it into an
bank accounts of SPCMB. SPCMB undertook this investigative body exercising quasi-judicial
petition for certiorari and prohibition on the powers. Hence, Section 11 of the AMLA, authorizing
following grounds that the Anti-Money a bank inquiry court order, cannot be said to violate
Laundering Act is unconstitutional insofar as it SPCMB's constitutional right to due process.
allows the examination of a bank account
without any notice to the affected party; Does it 3. No. We now come to a determination of whether
violate the following: (1) right to substantive Section 11 is violative of the constitutional right to
due process; (3) right to procedural due process privacy enshrined in Section 2, Article III of the
or (2) right to privacy. Constitution. We thus subjected Section 11 of the
AMLA to heightened scrutiny and found nothing
A: 1. No. Section 11 of the AMLA providing for ex- arbitrary in the allowance and authorization to
parte application and inquiry by the AMLC into AMLC to undertake an inquiry into certain bank
certain bank deposits and investments does not accounts or deposits. It provides safeguards before
violate substantive due process, there being no a bank inquiry order is issued, ensuring adherence
physical seizure of property involved at that stage. to the general state policy of preserving the
A bank inquiry order under Section 11 does not absolutely confidential nature of Philippine bank
necessitate any form of physical seizure of property accounts:
of the account holder. What the bank inquiry order
authorizes is the examination of the particular 1. The AMLC is required to establish
deposits or investments in banking institutions or probable cause as basis for its ex-parte
non-bank financial institutions. The monetary application for bank inquiry order;
instruments or property deposited with such 2. The CA, independent of the AMLC's
banks or financial institutions are not seized in demonstration of probable cause, itself
a physical sense, but are examined on particular makes a finding of probable cause that
details such as the account holder's record of the deposits or investments are related to
deposits and transactions. Unlike the assets an unlawful activity under Section 3(i) or a
subject of the freeze order, the records to be money laundering offense under Section 4
inspected under a bank inquiry order cannot be of the AMLA;
physically seized or hidden by the account holder. 3. A bank inquiry court order ex-parte for
Said records are in the possession of the bank and related accounts is preceded by a bank
therefore cannot be destroyed at the instance of the inquiry court order ex-parte for the
account holder alone as that would require the principal account which court order ex-
extraordinary cooperation and devotion of the parte for related accounts is separately
bank. based on probable cause that such related
account is materially linked to the principal
account inquired into; and

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4. The authority to inquire into or examine 6426, as amended; General Banking Laws
the main or principal account and the or RA 8791; and other similar laws.
related accounts shall comply with the
requirements of Article III, Sections 2 The Court of Appeals shall act on the application to
and 3 of the Constitution. inquire into or examine any deposit or investment
with any banking institution or non-bank financial
The foregoing demonstrates that the inquiry institution within twenty-four (24) hours from
and examination into the bank account are not filing of the application.
undertaken whimsically and solely based on the
investigative discretion of the AMLC. In The freeze order under Section 10 and the bank
particular, the requirement of demonstration inquiry order under Section 11 are similar in that
by the AMLC, and determination by the CA, of they are extraordinary provisional reliefs which the
probable cause emphasizes the limits of such AMLC may avail of to effectively combat and
governmental action. (Subido vs. CA G.R. No. prosecute money laundering offenses. Crucially,
216914. December 6, 2016) Section 10 uses specific language to authorize an ex
parte application for the provisional relief therein, a
AMLA and its IRR had laid down two (2) circumstance absent in Section 11. If indeed the
conditions when applying for civil forfeiture: legislature had intended to authorize ex
parte proceedings for the issuance of the bank
(a) When there is a suspicious transaction inquiry order, then it could have easily expressed
report or a covered transaction report such intent in the law, as it did with the freeze order
deemed suspicious after investigation by under Section 10.
the AMLC; and
(b) The court has, in a petition filed for the Distinctions between a Bank inquiry order and
purpose, ordered the seizure of any a Freezer order (Sec. 10 vs. Sec. 11)
monetary instrument or property, in whole
or in part, directly or indirectly related to The AMLA does not contemplate ex
said report. parte proceedings in applications for bank inquiry
orders is confirmed by the present implementing
The venue of civil forfeiture cases in any RTC of the rules and regulations of the AMLA, promulgated
judicial region where the money instrument, upon the passage of R.A. No. 9194. With respect to
property or proceeds representing, involving, or freeze orders under Section 10, the implementing
relating to an unlawful activity or to a money rules do expressly provide that the applications for
laundering offense is located. It is the preliminary freeze orders be filed ex parte, but no similar
seizure of the property which brings it within the clearance is granted in the case of inquiry orders
reach of judicial process. (Republic v. Glasgow Credit under Section 11.
and Collection Services 542 SCRA 95)
The sense in allowing ex parte proceedings under
AUTHORITY TO INQUIRE INTO BANK DEPOSITS Section 10 and in proscribing the same under
Section 11. A freeze order under Section 10 on the
The AMLC may inquire into or examine any one hand is aimed at preserving monetary
particular deposit or investment, including related instruments or property in any way deemed related
accounts, with any banking institution or non-bank to unlawful activities as defined in Section 3(i) of the
financial institution provided: AMLA. The owner of such monetary instruments or
property would thus be inhibited from utilizing the
1. It is upon order of any competent court; same for the duration of the freeze order. To make
2. Based on an ex parte application; and such freeze order anteceded by a judicial
3. In cases of violations of this Act, when it has proceeding with notice to the account holder would
been established that there is probable allow for or lead to the dissipation of such funds
cause that the deposits or investments, even before the order could be issued. Quite
including related accounts involved, are apparent from the foregoing is that absent a specific
related to an unlawful activity as defined in wording in the AMLA allowing for ex-
Section 3(i) hereof or a money laundering parteproceedings in orders authorizing inquiry and
offense under Section 4 hereof. examination by the AMLC into certain bank deposits
or investments, notice to the affected party is
NOTE: The inquiry conducted by the AMLC required. (Subido vs. CA G.R. No. 216914. December
is not violative of The Law on Secrecy of 6, 2016)
Bank Deposits or Ra 1405, as amended;
Foreign Currency Deposit Act or RA No.

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433 FACULTY OF CIVIL LAW
 Special Laws
Cases where no court order shall be required in Laundering Council (Republic v. Cabrini Green Ross,
order for the AMLC to inquire into deposit, G.R. No. 154522, May 5, 2006).
investment or related accounts
Q: Prosperous Bank is a domestic bank with
XPNs: No need of court order in cases of (KHDAM) head office in Makati. It handles the banking
1. Kidnapping, requirements of thousands of clients. The AMLC
2. Hijacking, initiated a discreet investigation of the financial
3. Drugs- violation of Dangerous Drugs Act, transactions of Lorenzo, a suspected drug
4. Arson, trafficker based in Naga City. The intelligence
5. Murder (Sec. 11 R.A. 9160, as amended) group of the AMLC, in coordination with the
counterpart group from the PDEA and the NBI,
Q: From his first term in 2007, Congressman gathered ample evidence establishing Lorenzo's
Abner has been endorsing his pork barrel unlawful drug activities. The AMLC had
allocations to Twin Rivers in exchange for a probable cause that his deposits and
commission of 40% of the face value of the investments in various banks, including
allocation. Twin Rivers is a non-governmental Prosperous Bank, were related to money
organization whose supporting papers, after laundering. Accordingly, the AMLC now
audit, were found by the Commission on Audit to transmits to Prosperous Bank a formal demand
be fictitious. Other than to prepare and submit to allow its agents to examine the banking
falsified papers to support the encashment of transactions of Lorenzo, but Prosperous Bank
the pork barrel checks, Twin Rivers does not refuses the demand. Is Prosperous Bank's
appear to have done anything on the endorsed refusal justified? Explain your answer. (2017
projects and Congressman Abner likewise does Bar)
not appear to have bothered to monitor the
progress of the projects he endorsed. The A: NO. While, as a general rule, the AMLC may
congressman converted most of the inquire into bank deposits only upon order of
commissions he generated into US dollars, and any competent court, there is no need for such
deposited these in a foreign currency account court order in cases of kidnapping, hijacking,
with Banco de Plata (BDP). Based on amply- violation of the Dangerous Drugs Act, arson, and
supported tips given by a congressman from murder. Given that there is probable cause that
another political party, the Anti-Money Lorenzo is engaged in unlawful activites as a
Laundering Council sent BDP an order: drug trafficker, the AMLC is authorized to
inquire into his bank deposits with Prosperous
(1) To confirm Cong. Abner's deposits with the Bank.
bank and to provide details of these deposits;
and Q: Rudy is jobless but is reputed to be a jueteng
(2) To hold all withdrawals and other operator. He has never been charged or
transactions involving the congressman's convicted of any crime. He maintains several
bank accounts. bank accounts and has purchased 5 houses and
lots for his children from the Luansing Realty I
As counsel for BDP, would you advise the bank Inc. Since he does not have any visible job, the
to comply with the order? (2013 Bar) company reported his purchases to the Anti-
Money Laundering Council (AMLC). Thereafter,
A: I shall advise Banco de Plata not to comply with AMLC charged him with violation of the Anti-
the order of the AMLC. It cannot inquire into the Money Laundering Law. Upon request of the
deposits of Congressman Abner, regardless of AMLC, the bank disclosed to it Rudy's bank
currency, without a bank inquiry order from a deposits amounting to P100 Million.
competent court, because crimes involved are not Subsequently, he was charged in court for
kidnapping for ransom, violations of the violation of the Anti-Money Laundering Law.
Comprehensive Dangerous Drugs Act, hijacking and
other violations of Republic Act No. 6235, a. Can Rudy move to dismiss the case on the
destructive arson, murder, and terrorism and ground that he has no criminal record?
conspiracy to commit terrorism. b. To raise funds for his defense, Rudy sold the
houses and lots to a friend. Can Luansing
The AMLC cannot order Banco de Plata to hold all Realty, Inc. be compelled to transfer to the
withdrawals and other transactions involving the buyer ownership of the houses and lots?
accounts of Congressman Abner. It is the Court of c. In disclosing Rudy's bank accounts to the
Appeals which has the power to issue a freeze order AMLC, did the bank violate any law?
over the accounts upon petition of the Anti-Money

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d. Supposing the titles of the houses and lots Covered institution with the requirements of the
are in possession of the Luansing Realty Inc., AMLA and its implementing rules and regulations.
is it under obligation to deliver the titles to
Rudy? (2006 Bar)
A: FOREIGN INVESTMENTS ACT
a. NO. The contention of Rudy is not tenable
because under AMLA, "money laundering
crime" committed when the proceeds of an POLICY OF THE LAW
"unlawful activity," like jueteng operations, are
made to appear as having originated from State policy of the law (NOSE Part)
legitimate sources. Money laundering crime is 1. It is the policy of the State to attract,
separate from the unlawful activity of being a promote and welcome productive
jueteng operator, and requires no previous investments in activities which
conviction for the unlawful activity (AMLA, Sec. significantly contribute to National
3). industrialization and socio-economic
b. YES. Rudy is still the owner of the house and lot development to the extent that foreign
in question and as such he may dispose the investment is allowed in such activity by
same as he pleases. Absent any freeze order the Constitution and relevant laws from:
filed by the OSG on behalf of the AMLC, Rudy a. Foreign individuals;
may dispose said properties and compel b. Partnerships;
Luansing Realty to transfer to the buyer c. Corporations;
ownership of the properties sold. d. Governments, including their political
c. YES. Under the Anti-money Laundering Law, as subdivisions.
amended, the AMLC may into bank accounts
upon order of any competent court based in ex 2. Foreign investments shall be encouraged in the
parte application when it has been established enterprises that significantly expand livelihood
that said accounts are related to an unlawful and employment Opportunities for Filipinos by:
activity. In the case at hand, the AMLC merely a. Enhancing economic value of farm
requested the disclosure of said accounts products;
without court order. The bank therefore b. Promoting the welfare of Filipino
violated the secrecy of bank account of Rudy consumers;
when it allowed the AMLC to look into said c. Expanding the scope, quality and volume of
accounts without court order (AMLA as exports and their access to foreign markets;
amended, Sec. 11) . d. And/or transferring relevant technologies
d. YES. The properties are validly sold in favor of in agriculture, industry and support
Rudy and as such Luansing Realty is under the services.
obligation to deliver the titles to the buyer. This
is without prejudice to the application of freeze 3. Foreign investments shall be welcome as a
order by the OSG on behalf of the AMLC. Supplement to Filipino capital and technology
in those enterprises serving mainly the
Related Accounts domestic market.
4. GR: There are no restrictions on extent of
Refers to accounts, the funds and sources of which foreign ownership of Export enterprises. In
originated from and/or are materially linked to the domestic market enterprises, foreigners can
monetary instrument or property subject of the invest as much as 100% equity
freeze order.
XPN: In areas included in the negative list.
Limitations on examination
5. Foreign-owned firms catering mainly to the
The authority to inquire into or examine the main domestic market shall be encouraged to
account and the related accounts shall comply with undertake measures that will gradually
the requirements of Sec. 2 and 3, Art. III of the 1987 increase Filipino Participation in their
Constitution (RA 9160, as amended by RA 10167, Sec. businesses by
11). a. Taking in Filipino partners;
b. Electing Filipinos to the board of director;
To ensure compliance with this Act, the Bangko c. Implementing transfer of technology to
Sentral ng Pilipinas may, in the course of a periodic Filipinos;
or special examination, check the compliance of a d. Generating more employment for the
economy; and

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435 FACULTY OF CIVIL LAW
 Special Laws
e. Enhancing skills of Filipino workers (Sec. 2, 8. Performing services auxiliary to an existing
RA 704) isolated contract of sale which are not on a
continuing basis [Sec. 3 (d), RA 7041].
DEFINITION OF TERMS
Note: Most of these activities do not bring any direct
FOREIGN INVESTMENT receipts or profits to the foreign corporation,
consistent with the ruling of this Court in National
It is an equity investment made by non-Philippine Sugar Trading Corp. v. CA18 that activities within
national in the form of foreign exchange and/or Philippine jurisdiction that do not create earnings
other assets actually transferred to the Philippines or profits to the foreign corporation do not
and duly registered with the Central Bank which constitute doing business in the Philippines. To
shall assess and appraise the value of such assets constitute "doing business," the activity undertaken
other than foreign exchange [Sec. 3(c), RA 7042]. in the Philippines should involve profit-
making.20 Besides, under Section 3(d) of RA 7042,
“DOING BUSINESS” IN THE PHILIPPINES "soliciting purchases" has been deleted from the
enumeration of acts or activities which constitute
“Doing Business” in the Philippines "doing business." (G.R. No. 168266, March 15, 2010,
CARGILL vs. INTRA STRATA)
Foreign corporations are considered “doing or
transacting business” in the Philippines if they are: Q: Petitioner Cargill, Inc. (petitioner) is a
corporation organized and existing under the
1. Soliciting orders, service contracts, and opening laws of the State of Delaware, United States of
offices whether called liason offices of America. Petitioner and Northern Mindanao
branches; Corporation (NMC) executed a contract dated 16
2. Appointing representatives or distributors August 1989 whereby NMC agreed to sell to
domiciled in the Philippines or who in any petitioner 20,000 to 24,000 metric tons of
calendar year stay for a period or periods molasses, to be delivered from 1 January to 30
totaling 180 days or more; June 1990 at the price of $44 per metric ton.
3. Participating in the management, supervision NMC was only able to deliver 219.551 metric
or control of any domestic business, firm, entity, tons of molasses out of the agreed 10,500 metric
or corporation in the Philippines; tons. Thus, petitioner sent demand letters to
4. Doing any act or acts that imply a continuity of respondent claiming payment under the
commercial dealings or arrangements, and performance and surety bonds. When
contemplate to some extent the performance of respondent refused to pay, petitioner filed on 12
acts or works or the exercise of some functions April 1991 a complaint8 for sum of money
normally incident to and in progressive against NMC and respondent. Respondent
prosecution of, the purpose and object of its claims Petitioner is barred from filing said suit
organization (R.A. 7042, Sec 3 [d]). for the lack of the requisite license under sec.
133 of the Corporation Code. Is petitioner doing
Instances that are considered as “not doing or or transacting business in the Philippines so as
transacting business” in the Philippines for to bar him from filing said suit?
foreign corporations
A: [T]he phrase "doing business" shall include
1. Mere investment as shareholder and/or "soliciting orders, service contracts, opening offices,
exercise of rights as investor; whether called ‘liaison’ offices or branches;
2. Having a nominee director or officer to appointing representatives or distributors
represent its interest in the corporation; domiciled in the Philippines or who in any calendar
3. Appointing a representative or distributor year stay in the country for a period or periods
which transacts business in its own name and totalling one hundred eighty (180) days or more;
for its own account; participating in the management, supervision or
4. Publication of a general advertisement through control of any domestic business, firm, entity or
any print or broadcast media; corporation in the Philippines; and any other act or
5. Maintaining a stock of goods in the Philippines acts that imply a continuity of commercial dealings
solely for the purpose of having the same or arrangements, and contemplate to that extent the
processed by another entity in the Philippines; performance of acts or works, or the exercise of
6. Consignment by the foreign corporation of some of the functions normally incident to, and in
equipment with a local company to be used in progressive prosecution of, commercial gain or of
the processing of products for export; the purpose and object of the business organization:
7. Collecting information in the Philippines; Provided, however, That the phrase ‘doing business’

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shall not be deemed to include mere investment as exports sixty percent (60%) or more of its output,
a shareholder by a foreign entity in domestic or wherein a trader purchases products
corporations duly registered to do business, and/or domestically and exports sixty per cent (60%) or
the exercise of rights as such investor; nor having a more of such purchases (Sec 3 [e], RA 7042).
nominee director or officer to represent its interests
in such corporation; nor appointing a An exporter in one country may export its products
representative or distributor domiciled in the to many foreign importing countries without
Philippines which transacts business in its own performing in the importing countries specific
name and for its own account. commercial acts that would constitute doing
business in the importing countries. The mere act of
Since respondent is relying on Section 133 of the exporting from one’s own country, without doing
Corporation Code to bar petitioner from any specific commercial act within the territory of
maintaining an action in Philippine courts, the importing country, cannot be deemed as doing
respondent bears the burden of proving that business in the importing country. The importing
petitioner’s business activities in the Philippines country does not require jurisdiction over the
were not just casual or occasional, but so systematic foreign exporter who has not yet performed any
and regular as to manifest continuity and specific commercial act within the territory of the
permanence of activity to constitute doing business importing country. Without jurisdiction over the
in the Philippines. (G.R. No. 168266, March 15, 2010, foreign exporter, the importing country cannot
CARGILL vs. INTRA STRATA) compel the foreign exporter to secure a license to do
business in the importing country.
Isolated Transaction
Otherwise, Philippine exporters, by the mere act
What is determinative of doing business is not really alone of exporting their products, could be
the number or the quantity of the transactions, but considered by the importing countries to be doing
more importantly, the intention of an entity to business in those countries. This will require
continue the body of its business in the country. The Philippine exporters to secure a business license in
number and quantity are merely evidence of such every foreign country where they usually export
intention. The phrase isolated transaction has a their products, even if they do not perform any
definite and fixed meaning, i.e. a transaction or specific commercial act within the territory of such
series of transactions set apart from the common importing countries. Such a legal concept will have
business of a foreign enterprise in the sense that deleterious effect not only on Philippine exports,
there is no intention to engage in a progressive but also on global trade. (B. Van Zuiden Bros., Ltd. v.
pursuit of the purpose and object of the business GTVL Marketing Industries, Inc G.R. No. 147905, 28
organization. Whether a foreign corporation is May 2007)
doing business does not necessarily depend upon
the frequency of its transactions, but more upon the DOMESTIC MARKET ENTERPRISE
nature and character of the transactions. (G.R. No.
118843. February 6, 1997 ERIKS PTE. LTD, v. CA) It is an enterprise which produces goods for sale, or
renders services to the domestic market entirely or
Q: A foreign company has a distributor in the if exporting a portion of its output fails to
Philippines. The latter acts in his own name and consistency export at least 60% thereof (R.A. 7042,
account. Will this distributorship be considered Sec 3 [f]).
as doing business by the foreign company in the
Philippines? (2015) Profit-Making Transaction

A: The appointment of a distributor in the To constitute "doing business," the activity

Philippines is not sufficient to constitute doin undertaken in the Philippines should involve profit-
business unless it is under the full control of the making.20 Besides, under Section 3(d) of RA 7042,
foreign corporation. If the distributor is an "soliciting purchases" has been deleted from the
independent entity doing business for its own name enumeration of acts or activities which constitute
and account, the latter cannot be considered as "doing business."
doing business (Steel Case v. Design International
Selection, GR No. 171995, April 18, 2012) Note: Other factors which support the finding that
petitioner is not doing business in the Philippines
EXPORT ENTERPRISE are: (1) petitioner does not have an office in the
Philippines; (2) petitioner imports products from
It is an enterprise wherein a manufacturer, the Philippines through its non-exclusive local
processor or service [including tourism] enterprise broker, whose authority to act on behalf of

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437 FACULTY OF CIVIL LAW
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petitioner is limited to soliciting purchases of and reliability of electronic documents
products from suppliers engaged in the sugar trade related to such activities; and
in the Philippines; and (3) the local broker is an 2. Promote the universal use of electronic
independent contractor and not an agent of transaction in the government and general
petitioner. (G.R. No. 168266, March 15, 2010, public (Sec. 3, RA 8792).
CARGILL vs. INTRA STRATA)
SPHERE OF APPLICATION

ELECTRONIC COMMERCE ACT OF 2000 (R.A. NO. The Act applies to any kind of data message and
8792) AND A.M. NO. 01-7-01-SC OR THE RULES electronic document used in the context of
ON ELECTRONIC EVIDENCE commercial and non-commercial activities (Sec. 4,
RA 8792).

POLICY OF THE LAW Electronic data message

The law is a recognition of the State of: This refers to information generated, sent, received
or stored by electronic, optical or similar means
1. The vital role of information and [Sec. 5(c), RA 8792; Sec. 1(g), Rule 2, A.M. No. 01-7-
communications technology (ICT) in 01-SC].
nation-building;
2. The need to create an information-friendly NOTE: Information shall not be denied legal effect,
environment which supports and ensures validity or enforceability solely on the grounds that
the availability, diversity and affordability it is in the data message purporting to give rise to
of ICT products and services; such legal effect, or that it is merely referred to in
3. The primary responsibility of the private that electronic data message (Sec. 6, RA 8792).
sector in contributing investments and
services in telecommunications and Electronic document
information technology;
4. The need to develop, with appropriate This refers to information or the representation of
training programs and institutional policy information, data, figures, symbols or other modes
changes, human resources for the of written expression, described or however
information technology age, a labor force represented, by which a right is established or an
skilled in the use of ICT and a population obligation extinguished, or by which a fact may be
capable of operating and utilizing prove and affirmed, which is received, recorded,
electronic appliances and computers; transmitted, stored, processed, retrieved or
5. Its obligation to facilitate the transfer and produced electronically [Sec. 5(f), RA 8792].
promotion of technology and to ensure
network security, connectivity and It includes digitally signed documents and any
neutrality of technology for the national print-out or output, readable by sight or other
benefit; and means, which accurately reflects the electronic data
6. The need to marshal, organize and deploy message or electronic document [Sec. 1(h), Rule 2,
national information infrastructures, A.M. No. 01-7-01-SC].
comprising in both telecommunications
network and strategic information NOTE: For purposes of the Rules on Electronic
services, including their interconnection to Evidence, the term "electronic document" may be
the global information networks (Sec. 2, RA used interchangeably with "electronic data
8792). message."

OBJECTIVES OF THE LAW FORMATION OF VALIDITY OF ELECTRONIC

CONTRACTS
The Act aims to:
GR: The elements required under existing laws for
1. Facilitate domestic and international the formation of contracts, i.e. offer and acceptance,
dealings, transactions, arrangements may be expressed in, demonstrated and proved by
agreements, contracts and exchanges and means of electronic data messages or electronic
storage of information through the documents [Sec 16 (1), RA 8792].
utilization of electronic, optical and similar
medium, mode, instrumentality and NOTE: No contract shall be denied validity or
technology to recognize the authenticity enforceability on the sole ground that it is in the

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form of an electronic data message or electronic (f) Granting, acquiring, renouncing,
document, or that any or all of the elements surrendering, transferring or negotiating
required under existing laws for the formation of rights in goods; and
contracts is expressed, demonstrated and proved by (g) Acquiring or transferring rights and
means of electronic data messages or electronic obligations under the contract (Sec. 25, RA
documents (Ibid.). 8792).

XPN: When the parties otherwise agree. NOTE: Where one or more data messages
are used to effect any action in
Electronic transactions made through subparagraphs (f) and (g), no paper
networking among banks document used to effect any such action is
valid unless the use of electronic data
Electronic transactions made through networking message or electronic document has been
among banks, or linkages thereof with other entities terminated and replaced by the use of
or networks, and vice versa, shall be deemed paper documents. The replacement shall
consummated upon the actual dispensing of cash or not affect the rights or obligations of the
the debit of one account and the corresponding parties involved [Sec. 26(5), RA 8792].
credit to another [Sec 16 (2), RA 8792].
Transport documents
NOTE: The obligation of one bank, entity, or person
similarly situated to another arising therefrom shall The use of one or more data messages or electronic
be considered absolute and shall not be subjected to documents meets the following requirements:
the process of preference of credits (Ibid.).
1. Where the law requires that any action
Choice of security methods referred to contract of carriage of goods be
carried out in writing or by using a paper
The parties to any electronic transaction shall be document [Sec. 26(1), RA 8792]; and
free to determine the type of level of electronic data
message and electronic document security needed, NOTE: The rule applies whether the
and to select and use or implement appropriate requirement is in the form of an obligation
technological methods that will suit their need (Sec. or whether the law simply provides
24, RA 8792). consequences for failing either to carry out
the action in writing or to use a paper
ELECTRONIC COMMERCE IN CARRIAGE OF document [Sec. 26(2), RA 8792].
GOODS
2. In the grant of a right to, or acquisition of an
Scope of application obligation by, one person, where the law
requires that, in order to effect this, the
This applies to any action in connection with, or in right or obligation must be conveyed to that
pursuance of, a contract of carriage of goods, person by the transfer, or use of, a paper
including but not limited to: document [Sec. 26(3), RA 8792].

(a) (i) Furnishing the marks, number, quantity NOTE: The standard of reliability required
or weight of goods; (ii) stating or declaring shall be assessed in the light of the purpose
the nature or value of goods; (iii) issuing a for which the right or obligation was
receipt for goods; (iv) confirming that conveyed and in the light of all the
goods have been loaded; circumstances, including any relevant
(b) (i) Notifying a person of terms and agreement [Sec. 26(4), RA 8792].
conditions of the contract; (ii) giving
instructions to a carrier; If a rule of laws is compulsorily applicable to a
(c) (i) Claiming delivery of goods; (ii) contract of carriage of goods which is in, or is
authorizing release of goods; (iii) giving evidenced by, a paper document, that rule shall not
notice of loss of, or damage to goods; be inapplicable to such a contract of carriage of
(d) Giving any other notice or statement in goods which is evidenced by one or more electronic
connection with the performance of the data messages or electronic documents [Sec. 26(6),
contract; RA 8792].
(e) Undertaking to deliver goods to a named
person or a person authorized to claim
delivery;

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REASON: The fact that the contract is evidenced by This refers to a provider of:
such electronic data messages or electronic
documents instead of a paper document. 1. On-line services or network access or the
operator of facilities therefor, including entities
ELECTRONIC TRANSACTIONS IN GOVERNMENT offering the transmission, routing, or providing of
connections for online communications, digital or
Government use of electronic data messages, otherwise, between or among points specified by a
electronic documents and electronic signatures user, of electronic documents of the user's choosing;
or
All departments, bureaus, offices and agencies of the 2. The necessary technical means by which
government, as well as all government-owned and - electronic documents of an originator may be stored
controlled corporations, that (1) require or accept and made accessible to designated or undesignated
the filling of documents, (2) require that documents third party [Sec. 5(j), RA 8792].
be created, or retained and/or submitted, (3) issue
permits, licenses or certificates of registration or Extent of liability
approval, or (4) provide for the method and manner
of payment or settlement of fees and other No person or party shall be subject to any civil or
obligations to the government, shall: criminal liability in respect of the electronic data
message or electronic document for which the
1. Accept the creation, filing or retention of person or party acting as a service providermerely
such documents in the form of electronic provides access if such liability is founded on:
data messages or electronic documents;
2. Issue permits, licenses, or approval in the 1. The obligations and liabilities of the parties under
form of electronic data messages or the electronic data message or electronic document;
electronic documents; or
3. Require and/or accept payments, and issue 2. The making, publication, dissemination or
receipts acknowledging such payments, distribution of such material or any statement made
through systems using electronic data in such material, including possible infringement of
messages or electronic documents; or any right subsisting in or in relation to such material
4. Transact the government business and/or (Sec. 30, RA 8792).
perform governmental functions using
electronic data messages or electronic REQUISITES:
documents, and for the purpose, are
authorized to adopt and promulgate the i. The service provider does not have
appropriate rules, regulations, or actual knowledge, or is not aware of
guidelines (Sec. 27, RA 8792). the facts or circumstances from which
it is apparent, that the making,
Authority of the Department of Trade and publication, dissemination or
Industry distribution of such material is
unlawful or infringes any rights
1. The DTI shall directly supervise the subsisting in or in relation to such
promotion and development of electronic material;
commerce in the country with relevant ii. The service provider does not
government agencies; and knowingly receive a financial benefit
2. The DTI is empowered to promulgate rules directly attributable to the unlawful or
and regulations, as well as provide quality infringing activity; and
standards or issue certifications, and iii. The service provider does not directly
perform such other functions as may be commit any infringement or other
necessary for the implementation of the Act unlawful act and does not induce or
in the area of electronic commerce to cause another person or party to
include the installation of an online public commit any infringement or other
information and quality and price unlawful act and/or does not benefit
monitoring system for goods and services financially from the infringing activity
aimed in protecting the interests of the or unlawful act or another person or
consuming public (Sec. 29, RA 8792). party (Ibid.).

EXTENT OF LIABILITY OF A SERVICE PROVIDER NOTE: The following matters shall not be affected:

Service provider 1. Any obligation founded on contract;

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2. The obligation of a service provider as such Piracy 1. Minimum fine of
under a licensing or other regulatory regime - unauthorized P100,000.00 and a
established under written law; copying, reproduction, maximum
3. Any obligation imposed under any written law; dissemination, or commensurate to
or distribution, the damage
4. The civil liability of any party to the extent that importation, use, incurred; and
such liability forms the basis for injunctive removal, alteration, 2. Mandatory
relief issued by a court under any law requiring substitution, imprisonment of 6
that the service provider take or refrain from modification, storage, months to 3 years.
actions necessary to remove, block or deny uploading, (Ibid.)
access to any material, or to preserve evidence downloading,
of a violation of law (Ibid.). communication,
making available to the
OBLIGATION OF CONFIDENTIALITY public, or broadcasting
of protected material,
Except for the purposes authorized under this Act, electronic signature or
any person who obtained access to any electronic copyrighted works
key, electronic data message or electronic including legally
document, book, register, correspondence, protected sound
information, or other material pursuant to any recordings or
powers conferred under this Act, shall not convey to phonograms or
or share the same with any other person (Sec. 32, RA information material
8792). on protected works,
through the use of
PROHIBITED ACTS AND PENALTIES telecommunication
networks, such as, but
PROHIBITED ACT PENALTIES not limited to, the
Hacking or crackling 1. Minimum fine of internet, in a manner
-unauthorized access P100,000.00 and a that infringes
into or interference in maximum intellectual property
a computer commensurate to rights. [Sec. 33(b), RA
system/server or the damage 8792]
information and incurred; and Violations of the Same penalties as
communication 2. Mandatory Consumer Act and provided in those laws.
system; imprisonment of 6 other relevant (Ibid.)
- any access in order to months to 3 years. pertinent laws
corrupt, alter, steal, or (Ibid.) through transaction
destroy using a covered by or using
computer or other electronic data
similar information messages or
and communication electronic documents
devices, without the [Sec. 33(c), RA 8792]
knowledge and Other violations of the 1. Maximum penalty
consent of the owner of provisions of this Act of P1,000,000; or
the computer or [Sec. 33(d), RA 8792] 2. 6 years
information and imprisonment.
communications (Ibid.)
system, including the
introduction of
computer viruses and DATA PRIVACY ACT
the like, resulting in the (R.A. NO. 10173)
corruption,
destruction, alteration,
theft or loss of Declaration of Policy
electronic data
messages or electronic It is the policy of the State to protect the
documents. [Sec. 33 (a), fundamental human right of privacy, of
RA 8792] communication while ensuring free flow of

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441 FACULTY OF CIVIL LAW
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information to promote innovation and growth. The
State recognizes the vital role of information and
communications technology in nation-building and
its inherent obligation to ensure that personal
information in information and communications
systems in the government and in the private sector
are secured and protected.

National Privacy Commission

This comprehensive privacy law also established a

National Privacy Commission that enforces and
oversees it and is endowed with rule-making power.
the agency tasked with administering and
implementing the provisions of the DPA. The NPC is
headed by a Privacy Commissioner, assisted by two
Deputy Commissioners. It is attached to the
Department of Information and Communications
Technology (‘DICT’), which itself was only created
in 2016 or about four years after the enactment of
the DPA; this created a kind of legal anachronism
since the DPA had provided that the NPC would be
attached to the then non-existent DICT

Constitutional Basis

The Right to Information and Communications

Privacy is recognized under Article III, Sec. 3(1) of
the Constitution, which states:
The privacy of communication and correspondence
shall be inviolable except upon lawful order of the
court, or when public safety or order requires
otherwise, as prescribed by law.
It also guarantees the freedom of expression and
speech under Article III, Sec. 4, which states:
No law shall be passed abridging the freedom of
speech, of expression, or of the press, or the right of
the people peaceably to assemble and petition the
government for redress of grievances.

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PERSONAL VS. SENSITIVE INFORMATION

PERSONAL INFORMATION SENSITIVE PERSONAL INFORMATION

Any information whether recorded in a material Any information:

form or not from which the identity of an
individual is apparent or can be reasonably and 1. About an individual’s race, ethnic origin,
directly ascertained by the entity holding the marital status, age, color, and religious,
information or when put together with other philosophical or political affiliations.
information would directly and certainly 2. About an individual’s health, education,
identify an individual. genetic or sexual life of a person, or to any
proceeding for any offense committed or
It must be: alleged to have been committed by such
person, the disposal of such proceedings, or
1) Collected for specified and legitimate the sentence of any court in such proceedings;
purposes determined and declared before, 3. Issued by government agencies peculiar to an
or as soon as reasonably practicable after individual which includes, but not limited to,
collection, and later processed in a way social security numbers, previous or current
compatible with such declared, specified health records, licenses or its denials,
and legitimate purposes only; suspension or revocation, and tax returns;
2) Processed fairly and lawfully; and
3) Accurate, relevant and, where necessary for 4. Specifically established by an executive order
purposes for which it is to be used the or an act of Congress to be kept classified.
processing of personal information, kept up
to date; inaccurate or incomplete data must GR: The processing of sensitive personal
be rectified, supplemented, destroyed or information and privileged information shall be
their further processing restricted; prohibited,
4) Adequate and not excessive in relation to
the purposes for which they are collected XPN:
and processed; (a) The data subject has given his or her consent,
5) Retained only for as long as necessary for specific to the purpose prior to the processing, or
the fulfillment of the purposes for which the in the case of privileged information, all parties to
data was obtained or for the establishment, the exchange have given their consent prior to
exercise or defense of legal claims, or for processing;
legitimate business purposes, or as (b) The processing of the same is provided for by
provided by law; and existing laws and regulations: Provided, That
6) Kept in a form which permits identification such regulatory enactments guarantee the
of data subjects for no longer than is protection of the sensitive personal information
necessary for the purposes for which the and the privileged information: Provided,
data were collected and further, That the consent of the data subjects are
processed: Provided, That personal not required by law or regulation permitting the
information collected for other purposes processing of the sensitive personal information
may lie processed for historical, statistical or the privileged information;
or scientific purposes, and in cases laid (c) The processing is necessary to protect the life
down in law may be stored for longer and health of the data subject or another person,
and the data subject is not legally or physically

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periods: Provided, further,That adequate safeguards able to express his or her consent prior to the
are guaranteed by said laws authorizing their processing;
processing. (SEC 11)
(d) The processing is necessary to achieve the
lawful and noncommercial objectives of public
organizations and their
associations: Provided, That such processing is
only confined and related to the bona
fide members of these organizations or their
associations: Provided, further, That the
sensitive personal information are not
transferred to third parties: Provided,
finally, That consent of the data subject was
obtained prior to processing;
(e) The processing is necessary for purposes of
medical treatment, is carried out by a medical
practitioner or a medical treatment institution,
and an adequate level of protection of personal
information is ensured; or
(f) The processing concerns such personal
information as is necessary for the protection of
lawful rights and interests of natural or legal
persons in court proceedings, or the
establishment, exercise or defense of legal
claims, or when provided to government or
public authority. (SEC 13)

Q: Juan Dela Cruz, a Filipino citizen, filled up a Is such health information a sensitive personal
survey form. Such survey form only asked about information?
his favorite coffee flavors and how much he
spends per week for coffee. The survey also A: No. health information such as medical diagnosis
asked for his first name. Is the survey collecting or prognosis by itself is not sensitive personal
personal information? information unless there is a Patient ID or name of
the patient together with the health information
A: No. First name by itself cannot reasonably that be used to trace back to an individual.
identify an individual. Juan cannot be identified BIR, SSS, GSIS, PhilHealth and other government
from other persons named “Juan”. Neither does records are also classified as Sensitive Personal
information about his favorite coffee flavors and Information.
how much he spends for coffee even if taken
together with his first name cannot be said to Note: Confidential information is specifically
reasonably identify Juan. provided by law under the Rules of Court (such as
doctor-patient or attorney-client privilege) or
Note: However, if the survey asked for his full name, statute (such as arbitration proceedings and awards
even if there are more than one (1) Juan Dela Cruz under the Domestic Arbitration Law). Generally, the
in the Philippines, it is still considered as collecting effect of confidentiality will result to the
personal information. information to being inadmissable in any court, in
any proceeding.
Q: Pedro Delos Santos, a Filipino took test for
HIV, knowing that it is free and no ID was Privileged information - refers to any and all
required of him, and out of fear, he filled up the forms of data which under the Rules of Court and
application form with incorrect information. He other pertinent laws constitute privileged
purports to be Juan De Vega who is 25 years old. communication.

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d. Personal information processed for
SCOPE journalistic, artistic, literary or research
purposes;
This Act applies to the processing of all types of e. Information necessary in order to carry out
personal information and to any natural and the functions of public authority which
juridical person involved in personal information includes the processing of personal data for
processing including those personal information the performance by the independent,
controllers and processors who, although not found central monetary authority and law
or established in the Philippines, use equipment enforcement and regulatory agencies of
that are located in the Philippines, or those who their constitutionally and statutorily
maintain an office, branch or agency in the mandated functions. Nothing in this Act
Philippines subject to the immediately succeeding shall be construed as to have amended or
paragraph: Provided, That the requirements of repealed Republic Act No. 1405, otherwise
Section 5 are complied with. known as the Secrecy of Bank Deposits Act;
Republic Act No. 6426, otherwise known as
Requisites: (ProNE-Act) the Foreign Currency Deposit Act; and
Republic Act No. 9510, otherwise known as
1) It must involve any processing of personal the Credit Information System Act (CISA);
information f. Information necessary for banks and other
2) By either natural or juridical persons financial institutions under the jurisdiction
3) Whether or not found in the Philippines that of the independent, central monetary
uses equipment or maintains an office, branch authority or Bangko Sentral ng Pilipinas to
or agency in the Philippines. comply with Republic Act No. 9510, and
4) Either acting as a controller or processor Republic Act No. 9160, as amended,
otherwise known as the Anti-Money
Laundering Act and other applicable laws;
This Act does not apply to the following: and
g. Personal information originally collected
a. Information about any individual who is or from residents of foreign jurisdictions in
was an officer or employee of a government accordance with the laws of those foreign
institution that relates to the position or jurisdictions, including any applicable data
functions of the individual, including: privacy laws, which is being processed in
(1) The fact that the individual is or the Philippines.
was an officer or employee of the
government institution; Protection Afforded to Journalists and Their
(2) The title, business address and Sources
office telephone number of the
individual; Nothing in this Act shall be construed as to have
(3) The classification, salary range and amended or repealed the provisions of Republic Act
responsibilities of the position No. 53, which affords the publishers, editors or duly
held by the individual; and accredited reporters of any newspaper, magazine or
(4) The name of the individual on a periodical of general circulation protection from
document prepared by the being compelled to reveal the source of any news
individual in the course of report or information appearing in said publication
employment with the government; which was related in any confidence to such
publisher, editor, or reporter. (SEC. 5)
b. Information about an individual who is or
was performing service under contract for Extraterritorial Application
a government institution that relates to the
services performed, including the terms of This Act applies to an act done or practice engaged
the contract, and the name of the individual in and outside of the Philippines by an entity if:
given in the course of the performance of
those services; 1. The act, practice or processing relates to
c. Information relating to any discretionary personal information about a Philippine citizen
benefit of a financial nature such as the or a resident;
granting of a license or permit given by the 2. The entity has a link with the Philippines, and
government to an individual, including the the entity is processing personal information in
name of the individual and the exact nature the Philippines or even if the processing is
of the benefit; outside the Philippines as long as it is about

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Philippine citizens or residents such as, but not further,That adequate safeguards are
limited to, the following: guaranteed by said laws authorizing their
a. A contract is entered in the Philippines; processing.
b. A juridical entity unincorporated in the
Philippines but has central management Note: The personal information controller must
and control in the country; and ensure implementation of personal information
c. An entity that has a branch, agency, office processing principles set out herein.
or subsidiary in the Philippines and the
parent or affiliate of the Philippine entity Principles of Transparency, Legitimate Purpose
has access to personal information; and and Proportionality

3. The entity has other links in the Philippines The processing of personal data shall be allowed
such as, but not limited to: subject to adherence to the principles of
a. The entity carries on business in the transparency, legitimate purpose, and
Philippines; and proportionality.
b. The personal information was collected or
held by an entity in the Philippines. (SEC. 6) a. Transparency. The data subject must be
aware of the nature, purpose, and extent of
PROCESSING OF PERSONAL INFORMATION the processing of his or her personal data,
including the risks and safeguards
General Data Privacy Principles involved, the identity of personal
information controller, his or her rights as
The processing of personal information shall be a data subject, and how these can be
allowed, subject to compliance with the exercised. Any information and
requirements of this Act and other laws allowing communication relating to the processing
disclosure of information to the public and of personal data should be easy to access
adherence to the principles of transparency, and understand, using clear and plain
legitimate purpose and proportionality. language.
Personal information must, be: b. Legitimate purpose. The processing of
information shall be compatible with a
1. Collected for specified and legitimate purposes declared and specified purpose which must
determined and declared before, or as soon as not be contrary to law, morals, or public
reasonably practicable after collection, and policy.
later processed in a way compatible with such c. Proportionality. The processing of
declared, specified and legitimate purposes information shall be adequate, relevant,
only; suitable, necessary, and not excessive in
2. Processed fairly and lawfully; relation to a declared and specified
3. Accurate, relevant and, where necessary for purpose. Personal data shall be processed
purposes for which it is to be used the only if the purpose of the processing could
processing of personal information, kept up to not reasonably be fulfilled by other means.
date; inaccurate or incomplete data must be (Sec 18 IRR of DPA)
rectified, supplemented, destroyed or their
further processing restricted; Criteria for Lawful Processing of Personal
4. Adequate and not excessive in relation to the Information
purposes for which they are collected and
processed; The processing of personal information shall be
5. Retained only for as long as necessary for the permitted only if not otherwise prohibited by law,
fulfillment of the purposes for which the data and when at least one of the following conditions
was obtained or for the establishment, exercise exists:
or defense of legal claims, or for legitimate
business purposes, or as provided by law; and 1) The data subject has given his or her consent;
6. Kept in a form which permits identification of 2) The processing of personal information is
data subjects for no longer than is necessary for necessary and is related to the fulfillment of a
the purposes for which the data were collected contract with the data subject or in order to
and processed: Provided, That personal take steps at the request of the data subject
information collected for other purposes may prior to entering into a contract;
lie processed for historical, statistical or 3) The processing is necessary for compliance
scientific purposes, and in cases laid down in with a legal obligation to which the personal
law may be stored for longer periods: Provided, information controller is subject;

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4) The processing is necessary to protect vitally and an adequate level of protection of personal
important interests of the data subject, information is ensured; or
including life and health; 6) The processing concerns such personal
5) The processing is necessary in order to respond information as is necessary for the protection of
to national emergency, to comply with the lawful rights and interests of natural or legal
requirements of public order and safety, or to persons in court proceedings, or the
fulfill functions of public authority which establishment, exercise or defense of legal
necessarily includes the processing of personal claims, or when provided to government or
data for the fulfillment of its mandate; or public authority. (SEC. 13.)
6) The processing is necessary for the purposes of
the legitimate interests pursued by the personal Subcontract of Personal Information
information controller or by a third party or
parties to whom the data is disclosed, except A personal information controller may subcontract
where such interests are overridden by the processing of personal
fundamental rights and freedoms of the data information: Provided, That the personal
subject which require protection under the information controller shall be responsible for
Philippine Constitution. (SEC. 12) ensuring that proper safeguards are in place to
ensure the confidentiality of the personal
Sensitive Personal Information and Privileged information processed, prevent its use for
Information unauthorized purposes, and generally, comply with
the requirements of this Act and other laws for
The processing of sensitive personal information processing of personal information. The personal
and privileged information shall be prohibited, information processor shall comply with all the
except in the following cases: requirements of this Act and other applicable laws.
(SEC. 14)
1) The data subject has given his or her consent,
specific to the purpose prior to the processing, Extension of Privileged Communication
or in the case of privileged information, all
parties to the exchange have given their consent Personal information controllers may invoke the
prior to processing; principle of privileged communication over
2) The processing of the same is provided for by privileged information that they lawfully control or
existing laws and regulations: Provided, That process. Subject to existing laws and regulations,
such regulatory enactments guarantee the any evidence gathered on privileged information is
protection of the sensitive personal information inadmissible. (SEC. 15)
and the privileged information: Provided,
further, That the consent of the data subjects Personal information controller
are not required by law or regulation
permitting the processing of the sensitive It refers to a person or organization who controls
personal information or the privileged the collection, holding, processing or use of personal
information; information, including a person or organization
3) The processing is necessary to protect the life who instructs another person or organization to
and health of the data subject or another collect, hold, process, use, transfer or disclose
person, and the data subject is not legally or personal information on his or her behalf. The term
physically able to express his or her consent excludes:
prior to the processing;
4) The processing is necessary to achieve the 1. A person or organization who performs such
lawful and noncommercial objectives of public functions as instructed by another person or
organizations and their organization; and
associations: Provided, That such processing is 2. An individual who collects, holds, processes or
only confined and related to the bona uses personal information in connection with
fide members of these organizations or their the individual’s personal, family or household
associations: Provided, further, That the affairs.
sensitive personal information are not
transferred to third parties: Provided, Personal information processor
finally, That consent of the data subject was
obtained prior to processing; It refers to any natural or juridical person qualified
5) The processing is necessary for purposes of to act as such under this Act to whom a personal
medical treatment, is carried out by a medical information controller may outsource the
practitioner or a medical treatment institution,

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processing of personal data pertaining to a data the collector and the data subject, or when
subject. the information is being collected and
processed as a result of legal obligation;
Processing
3) Access - Reasonable access to, upon demand,
It refers to any operation or any set of operations the following:
performed upon personal information including, a) Contents of his or her personal information
but not limited to, the collection, recording, that were processed;
organization, storage, updating or modification, b) Sources from which personal information
retrieval, consultation, use, consolidation, blocking, were obtained;
erasure or destruction of data. c) Names and addresses of recipients of the
personal information;
RIGHTS OF DATA SUBJECT d) Manner by which such data were
processed;
Rights of the Data Subject e) Reasons for the disclosure of the personal
information to recipients;
The data subject is entitled to: (AIREI) f) Information on automated processes
where the data will or likely to be made as
1) Information - Be informed whether personal the sole basis for any decision significantly
information pertaining to him or her shall be, affecting or will affect the data subject;
are being or have been processed; g) Date when his or her personal information
2) Be furnished the information indicated concerning the data subject were last
hereunder before the entry of his or her accessed and modified; and
personal information into the processing h) The designation, or name or identity and
system of the personal information controller, address of the personal information
or at the next practical opportunity: controller;
a) Description of the personal information to
be entered into the system; 4) Rectification - Dispute the inaccuracy or error
b) Purposes for which they are being or are to in the personal information and have the
be processed; personal information controller correct it
c) Scope and method of the personal immediately and accordingly, unless the
information processing; request is vexatious or otherwise unreasonable.
d) The recipients or classes of recipients to If the personal information have been
whom they are or may be disclosed; corrected, the personal information controller
e) Methods utilized for automated access, if shall ensure the accessibility of both the new
the same is allowed by the data subject, and and the retracted information and the
the extent to which such access is simultaneous receipt of the new and the
authorized; retracted information by recipients
f) The identity and contact details of the thereof: Provided, That the third parties who
personal information controller or its have previously received such processed
representative; personal information shall he informed of its
g) The period for which the information will inaccuracy and its rectification upon reasonable
be stored; and request of the data subject;
h) The existence of their rights, i.e., to access, 5) Erasure/Blocking/Objection - Suspend,
correction, as well as the right to lodge a withdraw or order the blocking, removal or
complaint before the Commission. destruction of his or her personal information
i) Any information supplied or declaration from the personal information controller’s
made to the data subject on these matters filing system upon discovery and substantial
shall not be amended without prior proof that the personal information are
notification of data subject: Provided, That incomplete, outdated, false, unlawfully
the notification under subsection (b) shall obtained, used for unauthorized purposes or
not apply should the personal information are no longer necessary for the purposes for
be needed pursuant to a subpoena or when which they were collected. In this case, the
the collection and processing are for personal information controller may notify
obvious purposes, including when it is third parties who have previously received
necessary for the performance of or in such processed personal information; and
relation to a contract or service or when 6) Indemnification - Be indemnified for any
necessary or desirable in the context of an damages sustained due to such inaccurate,
employer-employee relationship, between incomplete, outdated, false, unlawfully

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obtained or unauthorized use of personal with the data subject’s right to erasure. The law
information. (SEC. 16) does not describe how the data must be erased in
individual cases. The decisive element is that as a
Transmissibility of Rights of the Data Subject result it is no longer possible to discern personal
data without disproportionate effort. It is sufficient
The lawful heirs and assigns of the data subject may if the data media has been physically destroyed, or
invoke the rights of the data subject for, which he or if the data is permanently over-written using special
she is an heir or assignee at any time after the death software. The right to be forgotten is not
of the data subject or when the data subject is unreservedly guaranteed. It is limited especially
incapacitated or incapable of exercising the rights as when colliding with the right of freedom of
enumerated in the immediately preceding section. expression and information. Other exceptions are if
(SEC. 17) the processing of data which is subject to an erasure
request is necessary to comply with legal
Right to Data Portability obligations, for archiving purposes in the public
interest, scientific or historical research purposes or
The data subject shall have the right, where statistical purposes or for the defence of legal
personal information is processed by electronic claims. (Google Spain SL, Google Inc v Agencia
means and in a structured and commonly used Española de Protección de Datos, Mario Costeja
format, to obtain from the personal information González 2014)
controller a copy of data undergoing processing in
an electronic or structured format, which is Q: Nenita and Julienne were graduating high
commonly used and allows for further use by the school students at St. Theresa’s College (STC),
data subject. The Commission may specify the Cebu City. While changing into their swimsuits
electronic format referred to above, as well as the for a beach party they were about to attend, Julia
technical standards, modalities and procedures for and Julienne, along with several others, took
their transfer. (SEC. 18) digital pictures of themselves clad only in their
undergarments. These pictures were then
Non-Applicability uploaded by Angela on her Facebook profile.

The immediately preceding sections are not Back at the school, Escudero, a computer
applicable if the processed personal information are teacher at STC’s high school department,
used only for the needs of scientific and statistical learned from her students that some seniors at
research and, on the basis of such, no activities are STC posted pictures online, depicting
carried out and no decisions are taken regarding the themselves from the waist up, dressed only in
data subject: Provided, That the personal [Link] reported the matter and,
information shall be held under strict through one of her student’s Facebook page,
confidentiality and shall be used only for the showed the photos to Tigol, STC’s Discipline-in-
declared purpose. Likewise, the immediately Charge, for appropriate action. Were unlawful
preceding sections are not applicable to processing means used by STC in gathering information
of personal information gathered for the purpose of about the photo?
investigations in relation to any criminal,
administrative or tax liabilities of a data subject. A: NO. Even assuming that the photos in issue are
(SEC. 19) visible only to the sanctioned students’ Facebook
friends, respondent STC can hardly be taken to task
Right to be Forgotten for the perceived privacy invasion since it was the
minors’ Facebook friends who showed the pictures
Personal data must be erased immediately where to Tigol. Respondents were mere recipients of what
the data are no longer needed for their original were posted. They did not resort to any unlawful
processing purpose, or the data subject has means of gathering the information as it was
withdrawn his consent and there is no other legal voluntarily given to them by persons who had
ground for processing, the data subject has objected legitimate access to the said posts. Clearly, the fault,
and there are no overriding legitimate grounds for if any, lies with the friends of the minors. Curiously
the processing, or erasure is required to fulfil a enough, however, neither the minors nor their
statutory obligation under the EU law or the right of parents imputed any violation of privacy against the
the Member States. In addition, data must naturally students who showed the images to Escudero
be erased if the processing itself was against the law (Vivares v. St. Theresa’s College, G.R. No. 202666,
in the first place. The controller is therefore on the September 29, 2014).
one hand automatically subject to statutory erasure
obligations, and must, on the other hand, comply

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Q: Atty. X faces suspension from the practice of provided access to sensitive personal information
law for his ‘Facebook posts maligning and without being authorized under the Act or any existing
insulting’ the complainant, a famous beauty law.
doctor who counted local movie stars as clients.
His defense was that his Facebook page had Section 54. Improper Disposal of Personal Information
restricted access to ‘Friends Only.’ Is his and Sensitive Personal Information.
argument tenable?
a. A penalty of imprisonment ranging from six (6)
A: No. The Court did not accept the lawyer’s months to two (2) years and a fine of not less than One
argument that the statements were private since he hundred thousand pesos (Php100,000.00) but not
had restricted access to the page to ‘Friends Only,’ more than Five hundred thousand pesos
(Php500,000.00) shall be imposed on persons who
further observing that ‘even if the Court were to
knowingly or negligently dispose, discard, or abandon
accept the [lawyer’s] allegation that his posts were the personal information of an individual in an area
limited to or viewable by his ‘Friends’ only, there is accessible to the public or has otherwise placed the
no assurance that the same […] will be safeguarded personal information of an individual in its container
as within the confines of privacy.’ It noted the social for trash collection.
media platform’s goal of allowing ‘the world to be b. A penalty of imprisonment ranging from one (1) year
more open and connected […] in every conceivable to three (3) years and a fine of not less than One
way,’ the implied message being that a person who hundred thousand pesos (Php100,000.00) but not
shares information on social media shouldn’t be more than One million pesos (Php1,000,000.00) shall
surprised or angry if that information actually does be imposed on persons who knowingly or negligently
dispose, discard or abandon the sensitive personal
get shared. (Belo-Henares v. Guevarra, AC No. 11394,
information of an individual in an area accessible to the
dated 1 December 2016.) public or has otherwise placed the sensitive personal
information of an individual in its container for trash
Penalties collection.

Section 52. Unauthorized Processing of Personal

Section 55. Processing of Personal Information and
Information and Sensitive Personal Information.
Sensitive Personal Information for Unauthorized
Purposes.
a. A penalty of imprisonment ranging from one (1) year
to three (3) years and a fine of not less than Five
a. A penalty of imprisonment ranging from one (1) year
hundred thousand pesos (Php500,000.00) but not
and six (6) months to five (5) years and a fine of not
more than Two million pesos (Php2,000,000.00) shall
less than Five hundred thousand pesos
be imposed on persons who process personal
(Php500,000.00) but not more than One million pesos
information without the consent of the data subject, or
(Php1,000,000.00) shall be imposed on persons
without being authorized under the Act or any existing
processing personal information for purposes not
law.
authorized by the data subject, or otherwise
b. A penalty of imprisonment ranging from three (3) authorized under the Act or under existing laws.
years to six (6) years and a fine of not less than Five
b. A penalty of imprisonment ranging from two (2)
hundred thousand pesos (Php500,000.00) but not
years to seven (7) years and a fine of not less than Five
more than Four million pesos (Php4,000,000.00) shall
hundred thousand pesos (Php500,000.00) but not
be imposed on persons who process sensitive personal
more than Two million pesos (Php2,000,000.00) shall
information without the consent of the data subject, or
be imposed on persons processing sensitive personal
without being authorized under the Act or any existing
information for purposes not authorized by the data
law.
subject, or otherwise authorized under the Act or
under existing laws.
Section 53. Accessing Personal Information and
Sensitive Personal Information Due to Negligence.
Section 56. Unauthorized Access or Intentional Breach.

a. A penalty of imprisonment ranging from one (1) year

A penalty of imprisonment ranging from one (1) year
to three (3) years and a fine of not less than Five
to three (3) years and a fine of not less than Five
hundred thousand pesos (Php500,000.00) but not
hundred thousand pesos (Php500,000.00) but not
more than Two million pesos (Php2,000,000.00) shall
more than Two million pesos (Php2,000,000.00) shall
be imposed on persons who, due to negligence,
be imposed on persons who knowingly and unlawfully,
provided access to personal information without being
or violating data confidentiality and security data
authorized under the Act or any existing law.
systems, breaks in any way into any system where
b. A penalty of imprisonment ranging from three (3) personal and sensitive personal information are
years to six (6) years and a fine of not less than Five stored.
hundred thousand pesos (Php500,000.00) but not
more than Four million pesos (Php4,000,000.00) shall
be imposed on persons who, due to negligence,

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Section 57. Concealment of Security Breaches Involving responsible officers, as the case may be, who
Sensitive Personal Information. participated in, or by their gross negligence, allowed
the commission of the crime. Where applicable, the
A penalty of imprisonment ranging from one (1) year court may also suspend or revoke any of its rights
and six (6) months to five (5) years and a fine of not under this Act.
less than Five hundred thousand pesos If the offender is an alien, he or she shall, in addition to
(Php500,000.00) but not more than One million pesos the penalties herein prescribed, be deported without
(Php1,000,000.00) shall be imposed on persons who, further proceedings after serving the penalties
after having knowledge of a security breach and of the prescribed.
obligation to notify the Commission pursuant to If the offender is a public official or employee and he or
Section 20(f) of the Act, intentionally or by omission she is found guilty of acts penalized under Sections 54
conceals the fact of such security breach. and 55 of these Rules, he or she shall, in addition to the
penalties prescribed herein, suffer perpetual or
Section 58. Malicious Disclosure. temporary absolute disqualification from office, as the
case may be.

Any personal information controller or personal

information processor, or any of its officials, Section 62. Large-Scale.
employees or agents, who, with malice or in bad faith,
discloses unwarranted or false information relative to The maximum penalty in the corresponding scale of
any personal information or sensitive personal penalties provided for the preceding offenses shall be
information obtained by him or her, shall be subject to imposed when the personal data of at least one
imprisonment ranging from one (1) year and six (6) hundred (100) persons are harmed, affected, or
months to five (5) years and a fine of not less than Five involved, as the result of any of the above-mentioned
hundred thousand pesos (Php500,000.00) but not offenses.
more than One million pesos (Php1,000,000.00).
(Note: Penalties are not included in the 2019 Bar
Section 59. Unauthorized Disclosure. Syllabus)

a. Any personal information controller or personal

information processor, or any of its officials, PHILIPPINE COMPETITION ACT
employees, or agents, who discloses to a third party (R.A. NO. 10667)
personal information not covered by the immediately
preceding section without the consent of the data
subject, shall be subject to imprisonment ranging from
one (1) year to three (3) years and a fine of not less NOTE: This act is excluded from the coverage of the
than Five hundred thousand pesos (Php500,000.00) 2019 Bar Examinations.
but not more than One million pesos
(Php1,000,000.00). AREAS COVERED
b. Any personal information controller or personal
information processor, or any of its officials, 1. Creation of the Commission, its powers and
employees or agents, who discloses to a third party functions;
sensitive personal information not covered by the 2. Prohibited anti-competitive acts;
immediately preceding section without the consent of
3. Guide in disposition of cases;
the data subject, shall be subject to imprisonment
ranging from three (3) years to five (5) years and a fine 4. Fines and penalties;
of not less than Five hundred thousand pesos 5. Enforcement provisions; and
(Php500,000.00) but not more than Two million pesos 6. Miscellaneous provision.
(Php2,000,000.00).
PURPOSES AND LEGISLATIVE POLICIES
Section 60. Combination or Series of Acts.
Purpose
Any combination or series of acts as defined in Sections
52 to 59 shall make the person subject to The passage of the Act is Government’s recognition
imprisonment ranging from three (3) years to six (6) that:
years and a fine of not less than One million pesos
(Php1,000,000.00) but not more than Five million 1. The efficiency of market competition is a
pesos (Php5,000,000.00). mechanism for allocating goods and
services;
Section 61. Extent of Liability. 2. Past measures undertaken to liberalize key
sectors in the economy need to be
If the offender is a corporation, partnership or any reinforced by measures that safeguard
juridical person, the penalty shall be imposed upon the competitive conditions;

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3. The provision of equal opportunities to all of the Act, and its implementing rules and
promotes entrepreneurial spirit, regulations, (Sec. 12, RA 10667) and the sole and
encourages private investments, facilitates exclusive authority to initiate and conduct a fact-
technology development and transfer and finding or preliminary inquiry for the enforcement
enhances resource productivity; and of the Act (Sec. 31, RA 10667).
4. Unencumbered market competition serves
the interest of consumers by allowing them NOTE: The Act explicitly adopts the doctrine of
to exercise their right of choice over goods primary jurisdiction in recognition of the highly
and services offered in the market (Sec. 2, technical character of the contemplated cases,
RA 10667). requiring a specialized administrative agency to
have primary jurisdiction to dispose of them (Lim
NOTE: The Act is meant to make the Philippine and Recalde, 2016).
competition law in sync with similar legislation of
other countries, more importantly within the COMPOSITION AND QUALIFICATIONS
Association of South East Asian Nations (ASEAN)
region (Lim and Recalde, 2016). Composition of the Commission

Legislative policies The Commission is headed by a Chairperson and

four Commissioners (Sec. 6, RA 10667) who enjoy a
1. Enhance economic efficiency and promote seven-year security of tenure.
free and fair competition in trade, industry
and all commercial economic activities; The Chairperson and Commissioners, who shall
2. Prevent economic concentration which will have the rank equivalent of cabinet secretary and
control the production, distribution, trade undersecretary, respectively, shall be appointed by
or industry that will unduly stifle the President (Ibid.).
competition, lessen, manipulate or
constrict the discipline of free market; Qualifications
3. Penalize all forms of anti-competitive
agreements, abuse of dominant position 1. Citizens and residents of the Philippines;
and anti-competitive mergers and 2. Of good moral character;
acquisitions (Sec. 2, RA 10667). 3. Of recognized probity and independence
and must have distinguished themselves
PROSPECTIVE APPLICATION professionally in public, civic or academic
service in any of the following fields:
GR: The Act shall have no retroactive effect (Sec. 56,
RA 10667). a. Economics;
b. Law;
XPN: An existing business structure, conduct, c. Finance;
practice or any act that may be in violation of the Act d. Commerce; or
shall be subject to penalties only if it is not cured or e. Engineering;
is continuing upon the expiration of 2 years after the
effectivity of the act (Sec. 53, RA 10667). 4. Must have been in the active practice of
their professions for at least 10 years; and
NOTE: Criminal violations committed prior to the 5. Must not have been candidates for any
Act shall be penalized under Article 186 of the elective national or local office in the
Revised Penal Code (Sec. 55, RA 10667). immediately preceding elections, whether
regular or special (Sec. 6, RA 10667).
THE PHILIPPINE COMPETITION COMMISSION
NOTE: At least one (1) shall be a member of the
Nature or function of the Commission Philippine Bar with at least 10 years of experience
in the active practice of law, and at least one (1) shall
The Commission has been created as an be an economist (Ibid.).
independent quasi-judicial body to implement the
national competition policy and attain the Disqualifications
objectives and purposes of the Act (Sec. 5, RA
10667). 1. Shall not, during their tenure, hold any
other office or employment;
It has original and primary jurisdiction over the 2. Shall not, during their tenure, directly or
enforcement and implementation of the provisions indirectly practice any profession, except in

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a teaching capacity, participate in any 1. any person or entity engaged in any trade,
business, or be financially interested in any industry and commerce (TIC) in the
contract with, or any franchise, or special Philippines; and
privileges granted by the government;
3. Shall strictly avoid conflict of interest in the Entity- any person, natural or juridical, sole
conduct of their office; proprietorship, partnership, combination
4. Shall not be qualified to run for any office in or association in any form, whether
the election immediately succeeding their incorporated or not, domestic or foreign,
cessation from office; and including those owned or controlled by the
government, engaged directly or indirectly
NOTE: The election is not a Barangay in any economic activity [Sec. 4(h), RA
election or a Sangguniang Kabataan 10667].
election.
NOTE: Government’s public activity (jure
5. Shall not be allowed to personally appear imperii) is not covered by the Act (Lim and
or practice as counsel or agent on any Recalde, 2016).
matter pending before the Commission for
2 years following their cessation from office 2. international trade having direct,
(Sec. 8, RA 10667). substantial, and reasonably foreseeable
effects in TIC in the Philippines, including
NOTE: No spouse or relative by those that result from acts done outside the
consanguinity or affinity within the fourth Philippines (Sec. 3, RA 10667).
civil degree of any of the Commissioners,
the Chairperson and the Executive Director NOTE: The Act may apply to international
may appear as counsel nor agent on any trade having nexus to the Philippine market
matter pending before the Commission or (Lim and Recalde, 2016).
transact business directly or indirectly
therein: Who are excluded

a. During the incumbency of the Employees’ combinations, activities, agreements or

concerned Commissioner or arrangements when such are designed solely to
Executive Director; and facilitate collective bargaining in respect of
b. During the 2-year ban (Ibid.). conditons of employment.

COMPENSATION AND PROTECTION NOTE: The broad application of provisions on

agreements and abuse of dominance may restrict
Extent of protection provided by the Act the employees’ exercise of their right to collective
bargaining (Lim and Recalde, 2016).
GR: The Chairperson, the Commissioners, officers,
employees and agents of the Commission shall not NEXUS TO PHILIPPINE MARKET
be subject to any act done or omitted by them in the
performance of their duties and exercise of their The size of person and size of transaction tests
powers (Sec. 42, RA 10667). suggest when an international trade may have
nexus to Philippine trade. Specifically:
NOTE: They shall be indemnified for any and all
liabilities, losses, claims, demands, damages, 1. Where all the subject assets are in the
deficiencies, costs and expenses of whatsoever kind Philippines, the gross annual revenues or
and nature that may arise in connection with the value of assets in the Philippines;
exercise of their powers and performance of their 2. Where all the subject assets are outside the
duties and functions (Sec. 43, RA 10667). Philippines, the gross annual revenue of
such assets generated in or into the
XPN: Actions and omissions found to be in willful Philippines and the value of assets in the
violation of the Act, performed in evident bad faith Philippines of the acquiring entity; or
or gross negligence (Ibid.). 3. Where some of the subject assets are
inside and some outside the Philippines,
COVERED PERSONS AND ENTITIES the gross annual revenues generated in or
into the Philippines and any assets
Who are covered by the Act acquired outside the Philippines (Lim and
Recalde, 2016).

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SINGLE ECONOMIC ENTITY DOCTRINE f. There exists rights or contracts which
confer decisive influence on the decisions
An entity that controls, or is controlled by, or is of the entity (Sec. 25, RA 10667).
under common control with another entity or
entities, have common economic interests, and are ANTI-COMPETITIVE ACTS
not otherwise able to decide or act independently of
each other, shall not be considered competitors Constitutional prohibition
(Sec. 14, RA 10667).
The Constitution mandates the State to “regulate or
E.g. parent company and its subsidiary prohibit monopolies when the public interest so
requires. No combinations in restraint or trade or
NOTE: Entities belonging to a single economic unfair competition shall be allowed” (Constitution,
entity are considered as a single person, and not as Art. XII, Sec. 19).
different parties whose acts will otherwise normally
be covered by the Act. Implementation of the Constitutional mandate
to prohibit impermissible combinations
CONTROL through RA10667

Entities belonging to a single economic entity may The Act implements the mandate when it prohibits
be defined as entities under control of the ultimate “agreements” (under Section 14) and “conduct”
parent entity (Lim and Recalde, 2016). (under Section 15) with the “object” or “effect” of
substantially preventing, restricting or lessening
An ultimate parent entity exercises control when it competition (Lim and Recalde, 2016).
possesses the ability to substantially influence or
direct the actions or decisions of an entity, whether Concept of anti-competitive acts
by contract, agency or otherwise [Sec. 4(f), RA
10667]. In general, an act is “anti-competitive” when it
meets the object or effect test, i.e., it has the object
TEST: Whether the purported parent entity or effect of substantially preventing, restricting or
exercises decisive influence over the activities of its lessening competition in the relevant market (Ibid).
subsidiary or affiliate (Lim and Recalde, 2016).
Distinctive element of each anti-competitive act
Presumption of control
The various anti-competitive acts may be broadly
1. GR: When the parent owns directly or classified on the basis of their distinctive element,
indirectly, through subsidiaries, more than one- which differentiates one from the rest.
half (1/2) of the voting power of an entity;
1. There must be an agreement, in case of anti-
XPN: It can clearly be demonstrated that such competitive agreement;
ownership does not constitute control. 2. Abuse of dominant position, in case of anti-
competitive conduct;
2. Even when an entity owns one-half (1/2) or less 3. Concentration of economic undertakings of a
of the voting power of another entity when: more or less permanent effect, in case of anti-
competitive merger and acquisitions (M&As) (Ibid).
a. There is power over more than one-half
(1/2) of the voting rights by virtue of an Other key factors in resolving competition
agreement with investors; related disputes
b. There is power to direct or govern the
financial and operating policies of the 1. The relevant market- refers to the market in
entity under a statute or agreement; which a particular good or service is sold, and
c. There is power to appoint or remove the which is a combination of the relevant product
majority of the members of the board of market and the relevant geographic market,
directors or equivalent governing body; defined as follows:
d. There is power to cast the majority votes at
meetings of the board of directors or a. A relevant product market comprises all
equivalent governing body; those goods and/or services which are
e. There exists ownership over or the right to regarded as interchangeable or
use all or a significant part of the assets of substitutable by the consumer or the
the entity; or customer, by reason of the goods and/or

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services’ characteristics, their prices and Under Section 26, the Commission is mandated to
their intended use; and ascertain the economic context in which the entities
operate. For this purpose, it must perform the
b. The relevant geographic market following tests:
comprises the area in which the entity
concerned is involved in the supply and 1. Efficiency gains test - determine if there is
demand of goods and services, in which the actual or potential adverse impact on
conditions of competition are sufficiently competition in the relevant market caused by
homogenous and which can be the alleged agreement or conduct, and if such
distinguished from neighboring areas impact is substantial and outweighs the actual
because the conditions of competition are or potential efficiency gains that result from the
different in those areas [RA 10667, Sec. agreement or conduct.
4(k)]. 2. Broad and forward looking test - adopt a
broad and forward-looking perspective,
NOTE: Market refers to the group of goods or recognizing future market developments, any
services that are sufficiently interchangeable or overriding need to make the goods or services
substitutable and the object of competition, and available to consumers, the requirements of
the geographic area where said goods or large investments in infrastructure, the
services are offered [RA 10667, Sec. 4(i)]. requirements of law, and the need of our
economy to respond to international
2. The anti-competitive character of the act (i.e., competition, but also taking (into) account of
its potential or actual adverse impact on past behavior of the parties involved and
competition); and prevailing market conditions.
3. The entity’s justification. 3. Balancing of priority test - balance the need to
ensure that competition is not prevented or
MAIN SOURCES OF COMPETITIVE RESTRAINTS substantially restricted and the risk that
competition efficiency, productivity,
1. Time horizon factor, i.e., "the possibilities innovation, or development of priority areas or
of substituting the goods or services in industries in the general interest of the country
question, with others of domestic or foreign may be deterred by overzealous or undue
origin, considering the technological intervention.
possibilities extent to which substitutes are 4. Totality of circumstances test - assess the
available to consumers and time required totality of evidence on whether it is more likely
for such substitution." than not that the entity has engaged in anti-
2. Demand-side substitution factor, i.e., competitive agreement or conduct including
"the cost of distribution of the good or whether the entity's conduct was done with a
service, its raw materials, its supplements reasonable commercial purpose such as but not
and substitutes from other areas and limited to phasing out of a product or closure of
abroad, considering freight, insurance, a business, or as a reasonable commercial
import duties and non-tariff restrictions; response to the market entry or conduct of a
the restrictions imposed by economic competitor.
agents or by their associations; and the
time required to supply the market from COMPETITION ANALYSIS
those areas."
3. Supply-side substitution factor, i.e., “the In making the competition analysis, the following
cost and probability of users or consumers should be identified and analyzed to ascertain
seeking other markets.” whether the act is regarded as anti-competitive, and
4. Entry barriers factor, i.e., “national, local (if so) the possible remedies:
or international restriction which limit
access by users or consumers to alternate 1. The relevant market, which can be horizontal,
sources of supply or the access of suppliers or when there is vertical integration, upstream
to alternate consumers. Entry barriers may or downstream market;
be legal, economic, or behavioral”. (RA
10667, Sec. 24). NOTE:
Horizontal market- Refers to the market
OBJECT OR EFFECT TEST where the concerned entity primarily sells its
goods or services, e.g. in the soda drinks
Manner the test is performed market, the relevant market could be limited to

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the Metro Manila market or the entire Elements:
Philippine market for the soda products. i. There is an agreement;
ii. The parties are competitors or do not
Upstream market- From the perspective of the belong to a single economic entity;
entity, this is the relevant market from the and
supply side, e.g., the market for bottlers, iii. The subject of the agreement is either
canners and other container suppliers. to fix price or order terms of trade
or rig a competitive bidding.
Downstream market- From the perspective of
the entity, this is relevant market from the NOTE: Substantial foreclosure effect is not required,
distribution side, e.g., the market for and objective justification may not be raised as
distributors and retailers. defense. This penalizes competitors making
particular stipulations and is not subject to the
2. The entity's affiliates in each relevant market; object or effect test defense.
3. The activities of the entity in each relevant
market; (b) Non-per se cartel agreements–The following
4. The competition's level of concentration in each agreements, between or among competitors
relevant market; which have the object or effect of substantially
5. The entity's market shares in each relevant preventing, restricting or lessening competition
market and its ability to make unilateral action shall be prohibited:
to influence such market;
6. The actual or potential effect of the act in the (1) Limiting production - Setting, limiting, or
relevant market; controlling production, markets, technical
7. The entity's justification for the act; and development, or investment;
8. The entity's proposed remedies (Lim and (2) Market sharing - Dividing or sharing the
Recalde, 2016). market, whether by volume of sales or
purchases, territory, type of goods or
ANTI-COMPETITIVE AGREEMENTS services, buyers or sellers or any other
means;
GENERAL ELEMENTS
Elements:
Entities may be held liable under Section 14 of RA i. There is an agreement;
10667 when the following elements are present: ii. The parties are competitors or do not
belong to a single economic entity;
1. Parties are competitors, i.e., they do not belong iii. The subject of the agreement is either
to a single economic entity; to limit the production, or divide or
2. There must be an understanding between or share the market; and
among parties towards the accomplishment of iv. The object or effect of the agreement
a particular object; substantially prevents, restricts, or
3. The agreement must have substantial lessens competition.
foreclosure effect on the relevant market; and
4. There is no objective justification for such NOTE: This acts are subject to the object or effect
understanding. test and/or rule of reason defense.

TYPES OF ANTI-COMPETITIVE AGREEMENTS (c) Other agreements – Agreements other than

those specified in (a) and (b) of this section
(a) Per se cartel agreements - The following which have the object or effect of substantially
agreements, between or among competitors, preventing, restricting or lessening competition
are per se prohibited: shall also be prohibited.

(1) Price fixing - Restricting competition as to NOTE: Those which contribute to improving
price, or components thereof, or other the production or distribution of goods and
terms of trade; services or to promoting technical or economic
(2) Bid rigging - Fixing price at an auction or progress, while allowing consumers a fair share
in any form of bidding including cover of the resulting benefits, may not necessarily be
bidding, bid suppression, bid rotation and deemed a violation of this Act (RA 10667, Sec.
market allocation and other analogous 14).
practices of bid manipulation;

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FORM OF AGREEMENT prohibited acts (e.g., price-fixing and bid rigging)
(Lim and Recalde, 2016).
The law does not prescribe a particular form. It
broadly defines agreement as “any type or form of Legitimate topics for discussion during
contract, arrangement, understanding, collective members' meetings
recommendation, or concerted action, whether
formal or informal, explicit or tacit, written or oral” 1. Legislative initiatives at the local or national
(Sec. 4, par. b, RA 10667). levels and recent legal developments;
2. Technology in general, such as characteristics
ENTITIES DEEMED COMPETITORS and suitability of a particular technology (but
not a particular company's adoption of specific
Two or more entities are competitors when they: technology solutions)
3. Non-confidential technical issues relevant to
1. Offer “goods or services that are sufficiently the industry, such as health and safety
interchangeable or substitutable” in he standards initiatives (e.g., product concerns,
same geographic area (i.e., they operate in industry image);
the same relevant market); and 4. Advertising the merits of the industry as a
2. Belong to different economic entities. whole:
5. Common training programs;
Entities NOT deemed competitors 6. Market developments;
7. Industry public relations or collective lot
Two or more entities are not competitors when buying
“(an) entity that controls, is controlled by, or is 8. affecting the industry;
under common control with another entity or 9. Representation of the trade association as
entities, have common economic interests, and are participant or observer at other trade
not otherwise able to decide or act independently of association meetings and activities; and
each other” (Section 14, R.A. No. 10667). 10. Displays of the trade association at trade fairs
and shows (Ibid)
TRADE ASSOCIATIONS
Prohibited topics for discussion during
Non-prohibition on formation of trade members’ meetings
associations
Trade associations cannot be used as laundering
Nothing contained in this Act shall be construed to machines for acts or practices that violate the Act.
prohibit the existence and operation of trade For example, association members should not
associations organized to promote quality discuss, much less agree on, price fixing and
standards and safety issues: Provided, That, these submission, non-submission or rotation of bids as
associations shall not in any way be used to justify these are per se violations.
any violation of this Act: Provided, however, That it
shall not be illegal to use the association as a forum It would also be illegal for association members to
to discuss or promote quality standards, efficiency, agree or even discuss with their competitors,
safety, security, productivity, competitiveness and allocation of markets or customers between or
other matters of common interest involving the among them; adherence to certain production or
industry: Provided, further, That such is done output levels; and requirements to deal with certain
without any anti-competitive intent or effect suppliers or customers only. These are non-per se
(Section 48, RA No. 10667). violations, which may merit administrative and civil
penalties.
Thus, the mere exchange or sharing of information
to promote quality standards and safety issues, Non-binding policies or recommendations of an
especially when facilitated through trade association can restrict competition, even though
associations, shall not be considered an Agreement. such recommendation is non- binding (Ibid).

Treatment of trade associations Sensitive topics that may give rise to violations
of the Act
Trade or business associations are not exempted
from the coverage of the Act even as they are There are topics which, although do not directly
basically formed to advance the interest of its violate the Act when discussed, are nevertheless
members. Neither are they outlawed even as they risky topics from a competition law perspective,
may be used - wittingly or unwittingly - to commit such as the following:

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1. Pricing elements e.g., terms of sale, discounts, Factors in ascertaining existence of market
rebates, calculation methods); dominance
2. Pricing strategy;
3. Planned price changes; In determining whether an entity has market
4. Target sales revenue and sales volumes; dominant position for purposes of this Act, the
5. Marketing and distribution strategies; Commission shall consider the following:
6. Customer lists and sales to specific customers;
7. Purchases from specific suppliers, purchase (a) The share of the entity in the relevant market
volumes, etc.; and whether it is able to fix prices unilaterally
8. Cost structures and profit margins; or to restrict supply in the relevant market;
9. Production capacity, capacity utilization, (b) The existence of barriers to entry and the
output, or investments in production capacity; elements which could foreseeably alter both
or said barriers and the supply from competitors;
10. R&D plans and their results. (ibid) (c) The existence and power of its competitors;
(d) The possibility of access by its competitors or
INTERLOCKING DIRECTORSHIP other entities to its sources of inputs;
(e) The power of its customers to switch to other
This means that no person shall, at the same time, goods or services;
serve as a director or officer in any two corporations (f) Its recent conducts; and
that are competitors such that the elimination of (g) Other criteria established by the regulations of
competition by agreement between them would this Act (Section 27, RA No. 10667).
constitute a violation of the antitrust laws. Such is
not explicitly prohibited by the Act. It may not at all Presumption of Market Dominant Position
be intended to restrict or lessen competition.
Instead, employing overlapping directors may This rebuttable presumption arises when the
simply be the result of a desire to seek the most market share of an entity in the relevant market is
qualified and experienced outside directors for the at least fifty percent (50%), unless a new market
corporation (Lim and Recalde, 2016). share threshold is determined by the Commission
for that particular sector.
ANTI-COMPETITIVE CONDUCT
NOTE: The presumption shifts the burden of proof
Conduct - refers to any type or form of undertaking, on the entity, specifically on the issue whether the
collective recommendation, independent or entity has market dominance. It is rebuttable, and
concerted action or practice, whether formal or not meant to be a conclusive presumption.
informal [Sec. 4(c) RA 10667].
Thus, if the entity has market share of at least 50%,
Elements the burden of proof is on such entity. The
Commission is not required to establish the entity's
1. The entity must have market power; ability to independently take unilateral action. On
2. The entity commits abusive conduct; the other hand, if its market share is below 50%, the
3. The conduct must have substantial foreclosure burden of proof is on the Commission. Once the
effect on the relevant market; and concerned party is able to discharge its burden, the
4. There is no objective justification for the burden of evidence shifts to the other party to
conduct. disprove the evidence earlier presented.

DOMINANT POSITION Whether or not the entity actually has market

dominance depends on the evidence presented
Dominant position refers to a position of economic during the administrative proceedings, taking into
strength that an entity or entities hold which makes account the factors cited in Section 27 (Lim and
it capable of controlling the relevant market Recalde, 2016).
independently from any or a combination of the
following: competitors, customers, suppliers, or Power of the Commission to change the 50%
consumers (Section 4, RA No. 10667). threshold

Key element in dominant position The Commission shall from time to time determine
and publish the threshold for dominant position or
The key element is the ability to independently minimum level of share in the relevant market that
control or take unilateral action having foreclosure could give rise to a presumption of dominant
effect on, the relevant market. position. In such determination, the Commission

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would consider the structure of the relevant market, 3. Bundling or tying
degree of integration, access to end-users, 4. Discriminatory pricing
technology and financial resources, and other 5. Restrictive vertical agreements
factors affecting the control of a market (RA 10667, 6. Imposing unfair price
Sec. 27). 7. Limiting production, markets or technical
development
COLLECTIVE DOMINANCE
Innocent Monopolist may not be penalized
Dominant position attributed to several entities under Abuse of Dominant Position
demonstrating coordinated behavior towards the
accomplishment of a particular object. Should such A monopolist may not be penalized for imposing
entities collectively possess the ability to control the barriers to competition, imposing unfair price, and
relevant market, they have collective dominance. limiting production, markets or technical
The IRR has yet to clarify the breadth of this development if “the adverse effect of the barrier to
concept. entry or anti-competitive act is an indispensable
and natural result of the entity’s superior product or
If the Commission can establish the existence of process, business acumen or legal rights or laws.”
understanding between or among entities (whether
in horizontal, upstream or downstream market), Essential Facilities Doctrine
Section 14(c) shall apply. In the absence of such
understanding, the Commission must establish the It imposes upon a business or group of businesses
entities have coordinated behavior with foreclosure controlling a scarce facility an obligation to give
effect on competition. There must be a causal competitors reasonable access to it. This generally
connection between competitor contact and applies when an entity is unable to compete in the
conduct on the market. relevant market without access to a facility
controlled by another. The four (4) elements are as
Q: May members of trade associations be guilty follows:
of collective dominance?
1. Control of essential facility by a monopolist;
A: Section 48 explicitly recognizes the existence and 2. A competitor’s inability practically or
operation of trade associations. Their members may reasonably to duplicate essential facility;
not necessarily be construed to have violated the 3. Denial of use of facility to competitor; and
Act. The member entities may use their trade 4. Feasibility of providing facility to
associations as fora "to discuss or promote quality competitors (MRIS, Inc. vs. American Home
standards, efficiency, safety, security, productivity, Realty Network, Inc., June 10. 2013, 948 F.
competitiveness and other matters of common Supp. 2d, 538)
interest involving the industry," provided "such is
done without any anti-competitive intent or effect." PREDATORY PRICING

However, when members appear to be acting with It is the selling of goods or services below cost with
tacit coordination (facilitated by the exchange or the object of driving competition out of the relevant
sharing of information through their trade market.
associations), they may be considered to be acting
in concert and, if collectively they have the ability to IMPOSING BARRIERS TO COMPETITION
control the market, be considered to have collective
dominance. There must be a causal connection It is the imposing of barriers to entry or committing
between competitor contact and conduct on the acts that prevent competitors from growing within
market. The fact that they are members of trade the market in an anti-competitive manner except
associations is not a defense. Section 48 has those that develop in the market as a result of or
emphasized: "associations shall not in any way be arising from a superior product or process, business
used to justify any violation of (the) Act." acumen, or legal rights or laws.

COERCIVE MONOPOLY CONDUCT Elements of Imposing Barriers to Competition

The following are the potential abusive conduct The entity is guilty of this type of exclusionary
of coercive monopolists: conduct when:

1. Predatory pricing (i) It has a dominant position in the relevant

2. Imposing barriers to competition market;

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(ii) It imposes barriers to entry or committing acts For example, Firm 1 causes all its distributors to
that prevent competitors from growing within lease spaces with it. Leasing mall spaces with it may
the relevant market; have no connection with the distributorship of tea
(iii) Such conduct must have foreclosure effect on products.
competition; and
(iv) The barrier to entry is not an indispensable and There may be a vertical foreclosure (i.e., in the
natural result of the entity's superior product or distributorship service market) when small
process, business acumen or legal rights or distributors cannot cope with increased rental in
laws. Firm 1's malls (or malls in general) unlike if they
distribute through non-mall distribution channels.
Conversely, an innocent monopolist whose conduct
results in barrier to entry may not be held liable Bundling or tying where: "making supply of
under this. particular goods or services dependent upon the
purchase of other goods or services from the
BUNDLING OR TYING supplier which have no direct connection with
the main goods or services to be supplied.”
In general, there is "bundling" when two or more
products are offered to the customer with (v) The entity must have dominant position in the
inducements to take both, rather than take them relevant market;
separately. The inducement normally takes the (vi) There are at least two sets of products, i.e., the
form of a discount, which the customer will not get main product and the secondary product;
if he separately buys the products. (vii) Both products have no direct connection
with each other;
There is "tying" when two or more products are (viii) The supply of the main product to the
offered to the customer, who may not get one customer is made dependent purchase of the
product separately from the others. Effectively, the secondary product by such customer: and
sale of the second is used as a condition for the sale (ix) The conduct has foreclosure effect on
of the first product. Strictly, bundling is not tying competition.
since the former does not involve the same coercive
effect as the latter. However, both terms are at times DISCRIMINATORY PRICING
used interchangeably, and are penalized when they
have foreclosure effect. It refers to setting prices or other terms or
conditions that discriminate unreasonably between
Potential bundling or tying arrangements customers or sellers of the same goods or services,
where such customers or sellers are
1. "Making a transaction subject to acceptance by contemporaneously trading on similar terms and
the other parties of other obligations which, by conditions, where the effect may be to lessen
their nature or according to commercial usage, competition substantially: Provided, That the
have no connection with the transaction." following shall be considered permissible price
(Section 15, par. "c") and differentials:
2. "Making supply of particular goods or services
dependent upon the purchase of other goods or (1) Socialized pricing for the less fortunate sector
services from the supplier which have no direct of the economy;
connection with the main goods or services to (2) Price differential which reasonably or
be supplied." approximately reflect differences in the cost of
manufacture, sale, or delivery resulting from
Form of a tying arrangement, where the other differing methods, technical conditions, or
party is made to accept obligations that are quantities in which the goods or services are
unrelated to the transaction. sold or delivered to the buyers or sellers;
(3) Price differential or terms of sale offered in
(i) When the entity has a dominant position in the response to the competitive price of payments,
relevant market; services or changes in the facilities furnished by
(ii) It makes a tra suoject to acceptance of other a competitor; and
obligations having no connection with the (4) Price changes in response to changing market
transaction; conditions, marketability of goods or services,
(iii) The conduct has foreclosure effect; and or volume.
(iv) The entity has no objective justification for its
conduct (Tetra Pak v. European Commission). Instances when discriminatory pricing is
prohibited

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(i) The entity has dominant position in the or services may be sold or traded, such as fixing
relevant market; prices, giving preferential discounts or rebate upon
(ii) The entity discriminates between customers or such price, or imposing conditions not to deal with
sellers of the same products; competing entities, where the object or effect of the
(iii) The discrimination is in the form of difference restrictions is to prevent, restrict or lessen
in price, terms or conditions (i.e., price competition substantially.
differential), when such customers or sellers
contemporaneously trade on similar terms and Different forms of vertical agreements
conditions;
(iv) There is no justifiable reason for such Distribution and supply agreements may be in the
discrimination; form of agency, licensing, exclusive merchandising,
(v) The discrimination must have a reasonable exclusive distributorship, selective distributorship
possibility to substantially prevent, restrict or and franchising agreements.
lessen competition (i.e., there is a possible
competitive injury); and Permissible restrictive clauses or vertical
(vi) It does not fall under any of the block agreements
exemptions (i.e., permissible price
differentials). The Act provides the following block exemptions:

The law does not require the price differential must 1) "Permissible franchising, licensing, exclusive
in fact harm competition. It is sufficient its "effect merchandising or exclusive distributorship
may be to lessen competition substantially" agreements such as those which give each party
(Federal Trade Commission v. Morton Salt Co., 334 US the right to unilaterally terminate the
37 [1978]). agreement: or
2) Agreements protecting intellectual property
There are three (3) categories of competitive rights, confidential information, or trade
injury secrets."

(i) Injury to competition between the entity and its RESALE PRICE MAINTENANCE
competitors (primary-line injury);
A dominant entity may held liable if it engages in
(ii) Injury to competition between the favored "price fixing" resulting in vertical restraint. In
supplier or customer and the entity's particular: "restrictions on the lease or contract for
competitors (secondary-line injury); and sale or trade of goods or services concerning where,
to whom, or in what forms goods or services may be
(iii) Injury to competition among the entity's sold or traded, such as fixing prices, giving
suppliers or customers. preferential discounts or rebate upon such price, x x
x where the object or effect of the restrictions is to
In the last two (2) categories, "there (must) be a prevent, restrict or lessen competition
causal relation between the price discrimination to substantially" (Section 15, par. e, RA 10667).
the favored customers and the factor relied upon
evidencing an actual or reasonably probable Instances when there is impermissible RPM
substantial lessening of ability to compete on the
part of the unfavoured customer" (The American Oil (i) The entity has a dominant position in the
Company u. Federal Trade Commission, 325 F.2d 101, relevant market;
7th cir. 1963). (ii) In a lease or contract of sale, the entity imposes
restrictions concerning where, to whom, or in
RESTICTIVE VERTICAL AGREEMENTS what forms products may be sold or traded;
(iii) Such restrictions pertain to prices, giving
Restrictive vertical agreements refer to distribution preferential discounts or rebate upon such
and supply agreements providing prima facie price;
restrictive clauses, such as exclusive dealing or (iv) Such restrictions have anti-competitive effect;
minimum-quantity obligations, resale price (v) The case is not among the block exemptions
maintenance, formal or de facto restriction on (i.e., permissible arrangements);
parallel trade, and online sales bans. (vi) The entity has no objective justification for its
conduct.
It refers to imposing restrictions on the lease or
contract for sale or trade of goods or services An entity in a dominant position can protect its own
concerning where, to whom, or in what forms goods commercial interests when attacked and must be

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allowed the right to take reasonable steps as it (iii) Its counterparty must be considered a
deems appropriate to protect those interests. marginalized supplier; and
However, such actions cannot be allowed if the (iv) The conduct has foreclosure effect.
purpose is to strengthen that dominant position and
thereby abuse it (Clearstream Banking AG and LIMITING PRODUCTION
Clearstream International SA v. European
Commission, Case T-301/04 [2009]). (Niamh Dunne, Limiting production, markets or technical
Fitzwilliam College, Cambridge). development is impermissible when the same
results in prejudice to consumers, and is not "a
REFUSAL TO DEAL/EXCLUSIVITY AGREEMENT result of or due to a superior product or process,
business acumen or legal rights or laws" (Section 15,
A dominant entity may be held liable for refusal to par. i, RA 10667).
deal or impermissible exclusivity arrangement if it
imposes “restrictions on the lease or contract of sale Elements of limiting production
or trade of goods or services concerning where, to
whom, or in what forms goods or services may be (i) The entity must have a dominant position in the
sold or traded, such as imposing conditions not to relevant market;
deal with competing entities, where the object or (ii) It must limit production, markets or technical
effect of the restrictions is to prevent, restrict or development;
lessen competition substantially.” (iii) The conduct has foreclosure effect on
competition; and
Anti-competitive effect of refusal to deal or (iv) The limitation is not "a result of or due to a
exclusivity superior product or process, business acumen
or legal rights or laws."
Refusal to deal may have an anti-competitive
market when it forecloses the opportunity for other ANTI-COMPETITIVE MERGERS AND
competitors to operate in the market. In ACQUISITIONS
ascertaining whether the same has foreclosure
effect, the Commission must consider the following How the Act regulate M&A
factors:
The Act grants the Commission the authority to
1. The existence of equivalent transactions on the review M&A (Sec. 16, RA 10667).
relevant market; Parties have the burden to establish that their
2. Whether the refusal to deal has resulted in proposed transaction has no foreclosure effect, in
substantial damage to the refused party; and order to secure the Commission’s merger clearance.
3. Whether there are no objective justifications for
the refusal. GR: Once it is secured, the transaction cannot
anymore be challenged, as it enjoys the no-look back
IMPOSING UNFAIR PRICE protection under Section 23.

In general, a price is unfair when it is higher or XPN: The Commission is not precluded later on
lower than what could be objectively justified. from monitoring the act of the merged entity to
determine if the same is anti-competitive, either
For example, an entity may be held liable for under Section 14 or Section 15.
imposing unfair purchase price when it: "directly or
indirectly (imposes) unfairly low purchase prices NOTE: M&A control is preventive in nature.
for the goods or services of, among others,
marginalized agricultural producers, fisher folk, TWO CATEGORIES OF M&As
micro-, small-, medium-scale enterprises, and other
marginalized service providers and producers" 1. Those which meet the prescribed
(Section 15, par. g, RA 10667). notification thresholds- reviewed by the
Commission through compulsory
Elements of imposing unfair price notification regime (under Sec. 17); and
2. Those which do not meet the prescribed
(i) The entity must have a dominant position in the notification thresholds- reviewed by the
relevant market; Commission through the parties’ voluntary
(ii) It must directly or indirectly impose unfairly notification or the Commission’s motu
low purchase prices for the goods or services; proprio investigation.

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CONTEMPLATED M&As A: NO. The contemplated M&A covers transactions
between or among different entities, i.e., involving
Merger two or more ultimate parent entities.

The fusion of two (2) or more economic NOTIFICATION REGIMES

undertakings into a single undertaking.
Two major notification regimes
NOTE: It is not limited to statutory merger or
consolidation, as contemplated in the Corporation 1. Compulsory; and
Code. It may refer to an economic undertaking, 2. Voluntary.
regardless of whether the same is for profit or not
(Lim and Recalde, 2016). NOTE: Either regime may be further sub-divided
into mandatory and suspensory, or mandatory but
Acquisition not suspensory, regime.

Refers to an asset or securities purchase, so that: The Act adopts compulsory notification, which is
a. One economic undertaking will gain mandatory and suspensory in character.
control over the whole or part of another
economic undertaking; Consequence of non-compliance with
b. Two (2) or more economic undertakings notification requirement
will gain control over another economic
undertaking; or a. The parties may be liable to administrative
c. One or more economic undertakings will fine, ranging from 1% to 5% of the
gain control over one or more economic transaction value; and
undertakings. b. The transaction shall also be considered
void.
NOTE: These separate economic undertakings need
not be the same, or need not operate in the same The Commission pursuant to its authority under
market. Section 12(h) may “issue adjustment or divestiture
orders including orders for corporate
Q: Does the Act cover all asset acquisition? reorganization or divestment.”

A: NO. The transaction must have potential impact NOTE: Notwithstanding its void character, innocent
on competition in the relevant market. The term third parties may not be prejudiced with respect to
acquisitions should be broadly characterized as their completed transactions under the doctrine of
business acquisitions. operative facts.

Excluded transactions NOTIFICATION THRESHOLDS

a. In a share purchase, when the purpose is The Commission has authority to prescribe
“solely for investment and not used for notification thresholds contemplated in Section 17.
voting or exercising control and not to
otherwise bring about, or attempt to bring Prescribed thresholds for compulsory
about the prevention, restriction, or notification
lessening of completion in the relevant
market” (Sec. 21, RA 10667). The Commission has provided in Rule 4, Section 3
b. In an asset purchase, considering the the P1 billion transaction value threshold vis-à-
provisions of Section 21, when the asset is vis the following tests:
not used in business and/or not being
purchased for use in business that will 1. Size of person test; and
“bring about the prevention, restriction, or 2. Size of transaction test.
lessening of competition in the relevant
market.” REASON: To lessen the workload of the Commission
by not having the need to review every single M&A.
Q: Does M&A cover corporate restructuring The threshold is merely for notification purposes
within a single economic entity? and not for approval.

Size of person test

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The size of person test or size of acquiring or target control requires another round of
entity test requires at least one of the parties to the notification.
transaction must have gross annual revenues “in,
into or from” or assets in, the Philippines worth at For purposes of the enterprise value test, assets in
least P1 billion (Rule 4, Sec. 3(a)). the form of shares or intervening corporations (i.e.,
investment in subsidiaries or affiliates) are
Size of transaction test excluded to arrive at the value of consolidated
assets at the enterprise (or single economic entity)
There are different variations of the size of level.
transaction test depending on whether the
transaction is an acquisition, a merger or 3. Test in case joint ventures
consolidation, or a joint venture [Rule 4, Section 3,
pars. (b) to (e)]. In the formation of a joint venture (other than in
connection with a merger or consolidation), the
1. Size of transaction test for acquisitions contributing entities shall be deemed acquiring
entities, and the joint venture be deemed the
In case of acquisitions (i.e., de facto merger or acquired entity.” Thus, when individually the joint
consolidation), the main object of inquiry is the venture partners do not, but combined they, meet
place of subject assets: the P1billion tests, then the size of person test is met
[Rule 4, Sec 2 (c)].
(i) Where all the subject assets are in the
Philippines, the gross annual revenues 0n the other hand, Rule 4, Sec. 3 (d) provides: “in a
or value of assets in the Philippines notifiable joint venture transaction, an acquiring
must meet the P1 billion threshold; entity shall be subject to the notification
(ii) Where all the subject assets are outside requirements if either:
the Philippines, the gross annual (i) The aggregate value of the assets that
revenues of such assets and the value will be combined in the Philippines or
of assets in the Philippines of the contributed into the proposed joint
acquiring entity must meet the P1 venture exceeds One Billion Pesos
billion threshold; (Php1,000,000,000.00); or
(iii) Where some of the subject assets are (ii) The gross revenues generated in the
inside and some outside the Philippines by assets to be combined in
Philippines, the gross annual revenues the Philippines or contributed into the
“generated in or into the Philippines by proposed joint venture exceed One
assets acquired outside the Billion Pesos (Php1,000.000,000.00).”
Philippines” must collectively meet the
P1 billion threshold, and the value of How “value at the transaction” ascertained
assets in the Philippines of the
acquiring entity must similarly meet The P1 billion transaction value threshold considers
the P1 billion threshold. gross annual revenues and/or value of assets, and
are ascertained as follows:
2. Size of transaction test for statutory
mergers or consolidations 1. In case of gross annual revenues, from the
"last regularly prepared annual statement
The size of transaction test requires the hurdle of of income and expense" of the concerned
both the enterprise value test AND control test, entity;
specifically: 2. In case of value of assets, from the "last
regularly prepared balance sheet or the
(i) Under the enterprise value test, the most recent audited financial statements in
gross annual revenues “from sales in, which those assets are accounted tor" of
into or from the Philippines” or the the concerned entity.
value assets in the Philippines of the
subject enterprise must meet the Pl TIMING OF NOTIFICATION
billion threshold;
(ii) Under the control test, the acquiring Compulsory notification; when filed
entity must directly or indirectly gain At least thirty (30) days prior to “consummation” of
control or further control (i.e., 35% or the transaction (Sec. 17, RA 10667).
50% voting control, respectively) of
the subject enterprise. Gaining further

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Purpose: To give the Commission at least thirty or transactions under review "substantially
(30) days from receipt of notice and prescribed prevent, restrict or lessen competition in the
information to either issue a decision or, if relevant market or in the market or goods or
necessary, request additional relevant information. services" (Sec. 20, RA 10667).

NOTE: The issuance of such a request has the effect NOTE: A party may refuse to supply irrelevant
of extending the period within which the information (Lim and Recalde, 2016).
agreement may not be consummated for an
additional sixty (60) days, beginning on the day PREMATURE CONSUMMATION OF
after the request for information is received by the TRANSACTION
parties: Provided, That. in no case shall the total
period for review by the Commission of the subject Gun-jumping
agreement exceed ninety (90) days from initial
notification by the parties (Ibid.). It refers to the premature consummation of
transaction, which is penalized under Section 17
Voluntary notification; when filed (and/or Section 29). This may take the form of
premature integration, sharing of commercially
The Act does not explicitly set the period for filing sensitive information or improper exercise of
voluntary notification. control over the other entity.
Premature integration
GR: Parties may file voluntary notification at any There is premature integration when parties treat
time before or after the consummation of the the subject undertakings to have merged or
transaction, combined, even without merger clearance or lapse
of the applicable waiting period This may take the
XPN: They may no longer file such notification if a form of any of the following:
third party has filed a complaint or the Commission
has commenced a fact finding or preliminary 1. Taking possession of the other‘s assets.
inquiry. such as inventory, machinery, equipment,
customer and supplier lists;
When transaction deemed consummated 2. Operating such assets. including its
manufacturing facilities;
GR: A transaction is considered consummated when 3. Holding themselves out to the public as one
all parties have discharged their respective entity or giving the appearance of having
obligations. combined their operations;

XPN: In case of M&As, where "closing" is treated as a. Answering the target company's
the consummation. It is at closing where the parties telephones using the name of the
make the exchange, where one party delivers the merged entity; or
subject of the transaction and the other the b. Allowing the target’s employees to
consideration, which may be in cash and/or use e-mail addresses and hand out
promise to pay a definite amount in the future. The business cards of the merged
full payment of the price by one party may not be entity.
dependent on the delivery by the other party of the
subject matter of the transaction. 4. Relocating or integrating physical
operations;
REQUIRED INFORMATION 5. Posting employees at the other party's
offices;
1. Nature of the subject transaction; 6. Allowing representatives of one party to
2. Relevant product market; negotiate contracts or settle legal disputes
3. Relevant geographic market; on behalf of the other;
4. Parties‘ affiliates, their relationship, their 7. Appointing individuals of one party to
respective businesses, market share, manage or operate divisions of the other; or
significant competitors, customers, 8. Providing one party with access to the
suppliers, or consumers in the relevant other party’s computer systems.
market, their objectives; and
5. Significant terms of the transaction, Premature sharing of commercially sensitive
information
In general, the Commission needs information that
will assist in determining whether the transaction

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When the parties, before merger clearance or lapse regulator shall be consulted and afforded
of the applicable waiting period, share sensitive reasonable opportunity to submit its own opinion
information that is not essential in the negotiation and recommendation on the matter before the
and closing of the transaction. Commission makes a decision on any case.”

This may refer to any of the following: Thus, “a favorable recommendation by a

governmental agency with a competition mandate
1. Pricing, pricing plans, or discounts; shall give rise to a disputable presumption that the
2. Customers’ confidential information; proposed merger or acquisition is not violative of
3. Costs; (the) Act" (Sec. 17, RA 10667).
4. Products offered or in development; Such favorable recommendation does not dispense
5. Marketing or strategic plans; or with the Commission’s mandate to review the
6. Methods or formula used to determine transaction.
costs or prices.
NOTE: The Senate identified the EEG and the NTC as
Premature exercise of control the other agencies with a competition mandate. The
Commission is free to have a MOA with any agency
There is premature exercise of control when the and, for matters of efficiency, ask for a ruling or
acquiring entity, before merger clearance or lapse of comment on a matter within that agency’s expertise.
the applicable waiting period starts to exercise That said, primary jurisdiction over competition
control over the target 'undertaking, including the will rest solely with the Commission (September 2,
approval of the following: 2014 Senate Interpellations).

1. Ordinary course of business contracts; REMEDIES

2. Customer proposals;
3. Prices, discounts, quotations, or terms of Legally enforceable agreements
contracts;
4. Licensing strategies; or The contemplated agreement must, at a minimum,
5. Hiring or personnel decisions. stipulate on:

COMMISSION‘S DECISION ON NOTIFICATION 1. The identified behavioral or structural

remedies and their implementation;
The Commission may clear the transaction when it 2. The monitoring scheme; and
has no substantial impact on competition in the 3. The remedies of the Commission in case of
relevant market. It may also exempt the transaction. breach.
in accordance with Section 21. Otherwise, the
Commission may order any of the following: Q: How may the Commission monitor parties’
compliance with the agreement?
a) Prohibit the implementation of the
agreement; A: The agreement may stipulate on submission of
b) Prohibit the implementation of the periodic reports, detailing the extent of parties’
agreement unless and until it is modified by compliance. Further, the Commission may exercise
changes specified by the Commission; or its power to monitor compliance by the person or
c) Prohibit the implementation of the entities concerned with the consent judgment.
agreement unless and until the pertinent
party or parties enter into legally Commission’s remedies in case of parties' non-
enforceable agreements specified by the compliance
Commission (Sec. 18, RA 10667).
The Commission may exercise any of the remedies
Effect of a favorable recommendation by a stipulated in the agreement. As a rule, the terms of
government agency with competition mandate the agreement primarily govern the relationship
on the Commission’s merger control between or among the parties. Such terms may
proceedings provide the right of the Commission to implement
adjustment or divestment.
Under Section 32, the Commission has original and
primary jurisdiction in the enforcement and The violation of the agreement (e.g., violation of
regulation of all competition-related issues, “even if behavioral remedy) can take the form of an abuse of
the issue involves both competition and dominant position, which can be motu proprio
noncompetition issues, but the concerned sector investigated and acted upon by the Commission

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pursuant to Section 31. In this case, there is a (Spouses Pacquiao v. CTA, G.R. No. 213394, April 6,
violation prior to the Commission’s proceedings 2016).
that may be the subject of the Commission's
adjustment or divestiture order pursuant to Section A false information is one which “deviates from
12 (h). truth" (Aznar v. CTA, GR, No. L-20569, August 23,
1974). However, it must be"material," to make the
PROHIBITED M&As notification fall outside the scope of the no look back
protection.
M&As that substantially prevent, restrict or lessen
competition in the relevant market or in the market False information is “material” when the
for goods or services as may be determined by the Commission could have decided differently had the
Commission (are) prohibited (Sec. 20, RA 10667). notifying party not provided such information,

Block M&A exemptions? NOTE: According, to Sen. Aquino, this provision is

called the “touch move provision,” otherwise known
The Commission is authorized to permit an as the Gutierrez amendment. “If the Commission
otherwise prohibited M&As when parties, decides already on a case, they cannot overturn
presumably with the information supplied during themselves. This is for the protection of the business
Phase 2 Review or during the negotiations for sector that would be harassed if the merger had
legally enforceable agreements, establish either a already gone through" (June 4, 2015 Bicameral
rule of reason and/or white knight justification, Conference Committee).
specifically:
FINES AND PENALTIES
a) The concentration has brought about or is
likely to bring about gains in efficiencies HIT-WHERE-IT-HURTS
that are greater than the effects of any
limitation on competition that result or The Act follows the hit-where-it-hurts principle by
likely to result from the merger or prescribing heavy administrative fines on violators
acquisition agreement; or (Lim and Recalde, 2016).
b) A party to the merger or acquisition
agreement is faced with actual or imminent In general, the Act treats as an offense the
financial failure, and the agreement commission of any of the anti-competitive acts,
represents the least anti-competitive including the parties’ consummation of M&As
arrangement among the known alternative covered by compulsory notification without prior
uses for the failing entity’s assets (Sec. 21, clearance from the Commission or its inaction. The
RA 10667). commission of any such offense merits
corresponding fines and penalties, including
The burden of proof lies with the parties seeking the criminal penalties for certain violations (Ibid.).
exemption. A party seeking to rely on the exemption
must demonstrate that if the agreement were not ADMINISTRATIVE FINES
implemented, significant efficiency gains would not
be realized (Sec. 22, RA 10667). Section 29 provides administrative fines for
violations of Sections 14, 15 and 20. The fine shall
NO LOOK BACK PROTECTION be based on a schedule, with due regard to the
gravity and duration of the violation. Further, the
Effect of a favorable ruling from the Commission range depends on whether the fine is imposed on
first offense (i.e., from a base amount up to P100
GR: Merger or acquisition agreements that have million), or on second offense (i.e., not less than
received a favorable ruling from the Commission, P100 million, but not more than P250 million). The
may not be challenged under the Act (Sec. 23, RA second offense (which merits a higher fine, with
10667). higher thresholds) presumably involves the same,
and not of different, character of the first offense.
XPN: Such ruling was obtained on the basis of fraud The fines will be increased every five years to
or false material information. maintain their real value.

The fraud contemplated by law must be actual, and Factors in imposing the fine
not constructive. It must be intentional, consisting
of deception willfully and deliberately done 1. Gravity; and
2. Duration of the violation (Sec. 29, RA 10667)

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CRIMINAL PENALTIES 1. Administrative penalty for failure or refusal to
comply with Commission’s decisions, orders or
Anti-competitive acts rulings;

Under Section 30, criminal penalties are limited to: NOTE: The penalty ranges from P50,000 up to
P2 million for each violation. The Commission
1. Per se cartel violations; and may impose a similar penalty or each day of
2. Cartel violations without rule of reason delay in complying with any of such decisions,
justifications. orders or rulings, subject to a 45-day grace
period.
The violation is penalized by imprisonment from
two (2) to seven (7) years, and a fine of not less than 2. Administrative fine for supplying “intentionally
fifty million pesos (P50,000,000.00) but not more or negligently” incorrect or misleading
than two hundred fifty million pesos information in relation to “an application for a
(P250,000,000.00). binding ruling, a proposal for a consent
judgment, proceedings relating to a show cause
NOTE: These are in addition to administrative fines, order, or application for modification of the
as described earlier. Commission’s ruling, order or approval, as the
case may be;
Q: Are criminal penalties subject to adjustment?
A: NO. While administrative fines are reviewed and NOTE: The amount of fine is likewise schedular,
adjusted every five (5) years, criminal penalties ranging from a base amount up to P1 million.
under Section 30 are not explicitly made subject to
adjustment. 3. Administrative fine for other violations,
including violations of the IRR, ranging from
Who is liable for imprisonment P50,000 up to P2 million. Section 12(e)
specifically authorizes the Commission to
Imprisonment is imposed upon the responsible impose sanctions, fines or penalties on such
“officers, directors, or employees holding violations.
managerial positions, found to be “knowingly and
willfully responsible for such violation.” The POSSIBLE DEFENSES
elements of knowledge and willfulness are
important, and the prosecution must specifically Possible defense against the charge of “failure to
prove them by proof beyond reasonable doubt to comply with an order of the Commission”
secure conviction.
If the concerned entity fails to comply with a ruling,
NOTE: The above is consistent with Section 31 of order or decision of the Commission within forty
the Corporation Code (Liability of directors, five (45) days from its service, a daily fine of up to
trustees or officers) imposing a liability on directors P2 million will be imposed. The contemplated order
of trustees who willfully and knowingly vote for or assumes the Commission has validly and lawfully
assent to patently unlawful acts of the corporation issued such order. If it were otherwise, the entity
or who are guilty of gross negligence or bad faith in may not be held liable.
directing the affairs of the corporation. Such
directors or trustees shall be liable jointly and Possible defense against the charge of
severally for all damages resulting therefrom “supplying of incorrect or misleading
suffered by the corporation, its stockholders or information”
members and other persons.
The contemplated information in Section 29(c)
OTHER FINES AND PENALTIES assumes the same to be relevant and material to
the issue in question, i.e., were it not for such
The Act penalizes certain acts having adverse effect incorrect or misleading information, the
on the Commission’s proceedings. It also penalizes Commission would have decided differently. Thus,
violation of any of the provisions of the Act (in the supply of irrelevant or immaterial information,
general), the IRR and the Commission’s decisions, albeit erroneous or misleading, will not make the
orders or rulings. Thus, Section 29 provides the entity liable for administrative fine under this
following administrative penalties: subparagraph.

Possible defense against the charge of “violating

the provision of the IRR”

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The contemplated violation of the IRR in Section A: NO. All fees. fines, penalties collected by the
12(e) in relation to Section 29(d) assumes the Commission shall not be retained by the
purported violated provision is valid and issued Commission, but will be remitted to the National
in accordance with the Commission’s quasi- Treasury and shall accrue to the general funds.
legislative authority. Thus, an entity may not be However, the funds necessary for the continuous
held liable if the violated IRR provision has no and effective operation of the Commission shall be
relation to the proper implementation of the Act, or included in the annual General Appropriations Act
is irrelevant or immaterial to the issue in question. (Sec. 51, RA 10667).
For an administrative regulation to have the force of
penal law: LENIENCY PROGRAM

1) The provision claimed to be violated must The Commission shall develop a Leniency Program
be sanctioned by the law that it seeks to to be granted to any entity in the form of immunity
implement (i.e., relevant and material to its from suit or reduction of any fine which would
proper implementation); otherwise be imposed on a participant in an anti-
2) The violation of the administrative competitive agreement as provided in Section 14(a)
regulation must be made a crime by the and 14(b) of this Act in exchange for the voluntary
delegating statute itself; and disclosure of information regarding such an
3) The penalty for such violation must be agreement which satisfies specific criteria prior to
prov1ded by the statute itself (Hon. Perez U. or during the fact-finding or preliminary inquiry
LPG Refillers Association, GR. No. 159149, stage of the case (RA 10667, Sec. 35).
June 26, 2006; People v. Maceren, GR. No. L-
32166, October 18, 1977). Conditions for the grant of immunity from suit

Possible defense against the charge of “violation a. At the time the entity comes forward, the
of confidentiality of information” Commission has not received information
about the activity from any other source;
A person may not be held liable for violation of b. Upon the entity’s discovery of illegal activity, it
confidentiality clause under Section 34, if the took prompt and effective action to terminate
information purportedly to be protected by the its participation therein;
confidentiality rule c. The entity reports the wrongdoing with candor
and completeness and provides full, continuing,
1. Has not been properly established as and complete cooperation throughout the
confidential business information; investigation; and
2. Has been the subject of a waiver; or d. The entity did not coerce another party to
3. Is “mandatorily required to be disclosed by law participate in the activity and clearly was not
or by a valid order of a court of competent the leader in, or the originator of, the activity
jurisdiction or of a government or regulatory (Ibid).
agency, including an exchange.
Availability of immunity if the Commission has
TRIPLE PENALTY RULE already commenced its investigation

Treble damage concept where a violator of the law Even after the Commission has received
is liable to a private party for triple the amount of information about the illegal activity after a fact-
damages that he suffers as a result of the violation. finding or preliminary inquiry has commenced, the
The Act adopts the triple penalty rule with respect reporting entity will be granted leniency, provided
to the applicable administrative and/or criminal preceding conditions (b) and (c) and the following
fine, if the violation involves the trade or movement additional requirements are complied with:
of basic necessities and prime commodities as
defined by Republic Act No. 7581, as amended (Sec. 1. The entity is the first to come forward and qualify
41, RA 10667). for leniency;
2. At the time the entity comes forward, the
NOTE: The triple penalty clause does not apply to Commission does not have evidence against the
the penalty of imprisonment. entity that is likely to result in a sustainable
conviction; and
Q: Will the Commission retain the fines and 3. The Commission determines that granting
penalties? leniency would not be unfair to others (Ibid).

Scope of the immunity

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The program shall include the immunity from any 3. Forbear the implementation of the Act; (Sec. 28,
suit or charge of affected parties and third parties, RA 10667)
exemption, waiver, or gradation of fines and/or 4. Increase the schedule of fines every five years
penalties giving precedence to the entity submitting (Sec. 29, RA 10667);
such evidence. An entity cooperating or furnishing 5. Investigate and enforce its orders and
information, document or data to the Commission in resolutions (Sec. 33, RA 10667);
connection to an investigation being conducted 6. Develop a leniency (or whistle-blowing)
shall not be subjected to any form of reprisal or program (Sec. 35, RA 10667);
discrimination. Such reprisal or discrimination shall 7. Grant non-adversarial remedies, such as
be considered a violation of this Act subject to the issuance of binding ruling, show cause order
sanctions provided in the Act (Ibid). and consent order (Sec. 37, RA 10667);
8. Cite contumacious persons in contempt (Sec.
Sanction on person giving false or misleading 38, RA 10667);
information 9. Issue a writ of execution (Sec. 40, RA 10667);
and
An entity found to have reported false, misleading 10. Issue implementing rules and regulations (Sec.
or malicious information, data, or document may be 50, RA 10667).
penalized by a fine not less than the penalty
imposed in the section reported to have been DAWN RAIDS
violated by the entity complained of (Ibid).
“Dawn raids” refer to the authority’s surprise visits
ENFORCEMENT AND OTHER PROVISIONS and inspection of office premises, records and files
in order to enforce competition law.
Extent of authority of the commission
NOTE: The Act explicitly vests on the Commission
The Commission shall have: the authority to issue subpoena and conduct dawn
raids.
1. Power to inquire, investigate, hear and
decide on cases involving violations of any The Commission may deputize any and all
existing competition laws, including the enforcement agencies of the government or enlist
Act; the aid and support of any private institution,
corporation, entity or association, to carry out the
a. Upon complaint of any interested raid [Section 12 (i), RA 10667].
party;
b. Upon referral of another Dawn Raid vs. Search and Seizure
regulatory agency; or
c. On its own Particulars Search and Dawn raid
seizure
2. Power to institute civil and criminal Basis Constitution, Act, Sec. 12 (g)
charges; and Article III, Sec.
3. Power to issue injunctions, requirement of 2
divestment, and disgorgement of excess Pre-requisite Probable Reasonable
profits against violators, after due hearing. for issuance cause that a suspicion the
crime has books and
NOTE: It has no price-setting or regulation function been records
(Lim and Recalde, 2016). committed relevant to
Commission’s
Powers of the Commission relative to investigation
enforcement of the Act will be
removed,
In addition to its authority to conduct merger concealed,
control proceedings, the Commission has authority tampered
to: with, or
destroyed
1. Conduct a fact finding or preliminary inquiry Scope Search and Inspection
(Sec. 3, RA 10667); seizure
2. Conduct an administrative investigation (Sec.
31, RA 10667); The Constitution cannot be the basis for the
court’s dawn raid order; reason

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The Constitution (Article III, Sec. 2) does not Search Inspection
squarely apply to juridical persons. It distinctly uses “An examination of a “to examine;
the term “people” in Section 2, unlike “person” in man’s house or other scrutinize;
Section 1 (on due process and equal protection buildings investigate; look into;
clause). or premises, or of his check; or View for the
person, or of his purpose of
The Supreme Court has ruled in Valmonte v. vehicle, aircraft, ascertaining
Belmonte, Jr. (GR. No. 74930, February 13, 1989) that etc. with a view to the the quality,
juridical persons do not have the right to privacy discovery of authenticity, or
since the entire basis of the right to privacy is an contraband or illicit or conditions of an item,
injury to the feelings and sensibilities of the party stolen property, or product, document,
and a corporation would have no such ground for some evidence of guilt residence, business,
relief. to be used in the etc.”
prosecution of a
While the Supreme Court implicitly recognized in criminal action for
Stonehill v. Diokno (GR. No. L-19550, June 19, 1967) some crime or offense
the right of corporations against unreasonable with which he is
searches and seizures, its discussion was a mere charged. A prying into
obiter dictum. It cannot be used as authoritative hidden places
basis to confer to corporations such constitutional for that which is
right. The US case of Hale v. Henkel (201 US. 43, concealed and it is
1906) cited in some cases did not state that not a search to
corporations have the inherent right against observe that is open
unreasonable searches and seizures. It merely to view. Probing or
recognized that individuals do not waive such exploration for
constitutional rights just because they decided to something that is
form a collective body. concealed or hidden
from searcher; an
Thus, the Act had to explicitly require a court’s invasion, a quest with
order before the Commission can conduct a dawn some sort of
raid in order to protect the concerned entity. force, either actual or
constructive”
Probable Cause vs. Reasonable Suspicion (Emphasis supplied)

Probable Cause Reasonable (Black’s Law

Suspicion Dictionary, abridged
Such facts and Presupposes the fifth ed., p. 701)
circumstances which existence There is some element There is some element
would lead a of facts or information of force in search of voluntariness
reasonably discreet which would satisfy an
and prudent man to objective observer On-site interviews
believe that an that the person
offense has been concerned may have The Act does NOT explicitly sanction the conduct of
committed and that the committed an offense. on-site interviews of the entity’s officers and
objects sought in employees. Similarly, on-site interviews cannot be
connection NOTE: What implied from or considered incidental to the
with the offense are in may be regarded as exercise of the Commission’s inspection power.
the place sought to be “reasonable” will
searched however depend upon Commission’s remedy to secure relevant
(Del Castillo v People, all the circumstances” documents and testimony
GR. No. 135128, (Fox, Campbell and
January 30, 2012). Hartley v. the United 1. Following its dawn raid, the Commission
Kingdom, may secure relevant documents and
August 30, 1990, § 32, computer files by issuing a subpoena duces
Series A No. 182). tecum against persons in possession of such
documents and files;
2. Further, the Commission may issue a
Search vs. Inspect subpoena ad testificandum against persons

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471 FACULTY OF CIVIL LAW
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to secure their testimony that is deemed A: The person summoned may not assert the right
relevant to its investigation. with respect to corporate books and records, even
though he is the sole owner of the corporation or
AUTHORITY TO CONDUCT FACT-FINDING OR even though, as an officer of the corporation, he
PRELIMINARY INQUIRY would be criminally implicated by what the
corporate records contain. He may assert the
Scope of the Commission’s authority to conduct privilege only where a revelation of the matter
fact finding or preliminary inquiry sought from him would indicate that he had violated
a law (Stonehill, et al. v. Diokno, et al., GR. No. L-
The Commission is the sole and exclusive authority 19550, June 19, 1967).
to initiate and conduct a fact-finding or preliminary
inquiry for the enforcement of the Act (Sec. 31, RA NOTE: Disclosure of privileged communications
10667) cannot be compelled through a subpoena. In
particular, documents and papers in the hands of
1. Motu proprio; entity’s counsel are subject to attorney-client
2. Upon the filing of a verified complaint by an privilege if those documents and papers relate to
interested party; or confidential communications between the entity
3. Upon referral by a regulatory agency. and counsel.

No Parallel Action principle Possible actions of the Commission following

the conduct of fact finding or preliminary
The Commission shall have sole and exclusive inquiry
authority to initiate and conduct fact finding or
preliminary inquiry on possible violations of the The Commission, after considering the statements
law. made, or documents or articles produced in the
course of fact-finding or preliminary inquiry, shall
PURPOSE: To prevent entities from being subjected terminate the same by:
to multiple investigations by different government
agencies endowed by other law with competition (a) Issuing a resolution ordering its closure if
authority. no Violation or infringement of this Act is
found; or
Conditions to initiate such fact finding or (b) Issuing a resolution to proceed, on the basis
preliminary inquiry of reasonable grounds, to the conduct of a
full administrative investigatioN (Sec. 31,
The Act contemplates a possible violation of the Act RA 10667).
based on “reasonable grounds,” before the
Commission may initiate such fact finding or AUTHORITY TO CONDUCT ADMINISTRATIVE
preliminary inquiry (Sec. 31, RA 10667). INVESTIGATION

Reasonable ground can be ascertained from the Requirements in the conduct of the
allegations in the verified complaint filed by an Commission’s administrative investigation
interested party or parties, or in the referral by a
regulatory agency. Administrative due process requires the
Commission to provide due notice and hearing (Sec.
Powers of the Commission relative to the 31, RA 10667).
conduct of such fact-finding or preliminary
inquiry Additionally:

The Commission may gather relevant information a) The right to a hearing, which includes the
through the exercise of any of its Section 12 powers, right of the concerned party to present his
“by administering oaths, issuing subpoena duces case and submit supporting evidence;
tecum and summoning witnesses, and b) The duty of the Commission to consider the
commissioning consultants or experts” (Sec. 33, RA evidence presented;
10667). c) The Commission’s decision must be
supported by evidence;
Q: May a person invoke the right against self- d) The Commission’s evidence must be
incrimination? “substantial,” i.e., such relevant evidence as
a reasonable mind accepts as adequate to
support a conclusion;

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e) The Commission’s decision must be weigh the evidence and theories of the parties, and
rendered on the evidence presented at the decide based on the following quantum of evidence:
hearing, or at least contained in the record
and disclosed to the parties affected; 1. DOJ-OFC, evidence establishing the
f) The Commission must act on its own respondent is probably guilty of the offense
independent consideration of the law and charged;
facts of the controversy, and not simply 2. Court trying the criminal action, proof
accept the views of a subordinate in beyond reasonable doubt that the accused
arriving at a decision; and committed such offense;
g) The Commission should, in all 3. Court trying the civil action, preponderance
controversial questions, render its decision of evidence; or
in such a manner that the parties to the 4. Sector regulator, substantial evidence.
proceeding can know the various issues
involved, and the reasons for the decision Enforcement of the Commission’s ruling, order,
rendered (Ang Tibay v. Court of Industrial resolution, decision or judgment
Relations, GR. No. L-46496, February 27.
1940). Upon the finality of its binding ruling, order,
resolution, decision, judgment, or rule or regulation,
Actions of the Commission following its collectively, the Commission may issue a writ of
administrative investigation execution to enforce its decision and the payment
of the administrative fines” (Sec. 40, RA 10667).
The Commission’s investigation may either:
a) Exonerate the respondent entity; The Commission shall monitor the compliance by
b) Result in issuance of injunction, order of the entity or entities concerned, their officers, and
divestment, adjustment, disgorgement of employees, with the final and executory binding
excess profits, levy of administrative ruling, cease and desist order, or approval of a
sanctions, fines, or penalties (Sec. 12, RA consent judgment. Upon motion of an interested
10667); or party/parties, the Commission shall issue a
c) File a criminal complaint with DOJ~ OFC, in certification or resolution to the effect that the
case it finds a probable violation. entity or entities concerned have, or have not, as the
case may be, complied with a final and executory
On the other hand, the private party who initiated ruling, order, or approval (Sec. 12, par. “j”; and Sec.
the investigation could use the Commission’s 37, par. “d,” RA 10667).
findings as basis of his private action.
NON-ADVERSARIAL REMEDIES
How the Commission should evaluate the
evidence gathered during its administrative The Act adopts voluntary compliance (as against
investigation tedious litigation process) as its main implementing
mechanism. It seeks to do this by making available
The Commission should decide the case on the basis non-adversarial administrative remedies before the
of substantial evidence, i.e., such relevant evidence Commission.
that a reasonable mind might accept as adequate to
support a conclusion. 1. Renegotiation of existing agreements or
restructuring of businesses within two (2)
How courts and other administrative agencies years from the effectivity of the Act, to cure
should treat the Commission’s technical non-conforming existing business
findings structure, conduct, practice or act (Sec. 53,
RA 10667);
The Commission has presumed expertise in 2. Request for a Binding Ruling, with regard to
ascertaining and analyzing important factual contemplated or future acts where no prior
elements in resolving competition- related issues or complaint or investigation has been
disputes. initiated (Sec. 37, RA 10667);
3. Provide a justification before the
NOTE: Technical findings should, as a rule, be given Commission when it issues a Show Cause
great weight and respect by the other tribunals that Order, in the interest of the public (Ibid.);
will conduct follow-up proceedings. The entity has 4. Propose for a Consent Order, at any time
the burden to demonstrate such findings are prior to the conclusion of the Commission’s
erroneous. The concerned tribunal shall, in turn, inquiry (Ibid.);

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5. Propose a plea of Nolo Contendere, in With regard to the civil liability aspect, the same
criminal proceedings for possible Violation needs the agreement of the concerned private party.
of Section 14(a) or (b) (Sec. 36, RA 10667). This scheme is similarly beneficial to such party
since it will dispense with the possible protracted
NOTE: To prevent businesses from being unduly lengthy civil proceedings.
harassed, the Act provides that resort to non-
adversarial administrative remedies must first be Should such private party refuse to give consent and
made before any administrative, civil and criminal subsequently pursue a private action, the entity’s
actions are filed against the parties concerned. recourse to the consent order scheme shall not be
considered an admission of violation of the Act or
Binding ruling any other competition laws

An entity may secure a binding ruling on the effects Nolo contendere plea
of a particular agreement, conduct or stipulation
prior to the filing of complaint by an interested A plea of nolo contendere or “no contest plea” refers
party or motu proprio investigation by the to a plea where the accused does not accept nor
Commission (Sec. 37, RA 10667). deny responsibility for the charges. But agrees to
accept punishment as if he had pleaded guilty (Sec.
Such request may cover prospective agreements, 36, RA 10667).
conduct or stipulations.
It has the same legal effect as a guilty plea, i.e., the
Show cause order accused will have a criminal record.

Any person who has cause of action to enjoin an Q: How is it different from an ordinary plea?
entity from continuing with its identified business
conduct may file a verified complaint and request A: A plea of nolo contendere cannot be used against
the Commission for the issuance of a show cause the defendant entity to prove liability in a civil suit
order (Sec. 37, par. “b,” RA 10667). arising from the criminal action nor in another
cause of action. This is not the case in an ordinary
The entity, in turn, may immediately give plea, which could affect or influence the decision in
justifications for its action, without the elaborate the civil aspect, to be issued by the court in the same
proceedings required in an ordinary action. or separate action.

The Commission shall issue a show cause order: This plea is available not only to natural persons but
also to juridical entities, which may be held liable to
1. When the entity is conducting its business, a fine under Section 30.
in whole or in part in a manner that may not
be in accord with the provisions of the Act NOTE: This plea is limited only to criminal cases.
or other competition laws; and
2. It finds that the issuance of a show cause The accused may make the plea at any time up to his
order would be in the interest of the public arraignment and thereafter, with the permission of
(Ibid.). the court, which shall accept the plea only after
weighing its effect on the parties, the public and the
Consent order administration of justice.

An entity may secure a consent order “at any time The court must issue a decision on the basis of law
prior to the conclusion by the Commission of its and evidence presented. The court cannot utilize the
inquiry” (Sec. 37, par. c, RA 10667). nolo contendere plea as basis for its decision.

The consent order allows an entity to minimize its Under the Rules of Court, a plea of guilty later
administrative fine and civil liability to a private withdrawn, or an unaccepted offer of a plea of guilty
party, without in any manner admitting a violation to lesser offense, is not admissible in evidence
of the Act or any other competition laws. against the accused who made the plea or offe. (Sec.
27, Rule 130).
NOTE: A consent order shall not bar any inquiry for
the same or similar acts if continued or repeated In case of conviction, the court’s decision (based on
(Sec. 37, par. “e,” RA 10667). proof beyond reasonable doubt) shall include its
decision on the civil aspect, or may be used by third

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parties against the accused in the separate private The DOJ-OFC may dismiss the Commission’s
actions, as the case may be. criminal complaint, if it finds there is no reasonable
ground to believe that a crime has been committed
FOLLOW-ON ACTIONS and that the accused is not probably guilty thereof
(Sec. 4, Rule 112, Rules of Court).
The findings or decision of the Commission may be
the basis of criminal, civil or other administrative Possible defenses of the accused
action. This action may thereafter be immediately
commenced, unless the Commission’s decision has a) The accused are not competitors, i.e., they
been appealed and the appellate court has enjoined belong to different relevant markets, or
the implementation of such decision pending they belong to the single economic entity;
appeal. b) In case the entities involved are juridical
persons, the accused are not corporate
In case any of such actions is commenced while the officers, directors, or employees holding
Commission’s decision is on appeal and therefore managerial positions, or they have no
not yet final, and the appellate court has not knowledge or cannot be considered
enjoined the implementation of such decision willfully responsible for the offense
pending appeal, the DOJ-OFC, the court or the charged;
concerned sector regulator, as applicable, may c) There is no agreement between them,
conduct its own proceedings and have an specifically the stipulations contemplated
independent finding of facts and law, as applied to in the offense charged; or
the issue. d) In case of Section 14(b) Violations, the
agreement has no foreclosure effect on
CRIMINAL ACTION competition, i.e., the effect on competition
is de minimis or the act has objective
The Act has carefully differentiated the justifications.
Commission’s “administrative investigation” and
the DOJ-OFC’s “preliminary investigation.” The Jurisdiction over criminal actions under the Act
former always precedes the latter.
When the DOJ-OFC finds probable cause
Under Section 31, the Commission must endorse considering the complaint and evidence presented
matters to the DOJ-OFC for preliminary by the Commission, it shall file the corresponding
investigation if the evidence so warrants. information with the concerned Regional Trial
Specifically: “(if) the evidence so warrants, the Court, regardless of the penalties and fines (Sec. 44,
Commission may file before the DOJ criminal RA 10667).
complaints for violations of this Act or relevant laws
for preliminary investigation and prosecution NOTE: The standard test of jurisdiction under BP
before the proper court. The DOJ shall conduct such 129 does not apply.
preliminary investigation in accordance with the
Revised Rules of Criminal Procedure.” (Section 31) CIVIL ACTION
Under the Act, these cases are limited to Section
14(a) and (b) violations, penalized under Section While the Commission has authority to impose
30. administrative fines, it has no authority to award
damages in favor of private persons.
The (Office for Competition) OFC under the
Department of Justice (DOJ-OFC) shall only conduct Jurisdiction over civil actions under the Act
preliminary investigation and undertake
prosecution of all criminal offenses arising under A person having a cause of action against the entity
(the) Act and other competition-related laws in must file the private action with the concerned
accordance with Section 31. Regional Trial Court (Sec. 44, RA 10667)
notwithstanding the provisions of BP 129.
Scope of DOJ-OFC’s preliminary investigation
Consequence if a person files a civil action
The DOJ-OFC is not a rubber stamp of the without the Commission’s prior administrative
Commission. The latter’s affirmative determination determination
will not readily give rise to the former’s finding of
probable cause. Under Section 45, the Commission’s affirmative
finding is a condition precedent in filing a private
action. This requirement is consistent with the

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doctrine of primary jurisdiction. It is an element of Supreme Court for purposes of filing petitions under
the complainant’s cause of action, the absence of Rule 65 of the Rules of Court.
which is a ground for the defendant to move for the
dismissal of the action for being premature, or a It is placed under the Office of the President but with
condition precedent for filing the claim has not been numerous safeguards to protect its independence
complied with (Sec. 1 par. j, Rule 16, Rules of Court). (August 20, 2014 Senate Interpellations).

ADMINISTRATIVE ACTION
FINANCIAL REHABILITATION AND INSOLVENCY
The Commission exercises original and primary ACT OF 2010 (R.A. NO. 10142)
jurisdiction in the enforcement and regulation of all
competition-related issues.
Policy of the law
The Commission shall still have jurisdiction if the
issue involves both competition and 1. To encourage debtors, both juridical and
noncompetition issues, but the concerned sector natural persons, and their creditors to
regulator shall be consulted and afforded collectively and realistically resolve and adjust
reasonable opportunity to submit its own opinion competing claims and property rights.
and recommendation on the matter before the 2. To ensure a timely, fair, transparent, effective
Commission makes a decision on any case (Sec. 32, and efficient rehabilitation or liquidation of
RA 10667). debtors.
3. To ensure or maintain certainly and
Q: Which administrative agencies may qualify as predictability in commercial affairs, preserve
sector regulators? and maximize the value of the assets of these
debtors, recognize creditor rights and respect
A: Examples of sector regulators are the BSP, BBC, priority of claims, and ensure equitable
and NTC, who have their respective interest in the treatment of creditors who are similarly
proper regulation of entities operating within the situated.
banking, energy and telecommunications sectors, 4. When rehabilitation is not feasible, to facilitate
respectively. a speedy and orderly liquidation of these
debtor's assets and the settlement of their
GR: The concerned sector regulator is not obligations (FRIA, Sec. 2).
prohibited from conducting a parallel investigation
on non-competition-related issues falling under its Nature of the proceedings
jurisdiction.
1. In rem - Jurisdiction over all persons affected by
XPN: The findings of the Commission constitute as the proceedings shall beconsidered as acquired
prejudicial questions to the issues before the upon publication of the notice of the
concerned sector regulator. commencement of the proceedings in any
newspaper of general circulation in the
PRESCRIPTION Philippines.
2. Summary and non-adversarial (FRIA, Sec. 3)
The Act provides a five-year prescriptive period
reckoned, as follows: Covered persons

a) For criminal actions, from the time the 1. Individual debtor – a natural person who is a
violation is discovered by the offended resident and citizen of the Philippines that has
party, the authorities, or their agents; and become insolvent [FRIA, Sec. 4(o)]
b) For administrative and civil actions, from 2. Debtor – unless specifically excluded by a
the time the cause of action accrues (Sec. 46, provision of this Act, refers to:
RA 10667). a. A sole proprietorship duly registered with
the Department of Trade and Industry
JURISDICTION AND AUTHORITY OVER THE (DTI);
COMMISSION b. A partnership duly registered with the
Securities and Exchange Commission
Its decisions, orders or rulings are appealable to the (SEC);
Court of Appeals, (Sec. 39, RA 10667) and only c. A corporation duly organized and existing
subject to the supervisory function of the CA and under Philippine laws; or

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d. An individual debtor who has become 2. Insurance companies - refer to those
insolvent [Sec. 4(k), FRIA]. companies that are potentially or actually
subject to insolvency proceedings under the
Insolvent – refers to the financial condition of a Insurance Code (Presidential Decree No. 1460)
debtor that is generally unable to pay its or his or successor legislation;
liabilities as they fall due in the ordinary course of 3. Pre-need company - refers to any corporation
business or has liabilities that are greater than its or authorized/licensed to sell or offer to sell pre-
his assets [FRIA, Sec. 4(p)]. need plans.
4. National and local government agencies or
Excluded from the term debtor units

1. Bank – refers to any duly licensed bank or Government financial institutions other than banks
quasi-bank that is potentially or actually subject and government-owned or -controlled corporations
to conservatorship, receivership or liquidation are covered by this Act, unless their specific charter
proceedings under the New Central Bank Act provides otherwise (FRIA, Sec. 5).
(Republic Act No. 7653) or successor
legislation;

TYPES OF REHABILITATION PROCEEDINGS

BASIS I. COURT SUPERVISED II. PRE-NEGOTIATED

1. Voluntary proceedings An insolvent debtor, by itself or jointly with
any of its creditors. (FRIA, Sec. 76)
Initiated by the debtor when approved by:
a. Sole proprietorship – owner;
b. Partnership – majority of the partners;
c. Corporation – a majority vote of the
board of directors or trustees and
authorized by the vote of the
stockholders representing at least two-
thirds (2/3) of the outstanding capital
stock; or
d. Nonstock corporation – by the vote of at
Who may least two-thirds (2/3) of the members,
initiate in a stockholder's or member's meeting
duly called for the purpose (FRIA, Sec.
12).

2. Involuntary proceedings

Any creditor or group of creditors with a

claim of, or the aggregate of whose claims is,
at least One million pesos
(Php1,000,000.00) or at least twenty-five
percent (25%) of the subscribed capital
stock or partners' contributions, whichever
is higher (FRIA, Sec. 13).
1. Voluntary proceedings By filing a verified petition with the court
for the approval of a pre-negotiated
An insolvent debtor may initiate voluntary Rehabilitation Plan which has been
proceedings under this Act by filing a endorsed or approved by creditors holding
petition for rehabilitation with the court at least two-thirds (2/3) of the total
and on the grounds hereinafter specifically liabilities of the debtor, including:
How initiated
provided. The petition shall be verified to
establish the insolvency of the debtor a. secured creditors holding more than
and the viability of its rehabilitation. fifty percent (50%) of the total secured
claims of the debtor; and
Grounds: A group of debtors may jointly b. unsecured creditors holding more than
file a petition for rehabilitation under this fifty percent (50%) of the total

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Act when one or more of its members unsecured claims of the debtor (FRIA,
foresee the impossibility of meeting debts Sec. 76).
when they respectively fall due, and the
financial distress would likely adversely
affect the financial condition and/or
operations of the other members of the
group and/or the participation of the other
members of the group is essential under the
terms and conditions of the proposed
Rehabilitation Plan (FRIA, Sec. 12).

2. Involuntary proceedings

Filing a petition for rehabilitation with the

court if:

a. there is no genuine issue of fact or law

on the claim/s of the petitioner/s, and
that the due and demandable payments
thereon have not been made for at least
sixty (60) days or that the debtor has
failed generally to meet its liabilities as
they fall due; or
b. a creditor, other than the petitioner/s,
has initiated foreclosure proceedings
against the debtor that will prevent the
debtor from paying its debts as they
become due or will render it insolvent
(FRIA, Sec. 13).

The petition shall be verified to establish

the substantial likelihood that the debtor
may be rehabilitated (FRIA, Sec. 14).
1. Voluntary proceedings The petition shall include, as a minimum:
a. a schedule of the debtor's debts and
Petition shall include as a minimum: liabilities;
a. Identification of the debtor, its b. an inventory of the debtor's assets;
principal activities and its c. the pre-negotiated Rehabilitation Plan,
addresses; including the names of at least three (3)
b. Statement of the fact of and the qualified nominees for rehabilitation
cause of the debtor's insolvency or receiver; and
inability to pay its obligations as d. a summary of disputed claims against
they become due; the debtor and a report on the
c. The specific relief sought pursuant provisioning of funds to account for
to this Act; appropriate payments should any such
Contents of d. The grounds upon which the claims be ruled valid or their amounts
petition petition is based; adjusted. (FRIA, Sec. 76)
e. Other information that may be
required under this Act depending
on the form of relief requested;
f. Schedule of the debtor's debts and
liabilities including a list of
creditors with their addresses,
amounts of claims and collaterals,
or securities, if any;
g. An inventory of all its assets
including receivables and claims
against third parties;
h. A Rehabilitation Plan;

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i. The names of at least three (3)
nominees to the position of
rehabilitation receiver; and
j. Other documents required to be
filed with the petition pursuant to
this Act and the rules of procedure
as may be promulgated by the
Supreme Court (FRIA, Sec. 12).

2. Involuntary proceedings

Shall include:
a. identification of the debtor, its principal
activities and its address;
b. the circumstances sufficient to support
a petition to initiate involuntary
rehabilitation proceedings under
Section 13 of this Act;
c. the specific relief sought under this Act;
d. a Rehabilitation Plan;
e. the names of at least three (3) nominees
to the position of rehabilitation
receiver;
f. other information that may be required
under this Act depending on the form of
relief requested; and
g. other documents required to be filed
with the petition pursuant to this Act
and the rules of procedure as may be
promulgated by the Supreme Court
(FRIA, Sec. 14).

III. OUT-OF-COURT OR INFORMAL agreement or Rehabilitation Plan contemplated

RESTRUCTURING AGREEMENTS OR herein shall be effective and enforceable not only
REHABILITATION PLANS against the contracting parties but also against the
other creditors.
Minimum Requirements of Out-of-Court or
Informal Restructuring Agreements and Requisites:
Rehabilitation Plans a. Duch agreement is approved by creditors
representing more than fifty percent (50%) of
a. The debtor must agree to the out-of-court or the total liabilities of the debtor;
informal restructuring/workout agreement or b. Notice thereof is published in a newspaper of
Rehabilitation Plan; general circulation in the Philippines once a
b. It must be approved by creditors representing week for two (2) consecutive weeks; and
at least sixty-seven percent (67%) of the c. The standstill period does not exceed one
secured obligations of the debtor; hundred twenty (120) days from the date of
c. It must be approved by creditors representing effectivity.
at least seventy-five percent (75%) of the
unsecured obligations of the debtor; and The notice must invite creditors to participate in the
d. It must be approved by creditors holding at negotiation for out-of-court rehabilitation or
least eighty-five percent (85%) of the total restructuring agreement and notify them that said
liabilities, secured and unsecured, of the debtor. agreement will be binding on all creditors if the
(FRIA, Sec. 84) required majority votes prescribed in Section 84 of
the Act are met (FRIA, Sec. 85).
Standstill period
Effect of court actions or other proceedings
A standstill period that may be agreed upon by the
parties pending negotiation and finalization of the Any court action or other proceedings arising from,
out-of-court or informal restructuring/workout or relating to, the out-of-court or informal

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restructuring/workout agreement or Rehabilitation k. Prohibit the debtor's suppliers of goods or
Plan shall not stay its implementation, unless the services from withholding the supply of goods
relevant party is able to secure a temporary and services in the ordinary course of business
restraining order or injunctive relief from the Court for as long as the debtor makes payments for
of Appeals (FRIA, Sec. 88). the services or goods supplied after the
issuance of the Commencement Order;
COMMENCEMENT ORDER l. Authorize the payment of administrative
expenses as they become due;
If the court finds the petition for rehabilitation to be m. Set the case for initial hearing, which shall not
sufficient in form and substance, it shall, within five be more than forty (40) days from the date of
(5) working days from the filing of the petition, issue filing of the petition for the purpose of
a Commencement Order (FRIA, Sec. 15). determining whether there is substantial
likelihood for the debtor to be rehabilitated;
The rehabilitation proceedings shall commence n. Make available copies of the petition and
upon the issuance of the Commencement Order rehabilitation plan for examination and copying
which shall: by any interested party;
o. Indicate the location or locations at which
a. Identify the debtor, its principal business or documents regarding the debtor and the
activity/ies and its principal place of business; proceedings under this Act may be reviewed
b. Summarize the ground/s for initiating the and copied;
proceedings; p. State that any creditor or debtor, who is not the
c. State the relief sought under this Act and any petitioner, may submit the name or nominate
requirement or procedure particular to the any other qualified person to the position of
relief sought; rehabilitation receiver at least five (5) days
d. State the legal effects of the Commencement before the initial hearing;
Order, including those mentioned in Section 17 q. Include a Stay or Suspension Order which
hereof; shall:
e. Declare that the debtor is under rehabilitation;
f. Direct the publication of the Commencement 1. suspend all actions or proceedings, in
Order in a newspaper of general circulation in court or otherwise, for the
the Philippines once a week for at least two (2) enforcement of claims against the
consecutive weeks, with the first publication to debtor;
be made within seven (7) days from the time of 2. Suspend all actions to enforce any
its issuance; judgment, attachment or other
g. If the petitioner is the debtor, direct the service provisional remedies against the
by personal delivery of a copy of the petition on debtor;
each creditor holding at least ten percent (10%) 3. Prohibit the debtor from selling,
of the total liabilities of the debtor as encumbering, transferring or
determined from the schedule attached to the disposing in any manner any of its
petition within five (5) days; if the petitioner/s properties except in the ordinary
is/are creditor/s, direct the service by personal course of business; and
delivery of a copy of the petition on the debtor 4. Prohibit the debtor from making any
within five (5) days; payment of its liabilities outstanding as
h. Appoint a rehabilitation receiver who may or of the commencement date except as
may not be from among the nominees of the may be provided herein (FRIA, Sec. 16).
petitioner/s, and who shall exercise such
powers and duties defined in this Act as well as Effects of the Commencement Order (2017 Bar)
the procedural rules that the Supreme Court
will promulgate; 1. It vests the rehabilitation receiver with all the
i. Summarize the requirements and deadlines for powers and functions provided for in the Act,
creditors to establish their claims against the such as the right to review and obtain all
debtor and direct all creditors to file their records to which the debtor's management and
claims with the court at least five (5) days directors have access, including bank accounts
before the initial hearing; of whatever nature of the debtor, subject to the
j. Direct the Bureau of Internal Revenue (BIR) to approval by the court of the performance bond
file and serve on the debtor its comment on or filed by the rehabilitation receiver;
opposition to the petition or its claim/s against 2. It prohibits, or otherwise serves as the legal
the debtor under such procedures as the basis for rendering null and void the results of
Supreme Court may hereafter provide; any extrajudicial activity or process to seize

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property, sell encumbered property, or otherwise disposed of upon order of the court
otherwise attempt to collect on or enforce a after notice and hearing:
claim against the debtor after the
commencement date. a. If such are in the interest of
administering the debtor and
XPN: The court may authorize the sale, transfer, facilitating the preparation and
conveyance or disposal of encumbered implementation of a Rehabilitation
property of the debtor, or property of others Plan;
held by the debtor where there is a security b. In order to provide a substitute lien,
interest pertaining to third parties under a mortgage or pledge of property under
financial, credit or other similar transactions if, the Act;
upon application of the rehabilitation receiver c. For payments made to meet
and with the consent of the affected owners of administrative expenses as they arise;
the property, or secured creditor/s in the case d. For payments to victims of quasi
of encumbered property of the debtor and, after delicts upon a showing that the claim is
notice and hearing, the court determines that: valid and the debtor has insurance to
reimburse the debtor for the payments
a. Such sale, transfer, conveyance or made;
disposal is necessary for the continued e. For payments made to repurchase
operation of the debtor's business; and property of the debtor that is auctioned
b. The debtor has made arrangements to off in a judicial or extrajudicial sale
provide a substitute lien or ownership under this Act; or
right that provides an equal level of f. For payments made to reclaim
security for the counter-party's claim property of the debtor held pursuant to
or right. a possessory lien (FRIA, Sec. 52).

Provided, That properties held by the debtor 5. It consolidates the resolution of all legal
where the debtor has authority to sell such as proceedings by and against the debtor to the
trust receipt or consignment arrangements court: Provided, however, that the court may
may be sold or disposed of by the debtor, if such allow the continuation of cases in other courts
sale or disposal is necessary for the operation of where the debtor had initiated the suit (FRIA,
the debtor's business, and the debtor has made Sec. 17).
arrangements to provide a substitute lien or
ownership right that provides an equal level of NOTE: Attempts to seek legal or other recourse
security for the counter-party's claim or right against the debtor outside these proceedings shall
(FRIA, Sec. 50). be sufficient to support a finding of indirect
contempt of court.
NOTE: Sale or disposal of property section 50
shall not give rise to any criminal liability under The effects of the Commencement Order and the
applicable laws (FRIA, Sec. 50). Stay or Suspension Order on the suspension of
rights to foreclose or otherwise pursue legal
3. It serves as the legal basis for rendering null and remedies shall apply to government financial
void any set-off after the commencement date institutions, notwithstanding provisions in their
of any debt owed to the debtor by any of the charters or other laws to the contrary (FRIA, Sec.
debtor's creditors; 20).
4. It serves as the legal basis for rendering null and
void the perfection of any lien against the Waiver of taxes and fees due to the National
debtor's property after the commencement Government and to Local Government Units
date;
Upon issuance of the Commencement Order by the
NOTE: The court may rescind or declare as null court, and until the approval of the Rehabilitation
and void any sale, payment, transfer or Plan or dismissal of the petition, whichever is
conveyance of the debtor's unencumbered earlier, the imposition of all taxes and fees, including
property or any encumbering thereof by the penalties, interests and charges thereof, due to the
debtor or its agents or representatives after the national government or to LGUs shall be considered
commencement date which are not in the waived, in furtherance of the objectives of
ordinary course of the business of the debtor: rehabilitation.
Provided, however, That the unencumbered
property may be sold, encumbered or

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Effectivity or duration of the commencement reach a consensus on the proposed
order Rehabilitation Plan; and
g. The debtor has not committed acts of
Unless lifted by the court, the Commencement misrepresentation or in fraud of its creditor/s
Order shall be effective for the duration of the or a group of creditors (FRIA, Sec. 21).
rehabilitation proceedings for as long as there is a
substantial likelihood that the debtor will be Effect of creditor’s failure to file notice of claim
successfully rehabilitated (FRIA, Sec. 21).
A creditor whose claim is not listed in the schedule
Minimum requirements to determine whether of debts and liabilities and who fails to file a notice
there is substantial likelihood for the debtor to of claim in accordance with the Commencement
be successfully rehabilitated Order but subsequently files a belated claim shall
not be entitled to participate in the rehabilitation
a. The proposed Rehabilitation Plan submitted proceedings but shall be entitled to receive
complies with the minimum contents distributions arising therefrom (FRIA, Sec. 23).
prescribed by the Act;
b. There is sufficient monitoring by the NOTE: Claim shall refer to all claims or demands of
rehabilitation receiver of the debtor's business whatever nature or character against the debtor or
for the protection of creditors; its property, whether for money or otherwise,
c. The debtor has met with its creditors to the liquidated or unliquidated, fixed or contingent,
extent reasonably possible in attempts to reach matured or unmatured, disputed or undisputed,
a consensus on the proposed Rehabilitation including, but not limited to:
Plan;
d. The rehabilitation receiver submits a report, 1. All claims of the government, whether national
based on preliminary evaluation, stating that or local, including taxes, tariffs and customs
the underlying assumptions and the financial duties; and
goals stated in the petitioner's Rehabilitation 2. Claims against directors and officers of the
Plan are realistic, feasible and reasonable; or, if debtor arising from acts done in the discharge
not, there is, in any case, a substantial likelihood of their functions falling within the scope of
for the debtor to be successfully rehabilitated their authority: Provided, That, this inclusion
because, among others: does not prohibit the creditors or third parties
from filing cases against the directors and
i. There are sufficient assets with which to officers acting in their personal capacities
rehabilitate the debtor; [FRIA, Sec 4(c)].
ii. There is sufficient cash flow to maintain
the operations of the debtor; No diminution of secured creditor’s right
iii. The debtor's owner/s, partners,
stockholders, directors and officers have GR: The issuance of the Commencement Order and
been acting in good faith and with due the Suspension or Stay Order, and any other
diligence; provision of the Act, shall not be deemed in any way
iv. The petition is not a sham filing intended to diminish or impair the security or lien of a
only to delay the enforcement of the rights secured creditor, or the value of his lien or security,
of the creditor/s or of any group of
creditors; and XPN: The secured creditor’s right to enforce said
v. The debtor would likely be able to pursue security or lien may be suspended during the term
a viable Rehabilitation Plan; of the Stay Order.

e. The petition, the Rehabilitation Plan and the The court, upon motion or recommendation of the
attachments thereto do not contain any rehabilitation receiver, may allow a secured
materially false or misleading statement; creditor to enforce his security or lien, or foreclose
f. If the petitioner is the debtor, that the debtor upon property of the debtor securing his/its claim,
has met with its creditor/s representing at least if the said property is not necessary for the
three-fourths (3/4) of its total obligations to the rehabilitation of the debtor.
extent reasonably possible and made a good
faith effort to reach a consensus on the The secured creditor and/or the other lien holders
proposed Rehabilitation Plan; if the shall be admitted to the rehabilitation proceedings
petitioner/s is/are a creditor or group of only for the balance of his claim, if any (FRIA, Sec.
creditors, that the petitioner/s has/have met 60).
with the debtor and made a good faith effort to

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REHABILITATION RECEIVER The rehabilitation receiver shall have the following
powers, duties and responsibilities:
Rehabilitation receiver shall refer to the person or
persons, natural or juridical, appointed as such by a. To verify the accuracy of the factual
the court pursuant to this Act and which shall be allegations in the petition and its annexes;
entrusted with such powers and duties as set forth b. To verify and correct, if necessary, the
herein [FRIA, Sec. 4(hh)]. inventory of all of the assets of the debtor,
and their valuation;
If the rehabilitation receiver is a juridical entity, it c. To verify and correct, if necessary, the
must designate a natural person/s who possess/es schedule of debts and liabilities of the
all the qualifications and none of the debtor;
disqualifications as its representative, it being d. To evaluate the validity, genuineness and
understood that the juridical entity and the true amount of all the claims against the
representative/s are solidarily liable for all debtor;
obligations and responsibilities of the rehabilitation e. To take possession, custody and control,
receiver (FRIA, Sec. 28). and to preserve the value of all the property
of the debtor;
Minimum qualifications f. To sue and recover, with the approval of the
court, all amounts owed to, and all
a. A citizen of the Philippines or a resident of the properties pertaining to the debtor;
Philippines in the six (6) months immediately g. To have access to all information necessary,
preceding his nomination; proper or relevant to the operations and
b. Of good moral character and with business of the debtor and for its
acknowledged integrity, impartiality and rehabilitation;
independence; h. To sue and recover, with the approval of the
c. Has the requisite knowledge of insolvency and court, all property or money of the debtor
other relevant commercial laws, rules and paid, transferred or disbursed in fraud of
procedures, as well as the relevant training the debtor or its creditors, or which
and/or experience that may be necessary to constitute undue preference of creditor/s;
enable him to properly discharge the duties and i. To monitor the operations and the business
obligations of a rehabilitation receiver; and of the debtor to ensure that no payments or
d. Has no conflict of interest: Provided, that such transfers of property are made other than
conflict of interest may be waived, expressly or in the ordinary course of business;
impliedly, by a party who may be prejudiced j. With the court's approval, to engage the
thereby (FRIA, Sec. 29). services of or to employ persons or entities
to assist him in the discharge of his
Powers, duties and responsibilities of functions;
Rehabilitation Receiver k. To determine the manner by which the
debtor may be best rehabilitated, to review,
The rehabilitation receiver shall be deemed an revise and/or recommend action on the
officer of the court with the principal duty: Rehabilitation Plan and submit the same or
a new one to the court for approval;
1. Of preserving and maximizing the value of the l. To implement the Rehabilitation Plan as
assets of the debtor during the rehabilitation approved by the court, if so provided under
proceedings; the Rehabilitation Plan;
2. Of determining the viability of the rehabilitation m. To assume and exercise the powers of
of the debtor; management of the debtor, if directed by
3. Of preparing and recommending a the court pursuant to Section 36 hereof;
Rehabilitation Plan to the court; and n. To exercise such other powers as may, from
4. Of implementing the approved Rehabilitation time to time, be conferred upon him by the
Plan (FRIA, Sec. 31). court; and
5. To take an oath and file a bond, in such amount o. To submit a status report on the
to be fixed by the court, conditioned upon the rehabilitation proceedings every quarter or
faithful and proper discharge of his powers, as may be required by the court motu
duties and responsibilities (FRIA, Sec. 34). proprio, or upon motion of any creditor, or
6. To make an appropriate disclosure of conflict of as may be provided, in the Rehabilitation
interest either to the court or to the creditors in Plan (FRIA, Sec. 31).
case of out-of-court rehabilitation proceedings
(FRIA, Sec. 40).

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NOTE: Unless appointed by the court under section b. Paralyzation of the business operations of the
36 (management committee), the rehabilitation debtor; or
receiver shall not take over the management and c. Gross mismanagement of the debtor, or fraud
control of the debtor but may recommend the or other wrongful conduct on the part of, or
appointment of a management committee over the gross or willful violation of this Act by, existing
debtor in the cases provided by this Act. management of the debtor or the owner,
partner, director, officer or representative/s in
Removal of the Rehabilitation Receiver management of the debtor (FRIA, Sec. 36).

The rehabilitation receiver may be removed at any COMMON PROVISIONS

time by the court, either motu proprio or upon
motion by any creditor/s holding more than fifty Employment of professionals
percent (50%) of the total obligations of the debtor,
on such grounds as the rules of procedure may Upon approval of the court, and after notice and
provide which shall include, but are not limited to, hearing, the rehabilitation receiver or the
the following: management committee may employ specialized
professionals and other experts to assist each in the
a. Incompetence, gross negligence, failure to performance of their duties. Such professionals and
perform or failure to exercise the proper degree other experts shall be considered either employees
of care in the performance of his duties and or independent contractors of the rehabilitation
powers; receiver or the management committee, as the case
b. Lack of a particular or specialized competency may be (FRIA, Sec. 39).
required by the specific case;
c. Illegal acts or conduct in the performance of his Conflict of interest
duties and powers;
d. Lack of qualification or presence of any No person may be appointed as a rehabilitation
disqualification; receiver, member of a management committee, or
e. Conflict of interest that arises after his be employed by the rehabilitation receiver or the
appointment; and management committee if he has a conflict of
f. Manifest lack of independence that is interest.
detrimental to the general body of the
stakeholders (FRIA, Sec. 32). An individual shall be deemed to have a conflict of
interest if he is so situated as to be materially
MANAGEMENT COMMITTEE influenced in the exercise of his judgment for or
against any party to the proceedings. Without
Role of Management Committee limiting the generality of the foregoing, an
individual shall be deemed to have a conflict of
When appointed, the management committee shall interest if:
take the place of the management and the governing
body of the debtor and assume their rights and a. He is a creditor, owner, partner or stockholder
responsibilities (FRIA, Sec. 37). of the debtor;
b. He is engaged in a line of business which
NOTE: Members of the management committee are competes with that of the debtor;
considered also as officers of the court. c. He is, or was, within five (5) years from the
filing of the petition, a director, officer, owner,
How the management committee is appointed partner or employee of the debtor or any of the
creditors, or the auditor or accountant of the
Upon motion of any interested party, the court may debtor;
appoint and direct the rehabilitation receiver to d. He is, or was, within two (2) years from the
assume the powers of management of the debtor, or filing of the petition, an underwriter of the
appoint a management committee that will outstanding securities of the debtor;
undertake the management of the debtor, upon e. He is related by consanguinity or affinity within
clear and convincing evidence of any of the the fourth civil degree to any individual
following circumstances: creditor, owner/s of a sole proprietorship-
debtor, partners of a partnership-debtor or to
a. Actual or imminent danger of dissipation, loss, any stockholder, director, officer, employee or
wastage or destruction of the debtor's assets or underwriter of a corporation-debtor; or
other properties;

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f. He has any other direct or indirect material for determining whether supporting the plan is
interest in the debtor or any of the creditorS in their financial interest when compared to the
(FRIA, Sec. 40). immediate liquidation of the debtor, including
any reduction of principal interest and
NOTE: Any party to the proceeding adversely penalties payable to the creditors;
affected by the appointment of any person with a d. Establish classes of voting creditors;
conflict of interest to any of the positions e. Establish subclasses of voting creditors if prior
enumerated above may however waive his right to approval has been granted by the court;
object to such appointment and, if the waiver is f. Indicate how the insolvent debtor will be
unreasonably withheld, the court may disregard the rehabilitated including, but not limited to, debt
conflict of interest, taking into account the general forgiveness, debt rescheduling, reorganization
interest of the stakeholders. or quasi-reorganization, dacion en pago, debt-
equity conversion and sale of the business (or
Immunity parts of it) as a going concern, or setting-up of a
new business entity or other similar
The rehabilitation receiver and all persons arrangements as may be necessary to restore
employed by him, and the members of the the financial well-being and viability of the
management committee and all persons employed insolvent debtor;
by it, shall not be subject to any action, claim or g. Specify the treatment of each class or subclass
demand in connection with any act done or omitted described in subsections (d) and (e);
to be done by them in good faith in connection with h. Provide for equal treatment of all claims within
the exercise of their powers and functions under the same class or subclass, unless a particular
this Act or other actions duly approved by the court creditor voluntarily agrees to less favorable
(FRIA, Sec. 41). treatment;
i. Ensure that the payments made under the plan
REHABILITATION PLAN follow the priority established under the
provisions of the civil code on concurrence and
It refers to a plan by which the financial well-being preference of credits and other applicable laws;
and viability of an insolvent debtor can be restored j. Maintain the security interest of secured
using various means including, but not limited to, creditors and preserve the liquidation value of
debt forgiveness, debt rescheduling, reorganization the security unless such has been waived or
or quasi-reorganization, dacion en pago, debt- modified voluntarily;
equity conversion and sale of the business (or parts k. Disclose all payments to creditors for pre-
of it) as a going concern, or setting-up of new commencement debts made during the
business entity as prescribed in Section 62 hereof, proceedings and the justifications thereof;
or other similar arrangements as may be approved l. Describe the disputed claims and the
by the court or creditors [FRIA, Sec. 4(ii)]. provisioning of funds to account for
appropriate payments should the claim be
NOTE: Rehabilitation refers to the restoration of the ruled valid or its amount adjusted;
debtor to a condition of successful operation and m. Identify the debtor's role in the implementation
solvency, if it is shown that its continuance of of the plan;
operation is economically feasible and its creditors n. State any rehabilitation covenants of the
can recover by way of the present value of payments debtor, the breach of which shall be considered
projected in the plan, more if the debtor continues a material breach of the plan;
as a going concern than if it is immediately o. Identify those responsible for the future
liquidated [FRIA, Sec. 4 (gg)]. management of the debtor and the supervision
and implementation of the plan, their affiliation
Contents of rehabilitation plan with the debtor and their remuneration;
p. Address the treatment of claims arising after
a. Specify the underlying assumptions, the the confirmation of the rehabilitation plan;
financial goals and the procedures proposed to q. Require the debtor and its counter-parties to
accomplish such goals; adhere to the terms of all contracts that the
b. Compare the amounts expected to be received debtor has chosen to confirm;
by the creditors under the rehabilitation plan r. Arrange for the payment of all outstanding
with those that they will receive if liquidation administrative expenses as a condition to the
ensues within the next one hundred twenty plan's approval unless such condition has been
(120) days; waived in writing by the creditors concerned;
c. Contain information sufficient to give the s. Arrange for the payment of all outstanding
various classes of creditors a reasonable basis taxes and assessments, or an adjusted amount

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485 FACULTY OF CIVIL LAW
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pursuant to a compromise settlement with the c. Payments shall be made to the creditors in
bir or other applicable tax authorities; accordance with the provisions of the
t. Include a certified copy of a certificate of tax Rehabilitation Plan;
clearance or evidence of a compromise d. Contracts and other arrangements between the
settlement with the bir; debtor and its creditors shall be interpreted as
u. Include a valid and binding resolution of a continuing to apply to the extent that they do
meeting of the debtor's stockholders to not conflict with the provisions of the
increase the shares by the required amount in Rehabilitation Plan;
cases where the plan contemplates an e. Any compromises on amounts or rescheduling
additional issuance of shares by the debtor; of timing of payments by the debtor shall be
v. State the compensation and status, if any, of the binding on creditors regardless of whether or
rehabilitation receiver after the approval of the not the Plan is successfully implemented; and
plan; and f. Claims arising after approval of the Plan that
w. Contain provisions for conciliation and/or are otherwise not treated by the Plan are not
mediation as a prerequisite to court assistance subject to any Suspension Order (FRIA, Sec. 69).
or intervention in the event of any
disagreement in the interpretation or CRAM DOWN EFFECT
implementation of the rehabilitation plan
(FRIA, sec. 64). The cram-down refers to the power of the
rehabilitation court to approve and implement a
Confirmation of rehabilitation plan rehabilitation plan notwithstanding the objection of
the majority of creditors. (Bank of the Philippine
If no objections are filed within the relevant period Islands vs. Sarabia Manor Hotel Corporation, G.R. No.
or, if objections are filed, the court finds them 175844, 29 July 2013)
lacking in merit, or determines that the basis for the
objection has been cured, or determines that the A restructuring/workout agreement or
debtor has complied with an order to cure the Rehabilitation Plan that is approved pursuant to an
objection, the court shall issue an order confirming informal workout framework (out of court or
the Rehabilitation Plan. informal restructuring agreements) shall have the
same legal effect as confirmation of a Plan under
The court may confirm the Rehabilitation Plan Section 69 of FRIA. The notice of the Rehabilitation
notwithstanding unresolved disputes over claims if Plan or restructuring agreement or Plan shall be
the Rehabilitation Plan has made adequate published once a week for at least three (3)
provisions for paying such claims. consecutive weeks in a newspaper of general
circulation in the Philippines. The Rehabilitation
For the avoidance of doubt, the provisions of other Plan or restructuring agreement shall take effect
laws to the contrary notwithstanding, the court upon the lapse of fifteen (15) days from the date of
shall have the power to approve or implement the the last publication of the notice thereof (FRIA, Sec.
Rehabilitation Plan despite the lack of approval, or 86).
objection from the owners, partners or stockholders
of the insolvent debtor: Provided, that the terms STAY OR SUSPENSION ORDER
thereof are necessary to restore the financial well-
being and viability of the insolvent debtor (FRIA, The Stay or Suspension Order shall not apply:
Sec. 68).
a. To cases already pending appeal in the Supreme
Effects of confirmation of rehabilitation plan Court as of commencement date: Provided,
That any final and executory judgment arising
a. The Rehabilitation Plan and its provisions shall from such appeal shall be referred to the court
be binding upon the debtor and all persons who for appropriate action;
may be affected by it, including the creditors, b. Subject to the discretion of the court, to cases
whether or not such persons have participated pending or filed at a specialized court or quasi-
in the proceedings or opposed the judicial agency which, upon determination by
Rehabilitation Plan or whether or not their the court, is capable of resolving the claim more
claims have been scheduled; quickly, fairly and efficiently than the court:
b. The debtor shall comply with the provisions of Provided, That any final and executory
the Rehabilitation Plan and shall take all actions judgment of such court or agency shall be
necessary to carry out the Plan; referred to the court and shall be treated as a
non-disputed claim;

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c. To the enforcement of claims against sureties agency or similar entities duly authorized,
and other persons solidarily liable with the registered and/or recognized by the
debtor, and third party or accommodation appropriate regulatory agency like the Bangko
mortgagors as well as issuers of letters of credit, Sentral ng Pilipinas (BSP) and the SEC as well as
unless the property subject of the third party or any form of actions of such agencies or entities
accommodation mortgage is necessary for the to reimburse themselves for any transactions
rehabilitation of the debtor as determined by settled for the debtor; and
the court upon recommendation by the g. To any criminal action against the individual
rehabilitation receiver; debtor or owner, partner, director or officer of
d. To any form of action of customers or clients of a debtor shall not be affected by any proceeding
a securities market participant to recover or commenced under this Act (FRIA, Sec. 18).
otherwise claim moneys and securities
entrusted to the latter in the ordinary course of LIQUIDATION
the latter's business as well as any action of
such securities market participant or the Who is qualified to be a liquidator?
appropriate regulatory agency or self-
regulatory organization to pay or settle such A natural person or juridical entity may be
claims or liabilities; appointed as such by the court and entrusted with
e. To the actions of a licensed broker or dealer to such powers and duties as set forth in FRIA.
sell pledged securities of a debtor pursuant to a
securities pledge or margin agreement for the Kinds of debtors
settlement of securities transactions in
accordance with the provisions of the Securities 1. Juridical debtors
Regulation Code and its implementing rules and 2. Individual debtors
regulations;
f. To the clearing and settlement of financial
transactions through the facilities of a clearing

LIQUIDATION OF JURIDICAL DEBTORS

BASIS VOLUNTARY LIQUIDATION INVOLUNTARY LIQUIDATION
(FRIA, Sec. 90) (FRIA, Sec. 91)
Three (3) or more creditors the aggregate
of whose claims is at least either One
million pesos (Php1,000,000.00) or at
least twenty-five percent (25%) of the
An insolvent debtor may apply for
subscribed capital stock or partner's
Who may file liquidation by filing a petition for
contributions of the debtor, whichever is
liquidation with the court.
higher, may apply for and seek the
liquidation of an insolvent debtor by filing
a petition for liquidation of the debtor
with the court.
The petition shall be verified, shall
The petition shall show that:
establish the insolvency of the debtor and
shall contain, whether as an attachment or
a. there is no genuine issue of fact or
as part of the body of the petition:
law on the claim/s of the
a. a schedule of the debtor's debts and
petitioner/s, and that the due and
liabilities including a list of creditors
demandable payments thereon have
Contents of the with their addresses, amounts of
not been made for at least one
petition claims and collaterals, or securities, if
hundred eighty (180) days or that
any;
the debtor has failed generally to
b. an inventory of all its assets including
meet its liabilities as they fall due;
receivables and claims against third
and
parties; and
b. there is no substantial likelihood
c. the names of at least three (3)
that the debtor may be rehabilitated.
nominees to the position of liquidator.
When: At any time during the pendency
Conversion of When: At any time during the pendency of
of or after a rehabilitation court-
rehabilitation court-supervised or pre-negotiated
supervised or pre-negotiated
proceedings to rehabilitation proceedings
rehabilitation proceedings

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487 FACULTY OF CIVIL LAW
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liquidation Who may initiate: The debtor may also Who may initiate: Three (3) or more
proceedings initiate liquidation proceedings by filing a creditors whose claims is at least either
motion in the same court where the One million pesos (Php1,000,000.00) or
rehabilitation proceedings are pending at least twenty-five percent (25%) of the
How: By filing a motion to convert the subscribed capital or partner's
rehabilitation proceedings into liquidation contributions of the debtor, whichever is
proceedings. The motion shall be verified, higher,may also initiate liquidation
shall contain or set forth the same matters proceedings by filing a motion in the same
required in the preceding paragraph, and court where the rehabilitation
state that the debtor is seeking immediate proceedings are pending
dissolution and termination of its How: By filing a motion to convert the
corporate existence. rehabilitation proceedings into
liquidation proceedings. The motion shall
If a petition is sufficient in form and be verified, shall contain or set forth the
substance, the court shall issue a same matters required in the preceding
liquidation order. paragraph, and state that the movants are
seeking the immediate liquidation of the
debtor.

If a petition or motion is sufficient in form

and substance, court shall issue order
directing:
a. Publication of petition or
motion in a newspaper of
general circulation once a
week for 2 consecutive weeks;
and
b. Debtor and all creditors who
are not the petitioners to file
their comments within 15
days from the date of last
publication.
After considering the comments filed, of
court determines that petition/motion is
meritorious, it shall issue liquation order.
(Villanueva, 2018)

INSOLVENCY OF INDIVIDUAL DEBTORS

BASIS SUSPENSION OF VOLUNTARY LIQUIDATION INVOLUNTARY
PAYMENTS (Sec. 94) (Sec. 103) LIQUIDATION (Sec. 105)
An individual debtor who, An individual debtor whose Any creditor or group of
possessing sufficient properties are not sufficient creditors
property to cover all his to cover his liabilities
Who may
debts but foreseeing the
file
impossibility of meeting
them when they respectively
fall due.
Minimum The debts must be at least The debts must be at least
Amount of Five Hundred Thousand Five Hundred Thousand
Aggregate Pesos (P500,000) Pesos (P500,000)
Debts
File a verified petition that he File a verified petition with File a verified petition for
be declared in the state of the court of the province or liquidation with the court of
How to
suspension of payments by city in which he has resided the province or city in which
initiate
the court of the province or for six (6) months prior to the the individual debtor resides.
city in which he has resided filing of such petition.

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for six (6) months prior to the
filing of his petition.
He shall attach to his petition, He shall attach to his petition The following shall be
as a minimum: (a) a schedule a schedule of debts and considered acts of insolvency,
of debts and liabilities; (b) an liabilities and an inventory of and the petition for
inventory of assets; and (c) a assets. liquidation shall set forth or
proposed agreement with his allege at least one of such
creditors. The filing of such petition acts:
shall be an act of insolvency.
Acts of insolvency need not a. That such person is about
be alleged. to depart or has departed
from the Republic of the
Philippines, with intent to
defraud his creditors;
b. That being absent from
the Republic of the
Philippines, with intent to
defraud his creditors, he
remains absent;
c. That he conceals himself
to avoid the service of
legal process for the
purpose of hindering or
delaying the liquidation
or of defrauding his
creditors;
d. That he conceals, or is
removing, any of his
property to avoid its
being attached or taken
Contents of
on legal process;
the petition
e. That he has suffered his
property to remain under
attachment or legal
process for three (3) days
for the purpose of
hindering or delaying the
liquidation or of
defrauding his creditors;
f. That he has confessed or
offered to allow judgment
in favor of any creditor or
claimant for the purpose
of hindering or delaying
the liquidation or of
defrauding any creditor
or claimant;
g. That he has willfully
suffered judgment to be
taken against him by
default for the purpose of
hindering or delaying the
liquidation or of
defrauding his creditors;
h. That he has suffered or
procured his property to
be taken on legal process
with intent to give a
preference to one or

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489 FACULTY OF CIVIL LAW
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more of his creditors and
thereby hinder or delay
the liquidation or defraud
any one of his creditors;
i. That he has made any
assignment, gift, sale,
conveyance or transfer of
his estate, property,
rights or credits with
intent to hinder or delay
the liquidation or defraud
his creditors;
j. That he has, in
contemplation of
insolvency, made any
payment, gift, grant, sale,
conveyance or transfer of
his estate, property,
rights or credits;
k. That being a merchant or
tradesman, he has
generally defaulted in the
payment of his current
obligations for a period of
thirty (30) days;
l. That for a period of thirty
(30) days, he has failed,
after demand, to pay any
moneys deposited with
him or received by him in
a fiduciary capacity; and
m. That an execution having
been issued against him
on final judgment for
money, he shall have been
found to be without
sufficient property
subject to execution to
satisfy the judgment.

Effect of The debtor is not absent as Applies even in the case of

Absence of he files the petition. absent debtor under Sec. 108
Debtor of the FRIA.
Posting of bond by creditors The petitioning creditor/s
not required. shall post a bond in such sum
as the court shall direct,
conditioned that if the
petition for liquidation is
dismissed by the court, or
Posting of withdrawn by the petitioner,
Bond or if the debtor shall not be
declared an insolvent, the
petitioners will pay to the
debtor all costs, expenses,
damages occasioned by the
proceedings, and attorney's
fees.

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Issued without trial. Issued after trial.

If the court finds petition Upon filing of such creditors’

sufficient in form and petition, court shall issue a
substance, it shall, whithin 5 show-cause order against the
working days, issue a individual debtor, at a time
liquidation order. and place to be fixed therein
(Villanueva, 2018) why he should not be
adjudged an insolvent.

Issuance of Upon good cause shown, the

Liquidation court may issue an order
Order forbidding the individual
debtor from making
payments of any of his debts,
and transferring any property
belonging to him. If the
individual debtor shall
default or if, after trial, the
issues are found in favour of
petitioning creditors, court
shall isuue liquidation order.
(Villanueva, 2018)

Suspension of payments Q: SARABIA filed a Petition for corporate

rehabilitation with prayer for the issuance of a
Upon motion filed by the individual debtor, the stay order before the RTC as it foresaw the
court may issue an order suspending any pending impossibility to meet its maturing obligations to
execution against the individual debtor: Provided, its creditors when they fall due. It was later on
that properties held as security by secured creditors approved by the lower [Link] mainly argues
shall not be the subject of such suspension order. that the approved rehabilitation plan did not
give due regard to its interests as a secured
The suspension order shall lapse when three (3) creditor in view of the imposition of a fixed
months shall have passed without the proposed interest rate of 6.75% p.a. and the extended loan
agreement being accepted by the creditors or as repayment [Link] BPI correct?
soon as such agreement is denied.
A: No, BPI is not correct. Although undefined in the
No creditor shall sue or institute proceedings to Interim Rules, it may be said that the opposition of
collect his claim from the debtor from the time of the a distressed corporation’s majority creditor is
filing of the petition for suspension of payments and manifestly unreasonable if it counter-proposes
for as long as proceedings remain pending except: unrealistic payment terms and conditions which
would, more likely than not, impede rather than aid
a. Those creditors having claims for personal its rehabilitation. The unreasonableness becomes
labor, maintenance, expense of last illness and further manifest if the rehabilitation plan, in fact,
funeral of the wife or children of the debtor provides for adequate safeguards to fulfill the
incurred in the sixty (60) days immediately majority creditor’s claims, and yet the latter persists
prior to the filing of the petition; and on speculative or unfounded assumptions that his
b. Secured creditors (FRIA, Sec. 96) credit would remain unfulfilled.

Failure of Individual to perform the agreement It must be pointed out that oppositions which push
for high interests rates are generally frowned upon
If the individual debtor fails, wholly or in part, to in rehabilitation proceedings given that the
perform the agreement decided upon at the meeting inherent purpose of a rehabilitation is to find ways
of the creditors, all the rights which the creditors and means to minimize the expenses of the
had against the individual debtor before the distressed corporation during the rehabilitation
agreement shall revest in them. In such case the period. It is the objective of a rehabilitation
individual debtor may be made subject to the proceeding to provide the best possible framework
insolvency proceedings in the manner established for the corporation to gradually regain or achieve a
by this Act (FRIA, Sec. 102). sustainable operating form. Hence, if a creditor,

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whose interests remain well-preserved under the may order the conversion of rehabilitation
existing rehabilitation plan, still declines to accept proceedings to liquidation proceedings:
interests pegged at reasonable rates during the a. Upon a finding that:
period of rehabilitation, and, in turn, proposes rates
1. The debtor is insolvent; and
which are largely counter-productive to the 2. There is no substantial likelihood for
rehabilitation, then it may be said that the creditor’s the debtor to be successfully
opposition is manifestly unreasonable. (BANK OF rehabilitated as determined in
THE PHILIPPINE ISLANDS V SARABIA MANOR accordance with the rules to be
HOTEL CORPORATION G.R. No. 175844, July 29, promulgated by the supreme court
2013) [FRIA, Sec. 25(c)];

Involuntary Liquidation of Individual Debtor vs. b. If there is no rehabilitation plan is confirmed

Involuntary Liquidation of Juridical Debtor within one year from filing a petition to confirm
a rehabilitation plan (FRIA, Sec. 72);
c. If the termination of proceedings is due to
Individual Juridical
BASIS failure of rehabilitation or dismissal of the
Debtor Debtor
petition for reasons other than technical
At least three There can be grounds (FRIA, Sec. 75);
As to
(3) creditors one or more d. In voluntary liquidation of juridical debtors
Number of
required. creditors. (FRIA, Sec. 90); or
Creditors
e. At any other time upon the recommendation of
The debts must The debt or the rehabilitation receiver that the
be at least Five aggregate of rehabilitation of the debtor is not feasible (FRIA,
Hundred debts must be Sec. 92).
Thousand at least one
Pesos million pesos LIQUIDATION ORDER
As to (P500,000) (P1,000,000)
Minimum or equivalent The liquidation order shall:
Amount of to 25% of the
Debt subscribed a. Declare the debtor insolvent;
capital or b. Order the liquidation of the debtor and, in the
partner’s case of a juridical debtor, declare it as dissolved;
contribution, c. Order the sheriff to take possession and control
whichever is of all the property of the debtor, except those
higher. that may be exempt from execution;
The individual The business d. Order the publication of the petition or motion
As to can continue organization in a newspaper of general circulation once a
Continuation business. will be week for two (2) consecutive weeks;
of Business dissolved. e. Direct payments of any claims and conveyance
of any property due the debtor to the liquidator;
As to Proof of There must be Act if f. Prohibit payments by the debtor and the
Acts of an act of insolvency is transfer of any property by the debtor;
Insolvency insolvency. not required. g. Direct all creditors to file their claims with the
liquidator within the period set by the rules of
PROCEDURE procedure;
h. Authorize the payment of administrative
The liquidation process refers to the proceeding expenses as they become due;
where claims are filed and the assets of the i. State that the debtor and creditors who are not
insolvent debtor are disposed and the proceeds are petitioner/s may submit the names of other
divided among the creditors. nominees to the position of liquidator; and
j. Set the case for hearing for the election and
CONVERSION OF REHABILITAION appointment of the liquidator, which date shall
PROCEEDINGS TO LIQUIDATION PROCEEDINGS not be less than thirty (30) days nor more than
forty-five (45) days from the date of the last
During the pendency of court-supervised or pre- publication. (FRIA, Sec. 112)
negotiated rehabilitation proceedings, the court
EFFECTS OF LIQUIDATION ORDER

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Upon the issuance of the liquidation order: convey the property to the secured creditor and
the latter will be admitted in the liquidation
The juridical debtor shall be deemed dissolved and proceedings as a creditor for the balance; if its
its corporate or juridical existence terminated; value exceeds the claim secured, the liquidator
may convey the property to the creditor and
a. Legal title to and control of all the assets of the waive the debtor's right of redemption upon
debtor, except those that may be exempt from receiving the excess from the creditor;
execution, shall be deemed vested in the 2. The liquidator may sell the property and satisfy
liquidator or, pending his election or the secured creditor's entire claim from the
appointment, with the court; proceeds of the sale; or
b. All contracts of the debtor shall be deemed 3. The secured creditor may enforce the lien or
terminated and/or breached, unless the foreclose on the property pursuant to
liquidator, within ninety (90) days from the applicable laws (FRIA, Sec. 114).
date of his assumption of office, declares
otherwise and the contracting party agrees; POWERS, DUTIES AND RESPONSIBILITIES OF
c. No separate action for the collection of an THE LIQUIDATOR
unsecured claim shall be allowed. Such actions
already pending will be transferred to the The liquidator shall be deemed an officer of the
liquidator for him to accept and settle or court with the principal duty:
contest. If the liquidator contests or disputes
the claim, the court shall allow, hear and resolve c. Of preserving and maximizing the value and
such contest except when the case is already on recovering the assets of the debtor, with the end
appeal. In such a case, the suit may proceed to of liquidating them and discharging to the
judgment, and any final and executory extent possible all the claims against the debtor;
judgment therein for a claim against the debtor (FRIA, Sec. 119)
shall be filed and allowed in court; and d. To take an oath and file a bond, in such amount
d. No foreclosure proceeding shall be allowed for to be fixed by the court, conditioned upon the
a period of one hundred eighty (180) days proper and faithful discharge of his powers,
(FRIA, Sec. 113). duties and responsibilities. (FRIA, Sec. 117)

RIGHTS OF SECURED CREDITORS The powers, duties and responsibilities of the

liquidator shall include, but not be limited to:
Secured creditor
a. To sue and recover all the assets, debts and
Refers to a creditor with a secured claim [FRIA, Sec. claims, belonging or due to the debtor;
4(kk)]. b. To take possession of all the property of the
debtor except property exempt by law from
NOTE: Secured claim shall refer to a claim that is execution;
secured by a lien [FRIA, Sec. 4(jj)]. c. To sell, with the approval of the court, any
property of the debtor which has come into his
The Liquidation Order shall not affect the right of a possession or control;
secured creditor to enforce his lien in accordance d. To redeem all mortgages and pledges, and to
with the applicable contract or law. satisfy any judgment which may be an
encumbrance on any property sold by him;
A secured creditor may: e. To settle all accounts between the debtor and
his creditors, subject to the approval of the
a. Waive his rights under the security or lien, court;
prove his claim in the liquidation proceedings f. To recover any property or its value,
and share in the distribution of the assets of the fraudulently conveyed by the debtor;
debtor; or g. To recommend to the court the creation of a
b. Maintain his rights under his security or lien. creditors' committee which will assist him in
the discharge of his functions and which shall
If the secured creditor maintains his rights under have powers as the court deems just,
the security or lien: reasonable and necessary; and
h. Upon approval of the court, to engage such
1. The value of the property may be fixed in a professionals as may be necessary and
manner agreed upon by the creditor and the reasonable to assist him in the discharge of his
liquidator. When the value of the property is duties.
less than the claim it secures, the liquidator may

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In addition to the rights and duties of a register and may be subsequently set aside only on
rehabilitation receiver, the liquidator shall have the grounds of fraud, accident, mistake or inexcusable
right and duty to take all reasonable steps to neglect (FRIA, Sec. 125).
manage and dispose of the debtor's assets with a
view towards maximizing the proceedings LIQUIDATION PLAN
therefrom, to pay creditors and stockholders, and to
terminate the debtor's legal existence (FRIA, Sec. Within three (3) months from his assumption into
119). office, the Liquidator shall submit a Liquidation Plan
to the court. The Liquidation Plan shall, as a
DETERMINATION OF CLAIMS minimum, enumerate all the assets of the debtor, all
the claims against the debtor and a schedule of
Within twenty (20) days from his assumption into liquidation of the assets and payment of the claims
office, the liquidator shall prepare a preliminary (FRIA, Sec. 129).
registry of claims of secured and unsecured
creditors. Sales of assets in Liquidation

Secured creditors who have waived their security or The liquidator may sell the unencumbered assets of
lien, or have fixed the value of the property subject the debtor and convert the same into money. The
of their security or lien by agreement with the sale shall be made at public auction.
liquidator and is admitted as a creditor for the
balance, shall be considered as unsecured creditors. However, a private sale may be allowed with the
approval of the court if:
The liquidator shall make the registry available for
public inspection and provide publication notice to a. The goods to be sold are of a perishable nature,
creditors, individual debtors, owner/s of the sole or are liable to quickly deteriorate in value, or
proprietorship-debtor, the partners of the are disproportionately expensive to keep or
partnership-debtor and shareholders or members maintain; or
of the corporation-debtor, on where and when they b. The private sale is for the best interest of the
may inspect it. All claims must be duly proven debtor and his creditors. With the approval of
before being paid (FRIA, Sec. 123). the court, unencumbered property of the
debtor may also be conveyed to a creditor in
Right of set-off satisfaction of his claim or part thereof (FRIA,
Sec. 131).
If the debtor and a creditor are mutually debtor and
creditor of each other, one debt shall be set off With court’s approval, unencumbered property of
against the other, and only the balance, if any, shall Debtor may also be conveyed to a creditor in
be allowed in the liquidation proceedings (FRIA, Sec. satisfaction of his claim or part thereof.
124).
Concurrence and preference of credits
Opposition or challenge to claims
The Liquidation Plan and its implementation shall
Within thirty (30) days from the expiration of the ensure that the concurrence and preference of
period for filing of applications for recognition of credits as enumerated in the Civil Code of the
claims, creditors, individual debtors, owner/s of the Philippines and other relevant laws shall be
sole proprietorship-debtor, partners of the observed, unless a preferred creditor voluntarily
partnership-debtor and shareholders or members waives his preferred right. For purposes of this
of the corporation-debtor and other interested chapter, credits for services rendered by employees
parties may submit a challenge to a claim or claims or laborers to the debtor shall enjoy first preference
to the court, serving a certified copy on the under Article 2244 of the Civil Code, unless the
liquidator and the creditor holding the challenged claims constitute legal liens under Articles 2241 and
claim (FRIA, Sec. 125). 2242 thereof (FRIA, Sec. 133).

Finality of the claims The rules on preference and concurrence of credits

are of no consequence where the value of the
Upon the expiration of the thirty (30)-day period, property or the value of all the assets is sufficient to
the rehabilitation receiver shall submit to the court pay in full all the creditors. Hence, the rules become
the registry of claims containing the undisputed material only when insolvency proceedings - when
claims that have not been subject to challenge. Such the assets are insufficient for then some creditors of
claims shall become final upon the filing of the necessity will not be paid or some creditors will not

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obtain the full satisfaction of their claims.
(Philippine Savings Bank v. Hon. Lantin, 124 SCRA
476, 1983)

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