You are on page 1of 192

A. Letters of Credit 1.

Definition and nature of Letter of Credit That issued by one merchant to another for the purpose of attending to a commercial transaction.1 An instrument issued by a bank on behalf of one of its customers, authorizing an individual or a firm to draw drafts on the bank or one of its correspondents for its account under certain conditions of the credit.2 An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.3 Through it, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. The LC is a financial device4 developed as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. 2. Parties to a letter of credit a. Applicant/buyer/importer – one who purchases the goods, procures the LC, and obliges himself to reimburse the issuing bank upon receipt of the documents of title. b. Issuing/opening bank – one which issues the LC, and undertakes to pay the seller upon receipt of the draft and proper documents of title from the seller and to surrender them to the buyer upon reimbursement; and c. Seller/exporter/beneficiary – one who sells the goods to the buyer, and who delivers the draft and documents to the issuing bank to recover payment.5 d. Advising/notifying bank – the correspondent bank6 of the opening bank through which it advises the beneficiary of the LC.
1

Art. 567 Commercial Law Review, C. Villanueva, 2004 ed. 3 Prudential Bank vs. CA, 216 SCRA 257 4 mode of payment 5 The number of parties may be increased. Modern letters of credit are usually not made between natural persons. They involve bank-to-bank transactions.
2

1

e. Confirming bank – bank which, upon the request of the beneficiary, confirms the LC issued. f. Paying bank – bank on which the drafts are to be drawn, which may be the opening bank or another bank not in the city of the beneficiary. g. Negotiating bank – bank in the city of the beneficiary which buys or discounts the drafts contemplated by the LC, if such draft is to be drawn on the opening bank or on another designated bank not in the city of the beneficiary. a. Rights and obligations of parties 1. Drawer is liable to person on whom it was issued provided identity proven, for the amount paid within fixed maximum. 2. Bearer has no right of action if not paid by person who issued it. 3. Drawer may annul the letter of credit, informing the bearer and to whom it is addressed. 4. Bearer shall pay the amount received to drawer, otherwise action for execution may be filed with interest and current exchange in place where payment made on place where repaid. 5. If a bearer does not make use of letter of credit within agreed period, or if none, within 6 months from date if in the Philippines, and 12 months if outside the Philippines, it shall be void.7 3. Basic Principles of letter of credit a. Doctrine of independence The three (3) basic contracts are distinct and independent, and the undertakings of the respective parties in each are neither subject to claims and defenses nor affected by the breach in the others. b. Fraud exception principle

6 7

agent Arts. 569-572

2

When the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue.8 c. Doctrine of strict compliance It espouses that the documents tendered by the seller/beneficiary must strictly conform to the terms of the LC.9 B. Trust Receipts Law 1. Definition/Concept of a Trust Receipt Transaction A trust receipt transaction is any transaction by and between a person referred to as the entruster, and another person referred to as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In the case of goods or documents a) to sell the goods or procure their sale; or b) to manufacture or process the goods with the purpose of ultimate sale. In the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments,

8

Transfield Phils, Inc. vs. Luzon Hydro Corporation, Australia and New Zealand Banking Group Limited and Security Bank Corp., G.R. No. 146717, November 22, 2004 9 i.e. they must include all the documents required by the LC (Feati Bank vs. CA)

3

or instruments subject of a trust receipt transaction. The bank acquires a security interest in the goods as holder of a security title for the advances it made to the entrustee. 2. documents or instruments for profit who. has. This is not a simple loan transaction between a creditor and debtor-importer. 4 . Bank is also not liable to buyer of goods as vendor 5. The sale of goods. retaining title or other interest as security for the payment of the purchase price. or d) to effect their presentation.a) to sell or procure their sale or exchange. and any successor in interest of such person. The law warrants the validity of the entruster’s security interest as against the creditors of the trust receipt agreement. documents or instruments by a person in the business of selling goods. Goods are owned by the bank. general property rights in such goods. Ownership of the goods. and are only released to the importer in trust after the grant of the loan. 2. or c) to effect the consummation of some transactions involving delivery to a depository or register. Purchaser from entrustee gets good title. does not constitute a trust receipt transaction and is outside the purview and coverage of the Decree. Bank is preferred over other creditors. at the outset of the transaction. or b) to deliver them to a principal. or who sells the same to the buyer on credit. Rights of the Entruster11 The entruster shall be entitled to the proceeds from the sale of the goods. No particular form is required for trust receipt 2. as against the buyer. Loan/security feature 1. 4. documents or instruments. documents or instruments released under a trust receipt to the entrustee to the extent 10 11 Sec. documents. 4 Entruster" refers to the person holding title over the goods. 6. Entrustee must deliver money or return unsold goods to entrustor 3. 10 a. b. documents and instruments under a trust receipt 1. collection or renewal.

documents or instruments. become a purchaser. documents or instruments at public or private sale.12 a. or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. sell the goods.13 3. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. and the entruster may. Notice of sale shall be deemed sufficiently given if in writing. and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree. documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee. (c) to the satisfaction of the entrustee's indebtedness to the entruster. and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's last known business address. at a public sale. The entruster may cancel the trust and take possession of the goods.of the amount owing to the entruster or as appears in the trust receipt. keeping and storing the goods. shall be applied (a) to the payment of the expenses thereof. The proceeds of any such sale. documents. or to the return of the goods. Obligations and Liability of the Entrustee The entrustee shall 12 13 Sec. not less than five days after serving or sending of such notice. whether public or private. 7 Sec. and the entruster in possession of the goods. (b) to the payment of the expenses of re-taking. and may. give notice to the entrustee of the intention to sell. documents or instruments may. Validity of the security interest as against the creditors of the entrustee/innocent purchasers for value The entruster's security interest in goods. documents or instruments in case of non-sale. 12 5 . on or after default.

documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt. (3) insure the goods for their total value against loss from fire. shall not extinguish his obligation to the entruster for the value thereof. (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt. (5) return the goods. separate and capable of identification as property of the entruster. pilferage or other casualties. shall not extinguish his obligation to the entruster for the value thereof. pending their disposition.15 a. pending their disposition. Loss of goods. documents or instruments which are the subject of a trust receipt.(1) hold the goods. and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree. documents or instruments Keep said goods or proceeds separate and capable of identification. irrespective of whether or not it was due to the fault or negligence of the entrustee.16 14 15 Sec. 9 Sec. b. documents or instruments The risk of loss shall be borne by the entrustee. (4) keep said goods or proceeds thereof whether in money or whatever form.14 The risk of loss shall be borne by the entrustee. c. documents or instruments in the event of non-sale or upon demand of the entruster. documents or instruments in case of sale Return the goods. Payment/Delivery of proceeds of sale or disposition of goods. Loss of goods. 10 16 ibid. Return of goods. documents or instruments which are the subject of a trust receipt. Liability for loss of goods. documents or instruments in the event of non-sale or upon demand. theft. irrespective of whether or not it was due to the fault or negligence of the entrustee. 6 .

interest. or intent to defraud (People vs. which by its form and on its face. officers. Prudential Bank vs. 1981) Offense: estafa under Art. Penal sanction if offender is a corporation The penalty provided for in this Decree shall be imposed upon the directors. transportation. employees or other officials or persons therein responsible for the offense. insurance.18 5. ( Metropolitan Bank vs. There is no need to prove damage to the entrustor. 251 SCRA 421.d. so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties. and for the sale of the goods where default has been made in satisfying the warehouseman’s lien. 19 Negotiable instrument (NI) A written contract for the payment of money which complies with the requirements of Sec. 315 of the Revised Penal Code. 1999) The offense is malum prohibitum. all lawful claims for money advanced. NLRC. Requisites of Negotiability 1. Negotiable Instruments Law19 1. (Reviewer on Commercial Law.17 4.20 17 18 Sec. 1995 Failure to turn over proceeds of the sale of goods or to return unsold goods is a public nuisance to be abated by the imposition of penal sanctions (Tiomico vs. last sen. Cuervo. Cancel trust and take possession of the goofs b. coopering. labor. Tonda. Forms and Interpretation a. 13. weighing. without prejudice to the civil liabilities arising from the criminal offense. File a 3rd party claim or separate civil action at any time upon default or failure of entrustee to comply with terms and conditions of the trust agreement. 1 of the NIL. and other charges and expenses in relation to such goods. D. also all reasonable charges and expenses for notices and advertisements of sale. Warehouseman’s Lien All lawful charges for storage and preservation of the goods. 2000). Must be in writing and signed by the maker or drawer. Court of Appeals. Professors Sundiang and Aquino) 7 . Remedies available The entrustor can: a. is intended as a substitute for money and passes from hand to hand as money.

(Cesar Villanueva. When it is payable to a person named therein or to bearer. The instrument may be made payable to the order of: a. Commercial Law Review. No person liable on the instrument whose signature does not appear thereon. The drawee d. binding so long it is intended or adopted as the signature of the signer or made with his authority. (Sec. drawer or drawee b. NIL) Signature of party may be made by duly authorized agent. A sum is certain if the amount to be unconditionally paid by the maker or drawee can be determined on the face of the instrument and is not affected by the fact that the exact amount is arrived at only after a mathematical computation. Aquino) 22 The instrument is payable to order where it is drawn payable to the order of a specified person. When it is payable to the order of a fictitious or non-existing person. (Notes and Cases on Banks. One who signs in a trade or assumed name liable to same extent as if he had signed in his own name. (Sec. 18. or c. The drawer or maker c. no particular form of appointment necessary. or b. (Sec. The happening of the event does not cure the defect. or b) A statement of the transaction which gives rise to the instrument Where the promise or order is subject to the terms and conditions of the transaction stated. Negotiable Instruments and other Commercial Documents.2. Must be payable to order or to bearer. written or typed 21 Where the promise or order is made to depend on a contingent event. it is conditional. and such fact was known to the person making it so payable. Must be payable on demand. 8) The payee must be named or otherwise indicated therein with reasonable certainty. or at a fixed or determinable future time. (Notes and Cases on Banks. Timoteo B. or 8 . (Sec. and the instrument involved is non-negotiable. The NI must be burdened with the terms and conditions of that agreement to destroy its negotiability. or to him or his order. 3) The dates of each installment must be fixed or at least determinable and the amount to be paid for each installment. Aquino) Signature. With respect to the signature. 2 or more payees jointly e.includes print. A payee who is not the maker.) But an order or promise to pay out of a particular fund is NOT unconditional. One or some of several payees f. 4.21 3. NIL) "In writing" . the instrument is rendered non-negotiable. 2004 ed. Negotiable Instruments and other Commercial Documents. The unconditional nature of the promise or order is not affected by: a) An indication of a particular fund out of which reimbursement is to be made. it is enough that what the maker or drawer affixed shows his intent to authenticate the writing. When it is expressed to be so payable. The holder of an office for a time being Payable to Bearer The instrument is payable to bearer: a. Timoteo B.22 and 20 Any kind of material that substitutes paper is sufficient. Must contain an unconditional promise or order to pay a sum certain in money. 19. or a particular account to be debited with the amount.

he must be named or otherwise indicated therein with reasonable certainty. signed by the person giving it. 383) Fictitious payee rule: It is not necessary that the person referred to in the instrument is really non-existent or fictitious to make the instrument payable to bearer. Reason: The name of the payee does not purport to be the name of any person. Check d. CA. As opposed to an original order instrument becoming payable to bearer.26 It is the most common form of bill of exchange. 9(c) of the NIL if the person making it so payable does not intend to pay the specified persons. 126 26 Sec. (Sec. When the name of the payee does not purport to be the name of any person. 184 25 Sec. if the same is indorsed specially.24 Bill of exchange An unconditional order in writing addressed by one person to another.23 b. requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. it can no longer be negotiated further by mere delivery. When the only or last indorsement is an indorsement in blank. When the instrument is addressed to a drawee. 9) An instrument originally payable to bearer can be negotiated by mere delivery even if it is indorsed especially. The person to whose order the instrument is made payable may in fact be existing but he is till fictitious or non-existent under Sec. Professors Sundiang and Aquino) 23 Applicable only to a bill of exchange A bill may be addressed to 2 or more drawees jointly whether they are partners or not but not to 2 or more drawees in the alternative or in succession. a sum certain in money to order or to bearer. Kinds of negotiable instrument Promissory note An unconditional promise in writing by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time. 128) 24 Sec. or e. A check that is payable to the order of cash is payable to bearer. (Sec. it will always be a BEARER instrument. (Reviewer on Commercial Law. it has to be indorsed. 87 Phil.25 A bill of exchange drawn on a bank payable on demand.5. 185 9 . (Ang Tek Lian vs. If it is originally a bearer instrument.

14 29 Sec. is negotiated to a holder in due course. and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. it is valid and effectual for all purposes in his hands. This is a real defense. any holder may insert therein the true date of issue or acceptance. not a valid contract against a person who has signed before delivery of the contract even in the hands of a holder in due course but subsequent indorsers are liable.28 c. after completion. it must be filled up strictly in accordance with the authority given and within a reasonable time. or where the acceptance of an instrument payable at a fixed period after sight is undated. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. however. Incomplete and undelivered instruments If completed and negotiated without authority. 13 Sec.27 b. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course. delivery must be coupled with the intention of transferring title to the instrument. Complete but undelivered instruments 1. but as to him. and the instrument shall be payable accordingly.2. 27 28 Sec. In order. the date so inserted is to be regarded as the true date. But if any such instrument. that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion. Insertion of date Where an instrument expressed to be payable at a fixed period after date is issued undated. Completion and delivery a. the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. 15 10 . Completion of blanks Where the instrument is wanting in any material particular. Between immediate parties and those who are similarly situated. 29 d.

it is conclusively presumed that there was valid delivery. presumption of a valid and intentional delivery is rebuttable. Forgery35 30 31 Sec. he is not liable on the instrument if he was duly authorized. Signature of agent The signature of any party may be made by a duly authorized agent. 18 32 Sec.33 c. 22 35 Persons precluded from setting up defense of forgery 11 . 19 33 Sec. but the mere addition of words describing him as an agent. and the authority of the agent may be established as in other cases of agency.2. As to a holder in due course. Signing in trade name One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name.30 3.31 b.32 Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity. notwithstanding that from want of capacity. without disclosing his principal.34 d. No particular form of appointment is necessary for this purpose. Indorsement by minor or corporation The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein. or as filling a representative character. As against an immediate party and remote party who is not a holder in due course. 20 34 Sec. and 3. does not exempt him from personal liability. 16 Sec. the corporation or infant may incur no liability thereon. Signature a.

27) 12 .38 Exception: Unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. Those who. amount.39 4. the signature37 is wholly inoperative. Alteration of an instrument in the name. Value previously given c. Every person whose signature appears thereon is presumed to have become a party thereto for value. with intent to defraud. An antecedent or pre-existing debt b. 36 1 Agbayani. 1992 ed. (Sec. 24 What constitutes value: a. without receiving value therefor. drawer. or negligence. Consideration Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration. Signing of another’s name with intent to defraud.To give a discharge therefore 3. persons negotiating by delivery and acceptors. are estopped from setting up the defense of forgery. No right to retain the instrument 2. can be acquired through or under such signature 39 Sec. silence. or indorser. Lien arising from contract or by operation of law. Such a person is liable on the instrument to a holder for value.36 General Rule: When a signature is forged or made without the authority of the person. notwithstanding 1.Counterfeit making or fraudulent alteration of any writing. 2. This includes indorsers. 37 not instrument itself and the genuine signatures 38 Legal Effects: 1. and for the purpose of lending his name to some other person. To enforce payment thereof against any party thereto. name of payee. or 2. acceptor. etc. by their acts. 23 40 Sec.40 5. Those who warrant or admit the genuineness of the signature in question. Accommodation party One who has signed the instrument as maker. which may consist of: 1.

Notes and Cases on Banks. a NI may be negotiated by indorsement completed by delivery. at the time of taking the instrument. If payable to order. knew him to be only an accommodation party. (The Law on Negotiable Instruments with Documents of Title. and 2. The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effect to it.45 41 42 Sec. Distinguished from assignment Negotiation Assignment The transfer of the instrument from one The transferee does not become a holder person to another so as to constitute the and he merely steps into the shoes of the transferee as holder thereof. CA. 2000 ed. Hector de Leon.) 13 .42 transferor. a negotiable instrument may be negotiated by mere delivery. 29 Sec. 222 SCRA 466) 44 Sec. 2. 191 Steps: 1. Modes of negotiation Issuance First delivery of the instrument complete in form to a person who takes it as a holder.41 6.such holder. Aquino. Any defense available against the transferor is available against the transferee.44 Subsequent Negotiation 1. (Sesbreño vs.30 43 Timoteo B.43 b. Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1. If payable to bearer. Negotiable Instruments and other Commercial Documents Assignment may be effected whether the instrument is negotiable or non-negotiable. Negotiation a.

35 14 . Upon due notice to him of such failure.46 c. a. the instrument is to be payable. Upon no other condition than failure of prior parties to do so. Instrument becomes payable to bearer and may be negotiated by delivery. b. But for the purpose of determining whether the transferee is a holder in due course. Sima Wei. 49 Sec.48 b. delivery must be intended to give effect to the transfer of instrument. Blank Absolute One by which indorser binds himself to pay: a. Kinds of Indorsements Special Specifies the person to whom or to whose order. 45 In both cases. May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of 49 indorsement.47 Specifies no indorsee. 34 48 id.Incomplete instrument negotiation of order Where the holder of an instrument payable to his order transfers it for value without indorsing it. 49 47 Sec. the transfer vests in the transferee such title as the transferor had therein and he also acquires the right to have the indorsement of the transferor. 219 SCRA 736) 46 Sec. the negotiation takes effect as of the time when the indorsement is made. ( Development Bank vs.

Party required to pay may disregard the conditions. "at the indorser's own risk". "indorser not holder". 38 It is made by adding to the indoser's signature words like "sans recourse. or b. etc. 52 Sec. Vests the title in the indorsee in trust for or to the use of some other persons.Conditional Right of the indorsee is made to depend on the happening of a contingent event. But mere absence of words implying power to negotiate does not make an indorsement restrictive. Constitutes the indorsee the agent of the indorser. Restrictive Qualified Constitutes the indorser a mere assignor of the title to the instrument. not otherwise a party to an instrument.” “without recourse". places thereon his signature in blank before delivery. or c.50 When it either: a. 64 15 .52 50 51 Sec. 39 Sec.51 Indorsement payable to two (2) or more persons. Prohibits further negotiation of the instrument. Joint Irregular A person who.

The weight of authority sustains the view that a payee may be a holder in due course.57 53 54 Holder . Rights of the Holder53 a. and admits the existence of the payee and his then capacity to indorse. 3 For value and in good faith. 2. 52) Every holder of a negotiable instrument is deemed prima facie a holder in due course. and 4.a payee or endorsee of a bill or note who is in possession of it or the bearer thereof. However. (Sec. Defenses against the Holder In the hands of any holder other than a holder in due course. (Sec. G. 3. But a holder who derives his title through a holder in due course. May sue on the instrument in his own name. Became a holder before it was overdue and without notice that it had been previously dishonored. 58 57 Sec. August 15. 51 and 57 56 Sec. the presumption that he is a prima facie holder in due course applies in his favor.7. Maker The maker of a negotiable instrument. engages that he will pay it according to its tenor. At the time he took it. No.55 b. Liabilities of Parties a. 60 16 . Holds the instrument free from any defect of title of prior parties and free from defenses available to parties among themselves. May enforce payment of the instrument for the full amount thereof against all parties liable thereon. ( Cely Yang vs. Hence. 2003) 55 Secs.56 8.R. by making it. a negotiable instrument is subject to the same defenses as if it were non-negotiable. 138074. the instrument is discharged.Instrument is complete and regular upon its face. and who is not himself a party to any fraud or illegality affecting the instrument. this presumption arises only in favor of a person who is a holder as defined in Section 191 of the NIL. Holder in Due Course54 1. he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. 191) A holder who has taken the instrument under the following conditions: 1 . May receive payment and if payment is in due course. and 4. has all the rights of such former holder in respect of all parties prior to the latter. 2. Court of Appeals.

not otherwise a party to an instrument. d. engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer. Acceptor The acceptor. the instrument will be accepted or paid. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. Drawer The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse. or both. Indorser Where a person. 61 Sec. or is payable to bearer. places thereon his signature in blank before delivery. according to its tenor. in accordance with the following rules: (a) If the instrument is payable to the order of a third person. and (b) The existence of the payee and his then capacity to indorse. on due presentment. and his capacity and authority to draw the instrument. by accepting the instrument. he is liable to the payee and to all subsequent parties. (c) If he signs for the accommodation of the payee. the genuineness of his signature. (b) If the instrument is payable to the order of the maker or drawer.b. he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it.60 58 59 Sec.58 c. he incurs all the liability of an indorser. he is liable as indorser. he is liable to all parties subsequent to the payee.59 Where a person places his indorsement on an instrument negotiable by delivery. and engages that. he is liable to all parties subsequent to the maker or drawer. 64 17 . and that if it be dishonored and the necessary proceedings on dishonor be duly taken.

65 62 Sec. and that if it be dishonored and the necessary proceedings on dishonor be duly taken. d) That the instrument is. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. or to any subsequent indorser who may be compelled to pay. at the time of his indorsement. Sec. or both. But when the negotiation is by delivery only. (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. according to its tenor. (b) That he has a good title to it. it shall be accepted or paid. 66 18 .61 Every indorser who indorses without qualification. as the case may be. (c) That all prior parties had capacity to contract. Warranties Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be.62 9.e. b) That he has a good title to it. c) That all prior parties had capacity to contract. the warranty extends in favor of no holder other than the immediate transferee. on due presentment. warrants to all subsequent holders in due course: a) That the instrument is genuine and in all respects what it purports to be. he will pay the amount thereof to the holder. Presentment for Payment 60 61 ibid. and e) He engages that. valid and subsisting. it.

63 a. Presentment is excused and the instrument is overdue and unpaid. Dishonor by non-payment68 1. Notice of Dishonor Notice given by holder or his agent to party or parties secondarily liable that the instrument was dishonored by non-acceptance by the drawee of a bill or by nonpayment by the acceptor of a bill or by non-payment by the maker of a note. last sen. In order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. 72 66 Sec. Necessity of presentment for payment Presentment for payment is necessary in order to charge the drawer and indorsers. 89 19 . 84) 69 Sec. 2. 70.66 2. Payment is refused or cannot be obtained after due presentment for payment. 79 67 Sec. 65 Sec. or to the drawee or acceptor for payment or the production of a Promissory Note to the party liable for the payment of the same.69 10. In order to charge an indorser when the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. notice of dishonor is generally required.64 b. Parties to whom presentment for payment should be made To the person primarily liable or if he is absent or inaccessible. Dispensation with presentment for payment 1.The production of a Bill of Exchange to the drawee for his acceptance.70 63 64 Sec.65 c. However.67 d. 70 Sec. (Sec. 83 70 Sec. to any person found at the place where the presentment is made. 80 68 Effect: There is an immediate right of recourse by the holder against persons secondarily liable.

upon proper proceedings taken.a. or after the omission to give due notice. Parties who may give notice of dishonor Given by holder or his agent.71 b.73 d. but 2. Parties to be notified Given to secondary party or his agent. 97 Sec. 151 74 Sec. Waiver Either before the time of giving notice. it binds all parties.74 As to who are affected by an express waiver depends on where the waiver is written: 1. By bringing verbally or 2. Waiver may be expressed or implied. If it is written above the signature of an indorser. it binds him only. By writing to the knowledge of the person liable the fact that a specified instrument. Dispensation with notice 71 72 Sec. e. 109 75 Sec. and that the party notified is expected to pay it. 90 73 Sec.72 c. Form of notice 1. has not been accepted or has not been paid. Effect of notice Immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. If it appears in the body or on the face of the instrument. 110 20 .75 f. or by any party who may be compelled by the holder to pay.

5. consequently. whether primary or secondary. By any act which discharges the instrument.76 2. When party to be notified knows about the dishonor. 6. 120 21 . When after due diligence. 112 79 Sec. By a valid tender of payment made by a prior party. Discharge of Negotiable Instrument a. By the intentional cancellation of his signature by the holder. 81 Sec. By the discharge of a prior party. Effect of failure to give notice An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. 114-117 Sec. 109 78 Sec. It renders the instrument without force and effect and. Discharge of negotiable instrument A release of all parties. 4.81 c. If waived. 2000 ed. Hector de Leon. unless the holder’s right of recourse against the party secondarily liable is expressly reserved. 3. actually or constructively. By the release of the principal debtor. Right of party who discharged instrument 76 77 Secs.77 and 3. it cannot be given. from the obligations arising thereunder. By any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument. Discharge of parties secondarily liable 1. 2.79 11.80 b. it can no longer be negotiated.78 g.1. 117 80 The Law on Negotiable Instruments with Documents of Title.

the agreement to extend the time of payment does not discharge a party secondarily liable: a) where the extension of time is consented to by such party. 122 22 . b) The sum payable. It only cancels his own liability and that of the parties subsequent to him. But a renunciation does not affect the rights of a holder in due course without notice. it is not discharged. except: (a) Where it is payable to the order of a third person and has been paid by the drawer. and he may strike out his own and all subsequent indorsements and against negotiate the instrument. at. (Sec. c) The time or place of payment: d) The number or the relations of the parties. or after its maturity. 121 83 Sec. Payment at or after maturity by a party secondarily liable does not discharge the instrument.Where the instrument is paid by a party secondarily liable thereon. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon.82 d. or In the following cases. either for principal or interest. 121) 82 Sec. Material alteration a. e) The medium or currency in which payment is to be made. b) where the holder expressly reserves his right of recourse against such party. Renunciation by holder The holder may expressly renounce his rights against any party to the instrument before.83 12. Concept Any alteration which changes: a) The date. f) Adds a place of payment where no place of payment is specified. and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated. but the party so paying it is remitted to his former rights as regard all prior parties. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument.

and if such request is refused. Effect of material alteration Where a negotiable instrument is materially altered without the assent of all parties liable thereon. dates as of the day of presentation. When an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration. Definition The signification by the drawee of his assent to the order of the drawer. It is the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him. 133 88 Sec. except as against a party who has himself made. may treat the bill as dishonored. authorized. or assented to the alteration and subsequent indorsers.88 d.87 c. the acceptance. 132 87 Sec. 136 23 . Acceptance a. 124 86 Sec.84 b.86 The holder of the bill presenting the same for acceptance may require that the acceptance be written on the bill. if given. b. it is avoided.85 13. Rules governing acceptance 84 85 Sec. Manner Must be in writing and signed by the drawee and must not express that the drawee will perform his promise by any other means than the payment of money. he may enforce payment thereof according to its original tenor. Time for acceptance The drawee is allowed twenty-four (24) hours after presentment in which to decide whether or not he will accept the bill. 125 Sec. is a material alteration.g) Any other change or addition which alters the effect of the instrument in any respect.

91 Where a drawee to whom a bill is delivered for acceptance destroys the same. (b) Partial . 133 Sec. A general acceptance assents without qualification to the order of the drawer.90 An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who.94 An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere. if such request is refused. or after it has been dishonored by a previous refusal to accept. 140 24 . 137 93 Sec. or while otherwise incomplete.93 An acceptance is either general or qualified. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it. upon the faith thereof. on the faith thereof. 138 94 Sec.95 An acceptance is qualified which is: (a) Conditional . receives the bill for value. A qualified acceptance in express terms varies the effect of the bill as drawn.The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill. or by nonpayment.89 Where an acceptance is written on a paper other than the bill itself. 139 95 Sec.which makes payment by the acceptor dependent on the fulfillment of a condition therein stated. or refuses within twenty-four hours after such delivery or within such other period as the holder may allow.92 A bill may be accepted before it has been signed by the drawer. or when it is overdue. in the absence of any different agreement. he will be deemed to have accepted the same. 135 92 Sec. receives the bill for value. it does not bind the acceptor except in favor of a person to whom it is shown and who. is entitled to have the bill accepted as of the date of the first presentment. and. 134 91 Sec. may treat the bill as dishonored. the holder. 89 90 Sec. to return the bill accepted or non-accepted to the holder.an acceptance to pay part only of the amount for which the bill is drawn.

he must. 141 Sec. c. When the drawer or an indorser receives notice of a qualified acceptance. Effect of failure to make presentment The drawer and all indorsers are discharged. presentment may be made to his personal representative. within a reasonable time. (d) Qualified . b. last sen. one or more of the drawees but not of all. 143 99 See sec. Presentment for Acceptance a. or when it is necessary in order to fix the maturity of the instrument. Where drawee is dead. f.99 96 97 Sec. the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance. Where a bill is addressed to 2 or more drawees who are not partners. Where the bill expressly stipulates that it shall be presented for acceptance. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. presentment must be made to all. Time/place/manner of presentment a. e. (e) The acceptance of some. presentment may be made to him or his trustee or assignee. he may treat the bill as dishonored by non-acceptance.as to time. Where a qualified acceptance is taken. or subsequently assent thereto. express his dissent to the holder or he will be deemed to have assented thereto.97 14. Where the drawee is adjudged a bankrupt. 25 . insolvent or made an assignment to his creditors. b.98 d. 142 98 Sec. 144.an acceptance to pay only at a particular place.(c) Local . Where the bill is payable after sight.96 The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance.

103 b.102 16. or at a fixed or determinable future time. 184 103 Sec. signed by the maker. 105 Tan vs. Checks a. It is a primary obligation of the issuing bank and accepted in advance upon issuance. CA.c. It is similar to the cashier’s check as to the effect and use. engaging to pay on demand. Dishonor by non-acceptance When duly presented for acceptance – acceptance is refused or cannot be obtained. Definition A bill of exchange drawn on a bank payable on demand.100 15. 100 Sec. Where a note is drawn to the maker's own order. Commercial Law Review. 2004 ed.105 Manager’s Check A check drawn by the manager of a bank in the name of the bank itself payable to a third person. 239 SCRA 310 101 26 . Promissory Notes101 An unconditional promise in writing made by one person to another. or When presentment for acceptance is excused – bill is not accepted. in the name of the bank against the bank itself payable to a third person. 149 A promise to pay money 102 Sec. 185 104 Cesar Villanueva. it is not complete until indorsed by him. a sum certain in money to order or to bearer. Kinds104 Cashier’s Check One drawn by the cashier of a bank.

with the understanding that it is not to be presented at the bank. but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word “memorandum”.Memorandum Check A check given by a borrower to a lender for the amount of a short loan. 107 27 .107 (2) Effect of delay The drawer will be discharged from liability thereon to the extent of the loss caused by the delay.106 c. Presentment for payment (1) Time Within reasonable time after its issue.108 106 Sec. 186 108 Ibid. “memo” or “mem” on the check. 187 Sec. Certified Check An agreement whereby the bank against whom a check is drawn undertakes to pay it at any future time when presented for payment.

Voluntary The parties may incorporate such terms and conditions as they may deem convenient. 2. Insurance Code 1.) 28 . 3. 2. par. and 5. Concept of Insurance An agreement whereby one undertakes for a consideration to indemnify another against loss. 2002 ed. The insured makes a ratable contribution110 to a general insurance fund. Imposes legal duties only on the insurer who promises to indemnify in case of loss. The insurer assumes that risk of loss. Characteristics/Nature of Insurance Contracts Consensual It is perfected by the meeting of the minds of the parties.109 2. 4. If all the elements. damage or liability arising from an unknown or contingent event. 111 3. Elements of an Insurance Contract 1. 2 premium 111 A contract possessing only the first 3 elements above is a risk-shifting device. Unilateral 109 110 Sec. Such assumption is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing somewhat similar risks. Aleatory It depends upon some contingent event. Hector de Leon. it is a risk-distributing device (The Insurance Code of the Philippines Annotated. The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils.E. The insured possesses an insurable interest susceptible of pecuniary estimation.

may be exposed during a certain voyage or a fixed period of time. merchandise. Notice of loss – must be immediately given. docks and other aids to navigation and transportation. to which a ship. Classes Marine113 Insurance against risks connected with navigation. 1. Bridges. goods. valuable papers. IAC. the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo. Precious stones. piers. credit and conduct of the other. and once it is entered into. freight. and interest in respect to all risks or perils of navigation. jewelry and precious metals whether in the course of transportation or otherwise. Vessels. whether he be the shipowner or not. profits.Conditional It is subject to conditions the principal one of which is the happening of the event insured against. 3. tunnels. and 4. jewels. profits or other insurable interest in movable property. (Sec. cargo.114 Fire115 A contract by which the insurer for a 112 113 ibid. unless delay is waived expressly or impliedly by the insurer 2. Proof of loss – according to best evidence obtainable. money. 99 115 Prerequisites to recovery: 1.112 4. Except life and accident insurance. bottomry and respondentia. Delay may also be waived expressly or impliedly by the insurer 29 . (Roque v. 99) Cargo can be the subject of marine insurance. Persons or property in connection with marine insurance. freightage. a contract of insurance is a contract of indemnity whereby the insurer promises to make good only the loss of the insured Contract of indemnity Personal Each party having in view the character. 139 SCRA 596) B. Coverage: A. 2. cargo. Marine Protection and Indemnity Insurance 114 Sec.

175 30 . Aguedo Agbayani. 1988 ed. 3. Rule on co-insurance – applies primarily to marine insurance. and their property. Solidary. motor vehicle liability 118 Sec. excluding those falling under other types of insurance such as fire or marine. (Sec. 167 117 Classifications: 1. windstorm. Limited to the amount of the bond. tornado or earthquake and other allied risks. Rule on co-insurance applies to fire insurance only if expressly agreed upon. respectively. The determination is important for 2 reasons: 1. when such risks are covered by extension to fire insurance policies or under separate policies. 2. 3. Nature of liability of surety: 1. Insurance against specified perils which may affect the person and/or property of the insured. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee. (Commercial Law Reviewer. property by hostile fire. the benefit of doubt goes to the other party (insured/obligee) in case of an ambiguity following the rule in contracts of adhesion. robbery/theft insurance 2. It is considered an insurance contract if it is executed by the surety as a vocation. Suretyship. 2.) 116 Sec.120 It is very crucial to determine whether a marine vessel is covered by a marine insurance or fire insurance.consideration agrees to indemnify the insured against loss of. Rules on constructive total loss and abandonment – applies only to marine insurance.116 Casualty117 Insurance covering loss or liability arising from accident or mishap. 174 119 It is essentially a credit accommodation. Insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries to or damage to property of others. (third party liability insurance) Insurable interest is based on the interest of the insured in the safety of persons. 176) 120 Sec. (accident or health insurance) Examples: personal accident. who may maintain an action against him in case of their injury or destruction. Examples: workmen’s compensation. is thus treated like non-life insurance in some respects. 20) When the contract is primarily drawn up by 1 party. especially in fidelity bonding. or damage to. (Sec. and not incidentally. including loss by lightning.118 Suretyship119 An agreement whereby a surety guarantees the performance by the principal or obligor of an obligation or undertaking in favor of an obligee.

It is the only compulsory insurance coverage under the Insurance Code. so related. 121 122 Sec. RTC. damage or prejudice. If at the time of the death of the debtor the whole debt has already been paid. of his spouse and of his children.121 Compulsory Motor Vehicle Liability A species of compulsory insurance that Insurance122 provides for protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of motor vehicle by its owner. especially if they are poor regardless of the financial capability of motor vehicle owners or operators responsible for the accident sustained (Shafer v. 179 Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents. that by the preservation of the same he shall derive pecuniary benefit. 31 . 123 General rule: There is no limit in the amount the insured can insure his life. Insurable Interest The insured possess an interest of some kind susceptible of pecuniary estimation. of himself. the creditor can no longer recover on the policy because the principle of indemnity applies.Life Insurance on human lives and insurance appertaining thereto or connected therewith which includes every contract or pledge for the payment of endowments or annuities. so circumstanced. the limit of insurable interest is equal to the amount of the debt. Exception: In a creditor-debtor relationship where the creditor insures the life of his debtor. Judge. Claimants/victims may be a “passenger” or a “3rd party” It applies to all vehicles whether public and private vehicles. A person has an insurable interest in the subject matter if he is so connected. 167 SCRA 386). so situated. and by its destruction he shall suffer pecuniary loss. In Life/Health123 Every person has an insurable interest in the life and health: 1. 5.

3. or liability in respect thereof. 2. an expectancy coupled with an existing interest in that out of which the expectancy arises. 17) When insurable interest should exist: It must exist at the time the policy is taken and at the time the loss incurred but it need not exist in the meantime. or 3. not thereafter or when the loss occurs. or any relation thereto. and 4. any inchoate interest founded on an existing interest. of any person on whom he depends wholly or in part for education or support. 125 Sec. of any person upon whose life any estate or interest vested in him depends. of any person under a legal obligation to him to pay money or respecting property or services. 32 .126 124 Sec.125 which may consist in: 1. of which death or illness might delay or prevent performance.124 In Property Every interest in property whether real or personal. of such nature that the contemplated peril might directly damnify the insured. 14 The measure of insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof (Sec.2. 10 When it should exist: When the insurance takes effect. 13 126 Sec. an existing interest.

2. the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured.c. or of the insurable value in the case of unvalued policies. Additional or “Other Insurance” Clause A condition in the policy requiring the insured to inform the insurer of any other insurance coverage of the property insured. 2. Effects: Where double insurance is allowed. Each insurer is bound. he must hold such sum in trust for the insurers. 3. Interest insured is also the same. Where the insured receives any sum in excess of the valuation in the case of valued policies. but over insurance results: (Sec. to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. for any sum received by him under any policy. 3. otherwise the breach of an immaterial provision does not avoid it. up to the amount for which the insurers are severally liable under their respective contracts. Two or more insurers insuring separately. Person insured is the same. may claim payment from the insurers in such order as he may select. according to their right of contribution among themselves. unless the policy otherwise provides. as between himself and the other insurers. Subject matter is the same. The insured. 5.” A stipulation against double insurance. as against the full insurable value. 75 which provides that “(a) policy may declare that a violation of a specified provision thereof shall avoid it. 4. Risk or peril insured against is likewise the same. 4. Where the policy under which the insured claims is a valued policy. Purposes: 33 . 94) 1. Double Insurance127 and Over Insurance128 127 Requisites: 1. 5. Where the policy under which the insured claims is an unvalued policy he must give credit. It is lawful and specifically allowed under Sec.

Double insurance where same person is insured by several insurers separately in respect to same subject and interest. d. Offer and Acceptance/Consensuality Applicant usually makes the offer to the insurer. their interests were not identified. To prevent an increase in the moral hazard 2. “an acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge”. (Enriquez vs. of Canada .129 Over-insurance – when the insured insures the same property for an amount greater than the value of the property with the same insurance company. 93 130 Tort Theory What is being followed in insurance contracts is what is known as the “cognition theory”. Multiple or Several Interests on Same Property Several persons have insurable interests on same property. 2. 41 Phil. The insured is entitled to recover the amount of premium corresponding to the excess in value of the property. Perfection of the Contract of Insurance130 An insurance contract is a consensual contract and is therefore perfected the moment there is a meeting of minds with respect to the object and the cause or consideration. 269) 34 . 1. Sun Life Assurance Co. a. 129 Sec. To prevent over-insurance and fraud. The insurer is bound only to pay to the extent of the real value of the property lost. 6. there would be no coverage for those not named. there should have been double insurance. Thus. To constitute a violation of the clause. Unless each of them is named as insured in the property insurance. While they did have an insurable interest in the property. 128 Effect in case of loss: 1.

133 Actual delivery of the policy is not essential unless the parties have so agreed in clear language. even w/ payment is a mere offer on the part of the applicant. 35 . no contact) 132 the physical document 133 Effects of Delivery: 1) Where delivery is conditional – Non-performance of Condition precedent prevents contract from taking effect 2) Where delivery is unconditional – Delivery corresponding terms of application consummates the contract and policy delivered becomes final contract bet the parties 3) Where premium still unpaid after unconditional delivery – Policy will lapse if premium unpaid at time and manner specified in the policy. the applicant dies before the application is processed. 135 Basis of the right of the insurer to collect premiums: Assumption of risk. w/c is given to the estate of the deceased applicant. w/c takes an unreasonably long time before processing the application. Approval of the application by the insurer is necessary to perfect contract. Constructive delivery may be sufficient. Whether or not delivery to agent is delivery to insured is a question over w/c there has been many conflicting opinions. Concurrence of both is necessary. Also. De Sindayen case Whether or not policy was delivered after its issuance depends not upon manual possession by the insured but rather upon the intention of the parties as manifested in their acts or agreements.131 (2) Delivery of Policy The act of putting the insurance policy132 into the possession of the insured.w/ payment of premium – policy becomes effective . no contractual liability also bec. (see Perez v CA case) 134 Vda. (not to beneficiary because contract not perfected.134 b. it does not bind the insurer. thus. Individual life insurance contracts usually stipulate that: 1) Premium be paid and 2) Policy be delivered to the insured while he is alive and in good health. but due to negligence of company. in the absence of any clear agreement that insurer will extend credit.Submission of application. Premium Payment135 131 Remedy: Insurer liable for damages (Tort Theory) in the amount of the face value of the policy.w/o payment – effective upon payment of premium (1) Delay in acceptance Situation where applicant submits application for insurance. If made: . the contract is not perfected.

77) 2. Non-Default Options in Life Insurance Cash Surrender Value The amount the insured. (Sec. when the grace periods applies. notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid. v. CSV is the amount company holds in trust for insured deliverable upon General rule: No policy issued by an insurance company is valid and binding until actual payment of premium. of premiums paid. It is the portion of reserve on a life policy Nature: Premium is uniform throughout lifetime of policy. (UCPB vs.Consideration paid an insurer for undertaking to indemnify the insured against a specified peril. (Sec. When the insurer makes a written acknowledgment of the receipt premium. Where the parties are barred by estoppel.Surrender Charge = Cash Surrender Value 36 . after the payment of at least three (3) full annual premiums. Section 77 may not apply if the parties have agreed to the payment of the premium in installments and partial payment has been made at the time of the loss. In case of life or industrial life insurance. 77) Exceptions: 1. so during the earlier years of the policy. c. (Makati Tuscany Condominium Corp. 215 SCRA 462) 4. (Sec.. (id. is entitled to receive if he surrenders the policy and releases his claims upon it. the premium charges will be more than the actual cost of the protection against the risk in order to meet the higher cost of risk during the latter years of the policy when the insured is older. Masagana Telemart. Any agreement to the contrary is void. 215 SCRA 462) Effect of Acknowledgment of Receipt of Premium in Policy: Conclusive evidence of its payment. (Makati Tuscany Condominium Corp. in case of default. CA. so far as to make the policy binding. 308 SCRA 259) 5.136 The more premiums he has paid. 78) 136 Reserve Value . (Sec. Where a credit term has been agreed upon. 78) 3. v. CA. 356 SCRA 307) Section 77 merely precludes the parties from stipulating that the policy is valid even if the premiums are not paid. the greater will be the CSV but the value is always a lesser sum than the total amt.

na-reduce yung original insurance contract to one with a lower value) 37 . Insured can also reinstate the policy w/in this period. can purchase. will purchase. terminates the contract of insurance Effect: Policy continues in force from date of default. he may later reinstate policy if he wishes Automatic Premium Loan 137 138 Upon default. Beyond extended period: If he survives No benefits. “temporary insurance” or “paid-up extended insurance” Paid-up Insurance Amount of Insurance that the CSV. However.139 Better option if insured is still young and in good health because unlike extended insurance. though not the legal. the company has practically no beneficial interest in it except as its custodian. applied as a single premium. (In other words. beneficiary can recover face amount of policy.138 Either stated or equal to the amount of the cash surrender value. after the payment of at least three full annual premiums to have the policy continued in force from the date of default for a time either stated or equal to the amount as the net value of the policy taken as a single premium. upon default. he may recover only the “paid-up” value of the policy w/c is much less than the original amount agreed upon. the insured is given the right. taken as a single premium. relation of the company to this fund. this is the practical. will purchase Also called “term insurance”. So long as the policy remains in force. insurer lends/advances to Effect: Surrender policy. in case of death of insured. has to purchase new policy Better option if insured not in good health or geriatric 139 Effect: Policy continues in force from date of default for the whole period and under the same conditions of the original contract w/o further payment of premiums.137 Extended Insurance Depends on availability of CSV. for a period During extended period: If insured dies. He cannot even reinstate the policy by paying past premiums.demand.

After period. e. unless there remains CSV. insurer cannot require higher premium than amount stipulated in the contract. Reinstatement of a Lapsed Policy of Life Insurance141 1) Does not create a new contract. It is not an insurance for any single year. age. 141 Sec. 4) Application for reinstatement must be filed during the insured’s lifetime.the insured without any need of application on his part. etc. Only applies if requested in writing by the insured either in the application or at any time before the expiration of the grace period. merely revives the old policy. auto premium loan continues until it is exhausted. Insured under no legal obligation to repay “loan” d. but not to exceed the CSV of the policy. It is an entire contract of insurance for life subject to discontinuance and forfeiture for nonpayment of any of the stipulated premiums. Advantageous to the insured because it helps to continue the contract and all its features in full force and effect. 143 There is no right to recovery of premiums in life insurance because it is not a divisible contract. 142 Thus. if insured still does not resume paying his premiums. 38 .142 2) Required by Insurance Code for every individual and industrial life policy. w/ a privilege of renewal from year to year by paying the annual premium. 227 (j) Requisites: a) Exercised w/in 3 years from default b) Insured must present evidence of insurability satisfactory to the company c) Pay all back premiums and all his indebtedness to the insurance company d) CSV has not been duly paid nor the extension period expired Insurability – does not mean that insured is in good health. amount necessary to pay overdue premium. Other factors affect insurability like nature of work.140 If there is still CSV. 3) Not required that three (3) annual premiums have been paid. policy lapses. Refund of Premiums143 A person insured is entitled to a return of premium: 140 Effect: Insurance continues in force for period covered by the payment.

2) Where the insurance is made for a definite period and the insured surrenders his policy. returned (Sec. 82). 39 . 79) Exceptions: a) Short period rate agreed upon and appears on face of policy (exception to pro rata rate).). Such party concealing is duty bound to disclose such fact to the other. f) When there is over insurance (Sec. as a pro rata rate. c) When the contract is voidable because of fraud or misrepresentations of the insurer or his agent (Sec. A party knows a fact which he neglects to communicate or disclose to the other. b) Life insurance (exception to applicability of this section).1) To the whole premium if no part of his interest in the thing insured be exposed to any of the perils insured against. 81) d) When the contract is voidable because of the existence of facts of w/c the insurer was ignorant w/o his fault (ibid. Rescission of Insurance Contracts a. e) When the insurer never incurred any liability under the policy because of default of the insured other than actual fraud (ibid.). g) When rescission is granted due to the insurer’s breach of contract 145 Requisites: a. Concealment145 144 such portion as corresponds w/ unexpired time. b. before termination thereof144 7.

p.110 (marine insurance) The waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning the previous conditions of health and diseases suffered. 177 148 Requisites of a false representation (misrepresentation): a. Material Effects: Entitles insurer to rescind. G. Phil Commercial Law. Effect of Misrepresentation: the injured party is entitled to rescind from the time when the representation becomes false. d. No. Sec. and he fails to do so. Affirmative – affirmation of a fact when the contract begins.R. Incontestability clause b. and b. 147 b. 1998 Ed. He must make further inquiry. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead. Exception to Sec. (Philamcare Health Systems vs. 27 clearly provides that. Such party concealing makes no warranty as to the fact concealed.146 There is concealment where the insured has knowledge of facts material to the risk. b. or in making his inquiries (Sec. Sps. Such fact in either case is material to the risk.33) Where matters of opinion or judgment are called for. The right to information of material facts may be waived. but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due. March 18. 2002). 146 Sec. It may be oral or written. 246 SCRA 268). 31: a. 31). It always refers to the date the contract goes into effect. 125678. Kinds: a. (Sec. e. Misrepresentation/Omissions148 c. Promissory – promise to be performed after policy was issued. e. (Sunlife v. even if the death or loss is due to a cause not related to the concealed matter (Sec. It is made at the same time of issuing the policy or before but not after. Good Faith is not a defense in concealment. d.” Test of Materiality: Determined not by the event. either by the terms of the insurance or by neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated. Matters under Sec. and good faith and fair dealing requires him to reveal them. Reason: The insurer cannot rely on those statements. 26 147 Villanueva. It is not a part of the contract but merely a collateral inducement to it. c. It may be altered or withdrawn before the insurance is effected but not afterwards. Bacani.. Characteristics: a. b.A neglect to communicate that which a party knows and ought to communicate. answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue. The other party has not the means of ascertaining the fact concealed. “the concealment whether intentional or unintentional entitles the injured party to rescind the contract of insurance. 27). The insured stated a fact which is untrue. in forming his estimate of the advantages of the proposed contract. c. CA. 40 .

75 41 . Breach of Warranties General rule: Violation of material warranty or of a material provision of a policy will entitle the other party to rescind the contract.150 Immaterial.149 Exceptions: a) Loss occurs before the time of performance of the warranty. Claims Settlement and Subrogation 149 150 Sec. Other insurance clause 152 Sec. 74 Sec.151 General rule: It will not avoid the policy. They are considered an active form of concealment.152 8. the issuance of the policy to give information to the insurer and induce him to enter into the insurance contract. Exception: When the policy expressly provides or declares that a violation thereof will avoid it. c. or prior to. b) The performance becomes unlawful at the place of the contract. c) Performance becomes impossible.Factual statements made by the insured at the time of. 73 151 ex.

Notice may be an informal or provisional claim containing a minimum of information as distinguished from a formal claim which contains full details of the loss. These conditions are intended merely for evidentiary purposes and do not form any part of the conditions of liability and are construed with much less strictness than those conditions that operate prior to loss. It is necessary as the insurer cannot be liable to pay a claim unless he receives notice of that claim. insurer is exonerated if notice of loss is not given to the insurer by the insured or by the person entitled to the benefit without unnecessary delay. Under Sec. 155 Sec.154 Other provisions: When a preliminary proof of loss is required by a policy. Nature of notice and proof of loss: Although they are in the form of conditions precedent. or in preliminary proof thereof. insurer’s liability is contingent but with the happening of the loss. 89 42 . but it is sufficient for him to give the best evidence which he has in his power at the time. the particulars and the data necessary to enable the company to determine its liability and the amount. However. are waived. as grounds of objection. without unnecessary delay. the insured is not bound to give such proof as would be necessary in a court of justice. afford him a means of detecting any fraud that may have been practiced upon him. they are in the nature of conditions subsequent the breach of which affects a right that has already accrued (before the loss. The law does not stipulate any requirement as to the form in which notice or proof of loss must be given. it is advisable to give the notice in writing for the protection of the insured or his beneficiary. It has been held however that formal notice of loss is not necessary if insurer has actual notice of loss already. according to De Leon. which the insured might remedy. Notice and Proof of Loss Notice of Loss Proof of Loss The formal notice given the insurer by the The formal evidence given the insurance insured or claimant under a policy of the company by the insured or claimant under occurrence of the loss insured against. and supporting evidence. together with a demand or request for payment.a.155 All defects in a notice of loss.156 153 The purpose is to apprise the insurance company so that it may make proper investigation and take such action as maybe necessary to protect its interest. 154 Proof of loss is distinct from notice of loss and intended to: 1. 88. give the insurer information by which he may determine the extent of his liability 2. Is not tantamount to proof or evidence under the law on evidence.153 a policy of the occurrence of the loss. and which the insurer omits to specify to him. computations of the amounts claimed. his liability becomes properly fixed).

Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of him. or if he omits to take objection promptly and specifically upon that ground. and in case of the refusal of such person to give it. d) not attempting in good faith to effectuate prompt. or e) compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them. then to furnish reasonable evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified. 158 b. Sanctions Unfair claim settlement practices: a) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue. pertinent c) failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies. it is sufficient for the insured to use reasonable diligence to procure it.157 If the policy requires. the certificate or testimony of a person other than the insured. 241 (1) & (3) 43 . fair and equitable settlement of claims submitted in which liability has become reasonably clear. 90 Sec. Guidelines on Claims Settlement (1) Unfair Claims Settlement. by way of preliminary proof of loss. b) failing to acknowledge with reasonable promptness communications with respect to claims arising under its policies. 91 158 Sec. Sanction: Considered sufficient cause for the suspension or revocation of the company's certificate of authority. 92 159 See Sec.159 (2) Prescription of Action 156 157 Sec.

(Malayan Insurance Co.All criminal actions for the violation of any of the provisions of this Code shall prescribe after three (3) years from the discovery of such violation. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insured’s claim for loss. see also Art. 165 SCRA 536. v. it inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. b. CA. Where the insurer pays the insured for a loss or risk not covered by the policy. Such actions shall in any event prescribe after ten (10) years from the commission of such violation. NCC) 44 . In life insurance e. ( Pan Malayan Insurance Company v.160 (3) Subrogation161 It is a process of legal substitution where the insurer steps into the shoes of the insured and he avails of the latter’s rights against the wrongdoer at the time of loss. 420 There can be no subrogation in cases: a. 184 SCRA 54) d. CA. 2207. Said right is not dependent upon nor does it grow out of any private contract. Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage. Payment to the insured makes the insurer a subrogee in equity. For recovery of loss in excess of insurance coverage 162 The principle of subrogation is a normal incident of indemnity insurance as a legal effect of payment.. Inc. c.162 160 161 Sec.

Passenger: 45 . corporations. according to all the circumstances of each case. maintains no terminals. Neither does the law distinguish between a carrier offering its services to the general public that is the general community or population and one who offers services or solicits business only from a narrow segment of the general population. (First Philippine Industrial Corporation vs. CA) One is a common carrier even if he has no fixed and publicly known route. or air. as long as it is by land. CA. It also avoids a distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional. 168 SCRA 612). A person or entity is a common carrier even if he did not secure a Certificate of Public Convenience ( De Guzman vs. firms or associations engaged in the business of carrying or transporting passengers or goods or both. for compensation. CA). It does not provide that the transportation should be by motor vehicle. water or air. Rendition of service with the greatest skill and utmost foresight (Davao Stevedore Co. 1732 The said article avoids any distinction between one whose principal business activity is the carrying of persons or goods or both and one who does such carrying only as an ancillary activity (sideline). vs. Vigilance over goods (Arts. v. Fernandez) Coverage: 1.165 163 164 The articles mentioned are under the Civil Code Art.164 a. Common Carriers Persons. offering their services to the public. The extra-ordinary diligence required of carriers in the handling of the goods of the shippers and consignees last from the time the cargoes are loaded in the vessels until they are discharged and delivered to the consignees. episodic or unscheduled basis. Diligence Required of Common Carriers Common carriers are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them. Transportation Law163 1. Inc.F. and 2. 1734-1754). 165 Art. water. 1755-1763). Safety of passengers (Arts. 1733 The law requires CC to exercise extra-ordinary diligence which means that they must render service with the greatest skill and utmost foresight. and issues no tickets (Asia Lighterage Shipping. It makes no distinction as to the means of transporting. by land.

Common Carrier is liable for the misconduct of its employees done in their own interest. or deceit. One who has boarded by fraud. One who attempts to board a moving vehicle. Exempting Causes (1) Requirement of Absence of Negligence The extra-ordinary diligence required of common carriers in the handling of the goods of the shipper and the consignees lasts from the time the cargoes are loaded in A person who has entered into a contract of carriage. b. f. 1763 A common carrier is responsible for injuries suffered by a passenger on account of the lawful acts/negligence of other passengers or of strangers provided that the employees could have prevented the act or omission through the exercise of a good father of a family. Vigilance over goods a. Liabilities of Common Carriers Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the carrier’s employees. One who has not yet boarded any part of a vehicle regardless of whether or not he has purchased a ticket. 46 . One who rides any part of the vehicle which is unsuitable or dangerous or which he knows is not designed or intended for passengers. express or implied. One who has boarded a wrong vehicle. if the common carrier’s employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission. Common Carrier is liable for damages for defects of its equipment. hospital and other expenses. d. 166 Art. Invited guests and accommodation passengers. unless the attempt be with the knowledge and consent of the carrier. although he has a ticket. with the carrier.b. e. Valencia) g. although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. (Lara vs. c. and are entitled to ordinary diligence only: a. Carrier liable only for damages that are natural and probable consequence and breach of contract which includes medical.166 Carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers. Carrier is liable when it issues to passenger a confirmed ticket for a particular ticket if he is not put in that flight.167 2. One who remains on a carrier for an unreasonable length of time after he has been afforded every safe opportunity to alight. is injured by the carrier. 1759 167 Art. has been properly informed of such fact. stealth. and on alighting. The following are not considered passengers. They are entitled to extraordinary diligence from the common carrier. The liability does not cease even upon proof that they exercised diligence in the selection and supervision of their employees.

a natural disaster shall not free it from responsibility. or other natural disaster in order that the common carrier may be exempted from liability for the loss. 1740 Under Art. 1736 171 see (1). shall be equitably reduced. storm. by the carrier to the consignee or to the person who has the right to receive them.170 (2) Actual or constructive delivery171 (3) Temporary unloading or storage 168 Art. If the common carrier incurs in delay. or deterioration of the goods. the latter shall be liable in damages. Duration of liability (1) Delivery of goods to common carrier From the time the goods are unconditionally placed in the possession of. b. par. if the obligor incurs delay. which however. Contributory negligence If the shipper or owner merely contributed to the loss.the vessels until they are discharged and delivered to the consignees.169 c. actually or constructively. the common carrier should be afforded a wide discretion in the selection and supervision of persons who will handle the goods.168 (3) Due diligence to prevent or lessen the loss The common carrier must exercise due diligence to prevent or minimize the loss before. he shall be responsible for any fortuitous event until he has effected delivery. 3. To comply with this obligation. and received by the carrier for transportation until the same are delivered. the proximate cause thereof being the negligence of the common carrier. destruction or deterioration of the goods. during and after the occurrence of flood. destruction. 1741 170 Art. supra 47 . 1165. (2) Absence of Delay The common carrier must not be in delay. 169 Art.

violence or force is dispensed with or diminished. 1738 174 Art.174 (2) Limitation of liability to fixed amount 172 173 Art.172 It continues to be operative even during the time the goods are stored in a warehouse of the carrier at the place of destination until the consignee has been advised of the arrival of the goods and has had reasonable opportunity thereafter to remove them or otherwise dispose of them.173 d. destruction or deterioration of the goods. e) The carrier shall not be responsible for the acts or omissions of his or its employees. Stipulation for limitation of liability (1) Void stipulations a) The goods are transported at the risk of the owner or shipper. b) The carrier will not be liable for any loss. ship or other equipment used in the contract of carriage.It remains in full force and effect even when they are temporarily unloaded or stored in transit unless the shipper or owner has made use of the right of stoppage in transitu. g) The carrier is not responsible for the loss. destruction or deterioration of the goods on account of the defective condition of the car. 1745 48 . c) The carrier need not observe any diligence in the custody of the goods. 1737 Art. vehicle. d) The carrier shall exercise a degree of diligence less than that of a good father of a family over the movable transported. f) The carrier’s liability for acts committed by thieves or robbers who do not act with grave or irresistible threat.

is binding. In case of loss due to fault of the passenger. by the owner or shipper for the loss. or deterioration of the goods is valid. And the passenger took the necessary precaution.179 b. the carrier will not be liable. 1754. destruction. The common carrier shall be responsible for the baggage as depositaries. Void stipulations Dispensing with or lessening the extraordinary responsibility of a common carrier for the safety of passengers imposed by law. 1757 49 . like any other goods. which the carrier has advised them relative to the care and vigilance of their baggage.175 (3) Limitation of liability in absence of declaration of greater value A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading. id. 1733 to 1753 178 The act of the thief or robb er. is required to observe extraordinary diligence. 1749 177 under Arts. Duration of liability (1) Waiting for carrier or Boarding of carrier 175 176 Art. provided that notice was given to them or its employees.176 e.) 179 Art. if it is reasonable and just under the circumstances.A contract fixing the sum that may be recovered. who has entered the common carrier’s vehicle is not deemed force majeure. unless it is done with the use of arms or through an irresistible force (Art. Liability for baggage of passengers (1) Checked-in baggage The carrier who has in his custody the baggage of a passenger to be carried. by posting of notices.177 (2) Baggage in possession of passengers The baggage in transit will be considered as necessary deposit. Safety of Passengers a. 1750 Art. the carrier is presumed negligent.178 3. unless the shipper or owner declares a greater value. by statements on tickets or otherwise. by stipulation. and has been fairly and freely agreed upon. In case of loss or damage.

Perez 183 See d. Extent of liability for damages Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the former's employees. vs. 17 SCRA 739 . and they are liable for injuries suffered from the sudden starting up or jerking of their conveyances while doing so. CA. Liability for acts of others (1) Employees Tort. The duty which the carrier of passengers owes to its patrons extends to persons boarding the cars as well as to those alighting therefrom. 179 SCRA 95) 182 Maranan v. 1763.180 (2) Arrival at destination The duty of a common carrier to provide safety to its passengers so obligates it not only during the course of the trip. CA. although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers.183 d. Abiotiz Shipping Corporation v. 180 181 Dangwa Trans Co.. but for so long as the passengers are within its premises and where they ought to be in pursuance to the contract of carriage. 202 SCRA 574 LRTA v. CA . (La Mallorca v. limited by Art. however.. 181 c. Navidad.. infra 50 . Inc.182 (2) Other passengers and strangers Not absolute. [2003] All persons who remain on the premises within a reasonable time after leaving the conveyance are to be deemed passengers. the employee must be on duty at the time of the act. and includes a reasonable time to see after his baggage and prepare for his departure. and what is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances. 3rd par.It is the duty of common carriers of passengers to stop their conveyances a reasonable length of time in order to afford passengers an opportunity to enter.

1760 186 Art.184 The common carrier's responsibility prescribed in the preceding article cannot be eliminated or limited by stipulation. namely. carrier and consignee undertake specific responsibilities and assume stipulated obligations. 1763 51 .This liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees. by statements on the tickets or otherwise. It is a contract by which the three parties. Bill of Lading The written acknowledgment of receipt of goods and agreement to transport them to a specific place to a person named or to his order.185 A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers. It is a receipt for the goods shipped 2.186 4. by the posting of notices. if the common carrier's employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission. and 184 185 Art. Three-fold character 1. the shipper. a. 1759 Art.

188 Art. their respective claims may be determined by legal proofs which each of the contracting parties may present in conformity with law. Delivery of goods (1) Period for delivery Stipulated in Contract/Bill of Lading: Carrier is bound to fulfill the contract and is liable for any delay. its contents shall decide all disputes which may arise with regard to their execution and fulfillment. Code of Commerce 189 Art. 358. 3rd. he must give the latter a receipt for the goods delivered. As evidence. It is a legal evidence of the contract between the shipper and the carrier. No stipulation: 1.189 (3) Refusal of consignee to take delivery Instances include the following:: 1) Goods sought to be transported are dangerous objects.188 (2) Delivery without surrender of bill of lading In case the consignee. because of its loss or of any other cause. upon receiving the goods. Within a reasonable time. no matter from what cause it may have arisen.. 353.par. this receipt producing the same effects as the return of the bill of lading. 2.3. Carrier is bound to forward them in the 1st shipment of the same or similar goods which he may make to the point of delivery.187 b. Code of Commerce 52 . or substances including dynamite and other explosives 2) Goods are unfit for transportation 3) Acceptance would result in overloading 187 In the absence of a bill of lading. cannot return the bill of lading subscribed by the carrier.

& Hernando. it takes the risk of delivering it in good condition as when it was loaded. Aquino.68 191 PAL vs. Period for filing actions Not provided by Article 366. However. (Roldan vs. R.P. Civil Code rules on prescription apply. the carrier is exempted from liability if carriage is insisted upon by the shipper. action must be filed in court. when a common carrier accepts cargo for shipment for valuable consideration. capture by enemies and the like 7) Goods like livestock will be exposed to disease 8) Strike 9) Failure to tender goods on time. Sweetlines. 2004 ed. CA 192 These rules does not apply to misdelivery of goods. Inc. Period for filing claims192 Patent damage Shipper must file a claim against the carrier immediately upon delivery193 Latent damage Shipper should file a claim against the carrier within 24 hours from delivery. e.4) Contrabands or illegal goods 5) Goods are injurious to health 6) Goods will be exposed to untoward danger like flood. in such absence.191 d. the carrier refuses to pay. (PHILAMGEN vs. and to give it an opportunity to make an investigation and fix responsibility while the matter is fresh. T. and it is charged with liability therefore.) 194 Thus. provided its objections are stated in the bill of lading. Purpose of notice: To inform the carrier that the shipment has been damaged.194 190 Notes and Cases on the Law on Transportation and Public Utilities.190 In case of carriage by railway. 53 . If despite the notice of claim. Shorter period may be stipulated by the parties because it merely affects the shipper’s remedy and does not affect the liability of the carrier. p. Lim Ponzo) 193 it may be oral or written The filing of notice of claim is a condition precedent for recovery.

who thereby become the charter’s servants. The shipowner leases to the charterer the whole vessel. p. including the master and the crew. (Pandect of Commercial Law and Jurisprudence. It transforms a common carrier into a private carrier. 320 SCRA 244) 196 Charter party A contract by virtue of which the owner or agent binds himself to transport merchandise or persons for a fixed price. Justice Jose Vitug. except when the cause arises from the unworthiness of the vessel.197 195 Articles mentioned are under the Code of Commerce Maritime/admiralty law It is the system of laws which particularly relates to the affairs and business of the sea. possession and consequent control over the vessel’s navigation. food and fuel. and to maritime conveyance of persons and property. A contract by which an entire ship. Aquino & Hernando. just for that one particular purpose only. Ship owner or ship agent 2. The charterer is liable as if he were the owner. Because the charterer is treated as owner pro hac vice. or some principal part thereof is let/leased by the owner to another person for a specified time or use. (Planters Products. 5.) Arrastre service is not maritime in character. (Notes and Cases on the Law on Transportation and Public Utilities. 226 SCRA 476) Parties: 1. It refers to a contract for the unloading of goods from a vessel. Inc. citing Francisco. Charter Parties196 Bareboat/Demise Charter The charterer provides crew. Maritime Commerce195 a. Prudential Guarantee. 54 . their crews and navigation. the charterer assumes the customary rights and liabilities of the shipowner to third persons and is held liable for the expense of the voyage and the wages of the seamen. (ICTSI vs. transferring to the latter the entire command. 1997 ed. to ships. Charterer 197 The charterer becomes the owner of the vessel pro hac vice. CA.No bill of lading was issued within 6 years Bill of lading was issued: within 10 years. vs.254) Maritime laws apply only to maritime trade and sea voyages.

Damages due to misuse of power. f. Voyage/Trip Charter199 . the charterer merely having use of the space in the vessel in return for his payment of the charter hired. b. Damages due to mutinies. c. 199 ibid. d. while his possession continues. Liability of Shipowners and Shipping Agents Shipowner200 Person who has possession. equip and provision the vessel. to repair. Damages to vessel and to cargo due to lack of skill and negligence. command and navigation of the ship.202 (1) Liability for acts of captain All contracts of the captain.203 a. e. whether authorized or not. also includes the shipowner. 200 proprietario 201 naviero 202 Not a mere agent under civil law. Ship agent201 Person entrusted with provisioning and representing the vessel in the port in which it may be found. control and management of the vessel and the consequent right to direct her navigation and receive freight earned and paid.. For deviations. 203 Art. The shipowner retains the possession. 586 55 . Losses and fines for violation of laws. 198 A kind of contract of affreightment whereby the owner of the vessel leases part or all of its space to haul goods for others. he is solidarily liable with the ship owner. Thefts and robberies of the crew.Time Charter198 Vessel is chartered for a fixed period of time or duration of voyage. The vessel is leased for one or series of voyages usually for purposes of transporting goods for charterer b.

Damages due to non-observance of marine regulations. 28-31 206 Average . Liability under the Labor Code d. vessel or both. 207 Art. (Art. When the shipowner is at fault b. Insurance c. and to the cargo from the port of loading to the port of consignment.208 204 205 Art. h. For arrivals under stress. 618 Villanueva. (Rule IX. Phil. (Art. 811 Goods not covered by general average even if sacrificed: 1. 855 (2)) 3.204 (2) Exceptions to limited liability a. Goods not recorded in the books or records of the vessel. Accidents and Damages in Maritime Commerce General Average206 Damages or expenses deliberately caused in order to save the vessel. 56 . (Art.g.an extraordinary or accidental expense incurred during the voyage in order to preserve the cargo.855) 2. and all damages or deterioration suffered by the vessel from departure to the port of destination. York-Antwerp Rule) 208 Allision . 806) The person whose property has been saved must contribute to reimburse the damage caused or expense incurred if the situation constitutes general average. Chattel Mortgage of ship205 c. 1998 ed. Goods carried on deck. its cargo or both from real and known risk. Commercial Law..207 Collisions Impact of two vessels both of which are moving.impact between a moving vessel and a stationary one. Fuel for the vessel if there is more than sufficient fuel for the voyage. pp.

(Dole Phils. gone out of commerce. and c.. it does not apply to the claim against the insurer for the insurance proceeds. ( Stevens & Co. 188 SCRA 170) 2.A. vs. 212 Sec. IAC. vs. Inc. Thus. Manila Railroad Co. The date when the goods should have been delivered.. Lines Ltd. Patent damage: immediately upon delivery. vs. However. In such instance the. vs. SCRA 359) The insurer exercising its right of subrogation is bound by the one-year prescriptive period. Nordeutscher Lloyd. vs.) and damage arising from delay or late delivery (Mitsui O. 148 SCRA 118) The one-year period shall run from delivery to the arrastre operator and not to the consignee.. overseas/international/foreign210 Notice of Loss or Damage211 a. CA).S. Merchants Ins. Civil Code rules on prescription shall apply.K. vs. Latent damage: within three (3) days from delivery. for the carriage of goods. No. or disappeared in such a way that their existence is unknown or they cannot be recovered. ( Union Carbide Phils. Mayer Steel Pipe Corp. Delivery of the goods.214 or b. American Steamship Agencies Inc. water/maritime transportation. Carriage of Goods by Sea Act209 Application The transportation must be: a. 65 from foreign port to Philippine port It can be applied in domestic sea transportation if agreed upon by the parties (Clause paramount or paramount clause) 211 Loss or Damage” as applied to the COGSA contemplates a situation where no delivery at all was made by the shipper of the goods because the same had perished. The express agreement of the parties (Universal Shipping Lines. (Ang vs.d. it is inapplicable in case of misdelivery or conversion. Maritime Co. ( Fil. b. 6 SCRA 180) The one-year period shall run from delivery of the last package and is not suspended by extrajudicial demand.212 Period of Prescription Within one (1) year213 after: a. 213 The one-year prescriptive period is suspended by: 1. 3(6) The filing of a notice of claim is not a condition precedent.Inc. The filing of an action in court until it is dismissed.215 209 210 C. CA ) 214 delivered but damaged goods 215 non-delivery (Sec. 3[6]) 57 . b. Inc. vs. Alejandro. Co.

Limitation of liability

The liability limit is set at $500 per package or customary freight unit unless the nature and value of such goods is declared by the shipper.216

6. The Warsaw Convention217 a. Applicability218 The transportation must be: 1. International transportation;219 2. Air transportation;220 and 3. Carriage of passengers, baggage or goods. The WC shall also apply to fortuitous transportation by aircraft performed by an air transportation enterprise.
216

Sec. 4(5) This is deemed incorporated in the bill of lading even if not mentioned in it ( Eastern Shipping vs. IAC, 150 SCRA 463) 217 As much a part of Philippine law as the Civil Code, Code of Commerce and other municipal special laws, and the provisions therein contained, specifically on the limitation of carrier’s liability, are in operation in the Philippines but only in appropriate situation (PAL vs. CA, 255 SCRA 48) 218 When inapplicable: 1. When public policy is contradicted; 2. If the requirements under the Convention are not complied with. 219 any transportation in which the place of departure and the place of destination are situated either: 1. Within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or transshipment, or 2. Within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of another power, even though that power is not a party to the Convention. (“round trip”, Am. Jur.) Transportation to be performed by several successive air carriers shall be deemed to be one undivided transportation, if it has been regarded by the parties as a single operation, whether it has been agreed upon under the form of a single contract or of a series of contracts, and it shall not lose its international character merely because one contract or a series of contracts is to be performed entirely within a territory subject to the sovereignty, suzerainty, mandate, or authority of the same High Contracting Party. (Art. 1 Sec.3) 220 The period during which the baggage or goods are in the charge of the carrier, whether in an airport or on board an aircraft, or, in case of a landing outside an airport, in any place whatsoever. It includes any transportation by land or water outside an airport if such takes place in the performance of a contract for transportation by air, for the purpose of loading, delivery, or transshipment.

58

b. Limitation of liability221 (1) Liability to passengers General rule: Limited to 250,000 francs per passenger Exception: Agreement to a higher limit (2) Liability for checked baggage General rule: limited to 250 francs per kilogram. Exception: In case of special declaration of value and payment of a supplementary sum by consignor, carrier is liable to not more than the declared sum unless it proves the sum is greater than actual value. (3) Liability for hand-carried baggage Limited to 5,000 francs per passenger. c. Willful Misconduct The War Convention denies to the carrier availment of the provisions which exclude or limit the carrier’s liability if the damage is caused by his willful misconduct or by such default on his part, as, in accordance with the law of the court seized of the case, is considered to be equivalent to willful misconduct, of if the damage is similarly caused by any agent of carrier acting within the scope of his management.222

221 222

Art. 22, as amended by Guatemala Protocol, 1971; Alitalia vs. IAC Under domestic law and jurisprudence, the attendance of gross negligence (given the equivalent of fraud or bad faith) holds the common carrier liable for all damages which can be reasonable attributed, although unforeseen, to the non-performance of the obligation, including exemplary damages.

59

G. Corporation Law223 1. Corporation a. Definition An artificial being created by operation of law having the right of succession, and the powers, attributes and properties expressly authorized by law and incident to its existence.224 b. Attributes of the Corporation (1) It is an artificial being; (2) Created by operation of law; (3) With right of succession; (4) Has the powers, attributes, and properties as expressly authorized by law or incident to its existence. 2. Classes of corporations 1. As to organizers Public By State only Private By private persons alone or with the State

2. As to functions Public Government of a portion of the territory;
223 224

Private Usually for profit-making

B.P. 68 Sec. 2

60

Actual use or exercise in good faith of corporate powers. 226 Sec.226 It is neither de jure nor By prescription One which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power. Issuance of a certificate of incorporation by the SEC as a minimum requirement of continued good faith. a de facto corporation cannot sustain its right to exist. It cannot be permitted to deny its existence in an action under said transaction. The existence of a valid law under which it may be incorporated. The only difference between a de facto corporation and a de jure corporation is that a de jure corporation can successfully resist a suit by a state brought to challenge its existence.g. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. Roman Catholic Church 61 . A bona fide attempt in good faith to incorporate under such law. 3. As to legal status De jure Organized in accordance with the requirements of law. As to governing law Public Special Laws Private Law on Private Corporations 4. Its existence cannot be inquired collaterally.227 225 Sec. and 4.3.225 By estoppel Group of persons that assumes to act as a corporation knowing it to be without authority to do so. De facto Organized with a colorable compliance with the requirements of a valid law. 21 227 e. 2. and enters into a transaction with a third person on the strength of such appearance. 20 Requisites: 1.

One which is so related to another corporation that the majority of its directors can be elected directly or indirectly by such other corporation. 228 229 Sec. As to existence of shares of stock: Stock A corporation 1) whose capital stock is divided into shares and 2) which is authorized to distribute to shareholders dividends or allotments of the surplus profits on the basis of the shares held.de facto. As to relationship of management and control Holding Subsidiary Affiliate Parent Subsidiary and Non-stock Does not issue stocks nor distribute dividends to their members. 62 . Hector de Leon. The stockholders of the parent company demand representation in the board meetings of its subsidiary. 5.229 Company which is subject to common control of a mother holding company and operated as part of the system. The board of directors of the parent company determines its representatives to attend and vote in the stockholder’s meeting of its subsidiary. Separate entities with power to contract with each other. One which controls another as a subsidiary by the power to elect management. It is one that holds stocks in other companies for purposes of control rather than for mere investment. 2002 ed.228 6. 3 The Corporation Code of the Philippines Annotated.

As to place of incorporation Domestic Foreign Formed. This test is applied in times of war. organized. A rule that considers a corporation to be a resident in the country in which it is incorporated. or existing under any Philippine laws.231 Determined by the state of incorporation.230 3.” 63 . 123 232 also known as the “wartime test. or existing under Formed.232 230 231 Sec. laws other than those of the Philippines. regardless of the nationality of the stockholders. 123 embodied in Sec.7. Nationality of corporations (1) Place of incorporation test A corporation is of the nationality of the country under whose laws it has been organized and registered. organized. (2) Control test Determined by the nationality of the controlling stockholders or members.

Rules of Court). while AC Corporation would have a 25% Filipino interest in XYZ Company (50% of 50%). Rule 14.234 233 Ex: MV Corporation and AC Corporation have equal interest in XYZ Company. By the grandfather rule. (Art. corporate secretary. Hence. CA. Civil Code) 3. 93 SCRA 483) 2. Consequences/significance: 1. wherein corporations that are 60% owned by Filipinos are automatically considered as 100% Filipino-owned. It traces the nationality of the stockholders of investor corporations so as to ascertain the nationality of the corporation where the investment is made. (Creese vs. 234 Used for purposes of convenience and to subserve the ends of justice. (Sec. the total Filipino interest is only 55%. 11.(3) Grandfather rule Applied in determining the nationality of a corporation. 64 . Only when a corporation is less than 60% owned shall the grandfather rule be applied.233 The application of the test is limited however to resolving issues on investments. acting through its authorized agents are its sole liabilities. Acquisition of court of jurisdiction – service of summons may be made on the president. 44(3). the grandfather rule is merely an ancillary rule to the main method of determining nationality. treasurer or in-house counsel. Corporate juridical personality (1) Doctrine of separate juridical personality A corporation has a juridical personality separate and distinct from that of its stockholders or members. Right to acquire and possess property – property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members. Liability for acts or contracts – obligations incurred by a corporation. 4. general manager. Civil Code) 4. (Art. MV Corporation is 60% owned by Filipinos. 46. Right to bring actions – may bring civil and criminal actions in its own name in the same manner as natural persons. MV Corporation would have a 30% Filipino interest in XYZ Company (60% of 50%). while AC Corporation is 50% owned by Filipinos. By the Foreign Investments Act.

Diokno. in such case the responsible officers would be criminally liable.238 though. generally. AMEC’s claim for moral damages falls under item 7 of Article 2219 of the Civil Code. unlike a natural person. 13 SCRA 84) b. Protection against unreasonable searches and seizures. serious anxiety. it cannot experience physical suffering or such sentiments as wounded feelings. Ago Medical and Educational Center-Bicol Christian College of Medicine. mental anguish or moral shock. the Court’s statement in Mambulao that “a corporation may have a good reputation which. the Supreme Court recognized that corporations can be entitled to moral damages if their financial reputation had been harmed. (The Corporation Code of the Philippines Annotated. 2005 65 . through Justice Antonio Carpio said: “A juridical person is generally not entitled to moral damages because. Natividad. Entitlement to constitutional guaranties: a. Due process (Albert vs.235 Liability for crimes Since a corporation is a mere legal fiction. corporations can be awarded moral damages. Changes in individual membership – remains unchanged and unaffected in its identity by changes in its individual membership. to justify the award of moral damages. Tan Boon Kong. 20 SCRA 383) A corporation is not entitled to invoke the right against self-incrimination. Hector de Leon. Inc. 83 SCRA 237r 236 People vs. January 17. PNB. Equal protection of the law (Smith.) 6. et al. Court of Appeals 238 Filipinas Broadcasting Network. University Publishing. CA. or. (Stonehill vs.237 In one case. if besmirched. no emotions. PCGG) 235 PNB vs. Bell & Co. from the directors as the governing body. vs. The Court held that in all cases of libel. 2002 ed.236 (b) Recovery of damages A corporation is not entitled to moral damages because it has no feelings. This provision expressly authorizes the 5. since it does not have the essential element of malice. The Court of Appeals cites Mambulao Lumber Co. v. However. 54 Phil. 136) c. may also be a ground for the award of moral damages” is an obiter dictum. it cannot be held liable for a crime committed by its officers. The Court. no senses. v.(a) Liability for tort and crimes Liability for torts A corporation is liable whenever a tortuous act is committed by an officer or agent under the express direction or authority of the stockholders or members acting as a body. 40 Phil. Nevertheless. (Bataan Shipyard vs.607 237 ABS-CBN vs.

” (2) Doctrine of piercing the corporate veil It means that while the corporation cannot be generally held liable for acts or liabilities of its stockholders or members. In this case. where the broadcast is libelous per se.recovery of moral damages in cases of libel. The parent company finances the subsidiary 4. Neither in such a case is the plaintiff required to introduce evidence of actual damages as a condition precedent to the recovery of some damages. 3. The parent company subscribed to all the capital stock of the subsidiary or otherwise causes its incorporation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. The parent corporation owns all or most of the capital of the subsidiary. a juridical person such as a corporation can validly complain for libel or any other form of defamation and claim for moral damages. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. 6. however. AMEC is entitled to moral damages. 66 . as a shield to perpetuate fraud. Therefore. Thus. 239 Mere ownership by a single stockholder or by another corporation of all or substantially all of the capital stock of the corporation does not justify the application of the doctrine. evidence of an honest mistake or the want of character or reputation of the party libeled goes only in mitigation of damages. the corporate existence is disregarded under this doctrine when the corporation is formed or used for illegitimate purposes. In such a case. There must be other circumstances that must be present. the broadcasts are libelous per se. The parent and subsidiary corporations have common directors or officers. slander or any other form of defamation. (a) Grounds for application of doctrine239 1. 2. 5. particularly. Moreover. and vice versa because a corporation has a personality separate and distinct from its members or stockholders. The subsidiary has grossly inadequate capital. defeat public convenience. the law implies damages. justify wrong. evade a just and valid obligation or defend a crime.

242 (2) Liability of corporation for promoter’s contracts Contracts by the promoter for and in behalf of a proposed corporation generally bind only him. 10. The papers of the parent corporation or in the statements of its officers. subject to and to the extent of his representations. 381 SCRA 244 [2002]. National Bank v. or a dishonest and an unjust act in contravention of the plaintiff’s legal right. (PNB v. expressly or impliedly. The directors or executives of the subsidiary do no act independently in the interest of the subsidiary but take their orders from the parent corporation. 2005) 242 A promoter is an agent of the incorporators but not of the corporation. 362 SCRA 216 [2001] Such control must have been used by the defendant to commit a fraud or wrong to perpetuate the violation of a statutory or other positive legal breach of duty. acting alone or with others. 8. by its Board of Directors/Trustees.241 5. or its business or financial responsibility is referred to as the parent corporation’s own. 67 . Incorporation and Organization (a) Promoter A person who. Ritratto Group. The parent corporation uses the property of the subsidiary as its own..7. 240 (b) Test in determining applicability Control – not mere stock control but complete domination – not only of finances. v. but of policy and business practice in respect to the transaction attacked and must have been such that the corporate entity as to this transaction had at the time no separate mind. Andrada Electric & Engineering Company . takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. The said control and breach of duty must have proximately caused the injury or unjust loss complained of. and not the corporation. the subsidiary is described as a department or division of the parent corporation. will or existence or existence of its own. 240 241 Phil. (1) Liability of promoter He is liable to contracts entered by him in behalf of proposed corporation. Child Learning Center Inc. 9. unless and until after these contracts are ratified. The formal legal requirements of the subsidiary are not observed. and. Inc. Tagario (November 25.

.g. 4. 18 246 The amendment is effected before the expiration of corporate term. Natural persons. Rural Banks Act of 1992. Co..245 (d) Corporate term Not to exceed fifty (50) years in any one instance. The extension cannot be made earlier than 5 years prior to the expiration date unless there are justifiable reasons as determined by the SEC. 2. Of legal age. (c) Corporate Name – Limitations on the use of corporate name No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive. Majority must be residents of the Philippines. 3.243 (b) Number and qualifications of incorporators244 1. v.are those mentioned in the Articles of Incorporation as originally forming and composing the corporation. 244 68 . Inc. Note: However. Each must own or subscribe to at least one share. Not less than 5 but not more than 15. and 5.246 243 Cagayan Fishing Dev. it is undeniable that corporations can be corporators. They have no powers beyond those vested in them by the statute. Teodoro Sandiko. 245 Sec. for after dissolution by expiration of the corporate term there is no more corporate life to extend. Exception: When otherwise allowed by law. 223[1937] Incorporators .Without ratification by a corporation after its due incorporation. confusing or contrary to existing laws. 65 Phil. General rule: Only natural persons can be incorporators. having signed the Articles and acknowledged the same before a notary public. e. a contract entered into in behalf of a corporation yet to be organized or still in the process of incorporation is void as against the corporation. where incorporated cooperatives are allowed to be incorporators of rural banks.

name of corporation.I..248 Like the Constitution.249 (2) Contents a. the articles of incorporation provide the broad framework a corporation and its government. shareholders and state. 247 248 of Sec. upon call for payment by the board of directors. In no case shall the paid-up capital be less than five thousand (P5.00) pesos. purpose/s.247 (f) Articles of Incorporation The document prepared by the persons establishing a corporation and filed with the SEC containing the matters required by the Code. or in the absence of a fixed date or dates. At least twenty-five per cent (25%) of the total subscription must be paid upon subscription. v. 249 e-how. indicating the primary and secondary purposes. corporation and shareholders. the balance to be payable on a date or dates fixed in the contract of subscription without need of call. 699 (1929). and between the corporation and the State. and c. (1) Nature and function of Articles Essentially a contract between the corporation and the stockholders/ members. It defines the charter of corporation & the contractual relationship between state and corporation. At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation. b. b. 52 Phil.(e) Minimum capital stock and subscription requirements a. The charter is in the nature of a contract between the corporation and the government.000. Manila Railroad Co. between the stockholders/ member inter se. 13 Government of P.com 69 .

14 Limitations: a. It must be for legitimate purposes. nationalities. c. number of shares. or 2/3 of the members in case of non-stock corporations. The amendments shall take effect only upon their approval by the SEC. if a stock corporation. the amount of its authorized capital stock. the names. if non-stock. residences. d. f. and residences of the persons who shall act as directors or trustees until the first regular ones are elected and qualified. name of treasurer elected by subscribers. citizenship and residences of incorporators. the amount of capital. Such articles. a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. b. 70 . as amended. and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating that the amendments have been duly approved by the required vote of the stockholders or members must be submitted to the SEC. e. and the amounts subscribed and paid by each of the original subscribers which shall not be less than 25% of authorized capital stock. j. names. residences. k.c. names. names. h. g. number.251 250 251 Sec. f. and l. number of shares and in case the shares are par value shares. The amendment of any provision or matters stated in the articles of incorporation is not allowed when it will be contrary to the provisions or requirement prescribed by the Code or by special law or changes any provision in the articles of incorporation stating an accomplished fact. It must be approved by the required vote of the board of directors or trustees and the stockholders or members d. term of existence. names. and amount paid by each contributor. place of principal office.250 (3) Amendment Amended by a majority of the directors/ trustees and stockholders representing 2/3 of the outstanding capital stock. which shall not be less than 25% of total subscription. citizenship and residences of directors or trustees. The original articles and amended articles together must contain all provisions required by law to be set out in the articles of incorporation e. i. the par value of each share. if the corporation engages in a nationalized industry. must be indicated by underscoring the changes made.

rules of action adopted by a corporation for its internal government and for the regulation of conduct and prescribe the rights and duties of its stockholders or members towards itself and among themselves in reference to the management of its affairs. 5. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members towards the corporation and among themselves e. Members who contributed to the initial capital of a non-stock corporation. Continuing rule for the government of the corporation and the individuals composing it d. Witnesses to the signing and acknowledgment of the articles. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital. Names of incorporators. Source of authority for corporate officers and agents of the corporation 71 . 4. Provide for details not important enough to be stated in the articles of incorporation c. Supplement the articles of incorporation b. If the corporation is governed by special law. (g) Registration Incorporation and issuance of Certificate of Gives juridical personality to a corporation and places it under SEC jurisdiction (h) Adoption of By-Laws252 g. the amendments must be accompanied by a favorable recommendation of the appropriate government agency.(d) Non-amendable items Those matters referring to facts existing as of the date of the incorporation such as: 1. 3. Treasurer elected by the original subscribers. 6. Date and place of execution of the articles of incorporation. Functions: a. 2. 252 By-laws .

Must be general and uniform. They are binding only upon the corporation and on its members and those having direction. e.(1) Nature and functions of by-laws Rules of action adopted by a corporation for its internal government and for the regulation of conduct and prescribe the rights and duties of its stockholders or members towards itself and among themselves in reference to the management of its affairs. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members towards the corporation and among themselves e. not arbitrary or oppressive. As to third persons 72 . Must be consistent with the charter or articles of incorporation. Supplement the articles of incorporation b. b. Must not be contrary to law nor with the Corporation Code b. Functions: a. and f. c. Must not be contrary to morals and public policy. Must be reasonable. management and control of its affairs. d. Provide for details not important enough to be stated in the articles of incorporation c. Continuing rule for the government of the corporation and the individuals composing it d. As to members and corporation They have the force of contract between the members themselves. (3) Binding effects a. Source of authority for corporate officers and agents of the corporation (2) Requisites of valid by-laws a. Must not impair obligations and contracts.

v.A. 23. where a corporation is an injured party.253 (4) Amendment or Revision By a majority vote of the Board of Directors and majority vote of outstanding capital stock or a majority of the members in non-stock corporation. he must specifically be authorized by the Board of Directors. theory of general capacity 1. N. Corporation de facto may sue or be sued but a corporation which has been dissolved after the expiration of 3-year winding-up period ceases to exist de jure or de facto. Citibank. SSS v. 2006) Where the corporation is real party-in-interest. 253 By-laws have no extra-corporate force and are not in the nature of legislative enactments so far as third persons are concerned. Metro Drug Distribution Inc. 220 SCRA 75 (1993) For counsel to sign the certification for the corporation. CA.(2006 ) 73 . ( Tam Wing Tak v. A minority stockholder who is a member of the Board has no such power or authority to sue on the corporation’s behalf. 350 SCRA 475 (2001). De Onorio. When the power to sue is delegated by the by-laws to a particular officer. 162 SCRA 706 [1988]). v. Vda. 360 SCRA 230 [2001]). Court of Appeals. v. v. 416 SCRA 4 (2003). COA. United Paragon Mining Corp v. 36 of Corporation Code. Shipside Inc. 415 SCRA 573 (2003). 254 Power to amend or repeal by-laws or adopt new by-laws may be delegated by the 2/3 of the outstanding capital stock or 2/3 of the members in the case of non-stock corporation 255 This power (Section 36(1)) is an incident to corporate existence. Under Sec.They are not bound to know the by-laws which are merely provisions for the government of a corporation and notice to them will not be presumed. 384 SCRA 548 (2002). Corporate powers (1) General powers. nor the General Manager who has no authority to institute a suit on behalf of the corporation even when the purpose is to protect corporate assets. its power to sue is lodged with its Board of Directors.254 5. CA. Mariveles Shipyard Corp. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation. v. Enciso. Narciso. suits are to be brought by or against the corporation in his own name. (De Leon 2006 at 319) As a rule. (Central Cooperative Exchange Inc. v. (BP Leasing Corp. v. CA. 352 SCRA 334 (2001). Makasiar. such officer may appoint counsel to represent the corporation in a pre-trial hearing without need of a formal board resolution. neither administrator or a project manager could sign the certificate against forum-shopping without being duly authorized by resolution of the Board of Directors (Esteban. To sue and be sued in its corporate name. Jr. in relation to Sec.255 2. Chua.

2007) Enumerates 10 powers that a corporation enjoys in addition to the special powers that may be provided for in the purpose clause of the articles of incorporation. To make reasonable donations for public welfare. In case of extension of corporate term. for non-stock corporations: admit members. (ibid. theory of specific capacity (a) Power to extend or shorten corporate term Requites: a. take or grant. To exercise other powers essential or necessary to carry out its purposes as stated in the articles of incorporation. charitable. 795) 74 . 5. receive. convey. 10. p.. To adopt its by-laws not contrary to law. (ii) candidate and (iii) partisan political activity. securities and bonds 8. c. To adopt and use of corporate seal. cultural. To amend its Articles of Incorporation. To establish pension. hold. sell. retirement. 7. 6. pledge. To enter into merger or consolidation with other corporations. 794 of CLV’s CLR. For stock corporations: issue and sell stocks to subscribers and treasury stocks. 9. hospital. To purchase. and other plans for the benefit of its directors. lease. scientific. which would also constitute express powers. any dissenting stockholder may exercise his appraisal right. and 11. or public policy. Ratified by at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members. Written notice of the proposed action and of the time and place of the meeting addressed to each stockholder or member at his place of residence.256 (2) Specific powers.3. officers and employees. provided that no donation is given to any (i) political party. (p. morals. 4. mortgage and deal with real and personal property. and to amend or repeal the same.257 256 Sec. civic or similar purposes. 36 Enumerates some of the express powers of corporations (many of which even if not expressly provided for by law would constitute implied powers of every entity. trustees. Approved by a majority vote of the board of directors or trustees b.

(Page 243 of CLV’s Textbook) A corporate bond is an obligation to pay a definite sum of money at a future time at a fixed rate of interest. (SEC Opinion no. and therefore do not constitute bonded indebtedness and will not require approval of the stockholders. Majority vote of the members of the BoD b. in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Certificate of said corporate act shall be signed by majority of the members of the Board and the Chairman and Secretary of the stockholders’ meeting d. Shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock. SEC has limited the term “bonded indebtedness” to cover only indebtedness of the corporation which are secured by mortgage on real or personal property. (Page 347 of De Leon. 67 The corporation must submit proof to the SEC that such decrease will not prejudice the rights of creditors. Certificate must be accompanied by the Treasurer’s Affidavit certifying compliance with the 25%-25% requirements as to stock corporation. Such pre-emptive right shall not extend to: 1. in a meeting duly called for that purpose with notice previously given c. in proportion to their respective shareholdings. 2005) A corporation cannot issue stock in excess of the amount limited by its articles of incorporation.258 (c) Power to deny pre-emptive rights All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class. 2006) 259 Sec. unless such right is denied by the articles of incorporation or an amendment thereto. create. Debentures are issued on the basis of the general credit of the corporation and are not secured by collaterals. or 2. July 12.(b) Power to increase or decrease capital stock or incur. Ratification by 2/vote of the outstanding capital stock. Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public.259 257 258 Sec. increase bonded indebtedness Requisites: a. such issue is ultra vires and the stock so issued is void even in the hands of a bona fide purchaser for value. 39 75 . 05-10.

and c. To acquire treasury shares A pre-emptive right is the shareholder’s right to subscribe to all issues or disposition of shares or any class in proportion to his present stockholdings. The sale. To eliminate fractional shares out of stock dividends b. 832 of CLV’s CLR. in a delinquency sale and to purchase delinquent shares sold during said sale c. b. if a stockholder with pre-emptive right owns 20% of the outstanding shares of the corporation. the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the retained earnings and also in the net assets in the event of dissolution. (p. 2006) 260 No ratificatory vote needed: a. This principle is known as the right of pre. must be approved by the board of directors or trustees. (p. 2007) Whenever a capital stock of a corporation is increased and new shares of stocks are issued. arising out of unpaid subscription. For example.260 (e) Power to acquire own shares Instances: a. etc. If it is necessary in the usual and regular course of business b. the new issue must be offered first to the stockholders who are such at the rime the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. The authorization must be done at a stockholders’ or members’ meeting duly called for that purpose after written notice.emption or pre-emptive right of stockholders (Page 355 of De Leon. if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining business 76 . 356 of De Leon. he may subscribe 20% of any shares of stock issued by the corporation. To pay dissenting stockholders d. 2006) The rule [on pre-emption] aims to safeguard the right of stockholder to preserve unaltered and unimpaired his proportionate influence and interest in the corporation and the relative value of his holdings. To collect or compromise an indebtedness to the corporation. The action of the board of directors or trustees must be authorized by the vote of stockholding representing 2/3 of the outstanding capital stock including holders of non-voting shares or 2/3 of the members as the case may be.(d) Power to sell or dispose of corporate assets Requisites: a.

When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation. Stock While cash dividends due on delinquent shares can be applied to the payment of the unpaid balance. declared. there must be unrestricted retained earnings The other purposes for which the funds may be invested must be among those enumerated as secondary purposes and must further comply with the requirements of Section 42. such as when there is a need for special reserve for probable contingencies.263 261 262 In letters a-c. stock dividends cannot be applied as payment for unpaid subscription. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member.e. 77 . When justified by definite corporate expansion projects approved by the board of directors b. Any dissenting stockholder shall have appraisal right. General Rule: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock Except: a. Forms: a. Redeemable shares regardless of existence of retained earnings f.corporate profits set aside. In close corporations. Approved by a majority of the board of directors or trustees. or by at least two thirds (2/3) of the members in the case of non-stock corporations. 263 Dividends . when there is a deadlock in the management of the business261 (f) Power to invest corporate funds in another corporation or business Requisites: a. and b. When the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring dividends without its/his consent and such consent has not yet been secured c. Ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock. Property c.262 (g) Power to declare dividends General rule: Dividends can only be declared and paid out of actual and bona fide unrestricted retained earnings. and ordered to be paid by the directors for distribution among shareholders at a fixed time. To effect a decrease of capital stock g. Cash b. c.

liquidating dividends. 78 . c. patents and leaseholds. the income derived therefrom may be availed of for dividend distribution. which is not being used for business. Increase in the value of a fixed asset as a result of its revaluation is not retained earnings. No dividends can be declared out of capital except only in two instances: 1. dividends from investments in wasting asset corporation. However. at a gain. e. Has no deficit at the time the depreciation on the appraisal increase was charged to operations. and 2. and 3. hence the same cannot be declared as dividends. Such depreciation on appraisal increase previously charged to operations has not been impaired by losses. Where a corporation sold its real property. and 3. without allowance or deduction for depletion. No creditors are prejudiced. Reduction surplus can be a source of dividends. d. the entire consideration paid is considered capital. Has sufficient income from operations from which the depreciation on the appraisal increase was charged 2.266 264 265 Revaluation surplus paid-in surplus Unlike par value shares. b. increase in the value of fixed assets as a result of revaluation264 may be declared as cash or stock dividends provided that the company: 1.Special rules: a. Declared only as stock dividends and not cash. Dividends can be declared out of the amount received in excess of the par value of shares265 when: 1. oil wells. Rule on paid-in surplus is applicable. when no par value shares are sold at a premium. 2. 266 It permits corporations solely or principally engaged in the exploitation of “wasting assets” to distribute the net proceeds derived from exploitation of their holdings such as mines. There is no impairment of capital.

(h) Power to enter into management contract267 Requisites: a.. Money cannot be borrowed for the payment of dividends because indebtedness is not a retained earnings of the corporation. (i) Ultra vires acts An act which is beyond the conferred powers of a corporation or the purposes or objects for which it is created as defined by the law of its organization. 7 SCRA 361 269 Bar Review Materials in Commercial Law. Hector de Leon. 2002 ed. Management company must always be subject to the superior power of the board to give specific directions from time to time or to recall the delegation of managerial power. If a stockholder of the managed corporation owns more than 1/3 of the managing corporation. g. Express power of a corporation 2. that it is not for more than 5 years at any one time 268 Republic vs. h. the management contract must be approved by at least 2/3 of the stockholders of the managed corporation. by majority of the stockholders.any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation. Profits realized from sale of treasury shares are part of capital and cannot be declared as cash or stock dividend as purchase and sale of such shares are regarded as contractions and expansions of paid-in capital. A management contract should not be valid for more than 5 years for any one term. Jorge Miravite. Inc. 2002 ed. 79 . b. (The Corporation Code of the Philippines Annotated. Applicability of ultra vires doctrine 267 1.) Management contract . Approved by majority of the Board. of both the managed and managing corporation. Acoje Mining Co.f. You can just keep renewing it provided.269 1. Corporate earnings which have not yet been received even though they consist in money which is due. 268 An act done by a corporation outside of the express and implied powers vested in it by its charter and by the law. cannot be included in the profits out of which dividends may be paid.

The creditors may sue the stockholders directly for the latter’s unpaid subscription. Part executed and part executory – principle of “no unjust enrichment at expense of another” shall apply. Consequences of ultra vires acts a. 2. the TFD extends to the capital stock of the corporation as well as all of its property and assets. Coverage of the TFD: 1.272 270 271 void and unenforceable Sec. all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities. Where the corporation is insolvent. (j) Doctrine of individuality of subscription A subscription is one entire and indivisible whole contract. Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors. and which the corporation may not dissipate.The ultra vires doctrine typically applies to a corporate body so that any act done by the body which is beyond its capacity to act will be considered invalid. Executed contract – courts will not set aside or interfere with such contracts. Where it has transferred the corporate property in fraud of its creditors. If the corporation is solvent. Executory contracts – no enforcement even at the suit of either party270 c. Where it had released the subscribers to the capital stock from their subscriptions. and 4. b. 80 . Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply. 2. If the corporation is insolvent. 2. It cannot be divided into portions (k) Doctrine of equality of shares Where the articles of incorporation do not provide for any distinction of the shares of stock. 3. 6 272 Application of the TFD: 1.271 (l) Trust fund doctrine The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. the TFD extends to the capital stock represented by the corporation’s legal capital. and d.

311 SCRA 508 (1999) 276 Generally. 301 SCRA 152 (1999) 274 except in the redemption of the redeemable shares 275 NTC v. the capital stock. property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. the Board of Directors alone exercises the powers of the corporation. (b) By the Board of Directors Board must act as a body in a meeting. Redemption of redeemable shares (Sec. no part of the subscribed capital stock may be turned over or released to the stockholder274 without violating this principle. dividends must never impair the subscribed capital stock.275 (3) How exercised (a) By the shareholders They have residual power of fundamental corporate changes. when there should be a deadlock and the SEC orders the payment of the appraised value of the stockholder’s share. nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. (Sec. Until the liquidation of the corporation. Court of Appeals. Exceptions to the TFD: 1.273 The “trust fund” doctrine considers the subscribed capital stock as a trust fund for the payment of the debts of the corporation.Under the trust fund doctrine. of Internal Revenue v. Court of Appeals. Requisites of board meetings: 1) Meeting of the Board duly assembled 2) Existence of quorum 3) Decision of the majority of the quorum duly assembled (Exception: Election of directors – requires a vote of majority of all the members of the board) 81 .276 (c) By the Officers Via authority from (1) law. subscription commitments cannot be condoned or remitted. In close corporation. 104) 273 Comm. 8) 2. Thus. to which the creditors may look for satisfaction. It is responsible for corporate policies and the general management of the business and affairs of the corporation.

278 Application of the TFD: 1. (Sec. Bukal Enterprises and Dev. Where it had released the subscribers to the capital stock from their subscriptions. Board of directors and trustees279 (a) Doctrine of Centralized Management As can be gleaned from Sec. Coverage of the TFD: 1.(2) corporate by-laws. Exceptions to the TFD: 1. Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors. and which the corporation may not dissipate. Redemption of redeemable shares (Sec. If the corporation is insolvent. 3.277 (3) Trust fund doctrine The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. 414 SCRA 190 (2003) 281 Great Asian Sales Center Corp. custom or acquiescence in the general course of business. In practice. The creditors may sue the stockholders directly for the latter’s unpaid subscription. Where the corporation is insolvent. Corp.278 7. v. If the corporation is solvent. 8) 2. 104) 279 responsible for corporate policies and the general management of the business and affairs of the corporation 280 Firmev. either expressly or impliedly by habit. execute the policies laid down by the board. 2. and (3) authorization from the board. 2. the TFD extends to the capital stock of the corporation as well as all of its property and assets. Court of Appeals. In close corporation.”280 The exercise of the corporate powers of the corporation rests in the Board of Directors save in those instances where the Corporation Code requires stockholders’ approval for certain specific acts. the TFD extends t o the capital stock represented by the corporation’s legal capital. and 4. 381 SCRA 557 (2002) 82 .281 (b) Business Judgment Rule 277 In theory. when there should be a deadlock and the SEC orders the payment of the appraised value of the stockholder’s share. 23 of Corporation Code “It is the board of directors or trustees which exercises almost all the corporate powers in a corporation. often have wide latitude in determining the course of business operations. Where it has transferred the corporate property in fraud of its creditors.

& courts will not interfere. and c. Bacolod MurciaMilling Co. Non-stock Corp. 23 Exceptions: a. with due care & prudence. When directors or officers act against the corp.282 The rule has two (2) consequences: a) The resolution. If so. 285 Ibid.285 3.283 (c) Tenure. (1962) 284 Ibid. Qualifications: 282 283 see Sec. in conflict-of-interest situation General rule: Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if they acted in good faith. b. . Exception: If the contracts are so unconscionable & oppressive as to amount to a wanton destruction of the rights of the minority.must be a member 2. 83 . fairly incidental to the express powers and reasonably necessary to their exercise. When the Corp Code expressly provides otherwise. Contracts intra vires entered into by the board of directors are binding upon the corp. Majority of the corporate directors/trustees must be residents of the Philippines. and b) Directors and duly authorized officers cannot be held personally liable for acts or contracts done with the exercise of their business judgment.284 1. contracts and transactions of the BOD. Board of Directors has authority to modify the proposed terms of the contracts of the corporation for the purpose of making the terms more acceptable to the other contracting parties…The test to be applied is whether the act in question is the direct and immediate furtherance of the corporation’s business. cannot be overturned or set aside by the SHs or members and not even by the courts under the principle that the business of the corp. qualifications and disqualifications of directors or trustees Tenure Shall hold office for one (1) year until their successors are elected and qualified. has been left to the hands of the BOD. gross negligence or in bad faith. Stock Corp. He must be of legal age.must own at least one (1) share capital stock of the corporation in his own name.Unless otherwise provided in the Code. otherwise not. . When the directors or officers acted with fraud. the corporation has the power to do it. all corporate powers and prerogatives are vested directly in the BOD. [Montelibano v.

Disqualifications: 1. or 2. 287 Sec. it may be called at the instance of any stockholder or member. 84 . or if there be no capital stock. 286 (d) Elections (1) Cumulative voting A stockholder is allowed to concentrate his votes and give one candidate. Straight Voting Every stockholder may vote such number of shares for as many persons as there are directors to be elected. If the officers refuse to call a meeting to consider the removal of the Director. 24. The board cannot remove a director or trustee as member of the board. Convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years. a majority of the members entitled to vote. Removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled to under Section 24. 288 with or without cause Such removal shall take place either at a regular meeting or at a special meeting called for the purpose of removal of Directors or Trustees.287 (e) Removal By a vote of the stockholders holding or representing 2/3 of the outstanding capital stock. Violation of this Code committed within five (5) years prior to the date of his election or appointment. as well as the intention to propose such removal. (2) Quorum The owners of a majority of the outstanding capital stock. or if the corporation be a non-stock corporation. 27 By-laws may provide for additional qualifications/disqualifications as long as such additional qualifications/disqualifications shall not modify requirements as prescribed in the corporation code or be in conflict with such prescribed requirements. as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. 1st sen. by a vote of 2/3 of the members entitled to vote. but with due notice.288 286 Sec. with previous notice of the time and place of such meeting.

notwithstanding the fact that the director risked his own funds in the venture. If the vacancy is caused by the expiration of term. as such directors. the directors shall not receive any compensation. In case of increase in the number of directors or trustees as a result of an amendment of the articles authorizing such increase (g) Compensation In the absence of any provision in the by-laws fixing their compensation.291 Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally 289 290 Sec. by virtue of his office. This provision shall be applicable. and d. exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year. if still constituting a quorum. 30 Doctrine of Corporate Opportunity 291 Sec. except for reasonable per diems. When the remaining directors or trustees do not constitute a quorum.289 (h) Fiduciary Duties and Liability Rules Where a director.(f) Filling of vacancies By a vote of at least a majority of the remaining directors or trustees. 34 85 . If the vacancy is caused by the removal of a director or trustee c. as such directors. acquires for himself a business opportunity which should belong to the corporation. he must account to the latter for all such profits by refunding the same. the stockholders or members shall fill the vacancy: a. In the following cases. b.290 unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. thereby obtaining profits to the prejudice of such corporation. Any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors.

CA 295 Secs.293 While it is true that a criminal case can only be filed against the officers and not against the corporation itself. 54 Phil. Sia vs. 607 (1930).8. its stockholders or members and other persons. 27. Reyes. No duty to disclose facts known to the director or officer. 3.61. and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest. directors. since it does not have the essential element of malice. Tan Boon Kong. CA. in such case. he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. 23. Inc.2.for all damages resulting therefrom suffered by the corporation. Securities Regulation Code General rule: (Majority view) Directors owe no fiduciary duty to stockholders but they may deal with them at arm’s length. 31 People vs. Times. it cannot be held liable for a crime committed by its officers.292 (i) Responsibility for crimes Since a corporation is a mere legal fiction. the responsible officers would be criminally liable. any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence. 71. the corporation has a cause of action as long as there is unfair use of inside information It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer of the corporation.295 (k) Contracts 292 293 Sec. vs. 121 SCRA 655 (1983). When a director.294 (j) Inside information The fiduciary position of insiders. it does not follow that the corporation cannot be a real party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. 39 SCRA 303 (1971) 294 Cometa vs. 86 . trustee or officer attempts to acquire or acquires. as to which equity imposes a disability upon him to deal in his own behalf. in violation of his duty. The liability of a director or officer guilty of using inside information is to the corporation and not to any individual stockholder Since loss and prejudice to the corporation is not a requirement for liability.2.

3. That in case of an officer. unless all the following conditions are present: 1.298 296 297 Sec. That the vote of such director or trustee was not necessary for the approval of the contract. provided: (1) full disclosure of the adverse interest of the directors or trustees involved is made at such meeting. he shall be subject to the provisions of Section 32297 insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. in the case of a contract with a director or trustee. the contract has been previously authorized by the board of directors. That the contract is fair and reasonable under the circumstances. a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting. and 4. 32 supra 298 Sec. 33 87 . and (2) the contract is fair and reasonable under the circumstances. If the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal. such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least twothirds (2/3) of the members in a meeting called for the purpose.(1) By self-dealing directors with the corporation A contract of the corporation with one or more of its directors or trustees or officers is voidable. and provided the contract is fair and reasonable under the circumstances. 2. 296 (2) Between directors corporations with interlocking Except in cases of fraud. Where any of the first two conditions set forth is absent. at the option of such corporation.

301 Ibid.299 Contracts to manage the day-to-day affairs of the corporation in accordance with the policies laid down by the board of the managed corporation. When and where Regular meetings Shall be held monthly. It refers only to a management contract with another corporation. 2. Adoption. by majority vote of all its members. 300 Sec.. 299 Sec. to be appointed by the board. 44. Distribution of cash dividends.(3) Management Contract/s It is any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation. composed of not less than three members of the board. amendment or repeal of by-laws. on such specific matters within the competence of the board.300 Powers that cannot be delegated to the executive committee: 1. it does not apply to management contracts entered into by a corporation with natural persons. as may be delegated to it in the by-laws or on a majority vote of the board. unless the by-laws provide otherwise. 5. Approval of any action requiring concurrence of stockholders. 88 . Said committee may act. 2nd sen. 4. operating agreements or otherwise. 1st sen. whether such contracts are called service contracts. 3. (l) Executive committee The by-laws of a corporation may create an executive committee. Filling of vacancies in the board. 35. Hence. Amendment or repeal of board resolution which by its terms cannot be amended or repealed.301 (m) Meetings (1) Regular or special a.

) 306 Robert's Rules of Order. unless the by-laws provide otherwise.302 b. An abstention is a non-vote.303 (2) Who presides The president. A director or trustee may waive this requirement.Special meetings May be held at any time upon the call of the president or as provided in the bylaws. a director may vote "yes" or "no. Notice Must be sent to every director or trustee at least one (1) day prior to the scheduled meeting. 54 Some by-laws provide that the Chairman of the board of directors or trustees presides at board meetings. a decision not to make a decision. 25. An abstention may have the practical effect of a "no" vote since the motion may fail for lack of sufficient "yes" votes.306 The president votes on all motions. 10th ed. unless the by-laws provide otherwise. unless otherwise provided by the by-laws. that means the director has not voted. not just to break ties. 304 Sec. 305 unless the articles of incorporation or the by-laws provide for a greater majority (Sec. Meetings may be held anywhere in or outside of the Philippines. Unless a greater number is called for in the articles or bylaws. either expressly or impliedly..304 (3) Quorum A majority of the number of directors or trustees as fixed in the articles of incorporation.305 (4) Rules on abstention When it comes time for directors to vote on an issue." If a director abstains from voting. 53 Ibid. p 43 89 . 2nd par. a matter is deemed "approved" by the board if at any meeting at which a 302 303 Sec.

308 ibid. Voting rights. Justice Jose Vitug. the pool remains open to 10:00 p. each night.m. the motion fails. directors should cast votes on all issues put before them.m." and one abstains. (from the current 10:00 p. Otherwise. d..307 When the chair calls for a vote. b. only the ayes and The burden is on an abstaining director to speak up if he/she wants to be recorded as an abstention. The vote needed a majority of three yes votes to pass and it only received two. abstentions are not called for. Right to dividends. 309 ibid." "no" or "abstain. Proportionate participation in the distribution of assets in liquidation. Failure to do so could be deemed a breach of their fiduciary duties. p. Right to transfer of stocks in corporate Proprietary rights 307 For example. If the vote is called for and one of the directors fails or refuses to indicate "yes. Stockholders and members (a) Rights of a stockholder and Members310 Managerial rights a. Accordingly. the director should abstain from voting on the issue and make sure his/her abstention is noted in the minutes.309 The other reason a director might abstain is that he/she believes there was insufficient information for making a decision. 8. 90 .308 Whenever a director believes he/she has a conflict of interest. 1997 ed. nays. c. Right to remove directors a.quorum is present at least a majority of the required quorum of directors votes in favor of the action. the vote is counted as a "yes" vote.m.) and two directors vote "yes." and the chair of the meeting deems the director to have voted "yes" and the silent director does not object. if five directors are present (out of five) and there is a motion to close the pool each day at 8:00 p. and b. Under limited circumstances. 394 310 Pandect of Commercial Law and Jurisprudence. Right to issuance of stock certificate for fully paid shares. a director may change his/her vote or the matter may be reconsidered at a later date." two directors vote "no.

313 (2) Participation in management 311 312 not creditors whose remedies are merely subsidiary such as accion subrogatoria and accion pauliana Requisites: (i) An existing cause of action in favor of the corporation (ii) The stockholder/member must first make a demand upon the corporation or the management to sue unless such a demand would be futile (iii) The stockholder/member must be such at the time of the objectionable acts or transactions unless the transactions are continuously injurious (iv) The action must be brought in the name of the corporation The number of shares of the stockholder is immaterial since he is not suing in his own behalf The mere trustee of shares registered in his name cannot file a derivative suit for he is not a stockholder in his own right. officers and/or controlling shareholders of the corporation. e. but not duly pursued by it. Preemptive right Remedial rights Individual suit – a suit instituted by a shareholder for his own behalf against the corporation.312 (1) Doctrine of Equality of shares Where the articles of incorporation do not provide for any distinction of the shares of stock.books. against any person or against the directors. Right to recover stocks unlawfully sold for delinquent payment of subscription f. CA. 6 91 . (Bitong vs. 292 SCRA 304) 313 Sec. Representative suit – a suit filed by a shareholder in his behalf and in behalf likewise of other stockholders similarly situated and with a common cause against the corporation. all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities. and Derivative suit – a suit filed in behalf of the corporation by its shareholders311 upon a cause of action belonging to the corporation.

Stockholders or members may attend and vote in their meetings by proxy (Sec. Voting in case of joint ownership of stock. 25).(a) Proxy It must be in writing and signed by the stockholder or member314 and filed before the scheduled meeting with the corporate secretary. 4. however. subject. 3. Unless expressly renewed. all rights granted in the agreement shall automatically expire at the end of the agreed period.317 (c) Cases when stockholders’ action is required i. 58). Voting by trustee under voting trust agreement. 316 and/or any other rights 317 Limitations: a. 314 315 as principal Sec. 58 The right to vote by proxy may be exercised in any of the following instances: 1.315 (b) Voting trust An agreement whereby one or more stockholders transfer their shares of stocks to a trustee. To adopt. The agreement shall be subject to examination by any stockholder of the corporation f. 2. A certified copy of the agreement must be filed with the corporation and with the SEC e. it shall be valid only for the meeting for which it is intended. 318 infra 92 . directors cannot do so. As provided for in its by-laws. to the trust agreement. and in return. The agreement must not be used for purposes of fraud c. Cannot be entered into for a period exceeding 5 years at any one time except when it is a condition in a loan agreement or for the purpose of circumventing the law against monopolies and illegal combinations b. which are transferable like stock certificates. amend or repeal the by-laws. Unless otherwise provided in the proxy. trust certificates are given to the stockholder/s. who thereby acquires for a period of time the voting rights 316 over such shares. No proxy shall be valid and effective for a longer period than five years at any one time. Election of the board of directors or trustees. and given to another person (as agent) authorizing such person to exercise the voting rights of the former. To enter into management contract if any of the two (2) instances stated318 are absent. By a majority vote a. (Sec. b. 5. Pledge or mortgage of shares. It must be in writing and notarized and specify the terms and conditions thereof d. Directors must always act in person.

Create Bonded Indebtedness. d. g. lease. The total number of votes cast by a stockholder shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected.319 (3) Proprietary rights (a) Right to dividends 319 A stockholder is allowed to concentrate his votes and “give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal” . By cumulative voting A system of voting designed to increase the voting power of minority stockholders in the election of corporate directors when more than one director is to be elected. To invest in another corporation. e. By a two-thirds vote a. However. To deny pre-emptive right. Increase/Decrease Corporate Stock. 24 (mandatory in a stock corporation – statutory right of SHs). or (2) a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of the managed corporation. Sell. business other than the primary purpose. this allows the minority block to dominate the election of BOD. Power to extend or shorten corporate term. b. To amend the articles of incorporation. To declare stock dividends h.ii. c. Gives the minority an opportunity to elect a representative to the BOD. dispose. By-laws cannot provide against cumulative voting since this right is mandated in Sec. 93 . Members of the Board in a Non-stock Corporation shall not be voted cumulatively unless specifically provided for in the By-laws. Incur. Cumulative voting is allowed for election of members of the Board in a stock corporation. f. To enter into management contract if (1) a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total outstanding capital entitled to vote of the managing corporation. Cannot itself give the minority control of corporate affairs but may affect and limit the extent of majority’s control. the minority still needs the majority in order to constitute a quorum. encumber all or substantially all of corporate assets. i. Theoretically. iii.

3. 2. The proposed action is any one of the instances supra. 5. The fair value shall be agreed upon but in case there is no agreement within 60 days from the date the vote was taken. becomes a debt owing to the SH. the fair value shall be determined by a majority of the 3 distinguished persons one of whom shall be named by the stockholder another by the corporation and the third by the two who were chosen. Extension or reduction of corporate term. 321 Instances wherein appraisal right may be exercised: 1. 2. accordingly. The demand for inspection should cover only reasonable hours on business days. Exceptions: 1) not yet announced or communicated to the public. He withdraws the demand with the corporations consent. may be revoked prior to actual issuance. Merger or consolidation. revocable before announcement to SHs. Change in the rights of stockholders. The right of appraisal is extinguished when: a. The stockholder must made a written demand on the corporation within 30 days after the vote was taken. 320 The right to dividends is based on duly recorded stockholdings. 94 . the corporation is prohibited from entitling thereto anyone else.General rule: As soon as the same have been lawfully declared by the BOD. Corporation decides to sell or dispose of all or substantially all assets of corporation. 2) when stock dividends are declared since these are not distributions but merely represent changes in the capital structure. 3. 4. Exercise of appraisal right: 1. or restrict the right of any stockholder.321 (c) Right to inspect 1. authorize preferences superior to those stockholders. c. 4. b. No revocation can be made. Corporation authorized the board to invest corporate funds in another business or purpose. 5. The proposed action is abandoned. The SEC disapproves the action.320 (b) Right of appraisal The right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure. 6. The price to be paid is the fair value of the shares on the date the vote was taken. The stockholder must be a dissenting stockholder.

4. Exception: When a corporation at its inception offers only a specified portion of its authorized capital stock for subscription. There is no preemptive right with respect to the share to be re-offered. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock.322 (e) Right to vote Limitations: 322 Purpose: to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus. If subsequently. and. The stockholder. This is on the theory that when a corporation at its inception offers its first shares. in exchange for property needed for corporate purposes or in payment of a previously contracted debt 95 . When pre-emptive right not available: a. If the shares preferentially offered to a stockholder are not subscribed or purchased by him. If the corporation or its officers contest such purpose or contend that there is evil motive behind the inspection. (d) Preemptive right It is the shareholders’ preferential right to subscribe to all issues or dispositions of shares of any class in proportion to their present stockholdings. 3. it does not follow that said shares shall again be re-offered on a pro rata basis to stockholders who already exercised their preemptive rights. it is presumed to have offered all of those which it is authorized to issue. which must show good faith or legitimate purpose. the burden of proof is with the corporation or such officer to show the same. The demand must be accompanied with statement of the purpose of the inspection. there would be preemptive right as to the remaining portion thus offered for subscription. member. In case additional issues of originally authorized shares: General rule: There is no preemptive right. Shares requiring stock offering or minimum stock ownership by the public c. When denied by the article of incorporation b.2. it offers the remaining unsubscribed portion. director or trustees demanding the exercise of the right is one who has not improperly used any information secured through any previous examination of the records of the corporation or any other corporation. Extends to treasury shares in case of their reissuance.

4. Fractional shares of stock cannot be voted unless they constitute at least one full share. 6. (f) Right to Dividends As soon as the Board of Directors has declared dividends. 7. 324 Black’s Law Dictionary. NOT the number of shares he has. The extent of the SH’s share in the dividends will depend on the capital contribution. 2. Holders of stock declared delinquent by the board for unpaid subscription. 96 . 9th Ed. When no dividends are declared for 3 consecutive years.323 Exception: If the declaration has not yet been announced or stockholders. communicated to the (g) Right of First Refusal A potential buyer's contractual right to have the first opportunity to buy.1. 5.324 (4) Remedial rights325 323 McLaran v. 3. Where the Articles of Incorporation provides for classification of shares pursuant to Sec. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided. preferred SHs are given the right to vote for directors until dividends are declared. it becomes a debt owed by the corporation. non-voting shares are not entitled to vote except as other provided in the said section. and therefore can no longer be revoked. if the seller chooses to sell within the contracted period. A stockholder who mortgages or pledges his shares and gives authority for creditor to vote. A transferee of stock if his stock transfer is not registered in the stock and transfer book of the corporation. 6. From this time. Treasury shares have no voting rights as long as they remain in treasury. at a specified price. Crescent Planning.

quarterly. 97 . c. (6) Meetings (a) Regular326 or special327 i. 51. 1st par. weekly. Liability to the creditors o the corporation for unpaid subscription. whether regular or special. no notice is required except if required by law.laws. e. on any date in April of every year. Notice 325 326 see Rights of a stockholder and members. Liability for failure to create corporation. b. Liability for watered stock. are held in the city or municipality where the principal office of the corporation is located.330 ii. Liability to the corporation for interest on unpaid subscription if so required by the by. Liability for dividends unlawfully paid. supra Fixed in the by-laws at regular intervals (like monthly. Notice is required.329 Meetings. 327 Called specially at a date other than the regular meeting.328 Special meetings At any time deemed necessary or as provided in the by-laws. Generally. f.(5) Obligation of a stockholder a. if not fixed. 328 as determined by the board of directors or trustees 329 Sec. etc. 50 330 Sec.). Liability to the corporation for unpaid subscription. d. and if practicable in the principal office of the corporation. When and where Regular meetings Annually on a date fixed in the by-laws.

issued by the corporation. unless otherwise provided in the bylaws. Capital Structure This refers to the aggregate of the securities -.334 331 Ibid. 50 333 unless otherwise provided for in the Code or in the by-laws (Sec. the minutes of the meeting are more like a summary of what happened at the meeting. They can be legal documents. upon petition of a stockholder or member on a showing of good cause therefor.332 (c) Quorum Consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations.Regular meetings Written notice shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting. Notice is required for both regular and special meetings but such notice may be waived.instruments which represent relatively long-term investment -. 332 Sec. the SEC. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer. 9. In other cases. 98 . expressly or impliedly. 52) 334 There are basically 2 kinds of securities: shares of stock and debt securities. Special meetings At least one (1) week written notice shall be sent to all stockholders or members. unless a different period is required by the bylaws. may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws.333 (d) Minutes of meetings Formal records of business.331 (b) Who calls the meetings When there is no person authorized to call a meeting.

actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued. Shares of stock shall not be issued in exchange for promissory notes or future service (ibid) 99 . Outstanding shares exchanged for stocks in the event of reclassification or conversion. subject to approval by the Securities and Exchange Commission. Previously incurred indebtedness of the corporation. tangible or intangible.335 b. 3.336 c. Amounts transferred from unrestricted retained earnings to stated capital. 2. Nature of Stock 335 336 Sec. and 6. 4.a. Property. Shares of Stock a. Subscription Agreements It is any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. May be any or a combination of any two (2) or more of the following: 1. Consideration for Stocks Stocks shall not be issued for a consideration less than the par or issued price thereof. 5. 60 Sec. Labor performed for or services actually rendered to the corporation. This is notwithstanding the fact that the parties refer to it as a purchase or some other contract. the valuation thereof shall initially be determined by the incorporators or the board of directors. 62 Where the consideration is other than actual cash. Actual cash paid to the corporation. or consists of intangible property such as patents of copyrights.

337 b. 340 Sec. A proportional part of a corporation's capital represented by the number of equal units (or shares) owned.340 (c) Trust fund doctrine for liability for watered stocks It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. Consideration for Shares of Stock339 d. valued in excess of its fair value. liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. having knowledge thereof. and granting the holder the right to participate in the company's general management and to share in its net profits or earnings. Poizat. 37 Phil. or who.341 A corporation has no power to release an original subscriber to its capital stock form the obligation of paying for his shares. money/property less than par value. shall be solidarily. supra 339 Ibid. without a valuable consideration for such 337 338 Black’s Law Dictionary. services less than par value. (b) Liability of directors for watered stocks Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash.. Subscription Agreements338 c. 802 100 . 65 341 Velasco vs.The capital or principal fund raised by a corporation through subscribers' contributions or the sale of shares. Watered Stock (a) Definition Stocks issued gratuitously. dividends where no surplus profits exist. 9th Ed. does not forthwith express his objection in writing and file the same with the corporate secretary.

101 . The Trust fund doctrine under Philippine corporate setting 344 For purposes of execution. 62 of the Corporation Code provides that "the valuation thereof shall initially be determined incorporators or the board of directors subject to approval by the Securities and Exchange Commission. strict compliance with the statutory regulations is necessary.release. and as against creditors a reduction of the capital stock and take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. no distinction is made as to creditors whether they become such prior to or subsequent to the issuance of the watered stock and fraud is not made an element.343 e. 65 is by itself sufficient basis to hold a stockholder liable to any corporate creditor.342" Likewise. For purposes of taxation. Situs of the Shares of Stock Generally at the domicile of the owner. the situs of shares shall be the province in which the corporation has its principal business or office. But when the corporation is still a "going concern" and the watering of the stock does not actually render it insolvent. attachment and garnishment. Sec. For the purpose of registering the chattel mortgage over the shares of stock. Moreover. does Sec. Sec.620 Cesar L. The legal standing of corporate creditors against guilty stockholders and officers for watered stock is clear in a situation when the corporation is insolvent since then all corporate assets would be held for the satisfaction of the claims of the creditors.. 65 actually grant corporate creditors the legal standing to bring at that point a suit against the involved stockholder and the guilty officers? In the payment of property for subscribed shares. Classes of Shares of Stock Common shares The basic class of stock ordinarily and usually issued without extraordinary rights and privileges. before any distribution is made to the stockholders.J. under Sec. Villanueva. 498." In actual practice the watering of stock is not supposed to happen because property consideration for subscription is always evaluated by the Securities and Exchange Commission which often conducts an examination of the involved properties and appraisal reports are submitted to establish the fair value of such properties. the situs of shares of stock is the domicile of the corporation. 65 of the Corporation Code.344 f. and the owners thereof are 342 343 14 C. it is the domicile of the corporation that is generally controlling. When the Securities and Exchange Commission approves the valuation it may be difficult to sustain an assertion later on that there has been watering of the shares. In any event.

entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever.

Preferred shares

Those issued with par value, preferences either with respect to

and

(a) assets after dissolution, (b) distribution of dividends, or both, and other preferences.345 Redeemable shares Permits the issuing corporation to redeem or purchase its own shares.346 Shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, and redemption or through some lawful means.347

Treasury shares

345

Limitations: a. If deprived of voting rights, it shall still be entitled to vote on matters enumerated in Section 6 paragraph 6. b. Preference must not be violative of the Code. c. May be issued only with a stated par value. d. The board of directors may fix the terms and conditions only when so authorized by the articles of incorporation and such terms and conditions shall be effective upon filing a certificate thereof with the SEC. 346 Limitations: a. Redeemable shares may be issued only when expressly provided for in the articles of incorporation; b. The terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock representing such shares; c. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock. 347 Sec. 9 If purchased from stockholders: The transaction in effect is a return to the stockholders of the value of their investment in the company and a reversion of the shares to the corporation. The corporation must have surplus profits with which to buy the shares so that the transaction will not cause an impairment of the capital. If acquired by donation from the stockholders: The act would amount to a surrender of their stock without getting back their investments that are instead, voluntarily given to the corporation.

102

Founders' share

Shares issued to organizers and promoters of a corporation in consideration of some supposed right or property.348

Voting shares Non-voting shares

With a right to vote. Without right to vote.349 Deposited with a third person to be delivered to a stockholder or his assign after complying with certain conditions, usually payment of full subscription price. Stock issued in excess of the authorized capital stock. It is also known as spurious stock. Its issuance is considered null and void.

Escrow stock

Over-issued stock

Treasury shares need not be sold at par or issued value but may be sold at the best price obtainable, provided it is reasonable. When treasury shares are sold below its par or issued value, there can be no watering of stock because such watering contemplates an original issuance of shares. Treasury shares have no voting rights as long as they remain in treasury (uncalled and subject to reissue). Reason: A corporation cannot in any proper sense be a stockholder in itself and equal distribution of voting rights will be effectively lost. Neither are treasury shares entitled to dividends or assets because dividends cannot be declared by a corporation to itself. 348 Shares classified as such in the articles of incorporation which may be given special preference in voting rights and dividend payments. But if an exclusive right to vote and be voted for as director is granted, this privilege is subject to approval by the SEC, and cannot exceed 5 years from the date of approval. 349 The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided that there shall always be a class or series of shares which have complete voting rights. These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be entitled to vote on the following fundamental matters: a. amendment of Articles of Incorporation b. adoption and amendment of by-laws; c. sale or disposition of all or substantially all of corporate property; d. incurring, creating or increasing bonded indebtedness; e. increase or decrease of capital stock f. merger or consolidation of capital stock g. investments of corporate funds in another corporation or another business purpose; and h. corporate dissolution

103

Watered stock

A stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services. 350 With a value fixed in the certificates of stock and the articles of incorporation. Have no par value but have issued value stated in the certificate or articles of incorporation.351 A stock certificate endorsed by the registered holder in blank and transferee can command its transfer to his name from the issuing corporation Changeable by the stockholder from one class to another at a certain price and within a certain period. With a value of less than one (1) full share.

Par value shares

No par value shares

Street certificate

Convertible share

Fractional share

(d) Payment of balance of subscription
350

“Water” in the stock represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of said stock. Both par and no par stocks can thus be watered stocks. It includes stocks: a. Issued without consideration. b. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value. c. Issued for a consideration other than actual cash, the fair valuation of which is less than its par or issued value. d. Issued as stock dividend when there are no sufficient retained earnings to justify it. 351 Limitations: a. No par value shares cannot have an issued price of less than P5.00; b. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; c. They cannot be issued as preferred stocks; d. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association; e. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; f. Once issued, they are deemed fully paid and non-assessable. (Sec. 6)

104

(b) notification of such resolution made on the stockholders. plus accrued interest.(1) Call by board of directors352 The board of directors of any stock corporation353 may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof. or c) To representation at any stockholders’ meeting (2) Delinquent stockholder shall not be entitled to any of the rights of a stockholder but he shall still be entitled to receive dividends. (3) Delinquent stocks shall be subject to delinquency sale 105 . in either case.354 (2) Notice requirement Payment of any unpaid subscription or any percentage thereof. If within thirty (30) days from the said date no payment is made.355 (3) Sale of delinquent shares (a) Effect of delinquency356 Unless the delinquent stockholder pays to the corporation. all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided. 67. if any. if any. unpaid subscription plus interest is payable on a date agreed upon. or (c) the time when subscriptions become payable. The word “call” is capable of three meanings. 355 Id. if the subscription contract specifies a date for payment thereof. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance. or b) To be entitled to vote. shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. the balance due on his subscription. or upon call by the board of directors. 356 (1) Deprives the stockholder the right: a) To be voted for. unless a different rate of interest is provided in the by-laws. P. While the board may call for payment of the subscription at any time. or unless the board of 352 Call is a declaration by the board of directors that the unpaid subscriptions are due and payable to the corporation.. on or before the date specified for the sale of the delinquent stock. with accrued interest. together with the interest accrued. 1st par. costs of advertisement and expenses of sale. (CLV’s Textbook. as it may deem necessary. 2nd par. computed from such date until full payment. unless the board of directors orders otherwise. namely: (a) a resolution of the BoD for the payment of unpaid subscriptions. the board must respect said contract. 392) 353 subject to the provisions of the contract of subscription 354 Sec. Thus.

with a copy of the resolution. the corporation may bid for the same. 359 Id. costs of advertisement and expenses of sale. Id.357 (b) Call by resolution of the board of directors The board of directors may. by resolution.. 2nd par. time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent.. order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor.. 1st par. said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest. costs of advertisement and expenses of sale. 106 . 68. for the smallest number of shares or fraction of a share. The remaining shares. 3rd par. shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located.directors otherwise orders. and the total amount due shall be credited as paid in full in the books of the corporation. 360 Id. if any.358 (c) Notice of sale Notice of said sale.359 (d) Auction sale and the highest bidder? Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest. and the date. last par. for the smallest number of shares or fraction of a share.360 (e) Certificate of stock 357 358 Sec. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. shall be sent to every delinquent stockholder either personally or by registered mail.

363 (d) Issuance i. Payment pro-rata General rule: Entire subscription must be paid first before the certificates of stock can be issued. if any is due. except as between the parties. (b) Uncertificated shares Mutual fund shares which are maintained on the transfer agent's records. 63 investorwords. also called book shares. Shares of stock being personal property can also be pledged. the date of the transfer. has been paid.362 (c) Negotiability i. the number of the certificate or certificates and the number of shares transferred. Full payment No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares).364 ii.365 Exception: 361 362 See Sec. Requirements for valid transfer of stocks No transfer shall be valid.com 363 See Sec. 63 364 Sec. They are transferable in the manner provided for361 but the transfer shall bind the parties only when recorded in the books of the corporation. 64 365 Nava v Peers Mktg Corp and Fua Cun v Summers 107 . Partial payments are to be applied pro rata to each share of stock subscribed. but for which stock certificates have not been issued.(a) Nature of the certificate Evidence of ownership of stock in a corporation. until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction.

454 SCRA 54) 367 Gokongwei v. and the date of payment of any installment. Certificate of stock Otherwise.369 366 The stock and transfer book is the best evidence of the transactions that must be entered or stated therein. 278 SCRA 793 (1997) 368 Garcia v. and (4) Such other entries as the by-laws may prescribe. to issue certificates of stock to its individual SHs for unpaid shares of stock and to give full voting power to shares fully paid. (2) The installment paid and unpaid on all stock for which subscription has been made. Jomouad. Lingayen Gulf Electric Power Co case. (e) Stock and transfer book366 i. the entries are considered prima facie evidence only and may be subject to proof to the contrary (Lanuza v.In the Baltazar vs. SEC. the same shall not be binding on any purchaser in good faith. However.368 (f) Disposition and encumbrance of shares (1) Allowable restrictions on the sale of shares It must appear in the 1. 323 SCRA 424 (2000) 369 Sec. it was the practice of the corp. Who may make valid entries The corporate secretary is the officer who is duly authorized to make entries on the stock and transfer book. (3) A statement of every alienation. Court of Appeals.367 ii. Contents (1) All stocks in the names of the stockholders alphabetically arranged. Articles of incorporation 2. 98 108 . By-laws 3. sale or transfer of stock made.

372 (6) Requisites of a valid transfer a) Delivery of the certificate or certificates. (7) Involuntary dealings with shares It refers to such writ.370 (4) Sale of all of shares not fully paid Entire subscription not fully paid may be transferred to a single transferee. 371 Must secure the consent of the corporation since the transfer contemplates a novation of contract. (3) Sale of a portion of shares not fully paid Stockholder cannot transfer part of his subscription —indivisibility of subscription of contract. If upon the expiration of said period. and also to such Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms.(2) Sale of partially paid shares There can be no stock certificate on which an indorsement may be made. the existing stockholders or the corporation fails to exercise the option to purchase. and b) indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. 371 (5) Sale of fully paid shares Shares of stock issued with stock certificates become personal property and may be transferred by delivery of the certificate endorsed by the owner. 370 Nava and Fua Cun Difficult to determine whether or not partial payments made should be applied as full payment. order or process issued by a court of record affecting shares of stocks which by law should be registered to be effective. conditions or period stated therein. Shares are thus not transferable on the books. But cannot be forced upon the corporation 372 See Sec. 63 109 . the transferring stockholder may sell his shares to any third person.

Where creditors are affected 373 Examples of involuntary dealings of a share. (Reburiano v.E. the directors may be permitted to complete the liquidation by continuing as trustees by legal implication. The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. 375 Liquidation. A meeting must be held on the call of directors or trustees. A copy of the resolution shall be certified by directors or trustees and countersigned by the secretary.373 10. d. Vega. 1. It is the process of reducing assets to cash. Sale on execution of judgment or sales for taxes 3. 376 Sec.B. c. Court of Appeals. and the remaining balance if any is to be distributed to the stockholders. Attachment 2.instruments which are not the willful acts of the registered owner and which may have been executed even without his knowledge or against his consent. The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in the place. 118 110 . in corporation law. Dissolution374 and liquidation375 (1) Modes of dissolution (a) Voluntary i. connotes a winding up or settling with creditors and debtors. Adverse claims 4.U. 360 SCRA 33 (2001) Process by which all the assets of the corporation are converted into liquid assets in order to facilitate the payment of obligations to creditors. Where no creditors are affected a. 301 SCRA 342 (1999) If full liquidation can only be effected after the 3-year period and there is no trustee. discharging liabilities and dividing surplus or loss. e. v. Notice of the meeting should be given to the stockholders by personal delivery or registered mail at least 30 days prior to the meeting. The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution. the majority of the f. b. ( PVB Employees Union-N. Foreclosure of mortgage of stocks 374 Extinguishment of the franchise of a corporation and the termination of its corporate existence.376 ii.

a. Approval of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members in a meeting called for the purpose; b. Filing a petition with the SEC signed by majority of directors or trustees or other officers having the management of its affairs verified by President or Secretary or Director. Claims and demands must be stated in the petition; c. If Petition is sufficient in form and substance, the SEC shall issue an Order fixing a hearing date for objections; d. A copy of the Order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation or if there is no newspaper in the municipality or city of the principal office, posting for 3 consecutive weeks in 3 public places is sufficient; e. Objections must be filed no less than 30 days nor more than 60 days after the entry of the Order; f. After the expiration of the time to file objections, a hearing shall be conducted upon prior 5 day notice to hear the objections; g. Judgment shall be rendered dissolving the corporation and directing the disposition of assets; the judgment may include appointment of a receiver.377 iii. By shortening of corporate term This is done by amending the Articles of Incorporation. (b) Involuntary By filing a verified complaint with the SEC based on any ground provided by law or rules. i. By expiration of corporate term When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized.378 ii. Failure to organize and commence business within two (2) years from incorporation379 Its corporate powers cease and the corporation shall be deemed dissolved.380
377 378

Sec. 119 PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992) 379 non-use of charter

111

iii. Legislative dissolution Through appropriate laws passed by Congress. iv. Dissolution by the SEC on grounds under existing laws 1. Fraud or misrepresentation as to the paid-up capital of the corporation381 2. Misrepresentation 3. Ultra vires – mala prohibita, but too numerous infractions, which are persistent despite SEC earnings.382 4. Continuous inactivity of the corporation for at least five (5) years 5. Refusal to adopt or approve by-laws.383 (2) Methods of liquidation (a) By the corporation itself Liquidation by the corporation itself through its Board of directors who have only three (3) years to finish its work of liquidation.384 (b) Conveyance to a trustee within a 3-year period Conveyance of all corporate assets to trustees who will take charge of liquidation. Unless the trusteeship is limited in its duration by the deed of trust, the 3year limitation will not apply as long as the designation of trustees is made within said period. The Board who can’t finish liquidating in time may let trustees take over the job.385

380 381

automatic 25%-25% requirement 382 Republic vs. Security Credit and Acceptance Corp., 19 SCRA 58 (1967) 383 P.D. 902-A 384 After the dissolution of the corporation, it continues to exist as a body corporate, but only for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. 385 Anytime during the 3 year period, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of shareholders and other persons in interest.

112

(c) By management committee or rehabilitation receiver Liquidation by a receiver who may have been appointed by the SEC upon its decreeing the dissolution of the corporation. Three (3) year period does not apply because the corporation is substituted by the receiver. However, the mere appointment of a receiver, without anything more, does not result in the dissolution of the corporation nor bar it from the exercise of its corporate rights. (d) Liquidation after three (3) years There is nothing in Sec. 122386 which bars an action for the recovery of the debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. “Is immaterial that the present action was filed after the expiration of the three years . . . for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation.”387

l. Other corporations (1) Close corporations
If the 3-year extended life has expired without a trustee or receiver having been designated, the Board of Directors itself, following the rationale of the decision in Gelano, may be permitted to so continue as “trustees” to complete liquidation; and in the absence of a Board, those having pecuniary interest in the assets, including the shareholders and the creditors of the corporation, acting for and in its behalf, might make proper representations with the appropriate body for working out a final settlement of the corporate concerns. (Clemente v. Court of Appeals, 242 SCRA 717 (1995)) In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later case of Clemente v. Court of Appeals, the Board of Directors was permitted to complete the corporate liquidation by continuing as “trustees”. Under Sec. 145 “No right of remedy in favor or against any corporation . . . shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or o f any part thereof.” This provision safeguards the rights of a corporation which is dissolved pending litigation. ( Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002). 386 Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. 387 Republic v. Marsman Dev. Co., 44 SCRA 418 (1972)

113

389 388 389 Sec. with a right of preemption in favor of the stockholders or the corporation. Transfers of stocks to others. 96 Special rules are provided for close corporations because it is essentially an incorporated partnership (The Corporation Code of the Philippines Annotated. 6. the corporation shall not be listed in the stock exchange or its stocks should not be publicly offered. and 8. Deadlocks in board are settled by the SEC. 3.) 114 . on the written petition by any stockholder. 7. whose articles of incorporation should provide that: a. if the stockholder had knowledge or ratified the informal action of the others. the number of stockholders shall not exceed 20. 4. Stockholders who are involved in the management of the corporation are liable in the same manner as directors are. 5. Hector de Leon. Stockholders may act as directors without need of election and therefore are liable as directors. Corporate actuations may be binding even without a formal board meeting. which would increase the number of stockholders to more than the maximum are invalid. Preemptive right extends to all stock issues. b. 2.388 (a) Characteristics of a close corporation 1. issued stocks are subject to transfer restrictions. At least 2/3 of the voting stocks or voting rights should not be owned or controlled by another corporation which is not a close corporation.A special kind of stock corporation: 1. Quorum may be greater than mere majority. and c. and 2. Stockholder may withdraw and avail of his right of appraisal. 2002 ed.

and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons. the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction. such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. if such acquisition violates the restriction. 390 Sec. conditions or period stated therein.(b) Validity of restrictions on transfer of shares Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock. or is conclusively presumed under this section to have. 98 115 . not exceeding twenty (20). Whenever any person to whom stock of a close corporation has been issued or transferred has. If upon the expiration of said period. or (c) that the transfer of stock is in violation of a restriction on transfer of stock. If the articles of incorporation of a close corporation states the number of persons. 4. 2. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation. the corporation may. the existing stockholders or the corporation fails to exercise the option to purchase. otherwise.390 (c) Issuance or transfer of stock in breach of qualifying conditions Effects: 1. and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms. or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation. refuse to register the transfer of stock in the name of the transferee. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock. the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. who are entitled to be holders of record of its stock. the transferring stockholder may sell his shares to any third person. notice either (a) that he is a person not eligible to be a holder of stock of the corporation. and if the certificate for such stock conspicuously states such number. at its option. the same shall not be binding on any purchaser thereof in good faith.

written consent thereto is signed by all the directors. 7. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.392 If a director's meeting is held without proper call or notice.5. The provisions of subsection (4) shall not be applicable if the transfer of stock. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders. or in payment of corporate debts. unless the articles of incorporation provide otherwise. property or personal services. or 3.391 (d) When board meeting is unnecessary or improperly held Any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. or if the close corporation has amended its articles of incorporation in accordance with this Title. The term "transfer" is not limited to a transfer for value. has been consented to by all the stockholders of the close corporation. express or implied. unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. or 4. an action taken therein within the corporate powers is deemed ratified by a director who failed to attend. though contrary to subsections (1). 99 unless the by-laws provide otherwise 393 Sec. 394 391 392 Sec.393 (e) Preemptive right Shall extend to all stock to be issued. 6. including reissuance of treasury shares. (2) or (3). The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty. 102 116 . or 2. 101 394 Sec. whether for money. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing. Before or after such action is taken.

civic service. industry. Powers of the SEC in case of deadlock in close corporations: 1. 5. 397 (b) Purposes Charitable. deleting or removing any of the aforesaid provisions. alter or enjoin any resolution of the corporation 3.(f) Amendment of articles of incorporation Any amendment to the articles of incorporation which seeks to delete or remove any provision required to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock. scientific. subject to the provisions of the Corporation Code on dissolution. agricultural. during its existence.398 395 396 Sec. trustees. Granting such other relief as the circumstances may warrant. Appoint a provisional director 6. and no part of whose income is. cultural. or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending. fraternal. distributable as dividends to its members.395 (g) Deadlocks When the directors or stockholders are so divided respecting the management of the corporation’s business and affairs that the votes required for any corporate action cannot be obtained. Require the purchase at their fair value of shares of any stockholder either by any stockholder or by the corporation regardless of the availability of unrestricted retained earnings. whether with or without voting rights. literary.) 397 Sec. recreational. or officers. 87 117 . Dissolve the corporation 7. Cancel or alter any provision in the articles of incorporation or bylaws 2. social. 103 Sec.396 (2) Non-stock corporations (a) Definition A corporation organized for an eleemosynary purpose. Direct or prohibit any act of the corporation 4. Cancel. religious. professional. or similar purposes. 104. at a meeting duly called for the purpose. like trade. 1st par. (id. with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally. educational.

transfer or conveyance by reason of dissolution. (d) Distribution of assets upon dissolution 1. Other assets. be used for the furtherance of the purpose or purposes for which it was organized. societies. whenever necessary or proper.(c) Treatment of profits Any profit which it may obtain as an incident to its operations shall. shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws 5. as may be specified in a plan of distribution. satisfied and discharged or adequate provision shall be made therefor 2. to a number of special features. 399 Sec. benevolent. if any. Assets received and held by the corporation subject to limitations permitting their use only for charitable. whenever pertinent. 88 They are governed by the same rules established for stock corporations. and which condition occurs by reason of dissolution. All liabilities and obligations of the corporation shall be paid. The plan of distribution shall be approved by a majority vote of the board of trustees and by 2/3 of the members having voting rights at a meeting. religious. organizations or corporations. whether or not organized for profit. transferred or conveyed in accordance with such requirements 3. subject. shall be returned.399 (3) Foreign corporations 398 Sec. transfer or conveyance. however. shall be transferred or conveyed to one or more corporations. educational or similar purposes but not held upon a condition requiring return. assets may be distributed to such persons. Assets held by the corporation upon a condition requiring return. societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation pursuant to a plan of distribution 4. In any other case. 94 118 .

90 L. As held in Pennoyer v. organized or existing under any law other than those of the Philippines. Neff.402 the jurisdiction of courts to render judgment in personam is grounded on their de facto power over the defendant's person. 401 Salonga. 123 The definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes.A corporation formed. is founded on considerations of due process and fair play. v. 733. Cesar Villanueva. 66 S. and whose laws allow Filipino citizens and corporations to do business in its own country or state.. 95 (1945). 402 95 U. Twin characterization test Statutory Tests406 Acts constituting “doing business”: a) Whether the foreign corporation is a) Soliciting orders. 404 Cesar L. 310.S.Ct. It is not permitted to “transact or do business in the Philippines” until it has secured a license for that purpose from the SEC and a certificate of authority from the appropriate government agency.400 (a) Bases of authority over foreign corporations i. whether called “liaison” 400 Sec. 7042) 119 . State of Washington403 expanded the coverage by stating that due process requires only that in order to subject a defendant to a judgment in personam.A. 2001 ed. maintaining or continuing in the opening offices. 714. No. he must have certain minimum contacts with it such that the maintenance of the suit does not offend "traditional notions of fair play and substantial justice. 406 Foreign Investment Act of 1991 (R. Ed. Consent The legal standing of foreign corporations in the host state is founded on international law on the basis of consent. 24 L.401 Consent. International Shoe Co. 344.” Jurisprudential Tests:405 1. Therefore. p. as a requisite for jurisdiction over foreign corporations. 565 (1877) 403 326 U. if he not be present within the territory of the forum.S. service contracts. 1979 ed."404 ii. 154. Foreign Corporations and the Concept of “Doing Business in the Philippines” 405 Philippine Corporate Law. his presence within the territorial jurisdiction of a court is prerequisite to its rendition of judgment personally binding him. Ed. Doctrine of "doing business" The Corporation Code does not define the phrase “doing or transacting business. Villanueva. Private International Law.

407 and distributors domiciled in the Philippines or who in any calendar year stay in the b) Whether there is continuity of country for a period or periods totaling commercial dealings and arrangements. 7042 410 Sec. Resident agent 407 408 Substance Test Continuity Test 409 as defined under R. firm or entity or corporation in of.409 and organization. purpose of the business organization (b) Necessity of a license to do business i. unless such license is sooner surrendered.Philippines the body or substance of the offices or branches. business for which it was organized or whether it has substantially retired from it b) Appointing representatives or and turned it over another. and in progressive the foreign corporation. rules and regulations. revoked.408 d) Any other act or acts that imply a 2. Upon issuance of the license. contemplating to some extent the performance of acts or works or the c) Participating in the management. are consummated prosecution of. Requisites for issuance of a license If the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this Code and other special laws. and contemplate to that Whether the contracts entered into by extent the performance of acts or works. commercial gain or of the in the Philippines. exercise of some functions normally supervision or control of any domestic incident to and in progressive prosecution business. 180 days or more. the purpose and object of its the Philippines. such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation. the foreign corporation.A. 126 120 . the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license.410 ii. Contract Test continuity of commercial dealings or arrangements. suspended or annulled in accordance with this Code or other special laws. or by an agent or the exercise of some of the functions acting under the control and direction of normally incident to.

To protect its corporate reputation. 267 SCRA 567) 121 . residing in the Philippines. and 411 412 Sec. 431 SCRA 266 (2004) 413 Ibid. and goodwill. et al. 414 Foreign corporations.411 (c) Personality to sue No foreign corporation transacting business in the Philippines without a license. v.412 (d) Suability of foreign corporations Such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.. To enforce a right not arising out of a business transaction. can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. Inc. When the parties have contractually stipulated that Philippines is the venue of actions. designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines.Ltd vs. or a domestic corporation lawfully transacting business in the Philippines. ( Eriks Pte. shall be permitted to maintain or intervene in any action.g.. suit or proceeding in any court or administrative agency of the Philippines.413 (e) Instances when unlicensed foreign corporations may be allowed to sue . Chubb & Sons. CA.Isolated transactions414 1. To seek redress for an isolated business transaction. 4. 3. on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. name. e. tort that occurred in the Philippines.An individual. or its successors or assigns. even unlicensed ones. 2. 127-128 Lorenzo Shipping Corp. who must be of good moral character and of sound financial standing.

A misrepresentation in material matters in reports. 3. Merger and consolidation416 (1) Definition and concept Merger Consolidation A union whereby one or more existing The union of two or more existing corporations are absorbed by another corporations to form a new corporation corporation which survives and continues called the consolidated corporation. (f) Grounds for revocation of license 1. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation.5. 415 416 Sec. 5. Failure to submit copy of amended articles or by-laws or articles of merger or consolidation. 4. Failure to pay taxes. Acting as dummy of a foreign corporation. Failure to file annual reports required by the Code. 2. Failure to inform the SEC of the change of residence of the resident agent. Failure to appoint and maintain a resident agent. Engage in business unauthorized by SEC. 8. The approval of the SEC is required. 122 . imposts and assessments. 134 Merger or consolidation does not become effective by mere agreement of the constituent corporations.415 m. 7. Not licensed to do business in the Philippines. and 9. the combined business. 6.

The proportion between the two (2) corporations will be the basis of the shares of stocks that will be issued to the stockholders under the surviving corporation 418 In a merger or consolidation: 1. which shall obtain all the assets of the disappearing corporations. called the consolidated corporation.One of the constituent corporations remains as an existing juridical person.418 (2) Constituent v. The terms of the merger or consolidation and the mode of carrying the same into effect. there will be disappearance of both the constituent corporations with the emergence of a new corporate entity. and likewise shall assume all their liabilities. There is continuance of the enterprise and of the stockholders 4. whereas the other corporation shall cease to exist. and assuming all the liabilities of the disappearing corporation. 76 123 . rights of action. The constituent corporations are automatically dissolved 419 Sec. shall approve a plan of merger or consolidation setting forth the following: 1. Merger is the disappearance of one of the corporations with the other corporation acquiring all the assets. Said stockholders are now stockholders of the corporation which survives. 2. 417 Of course. Title to the assets are transferred by operation of law 5. hereinafter referred to as the constituent corporations. the number of shares that will be issued to each of the stockholders under the new corporation is determined by the ration between the assets of the two (2) corporations. There is automatic assumption of liabilities 3.417 If there is consolidation. party to the merger or consolidation. consolidated corporation Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation.419 (3) Plan of merger or consolidation The board of directors or trustees of each corporation. Sale of assets is always involved 2. Also. The names of the corporations proposing to merge or consolidate. there is an arrangement as to the shares of stocks that will be issued to the former stockholders of the two (2) corporations which were merged.

the number of shares or members voting for and against such plan. if any. in the articles of incorporation of the surviving corporation in case of merger. with respect to the consolidated corporation in case of consolidation. 124 . The board of directors or trustees of each corporation shall approve a plan of merger or consolidation 420 Ibid. or in the case of non-stock corporations. and 4. A statement of the changes. (5) Procedure a.3. and3) As to each corporation. the number of shares outstanding. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. 2) As to stock corporations. articles of merger or articles of consolidation shall be executed by each of the constituent corporations: 1) to be signed by the president or vice-president and 2) certified by the secretary or assistant secretary of each corporation The articles of merger or consolidation shall set forth: 1) The plan of the merger or the plan of consolidation. the number of members. respectively The articles of merger or consolidation shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval. and.420 (4) Articles of merger or consolidation After the approval by the stockholders or members. all the statements required to be set forth in the articles of incorporation for corporations organized under this Code.

b. The plan shall be submitted for approval by the stockholders or members of each of such corporation at separate corporate meetings duly called for the purpose c. The articles of merger or consolidation shall be executed by each of the constituent corporations d. Submission to the SEC for approval e. The SEC may or may not conduct a hearing f. Issuance of certificate of merger or consolidation by the SEC (6) Effectivity Upon issuance by the SEC of the certificate of merger and consolidation. 421 (7) Limitations a. Should not create monopolies b. Should not eliminate free and healthy competition c. Act 3518, Sec 20 inhibits illegal combinations. (8) Effects 1. The constituent corporations shall become a single corporation which, in case of merger shall be the surviving corporation and, in the case of consolidation, shall be the consolidated corporation; 2. The separate existence of the constituent corporation shall cease, except that of the surviving corporation; 3. The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and subject to all the duties and liabilities of a corporation; 4. The surviving or consolidated corporation shall thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; 5. All property, real or personal, and all receivables due to, and all other interest of each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed;
421

Sec. 79, 2nd sen.

125

6. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each of the constituent corporations; 7. Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporations; and 8. The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation.422

422

Sec. 80

126

H. Securities Regulation Code423 1. State policy, Purposes 1. To establish a socially conscious, free market that regulates itself 2. To encourage the widest participation of ownership in enterprises 3. To enhance the democratization of wealth 4. To promote the development of the capital market 5. To protect investors 6. To ensure full and fair disclosure about securities 7. To minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market.424 2. Securities required to be registered General rule: A registration statement duly filed and approved by the SEC is necessary before securities may be sold and offered for sale or distribution within the Philippines. Prior to any sale, information on the securities, in such form and substance prescribed by the SEC, shall be made available to each prospective purchaser.425 Exceptions: 1. Exempt securities; and 2. Exempt transactions. a. Exempt securities 1. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled by and acting as an instrumentality of said Government.
423 424

R.A. No. 8799 Sec. 2 425 Sec. 8

127

Judicial sale by executor. where the entire mortgage are sold to a single purchaser at a single sale. Housing and land Use Regulatory Board. by law. 6. Any security issued by a bank except its own shares of stock. Pre-incorporation subscription and subscription pursuant to an increase of the ACS. is under the supervision and regulation of the Office of the Insurance Commission. 3. Any securities added by the SEC by rule or regulation after public hearing. province or political subdivision or agency thereof on the basis of reciprocity. Exempt transactions 1. guardian/receiver in insolvency or bankruptcy. Any security or its derivatives the sale or transfer of which.2. 2. Exchange of securities by issuer with existing security holders exclusively 11. Distribution of stock dividends. Issuance of security in exchange of any security from same issuer pursuant to right of conversion. 9 128 . Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations. Sale on isolated transactions by owner. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. 4. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property. Sale of pledged or mortgaged security to liquidate a bona fide debt. administrator. Sale of capital stock exclusively to stockholders where no commission is paid. 5.426 b. 5. Broker’s transactions 9. 8. 10. 4. or the Bureau of Internal Revenue. or by any state.month period 426 Sec. 3. 6. 7. Sale to less than 20 persons during any 12.

depending on the necessity thereof or their applicability to the class of securities sought to be registered. including written information from an expert. in such form and with such substance as the Commission may prescribe.430 In promulgating rules governing the content of any registration statement (including any prospectus made a part thereof or annex thereto). shall be made available to each prospective purchaser.2. its principal operating officer. shall be deemed not to constitute an offer for sale under this Section 430 A record of the registration of securities shall be kept in Register Securities in which shall be recorded orders entered by the Commission with respect such securities. 428 8. of a sworn registration statement with the respect to such securities. the Commission may require the registration statement to contain such information or documents as it may.12.3.1427 shall be registered through the filing by the issuer in the main office of the Commission. 429 The Commission may specify the terms and conditions under which any written communication. Sale of securities to banks. in such form and containing such information and document as the Commission prescribe. shall include. 3. prescribe. or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer 427 Securities shall not be sold or offered for sale or distribution within the Philippines. Procedure for registration of securities All securities required to be registered under Subsection 8. The information required for the registration of any kind. its principal financial officer. Such register and all documents or information with the respect to the securities registered therein shall be open to public inspection at reasonable hours on business days. The registration statement shall include any prospectus required or permitted to be delivered under Subsections 8. The registration statement shall be signed by the issuer’s executive officer. information on the securities. insurance companies. its comptroller. especially foreign and local ownership.429 and 8. its principal accounting officer. by rule. without a registration statement duly filed with and approved by the Commission. Prior to such sale. registered investment house. among others. its corporate secretary. 428 The Commission may conditionally approve the registration statement under such terms as it may deem necessary. the effect of the securities issue on ownership. and all securities. or may require additional information or documents.4. pension fund or retirement plan maintained by the government or other persons authorized by the BSP to engage in trust functions. It may dispense with any such requirements. including any summary prospectus. on the mix of ownership. 129 .

the Commission shall declare the registration statement effective or rejected. 12 130 . the issuer shall pay to the Commission a fee of not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at which such securities are proposed to be offered. and that aforesaid registration statement. Within forty-five (45) days after the date of filing of the registration statement. (a) Upon filing of the registration statement. shall be furnished to interested parties at such reasonable charge as the Commission may prescribe. is on its face complete and that the requirements have been complied with. manipulation and insider trading a. or in such other manner as the Commission by the rule shall prescribe. Prohibitions on fraud. Upon affectivity of the registration statement. (b) Notice of the filing of the registration statement shall be immediately published by the issuer. in two (2) newspapers of general circulation in the Philippines.corporation. once a week for two (2) consecutive weeks. and copies thereof. as well as the papers attached thereto are open to inspection at the Commission during business hours. Where the registration statement shares to be sold by selling shareholders. unless the applicant is allowed to amend the registration statement as provided in Section 14 hereof. the issuer shall state under oath in every prospectus that all registration requirements have been met and that all information are true and correct as represented by the issuer or the one making the statement. The Commission shall prescribe by the rule diminishing fees in inverse proportion the value of the aggregate price of the offering. reciting that a registration statement for the sale of such securities has been filed. at its own expense. Any untrue statement of fact or omission to state a material fact required to be stated herein or necessary to make the statement therein not misleading shall constitute fraud.431 4. or by such later date to which the issuer has consented. The Commission may impose such terms and conditions as may be necessary or appropriate for the protection of the investors. a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders shall be filed. photostatic or otherwise. The Commission shall enter an order declaring the registration statement to be effective if it finds that the registration statement together with all the other papers and documents attached thereto. Manipulation of security prices 431 Sec. The written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed.

directly or indirectly: (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange of any other trading market: (i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof. (d) To make false or misleading statement with respect to any material fact. fixing or stabilizing the price of such security. has or will be entered by or for the same or different parties. for the sale or purchase of any such security. for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. hype and dump. or (iii) By performing similar act where there is no change in beneficial ownership. time and price. (ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size. a securities or transactions in securities that: (i) Raises their price to induce the purchase of a security. in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. (c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purpose of sale of such security. or (ii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close. Neither shall any short 131 . (b) To affect. boiler room operations and such other similar devices. (e) To effect. alone or with others. unless otherwise allowed by this Code or by rules of the Commission. which he knew or had reasonable ground to believe was so false or misleading. or commonly controlled company by others. squeezing the float. painting the tape. No person shall use or employ. either alone or others. any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging. controlled. whether of the same or a different class of the same issuer or of controlling.It shall be unlawful for any person acting for himself or through a dealer or broker.

in the light of the circumstances under which they were made. in connection with the purchase or sale of any securities to: (1) Employ any device. practice or course of business which operates or would operate as a fraud or deceit upon any person.434 d. 24 Black’s Law Dictionary 434 Sec.sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest for the protection of investors. If the price does not drop. 26 132 . or (3) Engage in any act. not misleading. allow certain acts or transactions that may otherwise be prohibited under this Section. scheme. directly or indirectly. Fraudulent transactions It shall be unlawful for any person. or artifice to defraud. The foregoing provisions notwithstanding. having due regard to the public interest and the protection of investors. It is considered unlawful unless: 432 433 Sec. by rules and regulations. (2) Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made. Short sales A sale of a security that the seller does not own or has not contracted for at the time of sale. transaction.432 b. Such a sale is usually made when the seller expects the security’s price to drop. the seller can make a profit on the difference between the price of the shares sold and the lower price of the shares bought to pay back the borrowed share. may. the Commission. Insider trading The selling or buying of a security by an insider while in possession of material non-public information with respect to the issuer or the security.433 c. and that the seller must borrow to make the delivery.

that he disclosed the information to the other party. and 3.” It is mandatory to make a tender offer for equity shares of a public company in an amount equal to the number of shares that the person intends to acquire in the following circumstances: 435 436 or his agent Sec. making a tender offer or requesting or inviting letters of such a security. 133 . By filing with the SEC a declaration to make a tender offer. profit and loss statement). Protection of investors a. Tender offer rule437 A publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a “public company. that he had reason to believe that the other party otherwise is also in possession of the information.436 5.1 437 Tender offer is made: 1. and ii. Annual Report (includes balance sheet. By publishing all requests or invitations for tender. or b. or 2.1. or materials. 17 of the SRC: i. 2. the insider proves: a. If the other party selling to or buying from the insider435 is identified. By furnishing the issuer or the originator of the security a statement containing such information required under Sec. The insider proves that the information was not gained from such relationship. 27. Periodical reports for interim fiscal periods.

no proxy shall be valid and effective for a period longer than 5 years at one time. and it has access to corporate funds for the normally substantial costs of solicitation. par. 20.438 b. with a written proxy statement containing the information required by the SEC (SRC Rule 20. The person intends to acquire 15% or more of the equity shares of a public company pursuant to an agreement made between or among the person and one or more sellers. concurrently or earlier. 4.f). 20. or c. 134 . Proxies must be in writing.439 unless otherwise provided in the proxy. 20. The person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months. Disclosure rule It shall be unlawful for an insider to sell or buy a security of the issuer. The form of proxy.a.4 442 Fundamentals of Securities Regulation. unless: 438 439 Rule 19. SRC Sec. it shall be valid only for the meeting for which it is intended. if not avoid.3 441 Sec. 432 No solicitation of proxy shall be made unless each person solicited is furnished. the abuse and misuse of the proxy device that may lead to the self-perpetuation and irresponsibility of management.440 and a broker or dealer cannot give a proxy in respect of any security it carries for the account of a customer without the express written authorization of such customer. par. b. while in possession of material information with respect to the issuer or the security that is not generally available to the public. shall be made unless each person solicited or given to stockholders at least 15 business days prior to the meeting date (SRC Rule 20.442 c. Rules on proxy solicitation Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to be issued by the Commission.441 The issuance and solicitation of proxies are regulated to minimize. p. it benefits from the usual inertia of stockholders. Management has innate advantages in the solicitation of proxies. it has the stockholder’s list. 3). The person intends to acquire shares that would result in ownership of more than 50% of the equity shares of a public company.2 440 Sec. signed by the stockholder or his duly authorized representative and filed with the corporate secretary before the scheduled meeting.

gives or gave him access to material information about the issuer or the security that is not generally available to the public. the insider proves: (i) that he disclosed the information to the other party. to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender 443 444 or his agent Sec.3 448 other than the tender offeror 135 . or a person controlling the issuer. or officer of an exchange.8. 445 Information is "material nonpublic" if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information. however. 27. 447 Sec. (d) A government employee.(a) The insider proves that the information was not gained from such relationship. shall be presumed to have been effected while in possession of material nonpublic information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for market to absorb such information: Provided.444 It shall be unlawful for any insider to communicate material nonpublic information445 about the issuer or the security to any person who. or (b) If the other party selling to or buying from the insider443 is identified.1 A purchase or sale of a security of the issuer made by an insider defined in Subsection 3. or (ii) that he had reason to believe that the other party otherwise is also in possession of the information. director. by virtue of the communication. 27. or such insider’s spouse or relatives by affinity or consanguinity within the second degree.8. clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public. (b) a director or officer (or any person performing similar functions) of. 446 "Insider" means (a) the issuer.447 It shall be unlawful where a tender offer has commenced or is about to commence for: (i) Any person448 who is in possession of material nonpublic information relating to such tender offer. legitimate or commonlaw. sell or hold a security. or (e) a person who learns such information by a communication from any forgoing insiders. That this presumption shall be rebutted upon a showing by the purchaser or seller that he was aware of the material nonpublic information at the time of the purchase or sale. or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy.446 where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer whole in possession of such information. becomes an insider as defined in Subsection 3.

or a person performing similar functions. unless it is proved that at the time of such acquisition he knew of such untrue statement or omission: (a) The issuer and every person who signed the registration statement: (b) Every person who was a director of. or a partner in. those acting on its behalf. and (ii) Any tender offeror. or a partner in. 27. the issuer of the securities sought or to be sought by such tender offer. has been named as having prepared or certified any part of the registration statement. with his written consent. Civil liability Any person acquiring a security. (d) Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus. (e) Every person who. the issuer at the time of the filing of the registration statement or any part. supplement or amendment thereof with respect to which his liability is asserted. those acting on its behalf. or any insider of such issuer. to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror. the registration statement of which or any part thereof contains on its effectivity an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make such statements not misleading. or as having prepared or certified any report or valuation which is used in connection with the registration statement. with 449 shall include any securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities 450 Sec. or any insider of such issuer. may sue and recover damages from the following enumerated persons. the issuer of the securities sought or to be sought by such tender offer. the issuer of the securities sought or to be sought by such tender offer.4 (a) (i) Any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender offer. those acting on its behalf.4 (a)(i). and who suffers damage.offeror.450 6. the issuer and whose written consent thereto is filed with the registration statement. 136 . or any other person performing similar functions.449 and any insider of such issuer to communicate material nonpublic information relating to the tender offer to any other person where such communication is likely to result in a violation of Subsection 27. (c) Every person who is named in the registration statement as being or about to become a director of. which shall be filed with the registration statement.

and who shall fail in the burden of proof that he did not know. (f) Every selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement. 56 Registration of securities 137 .respect to the statement.451 Any person who: (a) Offers to sell or sells a security in violation of Chapter III. or valuation. Any person who shall make or cause to be made any statement in any report. by means of a prospectus or other written or oral communication. not misleading (the purchaser not knowing of such untruth or omission). not knowing that such statement was false or misleading. with respect to that portion of the registration statement which purports to have been contributed by him. which statement as at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact. or document filed pursuant to this Code or any rule or regulation thereunder. (g) Every underwriter with respect to such security. which purports to have been prepared or certified by him. whether or not exempted by the provisions of this Code. then the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such income statement. If the person who acquired the security did so after the issuer has made generally available to its security holders an income statement covering a period of at least twelve (12) months beginning from the effective date of the registration statement. and in the exercise of reasonable care could not have known. by the use of any means or instruments of transportation or communication. upon the tender of such security. shall be liable to the person purchasing such security from him. report. who may sue to recover the consideration paid for such security with interest thereon. but such reliance may be established without proof of the reading of the registration statement by such person. in the light of the circumstances under which they were made. which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements. or for damages if he no longer owns the security. less the amount of any income received thereon.452 or (b) Offers to sell or sells a security. shall be liable to any person who. and relying upon such 451 452 Sec. of such untruth or omission.

457 20455 Any person who willfully participates in any act or transaction in violation of Section 24458 shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction.461 which the Commission denominates at the time of issuance as intended to prohibit fraud in the offer and sale of pre-need plans or to prohibit fraud. undue speculation.No person shall offer. consent or authorization. supra 456 On Fraudulent transactions. or invitation. shall be liable to any other person who purchases or sells any security. reports and recording keeping with respect to such plans. not misleading. providing for uniform accounting system. requiring disclosures to prospective plan holders. unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading.2.statement shall have purchased or sold a security at a price which was affected by such statement. 461 Pre-Need Plans. fictitious transactions. for the damages sustained by such other person as a result of such act or transaction. The Commission shall promulgate rules and regulations involving commodity futures contracts to protect investors to ensure the development of a fair and transparent commodities market.453 Any person who engages in any act or transaction in violation of Sections 19. manipulation. 138 .454 or 26. imposing capital. licensing persons involved in the sale of pre. define and prescribe means reasonably designed to prevent. or any solicitation for any security holders in opposition to or in favor of any such favor of any such offer. and establishing trust funds for the payment of benefits under such plans. The Commission shall. prescribing advertising guidelines. such acts and practices as are fraudulent. for damages caused by such reliance. among other things. or accepts or declines an invitation for tender of a security. regulations and orders the Commission may prescribe in the public interest. requiring the registration of pre-need plans. 58 458 On Manipulation of Security Prices. or other unfair or abusive practices with respect to 453 454 Sec.456 or any rule or regulation of the Commission thereunder. for the purposes of this subsection. request. sell or enter into commodity futures contracts except in accordance with the rules. Such rules shall regulate the sale of pre-need plans by. – No person shall sell or offer for sale to the public any pre-need plan except in accordance with rules and regulations which the Commission shall prescribe. bonding and other financial responsibility. and the person so injured may sue to recover the damages sustained as a result of such act or transaction. in connection with any tender offer or request or invitation for tenders. deceptive and manipulative. supra 457 Sec.need plans. supra 459 Sec. deceptive or manipulative acts or practices. 59 460 Commodity Futures Contracts. as the case may be.459 Any person who engages in any act or transactions in willful violation of any rule or regulation promulgated by the Commission under Section 11460 or 16. grants or refuses to grant any proxy. 455 On Proxies. . or to engaged to any fraudulent. 57 It shall be lawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made in the light of the circumstances under which they are made.

467 Any insider who violates Subsection 27. by purchasing or selling a security while in possession of material information not generally available to the public. shall be liable in a suit brought by any investor who. 465 id. 466 id. or any rule or regulation thereunder. 60 supra 464 id.3465 or any person in the case of a tender offer who violates Subsection 27. or such person in the case of a tender offer.1463 and any person in the case of a tender offer who violates Subsection 27.4 (a)(i). proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him. An insider who violates Subsection 27.469 462 463 Sec. As to each such rule or regulation so denominated. contemporaneously with the purchase or sale of securities that is the subject of the violation.462 Any insider who violates Subsection 27.464 or any rule or regulation thereunder. or person in the case of a tender offer. purchased or sold securities of the same class unless such insider. purchased or sold securities of the same class unless such insider. or such person in the case of a tender offer.4 (a)(I). by communicating material nonpublic information. 61 139 .1 and any person in the case of a tender offer who violates Subsection 27. contemporaneously with the purchase or sale of securities that is the subject of the violation. shall be jointly and severally liable under Subsection 61.466 or any rule or regulation thereunder. the Commission by rule shall prescribe the elements of proof required for recovery and any limitations on the amount of damages that may be imposed. by purchasing or selling a security while in possession of material information not generally available to the public. shall be liable in a suit brought by any investor who.1467 with.4 (a). and to the same extent as. to whom the communication was directed and who is liable under Subsection 61. shall be liable to any other person sustaining damages as a result of such act or transaction. 468 supra 469 Sec. proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him.commodity future contracts. the insider.1468 by reason of his purchase or sale of a security.

000.472 c. may thereafter determine. a balanced and sustainable growth of the economy.A. No. hereafter referred to as the Bangko Sentral. while being a government-owned corporation. The capital of the Bangko Sentral shall be Fifty billion pesos (P50.000. 1 472 Sec. shall enjoy fiscal and administrative autonomy. to be fully subscribed by the Government of the Republic. To regulate the operations of finance stability and the convertibility of the peso. Creation of the Bangko Sentral ng Pilipinas (BSP) An independent central monetary authority. The central monetary. and credit. To maintain price stability conducive to of money. Ten billion pesos (P10. 470 471 R. banking and credit. The New Central Bank Act470 a.000.000) of which shall be fully paid for by the Government upon the effectivity of this Act and the balance to be paid for within a period of two (2) years from the effectivity of this Act in such manner and form as the Government. State policies 1. banking. through the Secretary of Finance and the Secretary of Budget and Management. 2 140 .000).000.471 b. 2. which shall be a body corporate known as the Bangko Sentral ng Pilipinas. Responsibility and primary objective Responsibilities Primary objectives 1. To supervise bank operations 2. Maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money. 2. To provide policy directions in the areas 1.I. Banking Laws 1. To promote and maintain monetary 3. 7653 Sec.

To compromise condone or release any claim of or settled liability to the BSP 7. To enter into contracts 3.companies and non-bank financial institutions performing quasi-banking functions. To adopt. own. To sue and be sued 5.473 d. Examination by the appropriate BSP department as to the condition of the bank 473 Sec. To do and perform such other necessary powers e. Monetary Board . To lease. 3 141 . and similar institutions. (2) Closure Mandatory requirements for bank closure: a. alter and use a corporate seal which shall be judicially noticed 2.Powers and functions 1. To acquire and hold such assets and incur such liabilities in connection with its operations or as are essential to the proper conduct of operation 6. sell property 4. the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. shall appoint a conservator. How the BSP handles banks in distress (1) Conservatorship Whenever on the basis of a report submitted by the appropriate supervising or examining department.

a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks. The assets under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall be exempt from garnishment. Director shall inform the MB in writing of such fact d. Inability to continue business without involving probable losses to its depositors or creditors. Inability to pay liabilities as they become due in the ordinary course of business. 53. 3. CA Effects of appointment of receiver/ liquidation: 1. Deposits do not become preferred credits. (Sec. 30). 56. Procedure: 1. 30) 142 . He shall convert the assets of the institution to money for the purpose of paying the debts of the institution. 2. GBL) 476 Grounds: 1. MB shall find the statement of the department to be true.475 (4) Liquidation a. 53. GBL) 3. or 4.b. but not including inability to pay caused by extraordinary demands induced by financial panic in the banking community. Bank is not liable to pay interest on deposits during the period of suspension of operation (Overseas Bank v. A determination by the MB that the bank cannot be rehabilitated. the liquidation plan shall be adopted by the Monetary Board. Morfe) Grounds: A. The corporation retains its legal personality (Teal Motor Co. 2. involving acts or transactions which amount to fraud or a dissipation of the assets of the institution. the appointment of a receiver operates to suspend the authority of the bank and of its directors and officers over its property and effects. 3. Notification to the BSP or public announcement of a bank holiday (Sec. Under GBL 1. with the proper RTC. CA) 4.474 (3) Receivership Receivership is equivalent to an injunction to restrain the bank in any way.476 474 475 Banco Filipino v. levy. (Sec. Insufficiency of realizable assets to meet its liabilities. The condition of the bank is one of insolvency or that its continuance would involve probable loss to its depositors and creditors. 2. Thus. Examination shows that the condition of the bank is one of insolvency c. (CB v. GBL) 2. (Sec. The condition of the bank is one of insolvency or that its continuance would involve probable loss to its depositors and creditors. b. Persistence in conducting business in an unsafe or unsound manner. Receiver shall file ex parte. MB Villanueva v. attachment or execution (Sec. In case of quasi-banks. v CFI) 5. A determination by the MB that the bank cannot be rehabilitated. Willful violation of a cease and desist order that has become final. Under NCBA 1. Suspension of operation 2. Suspension of payment of deposit liabilities continuously for more than 30 days (Sec. 30) B.

57).00 BSP Authority to Replace 1. Payment shall be in accordance with the rules on concurrence and preference of credits 477 478 Sec. 3. After the expiration of this latter period. they shall cease to be legal tender during the following year or for such longer period as MB may determine. the notes and coins which have not been exchanged shall cease to be a liability of BSP and shall be demonetized (Sec.00 2. 10 centavos or less: In amounts not exceeding P20.f.477 Legal tender power of coins 1. 25 centavos and above: In amounts not exceeding P50. After that period. 52 Rules: 1. Notes and coins called in for replacement shall remain legal tender for a period of one year from the date of call. How the BSP handles exchange crisis (1) Legal tender power Legal tender All notes and coins issued by the Bangko Sentral are fully guaranteed by the Republic and shall be legal tender in the Philippines for all debts. Coins – More than 10 years old478 (2) Rate of exchange The Monetary Board shall determine: 3. both public and private. Notes for any series or denomination – More than 5 years old 2. 2. 143 .

The exchange rate policy of the country. 2. Examination and inquiry or looking into all deposits of whatever nature with the banks in the Philippines including investments in bonds issued by the Government. inquired or looked into by any person. 1405 479 From other laws R. To encourage people to deposit in banks 2. 2.1. Any disclosure by any official or employee of any bank to any unauthorized person of any information concerning the said deposits. Establish deviation limits from the effective exchange rate(s) as it may deem proper. Deposits covered The deposits covered by law are considered as of an absolutely confidential nature and may not be examined. No. 1405. Exceptions From R. and 4. 3. To discourage private hoarding so that banks may lend such funds and assist in the economic development. Law on Secrecy of Bank Deposits479 a. No. as amended 144 . The rates for other types of foreign exchange transactions by the Bangko Sentral including purchases and sales of foreign notes and coins. governmental. or office.A. d. c. bureau. 2.A. The rates of which the Bangko Sentral shall buy and sell spot exchange. b. Prohibited acts 1. Purpose 1.

NIRC 483 R. 2 R. cases481 2. Upon order of a competent court in cases of bribery or dereliction of duty of a. Hijacking and other violations 480 481 Sec. Inquiry or examination by the AntiMoney Laundering Council (AMLC) of any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of the AntiMoney Laundering Law. In cases where the money deposited or b.1. No. Inquiry by the Commissioner of Internal Revenue into bank deposits of: 3. b. A taxpayer who has filed an invested is the subject matter of the application for compromise of his tax litigation.480 liability by reason of financial incapacity to pay his tax liability. 3019. except that no court order shall be required in the following unlawful activities: a. In cases of impeachment. 267 RPC. He must file a written waiver of his privilege under RA 1405 or other general or special laws. added by analogy in PNB vs.A. Kidnapping for ransom under Art.482 3. A decedent to determine his gross public officials. 2. No. 9165 145 . 6[f]. 4. Gancayco 482 Sec. estate. Upon written permission of the 1. Anti-Graft and Corrupt Practices Act depositor. Comprehensive Dangerous Drugs Act of 2002. when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity or a money laundering offense.483 c.A.

488 Entities duly authorized by the Monetary Board to engage in the business of regularly lending funds obtained regularly from the public through the receipt of deposits of any kind.485 e. as amended by Sec. can exercise the powers of an investment house and invest in non-allied enterprises and have the highest capitalization requirement. 9160.A. R. 8 of R.486 3. 9194 Act No. Including those perpetrated by terrorists against noncombatant persons and similar targets. Classification: Universal banks Primarily governed by the General Banking Law (GBL). Disclosure to the Treasurer of the Philippines of dormant deposits for at least 10 years under the Unclaimed Balances Act.A.entities engaged in the lending of funds obtained in the form of deposits.under RA 6235. 3936 486 China Banking Corporation v. destructive arson and murder under RPC. No. 2 146 . Its purpose is merely to secure information as to the name of the depositor and whether or not the defendant had a deposit in said bank. General Banking Act 487 a. 484 485 Sec. 11. Garnishment of deposits. Definition and classification of banks Banks . No. including foreign deposits Garnishment of bank deposit of judgment debtor does not violate RA 1405. only for purposes of garnishment. 8791 488 Sec. No.A.”484 4. Ortega 487 R.

A. which are primarily governed by the Thrift Banks Act. 6938 147 . such as the Al Amanah Islamic Investment Bank of the 489 490 R.489 Rural banks Mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992. b) Stock savings and loan associations.490 Cooperative banks Those banks organized whose majority shares are owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. 7353 491 R. Thrift banks These are a) Savings and mortgage banks. c) Private development banks. They are governed primarily by the Cooperative Code. 7906 R.Commercial banks Ordinary banks governed by the GBL which have a lower capitalization requirement than universal banks and cannot exercise the powers of an investment house and invest in non-allied enterprises. It shall include cooperative rural banks.A.A.491 Islamic banks Banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Shari’a.

is not a legal entity and cannot contract in its own name. c.A.Philippines which was created by R. endorsement or assignment with recourse or acceptance of deposit substitutes. 2.492 b. Other classification of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas. Entities authorized to perform universal or commercial banking functions may also engage in quasi-banking functions. unlike a company. Trust A popular type of business arrangement for small business but. Entities engaged in the borrowing of funds through the issuance. Bank powers and liabilities (1) Corporate powers Commercial Banks: Universal Bank: 492 493 Sec. 3 supra 148 . Distinction of banks from quasi-banks and trust entities Banks493 Quasi-banks 1. 6848.

and other evidences of debt. 4. 4.In addition to the general powers incident to corporations. 29 supra 149 . 5. discounting and negotiating promissory notes. 3. in addition to the powers authorized for a commercial bank in Section 29. acquiring marketable bonds and other debt securities. bills of exchange. drafts. credit. These rules may include the determination of bonds and other debt securities eligible for investment. 494 495 Sec. and 5. all such powers as may be necessary to carry on the business of commercial banking. accepting or creating demand deposits. 2.494 (2) Banking and incidental powers 1. the maturities and aggregate amount of such investment. documents and valuable objects. such as Shall have the authority to exercise. buying and selling foreign exchange and gold or silver bullion. Receive in custody funds. accepting drafts and issuing letters of invest in non-allied enterprises.495 the powers of an investment house as provided in existing laws and the power to 1. receiving other types of deposits and deposit substitutes. extending credit subject to such rules as the Monetary Board may promulgate.

and 5.R. regularly engaged in the business of lending money secured by real estate mortgages. 350 SCRA 446.R. 2003. evidences of indebtedness and all types of securities. Act as financial agent and buy and sell. G. (Reyes v. CA.2. 4 Upon prior approval of the Monetary Board. adviser.) Due diligence required of banks extend even to persons. The appropriate standard of diligence must be very high. that is. Ramos. 155206. 331 SCRA 267)The business of a bank is one affected by public interest for which reason the bank should guard against loss due to negligence and bad faith. October 28.496 d. 496 497 Sec. act as managing agent. 3.relevant jurisprudence 1. CA) While an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title. J. Reason: Before a loan is approved. in case of a banking institution. by order of and for the account of their customers. November 11. Eduardo Santiago. G. 2003) 150 . (DBP vs. Diligence required of banks . PBCom v. Subject to reasonable regulation under the police power of the state. if not the highest. Rent out safety deposit boxes. and cannot rely upon what is or is not annotated on the title. representatives are sent to the premises offered as collaterals and investigate who the real owners are. It is expected to ascertain and verify the identities of the persons it transacts business with. highest degree of care. or institutions like the GSIS. 147800. 53 PCI Bank v.497 2. ( GSIS vs. shares. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business. degree of diligence. Callejo. as depository of the deposits of their depositors. consultant or administrator of investment management/advisory/consultancy accounts. CA This applies only to cases where banks are acting in their fiduciary capacity. it must exercise due diligence before entering into said contract. ( UCPB vs. CA. No. No.

Stipulation on interests Allowed provided it is within the limits or ceiling provided for by the Act. Safety deposit boxes 3. (Handbook on Bank Deposits. “And/or” account Either one of the co-depositors may deposit and withdraw from the account without the knowledge. As agent-principal a.) It may be deemed a survivorship agreement depending on the intention of the parties. Central Bank. 1998 ed. 96 SCRA 96) 151 . the survivor may withdraw the entire balance on deposit. Deposit for specific purpose c. or to defeat the legitime of a forced heir. (Rivera v. Time c. Deposit for safekeeping f. Joint a. “And” account . Deposit of check for collection b. Trust account 4. to transfer property in fraud of creditors. aleatory contract supported by a lawful consideration which is valid unless when made as a mere cloak to hide an inofficious donation. 498 Types of deposit accounts 1. A. As bailee-bailor a.e. As debtor-creditor a. Savings b. Viray. Demand499 2. As lessor-lessee a. Individual 2. As trustee-trustor a. b. consent and signature of the other. In the nature of irregular deposits (Serrano vs.Co-ownership The signature of both co-depositors are required for withdrawals. Deposit strictly for safekeeping and for specific purposes 5. People’s Bank) 499 Characteristics: a. Nature of bank funds and bank deposits498 1. And upon the death of one.

Should such statements prove to be false or incorrect. Grant of loans and security requirements Before granting a loan. except: purchases of evidence of indebtedness guaranteed by the Government (Sec. a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. 40 Sec. 152 . association. 500 501 Sec. the Monetary Board may require or suspend compliance with such ratio whenever necessary for a maximum period of one year. the bank may terminate any loan granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of obligation. The total amount of loans extended by a bank to any person. However. 3. or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio. the MB may temporarily relieve the surviving bank. 34 Effect of non-compliance with the prescribed minimum ratio: 1. 2. Acquisition of major assets and making of new investments may be restricted. In case of a bank merger or consolidation.g. A bank may demand from its applicants a statement of their assets and liabilities and of their income and expenditures and other information.500 (1) Ratio of net worth to total risk assets Risk-based capital: The minimum ratio prescribed by the Monetary Board which the net worth of a bank must bear to its total risk assets which may include contingent accounts. Distribution of net profits may be limited or prohibited and MB may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. Rules: 1. corporation or other entity shall at no time exceed 20% of the net worth of such bank. or 2.501 (2) Single borrower’s limit 1. partnership. or when a bank is under rehabilitation under a program approved by BSP. 34). consolidated bank. that such ratio shall be applied uniformly to banks of the same category.

b. Loans covered by assignment of deposits maintained in the lending bank and held in the Philippines. d. Other loans or credit accommodations which the MB may specify as non-risk items. Loans secured by obligations of the Bangko Sentral or the Philippine Government. 153 . or other entity. Loans. In the case of an individual who owns or controls a majority interest in a corporation. In a case of a corporation.2. the liabilities of the member thereof to such bank. The total amount of loans may be increased by additional 10% of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts. partnership. shipping documents. drawer or guarantor who obtains a loan or other credit accommodation from or discount paper with or sells paper to such banks. and d. c. and e. c. In the case of a partnership.502 502 The prescribed ceiling shall include: The direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general endorser. credit accommodations and acceptances under letters of credit to the extent covered by margin deposits. a. all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest. warehouse receipts or other similar documents transferring or securing title covering readily marketable. b. Loans fully guaranteed by the government. association or any other entity. the liabilities of the said entities to the bank. non-perishable goods which must be fully covered by insurance. Exclusions from the limits: a. association.

Directors – Directors of the lending bank 2. directly or indirectly. except with the written approval of the majority of all the directors of the bank. d. pledged or assigned to secure the loan or credit accommodations. or relative by legal adoption. The loan or financial accommodation is from (1) his bank or (2) a bank that is a subsidiary of a bank holding company of which both his bank and lending bank are subsidiaries. pledge or assignment covers only said coowner’s undivided interest. b. or relative by legal adoption. b. He contracts a loan or any form of financial accommodation c. 170): 1. officer. The loan or financial accommodation of the DOS. b. is in excess of 5% of the capital and surplus of the lending bank or in the maximum amount permitted by law. relatives within first degree of consanguinity or affinity. or in any manner be obligor or incur any contractual liability to the bank. and d. endorser or surety for loans from such bank to others. amount to 2% or more of the total subscribed capital stock of the bank: a. (3) a bank in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank. is a general partner. Requisites: a. Spouse. The written approval shall not be required for loans granted to officers under a fringe benefit plan approved by the Bangko Sentral. or relative by legal adoption of a DOS. Corporation wherein 20% of the capital stock is owned by the DOS and/or their spouses or relatives mentioned above. individually and/or together with any of the following persons. Officers – Either identified in the by-laws or are generally known as such 3. singly or with that of his related interest. A co-owner with the stockholder or the stockholder’s spouse or relative mentioned above of property/right/interest (mortgaged. The borrower is director. pledge or assignment covers only said co-owner’s undivided interest. assigned to secure the loans or credit accommodations. 170) 154 . No director or officer of any bank shall. 4. pledged.(BSP Circular No. 503 Who are covered (BSP Circular No. His spouse or relative within the first degree of affinity/consanguinity or relative by legal adoption. c. and (e). Partnerships of which a DOS or his spouse or relative within the first degree of consanguinity or affinity. (d).(3) Restrictions on bank exposure to DOSRI (directors. except when the mortgage. whichever is lower. Corporation wholly or majority owned or controlled by any related entity or a group of related entities in items (b). excluding the director concerned. except when the mortgage. stockholders and their related interests)503 a. A partnership in which the stockholder or his spouse or any of his relatives mentioned above is a general partner. Stockholders – those whose stockholdings. borrow from such bank nor shall be guarantor. Co-owner with the DOS or his spouse or relative within the first degree of consanguinity or affinity. or any stockholder of a bank and related interest. Related Interest – a. c. Corporation with inter-locking directors. e. f. officers. of the property/interest/ right mortgaged.

Cooperative bank with regard to its cooperative shareholders 155 .505 d. and guarantees secured by assets considered as non-risk by the Monetary Board.504 c. credit accommodations. and advances to officers in the form of fringe benefits. ii. Dealings of a bank with any of its DOSRI shall be upon terms not less favorable to the bank than those offered to others. Information obtained from examination is strictly confidential. Loans. 504 505 Arm’s length rule Except – i. Loans. credit accommodations. iii. No waiver is required if the related interests are the borrower f. Loans extended to DOSRI shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank.b. Waiver of secrecy of deposits of whatever nature in all banks in the Philippines by the borrower. The resolution approving the loan shall be entered in the records of the bank and transmitted to the BSP e.

Layout-Designs506 of Integrated Circuits. 3.1 508 trademark 509 service mark 156 . 2. Differences between copyrights. Intellectual property rights The term "intellectual property rights" consists of: 1. and 7. The scope of a copyright is confined to literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation. Copyright and Related Rights. Geographic Indications. Industrial Designs. 5. refer to any 506 507 Topographies Sec. Intellectual Property Code 1. Patentable inventions. 6. Intellectual Property Rights in general a. 4. trademarks and patent Trademark. Patents. A trademark is any visible sign capable of distinguishing the goods508 or services509 of an enterprise and shall include a stamped or marked container of goods. Trademarks and Service Marks. 4. copyright and patents are different intellectual property rights that cannot be interchanged with one another.J. Protection of Undisclosed Information507 b. on the other hand.

involves an inventive step and is industrially applicable. This provision shall not apply to micro-organisms and non-biological and microbiological processes.510 c. Technology transfer arrangements Refers to contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product. 21 512 Provisions under this subsection shall not preclude Congress to consider the enactment of a law providing sui generis protection of plant varieties and animal breeds and a system of community intellectual rights protection.. the application of a process. et al. Discoveries. or may relate to. Non-patentable inventions The following shall be excluded from patent protection: 1. a product. 379 SCRA 410 [2002] Sec. assignment or licensing of all forms of intellectual property rights. Anything which is contrary to public order or morality. involves an inventive step and is industrially applicable shall be patentable. 513 Sec. It may be. Patents a. or rendering of a service including management contracts. playing games or doing business. and the transfer.512 5. CA. or process.technical solution of a problem in any field of human activity which is new. This provision shall not apply to products and composition for use in any of these methods.513 c. 3. and 6. 511 b. Plant varieties or animal breeds or essentially biological process for the production of plants or animals. 2. and programs for computers. 4. rules and methods of performing mental acts. Schemes. including licensing of computer software except computer software developed for mass marke 2. Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body. Aesthetic creations. scientific theories and mathematical methods. Ownership of a patent 510 511 Kho v. Patentable inventions Any technical solution of a problem in any field of human activity which is new. 22 157 . or an improvement of any of the foregoing.

if the inventive activity is not a part of his regular duties even if the employee uses the time. the right to a patent shall belong to them jointly. or law affords similar privileges to Filipino citizens. to the contrary. the earliest priority date. and 514 515 Sec. (b) it is filed within twelve (12) months from the date the earliest foreign application was filed.515 (3) Inventions created pursuant to a Commission The person who commissions the work shall own the patent. 29 516 Sec. (b) The employer. the patent shall belong to: (a) The employee. the right to the patent shall belong to the person who filed an application for such invention. unless otherwise provided in the contract.516 (4) Right of priority An application for patent filed by any person who has previously applied for the same invention in another country which by treaty. In case the employee made the invention in the course of his employment contract. shall be considered as filed as of the date of filing the foreign application. 28 Sec. When two (2) or more persons have jointly made an invention. to the applicant who has the earliest filing date or. 514 (2) First-to-file rule If two (2) or more persons have made the invention separately and independently of each other. his heirs. or assigns. unless there is an agreement. Provided: (a) the local application expressly claims priority. or where two or more applications are filed for the same invention. facilities and materials of the employer. 30 158 .(1) Right to a patent Belongs to the inventor. convention. express or implied. if the invention is the result of the performance of his regularly-assigned duties.

offering for sale. prevent or prohibit any unauthorized person or entity from using the process. prohibit and prevent any unauthorized person or entity from making. Grounds for cancellation of a patent: (a) That what is claimed as the invention is not new or patentable.(c) a certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines. (b) File a new patent application in respect of the same invention. Where the grounds for cancellation relate to some of the claims or parts of the claim. and from manufacturing. 67 159 .518 e. (b) Subject matter of a patent is a process To restrain. or (c) That the patent is contrary to public order or morality. (c) Request that the application be refused. 517 518 Sec. using. cancellation may be effected to such extent only. or importing any product obtained directly or indirectly from such process. Rights conferred by a patent (a) Subject matter of a patent is a product To restrain.517 d. (b) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art. selling or offering for sale. within three (3) months after the decision has become final: (a) Prosecute the application as his own application in place of the applicant. selling or importing that product. 31 Sec. if one has already been issued.519 f. 61 519 Sec. using. dealing in. Remedy of the true and actual inventor Such person may. or (d) Seek cancellation of the patent.

and (b) to conclude licensing contracts for the same. vessel. Where the act consists of the preparation for individual cases. of a medicine in accordance with a medical prescription or acts concerning the medicine so prepared. Limitations of patent rights The owner of a patent has no right to prevent third parties from performing. 4. aircraft. before the filing date or priority date of the application on which a patent is granted. or land vehicle of any other country entering the territory of the Philippines temporarily or accidentally: Provided. in good faith was using the invention or has undertaken serious preparations to use the invention in his enterprise or business. 520 521 Sec. Using a patented product which has been put on the market in the Philippines by the owner of the product. the acts referred to in Section 71521 hereof in the following circumstances: 1. 5. or land vehicle and not used for the manufacturing of anything to be sold within the Philippines. aircraft. who. any prior user. Where the invention is used in any ship. That such invention is used exclusively for the needs of the ship. or transfer by succession the patent. Where the act consists of making or using exclusively for the purpose of experiments that relate to the subject matter of the patented invention. in a pharmacy or by a medical professional. shall have the right to continue the use thereof as envisaged in such preparations within the territory where the patent produces its effect.520 g. 72 523 supra 160 . 2.Patent owners shall also have the right (a) to assign. vessel. 3. without his authorization.522 (1) Prior user Notwithstanding Section 72523 hereof. That it does not significantly prejudice the economic interests of the owner of the patent. or with his express consent. Where the act is done privately and on a non-commercial scale or for a noncommercial purpose: Provided. 71 supra 522 Sec. insofar as such use is performed after that product has been so put on the said market.

1.The right of the prior user may only be transferred or assigned together with his enterprise or business. . Compulsory License Based on Interdependence of Patents. . 95. In situations of national emergency or other circumstances of extreme urgency. (b) In situations of national emergency or other circumstances of extreme urgency. by the owner of the patent or his licensee. The license will only be granted after the petitioner has made efforts to obtain authorization from the patent owner on reasonable commercial terms and conditions but such efforts have not been successful within a reasonable period of time. mutatis mutandis. 95.If the invention protected by a patent. or with that part of his enterprise or business in which the use or preparations for use have been made. The requirement under Subsection 95. the right holder shall be notified as soon as reasonably practicable.1 shall not apply in the following cases: (a) Where the petition for compulsory license seeks to remedy a practice determined after judicial or administrative process to be anti-competitive. or (b) A judicial or administrative body has determined that the manner of exploitation. 95.526 524 525 Sec. The invention claimed in the second patent involves an important technical advance of considerable economic significance in relation to the first patent.524 (2) Use by the government A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where: (a) the public interest. a compulsory license may be granted to the owner of the second patent to the extent necessary for the working of his invention. in particular. knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government. Requirement to Obtain a License on Reasonable Commercial Terms. as determined by the appropriate agency of the government. is anti-competitive. hereafter referred to as the "first patent.2. Sec." granted on a prior application or benefiting from an earlier priority. health or the development of other sectors.In the case of compulsory licensing of patents involving semi-conductor technology. 73 Sec. where the government or contractor. subject to the following conditions: 97. national security.3. (c) In cases of public non-commercial use. so requires. Sec. without making a patent search. Compulsory Licensing of Patents Involving Semi-Conductor Technology. the right holder shall be informed promptly. 96. or third person authorized by the Government shall be subject. 95. The use by the Government. In the case of public non-commercial use.4. 161 . to the conditions set forth in Sections 95 to 97 525 and 100 to 102." within the country cannot be worked without infringing another patent. 95. nutrition.1. hereafter referred to as the "second patent. the license may only be granted in case of public non-commercial use or to remedy a practice determined after judicial or administrative process to be anti-competitive. 97.

Use of the subject matter of the license shall be devoted predominantly for the supply of the Philippine market: Provided. 100. Sec. 100. 526 Sec. except that in cases where the license was granted to remedy a practice which was determined after judicial or administrative process. Sec. surrender. 286 SCRA 13 [1998]) 162 .Any person who works a patented product. Patent infringement527 1) Tests in patent infringement 97. 101. 100. The patentee shall be paid adequate remuneration taking into account the economic value of the grant or authorization.2. Terms and Conditions of Compulsory License. 102. 101. .The basic terms and conditions including the rate of royalties of a compulsory license shall be fixed by the Director of Legal Affairs subject to the following conditions: 100. Cancellation. 96 and 98 to 100 of this Act. (Creser Precision Systems. except with that part of the enterprise or business with which the invention is being exploited. and/or the licensee. to be anti-competitive. Amendment. Surrender of Compulsory License. CA. the need to correct the anti-competitive practice may be taken into account in fixing the amount of remuneration. there can be no infringement of a patent until a patent has been issued. the said Director may cancel the compulsory license: (a) If the ground for the grant of the compulsory license no longer exists and is unlikely to recur. In short.4.4. The use authorized in respect of the first patent shall be non-assignable except with the assignment of the second patent. to be anti-competitive. no collusion with the licensor is proven. 527 Only the patentee or his successor-in-interest may file an action for infringement.4. Licensee’s Exemption from Liability. since whatever right one has to the invention covered by the patent arises alone from the grant of patent. 101. The owner of the first patent shall be entitled to a cross-license on reasonable terms to use the invention claimed in the second patent. and cause notice thereof to be published in the IPO Gazette.. That this limitation shall not apply where the grant of the license is based on the ground that the patentee’s manner of exploiting the patent is determined by judicial or administrative process. Moreover.5. The licensee may surrender the license by a written declaration submitted to the Office. The license shall be non-exclusive.3.6. upon proper showing of new facts or circumstances justifying such amendment. The scope and duration of such license shall be limited to the purpose for which it was authorized.3. The license may be terminated upon proper showing that circumstances which led to its grant have ceased to exist and are unlikely to recur: Provided.h. Inc. Upon the request of the patentee or the licensee. and 97. . et al. shall be free from any liability for infringement: Provided however. 101. 100. The license shall be non-assignable.1. substance and/or process under a license granted under this Chapter.2. notify the patentee. (c) If the licensee has not complied with the prescribed terms of the license. or cancellation in the Register. The terms and conditions of Sections 95. This is without prejudice to the right of the rightful owner of the patent to recover from the licensor whatever he may have received as royalties under the license.2. Upon the request of the patentee.1. 101. 100.3. has no cause of action for infringement because the right to maintain an infringement suit depends upon the existence of a patent. the Director of Legal Affairs may amend the decision granting the compulsory license. The said Director shall cause the amendment. That in the case of voluntary licensing. v. That adequate protection shall be afforded to the legitimate interest of the licensee. and 100. (b) If the licensee has neither begun to supply the domestic market nor made serious preparation therefor. 97. a person or entity who has not been granted letter of patent over an invention and has not acquired any rights or title thereto either as an assignee or a licensee.

That the laws of the Philippines shall govern the interpretation of the same and in the event of litigation. CA. albeit with some modification and change.529 (2) Defenses in action for infringement The defendant. or parts of the claim. 81 163 . or (c) That the patent is contrary to public order or morality. on any of the following grounds: (a) That what is claimed as the invention is not new or Patentable. b. petition to cancel the patent or any claim thereof. the court must juxtapose the claims of the patent and the accused product within the overall context of the claims and specifications. the venue shall be the proper court in the place where the licensee has its principal office. performs substantially the same function in substantially the same way to achieve substantially the same result. in addition to other defenses available to him. Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement. an infringement also occurs when a device appropriates a prior invention by incorporating its innovative concept and. 531 Sec.531 i. 528 529 Godines v. cancellation may be effected to such extent only. upon payment of the required fee. to determine whether there is exact identity of all material elements. (b) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art. Licensing (1) Voluntary The following provisions shall be included in voluntary license contracts: a.528 (b) Doctrine of equivalents Under this doctrine. To determine whether the particular item falls within the literal meaning of the patent claims. on any of the grounds on which a petition of cancellation can be brought under Section 61530 hereof.(a) Literal infringement Resort must be had in the first instance to the words of the claim. or any claim thereof. Where the grounds for cancellation relate to some of the claims or parts of the claim. may show the invalidity of the patent. 226 SCRA 576 [1993] Ibid. 530 Any interested person may.

the statutory grounds upon which compulsory license is sought. R. 34-D. referred to as the "second patent. referred to as the "first patent. Upon filing of a petition. The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor. It shall contain the name and address of the petitioner as well as those of the respondents. the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country. 165) Section 99.c.532 (2) Compulsory If the invention protected by a patent. The owner of the first patent shall be entitled to a cross-license on reasonable terms to use the invention claimed in the second patent. the Director of Legal Affairs shall forthwith serve notice of the filing thereof upon the patent owner and all persons having grants or licenses. Notice of Hearing." granted on a prior application or benefiting from an earlier priority. or any other right. The invention claimed in the second patent involves an important technical advance of considerable economic significance in relation to the first patent. subject to the following conditions: 1. the ultimate facts constituting the petitioner's cause of action.536 532 533 Sec. and of 164 . a compulsory license may be granted to the owner of the second patent to the extent necessary for the working of his invention. In the event the technology transfer arrangement shall provide for arbitration. 3. verified by the petitioner and accompanied by payment of the required filing fee. 2.1. . and d." within the country cannot be worked without infringing another patent. 88 see footnote 525 534 Section 98. the name of the patentee. the title of the invention. The use authorized in respect of the first patent shall be non-assignable except with the assignment of the second patent. 96533 and 98534 to 100535 of this Act. and 4. the number and date of issue of the patent in connection with which compulsory license is sought. – 99.A. No.The petition for compulsory licensing must be in writing. Form and Contents of Petition. The terms and conditions of Sections 95. and the relief prayed for. title or interest in and to the patent and invention covered thereby as appears of record in the Office. (Sec.

Definitions of marks.A. No. An assignment may be limited to a specified territory. in which event the parties become joint owners thereof. shall be bound to accept service of notice of the filing of the petition within the meaning of this Section. trade names Mark Any visible sign capable of distinguishing the goods539 or services540 of an enterprise notice of the date of hearing thereon. Assignment and transmission of rights An assignment may be of the entire right. R. 105.538 3. collective marks. on such persons and petitioner. acknowledged before a notary public or other officer authorized to administer oath or perform notarial acts. id. 52.2. The resident agent or representative appointed in accordance with Section 33 hereof. 165) 535 see footnote 525 536 Sec. 99. (Sec. title or interest in and to the patent and the invention covered thereby. Trademarks a.j. Sec.537 The assignment must be in writing. once a week for three (3) consecutive weeks and once in the IPO Gazette at applicant's expense. or of an undivided share of the entire patent and invention. 104 538 Sec. the notice shall be published by the said Office in a newspaper of general circulation. 34-E. 539 trademark 540 service mark 165 . and certified under the hand and official seal of the notary or such other officer. 97 537 Sec. In every case.

including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark. institutions. d. (b) Consists of the flag or coat of arms or other insignia of the Philippines or any of its political subdivisions. 122 166 . 40 Sec. deceptive or scandalous matter.543 c. 541 542 Sec. Acquisition of ownership of trade name Prior use is the basis for ownership of trade names. or matter which may disparage or falsely suggest a connection with persons. or national symbols. 121 543 Sec.542 b. or any simulation thereof. Non-registrable marks A mark cannot be registered if it: (a) Consists of immoral. beliefs. living or dead.and shall include a stamped or marked container of goods. or of any foreign nation. Acquisition of ownership of mark The rights in a mark shall be acquired through registration made validly in accordance with the provisions of this law. or bring them into contempt or disrepute. Collective mark Any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic.541 Trade name The name or designation identifying or distinguishing an enterprise.

intended purpose. quality. and the owner of the registered mark: Provided further. (d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date. except by written consent of the widow. That in determining whether a mark is well-known.(c) Consists of a name. including knowledge in the Philippines which has been obtained as a result of the promotion of the mark. as being already the mark of a person other than the applicant for registration. if any. geographical 167 (j) . or confusingly similar to. or portrait of a deceased President of the Philippines. or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph. or 3) If it nearly resembles such a mark as to be likely to deceive or cause confusion. (i) Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in everyday language or in bona fide and established trade practice. (f) Is identical with. which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for: Provided. value. characteristics or geographical origin of the goods or services. (e) Is identical with. during the life of his widow. in respect of: 1) The same goods or services. (h) Consists exclusively of signs that are generic for the goods or services that they seek to identify. or 2) Closely related goods or services. or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines. and used for identical or similar goods or services: Provided. quality. or the name. rather than of the public at large. That the interests of the owner of the registered mark are likely to be damaged by such use. (g) Is likely to mislead the public. or confusingly similar to. portrait or signature identifying a particular living individual except by his written consent. That use of the mark in relation to those goods or services would indicate a connection between those goods or services. particularly as to the nature. Consists exclusively of signs or of indications that may serve in trade to designate the kind. account shall be taken of the knowledge of the relevant sector of the public. whether or not it is registered here. quantity. signature.

Similarity in size. 124. within three (3) years from the filing date of the application. et al. the value of which may be dissipated as soon as the court assumed to analyze carefully the respective features of the mark. and confusion is likely to result. or other characteristics of the goods or services. time or production of the goods or rendering of the services.546 (2) Holistic test To determine whether a trademark has been infringed. or (m) Is contrary to public order or morality. (k) Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value. 224 SCRA 437 [1993] 547 Del Monte Corporation. Otherwise. Tests to determine confusing similarity between marks (1) Dominancy test Infringement is determined by the test of “dominancy” rather than by differences or variations in the details of one trademark and of another.2 546 Asia Brewery v. the application shall be refused or the mark shall be removed from the Register by the Director. CA. 181 SCRA 410 [1990] 168 . (l) Consists of color alone.545 f. CA and San Miguel. while relevant. v. for the buyer acts quickly and is governed by a casual glance. Prior use of mark as a requirement The applicant or the registrant shall file a declaration of actual use of the mark with evidence to that effect. The court therefore should be guided by its first impression. If the buyer is deceived.547 g. form and color.origin. we must consider the mark as a whole and not as dissected. infringement takes place. not usually to any part of it. is not conclusive. it is attributable to the marks as a totality. 123. Well-known marks 544 545 Sec. If the competing trademark contains the main or essential or dominant features of another.544 e. unless defined by a given form.1 Sec.

1(e) Id. provided further that the interest of the owner of the registered mark are likely to be damaged by such use. That the interests of the owner of the registered mark are likely to be damaged by such use.549 The exclusive right of the owner of a well-known mark defined in Subsection 123.552 548 549 Sec. further. That use of the mark in relation to those goods or services would indicate a connection between those goods or services. or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph.. or confusingly similar to. shall extend to goods and services which are not similar to those in respect of which the mark is registered: Provided. Rights conferred by registration The owner of a registered mark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion shall be presumed.548 Identical with.1(e)550 which is registered in the Philippines. and used for identical or similar goods or services: Provided. including knowledge in the Philippines which has been obtained as a result of the promotion of the mark. or confusingly similar to. That the interests of the owner of the registered mark are likely to be damaged by such use.2 552 Sec. rather than of the public at large. That in determining whether a mark is well-known. 147. as being already the mark of a person other than the applicant for registration.(f) 550 supra 551 Sec. account shall be taken of the knowledge of the relevant sector of the public. The exclusive right of the owner of a well-known mark which is registered in the Philippines shall extend to goods and services which are similar to those in respect of which the mark is registered.Identical with. or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines. 123. 147 169 .551 h. provided that use of the mark in relation to those goods or services would indicate a connection between those goods and services and the owner of the registered mark. and the owner of the registered mark: Provided further. which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for: Provided. whether or not it is registered here. That use of that mark in relation to those goods or services would indicate a connection between those goods or services and the owner of the registered mark: Provided.

That the infringement takes place at the moment any of the acts stated in Subsection 155. Use in commerce any reproduction. or to cause mistake. prints. 155. shall be liable in a civil action for infringement by the registrant for the remedies hereinafter set forth: Provided. distribution. without the consent of the owner of the registered mark: 1. Reproduce.. or any such use of a similar trade name or mark. wrappers. Use by third parties of names. etc.1. or to cause mistake. or advertising of goods or services on or in connection with which such use is likely to cause confusion. shall be deemed unlawful. and 553 554 Sec. counterfeit. copy.553 j. 165 (b) Sec.i. counterfeit. distribution. signs. the following elements must be shown: [1] the validity of the mark. offering for sale.1 555 supra 556 Id. [2] the plaintiff’s ownership of the mark. advertising of any goods or services including other preparatory steps necessary to carry out the sale of any goods or services on or in connection with which such use is likely to cause confusion. likely to mislead the public. similar to registered mark Any subsequent use of the trade name by a third party. offering for sale.556 (1) Trademark infringement To establish trademark infringement. copy or colorably imitate a registered mark or a dominant feature thereof and apply such reproduction. or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale. receptacles or advertisements intended to be used in commerce upon or in connection with the sale.555 or this subsection are committed regardless of whether there is actual sale of goods or services using the infringing material. Infringement and remedies Any person who shall. packages. or to deceive. counterfeit.554 or 2. copy or colorable imitation to labels. (2) 170 . whether as a trade name or a mark or collective mark. or to deceive.

Likelihood of confusion is admittedly a relative term. L.559 A crucial issue in any trademark infringement case is the likelihood of confusion.561 (2) Damages The owner of a registered mark may recover damages from any person who infringes his rights. source or origin of the goods or identity of the business as a consequence of using a certain mark. Big Mak Burger. and [d] the registrant’s express or implied consent and other fair and equitable considerations.[3] the use of the mark or its colorable imitation by the alleged infringer results in “likelihood of confusion. and the measure of the damages suffered shall be either the reasonable profit which the complaining party would have made. In determining likelihood of confusion.1. Two types of confusion arise from the use of similar or colorable imitation marks. or the profit which the defendant actually made out of the infringement.558 While there is confusion of goods when the products are competing. mistake or deceit as to the identity. then the court may award as damages a reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was used in the infringement of the rights of the complaining party.C. 434 SCRA 473 [2004] 562 Sec. to be determined rigidly according to the particular560 circumstances of each case. namely.” Of these. 171 . [b] the similarity of the goods to which the trademarks are attached. or in the event such measure of damages cannot be readily ascertained with reasonable certainty. et al. 156. Gallo Winery.. it is the element of likelihood of confusion that is the gravamen of trademark infringement. confusion of goods557 and confusion of business. confusion of business exists when the products are non-competing but related enough to produce confusion of affiliation. & J. 437 SCRA 10 [2004] 560 and sometimes peculiar 561 Mighty Corporation v.562 (3) Requirement of Notice 557 558 product confusion source or origin confusion 559 McDonald’s Corporation v. Inc . E.. the court must consider: [a] the resemblance between the trademarks. had the defendant not infringed his rights. [c] the likely effect on the purchaser.

whereas unfair competition is the passing off of one’s goods as those of another. Inc . Gallo Winery.563 k. Hence. L.. the owner of the registered mark shall not be entitled to recover profits or damages unless the acts have been committed with knowledge that such imitation is likely to cause confusion. 437 SCRA 10 [2004]) 172 . The law on unfair competition is broader and more inclusive than the law on trademark infringement. 2. CA. et al. (McDonald’s Corporation v. v. his business or services from those of others. whereas in unfair competition registration is not necessary. 3.In any suit for infringement. Actual fraudulent intent need not be shown. 158 Del Monte Corporation. 181 SCRA 410 [1990] The following are the distinctions between infringement of trademark and unfair competition: 1. and [2] intent to deceive the public and defraud a competitor. The confusing similarity may or may not result from similarity in the marks. he may still obtain relief on the ground of his competitor’s unfairness or fraud. even if one fails to establish his exclusive property right to a trademark. In infringement of trademark the prior registration of the trademark is a prerequisite to the action. Such knowledge is presumed if the registrant gives notice that his mark is registered by displaying with the mark the words "Registered Mark" or the letter R within a circle or if the defendant had otherwise actual notice of the registration.C. The intent to deceive and defraud may be inferred from the similarity in appearance of the goods as offered for sale to the public.. or to deceive. Unfair competition564 A person who has identified in the mind of the public the goods he manufactures or deals in. whereas in unfair competition fraudulent intent is essential. In infringement of trademark. whether or not a registered 563 564 Sec. 434 SCRA 473 [2004]) The elements of an action for unfair competition are: [1] confusing similarity in the general appearance of the goods. but may result from other external factors in the packaging or presentation of the goods. E. et al. The latter is more limited but it recognizes a more exclusive right derived from the trademark adoption and registration by the person whose goods or business is first associated with it. Conduct constitutes unfair competition if the effect is to pass off on the public the goods of one man as the goods of another (Mighty Corporation v. & J. Big Mak Burger. or to cause mistake. fraudulent intent is unnecessary. Infringement of trademark is the unauthorized use of a trademark.

has a property right in the goodwill of the said goods. or who employs any other means calculated to induce the false belief that such person is offering the services of another who has identified such services in the mind of the public. business or services of another.mark is employed.. or his business. or services for those of the one having established such goodwill.1 Id.. or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade.566 The following shall be deemed guilty of unfair competition: (a) Any person. which will be protected in the same manner as other property rights.1 173 . shall be guilty of unfair competition. business or services so identified. (b) Any person who by any artifice. it is contrary to public order or morals and if. either as to the goods themselves or in the wrapping of the packages in which they are contained. other than the actual manufacturer or dealer. or the devices or words thereon. and shall be subject to an action therefor. it is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name. 168. 2 567 Id. or device. 568 565 566 Sec. or (c) Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods. in particular. 3 568 Sec. or who shall commit any acts calculated to produce said result. Trade names or business names A name or designation may not be used as a trade name if by its nature or the use to which such name or designation may be put. which would be likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer. who is selling his goods and gives them the general appearance of goods of another manufacturer or dealer.565 Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals. or in any other feature of their appearance. 165. or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose.567 l.

or suitability for their purpose. and the mark.. even prior to or without registration. The registration of a collective mark. be null and void if it is liable to mislead the public.Notwithstanding any laws or regulations providing for any obligation to register trade names. manufacturing process. if any. or an application therefor shall not be the subject of a license contract. source. In addition to the grounds provided in Section 149. 571 Sec. be provisionally recorded. governing the use of the collective mark.572 569 570 Id. characteristics. when registered. Transfers by mergers or other forms of succession may be made by any document supporting such transfer. Collective marks (a) An application for registration of a collective mark shall designate the mark as a collective mark and shall be accompanied by a copy of the agreement.2 or that he uses or permits its use in a manner liable to deceive trade circles or the public as to the origin or any other common characteristics of the goods or services concerned. Assignments and transfers shall have no effect against third parties until they are recorded at the Office. 167 174 . assignment and transfers of applications for registration shall. shall be in the name of the assignee or transferee. shall be in writing and require the signatures of the contracting parties. 2 (a) Assignment and Transfer of Application and Registration. irrespective of their mode or form of expression. Assignments and transfers of registration of marks shall be recorded at the Office on payment of the prescribed fee. as well as of their content. or its registration.570 the Court shall cancel the registration of a collective mark if the person requesting the cancellation proves that only the registered owner uses the mark. such names shall be protected. against any unlawful act committed by third parties. Copyrights a. Basic principles Works are protected by the sole fact of their creation. quality and purpose. or that he uses or permits its use in contravention of the agreements referred to in Subsection 166. may be assigned or transferred with or without the transfer of the business using the mark.569 m.571 4. particularly as regards the nature. or of its registration. of the goods or services to which the mark is applied. (n) Such assignment or transfer shall. An application for registration of a mark. on payment of the same fee. (b) The registered owner of a collective mark shall notify the Director of any changes made in respect of the agreement referred to in paragraph (a). The assignment of the application for registration of a mark. however.

engraving. the transfer or assignment of the copyright shall not itself constitute a transfer of the material object. 181 175 . concept.574 The copyright is distinct from the property in the material object subject to it.575 b. explained. models or designs for works of art. not the idea itself. whether or not reduced in writing or other material form. Nor shall a transfer or assignment of the sole copy or of one or several copies of the work imply transfer or assignment of the copyright. whether or not registrable as an industrial design. and other works of applied art. Original ornamental designs or models for articles of manufacture. even if they are expressed. with or without words. to any idea. addresses. are original intellectual creations in the literary and artistic domain protected from the moment of their creation and shall include in particular: (a) (b) (c) Books. (d) (e) (f) (g) (h) 572 Sec. 172. system method or operation. articles and other writings. Copyrightable works (1) Original works Literary and artistic works. hereinafter referred to as "works". principle. Lectures. illustrated or embodied in a work. dissertations prepared for oral delivery. architecture. 175 575 Sec. procedure. Dramatic or dramatico-musical compositions. Works of drawing.573 no protection shall extend. painting. Consequently. Letters. Musical compositions. 573 infra 574 Sec. sculpture. pamphlets. lithography or other works of art.2 Protection extends only to the expression of an idea. sermons.Notwithstanding the provisions of Sections 172 and 173. Periodicals and newspapers. choreographic works or entertainment in dumb shows. discovery or mere data as such. under this law.

maps. scientific and artistic works. adaptations.577 (b) The works referred to in paragraphs (a) and (b) of Subsection 173. charts and three-dimensional works relative to geography. and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents.579 c.576 (2) Derivative works (j) (k) (l) (m) (n) (o) (a) Dramatizations. translations. impose as a condition the payment of royalties. 578 supra 579 Sec. That such new work shall not affect the force of any subsisting copyright upon the original works employed or any part thereof. topography. No prior approval or conditions shall be required for the use of any purpose of statutes. sketches. Drawings or plastic works of a scientific or technical character. among other things. scholarly. plans.(i) Illustrations.1. and other alterations of literary or artistic works.2. Such agency or office may. lantern slides. arrangements. prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. or be construed to imply any right to such use of the original works. Non-copyrightable works No copyright shall subsist in any work of the Government of the Philippines. Sec. or to secure or extend copyright in such original works. 173. and Collections of literary. Photographic works including works produced by a process analogous to photography. architecture or science. 173.1578 shall be protected as a new works: Provided however. Computer programs. rules and 576 577 Sec. 172. However. Pictorial illustrations and advertisements. scholarly or artistic works. abridgments. 176 .1. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audiovisual recordings. and Other literary.

a work embodied in a sound recording. 2 582 Id.581 Notwithstanding the foregoing provisions. Rental of the original or a copy of an audiovisual or cinematographic work. pronounced. 6.583 copyright or economic rights shall consist of the exclusive right to carry out. The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership. Dramatization. addresses. addresses. bequest or otherwise. 2. read or rendered in courts of justice. abridgment. arrangement or other transformation of the work. a compilation of data and other materials or a musical work in graphic form. 3. a computer program. Other communication to the public of the work584 580 581 Sec. 4. Rights of copyright owner Subject to the provisions of Chapter VIII.580 The Author of speeches. irrespective of the ownership of the original or the copy which is the subject of the rental. 3 583 Limitations on Copyright 584 Sec. Reproduction of the work or substantial portion of the work. and dissertations... Public performance of the work. 176.1 id. sermons.582 d. lectures. translation. Public display of the original or a copy of the work. authorize or prevent the following acts: 1.regulations. the Government is not precluded from receiving and holding copyrights transferred to it by assignment. lectures. 177 177 . adaptation. and speeches. before administrative agencies. sermons. in deliberative assemblies and in meetings of public character. (n) 5. and 7. nor shall publication or republication by the government in a public document of any work in which copy right is subsisting be taken to cause any abridgment or annulment of the copyright or to authorize any use or appropriation of such work without the consent of the copyright owners. and dissertations mentioned in the preceding paragraphs shall have the exclusive right of making a collection of his works.

the composer of the music. and 6. 3. and the author of the work so adapted. 4. if the work is the result of the performance of his regularly-assigned duties. unless there is a written stipulation to the contrary. the court may authorize their publication or dissemination if the public good or the interest of justice so requires. the author of the scenario. the copyright shall belong to the producer. express or implied. In respect of letters. copyright shall belong to the author of the work. In the case of original literary and artistic works. (b) The employer. 178 178 . However. the producers shall exercise the copyright to an extent required for the exhibition of the work in any manner. the copyright shall belong to: (a) The employee. 5. the author of each part shall be the original owner of the copyright in the part that he has created. a work of joint authorship consists of parts that can be used separately and the author of each part can be identified. If. However. the film director. subject to contrary or other stipulations among the creators. if the creation of the object of copyright is not a part of his regular duties even if the employee uses the time. but the copyright thereto shall remain with the creator. 586 Sec. except for the right to collect performing license fees for the performance of musical compositions. In the case of work created by an author during and in the course of his employment. In the case of a work-commissioned by a person other than an employer of the author and who pays for it and the work is made in pursuance of the commission. In the case of works of joint authorship.586 585 Letters and other private communications in writing are owned by the person to whom they are addressed and delivered. however. Rules on ownership of copyright 1. the copyright shall belong to the writer subject to the provisions of Article 723585 of the Civil Code. to the contrary. 2.e. which are incorporated into the work. In the case of audiovisual work. facilities and materials of the employer. but they cannot be published or disseminated without the consent of the writer or his heirs. the person who so commissioned the work shall have ownership of work. their rights shall be governed by the rules on co-ownership. the co-authors shall be the original owners of the copyright and in the absence of agreement. with or without words. unless there is an agreement.

f. if appearing on the work. if such inclusion is made by way of illustration for teaching purposes and is compatible with fair use: Provided. are mentioned. The reproduction or communication to the public by mass media of articles on current political. The recording made in schools. universities or educational institutions: Provided. further. economic. if appearing in the work. scientific or artistic works as part of reports of current events by means of photography. Limitations on copyright Notwithstanding the provisions of Chapter V. including quotations from newspaper articles and periodicals in the form of press summaries: Provided. (b) (c) (d) (e) (f) 587 Copyright or Economic Rights 179 . if done privately and free of charge or if made strictly for a charitable or religious institution or society. which are delivered in public if such use is for information purposes and has not been expressly reserved: Provided. addresses and other works of the same nature. once it has been lawfully made accessible to the public. or other communication to the public. The inclusion of a work in a publication. That such recording may not be made from audiovisual works which are part of the general cinema repertoire of feature films except for brief excerpts of the work. social. That the source and the name of the author. sound recording or film. broadcast. are mentioned. universities. or educational institutions of a work included in a broadcast for the use of such schools. The reproduction and communication to the public of literary. That the source and of the name of the author. cinematography or broadcasting to the extent necessary for the purpose. That the source is clearly indicated. scientific or religious topic.587 the following acts shall not constitute infringement of copyright: (a) the recitation or performance of a work. That such recording must be deleted within a reasonable period after they were first broadcast: Provided. The making of quotations from a published work if they are compatible with fair use and only to the extent justified for the purpose. lectures.

by the National Library or by educational. (b) 588 Sec. teaching including multiple copies for classroom use. or. including whether such use is of a commercial nature or is for non-profit education purposes. whose aim is not profit making. comment. in a place where no admission fee is charged in respect of such public performance or communication.(g) The making of ephemeral recordings by a broadcasting organization by means of its own facilities and for use in its own broadcast. news reporting. television image or otherwise on screen or by means of any other device or process: Provided. and Any use made of a work for the purpose of any judicial proceedings or for the giving of professional advice by a legal practitioner.588 (1) Doctrine of fair use The fair use of a copyrighted work for criticism. the factors to be considered shall include: (a) The purpose and character of the use. by a club or institution for charitable or educational purpose only. slide. The nature of the copyrighted work. subject to such other limitations as may be provided in the Regulations. The use made of a work by or under the direction or control of the Government. research. That either the work has been published. Decompilation. which is understood here to be the reproduction of the code and translation of the forms of the computer program to achieve the inter-operability of an independently created computer program with other programs may also constitute fair use. 184 180 . Public display of the original or a copy of the work not made by means of a film. given away or otherwise transferred to another person by the author or his successor in title. scientific or professional institutions where such use is in the public interest and is compatible with fair use. (h) (i) (j) (k) The provisions of this section shall be interpreted in such a way as to allow the work to be used in a manner which does not conflict with the normal exploitation of the work and does not unreasonably prejudice the right holder's legitimate interest. scholarship. The public performance or the communication to the public of a work. that original or the copy displayed has been sold. and similar purposes is not an infringement of copyright. In determining whether the use made of a work in any particular case is fair use.

or even a large portion of it. without the consent of the owner of the copyright.. he at least knew that what he was copying was not his. and The effect of the use upon the potential market for or value of the copyrighted work. The act of lifting from another’s book substantial portions of discussions and examples and the failure to acknowledge the same is an infringement of copyright.”590 589 590 Sec. of anything the sole right to do which is conferred by statute on the owner of the copyright. It is no defense that the pirate did not know whether or not he was infringing any copyright.. be copied. (d) The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the above factors. and he copied at his peril. For there to be substantial reproduction of a book it does not necessarily require that the entire copyrighted work. 310 SCRA 511 [1999] 181 . If so much is taken that the value of the original work is substantially diminished. Robles.589 (2) Copyright infringement Infringement consists in the doing by any person. v.(c) The amount and substantiality of the portion used in relation to the copyrighted work as a whole. et al. et al. there is an infringement of copyright and to an injurious extent. In cases of infringement. The copying must produce an “injurious effect. copying alone is not what is prohibited. the work is appropriated. 185 Habana.

To pursue State’s foreign policy to extend cooperation in transnational investigations and prosecution on money laundering activities. Anti-Money Laundering Law591 a. 9160. Covered institutions a. and 591 R.A. Quasi-banks d. 182 . as amended by R. Special Laws 1. To protect and preserve the integrity and confidentiality of bank accounts.A. Non-banks c. Policy of the law 1.K. Trust entities. b. 9194 Anti-Money Laundering A crime whereby the proceeds of an unlawful activity are translated thereby making them appear to have originated from legitimate sources. to ensure that the Philippines shall not be used as a site for unlawful money laundering activities. and 2. Banks b.

9194 183 . b. in cash or other equivalent monetary instrument in excess of P500. within one banking day. There is no underlying legal or trade obligation. Covered transactions Transaction. their subsidiaries and affiliates supervised or regulated by the BSP c. Amount involved is not commensurate with the business or financial capacity d. is being or has been committed. e. Suspicious transactions Transactions with covered institutions regardless of the amounts involved.592 d. R.e.A.000. which transactions are called "covered transactions. 2. e. Analogous transactions to any of the foregoing.593 592 593 See Sec. All other institutions. g. Taking into account all known circumstances. 9 Sec. f. Any circumstances relating to the transaction which is observed to deviate from the profile and/ or the client’s past transactions with the covered institution. Client is not properly identified c. it may be perceived that the client’s transaction is structured in order to avoid being the subject of reporting requirements under the Act. where any of the following circumstances exists: a. Obligations of covered institutions To report transactions being coursed through them that may have tell-tale signs of money laundering. Transaction is in any way related to an unlawful activity or offense under this Act that is about to be.

Knowledge that any monetary instrument or property involves proceeds of any unlawful activity. When is money laundering committed Crime of money laundering: 1. robbery and extortion 6. drug trafficking or violation of RA No. jueteng and masiao ( illegal gambling) 7. 9165595 2. swindling 594 595 infra Comprehensive Dangerous Act of 2002 184 . involved or relates the proceeds of any unlawful activity. piracy on the high seas 8. qualified theft 9. Knowledge that any monetary instrument or instrument is required to be disclosed and filed with AMLC594 fails to do so. kidnap for ransom 3. Knowledge that any monetary instrument or property represents. g. anti-graft and corrupt practices act 4. Unlawful activities or predicate crimes 1.f. transact or attempts to transact said monetary instrument or property 2. performs or fails to perform any act as a result of which he facilitates the offense of money laundering 3. plunder 5.

To require and receive covered or suspicious transaction reports from covered institution 2. absence or disability. Insurance Commissioner 3. all members of Secretariat. on secondment shall not reveal in any manner any information by reason of their office Exception: Under any orders of the court. 455 & 1937 General Rule: AMLC acts unanimously in discharge of functions. the officer designated shall act in his stead.597 i. violations of E-commerce Act of 2000 12. 3. Congress. Nos. on the basis of substantial evidence. Functions 1. smuggling596 11. Exception: In case of incapacity. Chairman of Security & Exchange Commissioner AMLC is a collegial body where Chairman & members of AMLC are entitled to one vote each. 185 . Governor of Bangko Sentral ng Pilipinas as Chairman 2. or any government offices authorized by law. wherever located representing. involving. or believed by the council. All covered transactions and suspicious transactions shall be reported to AMLC within 5 working days from occurrence thereof. 596 597 under RPC and R.A. hijacking h. To issue orders addressed to the appropriate supervising authority or the covered institution to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious transaction report or request for assistance from a foreign state. Anti-Money Laundering Council (AMLC) Composition: 1.10. any member to discharge his functions. to be in whole or in part. Executive Director. General Rule: Members of AMLC. unless the Supervising Authority prescribes a longer period not exceeding 10 working days. on detail.

department. To cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses. AMLC may refuse to comply with such request. which may include the use of its personnel. facilities and resources for the more resolute 598 effective immediately upon determination of probable cause shall be for a period of 20 days unless extended by the court 599 through conventions. all particulars necessary for the issuance of the order/processes f. for the freezing of any monetary instrument or property alleged to be the proceeds of any unlawful activity. 9. covered institution believed to have been any information which may be of assistance to the investigation e. agency or instrumentality of the government including government-owned and controlled corporations in undertaking any and all anti-money laundering operations. investigation/prosecution b. when: a. money laundering activities. bureau. in any manner or by any means. To institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General. 4. the viable means of preventing money laundering and the effective ways of prosecuting and punishing offender. and other violations of this Act.599 10. 5. other information 600 through nationwide information campaigns to heighten awareness of the public of their civic duty 186 . 7. 6. identity of said person d. To investigate suspicious transactions deemed suspicious after an investigation by the AMLC. it contravenes provision of Constitution b.or related to. However. the methods and techniques used in money laundering. To implement such measures as may be necessary and justified under the law to counteract money laundering. grounds c. the proceeds of an unlawful activity. To enlist the assistance of any branch. it prejudices national interest of the Philippines Requirements for requests for mutual assistance from foreign sates: a. To receive and take action in respect to any request from foreign states for assistance in their own anti-money laundering operations.600 11. resolutions & other directives of any organizations of which Philippines is a member. To apply before the Court of Appeals. To develop educational programs on the pernicious effects of money laundering. directly or indirectly.598 8. office. ex parte.

A. detection and investigation of money laundering offense and prosecution of offenders 12. Freezing of monetary instrument or property601 k. 7. when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity or a money laundering offense except that no court is needed for cases qualified by the law. j.prevention. promote and welcome productive investments from foreign individuals. partnerships. Foreign Investments Act 602 a. rules. Authority to inquire into bank deposits Inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of the law. including their political subdivisions. corporations. No. No. regulations and orders and resolutions. 2. 7042 187 . in activities which significantly contribute to national industrialization and socioeconomic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws. Functions. and governments. Foreign investments shall be encouraged in enterprises that significantly expand livelihood and 601 602 See i. Policy of the law It is the policy of the State to attract. To impose administrative sanctions for the violation of laws. supra R.

however.604 (2) "Doing business" in the Philippines Include soliciting orders. quality and volume of exports and their access to foreign markets. That the phrase "doing business: shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business. promote the welfare of Filipino consumers. As a general rule. industry and support services.603 b. participating in the management. 3 188 . entity or corporation in the Philippines. and any other act or acts that imply a continuity of commercial dealings or arrangements. and/or the exercise of rights as such investor. appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more. whether called "liaison" offices or branches. enhance economic value of farm products. opening offices. Foreign investments shall be welcome as a supplement to Filipino capital and technology in those enterprises serving mainly the domestic market. generating more employment for the economy and enhancing skills of Filipino workers. nor appointing a 603 604 Sec. Foreign owned firms catering mainly to the domestic market shall be encouraged to undertake measures that will gradually increase Filipino participation in their businesses by taking in Filipino partners. Definition of terms (1) Foreign investment Equity investment made by a non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange. foreigners can invest as much as one hundred percent (100%) equity except in areas included in the negative list. firm. 2 Sec. there are no restrictions on extent of foreign ownership of export enterprises. or the exercise of some of the functions normally incident to. and in progressive prosecution of. expand the scope. and contemplate to that extent the performance of acts or works. nor having a nominee director or officer to represent its interests in such corporation. electing Filipinos to the board of directors. supervision or control of any domestic business. implementing transfer of technology to Filipinos.employment opportunities for Filipinos. and/or transfer relevant technologies in agriculture. In domestic market enterprises. commercial gain or of the purpose and object of the business organization: Provided. service contracts.

as that term is defined in Section 3 a). That where a corporation and its nonFilipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise. as the case may be.607 c.representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. Ibid. The SEC or BTRCP.608 and not otherwise disqualified by law may upon registration with the Securities and Exchange Commission (SEC). That a non-Philippine national intending to engage in the same line of 605 606 Ibid. which shall process such application for registration in accordance with the criteria for evaluation prescribed in said Code: Provided. or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. 1 (k). Registration of investments of non-Philippine nationals Without need of prior approval. Implementing Rules & Regulations of the Foreign Investments Act of 1991 608 The term "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by citizens of the Philippines. where the trustee is a Philippine national and at least sixty (60%) of the fund will accrue to the benefit of the Philippine nationals: Provided. unless participation of non-Philippine nationals in the enterprise is prohibited or limited to a smaller percentage by existing law and/or limited to a smaller percentage by existing law and/or under the provisions of this Act. or a trustee of funds for pension or other employee retirement or separation benefits. at least sixty percent (60%) of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines. 607 Sec. That any enterprise seeking to avail of incentives under the Omnibus Investment Code of 1987 must apply for registration with the Board of Investments (BOI). in order that the corporations shall be considered a Philippine national. do business as defined in Section 3 (d) of this Act or invest in a domestic enterprise up to one hundred percent (100%) of its capital. shall not impose any limitations on the extent of foreign ownership in an enterprise additional to those provided in this Act: Provided. 189 .605 (3) Export enterprise An enterprise which produces goods for sale. however. a non-Philippine national. or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry in the case of single proprietorships. or renders service or otherwise engages in any business in the Philippines.606 (4) Domestic market enterprise An enterprise which produces goods for sale. finally. or renders services to the domestic market entirely or if exporting a portion of its output fails to consistently export at least sixty percent (60%) thereof.

and/or the penalties provided in Section 14 hereof. 5 Sec. 7 190 . as the case may be.609 d. particularly the Filipino partners therein. Export enterprises which are non-Philippine nationals shall register with BOI and submit the reports that may be required to ensure continuing compliance of the export enterprise with its export requirement. SEC shall disallow registration of the applying non-Philippine national if the existing joint venture enterprise. can reasonably prove they are capable to make the investment needed for they are competing applicant. Upon effectivity of this Act.business as an existing joint venture in his application for registration with SEC. BOI shall advise SEC or BTRCP.611 f. 6 611 Sec. failure to comply with such SEC or BTRCP order. Foreign Investment Negative List The Foreign Investment Negative List shall have three (3) component lists: A. shall subject the enterprise to cancellation of SEC or BTRCP registration. of any export enterprise that fails to meet the export ratio requirement.610 e. B. The SEC or BTRCP shall thereupon order the non-complying export enterprise to reduce its sales to the domestic market to not more than forty percent (40%) of its total production. and C: 609 610 Sec. Foreign investments in domestic market enterprises Non-Philippine nationals may own up to one hundred percent (100%) of domestic market enterprises unless foreign ownership therein is prohibited or limited by existing law or the Foreign Investment Negative List. without justifiable reason. SEC shall effect registration of any enterprise applying under this Act within fifteen (15) days upon submission of completed requirements. During the transitory period as provided in Section 15 hereof. Foreign investments in export enterprises Foreign investment in export enterprises whose products and services do not fall within Lists A and B of the Foreign Investment Negative List provided under Section 8 hereof is allowed up to one hundred percent (100%) ownership. A domestic market enterprise may change its status to export enterprise if over a three (3) year period it consistently exports in each year thereof sixty per cent (60%) or more of its output.

c) List C shall contain the areas of investment in which existing enterprises already serve adequately the needs of the economy and the consumer and do not require further foreign investments. such as the manufacture. Amendments to List B may be made upon recommendation of the Secretary of National Defense. and promulgated by Presidential Proclamation. lethal weapons. repair. explosives.000) are reserved to Philippine nationals. storage and/or distribution of firearms.000) are likewise reserved to Philippine nationals. unless they involve advanced technology as determined by the Department of Science and Technology. nightclubs. Upon petition by a Philippine national engage therein. as determined by NEDA applying the criteria provided in Section 9612 of this Act. Export enterprises which utilize raw materials from depleting natural resources. requiring prior clearance and authorization from Department of National Defense (DND) to engage in such activity. approved by the President and promulgated in a Presidential Proclamation. or the Secretary of Education. with a substantial export component. sauna and steambath houses and massage clinics. an area of investment may be recommended by NEDA for inclusion in List C of the Foreign Investment Negative List upon determining that it complies with all the following criteria: a) The industry is controlled by firms owned at least sixty percent (60%) by Filipinos. ammunition. Small and medium-sized domestic market enterprises with paid-in equity capital less than the equivalent of five hundred thousand US dollars (US$500. indorsed by the NEDA. c) Sufficient competition exists within the industry. to a non-Philippine national by the Secretary of National Defense. b) List B shall contain the areas of activities and enterprises pursuant to law: 1) Which are defense-related activities. such as the manufacture and distribution of dangerous drugs. with paid-in equity capital of less than the equivalent of five hundred thousand US dollars (US$500. Culture and Sports. beerhouses. or the Secretary of Health. pyrotechnics and similar materials. dance halls. unless such manufacturing or repair activity is specifically authorized. or upon recommendation motu proprio of NEDA. bars.613 612 Determination of Areas of Investment for Inclusion in List C of the Foreign Investment Negative List. or 2) Which have implications on public health and morals. approved by the President.a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws. military ordnance. b) Industry capacity is ample to meet domestic demand. 191 . all forms of gambling.

in the absence of such. 2013. 613 Sec. and are reasonably competitive in quality with similar products in the same price range imported into the country. and g) The prices of industry products are reasonable. 8 192 .INCLUDE: Pertinent Supreme Court decisions promulgated up to January 31. e) Quantitative restrictions are not applied on imports of directly competing products. d) Industry products comply with Philippine standards of health and safety or. with international standards. f) The leading firms of the industry substantially comply with environmental standards.