4B & 4C 2020-2021
Notes for Merc Rev 1
NOVEMBER 3, 2020
CORPORATE OFFICERS
Q: What are the revisions under the RCC
on corporate officers?
A:
1. The treasurer is required to be a
resident.
2. It requires the appointment of a
compliance officer for those
corporations vested with public
interest.
3. The provision on the determination of
quorum of directors or trustees for the
transaction of corporate business was
moved from Section 24 to Section 52
of the RCC. Likewise, the prohibition
on proxies during board meetings was
moved to Section 52 of the RCC.
4. The prohibition that one cannot act as
president and secretary or as president
and treasurer at the same time is now
subject to an exception – if the same
is allowed by in the RCC.
Q: Who are the statutory officers of the
corporation?
A: All corporations are required to have a
President, Secretary, and Treasurer. If the
corporation is vested with public interest, the
board should also appoint a compliance
officer.
The bylaws must also provide for other
officers or authorize the board of directors to
create offices.
Q: What are the qualifications of the
President, secretary, and treasurer?
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1. The President must be a director and
as such, should also be a stockholder.
He must not concurrently hold the
positions of Secretary or Treasurer.
2. The Secretary must be a citizen and
resident of the Philippines.
3. The Treasurer must be a resident.
4. All of them must also possess all of
the qualifications and none of the
disqualifications under the bylaws of
the corporation.
Thus, a provision in the bylaws that not all
officers are required to be stockholders is
void because the President, being required to
be a director, must also be a stockholder of
the corporation.
Q: May a foreigner be elected President,
Secretary, and Treasurer?
A: Only the Corporate Secretary is required
to be a Filipino citizen. The President,
Treasurer and other officers of the
corporation are not required to be citizens of
the Philippines, unless the corporation is
engaged in nationalized activities which are
reserved for Filipinos, in whole or in part, in
which case, the Anti-Dummy law prohibits
their appointment.
Under Section 2-A of the Commonwealth
Act. No. 108, as amended by Presidential
Decree No. 715 or the Anti-Dummy law,
citizens of foreign countries may not
intervene in the management, operation,
administration or control thereof, whether as
an officer, employee or laborer therein with
or without remuneration except for technical
personnel whose employment may be
specifically authorized by the Secretary of
Justice.
Q: What positions can be held
concurrently by the same officer?
A: The Chairman of the Board can also be the
President of the corporation except for

publicly listed companies. For publicly-listed
companies, the Chair and the Chief Executive
Officer should be held by separate
individuals and each should have clearly
defined responsibilities. This is intended to
avoid conflict or a split board and to foster an
appropriate balance of power, increased
accountability, and better capacity for
decision-making.
Q: May the Board of Directors create
positions and offices?
A: The Board can also create ordinary
positions, offices and even departments
under the Business Judgment Rule. However,
the board has no power to create corporate
officers without first amending the corporate
bylaws to include therein the newly created
office. Though the board may create
appointive positions, the persons occupying
such positions cannot be viewed as corporate
officers under Section 24 of the RCC.
Q: What is the repercussion or
significance of making a distinction
between a corporate office and non-
corporate office?
A: If it is a corporate officer, any issue about
his appointment or removal is an intra-
corporate dispute or controversy, which is
cognizable by the RTC.
If it is not a corporate officer, his removal is
a labor dispute cognizable by the Labor
Arbiter.
Q: What makes an officer a corporate
officer?
A: The test is simple: Are you holding on to
a bylaws position? Are you holding on to an
office enumerated in the bylaws of the
corporation? If yes, you are a corporate
officer; otherwise, you are not.
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Q: If the Board appoints you to be the head
of legal, but the legal department is not in
the bylaws of the corporation. Now, that
head of legal was removed. Where should
you go – the Labor Arbiter or the RTC?
A: You go to the Labor Arbiter because you
are not a corporate officer.
Q: What about if the bylaws allows the
Board to create offices and the Board,
pursuant to that authority, created the
office for legal and appointed the person to
occupy it. Thereafter, that person was
removed. Where should he go – the Labor
Arbiter or the RTC?
A: The Labor Arbiter because despite the
authority granted under the bylaws, the Board
cannot create a corporate office.
Q: When is that office that the Board
created be considered a corporate office?
A: Only if the bylaws is amended – to make
that office a newly-created corporate office.
At that point, if you appoint the person to
occupy it, and is removed, it becomes an
intra-corporate controversy.
Q: What is the significance is he is a
corporate officer?
A: It is not a question of which is more
important; it is a question of jurisdiction.
In this regard, in Matling Industrial and
Commercial Corporation, et. al. vs. Coros, it
was held that a position must be expressly
mentioned in the bylaws in order to be
considered as a corporate office. Specifically,
only the following are considered as
corporate officers: (1) President; (2)

Treasurer; (3) Secretary; and (4) such other
officers as may be provided for in the bylaws.
WESLEYAN UNIVERSITY-PHILIPPINES V.
MAGLAYA, SR. (2017)
 Accordingly, the corporate officers in the
context of Presidential Decree No. 902-
A, in relation to the SRC, are exclusively
those who are given that character either
by RCC or by the corporation’s bylaws.
 In other words, the creation of the
position is under the corporation’s charter
or bylaws and that the election of the
officer is by the directors or stockholders
must concur In order for an individual to
be considered a corporate officer, as
against an ordinary employee or officer.
It is only when the officer claiming to
have been illegally dismissed is classified
as such corporate officer that the issue is
deemed an intra-corporate dispute which
falls within the jurisdiction of the trial
courts.
FACTS:
 Maglaya was appointed President for a 5-
year term of Wesleyan University-
Philippines. Before the 5-year period
expired, he was removed.
 The argument of Wesleyan is that
Maglaya, even though he was President,
is only an employee of the corporation.
He is listed in the payroll of the
university, he is issued an ID of the
university and, to a certain extent, control
was exercised by the university over him
in terms of the results that he has to
accomplish and the means and methods
of accomplishing those objectives.
ISSUE: Is he a corporate officer? (YES)
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RULING: The Supreme Court said that he is
a corporate officer because his position is
required by law and likewise appearing in the
bylaws of the corporation.
Q: Is the Vice President required to be a
director of the corporation?
A: This is an SEC Opinion. The Vice
President need not be a director because there
are only 15 [directors] for a stock corporation
and you can have as many Vice Presidents
depending on the needs of the corporation.
However, the Vice President is required to be
a director only if he will take the place of the
President upon his retirement or
abandonment of office.
Q: When is the act of the officer of the
corporation considered the act of the
corporation and therefore, valid and
enforceable against the corporation?
A: The authority of certain individuals to
bind the corporation is generally derived
from law, corporate bylaws or authorization
by the board, either expressly or impliedly,
by habit, custom or acquiescence. Thus, the
act of the officer binds the corporation if he
is authorized by law, the bylaws or by the
board of directors, or if despite lack of
authority from any act of the three (3)
sources, his act is ratified by the corporation.
CITIBANK V. CHUA (1993)
 For instance, since the bylaws are a
source of authority for corporate officers
and agents of the corporation, and agents
of the corporation, a resolution of the
Board of Directors of Citibank appointing
an attorney in fact to represent and bind it
during the pre-trial conference of the case
at bar is not necessary because its bylaws
allows its officers, the Executing Officer

and the Secretary Pro-Term to execute a
power of attorney to a designated bank
officer clothing him with authority to
direct and manage corporate affairs,
including the appointment of legal
counsel.
 If the corporation is a defendant or a
plaintiff and attends pre-trial, the agent or
representative of the corporation must be
equipped with a Special Power of
Attorney to represent the corporation. If
he is a natural person, it must be a Special
Power of Attorney. If it is a corporation,
that authority comes by way of a board
resolution adopted by the Board,
confirming the authority of this lawyer to
represent the corporation and agree on
those points that have been taken up
during the pre-trial conference.
FACTS:
 The lawyer who represented Citibank in
this case was not equipped with a board
resolution. What he had was an
appointment from the Executive Officer
of Citibank Corporation.
ISSUE: Is that [appointment from the
Executive Officer] sufficient to authorize the
lawyer to represent the corporation? (YES)
RULING: It is sufficient because under the
bylaws of the corporation, that Executive
Officer is authorized to appoint the lawyer to
represent the corporation. Therefore, he
derives authority from the bylaws of the
corporation.
GREAT ASIAN SALES CENTER
CORPORATION V. COURT OF APPEALS
(2002)
 The board, on the other hand, as
previously discussed, has the power to
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designate the officer who will perform
specified acts on behalf of the
corporation.
 In one case, it was held that a board
resolution authorizing a corporate officer
to obtain a law includes the authority to
assign receivables to secure the loan if the
resolution empowers the officer to agree
to the terms and conditions of the loan
and to sign the implementing documents.
PEOPLE’S AIRCARGO AND WAREHOUSING
CO., INC. V. COURT OF APPEALS AND
SAÑO (1998)
 Even in the absence of authority from the
articles of incorporation and/or the
bylaws or from the board of directors, the
acts of the officer are binding on the
corporation if such acts are ratified by the
corporation, either subsequent thereto or
under the doctrine of apparent authority.
 The Supreme Court held that in the
absence of charter or bylaw provision to
the contrary, the president is presumed to
have the authority to act within the
domain of the general objectives of its
business and falls within the scope of his
usual duties, and even if a certain contract
is outside the usual powers of the
president, the corporation’s ratification of
the same and accordance of benefits
make it binding.
Q: What is the doctrine of apparent
authority?
A: The doctrine of apparent authority
provides that a corporation will be estopped
from denying the agent’s authority if it
knowingly permits one of its officers or any
other agent to act within the scope of apparent

authority and it holds him out to the public as
possessing the power to do those acts.
ADVANCE PAPER CORPORATION V. ARMA
TRADERS CORPORATION (2013)
 Apparent authority is derived not merely
from practice. Its existence may be
ascertained through (1) the general
manner in which the corporation holds
out an officer or agent as having the
power to act or, in other words, the
apparent authority to act in general, with
which it clothes him; or (2) the
acquiescence in his acts of a particular
nature, with actual or constructive
knowledge thereof, within or beyond the
scope of his ordinary powers. It is not the
quantity of similar acts which establishes
apparent authority, but the vesting of a
corporate officer with the power to bind
the corporation.
FACTS:
 The corporation purchased paper
products from the seller-corporation and
furnished a contract signed by the officers
of the buyer-corporation. At a certain
point, they were not paid. So the seller-
corporation sued the buyer-corporation.
 The buyer-corporation repudiated the
authority of those officers, saying that
they were not authorized by the board to
enter into those contracts.
ISSUE: Is the buyer-corporation bound by
the purchases made by those officers? (YES)
RULING: Those officers were entrusted
with the management of the corporation.
They are being clothed with apparent
authority by the corporation.
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TERP CONSTRUCTION CORPORATION V.
BANCO FILIPINO SAVINGS AND
MORTGAGE BANK (2019)
 Although an officer acts without, or in
excess of his actual authority if he acts
within the scope of an apparent authority
with which the corporation has clothed
him, by holding him out or permitting
him to appear as having such authority,
the corporation is bound thereby in favor
of a person who deals with him in good
faith in reliance on such apparent
authority, as where an officer is allowed
to exercise a particular authority with
respect to the business, or a particular
branch of its continuously and publicly,
for a considerable time.
FACTS:
 This case is about an issuance of a bond
by TERP Construction with a yield of
8.5%. One of the investors is Banco
Filipino. The SVP of TERP Construction
paid more than 8.5% interest. Those
payments were not objected to by TERP
Construction.
ISSUE: Can Banco Filipino enforce payment
of interest higher than the guaranteed yield?
(YES)
RULING: The Supreme Court said yes
under the Doctrine of Apparent Authority,
particularly because this SVP made payments
above the guaranteed yield and those
payments were recognized by the
corporation.
Q: Cite jurisprudence where the Supreme
Court applied the doctrine of apparent
authority.
A:

RURAL BANK OF MILAOR (CAMARINES
SUR) V. OCFEMIA, ET AL. (2000)
 When a bank, by its act failure to act, has
clearly clothes its manager with apparent
authority to sell an acquired asset in the
normal course of business, it is legal
obliged to confirm the transaction by
issuing a board resolution to enable the
buyers to register the property in their
names. It has a duty to perform necessary
and lawful acts to enable the other parties
to enjoy all benefits of the contract which
it had authorized.
FACTS:
 The manager sold a property and
acquired asset or property. The buyer
paid the purchase price and went to the
Register of Deeds to cancel the title of the
seller and to issue a new title to the buyer.
 The Register of Deeds required the
submission of a board resolution to
confirm the authority of the officer who
signed the Deed of Sale. He was given the
run around by the corporation until the
seller-corporation repudiated or did not
recognize the authority of the manager
who signed the deed of sale.
ISSUE: Is the corporation bound with the
sale entered into by the manager? (YES)
RULING: The Supreme Court said yes,
following the Doctrine of Apparent
Authority.
GAMES AND GARMENT CORPORATION V.
ALLIED BANKING CORPORATION (2015)
 A bank is liable to the seller who
transferred ownership of his property in
favor of its buyer after the seller relied on
the letter of the bank manager that the
buyer has an approved real estate loan
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which the bank and guaranteed that
subsequent releases from the loan would
be made directly to the seller, but the
manager released the loan instead to the
buyer who, however, failed to pay the
seller.
FACTS:
 The owner of a real property sold and
transferred title to the buyer on the
strength of a certification by Allied Bank
that the buyer has obtained a loan and that
loan is earmarked in favor of the seller as
payment for the purchase price.
 But, eventually, Allied Bank refused to
recognize the binding effect of that
certification signed by its manager.
 Allied Bank argues as follows: (1) That
certification is a guaranty and the bank is
not allowed by law to enter into a
guaranty agreement; and (2) even
assuming that it is not a guaranty, we did
not authorize the manager to sign that
certification.
ISSUES:
1. Is that certification a guaranty? (NO)
2. Is the manager authorized to sign the
certification? (YES)
RULING:
1. If the bank only certifies that there is
a loan granted and the loan is for this
particular transaction, it is not a
guaranty. So, the bank is not making
a promise or a commitment to pay. It
is just certifying a matter of fact.
2. This manager has been issuing
certifications to other clients. He has
been dealing with various customers
and clients. Therefore, so far as the
seller is concerned, this manager was
clothed with the power and authority
that let him to believe that he is

authorized to sign the certification on
behalf of Allied Bank.
ENGINEERING GEOSCIENCE, INC. V.
PHILIPPINE SAVINGS BANK (2019)
 The records of the case show no evidence
that the corporation authorized the
president to file a complaint and enter
into a compromise agreement on its
behalf. Neither was they any showing that
the corporate bylaws authorize its
President to do such acts. The
corporation’s grant of authority to the
President, however, falls under the
doctrine of apparent authority.
Furthermore, having availed of benefits
under the Compromise Agreement, the
corporation is estopped from repudiating
it.
TERP CONSTRUCTION CORPORATION V.
BANCO FILIPINO SAVINGS AND
MORTGAGE BANK (2019)
 Banco Filipino purchased a bond from
TERP Construction and relied on TERP
senior vice president’s apparent authority
to promise interest payments over and
above the guaranteed 8.5% considering
the SVP’s position in TERP. His apparent
authority was further demonstrated when
TERP paid Banco Filipino what the SVP
promised during the Bonds’ term.
Q: Cite jurisprudence where the Supreme
Court did not apply the doctrine of
apparent authority.
A:
PHILIPPINE RACE HORSE TRAINER’S
ASSOCIATION, INC. V. PIEDRAS NEGRAS
CONSTRUCTION AND DEVELOPMENT
CORPORATION (2015)
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 While in the absence of a charter or bylaw
provision to the contrary the president is
presumed to have authority, the
questioned act should still be within the
domain of the general objectives of the
company’s business and within the scope
of his or her usual duties. Here, the
corporation is an association is an
association of professional horse trainers
in the Philippine horse racing industry
organized as a non-stock corporation and
it is committed to the uplifting pf the
economic condition of the working sector
of the racing industry. It is not in its
ordinary course of business to enter into
housing projects, especially not in such
scale and magnitude so massive as to
amount to P101,250,000.00.
FACTS:
 The President of the corporation,
meaning Philippine Race Horse Trainer’s
Corporation, entered into a Housing
Project with Fil-Estate involving 101
million pesos. The contract was,
thereafter, taken over by Piedras Negras
Construction.
 After completion of the project, the
corporation refused to pay, arguing that
the President was never authorized to
enter into a Housing Project.
 Piedras Negras Construction banked into
the Doctrine of Apparent Authority – that
they have been led to believe by the
corporation that the President is
authorized to enter into that kind of
project on behalf of the corporation.
RULING: The Supreme Court did not apply
the Doctrine of Apparent Authority because
it is not related to the function of the
corporation.
NOTE: The Doctrine of Apparent Authority
WILL NOT apply if the transaction is not
related to the purpose of the corporation or

the transaction is not related to the function
of the officer of the corporation.
REPORT OF ELECTION OF
DIRECTORS, TRUSTEES AND
OFFICERS, NON-HOLDING OF
ELECTION AND CESSATION FROM
OFFICE
Q: What are the revisions under the RCC
relating to non-holding of election and
cessation from office?
A:
a. The non-holding of elections and the
reasons therefor shall be reported to
the SEC within 30 days from the date
of the scheduled election. The report
shall specify a new date for the
election, which shall not be later than
60 days from the scheduled date.
b. If no new date has been designated, or
if the rescheduled election is likewise
not held, the SEC may, upon the
application of a stockholder, member,
director or trustee, and after
verification of the unjustified non-
holding of the election, summarily
order that an election be held. The
SEC shall have the power to issue
such orders as may be appropriate,
including orders directing the
issuance of a notice stating the time
and place of the election, designated
presiding officer, and the record date
or dates for the determination of
stockholders or members entitled to
vote.
c. Should a director, trustee, or officer
die, resign or in any manner cease to
hold office, the secretary, or the
director, trustee or officer of the
corporation shall, within 7 days from
knowledge thereof, report in writing
such fact to the SEC.
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Q: What is the concept of emergency
quorum under the RCC?
A: Emergency quorum means that, in certain
cases, stock or membership represented in a
meeting called by the SEC may constitute a
quorum to elect directors of corporation even
though the number of shares or members
present is less than majority of the
outstanding capital stock or total members, or
the quorum required under the articles and
bylaws of the corporation.
For purposes of Section 25 of the RCC, the
attendants of the election, as summarily
ordered by the SEC, who are entitled to vote
shall constitute a quorum regardless of the
required number of attendants stated in the
Articles of Incorporation or bylaws of the
corporation.
This finds basis in the Section 25 of the RCC
that in case of non-holding of the election of
directors and no new date has been
designated, or it the rescheduled election is
likewise not held, the SEC may also
summarily order the holding of elections
should the reason for the non-holding of
election be found unjustifiable upon the
application of any stockholder or member.
Notwithstanding any provision of the articles
of incorporation or bylaws to the contrary,
the shares of stock or membership
represented at such meeting called by SEC
and entitled to vote shall constitute a quorum
for purposes of conducting an election.
DISQUALIFICATION OF
DIRECTORS, TRUSTEES OR
OFFICERS
Q: What are the revisions under the RCC
regarding disqualifications of directors,
trustees or officers?
A: Under the OCC, grounds for
disqualification were conviction by final

judgment of an offense punishable by more
than 6 years or violation of the RCC
committed within 5 years prior to election or
appointment. The RCC expanded and
qualified the grounds such that a person shall
be disqualified from being a director, trustee
or officer of any corporation if, within 5 years
prior to the election or appointment as such,
the person was:
a. Convicted by final judgment:
i. Of an offense punishable by
imprisonment for a period
exceeding 6 years;
ii. For violating the RCC; and
iii. For violating Republic Act
No. 8799, otherwise known as
“The Securities Regulation
Code”
b. Found administratively liable for any
offense involving fraudulent acts; and
c. By a foreign court or equivalent
foreign regulatory authority for acts,
violations or misconduct similar to
those enumerated in paragraphs (a)
and (b) above.
The foregoing is without prejudice to
qualifications or other disqualifications,
which the SEC, the primary regulatory
agency, or the Philippine Competition may
impose in its promotion of good corporate
governance or as a sanction in its
administrative proceedings.
To be a ground for disqualification, it is not
enough then that the violation of the RCC, be
committed within 5 years prior to election. It
is also required that there is a conviction by
final judgment.
Based on the language of the law, the
administrative liability may be imposed by
any government agency, different from the
SEC, as long as it is an offense involving
fraudulent act. The SEC, by itself, is
authorized to impose disqualification from
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being elected to the board, as a sanction in its
administrative proceeding.
Note that the bylaws may likewise provide
for grounds for disqualification.
Q: May the bylaws provide as a ground for
disqualification being a director or
stockholder of a competing corporation or
representing an interest in conflict with or
adverse to the corporation?
A: Yes, sound principles of corporate
management counsel against sharing
sensitive information with a director whose
fiduciary duty of loyalty may well require
that he disclose this information to a
competitive arrival. These dangers are
enhanced considerable where the common
director such as the petitioner is a controlling
stockholder of 2 of the competing
corporations. It would seem manifest that in
such situations, the director has an economic
incentive to appropriate for the benefit of his
own corporation the corporate plans and
policies of the corporation where he sits as
director.
GOKONGWEI, JR. V. SECURITIES AND
EXCHANGE COMMISSION, ET AL. (1979)
 Indeed, access by a competitor to
confidential information regarding
marketing strategies and pricing policies
of the corporation would subject the latter
to a competitive disadvantage and
unjustly enrich the competitor, for
advance knowledge by the competitor of
the strategies for the development of
existing or new markets of existing or
new products could enable said
competitor to utilize such knowledge to
his advantage.
FACTS:

 Gokongwei acquired shares of stock of
San Miguel Corporation enough for a
board seat. At the same time, he was the
owner of other corporations and
businesses that compete with San Miguel
Corporation.
 When San Miguel knew that Gokongwei
had acquired enough shares to be assured
of a board seat, San Miguel amended the
bylaws and disqualified any director of a
competing corporation – any person
owning more than 10% of a competing
corporation or any person who represents
an interest in conflict with or adverse to
the corporation.
ISSUE: Is that amendment to the bylaws
valid? (YES)
RULING: It is a valid provision and a valid
disqualification because the duty of loyalty
may be compromised if he sits in the board of
two (2) competing corporations. He may
appropriate an information and share it with
the other competitor corporations.
❖ Can you disqualify a person to be
elected to the board just because he
sits in the board of competing
corporations?
No, because it is not provided for in
the Corporation Code. Conflict of
interest is not a reason to disqualify
under the law, but a valid ground to
disqualify under the bylaws.
FFICERS
REMOVAL OF DIRECTORS OR
TRUSTEES
Q: What are the revisions under the RCC
on removal of directors or trustees?
A:
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a. The SEC is given the authority, motu
proprio, or upon verified complaint,
and after due notice and hearing, to
order the removal of a director or
trustee elected despite the
disqualification, or whose
disqualification arose or is discovered
subsequent to an election.
b. The removal of a disqualified director
shall be without prejudice to other
sanctions that the SEC may impose
on the board of directors or trustees
who, with knowledge of the
disqualification, failed to remove
such director or trustee.
Q: May a director or trustee be removed
from office? If yes, under what conditions?
A: Yes, a director or trustee may be removed
from office. The removal may be carried out
by the stockholders or the SEC.
Within the corporation, only stockholders or
members have the power to remove the
directors or trustees elected by them. The
board of directors or trustees may remove an
officer but not a director or trustee.
The removal of a director or trustee by the
stockholders or members is subject to the
following requisites:
a. There must be a previous notice of the
meeting to stockholders or members
and the procedures prescribed by the
RCC and bylaws must be followed;
b. The notice of the meeting must
specify the intention to propose the
removal of a director.
Note, however, that RCC does not require
that the name of the director proposed to be
removed be specified. Thus, it is enough to
include in the agenda that there is such an
intention to remove a director.

c. The removal must be approved by
stockholders representing at least 2/3
of the outstanding capital stock or by
at least 2/3 of the members entitled to
vote for non-corporation.
d. The removal may be with or without
just cause. However, if the removal is
intended to deprive the minority of
their representative, the removal has
to be with cause.
e. The vacancy brought about by the
removal of the director may be filled
at the same stockholders’ meeting
where the removal was effected as
long as this fact is similarly stated in
the agenda and notice of the said
meeting, or in a separate meeting
called for that purpose.
Note, however, that only a majority of the
outstanding capital stock of the corporation
must be present to have a quorum on the
election to be held to fill the aforesaid
vacancy.
The SEC may order the removal, after due
notice and hearing, of a director or trustee
who has been elected despite his
disqualification, or who disqualification
arose or is discovered subsequent to an
election.
Q: Henry is a board director in XYZ
Corporation. For being the “fiscalizer” in
the Board, the majority of the board of
directors want him removed and his
shares sold at auction, so he can no longer
participate even in the stockholders’
meetings. Henry approached you for
advice on whether he can be removed as a
board of director and stockholder even
without cause.
What is your advice? Explain “amotion”
and the procedure in removing a director.
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A: Henry cannot be removed by his fellow
directors. The power to remove belongs to
the stockholders. He can only be removed by
the stockholders representing at least 2/3 of
the outstanding capital stock in a meeting
called for that purpose. The removal may be
with or without cause except that in this case,
the removal has to be with a cause because it
is intended to deprive minority stockholders
of the right of representation.
He cannot likewise be removed as a
stockholder. Unlike in a non-stock
corporation where a member may be
removed for caused specified in the bylaws,
Philippine laws so not allow the removal of a
stockholder in a stock corporation.
Amotion is the premature ousting of a
director or officer from his post in the
corporation. 2016 BAR Exam
VACANCIES IN THE OFFICE OF
DIRECTOR OR TRUSTEE:
EMERGENCY BOARD
Q: What are the revisions under the RCC
on filling vacancies in the board of
directors or trustees?
A:
a. There are not fixed periods within
which the corporations must hold
their elections to fill vacancies in the
director or trustee positions, viz:
i. If the vacancy is due to term
expiration, the election shall
be held no later than the day
of such expiration;
ii. If the vacancy arises as a
result of removal by the
stockholders or members, the
election may be held on the
same day of the meeting
authorizing the removal.
However, this fact must be so

stated in the agenda and notice
of the said meeting;
iii. For all other cases, the
election must be held no later
than 45 days from the time the
vacancy arose.
b. The RCC also introduced the concept
of emergency board.
Q: What if Congress enacts a law saying
that all directors of a corporation who are
former Congressmen are disqualified
from continuing their director positions?
Does that need stockholders’ approval?
A: No.
Q: If the SEC would be the one to remove
a director, does that require authority or
approval of concerned stockholders?
A: No.
Q: What are the grounds or causes of
vacancy in the position of board director
or trustee?
A:
a. Vacancy in the position of director or
trustee may be due to expiration of
term, removal or increase in the
number of board seats; or
b. It may be due to resignation,
retirement, withdrawal, death,
abandonment or similar grounds,
other than those stated in the
preceding paragraph.
Q: Who may fill the vacancy?
A: The stockholders or the board of directors,
depending on the circumstances may fill the
vacancy.
The stockholders have the sole power to fill
the vacancy in the following cases:
a. The cause of the vacancy is the
expiration of term, removal of a
director or increase in the number of
board seats;
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b. The cause of the vacancy is not any of
the 3 grounds referred to above but
the remaining directors do not
constitute a quorum; and
c. The cause of the vacancy is not any of
the 3 grounds referred to above, the
remaining directors constitute a
quorum but the board of directors
referred the authority to fill the
vacancy to the stockholders.
The filling of vacancy by the stockholders is
subject to the notice and quorum
requirements under Section 24 of the RCC.
Non-voting shares are not included in the
computation of quorum because the election
of directors is outside the 8 cases where non-
voting shares are vested the right to vote.
The board of directors may fill the vacancy if
the following requisites are present:
a. The cause of the vacancy is due to any
ground other than expiration of term,
removal of director or increase in the
number of board seats; and
b. The remaining directors constitute a
quorum.
Q: Within what periods should the
vacancies be filed?
A:
a. If the vacancy is due to term
expiration, the election shall be held
no later than the day of such
expiration;
b. If the vacancy arises as a result of
removal by the stockholders or
members, the election may be held on
the same day of the meeting
authorizing the removal. However,
this fact must be so stated in the
agenda and notice of the said meeting.
c. For all other cases, the election must
be held no later than 45 days from the
time the vacancy arose.

It may not be amiss to point out that under the
RCC, any directorship or trusteeship to be
filled by reason of an increase in the number
of board of directors or trustees shall be filled
by an election at a regular or at a special
meeting of stockholders or members duly
called for the purpose, or in the same meeting
authorizing the increase of directors or
trustees is so stated in the notice of the
meeting.
At best, the election is conditional because
the SEC is yet to approve the amendment to
the articles of incorporation on increasing the
number of board seats.
Q: Who should fill the vacancy due to the
resignation of a hold-over director?
A: In the case of Valle Verde Country Club,
Inc. et. al. v. Africa, the Supreme Court ruled
that the resignation as holdover director will
not change the nature of the cause of the
vacancy which is due to the expiration of
director’s term. The term of a holdover
director has expired. The holdover period is
not part of his term. So, the cause of the
vacancy is not resignation but the expiration
of term. As such, the vacancy must be filled
by the stockholders in a regular or special
meeting called for the purpose pursuant to
Section 29 of OCC.
Q: Supposing that there are 15 directors in
the corporation and 10 of the 15 are
nominees of the controlling stockholder.
The controlling stockholder decided to sell
his shares to another investor. It is
customary for the buyer to require the
resignation of the nominees of the seller to
the board so that the buyer can nominate
his trusted allies or nominees in the
corporation.
If you have 10 [directors] who will resign,
you don’t have a quorum, right? You have
to call a stockholders’ meeting to fill the
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vacancies. Is there a way such that you
don’t have to call a stockholders’ meeting?
A: Yes, you can request that the resignation
be accepted on a staggered basis. You can
arrange it in such that the resignation shall be
made in staggered basis – 5 will resign and
after their resignation, 5 will come in and
after the 5 have been elected, the remaining 5
of the 10 who were supposed to resign will
then resign to pave the way for the election or
appointment of the remaining 5 to create the
15, as long as any given time you have a
quorum.
Q: If there are 15 directors and 7 died in a
plane crash. The [other] 8 called a meeting,
can the 5 out of the 8 vote to fill the
vacancy?
A: Yes, because the law says majority of the
remaining directors present until they have a
quorum. The law does not say majority of the
board to fill the vacancy – it says majority of
directors present if they have a quorum.
In simple words, majority of the quorum may
fill the vacancy, unless the bylaws provide
otherwise.
Q: What are the requisites to create an
Emergency Board?
A:
a. The vacancy prevents the remaining
directors from constituting a quorum;
b. Emergency action is required to
prevent grave, substantial and
irreparable loss or damage to the
corporation;
c. The vacancy may be temporarily
filled from among the officers of the
corporation;
d. The appointment must be made by the
unanimous vote of the remaining
directors or trustees; and
e. The action by the designation director
or trustee shall be limited to the
emergency action necessary, and the

term shall cease within a reasonable
time from the termination of the
emergency or upon the election of the
replacement director or trustee,
whichever comes earlier.
The corporation must notify the SEC within
three (3) days from the creation of the
emergency board, stating therein the reasons
for its creation.
COMPENSATION OF DIRECTORS
OR TRUSTEES
Q: What are the revisions on the provision
on compensation of directors or trustees?
A:
a. Section 29 of the RCC clarified that
directors or trustees shall not
participate in the determination of
their own per diems or compensation.
Q: Who then can determine the per diem
allowance of directors?
A: Either the stockholders or the bylaws or
the board of directors but the resolution of the
board on per diem should not apply to them.
b. It imposed an annual reportorial
requirement in relation to the total
compensation of each of the directors
or trustees for corporations vested
with public interest.
Q: Are directors or trustees entitled to
compensation for their services rendered
to the corporation in their capacity as
such?
A: As a general rule, directors or trustees are
not entitled to compensation in their capacity
as such, because they are supposed to render
their services to the corporation gratuitously,
and the return upon their shares adequately
furnishes the motives for service, without
compensation.
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In other words, the directors presumably have
significant equity stake in the corporation
since one generally cannot be elected to the
board unless he has sufficient number of
shares. The return on their equity is sufficient
motive or consideration for their work.
The exceptions to this rule are as follows:
1. The bylaws authorize the said
compensation; or
2. The stockholders representing at least
a majority of the outstanding capital
stock or a majority of the members
grant the directors or trustees with
compensation and approve the
amount thereof at a regular or special
meeting.
Q: “A” is the President of ABC
Corporation, a corporation vested with
public interest while X is a director and at
the same time Vice Chairman of the Board
with executive functions. The
Compensation Committee of the Board of
Directors fixed their compensation
package as President and Vice Chairman,
respectively. The Board of Directors
thereafter confirmed it. When their
compensation package was reported to the
stockholders during the regular meeting, a
stockholder representing minority interest
argues that the compensation is invalid
and irregular because it is not authorized
by the laws nor approved by the
stockholders. Is he correct?
A: He is not correct. The Supreme Court held
in Western Institute of Technology, Inc. et.
al. v. Salas, et. al., that the above proscription
against granting compensation to directors or
trustees of a corporation is not a sweeping
rule. The said provision itself delimits the
scope of the prohibition to the compensation
given to directors or trustees. The members
of the board may receive compensation, in
addition to reasonable per diems, when they

render services to the corporation in a
capacity other than as directors/trustees.
In sum, there are, therefore, 3 instances when
directors or trustees may receive
compensation, to wit:
a. The bylaws authorize the said
compensation, or
b. The stockholders representing at least
a majority of the outstanding capital
stock or a majority of the members
grant the directors or trustees with
compensation and approve the
amount thereof at a regular or special
meeting, or
c. They render services in their capacity
other than as directors or trustees,
even though the payment of
compensation is not authorized by the
bylaws of the stockholders.
Q: The Board of Directors adopted a
couple of resolutions, the first one
approving car and housing plans for the
board members and the second, fixing the
per diem allowance of directors to P35,000
for every board meeting. The board
resolutions shall be applicable to directors
who will be elected in the next
stockholders’ meeting. Are the resolutions
valid?
A: The first resolution is invalid. The housing
and car plan are considered forms of
compensation. They are to be given to
directors as a form of remuneration for their
services in their capacity as directors. These
require authority in the bylaws or approval by
the stockholders representing at least
majority of the outstanding capital stock in a
duly called stockholders meeting.
The second resolution is valid. The Board of
Directors may fix the directors’ per diem
allowance. The only conditions are the
amount must be reasonable and the directors
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must not participate in the determination of
their own per diem allowance.
Per diem (Latin term for each day) is a
specific amount a corporation or organization
gives an individual per day to cover living
expenses when traveling and attending board
meeting. The reasonableness depends on the
amount, the statute of the directors, the
income and size of the corporation, and other
related considerations. Per diem of P35,000
for every board meeting is deemed to be
reasonable.
Q: Is there a limit on the amount of
compensation of directors or trustees?
A: Yes, total yearly compensation if directors
shall not exceed 10% of the net income
before income tax of the corporation during
the preceding year.
Note that unlike the OCC, where the 10%
limit applies to the annual compensation of
directors or trustees, as such, the 10% limit
under the RCC does not make any such
qualification. It should, therefore, apply to all
forms of compensation for services rendered
by the directors or trustees to the corporation
in whatever capacity.
 4B & 4C 2020-2021
Notes for Merc Rev 1

i. The complainant must allege in the

NOVEMBER 5, 2020
complaint that the director or officer
assented to patently unlawful acts of
the corporation, or that the officer was
RECIT guilty of gross negligence or bad
faith; and
Q: The corporation adopted a resolution
ii. The complainant must clearly and
to authorize the purchase of a truck
convincingly prove such unlawful
needed for the business of the company.
acts, negligence, or bad faith.
The board likewise agreed and set the
terms of conditions of the proposed
Q: What if, let’s say, the corporation,
purchase. Its general manager signed the
unable to pay the purchase price, the seller
deed of sale. Pursuant to that resolution,
filed an action for collection against the
the corporation, through the general
corporation. It turns out that the
manager, purchased a truck.
corporation has no more leviable assets.
Unfortunately, it was not paid by the
Can the seller have a basis to file or to
corporation. So the seller filed an action
make the directors and corporate officers
for collection against the corporation, the
liable for the payment of the purchase
board of directors and the general
price?
manager who signed the deed on behalf of
A: No. The absence of any leviable assets of
the corporation. Who is/are liable for the
the corporation does not automatically make
payment of the purchase price?
the directors and corporate officers liable
A: Only the corporation is liable. Absent any
absent any gross negligence or bad faith on
gross negligence or bad faith on the part of
their part.
the board of directors and the general
manager, they cannot be held liable. The
Dean: The closure of business is not an act of
corporation is liable because it was a
bad faith that will make the officer liable with
corporate act duly approved by the board.
the corporation. Mere closure,
unaccompanied by bad faith or gross
Q: What are the conditions by which the
negligence, would not make the officers
general manager and the directors can be
liable with the corporation.
made liable with the corporation?
A: When the acts of the director or officer are
The liability of the directors is governed by
tainted with bad faith and negligence.
the RCC and not by the Labor Code.

Q: What are the requisites to hold these

directors/officers liable with the LIABILITY OF BOARD OF
DIRECTORS
corporation for gross negligence or bad
faith in directing the affairs of the
corporation? Slide: A corporation, as a juridical entity,
A: may act only through its directors, officers,

Page 16 of 351

and agents. Obligations incurred as a result of
the directors' and officers' acts as corporate
agents are not their personal liability but the
direct responsibility of the corporation they
represent.
As such, as a general rule, directors or
officers are not liable for any action taken on
behalf of the corporation. Girly G. Ico vs.
Systems Technology Institute Inc, et al.,
G.R. 185100, July 9, 2014.
Discussion: The acts of the agent were the
acts of the corporation and not the acts of the
corporate representatives.
Q: What are the instances when personal
liability may attach to directors, trustees,
or officers of the corporation?
A: A director, officer or trustee may be held
personally liable in the following cases:
a. Knowingly voting for or assenting to
patently unlawful acts of the corporation;
b. Gross negligence or bad faith in directing
the affairs of the corporation;
c. Acquiring any personal or pecuniary
interest in conflict with his duty as
director or trustee or officer resulting in
damage to the corporation; Section 30,
RCC.
d. He consents to the issuance of watered
stocks or who, having knowledge thereof,
does not forthwith file with the corporate
secretary his written objection thereto;
e. He agrees to hold himself personally
liable with the corporation; and
(Dean: Take note. He did not say that he
is solidary liable with the corporation. He
says he is personally liable with the
corporation.)
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f. He is made, by a specific provision of
law, to personally answer for his
corporate action.
Discussion: In all of these cases, the agent or
director is liable with the corporation.
Q: Explain each instance when personal
liability may attach to directors, trustees
or officers of a corporation.
A:
a. Knowingly voting for or assenting to
patently unlawful acts of the
corporation
It is not just to vote for, but to assent likewise
to, a patently unlawful act which makes a
director, trustee or officer personally liable. It
is not enough that the act is unlawful, it must
be a patently unlawful act, meaning without
doubt, whatsoever that the act is unlawful.
Discussion:
Q: What makes an act unlawful?
A: It is unlawful if there is a law declaring the
act to be unlawful.
Slide: In Carag vs. NLRC, the Supreme
Court ruled that what makes the act unlawful
is the existence of a law declaring the act to
be unlawful. Thus, the failure of a director or
officer to inform the Department of Labor
and Employment about the termination of an
employee due to authorized cause may affect
the legality of the termination but it will not
make the director or officer personally liable
because there is no law declaring such act to
be unlawful. The erring officer though may
be held liable though if such omission
amounts to gross negligence or bad faith.

The Supreme Court similarly held in Carag
vs. NLRC that the liability of the officers of
the corporation is not determined by the
Labor Code but by the Corporation Code,
particularly, sections 31 and 34 of the
Corporation Code (now Section 30, RCC).
Carag vs. NLRC, G.R. No. 147590, April
2, 2007.
Discussion: In this case, the issue is whether
or not the failure of a director/officer to
inform the DOLE about the termination of
the employee due to authorized cause.
The answer is no because there is no law
declaring such act to be unlawful. Therefore,
on the basis of such omission, that officer
cannot be held personally liable.
However, if the omission amounts to gross
negligence or bad faith, the officer shall be
liable.
b. Gross Negligence or Bad Faith in
Directing the Affairs of the
Corporation.
Directors, trustees and officers are not liable
for oversight, imprudence, or ordinary
negligence. They cannot be held liable just
because they erred in their business decision.
Under the business judgment rule, questions
of business policy and management are left to
the sound discretion of the board and they
cannot be held liable for any adverse
consequence of those decisions as long as
they acted in good faith and not contrary to
law. Balinghasay vs. Castillo, G.R. NO.
185664, April 8, 2015.
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They are not, after all, insurers of the
profitability of this corporation. Their
liability will attach under this ground only if
their acts amount to gross negligence or bad
faith in directing the affairs of the
corporation. Gross negligence is a
conscious, voluntary act or omission in
reckless disregard of a legal duty and of
the consequences to the other party. It is
one that is characterized by the want of even
slight care, acting or omitting to act in a
situation where there is a duty to act, not
inadvertently but willfully and intentionally
with a conscious indifference to
consequences insofar as other persons may
be affected. Parenthetically, gross or willful
negligence could amount to bad faith. Lucia
Magaling, et al. vs. Peter Ong, G.R. No.
173333, August 13, 2008.
Discussion: The standard to make them
liable is gross negligence or bad faith. They
are not liable for mere oversight, for
imprudence or ordinary negligence. They
cannot be held liable just because they made
a mistake in making a business decision.
They could not guarantee that their decisions
translate to profitability.
Slide:
However, before a director or officer of a
corporation can be held personally liable for
corporate obligations, the following
requisites must concur:
iii. The complainant must allege in the
complaint that the director or officer
assented to patently unlawful acts of
the corporation, or that the officer was

guilty of gross negligence or bad
faith; and
iv. The complainant must clearly and
convincingly prove such unlawful
acts, negligence, or bad faith. Heirs
of Fe Tan Uy vs. International
Exchange Bank, G.R. No. 166282,
February 13, 2013.
In Heirs of Fe Tan Uy vs. International
Exchange Bank, it was held that the President
of the corporation cannot be held personally
liable for gross negligence or bad faith if the
complaint merely averred that he signed as a
surety to secure the obligation of the
corporation, but which surety turned out to be
spurious.
Discussion: Since the surety agreement is
spurious, the same is void and cannot be
enforced against the President.
Q: So, can the corporation, now, the
lender, hold the president for bad faith
and gross negligence if the complaint
alleges only suretyship as the basis for the
liability?
A: The SC said you cannot make the
president liable for bad faith or gross
negligence because it is not alleged in the
complaint. What is alleged in the complaint
is the spurious suretyship agreement
The complaint must allege with particularity
the patently unlawful acts or gross
negligence.
Q: In another case, one was signed as a
marketing agent of a corporation to sell
water dispenser. He was able to get a
contract with ITCSI. He was entitled to the
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commission but he was not given the
commission. He sued the president and the
corporation for non-payment of
commission. Who is liable?
A: Only the corporation because there was no
allegation of bad faith or negligence on the
part of the president.
Slide: In one case, the Supreme Court
considered the corporation president's casual
manner, insouciance, and nonchalance, nay,
indifference, to the predicament of the
distressed corporation, as gleaned from his
court testimony, glaringly exhibited a
lackadaisical attitude from a top officer of a
corporation, a conduct totally abhorrent in the
corporate world constitute gross negligence
that will impute liability to the corporate
officer for corporate obligations. Thus, under
the circumstances, the investor who made
placement with the corporation could recover
the same from the grossly negligent officer.
Lucia Magaling, et al. vs. Peter Ong, ibid.
Relating to a criminal case, the Supreme
Court said that approval of a loan during the
incumbency as a director does not establish
probable cause absent showing of personal
participation in any irregularity as regards
approval of the loan. Presidential
Commission on Good Government vs.
Hon. Ma. Merceditas Gutierrez, G.R. No.
189800, July 29,2018.
It should be noted that the stockholders are
not included in the enumeration of persons
who may be held personally liable.
Stockholders are liable only to the extent of
their subscription unless they also act as
directors, officers, or agents of the

corporation. Donnina Halley vs. Printwell,
Inc., G.R. No. 157549, May 30, 2011.
Discussion:
Q: The question we asked earlier is the
case of Remo. In this case, the corporation
authorized the purchase of a truck
approved by the board through a
resolution implemented by an officer. Who
is liable to pay the purchase price?
A: Only the corporation, not the director and
the officer who implemented it.
Q: What if this time, the corporation lent
or granted a loan to a borrower. Let’s
assume that the corporation is
sequestered. Will the directors who
participated in the approval of the loan be
made liable?
A: The answer is NO if there is no irregularity
anyway as regards the approval of the loan
transaction.
Take note that you did not see in the
enumeration the stockholders. Directors,
officers, trustees, agent and no mention of the
stockholders because we are clear at the
outset that the liability of the stockholders
is limited to the extent of their subscription
to the corporation unless they are also
directors, officers, or agents of the
corporation.
c. Acquiring any personal or pecuniary
interest in conflict with their duty as
directors or trustees.
This conflict of interest must result in
damage to the corporation. In relation
thereto, the doctrine of corporate
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opportunity refers to a case when a director,
by virtue of his office, acquires for himself a
business opportunity which should belong to
the corporation, thereby obtaining profits to
the prejudice of such corporation. There is a
responsibility not just to account but to remit
to the corporation any profit he realized from
the venture.
Discussion: It is not enough that there is
conflict of interest. The conflict should result
in damage to the corporation.
Q: When do you know there is a conflict?
A: When you take a position adverse to the
corporation and that results in damage to the
corporation.
Q: What are the consequences when a
director acquires a business opportunity
that belongs to the corporation?
A: He is liable to account and remit profits
earned from that transaction.
d. Consenting to the issuance of watered
stocks.
Under Section 64 of the RCC, a director or
officer of a corporation who: (a) consents to
the issuance of stocks for a consideration less
than their par or issued value; (b) consents to
the issuance of stocks for a consideration in
any form other than cash, valued in excess of
their fair value, or (c) having knowledge of
the insufficient consideration, does not file a
written objection with the corporate
secretary, shall be liable to the corporation or
its creditors, solidarily with the stockholder
concerned for the difference between the
value received at the time of the issuance of

the stock and the par or issued value of the
same.
Discussion:
Q: What do you mean by watered stocks
again?
A: Watered stocks are those issued for an
amount lower than par value for a stock with
par value. What about no par value share? If
issued lower than the issued price as
approved by the board or the stockholders. It
is not correct to say that watered stocks are
issued for an amount lower than fair value.
You use fair value if the consideration in the
issuance of the stocks is property and the
property is valued in excess of the fair value.
In which case, the stocks issued are
accordingly watered.
Q: Liable to whom?
A: The corporation and the creditors of the
corporation.
Q: Why do you hold the director and the
subscriber liable and for what amount?
A: They are liable for the difference between
the par or issued price and the amount
actually received by the corporation,
They are liable to the creditors because of the
trust fund doctrine. The trust fund doctrine
says that the totality of subscriptions are
funds held in trust for the benefit of the
creditors.
e. Contractual Liability
If a director or officer makes himself
contractually liable with the corporation, is
he automatically liable solidarity? It depends
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on the nature of the agreement he entered to
secure the obligation of the corporation. If he
signs a surety agreement, he is liable
solidarity with the corporation. If it is a
guaranty agreement, he is liable subsidiarily
with the corporation because as a guarantor,
he has the right of excussion. However, if the
guaranty agreement waives the benefit of
excussion, then he is liable solidarily with the
corporation. It is thus clear that the
assumption of the corporation's liability does
not always translate to solidary liability. It
has to be read in conjunction with the
provisions of the Civil Code on guaranty.
In Security Bank and Trust Company vs.
Cuenca, the president signed a surety
agreement to secure the obligation of the
corporation. Thereafter, he lost his position
as he was not re-appointed. The Bank,
subsequently, extended the term of payment.
The question on the extent of liability of the
president cannot be resolved by corporation
law. Reference should be made to the
provisions of the Civil Code on guaranty.
Under the Civil Code, any material or
adverse change in the terms and conditions of
the principal contract made without the
consent of the surety or guarantor shall
release him from liability. Extension of term
is a material adverse change to the principal
contract. It was extended without his consent.
His consent could not be obtained as he was
no longer the president when the loan was
extended. He is consequently released from
liability under the law on guaranty. Security
Bank and Trust Company vs. Cuenca,
G.R. No. 138544, October 3, 2000.

f. Statutory liability for corporate act or
omission
There are cases when the law makes the
directors and officers liable for the
corporate act or omission. The general rule
is that directors, trustees, and officers can be
held criminally liable for acts or omission
done on behalf of the corporation only when
they are made by specific provision of law to
personally answer for their corporate act or
omission. If the offender is a corporation,
certain laws impose criminal liability on the
directors, officers, or even agents responsible
for the violation or offense. An example is 4
Presidential Decree 115 ("P.D. 115") or Trust
Receipts Law. Sia vs. People of the
Philippines, G.R. No. L-30896, April 28,
1983.
In Ching vs. Secretary of Justice, the
director/officer, who signed the trust receipt
agreement, did not receive the goods under
the trust receipt. He4 did not get the loan
himself nor derived any personal benefit
under the trust receipt transaction. The
Supreme Court said that these are not valid
justifications to negate his criminal liability
because it is the law that makes him liable for
the corporate act of violating the trust receipt.
The director or officer who signed the trust
receipts cannot, thus, hide behind the cloak of
the separate corporate personality of the
corporation. In the words of Chief Justice
Earl Warren, a corporate officer cannot
protect himself behind a corporation where
he is the actual, present, and efficient actor.
Ching vs. Secretary of Justice, G.R. No.
164317, 6 February 2006.
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In Edward C Ong, vs. the Court of Appeals
and the People of the Philippines, criminal
liability was imposed against the person who
signed the trust receipt agreement on behalf
of the corporation even though he is not a
director or officer of the corporation. It is
because under PD 115, or the Trust Receipts
Law, if the offender is a corporation shall be
imposed upon the director, officer, or any
person responsible for the violation. Edward
Ong vs. Court of Appeals and People of the
Philippines, G.R. No. 119858, April 29,
2003.
Discussion: If there is no law that make an
officer criminally liable, then there is no basis
to impose criminal liability.
In Ong v. CA, this time, an agent signed the
TR agreement. He is still liable even though
he is not a director or an officer because the
law is sweeping in making any person liable.
Q: A, B, C, are stockholders of ABC
Corporation. All of them have fully paid
their subscription except B. C is also a
director of the corporation. The
corporation experienced financial
difficulties and failed to pay its obligations
to various creditors. It eventually became
insolvent and closed business. It appears
that the company's financial woes were
due to the gross negligence and faith of the
directors, including C.
May the creditors of the corporation run
after A, B, and C?
A: They cannot hold A personally liable
because as a stockholder, A is liable only to

the extent of his subscription. They can
proceed against B up to the extent of his
unpaid subscription. C is solidarily liable
with the corporation for the payment of the
creditor's claims because of C's gross
negligence in directing the affairs of the
corporation. 1997 Bar Exam.
Of course, even if the law does not impose
liability upon directors or officers for the
corporate act omission, the officers of the
corporation, other than the board of
directors, can be made criminally liable for
their criminal acts if it can be proven that
they participated therein. Gregorio Singian,
Jr. vs. the Honorable Sandiganbayan and
the Presidential Commission on Good
Government, G.R. Nos. 160577-94,
December 16, 2005.
Discussion: There are two instances where
you can impose criminal liability upon
directors or officers:
1. If they are made liable for the act of
the corporation (PD 115 is an
example);
2. Even if there is no law that imposes
liability upon them, if they
themselves participated in the
commission of the criminal acts.
Slide: Labor disputes such as that of illegal
recruitment can also trigger the liability of
employees and employers. An employee of a
corporation, engaged in illegal recruitment
may be held liable as principal, together with
his employer, if it is shown that he actively
and consciously participated in illegal
recruitment because the existence of the
corporate entity does not shield from
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prosecution the corporate agent who
knowingly and intentionally causes the
corporation to commit a crime. The
corporation obviously acts and can act, only
by and through its human agents, and it is
their conduct which the law must deter. The
Executive Secretary, et al. vs. Court of
Appeals, et al., G.R. No. 131719, May
25,2004.
There is likewise jurisprudence that not only
persons who participated in the act can be
made criminally liable. Even those with
power to prevent the illegal act may be
held criminally liable. Thus, to be held
criminally liable for the acts of a corporation,
there must be a showing that its officers,
directors, and shareholders actively
participated in or had the power to prevent the
wrongful act. Securities and Exchange
Commission vs. Price Richardson Corp.,
et al, G.R. No. 197032, July 26, 2017.
Discussion: In this case of SEC v. Price
Richardson, it turns out that the corporation
is engaged in selling unregistered securities.
In paper, their purposes is legitimate because
they provided that they are engaged in the
business of admin and housekeeping
activities.
Q: Aside from the six circumstances
discussed above, is there any other ground
to hold a director or officer personally
liable for corporate acts or omission?
A: The abovementioned six circumstances
where a director or officer can be held
personally liable for corporate acts or
omission are exclusive.

In one case, Restaurante Las Conchas vs.
Llego, the Supreme Court held an exception
to the rule that officers and members of the
corporation are not personally liable for acts
done in the performance of their duties is
when the corporation is no longer existing
and is unable to satisfy the judgment in favor
of the employee. The officers in this case
should be liable for acting on behalf of the
corporation. There were also cases where the
Supreme Court held that if the records do not
clearly identify the "officer or officers"
directly responsible for the payment of
monetary benefits to the employees, the
president of the corporation, as the
responsible officer of the corporation, may be
ordered to respond personally in case of
closure of the corporation. These cases are
no longer controlling. As explained in
Carag vs NLRC, the Supreme Court said
that the liability of the director or officer is
determined not by the Labor Code but by
the provisions of the Corporation Code.
Just because the corporation has no
available leviable assets should not make
the directors or officers personally liable.
There ought to be any of the abovementioned
circumstances to make the officer or director
liable with the corporation.
The enumeration is therefore exclusive.
The six instances have been reiterated in
various cases without addition or
subtraction.
What about the application of the doctrine of
piercing the veil of corporate fiction where
the directors and officers are liable for the
debts of the corporation? This is not really an
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exception because when the corporate veil is
pierced, the director/officers become one
with the corporation. They cease to be
corporate representatives. They are no
longer being made liable for the act taken on
behalf of the corporation as the corporation
ceases to have a separate legal personality.
Besides, piercing the corporate veil assumes
gross negligence, bad faith, or breach of
fiduciary duties on the part of directors and
officers and as such, subsumed under the 2nd
circumstance as previously discussed.
Q: What do you understand by the special
fact doctrine?
A: It is a doctrine holding that a corporate
officer with superior knowledge gained by
virtue of being an insider owes a limited
fiduciary duty to a shareholder in transactions
involving transfer of stock. This duty arises
because of the superior knowledge the officer
holds by virtue of his or her position.
Discussion: This is different from insider
trading. Insider trading is buying or selling of
securities by an insider while in possession of
a material non-public information. The law
defines who are the insider.
Q: This special fact doctrine applies to a
corporate officer limited in scope not to all
insiders but only to a corporate officer who
secured knowledge gained by reason of
him being an insider, being an officer of
the corporation. So what is his duty? Does
he have duty, for example, to disclose such
information to all stockholders of the
corporation or to the public for that
matter?

A: He has no such obligation but he has the
duty to disclose if he is the one involved in
the transaction. If acquires information on
account of being a corporate officer and he is
a party to that transaction, he had the duty to
disclose the same in favor of the counterparty
in the transaction. So only if he is involved in
the sale transaction, he is required to disclose
but is not required to disclose any
information he knows about the corporation
to all stockholders unless it’s a public
company and any material benefit against the
company has to be disclosed to the public and
the SEC.
Q: What do you mean by self-dealing?
A: Basically, it is a transaction between the
corporation and its director or the corporation
and its officer.
Q: What are the revisions under the RCC
on self-dealing provision?
A:
a. It expands the coverage of self-dealing
provision to spouses and relatives within
the fourth civil degree of consanguinity
or affinity of the directors, trustees,
officers.
(Dean: The conditions or requisites that
should be complied with for a contract
between the corporation and its director,
officer, trustee should now apply even to
a contract between the corporation and
the relatives of director, officer, trustee
up to 4th degree of consanguinity.)
b. In the case of corporations vested with
public interest, material contracts are
approved by at least two-thirds (2/3) of
the entire membership of the board, with
at least a majority of the independent
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directors voting to approve the material
contract.
(Dean: The code has not defined yet what
are material contracts. It may be defined
by the corporation.)
Q: What is the legal status of a contract
between the corporation and any of its
directors, trustees or officers or their
related interest?
A: A contract of the corporation with one (1)
or more of its directors, trustees, officers or
their spouses and relatives within the fourth
civil degree of consanguinity or affinity is
voidable, at the option of such corporation,
unless all the following conditions are
present:
a. 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;
b. The vote of such director or trustee was
not necessary for the approval of the
contract;
c. The contract is fair and reasonable under
the circumstances;
d. In case of corporations vested with public
interest, material contracts are approved
by at least two-thirds (2/3) of the entire
membership of the board, with at least a
majority of the independent directors
voting to approve the material contract;
and
e. In the case of an officer, the contract has
been previously authorized by the board
of directors.
Where any of the first three (3) conditions set
forth in the preceding paragraph is absent, in
the case of a contract with a director or

trustee, 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 two-thirds (2/3) of the
members in a meeting called for the purpose:
Provided, That full disclosure of the adverse
interest of the directors or trustees involved is
made at such meeting and the contract is fair
and reasonable under the circumstances.
Under this provision, such a contract is
voidable at the option of the corporation,
meaning valid, until annulled by the
corporation. The option to void the contract
ceases if the foregoing requisites are duly
complied with.
Note further that the presence and vote of the
self-dealing director may be dispensed with
in lieu of the ratification by the stockholders
representing at least 2/3s of the outstanding
capital stock or at least 2/3s of the members
for a non-stock corporation in a meeting
called for the purpose. The condition that
cannot be dispensed with is that the contract
must be fair and reasonable under the
circumstances.
Discussion: It is voidable so valid until
annulled so it may be annulled by the
corporation. However, the option to declare it
void ceases if the aforementioned conditions
are present.
The one requirement that you cannot do away
with is that the contract is fair and reasonable
under the circumstances.
Q: ABC Corporation is engaged in the
business of manufacturing prime white
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cement. It entered into a contract with XX,
one of its directors, making him the
exclusive distributor of prime white
cement in the entire country. The contract
further stipulated that the price of the
cement is fixed at P9 pesos per bag for a
period of five (5) years. Is the contract fair
and reasonable under the circumstances?
Is it valid?
A: In the case of Prime White Cement
Corporation vs. IAC, the Supreme Court held
that the transaction is covered by the self-
dealing provision under the Corporation
Code. It is not valid because the contract is
not fair and reasonable under the
circumstances. There is no hard and fast rule
in determining whether the contract is fair
and reasonable under the circumstances,
hence the clause "under the circumstances."
In this case, the Supreme Court held that it is
not fair and reasonable because one cannot
fix the price of cement for a period of five (5)
years, considering the fluctuation of market
prices and nature of the commodity.
Another example is when a corporation hires
one of its directors to serve as legal counsel
to handle an important case for the
corporation. The director should recuse
himself in presence and voting. He can waive
his fees or charge less what he would
ordinarily charge other clients for similar
cases to fulfill the spirit against the rule on
self-dealing.
Q: Let’s say ABC Corporation and XYZ
Corporation entered into a contract and
they have the same directors or
interlocking directors. Can the contract

they entered into be invalidated on the fact
that they have interlocking directors?
A: No except in cases of fraud and the
contract is not fair.
Q: What is the legal status of a contract
between two corporations with
interlocking directors?
A: Except in cases of fraud, and provided the
contract is fair and reasonable under the
circumstances, a contract between two (2) or
more corporations having interlocking
directors shall not be invalidated on that
ground alone: Provided, That if the interest of
the interlocking director in one (1)
corporation is substantial and the interest in
the other corporation or corporations is
merely nominal, the contract shall be subject
to the provisions of the preceding section
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 other words, the mere fact that there is a
contract between two (2) corporations with
common directors is not a ground to
invalidate the said contract. However, the
contract must be fair and reasonable under
the circumstances and should not be tainted
with fraud.
Discussion: What does this mean? It means
that the corporation where the interest of the
director is nominal, it’s as if it is a contract
between the corporation and its director.
With respect to the corporation with the
interest is nominal, his presence is not needed
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for the quorum there and his vote is not
required to cover the contract or transaction
there. You can dispense with these 2
conditions upon approval of the 2/3 of the
outstanding capital stock of the other
corporation.
Q: When do you say that one is substantial
and the other one nominal?
A: More than 20% is substantial. Below is
nominal.
Q: What if both are substantial?
A: This rule will not apply. Meaning, you
don’t subject the other corporation to the
rules under Section 31.
Q: What if they are both nominal?
A: Again, those conditions under Section 31
will not apply.
DBP v. CA
Facts: DBP granted loan accommodations to
Marinduque Mining secured by mortgage on
the property of Marinduque Mining. Loan
was not paid. The bank foreclosed the
mortgage. Redemption right was not
exercised. Bank became the owner of the
foreclosed assets. After that, the bank set up
a new mining company called Nonoc Mining.
It assigned the foreclosed assets to Nonoc
Mining. It turns out that Marinduque Mining
purchased steel products from Remington
Steel and did not pay the purchase price.
Issue: Can Remington Steel, un unpaid seller
of Marinduque Mining, question the contract
of assignment of foreclosed assets between

DBP and Nonoc just because they have
common directors and officers?
Ruling: No. Only the corporations involved
having interlocking directors can question the
contract, not a third party. Remington as a
third party has no legal personality to
question the contract just because the two
corporations have common or interlocking
directors. It’s supposed to be the parties
which entered into the contract itself.
Q: Why do we have this rule? Why not
prohibit corporations from dealing with
another corporation if they have common
directors?
A: Because this is the reality of business. You
don’t farm out business to a competitor. You
farm out a business to an affiliate company, a
company where you have a common director
or you have a stake in.
NOTE: There are special laws which
prohibit contracts between corporations
having interlocking directors.
Examples: director of a bank and a quasi-
bank, director of an investment house,
director of 2 thrift banks.
Remember, except for these special cases,
there is nothing wrong if a person sits as a
director of 2 corporations (even competing
corporations subject to the provisions of the
corporation’s bylaws disqualifying a
stockholder from a competing corporation to
be a director).
Q: What is the so-called “doctrine of
corporate opportunity”? What is the
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underlying philosophy upon which such
doctrine rests?
A: The doctrine of corporate opportunity
means that if the director acquired for himself
a business opportunity that should belong to
the corporation, he must account to the
corporation for all the profits he obtained
unless his act was ratified by the stockholders
representing at least 2/3s of the outstanding
capital stock.
Under such doctrine, a director of the
corporation is prohibited from competing
with the business in which the corporation is
engaged in, as otherwise, he would be guilty
of disloyalty, where profits he may realize
will have to go to the corporate funds except
if the disloyal act is ratified. IENT vs. Tullett
Prebon, G.R. No. 189158, January 11,
2017
This doctrine rests fundamentally on the
unfairness, in particular circumstances, of an
officer or directql taking advantage of an
opportunity for his own personal benefit
when the interest of the corporation should
have been more paramount. 1985 and 2005
Bar Exams.
Under Section 33 of RCC, when a director
seized an opportunity belonging to the
corporation, there is an obligation to account
for and remit any profit he earned from that
venture or transaction. The obligation to
account and remit is not excused even if he
risked his own funds unless the act was
ratified by the stockholders representing
at least two-thirds (2/3) of the outstanding
capital stock.

Discussion: This doctrine has two facets:
1. The director should not compete with
the business of the corporation;
2. If there is a business opportunity
belonging to the corporation, he
should not take advantage of it. If he
does, he must account for any profit
earned from that venture and remit
the same to the corporation unless the
acts are ratified by the stockholders
representing at least 2/3 of the
outstanding capital stock.
Q: Is there any revision under the RCC
relating to Executive Committee?
A: In Section 34 of the RCC, a new paragraph
was added in relation to the power of the
board to create other special committees of
temporary or permanent nature and
determine the members' term, composition,
compensation, powers, and responsibilities.
Discussion: Take note that the board cannot
create a corporate office.
Q: What is an executive committee?
A: It is a committee that the board creates
pursuant to an authority granted under the
corporation's bylaws, composed of at least
three members of the Board, that can act on
matters falling within the board's
competence.
Discussion: Let’s dissect this. It is created
pursuant to an authority granted under the
corporation’s bylaws. Therefore, there ought
to be a provision in the bylaws on execom or
the bylaws authorized the board to create it.
Without the authority, there can be no legal
basis to create an execom that can act on
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matters falling within the board’s
competence.
An execom is basically a small board of
directors. A mini board of directors that can
act on matters that fall within the board’s
competence. Whatever the board can do, the
execom can also do. Because the board is
appointed or elected by the stockholders, then
only the stockholders have right to determine
or decide whether to create a small board of
directors. So, it is an adjunct or an extension
of the board.
Q: What’s the rational of the creation of
the executive committee?
A: Regular board meetings are often
conducted only once a month. There are
occasions where transactions require
corporate approval but cannot wait for the
Board to meet, given the urgency or the need
to make a prompt decision. The bylaws may
authorize the creation of an executive
committee, which is an adjunct or extension
of the board, that can act on matters falling
within the board's competence.
Q: Who may create the executive
committee?
A: The executive committee is created by the
bylaws. Once created, the board may fill the
composition of the committee. As the power
to adopt bylaws is lodged with the
stockholders, by parity of reasoning, only
the stockholders may decide to create a
committee that will serve as an adjunct or
extension of the board of directors or a
mini-board of directors.
However, the board can create a committee
and name it "executive committee" as long as

it will not perform the functions of the
executive committee referred to in Section 34
of RCC. Otherwise, only the bylaws may
authorize its creation. Filipinas Port
Services Inc. vs. Go, G.R. No. 161886,
March 16,2007.
Q: Who appoint the members of the
execom?
A: The board.
Q: The execom is composed of how many
members?
A: At least 3 members. There is no maximum
number, only a minimum number for the
members of the execom.
Q: Why is it that there is no maximum
number of members?
A: Because if the purpose of the execom is to
be a small board, then obviously the members
of your execom cannot be more than 15 (take
note of the maximum number of directors
provided by the RCC).
Q: What are the powers of the executive
committee?
A: Generally, the executive committee can do
almost all the authorized acts of the board
under the RCC, except for the following:
a. any corporate act requiring stockholders
approval;
b. filling of vacancies in the board;
c. amendment or repeal of bylaws, or the
adoption of new bylaws;
d. amendment of a board resolution, which
by its express terms is not amendable or
repealable; and
e. distribution of cash dividends to
shareholders.
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It should be clear that the executive
committee cannot also approve stock
dividends since the said act requires
stockholders' approval.
Discussion:
Q: What about stock dividends? Can the
execom allow the issuance of stock
dividends?
A: No, even though letter e only says stock
dividends. Execom cannot approve stock
dividends because it will fall under letter a.
Q: On letter d, does it mean that a board
resolution cannot be amended or repealed
by subsequent resolution?
A: The answer is NO because a board
resolution cannot be permanent. It can be
modified, repealed, amended by subsequent
resolution. Otherwise, then you emasculate
the power and the functions of the new board
of directors. What this section means is that
the execom cannot ament a board resolution
which by express terms the board does not
want to be amended or repealed. Now, if
there is no such prohibition, then the execom
can amend the board resolution.
Q: Pursuant to its Bylaws, Soei
Corporation's Board of Directors created
an Executive Committee to manage the
affairs of the corporation in between
board meetings. The Board of Directors
appointed the following members of the
Executive Committee: the President,
Sarah L; the Vice President, Jane L; and,
a third member from the board, Juan
Riles. On December 1, 2013, the Executive
Committee, with Sarah L and Jane L

present, met and decided on the following
matters:
a. purchase of a delivery van for use in the
corporation's retail business;
b. declaration and approval of the
13thmonth bonus;
c. purchase of an office condominium unit
at the Fort; and
d. declaration of P10.00 per share cash
dividend.
Are the actions of the Executive
Committee valid?
A: The actions of the Executive Committee
are valid except for the declaration of cash
dividends which is an act that cannot be
delegated by the Board of Directors to the
Executive Committee pursuant to Section 34
of the RCC.
NB: The answer is on the assumption that: a)
the Vice President is also a director because
only board directors can be appointed as
regular and voting members of the Executive
Committee; and, b) that it is the bylaws that
created the Executive Committee and the
Board is simply authorized under the bylaws
to appoint the members.
POWERS OF CORPORATIONS
Q: What are the revisions under the RCC
on corporate powers?
A:
a. As previously discussed, corporations
under the RCC may have perpetual
existence.
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b. Corporations are now expressly allowed
to enter into a partnership, joint venture,
or any other commercial agreement with
natural and juridical persons.
c. It appears that there is no more
prohibition for domestic corporations to
donate in favor of a political party or
candidate.
Q: What are the classifications of
corporate powers and capacity?
A: The powers of a corporation can be
classified as follows:
a. Express powers - those which are
expressly granted under the RCC and
those embodied in the corporation's
articles of incorporation, as sanctioned by
the State
b. Implied or incidental powers - these are
the corporation's "powers, attributes and
properties…incident to its existence",
which may be "essential or necessary to
carry out its purpose or purposes as stated
in its articles of incorporation."
Corporate Powers: Ultra Vires Acts,
SEC-OGC Opinion No. 20-09, August
4, 2009.
(Dean: There can be no enumeration of
implied powers. It is implied because it is
necessary for the purpose of the
corporation.
If there is a power to obtain a loan, does
the corporation also have the power to
sign documents through its agent?
Obviously, the answer is yes. The power
to sign documents is implied from the
power to obtain a loan.)

c. Inherent powers - those which are not
expressly stated but are deemed to be
within the capacity of corporate entities.
Incidental powers are also called inherent
corporate powers and include those
which a corporation can exercise by the
mere fact of its corporate existence, such
as:
a. Right to succession
b. Right to have a corporate name
c. Right to adopt its own bylaws
(Dean: In our code, the inherent powers are
also express powers. Every corporation has
the right of succession, the right to adopt
bylaws, the right to adopt a corporate name.)
The inherent powers of the corporation are
also included in the enumeration of express
powers under Section 35 of the RCC.
Acts outside these powers are ultra vires
acts. The statutory provision prohibiting
them is Section 44 of the RCC.
Discussion: If the acts are ultra vires, they are
not enforceable against the corporation. For
an action to be valid and binding against the
corporation, it must be consistent with and
not contrary to the express, implied or
inherent powers of the corporation.)
Q: Give examples of implied or incidental
powers.
A: In the case of National Power Corporation
vs. Vera, the stevedoring services which
involve the unloading of the coal shipments
into the NPC pier for its eventual conveyance
to the power plant were considered as
incidental and indispensable to the operation
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of the plant. The Court ruled that "a
corporation is not restricted to the exercise of
powers expressly conferred upon it by its
charter, but has the power to do what is
reasonably necessary or proper to promote
the interest or welfare of the corporation".
National Power Corp. vs. Vera, G.R. No.
83558, Third Division, February 27, 1989,
J. Cortes.
Discussion: In this case, the question is
whether NAPOCOR can hire its own
stevedores? The SC said that NAPOCOR has
no power to engage stevedores and it is not
consistent to its purposes. However, in this
case, the hiring of the stevedore is for the
purpose of unloading the coal shipments into
the pier and for transmission to the power
plant. This, therefore, is incidental to the
operation of the plant. Therefore, implied
from the power of the corporation. This is the
case where the SC said that the powers of the
corporation are not restricted to what appears
in the articles of incorporation.
The ultimate test is “Is that act or transaction
related to the purpose of the corporation?
Incident to the purpose of the corporation?
Germane to the purpose of the corporation?”
The purpose is what you see in the articles of
incorporation. If the answer is yes, then the
act is binding and enforceable.
Slide: Also, in the case of Teresa Electric &
Power Co., Inc. vs. Public Service
Commission and Filipinos Cement
Corporation in interpreting a provision found
in respondent corporations articles of
incorporation authorizing the corporation to
perform any and all acts connected with the

business of manufacturing portland cement
or arising therefrom or incidental thereto, the
Supreme Court concluded that the
corporation must be deemed authorized to
operate and maintain an electric power plant
exclusively for its own use in connection with
the operation of its cement factory in a remote
barrio. The Supreme Court found that the
operation of such plant was necessarily
connected with the business of
manufacturing cement. Teresa Electric &
Power, Co., Inc. vs. Public Service
Commission, G.R. No. L-21804,
September 25, 1967.
As a practical example, a corporation which
is expressly allowed by its articles of
incorporation to obtain a loan is impliedly
authorized to sign, execute and deliver
documents and perform other acts necessary
to carry out the loan transaction.
Q: What is the theory of general capacity?
A: Under the theory of general capacity, a
corporation holds such powers which are not
prohibited or withheld from it by general
laws.
The general powers of a corporation are
enumerated under Section 35 of the RCC, to
wit:
a. To sue and be sued in its corporate name;
b. To have perpetual existence unless the
certificate of incorporation provides
otherwise;
c. To adopt and use a corporate seal;
(Dean: a corporate seal is used to identify
the documents of the corporation. There
are two provisions on corporate seal: this
one (Sec. 35) and the provision on stock
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certificate that it shall bear the corporate
seal. However, the lack of corporate seal
in the stock certificate does not invalidate
the document.)
d. To amend its articles of incorporation in
accordance with the provisions of the
RCC;
e. To adopt bylaws, not contrary to law,
morals or public policy, and to amend or
repeal the same in accordance with the
RCC;
f. In case of stock corporations, to issue or
sell stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of the RCC and to admit
members to the corporation if it be a
nonstock corporation;
g. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and
personal property, including securities
and bonds of other corporations, as the
transaction of the lawful business of the
corporation may reasonably and
necessarily require, subject to the
limitations prescribed by law and the
Constitution;
h. To enter into a partnership, joint venture,
merger, consolidation, or any other
commercial agreement with natural and
juridical persons;
(Dean: This is something new. Before
corporations can only enter into joint
ventures. Now, they can enter into
partnerships.)
i. To make reasonable donations, including
those for the public welfare or for
hospital, charitable, cultural scientific,
civic, or similar purposes: Provided, That
no foreign corporation shall give

donations in aid of any political party or
candidate or for purposes of partisan
political activity;
(Dean: This is our basis for saying that
domestic corporations are not allowed to
give donations to political parties or for
purposes of partisan political activity.
The prohibition is only for foreign
corporations.)
j. To establish pension, retirement, and
other plans for the benefit of its directors,
trustees, officers, and employees; and
k. To exercise such other powers as may be
essential or necessary to carry out its
purpose or purposes as stated in the
articles of incorporation.
RECIT
Q: Let’s say, a director and stockholder of
the corporation introduced improvements
on the property of the corporation. Let’s
say he constructed a restaurant on the
property of the corporation. Juan dela
Cruz representing the majority of the
stockholders or let’s say a majority
stockholder filed an action against the
director-stockholder to remove the
improvements on the property of the
corporation. Is that suit valid?
A: No. There is no board resolution allowing
the suit. The property is the property of the
corporation and not the property of the suing
stockholder.
Q: Can he sue by way of derivative suit?
A: No because he must sue on behalf of the
corporation. Furthermore, only the minority
stockholder can file derivative suit.
Dean: Now we have two remedies:
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1. To sue pursuant to a board resolution;
and
2. To file a derivative suit.
The remedy of the majority stockholder is to
cause the board to adopt a resolution to
authorized the filing of a legal action on
behalf of the corporation. Derivative suit is a
last resort. Board resolution must take
precedence before filing a derivative suit.
This is consistent with what we are saying
that the power to sue and be sued is lodged
with the board of directors. If the BOD,
majority of them, are the ones who
committed the wrongful acts, then the
minority on behalf of the corporation can
now file a derivative suit in the name and for
the benefit of the corporation to enforce the
corporate right or cause of action.
LECTURE
Q: Discuss the specific powers of the
corporation under the theory of general
capacity.
A:
a. Power of a Corporation to Sue and Be
Sued in its Corporate Name
Under Section 35 of the RCC, read in relation
to Section 22, it is clear that where the
corporation is the injured party, the power to
sue is lodged with the board of directors or
trustees. Thus, in the absence of proof that
he was authorized by the board, a minority
stockholder and member of the board had
no authority to sue (for violation of BP 22)
on behalf of the corporation unless he is
suing on a derivative cause of action. Tam

Wing Talk vs. Makasiar, G.R. No. 122452,
January 29, 2001.
It is also not lodged with the President of the
corporation. In one case, it was held that a
derivative suit should not prosper if it is filed
by the president, not authorized by the
corporate shareholder for whose benefit the
shares are held. Nora Bitong vs Court of
Appeals, G.R. No. 123553. July 13, 1998.
The corporate power to sue and be sued
commences upon the issuance by SEC of the
certificate of incorporation. This power, as
previously pointed out, is exercised by the
board of directors. The physical acts of the
corporation, like the signing of documents,
can be performed only by natural persons
duly authorized for the purpose by corporate
bylaws or by a specific act of the board.
Absent the said board resolution, a petition
may not be given due course. Ligaya
Esguerra vs. Holcim Philippines, Inc.,
G.R. No. 182571, September 2, 2013.
If the real party in interest is a corporate body,
an officer of the corporation can sign the
certification against forum shopping so long
as he has been duly authorized by a resolution
of its board of directors. It was held that the
lower court did not commit grave abuse of
discretion in dismissing the petition for lack
of authority of the officer who signed the
certification of non-forum shopping in
representation of petitioner corporation. San
Miguel Bukid Homeowners Association,
Inc. vs. City of Mandaluyong, et al., G.R.
No.153653, October 2, 2009; Republic of
the Philippines vs. Coalbrine International
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Philippines, et al., G.R. No. 161838, April
7, 2010.
In the case of Maranaw Hotels and Resort
Corporation vs. Court of Appeals , G.R. No.
149660, First Division, January 20, 2009, ,
the Supreme Court ruled that the lawyer who
signed the pleading, verification and
certification against forum shopping must
be specifically authorized by the Board of
Directors of the Corporation to make his
actions binding on his principal. Similarly,
a petition filed, and the accompanying
certification against non-forum shopping
signed, by the Chief Legal Counsel and one
of the controlling stockholders of the
corporation is not valid unless he is
authorized by the board. Philippine Rabbit
Bus Lines vs. Aladdin Transit
Corporation, G.R. No. 166279, June 30,
2006.
Under the Revised Rules of Civil Procedure,
the authorization of the affiant to act on
behalf of a party, whether in the form of a
secretary's certificate or a special power of
attorney, should be attached to the
pleading. Failure to comply with the
foregoing requirements shall not be curable
by mere amendment of the complaint or other
initiatory pleading but shall be cause for
dismissal of the complaint without prejudice,
unless otherwise provided, upon motion and
after hearing. Rule 7, Section 5 of the
Revised Rules of Procedure, AM No. 19-
1020-SC (which took effect on May 1,
2020)
Cases abound that board resolution on the
authority of the agent of the corporation may

be dispensed with if the verification and
certification against forum shopping is signed
by the following corporate officers:
a. Chairperson of the Board of Directors;
b. President;
c. General Manager;
d. Personnel Officer; or
e. Employment Specialist in labor case.
The reason they can sign the verification and
certification even without approval is that
these officers are in the position to verify the
truthfulness and correctness of the allegation
in the petition.
It is not settled yet whether the jurisprudence
on the authority of the foregoing officers to
sign the initiatory pleading and certification
against non-forum shopping even without the
supporting board resolution ceases to apply
in view of the foregoing revision in the Rules
of Civil Procedure. The author believes that
such jurisprudence should be deemed
superseded by the new rules. While these
officers are in the position to certify as to the
accuracy and truthfulness of the allegations
of the initiatory pleading, it does not
necessarily mean that they have been
authorized by the board to initiate the legal
action and verify the pleading accordingly.
For practitioners, it is also better to err in the
side of caution.
The only instance that board resolution is not
necessary in filing legal action on behalf of
the corporation is through a derivative suit. A
derivative suit is an action filed by a minority
stockholder in the name and on behalf of the
corporation to enforce a corporate right or
cause of action against the directors and
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officers who committed a wrongful act
against the corporation. Obviously, the
directors who committed the wrongful act,
being in control of the corporation, are not
expected to adopt a resolution to authorize
the filing of legal action to nullify their very
own acts. To require a board resolution on the
part of the suing stockholder will render
illusory the right of a stockholder to file a
derivative suit. In Tan Wing Talk case, it was
also held that the minority stockholder could
have sued on a derivative cause of action but
he must allege and comply with the
conditions for a derivative suit.
Discussion: If the corporation wants to sue,
it needs the approval of the board of directors.
The board shall authorize likewise the person
who shall sign the pleadings and the
complaint or petition on behalf of the
corporation. If there is no board resolution
attached to the complaint, it will result to the
dismissal of the complaint or petition.
The exception is a derivative suit. A
derivative suit does not need a board
resolution. In fact, to require board resolution
on derivative suit is to render illusory the
power of the minor stockholder to file such
suit on behalf of the corporation.
Q: What is the essence of derivative suit?
A: The corporation is the aggrieved party.
The ones who performed the wrongful acts
are the majority directors and/or corporate
officers or the ones who are in control of the
corporation. They refused to act on these
wrongful acts so someone has to act on behalf
of the corporation to enforce a corporate right
or a cause of action by filing that suit on

behalf of the corporation to seek redress for
the corporation.
In Ago v. Agro Realty, only the minority can
file derivative suit. The remedy of majority of
stockholders to cause the board to issue a
board resolution to authorize the filing of the
suit.
Derivative suit is only a last resort.
Q: A minority stockholder filed a
derivative suit on behalf of the corporation
to question the acts of the management on
the part of the board and the corporate
officers. The board convened and passed a
resolution instructing the counsel of the
corporation to cause the dismissal of the
derivative suit on the ground that it is not
authorized by the board. Would you grant
the motion to dismiss?
A: No. You will deny the motion to dismiss
because you cannot subject a derivative suit
to the approval of the board. It does not
require any board approval. Otherwise, you
render illusory or meaningless the right of the
stockholder to file derivative suit.
There is one case where the SC that board
resolution is need to file derivative suit. It is
because the stockholders suing is a corporate
stockholder. So, if the plaintiff is a corporate
stockholder, then you need a board resolution
from the corporate stockholder, not the board
resolution of the corporation whose acts of
the board you are questioning.
There are cases where the SC said certain
officers can sign a petition or complaint on
behalf of the corporation even without board
resolution. These officers are: (1) chairman;
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(2) President; (3) General Manager (4)
Human Resource Officer; and (5)
Employment specialist in labor cases.
Why is it they can sign the complaint or
petition even without board resolution?
Because by reason of the nature of their
position, they are deemed to be familiar with
the affairs of the corporation and therefore,
can certify as to the accuracy in the complaint
or petition.
HOWEVER, under the Revised Rules of
Procedure, the authorization of the affiant to
act on behalf of the party in the form of a
secretary certificate or a special power of
attorney should be attached to the pleading.
This procedure should supersede the
jurisprudence.
b. Power of the Corporation to Have
Perpetual Existence
As previously discussed, unlike the OCC
which prescribed a maximum corporate term
of 50 years unless extended, corporations are
now expressly allowed to have perpetual
existence unless their certificate of
incorporation provides otherwise.
c. Power of the Corporation to Issue or
Sell Stocks to Subscribers
The power of the corporation to issue stocks
includes the authority to set the terms and
conditions of the issuance. These may
include terms and dates of payment.
Ordinarily, the 25% payment requirement for
subscription only applies in case of an
increase of capital stock. The corporation,

however, by stipulation, may require that
25% of the subscription be likewise paid
upon issuance of the shares and the balance
on a specified date.
It may also do a stock split and reverse stock
split. A stock split is when the corporation
decides to increase the number of shares
outstanding by issuing more shares to
current stockholders. For example, in a 2:1
stock split, an additional share is given for
each share held by a shareholder. A reverse
stock split is when the company decreases
the number of shares outstanding in the
market by cancelling the current shares
and issuing fewer new shares based on a
predetermined ratio. For example, in a 2:1
reverse stock split, a company would take
every two shares and replace them with one
share.
Various other options may be exercised
regarding the issuance of shares as long as
they don't violate the rights of the
stockholders.
d. Power of Corporation to Deal with
Properties
The RCC expressly allows corporations "to
purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage, and
otherwise deal with such real and personal
property, including securities and bonds of
other corporations. This, however, is subject
to the following limitations:
i. It must be in furtherance of the
purpose for which the corporation
was organized.
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ii. It is subject to Constitutional
limitations:
a. Corporations cannot acquire
public lands except by lease,
for a period not exceeding 25
years, renewable for not more
than twenty-five years, and
not to exceed one thousand
hectares in area.
b. Only corporations at least
sixty per centum of whose
capital is owned by Filipino
citizens can acquire private
lands.
iii. It is subject to the provisions of
special laws such as the Bulk Sales
Law, Philippine Competition Act,
and other related laws.
Discussion: The dealing of property must
satisfy one test. The ultimate test is “Is it
related to the purpose of the corporation? Is it
necessary and convenient to the purpose of
the corporation?”
You cannot buy a property because you want
it. It has to be related to the purpose of the
corporation.
Other related laws include the General
Banking Act.
e. Power of Corporation to Enter into
Commercial Agreement with Natural
and Juridical Persons
Another significant revision under the new
law is the express grant of power to
corporations to enter into any commercial
agreement, including but not limited to
 4B & 4C 2020-2021
Notes for Merc Rev 1

partnership, joint venture, merger, 9. To make reasonable donations,

consolidation.
It shall be noted that under Section 36 of the
OCC, corporations were expressly allowed to
only enter into merger or consolidation with
other corporations as a form of corporate
combination.
In the past, jurisprudence is replete with cases
prohibiting a corporation from entering into a
partnership contract.
including those for the public welfare
or for hospital, charitable, cultural,
scientific, civic, or similar purposes:
Provided, That no corporation,
domestic or foreign, shall give
donations in aid of any political party
or candidate or for purposes of
partisan political activity...
On the other hand, Section 35(i) of the RCC
states:

But for joint venture, as far back as the case
of Aurbach vs. Sanitary Wares
Manufacturing Corporation, the Supreme
Court had already ruled that a joint venture is
a form of partnership and should thus be
governed by the law of partnerships. The
Supreme Court, however, recognized a
distinction between these two business forms
and held that although a corporation cannot
enter into a partnership contract, it may
however engage in a joint venture with
others. Aurbach vs. Sanitary Wares
Manufacturing Corp., G.R. No. 75875,
75951, 75975-76, Third Division,
December 15, 1989.
Discussion: Now, expressly allowed to enter
into partnerships. The SEC said that the
corporation before it enter into a partnership,
it must be authorized by its articles of
incorporation.
f. Power of Corporation to Make
Donations
Section 36(9) Of the OCC reads:
(i) To make reasonable donations,
including those for the public welfare
or for hospital, charitable, cultural,
scientific, civic, Or similar purposes:
Provided, That no foreign corporation
shall give donations in aid of any
political party or candidate or for
purposes of partisan political
activity...
As previously indicated, it appears that there
is no more prohibition for domestic
corporations to donate in favor of a
political party or candidate.
Hence, the following are the requisites for a
valid donation by a corporation:
a. The donation must be reasonable;
b. It must be for a valid purpose including
public welfare or for hospital, charitable,
cultural, scientific, civic, or similar
purposes; and
c. The donation must bear a reasonable
relation to the corporation's interest and
must not be so remote and fanciful.

Page 39 of 351

For foreign corporations, there is an
additional requirement in making donations:
The donation must not be in aid of any:
i. Political party;
ii. Candidate; or
iii. Partisan political activity.
Discussion: What is reasonable depends on
the capacity of the donor corporation and the
means of the recipient.
g. Power of Corporation to Provide
Gratuity Pay
Providing gratuity pay is one of the express
powers of the corporation and therefore,
resolutions duly passed by the board
approving the grant of gratuity pay to the
employees of the corporation are not ultra
vires. The grant of gratuity pay does not
require shareholders' approval as it is not
tantamount to the sale, lease, exchange or
disposition of all or substantially all of the
corporation's assets. Lopez Realty, Inc. vs.
Fontecha, G.R. No. 76801, Second
Division, August 11, 1995
Discussion: The grant of gratuity pay does
not require shareholders’ approval. The grant
of gratuity pay is not tantamount to sale,
lease, exchange of property.
Q: Can the corporation grant housing
loan, car loan, motorcycle loan?
A: Yes because these are all welfare benefits
and considered included in the powers of the
corporation to grant similar benefits to its
employees.
Q: What about salary loans through a
lender? Can the corporation enter into a
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tripartite agreement among the employees
and lending investor, for example, where
loan is granted by the lending investor but
payment is facilitated by way of salary
deduction?
A: The SEC said it is allowed as long as the
corporation will not gain any benefit from
that transaction. The moment it gains benefit,
it becomes an ultra vires act because it no
longer becomes the benefit of its employees.
It becomes an income generating venture that
must be authorized in the articles of
incorporation.
Q: What about retirement benefits? Can
the corporation grant retirement benefits
superior to what the law provides?
A: Yes.
Q: What about inferior to what the law
provides?
A: No.
Q: What is the theory of specific capacity?
A: Under the Theory of Specific Capacity, a
corporation cannot exercise powers except
those expressly or impliedly given to it.
The specific powers of a corporation can be
found in Sections 36 to 43 of the RCC.
 4B & 4C 2020-2021
Notes for Merc Rev 1

articles of incorporation, in lieu of perpetual

NOVEMBER 10, 2020
existence, and under the conditions specified
by the RCC.

POWERS OF THE CORPORATION On the other hand, the corporate term may be
shortened for corporations with a specified
term in the articles of incorporation or even
Q: Is there any revision under the RCC on
those with perpetual existence.
modes of notice of meeting for any of the
corporate act requiring approval of
Discussion: May be exercised only in the
stockholders or members in a meeting
event when the corporation has a fixed term.
called for the purpose?
As we said, corporations under the RCC have
A: Under the RCC, notices of the meeting,
the perpetual existence and corporations
when allowed by the bylaws or done with the
organized prior to the effectivity of the RCC
consent of the stockholder, may be sent
likewise are deemed to have perpetual
electronically in accordance with the rules
existence.
and regulations of the SEC on the use of
electronic data messages. This is a new
Section 36 on the extension of term refers to
provision which cannot be found in BP Blg.
the corporations which opted or preferred to
68 and which can be uniformly seen in
have a fixed term specified in the articles of
Section 36 (Power to Extend or Shorten
incorporation.
Corporate Term), Section 37 (Power to
Increase or Decrease Capital Stock; Incur,
Q: What are the requirements for
Create or Increase Bonded Indebtedness),
extending or shortening the corporate
Section 39 (Sale or Other Disposition of
term?
Assets) and Section 41 (Power to Invest
A: The requirements are as follows:
Corporate Funds in Another Corporation or
a. At least majority vote of the board;
Business or for Any Other Purpose) of the
b. Ratification by the stockholders
RCC.
representing at least 2/3 of the
outstanding capital stock or by at least
Discussion: The revision or amendment is
2/3 of the members in case of non-
Notices can be sent electronically based on
stock corporations;
the rules of the SEC if provided for in the
c. Written notice of proposed action and
bylaws of the corporation. This goes through
the time and place of the meeting
all of the various corporate acts.
must be given to stockholders' or
members' residences, served
Q: When may the power to extend or
personally or sent electronically;
shorten the corporate term be exercised?
d. The extension or shortening of
A: This power to extend the corporate term
corporate term entails an amendment
may be exercised in case the corporation has
of the articles of incorporation. As
opted to have a fixed term, as specified in its

Page 41 of 351

such, it has to comply with the
requirements of Section 15 which
requires a favorable endorsement of
the appropriate government agency in
case of special corporations (banks,
banking and quasi-banking
institutions, preneed, insurance and
trust companies, NSSLAs,
pawnshops, and other financial
intermediaries); and
e. The extension must be done during
the lifetime of the corporation but
not earlier than three (3) years prior to
the original or subsequent expiry date
unless there are justifiable reasons for
an earlier extension as may be
determined by the SEC.
(Dean: Cannot be done during the
liquidation period BUT NOT
EARLIER than 3 years prior to the
original expiry date, UNLESS there
are justifiable reasons for an earlier
extension.)
Discussion: The last one is effective upon
approval by the SEC.
Q: What is the effect of the failure of the
corporation to extend its corporate term?
A: In the case of Philippine National Bank vs.
Court of First Instance of Rizal, Pasig , the
Supreme Court ruled that upon the expiration
of the period fixed in the articles of
incorporation, in the absence of compliance
with the legal requisites for the extension of
the period, the corporation ceases to exist and
is dissolved ipso facto. The automatic
dissolution of the corporation is no longer
applicable under the RCC given the option
available to the corporation to revive the
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corporate term. As previously indicated,
since the period of revival is not indicated in
the RCC, the option may be exercised within
a reasonable period, but prior to the
dissolution and liquidation of the
corporation. What is a reasonable period is
for the SEC to determine.
Discussion:
Q: What is the effect of the failure to
extend its corporate term?
A: Before, automatically dissolved.
However, the automatic dissolution of the
corporation is no longer applicable under the
RCC, given the option available to the
corporation to revive the corporate term.
 The period to apply for revival is not
indicated. Therefore, the option may
be exercised for a reasonable period
PRIOR TO THE DISSOLUTION
AND LIQUIDATION OF THE
CORPORATION.
 Reasonable period is for the SEC to
determine.
Q: What is the remedy available to the
stockholder not in favor of the extension of
corporate term?
A: The stockholder not in favor of extension
of the corporate term may exercise his
appraisal right, that is, he may get out of the
corporation and demand for the payment of
the fair value of his shares subject to the
conditions specified in Section 80 of the
RCC.
Discussion: Appraisal Right. Demand the
payment of the fair value of the shares.

Q: May a stockholder also exercise
appraisal right in case of shortening of the
corporate term?
A: Yes, a stockholder may also exercise
appraisal right in case of shortening of the
corporate term. While Section 36 of the RCC
refers to the remedy of appraisal right only in
case of extension of corporate term, Section
80 of the RCC also provides for the same
remedy in case a stockholder votes against
the shortening of corporate term.
It should be stressed, however, in relation to
the appraisal right of the dissenting
stockholder, a distinction should be made on
whether the shortening of the term is intended
to dissolve the corporation or not. If the
intention is to dissolve the corporation, the
exercise of appraisal right will be a mere
superfluity, since the dissolution of the
corporation necessarily involves the
distribution of assets to the stockholders
after the satisfaction of the claims of
corporate creditors.
Discussion: Shortening of term is shortening
of term of existence of the corporation
without dissolution.
Note: The extension can only be done during
the lifetime but not earlier than 3 years prior
to the original expiry date. It cannot be done
during the liquidation period. Liquidation is
intended to wind up the affairs of the
corporation.
Q: What about shortening of corporate
term? Can it be shortened earlier than
three years?
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A: Yes. The 3-year period is applicable
ONLY to extension of term. You can shorten
the term any time you want as long as you
shorten it before the expiration of the
corporate term.
Q: What are the revisions under the RCC
on the power of the corporation to increase
or decrease capital stock or incur, create
or increase bonded indebtedness?
A:
a. The approval of the Philippine
Competition Commission on the
corporation's increase or decrease of the
capital stock or in incurring, creating or
increasing of any bonded indebtedness is
required in certain cases.
b. The RCC prescribed a period of six (6)
months from the date of approval of the
board and stockholders, to file the
application with the SEC. Such period
may be extended provided there are
justifiable reasons therefor.
Q: What are the practical reasons for
increasing the capital stock of the
corporation?
A: The practical reasons are as follows:
a. To obtain additional funds — an increase
in the capital stock entails compliance
with the 25% subscription-25% payment
requirement; in which case, the
corporation is guaranteed to obtain fresh
equity from the stockholders.
b. To acquire corporate assets — Section 37
of the RCC provides that the required
additional paid-in capital can be paid in
cash or property. Moreover, Section 61 of
the RCC provides that a property may be
used as consideration for the issuance of

shares. The properties exchanged for
shares become the assets of the
corporation.
c. c. To support stock dividend declaration
— if the unsubscribed shares of the
authorized capital stock of the
corporation are not sufficient to
accommodate the shares that the
corporation may issue as a result of the
stock dividends, the capital stock must be
increased to support such stock dividend.
Over-issuance of shares is not allowed,
being an ultra vires act. 2001 Bar Exam.
Discussion:
Q: What are the tools /remedies available
to the corporation to raise funds?
A:
a. To increase the capital stock
b. To issue shares from the unsubscribed
portion of the ACS
c. Loans from creditors
d. Advances from SH
Note: Advances from SH are not considered
as equity. They are loans of SH to
corporation until they decide to convert it to
equity.
Q: What is the difference between an
advance and equity?
A:
a. Loan earns interest. Equity does not
earn interest; Equity will earn
dividends if declared by the
corporation.
b. Loan is an obligation. Dividends are
not.
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Q: The authorized capital stock of ABC
Corporation is Php100 million divided into
100,000,000 shares with par value of Php
1/share. The subscribed capital stock is
P50,000,000 divided into 50,000,000 shares
with par value of Php 1/share and fully
paid-up. The corporation posted a surplus
profit of Php100,000,000 in the preceding
year. The corporation would like to
declare 200% stock dividends. What steps
should the corporation take?
A: The stock dividend declaration has to be
approved by the board of directors by at least
majority vote and the stockholders
representing at least 2/3s of the outstanding
capital stock.
The corporation should also increase the
capital stock. Their base figure for the
declaration of stock dividends is the number
of subscribed shares which is 50 million. The
200% stock dividend declaration translates to
100 million shares. This means that the
corporation will have to issue this number of
shares because of the 200% stock dividend
declaration. The only available shares are the
50 million unsubscribed shares. The capital
stock then has to be increased by at least P
150 million divided into 150 million shares to
support the stock dividend declaration.
Discussion: The following are the steps that
should be taken by the corporation:
1. Get the approval of the majority of the
Board and ⅔ of SH to declare stock
dividends
2. Corpo must likewise increase the capital
stock by at least P150M to support the
stock dividend declaration.

a. Why? Because the base figure for
stock dividend declaration is the
number of subscribed shares.
Here, the subscribed shares is
P50M, therefore 200% is based
on subscribed shares - P50M.
b. 200% of P50M means P100M
shares. This means that ABC corp
will have to issue P100M
Unfortunately, for this corporation, the only
available shares are 50M unsubscribed
shares. Therefore, you have to increase the
capital stock by at least P150M divided into
150 million shares to support the stock
dividend declaration.
Slide: Pertinently, the Supreme Court in the
case of Central Textile Mills, Inc. vs.
National Wages and Productivity
Commission, ruled that prior to the approval
by the SEC of the increase in the authorized
capital stock, subscription payments cannot,
as yet, be deemed part of a corporation's paid-
up capital, technically speaking, because its
capital stock has not yet been legally
increased. Such payments constitute deposits
on future subscriptions, money which the
corporation will hold in trust for the
subscribers until it files a petition to increase
its capitalization and a certificate o f filing of
increase of capital stock is approved and
issued by the SEC. Central Textile Mills,
Inc. vs. NWPC, G.R. No. 104102, Second
Division, August 7, 1996.
Q: The authorized capital stock of ABC
Corporation is Php 1 billion divided into 1
billion shares with a par value of P 1.00 per
share. The subscribed capital stock is
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Notes for Merc Rev 1
Php500,000,000 divided into 500,000,000
shares with par value of Php 1.00 per share
while the paid-up capital stock is
Php250,000,000 divided into 250,000,000
shares with par value of Php 1.00 per
share. ABC Corporation intends to
increase its capital stock to Php2 billion
pesos divided into 2 billion shares.
a. May ABC corporation increase its
capital stock even if its authorized
capital stock is not yet fully
subscribed?
b. Is the corporation required to collect
payment on the subscription to the
increase in capital stock considering
that Php500,000,000 already amounts
to 25% of the Php2 billion increased
capital stock?
c. Are there other ways by which ABC
Corporation can increase its
authorized capital stock from Php 1
billion to Php 2 billion?
A:
a. Yes, a corporation is not prohibited from
increasing its authorized capital stock
even if the same has not yet been fully
subscribed.
(Dean: According to the SEC, the corpo
is not prohibited from increasing its ACS
even if the same has not yet been fully
subscribed. There is no obligation to
subscribe in full the ACS before it can
increase the same.)
b. Yes, because the 25% subscription is
based on the P1 billion increase in the
capital stock and not on the total capital
stock as increased. The 25% subscription

requirement in case of an increase of
capital stock is intended to ensure the
infusion of fresh capital to the
corporation.
c. ABC Corporation may increase the
number of shares from 1 billion to 2
billion while retaining the par value per
share, or it may maintain the number of
shares at 1 billion while increasing the par
value from Php 1.00 to Php 2.00 per
share, or increase the number of shares
from 1 billion to 1.6 billion shares and
increasing the par value from Php 1.0o to
Php 1.25 per share.
The most practical approach though is to
increase the number of shares and maintain
the par value because the other ways of
increasing the capital stock may require the
surrender of stock certificates to change the
par value thereof.
Q: Is the 25% payment requirement for
the increase in capital stock impose on per
a subscriber basis or based on the totality
of subscription?
A: The law does not require each subscriber
to pay 25% of his subscription. The amount
of payment therefore depends on the terms of
the subscription agreement. The 25%
payment requirement is based on the total
amount of subscription. Thus, when the
corporation issues a mixture of shares, the
25% subscription requirement may be
applied to only one class of shares or it may
distribute to all classes of shares as the
corporation may determine.
Discussion: Based on totality of
subscription. Same thing when the
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Notes for Merc Rev 1
corporation will issue a mixture of shares, the
25% may be applied to only one class of
shares or it may distribute to all classes of
shares.
Q: If the law does not require that the
subscriber pay 25% of the subscription,
how much then should the SH subscriber
pay?
A: It depends on the terms of the subscription
agreement.
Q: Distinguish between issuance of shares
arising from the increase in capital stock
and subscription to the unissued portion of
the authorized capital stock?
A: The distinctions are as follows:
a. The increase of capital stock requires
approval by at least the majority of the
board and the stockholders representing
at least 2/3s of the outstanding capital
stock while a subscription to the unissued
portion of the authorized capital stock
only requires a majority of the quorum of
the board of directors.
b. At least 25% of the increase in capital
stock must be subscribed and at least 25%
of the amount subscribed must be paid
while the required payment for
subscription to the unissued portion of the
authorized capital stock depends on the
amount that the Board of Directors may
approve, which can be higher or lower
than 25% of the subscription.
 4B & 4C 2020-2021
Notes for Merc Rev 1

ISSUANCE FROM Q: Let’s say the ACS is P1Billion - 1 billion

FROM UNSUBSCRIBED shares with par value of P1/share. But
INCREASE PORTION P500M is common shares and P500M in
form of preferred redeemable shares. It
Approval by Approval by
has to be redeemed after 3 years. On the
majority of the majority of the
3rd year, the corporation redeems such.
Board and ⅔ of SH quorum of the
Will it result in a decrease of capital stock?
Board
A: Yes, if the redeemed shares are cancelled
At least 25% of the Required payment
or retired and the issuance is not allowed by
increase in capital depends on the
the articles of incorporation.
stock must be amount that the
subscribed and at Board may approve;
Q: The ACS of the corporation is P100M
least 25% of the can be higher or
divided into 100M shares with par value of
amount subscribed lower than 25% of
P1.00 per share. It is fully subscribed and
must be paid the subscription
paid-up. Can the corpo reduce it to P50M?
A: Yes, but it has to comply with the
NOTE: Don’t answer that when the
formalities of the decrease of capital stock.
corporation issued from the unsubscribed
portion, the subscriber has to pay at least
Q: What are those formalities for
25%.
decrease?
A:
Q: Cite instances of decrease of capital
1. Approval by the majority of Board
stock through decrease in number of
and ⅔ of SH
authorized shares.
2. Decrease must not prejudice third
A:
party creditors
a. Redemption of redeemable shares.
b. Purchase by the corporation of its own
Q: What about increase? What
shares and then cancelling or retiring
requirement for increase is not applicable
them.
to the decrease of capital stock?
c. Cancelling shares that have not yet been
A: Subscribe to 25% of the increase
issued.

Q: If the subscribed capital stock is P60M

There is, however, no decrease of capital
divided into 60M shares with par value of
stock despite the redemption of redeemable
P1.00 per share and the paid-up is P50M,
shares or the purchase by the corporation of
can the corporation reduce the capital
its own shares unless the shares redeemed or
stock to P50M?
acquired are cancelled or retired. Otherwise,
A: No, the capital stock of the corporation
these shares are considered treasury shares
may be decreased only if it will not result in
and they can be resold upon such terms and
prejudice to corporate creditors. In this case,
conditions that the Board of Directors may
the reduction of the capital stock to
determine.

Page 47 of 351

50,000,000 will mean the release or
condonation of the 10,000,000 unpaid
subscription, thereby causing prejudice to the
creditors as subscriptions to the capital stock
are funds held in trust for their benefit under
the trust fund doctrine.
Discussion: No, because the decrease of
capital stock will prejudice the creditors. The
reduction to P50M will mean the
condonation of the P10M unpaid
subscription, in violation of the Trust Fund
Doctrine. Capital Stock are funds held in
trust for the benefit of the creditors.
Q: What is bonded indebtedness?
A: It is a borrowing by the corporation which
is long term in nature involving a large
number of lenders and secured by the
encumbrance on corporate assets. Since
bonds are securities, they should be
registered with the SEC.
Q: From this definition, what are the
features and characteristics of bonded
indebtedness?
A:
1. Long term in nature - The corpo needs
longer time to use the money
2. Involving large number of lenders - You
use a bond, and not a promissory note
(PN is used when you borrow from a
bank)
3. Encumbrance on corporate assets
4. Registered with the SEC - because bonds
are considered as securities
NOTE: Regardless of the amount of
borrowing, if the borrowing does not have
these characteristics, it is not a bonded
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Notes for Merc Rev 1
indebtedness and therefore will not require
SH approval and majority of the entire Board.
NOTE: The bonds usually, but not all the
time, are payable to bearer. So they are
transferred by delivery.
Q: What are the characteristics or features
of a bonded indebtedness?
A: The two principal elements of distinction
are time duration and the division of the
whole debt into like aliquot part units of
round number denominations, represented by
negotiable or assignable certificates of
indebtedness.
a. Such certificates are generally called
bonds, the purpose being to enable the
corporation to make use of the borrowed
money for a long period of years, to
obtain from a large number of people and
to facilitate the transfer of the certificate
of indebtedness from hand to hand during
the term of the collective obligation.
b. b. Such bond issues are usually secured
by the transfer to a trustee of specific
property to secure payment of the debt.
c. The bonds usually, but not necessarily,
run to bearer and transferable by delivery.
d. The effect of the creation and issuance of
such obligations is borrowing from the
general public.
Whenever a corporation resorts to this
method of borrowing funds, the resulting
obligations constitute a bonded indebtedness,
subject to the requirements of Section 37 as
to creation and increase.
Discussion: Regardless of the amount of
borrowing, if the borrowing does not have

those characteristics and features, it is not a
bonded indebtedness that will require
stockholders’ approval or approval of the
majority of the board.
Q: What is pre-emptive right?
A: It is the right of stockholders to subscribe
to all issues or disposition of shares of any
class by the corporation, in proportion to their
respective shareholdings. In practical terms,
this means that the shares of stock of the
corporation should first be offered
proportionately to the stockholders before
they can be issued or sold to non-
stockholders. 2019 Bar Exam.
Discussion: Check the first sentence. Right
of stockholders. Obviously, available to all
stockholders.
NOTE: Right of SH to subscribe to all issues
 All issues mean whether such is taken
on increase of capital stock or
issuance of shares from the
unsubscribed portion of ACS
 Pre-emptive right also applies to
disposition of Treasury shares
 The phrase any class means that
preferred shares are also covered by
this right
 Owners of Common shares are
allowed to exercise this right even
when the new shares issued by the
corpo are only preferred shares.
Why? Because it will dilute the stake
of the owners of the common shares
if they would not be allowed to
exercise pre-emptive right even to the
newly issues preferred shares.
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Notes for Merc Rev 1
Note: It is a right and option but not an
obligation.
Q: What is the rationale of pre-emptive
right?
A: The foundation of this right is to maintain
the proportionate voting strength and control
of existing SH, that is, the existing ratio of
their interest and voting power in the
corporation. It prevents dilution and
impairment of the SH interest in the
corporation.
EXAMPLE: The ACS is P100M divided
into 100M shares with par value of P1.00
per share. P50M is fully subscribed. Of
these, A, B, C, D, E subscribed to P10M
each. Each gets to receive 20% of the
dividends that the corpo may declare. In
case of dissolution, they will also receive
20% each of the residual assets of the
corporation. In case of new share issuance,
the SH should be given the first
opportunity to subscribe thereto, in
proportion to their shareholdings in the
corpo, before such new shares can be
issued to non-SH otherwise, the 20%
equity stake of each SH will be diluted.
Dean: If you are the SH, you have the right to
prevent the entry of any investor.
Q: Do stockholders have pre-emptive right
to additional shares to be issued from
existing authorized capital stock, or only in
case of an increase of capital stock or both?
A: The preemptive right applies to any and all
issuance of shares by the corporation whether
sourced from the unissued portion of the
authorized capital stock or in case of an

increase of capital stock. The issuance of
shares referred to in Benito vs. SEC (July 2S,
1983) which was cited In the case of Dee vs.
SEC, July 16, 1991 (where the Supreme
Court ruled that stockholders are not entitled
to pre-emptive right to additional shares to be
issued from existing authorized capital stock
before offering them to third parties)
occurred under the old Corporation Law (Act
No. 1459, as amended) where the pre-
emptive right of existing stockholders to
subscribe to new issuances was not expressly
provided. The RCC lifted the rule under the
OCC (BP 81g. 68) that the grant of pre-
emptive right is made mandatory except in
those situations falling under the exceptions
enumerated therein. Thus, unless denied in
the articles of incorporation or except in cases
where the issuance falls under any of the
exceptions enumerated in Section 38 of the
RCC, all issuances or disposition of shares by
a corporation shall be subject to the pre-
emptive right of existing shareholders. See
SEC Letter-Opinion Dated March 10, 2000.
Interestingly, in one case, the Supreme Court
ruled that even if the pre-emptive right does
not exist either because the issue comes
within the exceptions in Section 39 of the
0CC (now Section 38 of the RCC) or because
it is denied in the articles of incorporation, an
issue of shares may still be objectionable if
the directors acted in breach of trust and their
primary purpose is to perpetuate or shift
control of the corporation or to "freeze out"
the minority interest. The issuance of
unissued shares out of the original authorized
capital stock pursuant to a rehabilitation plan
the propriety and validity of which was on
question by the minority stockholders and
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Notes for Merc Rev 1
subsequently disapproved by the court
amounts to unlawful dilution of the minority
shareholdings. Majority of Stockholders of
Ruby Industrial Corporation vs. Lim,
G.R. No. 165887, June 6, 2011.
Q: Cite instances when pre-emptive right
does not apply.
A: The pre-emptive right of stockholders is
not an absolute right. It is subject to the
following exceptions:
a. Denial of pre-emptive right in the
articles of incorporation or
amendment thereto.
Take note that the denial of pre-emptive right
must be contained in the articles of
incorporation or amendment thereto. The
denial cannot be by mere board resolution or
as an amendment to the bylaws of the
corporation. 2011 Bar Exam.
Dean:
1. The denial cannot be by mere board
resolution or bylaws
2. Denial usually happens when the
corporation goes public
b. Waiver of such right by the
stockholder, whether express or
implied.
If the board resolution approving the issuance
of shares prescribes certain number of days to
exercise the pre-emptive right and the
stockholder fails to exercise such right within
the fixed period, the stockholder is deemed to
have impliedly waived his right.

Dean: In the board resolution, there should
be a period given to the SH to subscribe.
Failure to subscribe within the period
constitutes an implied waiver on the part of
SH.
c. Shares issued in compliance with the
laws requiring minimum stock
ownership by the public.
Public companies are required to have a
portion of their outstanding capital stock
owned by the public. The current minimum
public ownership set by law is 10% of the
corporation's outstanding capital stock.
Failure to comply with this requirement will
result to the delisting of the shares in the
Stock Exchange. Thus, the issuance of shares
to comply with the minimum public
ownership requirement is not subject to pre-
emptive right.
Dean:
1. Those companies whose shares are
traded in stock exchange
2. Failure to comply with this will result
in the delisting of the shares in the
stock exchange
d. Issuance of shares in exchange for
property given for a corporate
purpose, if approved by the
stockholders representing at least 2/3
of the outstanding capital stock
e. Issuance of share in payment of debt
made in good faith, if approved by the
stockholders representing 2/3 of the
outstanding capital stock.
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NOTE: Only in these two cases that you are
allowed to issue shares to a non-stockholder
without violating pre-emptive right as long as
the issuance is approved by the stockholders
owned by at least 2/3 of the outstanding
capital stock.
Issuance of shares to a non-SH even
though he may be an investor, is subject to
pre-emptive right. Even though it was
approved by 99% of the stockholders, the 1%
owner should be entitled to pre-emptive right.
Q: `X" Realty, Inc., a corporation engaged
in the subdivision business, has an
authorized capital of P8, 000,000, all of
which has been fully subscribed. At a
special meeting of the board of directors,
the majority vote decided, on the basis of
the recommendation of its Executive
Committee, that the corporation purchase
a 5-hectare property offered to It because
It was ideal for its subdivision business, the
price offered was lower than the prevailing
market price, and John Roque, the owner
of the property, was willing to accept P2,
000,000 worth of shares of the corporation
in exchange of, or as payment for, his
property. No cash was involved in the
transaction. Thus, the board approved a
resolution increasing the authorized
capital stock from P8,000,000 to P10
Million, stipulating that the additional
P200,000 worth of shares shall be issued in
exchange for the 5-hectare property and
that the existing stockholders shall have no
pre-emptive right to subscribe to the
additional shares as the same were being
issued to pay for the property.
 4B & 4C 2020-2021
Notes for Merc Rev 1

Was the action of the Board correct and capital stock requires approval by the
sufficient? board and the stockholders
A: The action of the Board of Directors was representing at least 2/3s of the
correct, but not sufficient. Under Sections 38 outstanding capital stock.
and 61 of the RCC, shares may be issued for - The resolution authorizing the
property needed for corporate purposes but issuance of shares to outside investors
subject to SEC approval to ensure that the is also valid. Shares may be issued to
real property is fairly valued, to prevent the non-stockholders but subject to
issuance of watered stocks. The increase of stockholders' pre-emptive right.
capital stock is also subject to the approval
of the stockholders representing at least B. What remedies, if any, are available to
2/3s of the outstanding capital stock. No dissenter?
A: Estrada, the dissenting stockholder,
SEC and stockholders approvals were
may exercise his pre-emptive right. Pre-
indicated in the problem.
emptive right is not applicable only if the
stockholders' approval representing 99%
Q: The stockholders of People Power, Inc.
of the outstanding capital stock pertains
("PPI") approved the following two
to issuance of shares for property needed
resolutions in a special stockholder's
for corporate purpose or in payment of
meeting: (i) Resolution increasing the
previously incurred indebtedness. He
authorized capital stock of PPI, and (ii)
cannot exercise his appraisal right
Resolution authorizing the Board of
because an increase in capital stock is not
Directors to issue for cash payment the
one of the instances where such right may
new shares from the proposed capital
be exercised under Section 80 of the
stock increase in favor of outside investors
RCC. 1987 Bar Exam.
who are non-stockholders. The foregoing
resolutions were approved by stockholders
Q: What is the remedy of the stockholder
representing 99% of the total outstanding
not in favor of an amendment to the
capital stock. The sole dissenter was Jose
articles of incorporation to deny pre-
Estrada who owned the rest 1% of the
emptive right?
stock.
A: He can exercise his appraisal right. It is
available in case of an amendment to the AOI
A. Are the resolutions binding on the
that has the effect of changing the rights of
corporations and its SH, including the
the SH or of any shares. If you deny pre-
dissenter?
emptive right to the SH, it restricts his right
A:
to subscribe to the issuance of the
- The resolution to increase capital
corporation.
stock is binding on the corporation on
the assumption that it was similarly
Q: What are the revisions under the RCC
approved by at least a majority of the
on the power of a corporation to sell,
board of directors. The increase of

Page 52 of 351

encumber, and dispose of its corporate
assets?
A:
a. Approval of the Philippine Competition
Commission should be obtained for sale
and purchase transactions covered by the
provisions of Republic Act No. 10667,
otherwise known as the "Philippine
Competition Act".
b. The determination whether the
disposition involves the sale of all or
substantially all corporate assets does not
rest solely on whether the corporation
would be rendered incapable of
continuing the business or accomplishing
the purpose for which it was
incorporated, it also must be read in
harmony with the revised provision
essentially stating that it must be
computed based on its net asset value, as
shown in its latest financial statement.
Q: Where the assets to be disposed of
constitutes the only property of the
corporation, whose approvals are needed?
A: Where an asset constitutes the only
property of the corporation, its sale to a third-
party is a sale or disposition of all the
corporate property and assets of said
corporation falling squarely within the
contemplation of Section 39 of the RCC. In
the case of Islamic Directorate of the
Philippines vs. Court of Appeals, the Court
ruled that for such sale to be valid, the
majority vote of the legitimate Board,
concurred in by the vote of at least 2/3 of the
bona fide members of the corporation should
have been obtained. Islamic Directorate of
the Philippines, et al., vs. Court of Appeals
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Notes for Merc Rev 1
and Iglesia Ni Cristo, G.R. No. 117897, May
14,1997.
Dean: Approval by the majority vote of the
Board and SH representing ⅔ of OCS
Slide: Similarly, the assignment of the right
to redeem the only asset of the corporation
amounts to a sale of all or substantially all of
the corporate assets. As such, it requires
approval by at least a majority of the board
and the affirmative vote of the stockholders
representing at least 2/3s of the outstanding
capital stock. Rosita Pena vs. the Court of
Appeals, et al., G.R. No. 91478, February
7, 1991.
PENA v. CA
Q: What if the corporation will assign the
right to redeem the only asset of the
corporation in favor of third party?
A: The assignment of the right to redeem the
only asset is tantamount to sale of all or
substantially all of the corporate assets.
Hence, approval by majority of the Board and
SH representing ⅔ of the OCS is required.
Slide: In one case though, it was held that a
stockholder cannot invalidate the sale of
corporate properties for failure to comply
with Section 40 of the Corporation Code
( now Section 39 of the RCC ), where the
buyer relied on the secretary's certificate that
the sale had been authorized by resolutions of
the board and stockholders. Being regular on
its face, a Secretary's Certificate is sufficient
for a third party to rely on. It does not have to
investigate the truth of the facts contained in
such certification, otherwise business
transaction of a corporation would become
 4B & 4C 2020-2021
Notes for Merc Rev 1

tortuously slow and unnecessarily hampered. REQUIREMENTS IN CASE OF SALES

Esguerra vs Court of Appeals, G.R. No.
119310, February 3, 1997.
ESGUERRA v. CA
FACTS: Corporate Secretary, as custodian
of corporate records, certified under oath that
the corporation adopted a resolution to sell
the property. It turns out, it is false.
ISSUE: Is the sale valid?
IN BULK:
1. The seller must provide the buyer with a
verified list of the creditors containing
their names, addresses, amounts owing to
each, and the respective maturity dates
2. There must be a full detailed inventory of
the properties or assets to be sold,
including their cost
3. The inventory and the list must be filed
with DTI

NOTE: (Civil Consequences) If the sale

SC: The third party may rely on the face of
failed to comply with these and the vendor
the Secretary’s certification in the absence of
does not apply the purchase price to the
any instance that may arouse suspicion.
payment of the creditor’s claim, the vendor
shall be deemed to have violated the law. The
THE BULK SALES LAW
sale is void. In that case, the buyer shall hold
Under this, any sale in bulk must comply
in trust the properties of the vendor for the
with certain procedural requirements,
benefit of the creditors, but with the right to
otherwise, the sale is deemed to be in fraud
require the return of the purchase price and
of creditors and therefore null and void.
damages.
- Is it a bulk sale?
- If yes, it must comply with certain
(Criminal Consequences): Imprisonment
requirements.
for not less than 6 months nor more than 5
years, or a fine not exceeding P5,000 or both.
Q: When is a sale in bulk?
1. Sale, transfer, mortgage or assignment of
Q: Juan Dela Cruz set up a holding
properties not in the ordinary course of
company. He transferred all his properties
business
to a holding company in exchange for
2. Sale, transfer, mortgage or assignment of
shares of stock in order to avoid taxes.
all or substantially all of the assets used
What are the remedies of his creditors?
in and about the business of the vendor,
A: They cannot pierce the veil of corporate
mortgagor, transferor, or assignor
fiction because the transfer of his properties
(collectively referred to as vendor); and
for purposes of tax avoidance is valid.
3. Sale, transfer, mortgage or assignment of
Therefore, the remedy is Bulk Sales Law.
all or substantially all of the business or
The transfer of his properties to the
trade conducted by the vendor
corporation without compliance with the
requirements of the Bulk Sales Law makes
the transfer invalid. Therefore, the holding

Page 54 of 351

company holds the company in trust of the
creditors of Juan dela Cruz.
Q: Venezia is a famous international
fashion chain with outlets in Makati,
Ortigas, and Manila. It has complied with
the minimum capitalization required
under the Retail Trade Nationalization
Act and carries on retail business worth
more than $3 million for each of its outlets.
As its Manila outlet is not doing very well,
it decides to sell all of its business there
consisting of the remaining inventory,
furniture and fixtures, and other assets to
its competitor.
a. Venezia’s Manila outlet constitutes
one-third (1/3) of its total business.
Should it comply with the
requirements of the Bulk Sales Law?
Why or why not?
A: Venezia need not comply with the
requirements of the Bulk Sales Law as the
sale does not constitute a sale of all or
substantially all of its business. While the
law does not define what sale of
substantially all of the business mean, this
should be read in conjunction with the
Corporation Code that the sale is
considered substantially all if, after the
sale, the seller cannot continue with the
business for which it was organized. In
this case, Venezia is still in business
despite the sale of its Manila outlet
inventory.
NOTE: The sale must involve all or
substantially all of the assets. Sale
involves substantially all, if after the sale,
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the seller cannot continue with the
business for which it was organized.
b. If instead of selling its Manila outlet,
Venezia merely mortgages its assets
there, would it need to comply with the
requirements of the Bulk Sales Law
A: For the same reasons stated in the
answer to (1) above, Venezia need not
comply with the requirements of the Bulk
Sales Law. While the bulk sales also
covers mortgage, the same should
likewise involve all or substantially all of
the business or assets of the seller.
c. What are the legal consequences of a
failure to comply with the
requirements of the Bulk Sales Law?
A: Failure to comply with the
requirements of a Bulk Sales Law renders
the sale, transfer, mortgage, or
assignment fraudulent and void, and
makes any person found guilty of
violating any provision of the Bulk Sales
Law punishable by imprisonment for not
less than 6 months nor more than 5 years,
or a fine in an amount not exceeding
P5,000, or both such imprisonment and
fine in the discretion of the court. 2010
Bar Exam.
Q: What is the remedy available to a
stockholder not in favor of the disposition
of all or substantially all of the corporate
properties?
A: He may exercise his appraisal right,
which means, that he can demand the
payment of the pair value of his shares
subject to the conditions under Section 80 of
the RCC.

BAR Q: AAA Corporation is a bank. The
operations of AAA Corporation as a bank
were not doing well. So, to avert any bank
run, MA Corporation, with the approval
of the Monetary Board, sold all its assets
and liabilities to BBB Banking
Corporation which includes all deposit
accounts. In effect then, BBB Corporation
will service all deposits of all depositors of
AAA Corporation.
Will the sale of all assets and liabilities of
MA Corporation to BBB Banking
Corporation automatically dissolve or
terminate the corporate existence of AAA
Corporation? Explain your answer.
A: No, the sale of all the assets and liabilities
of MA Corporation to BBB Banking
Corporation will not result in the automatic
dissolution or termination of the existence of
the former. Such sale is not one of the modes
of dissolution under the Corporation Code.
Moreover, having assets is not a condition for
the continuation of juridical existence.
(Dean: That’s why even when you sell your
assets, you continue to exist.)
Q: Is there a merger between AAA and
BBB? Or only a sale transaction/?
A: There can be no merger without a
certificate of merger issued by the SEC. It is
only a sale of all of the assets from the seller
to buyer. Therefore, the buyer is not liable to
all the remaining liabilities of the seller,
despite the transfer of all the assets and
liabilities. THIS IS NELL DOCTRINE.
Q: Is there a de facto merger?
A: None. A de facto merger takes place when
a corporation acquires the assets and
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liabilities of the other corporation in
exchange for shares of stock. In this case,
BBB acquires the assets in exchange for
liabilities.
NELL DOCTRINE
GR: Where one corporation sells or
otherwise transfers all of its assets to another
corporation, the latter is not liable for the
debts and liabilities of the transferor.
EXPN: (where buyer is liable to assume the
obligation of the seller)
1. When the buyer expressly or impliedly
assumes the liabilities of the seller (Art.
2047 of Civil Code)
2. If the sale amounts to a merger or
consolidation (Title X of RCC)
3. If the sale is entered into fraudulently or
made in bad faith (Art. 1388 of Civil
Code)
4. If the buyer is merely a continuation of
the personality of the seller or the
business-enterprise transfer rule
(Business-Enterprise Transfer Rule)
Q: Under the Nell Doctrine, so called
because it was first pronounced by the
Supreme Court in the 1965 ruling in Nell
vs. Pacific Farms, Inc. , the general rule is
that where one corporation sells or
otherwise transfers all of its assets to
another corporation, the latter is not liable
for the debts and liabilities of the
transferor.
State the exceptions to the Nell Doctrine.
A: The exceptions to the Nell doctrine are as
follows:

a. When the buyer expressly or impliedly
assumes the liabilities of the seller;
b. If the sale amounts to a merger or
consolidation;
c. If the sale is entered into fraudulently or
made in bad faith; and
d. If the buyer is merely a continuation of
the personality of the seller or the so
called business- enterprise transfer rule.
2017 Bar Exam.
Q: State the legal basis of each of the
exceptions.
A: The first exception under the Nell
Doctrine, where the transferee corporation
expressly or impliedly agrees to assume the
transferor's debts, is provided under Article
2047 of the Civil Code. When a person binds
himself solidarily with the principal debtor,
then a contract of suretyship is produced.
Necessarily, the corporation which expressly
or impliedly agrees to assume the transferor's
debts shall be liable to the same.
The second exception under the doctrine, as
to the merger and consolidation of
corporations, is well-established under Title
X of the RCC. If the transfer of assets of one
corporation to another amounts to a merger
or consolidation, then the transferee
corporation must take over the liabilities of
the transferor.
Mother exception of the doctrine, where the
sale of all corporate assets is entered into
fraudulently to escape liability for transferor's
debts, can be found under Article 1388 of the
Civil Code. It provides that whoever acquires
in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for
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damages suffered. Thus, if there is fraud in
the transfer of all the assets of the transferor
corporation, its creditors can hold the
transferee liable.
The legal basis of the last in the four (4)
exceptions to the Nell Doctrine, where the
purchasing corporation is merely a
continuation of the selling corporation, is
challenging to determine.
In other words, in this last exception, the
transferee purchases not only the assets of the
transferor but also its business. As a result of
the sale, the transferor is merely left with its
juridical existence, devoid of its industry and
earning capacity. Fittingly, the proper
provision of law that is contemplated by this
exception would be Section 39 of the RCC.
The purpose of the business-enterprise
transfer is to protect the creditors of the
business by allowing them a remedy against
the new owner of the assets and business
enterprise. Otherwise, creditors would be left
"holding the bag," because they may not be
able to recover from the transferor who has
"disappeared with the loot." or against the
transferee who can claim that he is a
purchaser in good faith and for value. Based
on the foregoing, as the exception of the Nell
doctrine relates to the protection of the
creditors of the transferor corporation, and
does not depend on any deceit committed by
the transferor-corporation, then fraud is
certainly not an element of the business
enterprise doctrine, Y-I Leisure Philippines
vs. James Yu; G.R. No, 207161, September
13, 2015

In the Y-1 Leisure case, James Yu purchased
golf and country club shares from a
corporation organized to establish a golf
course in Arayat, P'ampanga. When he
visited the site, he discovered that the golf
and country club was non-existent. He filed
an action for collection against the seller-
corporation and its President. Meanwhile, the
property was conveyed to Y-1 Leisure. The
latter was made liable because the seller
corporation, after the sale, had been rendered
incapable of continuing the business for
which it was organized the development of
the golf course) and the buyer-corporation
acquired the property to complete the
development of the project. It was held that
two requisites must concur for the business-
enterprise rule to apply: (a) the transferor
corporation sells all or substantially all of its
asserts to another entity.; and (b) the
transferee corporation continues the business
of the transferor corporation. Both were
accordingly present.
Based on this case, which incidentally is an
en bane decision, it appears that if the
transferee acquires all of the assets of the
transferor corporation and continues the
business of the transferor, the transferee
should be liable to pay the claims of the
transferor's creditors. There is a very thin line
between the mere sale of all or substantially
all of the assets and tie business-enterprise
rule because in most cases, the transferee
devotes the acquired assets for a purpose
similar, if not exactly the same, to the
business of the transferor. Does it mean that
the buyer is now liable for the obligations of
the seller? Can we still say that the creditors
of the seller are holding an "empty bag" if the
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seller obtained funds from the buyer, which
funds may be garnished by the seller's
creditors?
With respect to employment agreements, the
Supreme Court held that in asset sales, the
rule is that the seller in good faith is
authorized to dismiss the affected employees,
but is liable for the payment of separation pay
under the law, The buyer in good faith, on the
other hand, is not obliged to absorb the
employees affected by the sale, nor is it liable
for the payment of their claims. The most that
it may do, for reasons of public policy and
social justice, is to give preference to the
qualified separated personnel of the selling
firm. SME Bank, Inc_ et al., vs. Peregrin de
Guzman, et al., G.13. No. 186M1, October 8,
2013.
Y-1 LEISURE PH v. JAMES YU
FACTS: James Yu bought a certificate of
membership in a corporation that was
organized for the purpose of constructing a
golf course. After a few months, there is no
development. He wanted a refund of his
investments from the President of the
Corporation. The obligation was
acknowledged by the corporation and the
president. The corporation transferred the
property to another corpo and another corpo.
ISSUE: WON James Yu can recover his
claim from the buyer of the property of the
seller corporation
RULING: In this case, what was transferred
is not only the assets of the seller but also the
business, because the buyer will continue the
 4B & 4C 2020-2021
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business. Therefore, the buyer must assume

the obligation of the seller to James Yu, Q: Who is/are liable to pay the officers?
otherwise, James Yu and other creditors will
be left holding an empty bag. This is under RULING: XYZ is liable because he is the
the BUSINESS-ENTERPRISE employer of the officers when they were
TRANSFER RULE. terminated. ABC is not liable because the
sale of shares does not mean change of
SME BANK v. GUZMAN corporation.
FACTS: ABC would like to purchase the
Doctrine: In sale of all of the assets, the buyer
shares of X and Y in XYZ corporation. But
has no obligation to absorb the employees of
the condition of ABC is that some officers of
the seller. However, the Court suggests that
XYZ corporation must be terminated. X and
the buyer of the assets gives preference to the
Y talked to the officers and asked them to go,
employees of the seller. The seller in good
with the promise that they will be re-hired by
faith, on the other hand, is authorized to
the next management. ABC purchased the
terminate employment.
shares of X and Y, making them the
controlling SH of XYZ corporation. The
officers were not re-hired.

Page 59 of 351
 4B & 4C 2020-2021
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lawful or legitimate and proper purpose, then

NOVEMBER 24, 2020
the corporation acted in good faith
accordingly.

POWER TO ACQUIRE OWN Q: Why is it that a corporation must have

SHARES surplus profit to be able to acquire its own
shares?
A: Because the corporation cannot use its
Q: May a corporation acquire its own
subscriptions or legal capital to buy its own
shares of stock?
share. So, in effect if you buy the shares of
the stockholders what is the consequence?
A: YES. Ordinarily, a stock corporation has
You return the investments of the
no power to acquire its own shares as it is
stockholders. You give back the money to
illogical for the corporation to be its own
him. And you can only do so if you have
stockholder. Moreover, the funds of the
funds in excess of your subscriptions and
corporation should be devoted to attain the
liabilities of the corporation. So you cannot
purposes of incorporation. However, the
use the subscriptions because it will violate
RCC allows the corporation to acquire or
the trust fund doctrine.
purchase its own shares in certain instances.
Slide: It is imperative that there must be
Q: Under what conditions may a
unrestricted retained earnings before it may
corporation acquire or purchase its own
purchase its own shares. Otherwise, this
shares?
would lead to an unauthorized increase of
shares of stock, as well as constitutes a
A: For a corporation to be able to acquire its
violation of the trust fund doctrine. The
own shares, the following conditions must be
rationale for this is that share repurchase
present: (1) it is for a legitimate and proper
constitutes in effect a distribution to the
corporate purpose; (2) there shall be an
stockholders which, if abused and without
unrestricted retained earnings to purchase the
proper safeguards, will deplete and impair the
same and its capital is not thereby impaired;
assets of the corporation, to the prejudices of
(3) the corporation acts in good faith and
the stockholders and creditors of the
without prejudice to the rights of creditors
corporation.
and stockholders; and (4) the conditions of
corporate affairs warrant it. (SECTION 40)
With respect to banks, as previously
indicated, no bank shall purchase or acquire
Essentially, nos. 3 and 4 conditions are
shares of its own capital stock or accept its
subsumed in the 1st two conditions. If you
own shares as security for a loan, except
have surplus profit or URE, obviously even if
when authorized by the Monetary Board;
the corporation acquire its own share the
Provided that in every case the stock so
interest of the creditors is not impaired and
purchased or acquired shall, within six
because the transaction of purchase is for

Page 60 of 351

months from the time of its purchase or
acquisition, be sold or disposed of at a public
or private sale.
Q: Cite examples of legitimate corporate
purposes to warrant acquisition or
purchase by the corporation of its own
shares of stock.
A: a. To eliminate fractional shares arising
out of stock dividends.
A fractional share is less than one (1) share.
For example, a stockholder owns 250 shares
and the corporation declares 25% stock
dividends. 25% of 250 is 62.5; the .5 is the
fractional share that the corporation may
acquire.
Fractional share cannot vote. But if one
fractional share added to another fractional
share became a composite share.
b. To collect or compromise an indebtedness
to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during the
said sale.
In case of delinquent stocks, arising out of
unpaid subscription, the corporation may
either file an action for collection or bid for
the delinquent shares, if in the public auction,
there is no bidder willing to pay the full
amount of the subscription plus interest,
costs, and expense.
To refresh your memory, the stockholder can
pay his shares partially. It depends on amount
prescribed by the BOD and not even 25%.
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And the balance is payable on the later date.
Such later date maybe specified in the
contract of subscription or upon call of the
BOD.
If the shares are not paid 30 days from due
date, it become delinquent stocks. Being
delinquent stock there are two remedies
available to the corporation:
1. File an action for collection to enforce
payment of the unpaid subscription
2. Extrajudicial Sale – done through
auction sale
Q: Can a corporation participate in the bid
for delinquent shares?
A: GR: It cannot.
XPN: if there is no bidder willing to pay or
able to pay the balance of the subscription,
the law allows the corporation to acquire the
delinquent shares as long as it has surplus
profit.
c. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of the RCC.
A dissenting or Withdrawing stockholder is
one who exercised his appraisal right in any
of the instances specified in Section 80 of the
RCC.
d. To acquire redeemable shares.
Redeemable shares may be issued by the
corporation when expressly so provided in
the articles of incorporation. They may be
purchase or taken up by the corporation upon
 4B & 4C 2020-2021
Notes for Merc Rev 1

the expiration of a fixed period, regardless of Dacion en pago

the existence of unrestricted retained
earnings in the books of the corporation.
To refresh our memory, redeemable shares
are shares that are expressly specified or
authorized in the AOI that a corporation may
take up or purchase upon the expiration of a
fixed period, regardless of the availability of
surplus profit. Once the term arrived, the
corporation redeemed its shares. If reissuance
is not allowed, then it became retired shares.
The shares of stock of the stockholder may be
conveyed to the corporation in payment of a
debt; or
Garnishment
A corporation may garnish the shares of
judgment debtor. It may happen that
judgment debtor may own shares of the
corporation itself. Or judgment debtor may
be a stockholder of the corporation that owes
money to the corporation.

e. To acquire treasury shares. Q: In acquiring its own share through

dacion en pago or garnishment, is there a
Treasury shares are shares of stock which need for surplus profit or URE?
have been issued and fully paid for, but
subsequently reacquired by the issuing A: No because it is recovery of a debt and not
corporation through purchase, redemption, to acquire its own shares.
donation, or some other lawful means. Such
shares may again be disposed of for a
reasonable price fixed by the board of INSTANCES WHERE A CORPORATION CAN
directors. ACQUIRE SHARES EVEN WITHOUT THE
EXISTENCE OF SIRPLUS PROFIT:
Q: Why a corporation buy back its own
shares? 1. Redemption as expressly provided by law
A: if the shares of stock is trading below book 2. Other lawful means
value it makes sense for the corporation to a. Dacion en pago
buy back its own shares. b. Garnishment

The book value is 50 pesos, you only trading

the shares for 20 pesos per shares. So, it is TREASURY SHARES REDEEMABLE
cheap basically. So, the corporation buys it at SHARES
20 pesos. Then if economic conditions
TS by their vey RS are entitled to
improve or the economic conditions of the
nature cannot vote vote and receive
corporation warrant it then it can be sold at
and cannot receive dividends unless the
50pesos or higher amount. Making it a gain
dividends. right are denied in
for the corporation.
the AOI
TS are not part of RS are part of OCS
Other lawful means:
OCS

Page 62 of 351

TS can be acquired RS can be redeemed
by the corporation by the corporation
subject to surplus even without
profit surplus profit
POWER TO INVEST CORPORATE
FUNDS
Q: What are the distinctions among the
different kinds of investment of corporate
funds?
A: Where the funds are invested in the
primary purpose or any activity reasonably
necessary to accomplish the primary purpose
of the corporation, board approval suffices.
For the other kinds of investment, board and
stockholders' approvals are required. And if
the investment of funds will be made in any
business other than the corporation's primary
and secondary purpose, there should be a
corresponding amendment to the articles of
incorporation to include the desired business
activity, otherwise, the investment is ultra
vires.
Q: What are the requisites for the exercise
by the corporation of the power to invest
corporate funds for purposes other than
the primary purpose?
A:
a. Such action must be approved by a
majority of the board of directors or trustees
and ratified by the stockholders representing
at least two-thirds (2/3) of the outstanding
capital stock, or by at least two-thirds (2/3) of
the members in case of a non-stock
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corporation, at a stockholders' or members'
meeting duly called for the purpose.
b. Notice of the proposed investment and the
time and place of the meeting shall be
addressed to each stockholder or member at
the place of residence as shown in the books
of the corporation and deposited to the
addressee in the post office with postage
prepaid, served personally, or sent
electronically in accordance with the rules
and regulations of the SEC on the use of
electronic data message, when allowed by the
bylaws or done with the consent of the
stockholders.
c. Any dissenting stockholder shall have
appraisal right as provided in the
RCC.
BAR Qs
Q: ABC Corporation is engaged in the
business of manufacturing soft drinks. For
the past 10 years, it has bought all its
bottles from XYZ Corporation.
Considering the volume of its production,
it now finds that it will he more economical
to manufacture its own bottles.
The Board of Directors, after studying and
discussing the matter thoroughly, decides
to set aside the amount of 1 Million for this
project. Most of this amount will go to the
cost of equipment and materials.
M is a stockholder of ABC Corporation
and is against this investment in the
bottling project and would like to
withdraw from the corporation by

exercising his appraisal right if the project
goes through. He, therefore, demands that
the project be submitted to the
stockholders for approval, but the board
refuses to do so on the ground that there is
no need for such approval and that the
calling of a special stockholder's meeting
would entail too much expenses.
M thus cannot have the opportunity to
exercise his appraisal right. He wants to
sue the board to compel it to submit the
matter to the stockholders and to enjoin it
from pursuing the project until the
stockholders shall have approved it.
Do you think the matter needs the
stockholders' approval or is the action of
the Board of Directors sufficient? Explain.
A: No, it does not need stockholders'
approval. Under Section 41 of the RCC, a
corporation may, as a general rule, invest its
funds in another business or in any purpose
other than the primary purpose for which it
was organized, when approved by the Board
of Directors and by the stockholders
representing at least 2/3 of the outstanding
capital stock in a meeting duly called for the
purpose. Any dissenting stockholder may
exercise his appraisal right.
However, where the investment is reasonably
necessary to accomplish its primary purpose,
the approval of the stockholders is not
necessary. In this case, the manufucture of
bottles is reasonably necessary for the
corporation's primary business of
manufactunng soft drinks and does not,
therefore, need the approval of the
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stockholders. Board approval suffices. (Del
Rama vs. Maao Sugar Central, G.R. No.
175041 Feb. 28, 1969)
Q: Stikki Cement Corporation
("STIKKI") was organized primarily for
cement manufacturing. Anticipating
substantial profits, its President proposed
that STIKKI invest in (a) a power plant
project, (b) a concrete road project, and (c)
quarry operations for limestone used in
the manufacture of cement.
What corporate approvals or votes are
needed for the proposed investments?
Explain.
A: Unless the power plant and the concrete
road project are reasonably necessary to the
manufacture of cement by STIKKI (and they
do not appear to be so), then the approval of
the said projects by a majority of the Board
of Directors and the ratification of such
approval by the stockholders representing at
least 2/3 of the outstanding capital stock
would be necessary.
As for the quarry operations for limestone,
the same is an indispensable ingredient in the
manufacture of cement and may, therefore,
be considered reasonably necessary to
accomplish the primary purpose of STIKKI.
In such a case, only the approval of the Board
of Directors would be necessary.
This provision likewise refers to property.
The property of the corporation must be
devoted to attain the primary purpose. If the
property would be devoted to attain the

secondary purpose, it requires board and
stockholders’ approval.
Q: Can a corporation mortgage its
property to secure the obligation of
another?
A: No, because the property of the
corporation must be devoted to attain the
primary purpose.
Let’s say, the corporation obtained a loan that
loan can be secured by a mortgage of the
property. So the mortgage is connected to the
primary purpose of the corporation. Because
the loan is obtained to accomplish the
purpose of the corporation. Thus, the
mortgage is reasonably necessary or
connected to the loan transaction.
In order to secure obligation of another, you
need amendment. If it is done for secondary
purpose, you need board and stockholders’
approval.
Q: What if the amendment, is to make the
corporation a bonding company?
A: You don’t need stockholders’ approval
anymore because the bonding company’s
business is to secure the obligation of
another. It becomes the primary purpose and
board approval will suffice.
POWER TO DECLARE DIVIDENDS
Q: What are dividends?
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A: Dividends can be viewed from 2
perspective:
1. Right of the stockholders
2. Power of the corporation
Slide:Dividends are corporate profits
allocated, lawfully declared and ordered by
the directors to be paid proportionately to the
stockholders in the form of cash, property, or
stocks.
Q: Are profits the same as dividends?
A: NO
Profits are the sources of dividends. Profits
are dividends only when they have been set
aside for distribution to stockholders under
the conditions specified by law.
Profits belong to the corporation while
dividends once declared, belong to the
stockholders.
Q: Under what conditions may the
corporation declare dividends?
A:
a. The corporation must have
unrestricted retained earnings as of
the last fiscal or calendar year.
b. The dividends shall be payable in
cash, in property, or in stock to all
stockholders based on outstanding
stock held by them.
c. The cash dividend declaration must
be approved by the board of
directors. In case of stock dividends,
in addition to board approval, the
declaration must likewise be

approved by the stockholders
representing at least two-thirds (2/3)
of the OCS at a regular or special
meeting duly called for the purpose.
Board approval does not mean the majority
of the entire board. Majority of the quorum
will suffice unless the bylaws provide
otherwise.
NOTE: SEC approval is not needed in
declaring dividends. SEC approval are
only required in increasing capital stock
as a result of stock dividends declaration.
Q: What are retained earnings?
A: Retained Earnings are the accumulated
profits realized out of normal and continuous
operations of the business after deducting
therefrom distributions to stockholders and
transfers to capital stock or other accounts.
The Retained Earnings shall be the amount as
shown in the financial statements audited by
the company's independent auditor. If
applicable, such amount shall refer to the
retained earnings of the parent company but
not the consolidated financial statements.
Stated otherwise, the corporation has retained
earnings if its assets exceed the total
liabilities and combined subscriptions to the
capital stock of the corporation. This may be
expressed in the following formula:
Retained Earnings = Assets - Liabilities and
Subscriptions
Such retained earnings or portion thereof are
unrestricted if there are no legal and
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contractual impediment for their distribution
to the stockholders.
Q: Why do you deduct subscriptions from
the assets of the corporation?
A: Because subscription are funds held in
trust for the benefit of the creditors. They
must not be impaired.
Slide: The total subscriptions are deducted
from the assets to determine the availability
of retained earnings because, under the trust
fund doctrine, subscriptions to the capital
stock constitute a fund to which creditors
have a right to look for the satisfaction of
their claims and which the corporation is not
allowed to impair to their prejudice.
Q: What are unrestricted retained
earnings?
A: Unrestricted retained earnings represent
the amount of accumulated profits and gains
realized out of the normal and continuous
operations of the company after deducting
therefrom distributions to stockholders and
transfers to capital stock or other accounts,
and which are: (1) not appropriated by its
Board of Directors for corporate expansion
projects or programs: (2) not covered by a
restriction for dividend declaration under a
loan agreement; and (3) not required to be
retained under special circumstances
obtaining in the corporation such as when
there is a need for a special reserve for
probable contingencies.
Therefore, the retained earnings are
unrestricted if they are not appropriated for

BOD expansion, not covered by restriction
declaration of dividends under loan
agreement, and not required to be retained
under special circumstances if there is a need
for a special reserve for probable
contingencies.
Q: Is it a ministerial duty of the
corporation to declare dividends if surplus
profit is available?
A: The declaration of dividends is
discretionary, covered by the business
judgment rule. However, stock corporations
are prohibited from retaining surplus profits
in excess of one hundred percent (100%) of
their paid-in capital stock, except: (a) when
justified by definite corporate expansion
projects or programs approved by the board
of directors; or (b) when the corporation is
prohibited under any loan agreement with
financial institutions or creditors, whether
local or foreign, from declaring dividends
without their consent, and such consent has
not yet been secured; or (c) when it can be
clearly shown that such retention is necessary
under special circumstances obtaining in the
corporation, such as when there is need for
special reserve for probable contingencies.
Thus, the board of directors may be
compelled to declare dividends if the surplus
profit is in excess of 100% of its paid-in
capital and no justifiable reasons exist to
withhold dividend declaration (Section 42,
RCC).
Under Section 49 of the RCC, however, the
board of directors must endeavor to present
to the stockholders an explanation on
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dividend policy and the fact of payment of
dividends or the reasons for the nonpayment
thereof.
Q:May the corporation
revaluation/appraisal surplus?
A: No, the SEC opined that an increase in the
value of a fixed asset as a result of its
revaluation is not retained earnings. Such are
mere increments in the value of corporate
assets which may fluctuate from time to time.
Thus, if a parcel of land originally acquired
for P 10,000,000 had doubled in value after
three years, the recognition in the corporate
books of the revaluation does not justify
dividend declaration. It is the gain arising
from the sale of the revalued property which
may serve as the basis for the declaration of
dividends. (1987 BAR EXAM)
It is only when the property is sold in the
higher price that the gain arising from the sale
of the revalued property can be served as a
basis for declaration of dividends.
Q: What are the kinds of dividends?
A: Either cash, stock or property dividends.
NOTE: For the purposes of approval, any
dividends not payable in stock or shares is
considered cash dividends. So, property
dividend is considered cash dividend. It only
requires BOD’s approval. Same as bond
dividend.

Q: Shares of stock by the corporation in
the other corporation. Can they be
declared dividends?
A: Yes, they are property dividends.
Dividends as a result of the investment in
another corporation. Board’s approval only.
Slide: Dividends may either be cash or stock.
Any dividend other than from the unissued
shares of the corporation is, in contemplation
of law a cash dividend. Thus, property
dividend is essentially a cash dividend.
Stockholders' approval, therefore, is not
required for property dividends.
A stock dividend is one that is declared and
paid out from the unissued shares of the
corporation. It is paid in shares of stock
instead of cash.
Q: Discuss the concept of stock dividends.
A: Stock dividend is actually a two-step
process:
(1) a dividend, and (2) the enforced use of the
dividend money to purchase additional shares
of stock at par value to be proportionately
distributed to the stockholders on the basis of
the shares held.
Slide: Palmavera Corporation has an
authorized capital stock of P500,ooo,ooo all
subscribed and outstanding as of December
31, 2019. The corporation also has
unrestricted retained earnings in its book
amounting to P375,ooo,ooo. Since the
corporation needed the cash surplus to carry
out its expansion projects, the board of
directors, in its meeting held on January 5,
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2020, approved a resolution declaring and
ordering the issuance of 50% stock dividends
in lieu of cash dividends.
Q: Was the resolution declaring the
issuance of stock dividends valid? Explain
your answer.
A: Yes, the resolution of the Board of
Directors declaring the issuance of stock
dividends was valid, but still insufficient for
purposes of stock dividend.
Q: What step or steps need to be taken so
that the decision of the board could be
implemented? State the required vote.
A: The aforesaid approval of the Board of
Directors for the declaration of stock
dividends should still be concurred in by the
stockholders representing not less than 2/3 of
the outstanding capital stock, at a regular or
special meeting called for the purpose. In
addition, the authorized capital stock must be
increased to accommodate the stock
dividends since the authorized capital stock
of Palmavera Corporation is fully subscribed.
The increase in capital stock is subject to SEC
approval.
Q: When you declare stock dividends and
you increase ACS, do you need to collect
money from the stockholders to be able to
comply with 25% subscription and
payment requirement in case of increase in
ACS?
A: No, it is cash coming from the corporation
to fund the increase.
 4B & 4C 2020-2021
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CASH DIVIDENDS STOCK DIVIDENDS corporation is declaration but the

bound to make good share issuance.
Involves the Stock dividend does
its obligation to the
disbursement of not require any
creditor-
earnings to disbursement.
stockholder to pay
stockholders
the cash dividends.
Cash dividend Stock dividend does
Any cash dividends Stock dividends
increases the wealth not.
due on deliquent shall be withheld
of the stockholder
stock shall first be from the delinquent
A cash dividend Stock dividend
applied to the stockholder until his
does not affect the decreases the
unpaid balance on unpaid subscription
fractional interest in fractional interest in
the subscription is fully paid.
property which corporate property
plus costs and
each share which each share
expenses
represents represents.
Cash dividends Stock dividends,
Q: ABC Management, Inc. presented to
when received by regardless of the
DEF Mining Corp. the draft of its
natural persons are recipient, are not
proposed Management Contract. As an
subject to tax subject to tax.
incentive, ABC included in the terms of
In the declaration of Declaration of stock
compensation that ABC would be entitled
cash dividend, dividend requires
to 10% of any stock dividend which DEF
board approval the approval of at
may declare during the lifetime of the
suffices. least a majority of
Management Contract. Would you
the board of
approve of such provision? If not, what
directors and
would you suggest as an alternative?
stockholders
representing at least
A: I would not approve of a proposed
2/3 of the
stipulation in the management contract that
outstanding capital
the managing corporation, as additional
stock.
compensation to it, should be entitled to 10%
Declaration of cash Stock dividends
of any stock dividend that may be declared.
dividends may not may be revoked
Stockholders are the only ones entitled to
be revoked since, even after
receive stock dividends. I would add that the
upon declaration, declaration but prior
unsubscribed capital stock of a corporation
a creditor-debtor to the actual
may only be issued for cash or property or for
relationship is issuance of shares
services already rendered constituting
established between because what
demandable debt. As an alternative, I would
the stockholder and consummates stock
suggest that the managing corporation should
the corporation. dividend is not the
instead be given net profit participation and,
Hence, the debtor-
if later so desires, to then convert the amount

Page 69 of 351

that may be due thereby to equity or shares of
stock at no less than the par value thereof.
Q: What is the trust fund doctrine?
A: The trust fund doctrine provides that
subscriptions to the capital stock of a
corporation constitute a fund to which the
creditors have a right to look for the
satisfaction of their claims.
In a sense, they have to be unimpaired for the
protection of creditors. These cover the entire
consideration received for the issuance of no
par value shares or the aggregate amount for
the par value shares issued by the
corporation.
It must be noted, however, that the trust fund
doctrine is not limited to the stockholders'
subscriptions. The scope of the doctrine
encompasses not only the capital stock but
also other property and assets generally
regarded in equity as a trust fund for the
payment of corporate debts.
Q: When is the trust fund doctrine
violated?
A: The Trust Fund Doctrine is violated in the
following cases:
a. The corporation has distributed its capital
among the stockholders without providing
for the payment of creditors
b. It released the subscribers to the capital
stock from their unpaid subscriptions in fraud
of its creditors.
c. It transferred corporate property by way of
dissolution
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d. It distributed properties to stockholders
except by way of dissolution and liquidation,
the redemption of redeemable shares, and of
reduction of capital stock
e. When it declared dividends without
unrestricted retained earnings.
f. When it acquired its shares without
unrestricted retained earnings.
Q: What are those cases that a corporation
can distribute properties without
impairing the trust fund doctrine?
A:
1. Dissolution and liquidation
2. Redemption of redeemable shares
3. Reduction of capital stock
NOTE: Properties cannot distributed to the
stockholders except in cases of dissolution
and liquidation, redemption of redeemable
shares and reduction of capital stock.
Q: Does the additional paid-in capital
("APIC"), that is, the premium above par
value, form part of the trust fund
doctrine?
A: APIC forms part of the equity emanating
from the original subscription agreement.
APIC, as a premium, forms part of the capital
of the corporation and therefore, falls within
the purview of the trust fund doctrine.
There have been previous SEC Opinions that
stock dividends can be declared out of APIC
but the most recent SEC regulation, as
previously pointed out, is that APIC shall
neither be declared as dividend nor shall it be
reclassified to absorb deficiency except

through an organizational restructuring duly
approved by the SEC.
Q: ABC Corporation ("ABC") obtained a
loan from XYZ Bank secured by a
mortgage on its real property. ABC
defaulted. To stave off foreclosure, A, the
controlling stockholder of ABC invited
investor X to invest in ABC. X subscribed
to shares of stock of ABC and became a
significant stockholder. In further
consideration of his investment, X and A
agreed on how to manage the corporation.
Unfortunately, the two stockholders had a
disagreement, with each one claiming a
breach of the subscription agreement.
May A rescind the subscription of X?
A: No, the rescission of the Subscription
Agreement will effectively result in the
unauthorized distribution of the capital assets
and property of the corporation, thereby
violating the Trust Fund Doctrine. Rescission
of a subscription agreement is not one of the
instances when the distribution of capital
assets and property of the corporation is
allowed. The Trust Fund Doctrine provides
that subscriptions to the capital stock of a
corporation constitute a fund to which the
creditors have a right to look for the
satisfaction of their claims.
Q: Halley was an incorporator and
original director of Business Media
Philippines, Inc. (BMPI ) which originally
had an ACS of Php 3,000,000.00 with a par
value of Php 10.00 0 of which 75,000 were
initially subscribed. BMPI commissioned
Printwell for the printing of a magazine
that BMPI published and sold. For that
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purpose, Printwell extended 30-day credit
accommodations.
BMPI then place with Printwell several
orders on credit totaling P316, 342.76.
Considering that the former paid only
P25,ooo.oo, the latter sued the former for
the collection of the unpaid balance.
Impleaded as defendants are all the
original stockholders and incorporators of
BMPI to recover on their unpaid
subscriptions.
May Printwell collect the unpaid
subscription of Halley?
A: Yes, a creditor is allowed to maintain an
action upon any unpaid subscriptions (in the
same collection suit against the corporation)
and thereby steps into the shoes of the
corporation for the satisfaction of the debt.
To make out a prima facie case in a suit
against stockholders of an insolvent
corporation to compel them to contribute to
the payment of its debts by making good the
balances upon their subscriptions, it is only
necessary to establish that the stockholders
have not in good faith paid the par value of
the stocks of the corporation. Subscriptions to
the capital stock of a corporation constitute a
fund to which creditors have the right to look
for the satisfaction of their claims.
In PNB v. Bitulok Sawmill, that the only time
the unpaid subscribers can be made liable to
corporation’s creditors or corporate creditors
may enforce payment of the unpaid
subscription, is when the corporation
becomes insolvent. So you need formal

declaration of insolvency to be able to run
after the unpaid subscribers.
If the corporation is insolvent but not bona
fide insolvent, the creditors cannot enforce
payment of the unpaid subscriptions against
those subscribers then the remedy is to run
after the corporation and not to run against
the subscribers yet because the subscribers is
not liable solidarily with the corporaton for
the payment of the obligations of the
corporation to the creditor.
The only time the unpaid subscribers are
liable solidary with the BOD is in case of
Watered stocks.
That is why the corporate creditors must wait
first for the insolvency of the corporation
before they can run after the unpaid
subscribers. Not anymore in the case of
Halley v. Printwell.
In the case of Halley v. Printwell, lnc., there
was no insolvency proceeding and yet the
Supreme Court affirmed the right of the
creditor to enforce the payment of the unpaid
subscription in the same collection suit
against the corporation.
It is submitted that the correct thing to do is
to enforce the judgment against the
corporation first and it is only when the writ
of execution is returned unsatisfied for lack
of leviable assets sufficient to satisfy the
judgment debt that the judgment against the
unpaid subscriber may be enforced.
Otherwise, the unpaid subscriber effectively
becomes solidarily liable with the
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corporation. Such solidary liability has no
basis in law.
Dividends are payable to stockholders as of
the record date fixed in the bylaws or fixed
by the BOD.
Example:
The board declared or approved dividends
today. The dividends are not payable right
away. They payable usually after 1 month. So
payable to all stockholders on Dec. 15, 2020.
Declaration date, December 1; Record date,
Dec. 15, 2020 and payment date, December
30, 2020.
Q: What if between record date and
payment date, the stockholder sold his
shares. Who gets the dividends in payment
date? The owner or stockholder of record?
A: Stockholder of record, the one who is
entitled to the rights of the stockholder. As far
as the corporation is concerned, dividends are
payable to the stockholders as of this
particular date.
POWER TO ENTER INTO
MANAGEMENT CONTRACT
Q: What is a management contract?
A: A management contract is an agreement
under which a corporation delegates the
management of its affairs to another
corporation for a certain period of time. The
contract can have a different nomenclature
but falls within the purview of a management
contract for so long as the intention is to

entrust to another corporation the
management of the business affairs of the
corporation.
NOTE: It is not the power being delegated
to the management corporation but the
management of business affairs of the
corporation. Approval of corporate acts still
reserve to the BOD and stockholders as the
case may be.
Q: What are the requirements for the
exercise of the power to enter into
Management Contracts?
A:
a. Such contract shall have been approved by
the board of directors and by stockholders
owning at least the majority of the
outstanding capital stock, or by at least the
majority of the members in the case of a
nonstock corporation, of both the managing
and the managed corporation, at a meeting
duly called for the purpose;
b. Where a stockholder or stockholders
representing the same interest of both
managing and managed corporation own and
control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of
the managing corporation; or where a
majority of the members of the board of
directors of the managing corporation also
constitute a majority of the board of directors
of the managed corporation, then the
management contract must be approved by
the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or
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by at least two-thirds (2/3) of the members 1n
case of a non-stock corporation; and
c. No management contract shall be entered
into for a period longer than five years for one
term except for service contracts or operating
agreements which relate to the exploration,
development, exploitation or utilization of
natural resources may be entered into for
such periods as may be provided by the
pertinent laws or regulations.
As a rule, the period of management contracts
is five (5) years for any one (1) term, and for
so long as it is between two corporations.
However, the following are some of the
exceptions:
a. Management contract between two
corporations pursuant to the Mining Act of
1995. Under this law, the contract may be for
25 years.
b. Technical/Financial Service Agreement or
Production Agreement can be for 25 years.
The aforementioned conditions shall apply to
any contract whereby a corporation
undertakes to manage or operate all or
substantially all of the business of another
corporation whether such contracts are called
service contracts, operations agreements, or
otherwise.
NOTE: The 5yr period limitation on the
management contract only applies to
management contract between two
corporations. Not in a management contract
between a natural person and a corporation

because it is governed by Oblicon and not by
RCC.
ULTRA VIRES ACTS OF
CORPORATIONS
Q: What is the test to determine whether
or not an act is within the powers of the
corporation?
A: The test to be applied is whether the act in
question is in direct and immediate
furtherance of the corporation’s business,
fairly incident to the express powers and
reasonably necessary to their exercise. If so,
the corporation has the power to do it;
otherwise not. It is a question therefore in
each case of the logical relation of the act to
the corporate purpose expressed in the
charter. If the act, which is lawful in itself and
not otherwise prohibited, is done for the
purpose of serving corporate ends, and is
reasonably tributary to the promotion of
those ends, in a substantial, and not in a
remote sense, it may fairly be considered
within the powers.
NOTE: The powers of the coporation is not
restricted to what appears on AOI. It is not
everything that can be captures by the AOI.
It also extends to incidental powers or
powers implied to expressed powers. Or
simply any act that is related to furtherance
of the purpose of the corporation.
Q: What is an ultra vires act of the
corporation?
A: The term is used to describe a corporate
transaction that is outside the objects for
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which the corporation was created as defined
in the law of its organization, and therefore,
beyond the powers conferred upon it by law.
LEONEN: Corporations are artificial entities
granted legal personalities upon their creation
by their incorporators in accordance with
law. Unlike natural persons, they have no
inherent powers. Third persons dealing with
corporations cannot assume that corporations
have powers. It is up to expressly defined by
the law and their articles of incorporation.
A corporation may exercise its powers only
within those definitions. Corporate acts that
are outside those express definitions under
the law or articles of incorporation or those
committed outside the object for which a
corporation is created are ultra vires. The
only exception to this rule is when acts are
necessary and incidental to carry out a
corporation's purposes and to the exercise of
powers conferred by the Corporation Code
and under a corporation's articles of
incorporation.
Tersely, an ultra vires act is an act done by a
corporation outside of the express and
incidental powers vested in it by its charter
and by law.
Q: Is ultra vires act limited to any act
which is outside the express and incidental
powers of the corporation?
A: No, there are three types of ultra vires acts:
a. Acts done beyond the powers of the
corporation as provided in the law or its
articles of incorporation.

b. Acts entered into on behalf of the
corporation by persons who have no
corporate authority or exceeded the scope of
their authority.
c. Acts or contracts, which are per se illegal
as being contrary to law.
Cite jurisprudence on ultra vires acts for
being outside or beyond the powers of the
corporation.
a. Petitioner an educational institution does
not have the power to mortgage its properties
in order to secure loans of a savings and loan
association even though they have common
stockholders.
Securing SLA's loans by mortgaging the
school's properties does not appear to have
even the remotest connection to its operations
as an educational institution. Further, not
having the proper board resolution to
authorize the signatory to execute the
mortgage contracts for the school, the
contracts he executed are unenforceable
against the petitioner. While the lender's
mortgage is annotated on the certificates of
titles of petitioner's properties, the
annotations are merely claims of interest or
claims of the legal nature and incidents of the
relationship between the person whose name
appears on the document and the person who
caused the annotation. It does not say
anything about the validity of the claim nor
convert a defective claim or document into a
valid one.
b. While Section 13 of DBP's charter,
exempts it from existing laws on
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compensation and position classification, it
concludes by expressly stating that DBP's
system of compensation shall nonetheless
conform to the principles under the Salary
Standardization Law (SSL). From this, there
is no basis to conclude that the DBP's Board
of Directors was conferred unbridled
authority to fix the salaries and allowances of
its officers and employees. The authority
granted DBP to freely fix its compensation
structure under which it may grant
allowances and monetary awards remains
circumscribed by the SSL; it may not entirely
depart from the spirit of the guidelines
therein.
The grant of a wider latitude to DBP's Board
of Directors in fixing remunerations and
emoluments does not include an abrogation
of the principle that employees in the civil
service "cannot use the same weapons
employed by the workers in the private sector
to secure concessions from their employees."
While employees of chartered GFls enjoy the
constitutional right to bargain collectively,
they may only do so for non-economic
benefits and those not fixed by law, and may
not resort to acts amounting to work
stoppages or interruptions. There is no other
way to view the Governance Forum
Productivity Award (GFPA) other than as a
monetary benefit collectively wrung by
DBP's employees under threat of disruption
to the bank's smooth operations.
All told, the grant of GFPA was indeed an
ultra vires act or beyond the authority of
DBP's Board of Directors.

Cite instances where the corporate acts are
within the powers of the corporation but
are considered ultra vires because they
were entered into on behalf of the
corporation by persons w h o h ave no
corporate authority or have exceeded the
scope of their authority.
a. Another, a contract to sell cement signed
by the president and chairman of the
corporation is not binding upon it where they
were not authorized by the board of directors
to enter into a contract and the company
board of directors disapproved the contract
and the bylaws conferred the power to
manage the business of the corporation upon
the general manager.
b. Also, the assignment of certificates of
indebtedness belonging to a corporation
made without the authorization of the board
of directors does not bind the corporation.
c. There is also ultra vires act on the part of
the board of directors when it performs a
corporate act without the affirmative or
ratificatory vote of the stockholders in those
instances where the RCC so requires.
And there is an ultra vi res act on the part of
the corporate officers when they performed
acts, purportedly on behalf of the
corporation, without having been so
expressly or impliedly authorized by the
bylaws or board of directors, even when the
act or contract falls within the Corporation’s
express, implied or incidental power, unless
the acts are ratified by the corporation.
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Q: Y, as President of and on behalf of AAA
Corporation, as a way to accommodate X,
one of its stockholders, endorsed the check
issued by X. Which statement is most
accurate?
a. It is an ultra vires act;
b. It is a valid indorsement;
c. The corporation will be held liable to
any holder in due course;
d. It is an invalid indorsement.
Answer: a. It is an ultra vires act.
Q: Is an ultra vires act illegal?
A: It depends. If the act is illegal then that act
is void. But not all ultra vires act are illegal
act. If act is illegal it is automatic ultra vires.
Ultra vires acts are those acts outside the
powers of the corporations but not contrary to
law and can be ratified.
Slide: An illegal act, such as one that is
contrary to law, is necessarily ultra vires but
an ultra vires act is not necessarily an illegal
act if it only one that is outside the conferred
powers of the corporation.
The term ultra vires should be distinguished
from an illegal act for the former is merely
voidable which may be enforced by
performance, ratification, or estoppel, while
the latter is void and cannot be validated. It
being merely voidable, an ultra vires act can
be enforced or validated if there are equitable
grounds for taking such action.
Q: May an ultra vires act be ratified?

A: Yes, as long as it is not contrary to law. It
can be ratified based on equitable grounds.
Slide: In the Pirovano vs. Dela Rama
Steamship, the board authorized the
corporation to obtain insurance policy on the
life of Pirovano making his children as
beneficiaries. This was done in recognition of
Pirovano's immense contribution to the
growth of the corporation. Upon Pirovano's
death, however, the corporation questioned
the obtention of the insurance policy arguing
that it is ultra vires. The Supreme Court held
that even assuming it is an ultra vires act, it is
deemed ratified by the corporation. A careful
reading of the case shows, however, that that
the ratio decidendi was more on estoppel
rather than ratification.
In Republic vs. Acoje Mining Co., a mining
company requested the Director of Post to
establish a postal office inside the mining
camp. The latter agreed but subject to the
condition that the company shall indemnify
for any loss or damage that the government
would suffer by reason of the act of the
person designated as postal officer by the
mining company. The latter agreed and
adopted the corresponding board resolution.
When the postal officer incurred cash
shortage and Director of Posts demanded
payment for it, the mining company denied
liability arguing that the establishment of the
postal office is ultra vires. The Supreme
Court held that "although not expressly
authorized to do so, the establishment of the
local post office is a reasonable and proper
adjunct to the conduct of the business of a
mining company for such post office is a vital
improvement in the living condition of its
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employees and laborers who came to settle in
its mining camp which is far removed from
the postal facilities or means of
communication accorded to people living in
a city or municipality.
And even assuming it is ultra vires, it is
deemed ratified because the corporation
requested for it and agreed to the conditions
imposed by the government and as such,
estopped from claiming otherwise.
In the case of Metropolitan Bank & Trust
Co. vs. Quilts & All, Inc., a mortgage on a
corporate property accepted by a bank as the
basis for restructuring a personal loan cannot
be annulled even though it could not have
been authorized by the board of directors (for
lack of quorum) where the bank relied on the
secretary's certificate attesting to the
existence of a board resolution approving the
mortgage.
Q: What are the consequences of Ultra
Vires Acts?
A: Unenforceable
Q: What is the remedy of the stockholder
against an ultra vires act?
A: If the act is yet to be done, the remedy is
one of injunction to enjoin the performance
or continued performance of the ultra vires
act.
If the act has already been performed, a
stockholder may file a derivative suit on
behalf of the corporation to set aside the ultra
vires act.

NOVEMBER 26, 2020
TITLE V
BYLAWS
-Recitation-
Q: ABC Corporation allows the BOD to
amend the bylaws. The bylaws is approved
by all the stockholders, not just the
majority and not just 2/3. Let’s just say
that they filed and approved the bylaws
prior to incorporation. So pursuant to the
authority delegated by the SH to the
board, the board amended the bylaws to
reduce the number of votes needed to
disqualify a competitor. The board
adopted a resolution and effected the
amendment to the bylaws. If you are the
SEC, will you approve the amendment to
the bylaws?
A: No, because there is no valid delegation of
authority. Under the RCC, the delegation of
authority by the SH to the BOD to amend the
bylaws must be embodied in a stockholders’
resolution.
Q: What if the delegation of authority is in
the bylaws? Is it valid?
A: No, delegation found in the bylaws is
invalid. Being a part of the bylaws, it is
difficult to withdraw or revoke the authority
granted to the BOD. (One of the significant
amendments under the RCC)
Q: If the bylaws are not submitted within
one (1) month from incorporation, is that
a ground to dissolve the corporation?
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A: No, the RCC removed the one-month
period to submit the bylaws. In effect, the
non-submission of the bylaws ceased to be a
ground for the suspension or revocation of
the certificate of registration.
Q: What is then the status of the
corporation?
A: The corporation may be considered as a de
facto corporation whose right to exercise
corporate powers may not be inquired into
collaterally in any private suit to which such
corporation may be a party.
Dean’s Book: It is submitted that a
corporation which has not adopted bylaws,
after incorporation, should be considered a de
facto corporation. It has all the powers and
privileges of a corporation under the RCC
until the State assails its existence in a direct
proceeding. But because the one-month
period to submit the bylaws was removed, it
may adopt the bylaws anytime and the basis
of the suit against the corporation is only the
inaction or refusal of the corporation to
adopt and submit bylaws despite the order
from the SEC.
In actuality, the bylaws are submitted prior to
incorporation. SEC will not act on the
application without the bylaws. (Divina,
2020)
-Slide-
Q: What are the revisions under the RCC
on bylaws?
A:
a. It removed the option of adopting and
submitted the bylaws of the corporation

to the SEC within a period of one month
from the former’s incorporation but,
nevertheless, retained the option of the
corporation to adopt bylaws after
incorporation.
b. On the contents of the bylaws, it included
the provisions on the mode of notice to
the stockholders or members and the
modes by which they may attend
meetings; the guidelines for setting the
compensation of directors or trustees and
officers, and the number of other board
representations that an independent
director or trustee may have which shall,
in no case, be more than the number
prescribed by the SEC; and other matters
as may be necessary for the promotion of
good governance and anti-graft and
corruption measures.
c. It also allows the inclusion of an
arbitration agreement in the bylaws.
Q: What are the nature and functions of
bylaws?
A: Bylaws are set of rules and regulations
adopted by the corporation for its internal
government, and to regulate the conduct and
prescribe the rights and duties of its members
towards itself and among themselves in
reference to the management of its affairs.
(John Gokongwei, Jr. vs. SEC, L-45911,
Aprill 11, 1979) The corporation has the
inherent and, at the same time, express power
to adopt bylaws.
Q: How are the bylaws adopted?
A: For the adoption of bylaws by the
corporation, the affirmative vote of the
stockholders representing at least a majority
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of the outstanding capital stock, or of at least
a majority of the members in case of non-
stock corporations, shall be necessary. The
bylaws shall be signed by the stockholders or
members voting for them and shall keep in
the principal office of the corporation, subject
to the inspection of the stockholders or
members during office hours. A copy thereof,
duly certified by a majority of the directors or
trustees and countersigned by the secretary of
the corporation, shall be filed with the SEC
and attached to the original articles of
incorporation.
-Discussion-
There are two (2) ways of adopting bylaws:
1. Prior to incorporation
 shall be signed by the stockholders
voting for them (basically, all the
incorporators); and
 shall keep in the principal office of
the corporation subject to the
inspection
2. After incorporation was approved by
the SEC
 Shall be approved by the stockholders
representing at least a majority of the
members of the outstanding capital
stock (or majority of members in case
of nonstock corporation)
As you can see, the BOD has no participation
regarding the adoption and approval of
bylaws. Bylaws are set of rules adopted by
the owners of the corporation.
Who are the owners? Stockholders owning
the corporation but only requires the majority
of the outstanding capital stock.
What is the participation of the BOD? The
copy of the bylaws, as approved by the

stockholders, must be kept and filed with the
SEC. The copy with the corporation must be
certified by the majority of the directors and
countersigned by the Corporate Secretary of
the corporation. This is to make sure that this
is the bylaws approved by the stockholders
and by the SEC or that there are no two sets
of bylaws.
Special Corporations (i.e. banks, insurance
companies, building and loan association,
public utility, educational institution, or
other special corporations governed by
special laws)
The bylaws must be indorsed favorably by
the appropriate government agency. So, SEC
will not accept any application for approval
of bylaws or its amendment if there is no
indorsement from the appropriate
government agency.
Q: What are the contents of bylaws?
A:
a. The time, place and manner of calling and
conducting regular or special meetings of
the directors or trustees;
b. The time and manner of calling and
conducting regular or special meetings
and mode of notifying the stockholders or
members thereof;
c. The required quorum in meetings of
stockholders or members and the manner
of voting therein;
d. The modes by which a stockholder,
member, director or trustee may attend
meetings and cast their votes;
e. The form for proxies of stockholders and
members and the manner of voting them;
f. The directors’ or trustees’ qualifications,
duties and responsibilities, the guidelines
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for setting the compensation of directors
or trustees and officers, and the maximum
number of other board representations
that an independent director or trustee
may have which shall, in no case, be more
than the number prescribed by the SEC;
g. The time for holding the annual election
of directors or trustees and the mode or
manner of giving notice thereof;
h. The manner of election or appointment
and the term of office of all officers other
than directors or trustees;
i. The penalties for violation of the bylaws;
j. In the case of stock corporations, the
manner of issuing stock certificates; and
k. Such other matters as may be necessary
for the proper or convenient transaction
of its corporate affairs for the promotion
of good governance and anti-graft and
corruption measures.
An arbitration agreement may be provided in
the bylaws pursuant to Sections 46 and 181
of the RCC.
(a and b)
If you compare A and B, you will notice that
with respect to the meetings of directors, the
bylaws included “place,” right?
The bylaws allows a venue for board
meetings. Meetings of the board may be held
anywhere, even outside the country. Unless,
the bylaws provides otherwise.
BUT FOR STOCKHOLDERS’ MEETING,
that option is not available. This is because
the place of stockholders’ meeting is fixed by
law. i.e. principal office of the corporation
and if not practicable, in the city or
municipality where the principal office is
located.

Mode of Notice: The RCC included the
electronic notice if allowed by the bylaws.
Before RCC, the usual modes of giving
notice are the ff:
1. Personal notice;
2. Notice by Publication; and
3. Notice, electronically, thru email.
What is the most practical and most
convenient mode of giving notice? Still,
publication. Because personal notice, you
have to prove that you have given notice to
all the stockholders. For electronic notice,
you have to go to so many processes of
authentication whether or not the notice was
received by the stockholder concerned.
Whereas, in publication, all you have to
present to prove notice is the affidavit of the
publisher that publication was done in
newspaper of general circulation in the city
where the principal office of the corporation
is located and following the frequency
prescribed by the bylaws of the corporation.
(c)
Required quorum in SHs’ meetings:
It can be less than outstanding capital stock.
Except when the RCC requires majority OCS
or 2/3 capital stock as the case may be.
(d)
Modes in attending meetings:
This refers to the mode on how the
stockholders may be present in the meeting
and cast their votes.
1. In Person
2. Proxy
3. Remote Communication
4. In Absentia
If allowed by the bylaws or not, by approval
of the board that is majority of the
members(?)
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Corporation vested with Public Interest:
even if not in the bylaws, they can participate
thru electronic communication.
(e)
Proxies: Forms and Manner of Voting
RCC provides that proxies must be in writing
and filed with the Corporate Secretary before
the meeting. Meaning? The bylaws may
require additional requirement/s for a valid
proxy. E.g. (1) it must be notarize to ensure
authenticity. (2) period to file the proxy with
the Corporate Secretary. For public
companies, it is at least five (5) days before
the scheduled meeting.
(f)
Qualifications of Directors:
They must have the basic qualifications
under the Code and the Bylaws.
The RCC provides for the duties and
responsibilities of the directors but the
bylaws may expand such.
Compensation of the Directors:
Cannot be fixed by the directors. Can only be
fixed by the bylaws or the stockholders
owning the majority OCS. The bylaws may
provide for the guidelines in setting their
compensations.
Independent Directors:
The maximum number of other board
representations that an ID may have may also
be provided by the bylaws. But such must be,
in no case, more than the number prescribed
by the SEC.
SEC prescribes: maximum of 9.
Public Companies are required to have at
least 2 IDs. Justices of the SC are appointed
as ID in various public companies. Public
companies usually appoint retired justices.
(g)

Time for Holding the Annual Election:
Dean only read it.
(h)
Term of Office of All Officers:
Q: Can the bylaws provide that the term of all
officers is 1 year subject to reappointment? If
you are not reappointed, then your term has
prescribed and you lose your job.
A: the “officers” in letter “h” pertains to
corporate officers and other officers
holding their positions based on trust and
confidence. Remember, when you are
holding on a bylaws position, you are a
corporate officer. Meaning, this cannot be
construed to mean non-corporate officers.
Non-corporate officers are protected by
security of tenure under our Labor Laws.
(i)
Penalties for Violation of the Bylaws:
As long as they are not contrary to law, the
bylaws may provide for such.
e.g. directors who failed to pay dues and
assessment or who are absent for 3
consecutive meetings may be removed by the
board.
Of course, the removal by director is void
because only stockholders can remove a
director. BUT the penalties mentioned above
will provide as the just cause that may
warrant the removal of a minority director.
(j)
Manner of Issuing Stock Certificates:
Dean only read it.
(k)
Other matters: Dean only read it.
Arbitration Agreement:
Can be in the AOI or in the bylaws.
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Having an arbitration agreement, any court
suit, without resorting first to arbitration
proceedings, will be premature.
CHINA BANKING CORPORATION VS. CA
117504 | MARCH 26, 1997
Q: Are the bylaws of the corporation
binding on third parties?
A: No, bylaws are only binding among the
stockholders and members of the
corporation. To be bound, a third party must
have acquired knowledge of the pertinent
bylaws at the time the transaction or
agreement was entered into.
Thus, a provision in the bylaws of a country
club granting it a preferred lien over the share
of stock of a member for unpaid dues is not
binding on the pledgee of the same share of
stock if the latter had no actual knowledge of
it when the shares were assigned to it as
security for a loan transaction.
Fully Paid Shares: The consent of the
corporation is not required. In case of
subscription which are not fully paid, the
corporation may refuse the transfer of shares.
Correlate it to Sec. 62, RCC: “unpaid claim”
pertains to unpaid subscription, nothing
more/less.
PMI COLLEGES VS. NLRC AND GALVAN
121466 | AUGUST 15, 1997
❖ The bylaws provides that the
employment contracts must be signed
by the Chairman of the Board of the
school. Is the employment contract

entered into by the school and the
instructors still valid if the Chairman is
not a signatory thereon?
Yes, it is still valid. Bylaws cannot affect or
prejudice third persons who deal with the
corporation, unless they have knowledge of
the contents of bylaws.
Q: When do bylaws become effective?
A: Under Section 45 of the RCC, bylaws
become effective only upon the issuance of
the SEC of a certification that the bylaws are
in accordance with the RCC.
Amended or new bylaws become effective
upon the issuance by the SEC of a
certification that the same is in accordance
with the RCC and other relevant laws.
IN PRACTICE: When applying for the
incorporation make sure you have the
following documents:
1. Certificate of Incorporation or
Registration
o signed by Director for
Company Monitoring and
administration department
2. Certification of filing of Articles of
Incorporation; and
3. Certification of filing of Bylaws.
Q: Is there any revision under the RCC on
the amendment of bylaws?
A: Yes, the delegation of authority by the
stockholder or members to the BOD or BOT
to amend the bylaws must be embodied in a
SHs’ or Ms’ Resolution.
Q: How are bylaws amended or revised?
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Under Section 47 of the RCC, bylaws may be
amended by at least majority of the BOD or
BOT and the owners of at least majority of
the OCS in case of a stock corporation or of
the members in case of a non-stock
corporation, at a regular or special meeting
duly called for the purpose.
Owners of 2/3 of the OCS of stock
corporation or 2/3 of the members in a
nonstock corporation can delegate to the
board of directors or trustees the power to
amend or repeal the bylaws or adopt new
bylaws. This delegation is revoked by the
vote of stockholders owning or representing
a majority of the OCS or a majority of the
members at a regular or special meeting.
Whenever the bylaws are amended or new
bylaws are adopted, the corporation shall file
with the SEC such amended or new bylaws
and, if applicable, the SHs’ or Ms’ resolution
authorizing the delegation of the power to
amend and/or adopt new bylaws, duly
certified under oath by the corporate
secretary and a majority of the directors or
trustees. (Sec. 47, RCC)
Delegation – 2/3 of the OCS
Revocation – Majority of the OCS only.
Q: May the bylaws reflect the actual
delegation of authority to the board of
directors to amend the bylaws?
A: No, the bylaws may not reflect the actual
delegation. The delegated authority is
temporary. If the delegation is in the bylaws,
the authority cannot be simply recalled for it
would have required an amendment to the
bylaws itself. (SEC-OGC Opinion 18-08,
dated April 20, 2018)
 4B & 4C 2020-2021
Notes for Merc Rev 1

5) A list of the directors or trustees,

TITLE VI
officers and stockholders or
MEETINGS members who attended the
-Slide- meeting; and
Q: What are the revisions under the RCC 6) Such other items that the SEC
on meetings? may require in the interest of good
A: corporate governance and the
a. It specified that if the bylaws are silent, protection of minority
the regular stockholders’ meeting shall be stockholders.
held on any date after April 15 of every b. A members’ list for nonstock
year. corporations and, for stock
b. Written notice of the regular meetings corporations, material
shall now be sent at least 21 days prior to information on the current
the meeting, compared to two weeks prior stockholders and their voting
notice under the OCC. rights;
c. Written notice of regular meetings may c. A detailed, descriptive, balanced
be sent to all stockholders or members of and comprehensible assessment
record through electronic mail or such of the corporation’s performance,
other manner as the SEC shall allow which shall include information
under its guidelines. on any material change in the
d. At each regular meeting of stockholders corporation’s business, strategy,
or members. The BOD or BOT shall and other affairs;
endeavor to present to stockholders or d. A financial report for the
members the following: preceding year, which shall
a. The minutes of the most recent include financial statements duly
regular meeting which shall signed and certified in accordance
include, among others: with the RCC and the rules the
1) A description of the voting and SEC may prescribe, a statement
vote tabulation procedures used in on the adequacy of the
the previous meeting; corporation’s internal controls or
2) A description of the opportunity risk management systems, and a
given to stockholders or members statement of all external audit and
to ask questions and a record of non-audit fees;
the questions asked and answers e. An explanation of the dividend
given; policy and the fact of payment of
3) The matters discussed and dividends or the reasons for
resolutions reached; nonpayment thereof;
4) A record of the voting results for f. Director or trustee profiles which
each agenda item; shall include, among others, their

Page 84 of 351

qualifications and relevant
experience, length of service in
the corporation, trainings and
continuing education attended,
and their board representations in
other corporations;
g. A director or trustee attendance
report, indicating the attendance
of each director or trustee at each
of the meetings of the board and
its committees and in regular or
special stockholder meetings;
h. Appraisals and performance
reports for the board and the
criteria and procedure for
assessment;
i. A director or trustee
compensation report prepared in
accordance with the RCC and the
rules the SEC may prescribe;
j. Director disclosure on self-
dealing and related party
transactions; and/or
k. The profiles of directors
nominated or seeking election or
reelection.
e. A director, trustee, stockholder, or
member may propose any other matter
for inclusion in the agenda at any regular
meeting of stockholders or members.
f. A stockholder or member may propose
the holding of a special meeting and items
to be included in the agenda.
g. General waivers of notice in the AOI or
the Bylaws shall not be allowed:
Provided, further, that attendance at a
meeting shall constitute a waiver of
notice of such meeting, except objecting
to the transaction of any business because
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the meeting is not lawfully called or
convened.
h. The SEC may issue an order directing the
petitioning stockholder or member to call
a meeting when there is no person
authorized or the person authorized
unjustly refuses to call a meeting;
i. Unless the bylaws provide for a longer
period, the stock and transfer book or
membership book shall be closed at least
twenty (20) days for regular meetings and
seven (7) days for special meetings
before the scheduled date of the meeting.
j. In case of postponement of stockholders’
or members’ regular meetings, written
notice thereof and the reason therefor
shall be sent to all stockholders or
members of record at least two (2) weeks
prior to the date of the meeting, unless a
different period is required under the
bylaws, law or regulation.
k. The right to vote of stockholders or
members may be exercised in person,
through a proxy, or when so authorized in
the bylaws, through remote
communication or in absentia. The SEC
shall issue the rules and regulations
governing participation and voting
through remote communication or in
absentia, taking into account the
company’s scale, number of stockholders
or members, structure, and other factors
consistent with the protection and
promotion of stockholders’ or members’
meetings.
-Discussion-
(a)
Why at any date after April 15?

Old Code: Any day in April.
April 15 – deadline to submit financial
statements and to pay taxes to the BIR.
(b)
Written Notice:
Old Code: at least 2 weeks
RCC: at least 21 days
(d. iv.)
CUSTOM: only external audit fees.
Now, RCC included “non-audit fees”
Hence, attorney’s fees, as appearing in the
financial reports, are now not exempted from
right to inspection.
(d. vi.)
Directors’ or Trustees’ Profile
Reason: So that the stockholders can decide
whether or not the person they are electing
indeed has the qualifications to run the affairs
of the corporation.
(d. vii.)
Attendance Report
You cannot be absent because the
stockholders can see whether or not you are,
in fact, diligent or not diligent in attending
meetings.
(g)
Waiver of Notice
As we know, even only 1 director was not
notified, the entire meeting is voided. Unless,
the infirmity was waived by the director
concerned.
(h) CASE:
BERNAS VS. CINCO
163356-57 | JULY 10, 2015
❖ Makati Sports Club has an oversight
committee. It is consisting of former
presidents of MSC. The committee is
allowed to sort of intervene if there are
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questions affecting the corporation.
The committee called for a special
stockholders’ meeting. In that meeting,
the group of Bernas was removed. The
removal was approved by the
stockholders owning 2/3 of the OCS. Is
the removal valid?
Supreme Court voided the removal because
the one who called the meeting is not the one
authorized by the bylaws to call the meeting.
There is no valid meeting when the person
who called the meeting is not authorized.
(i)
What if you acquired a share a day before
the meeting? Can you participate?
No, because the bylaws may close the STB
(stock and transfer book) for purposes of
attending the SHs’ or Ms’ Meeting.
Closing of STB
GR: long period provided under the bylaws
XPN: at least 20 days for regular meetings
and 7 days for special meetings before the
scheduled date of meeting.
Q: What are the requisites of a valid
stockholders meeting?
A: The following requisites must be present
for a stockholders’ meeting to be considered
valid:
a) It must be held at the stated date and the
appointed time or at a reasonable time
thereafter. To determine the date of the
annual stockholders’ meeting, reference
must be made to the pertinent provision
of the bylaws of the corporation.
b) There must be previous notice. The notice
must be in the form required by the
bylaws, given within the period fixed in

the bylaws and sent by the proper officer
authorized therein.
c) It must be called by the proper person.
The person authorized to call the meeting
is normally stated in the bylaws. If no
person is designated in the bylaws, the
authority to call a stockholders’ meeting
rests with the board of directors.
d) It must be held in the proper place. It is
mandatory that stockholders’ meetings
must be held in the principal office of the
corporation, as indicated in the AOI, and
if not practicable, in the city or
municipality where the principal office of
the corporation is located.
e) The quorum and voting requirements
must be met.
-Discussion-
(c)
Called by the Proper Person
It used to be the President. Now, it is the
Chairman. Usually, the bylaws already
provides for the person authorized to call the
meeting.
(d)
Proper Place
Old Code: in the city or municipality and if
practicable, in the principal office of the
corporation.
RCC: reversed. Principal office and if not
practicable, in the city or municipality where
the principal office of the corporation is
located.
Q: What are the modes of notice of
meeting to stockholders?
A: Notices can be made personally, or by
mail or by publication or through electronic
mail or other modes as may be allowed by the
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SEC; provided that the mode of notice
conforms to what the bylaws provide.
RICAFORT VS. DICDICAN
202647-50 | MARCH 9, 2016
❖ Q: When is regular stockholder
meeting valid even without notice to
the stockholders?
A: The regular stockholders’ meeting is valid
despite lack of written notice to the
stockholders if the bylaws specify the date
and time of the annual meeting. It was held
that the failure to give notice of the regular or
annual meetings, when the date thereof is
fixed in the bylaws, as in “at twelve-thirty
P.M., on the THIRD MONDAY OF AUGUST
in each year, if not a legal holiday, and if a
legal holiday, then on the first day following
which is not a legal holiday,” will not affect
the validity of the regular or annual
stockholders’ meeting or the proceedings
therein. (This is yet to be asked in the bar.)
❖ Q: Is it an election contest if it is filed
by a stockholder questioning the
results of the election, even though the
petitioner is not aspiring for a seat in
the board?
A: Yes, it is an election contest. Election
contest is not limited to a petition filed by
someone who is aspiring for a board seat. It
includes nullifying the results of the election.
This became important because election
contest can only be filed within 15 days after
election.

This petition is therefore barred for being
filed out of time.
-Recitation-
Q: TRUE OR FALSE: Quorum and
voting requirements are the same.
A: FALSE. Quorum is the number of
stockholders/directors required to be present
to conduct a meeting. Voting requirements
are the number of votes needed, under the
bylaws, to approve a corporate act.
Q: TRUE OR FALSE: The quorum for
board meeting is majority of the directors
as fixed under the bylaws.
A: FALSE. It is the majority of the directors
as fixed by the articles of incorporation.
Q: Can the bylaws prescribed a lesser or
greater number than what the AOI
required?
A: No. The bylaws cannot.
Q: TRUE OR FALSE: Board meetings
require prior written notice to the
stockholders at least 2 days before the
scheduled meeting.
A: FALSE. The notices for board meeting
need not be written.
Q: Principal Office of the corporation is in
the Pacific Star Building in Makati and it
is not practicable to conduct meeting at the
principal office. Then, the meeting can be
held anywhere in the City of Manila.
A: If stockholders’ meeting, it can only be
held in Makati because it is the city where the
principal office of the corporation is located.
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Q: Pledgee or creditors with security
interest cannot vote the shares even
though the security agreement is recorded
in the books of the corporation.
A: They are not allowed to vote. Only
stockholders of record are allowed to vote
and participate in the stockholders meeting.
Q: Can they be allowed to vote by
agreement?
A: Yes, provided that it is expressly stated
and recorded in the books of the corporation.
Q: When the law says that notices must be
sent to the stockholders, it means the day
it was mailed and not the day it was
received.
A: Case decided by former CJ Serreno and
express provision of the RCC, it is the date of
mailing.
Dean’s book: It must be the date of receipt
date of mailing.
-Slides-
Q: What is the quorum requirement for
stockholders’ meetings?
A: Unless otherwise provided in the
Corporation Code or in the bylaws, a quorum
shall consist of the stockholders representing
a majority of the outstanding capital stock.
(Sec. 51, RCC) Quorum is based on the
totality of the shares which have been
subscribed and issued, whether it be
founders’ shares or common shares. The
totality of shares issued is not only based on
the stock and transfer book of the corporation
but also the articles of incorporation and all
records of the corporation. (Lanuza vs. CA)

To be more precise, for stock corporations,
the quorum is the majority of the outstanding
stocks whereas for a nonstock corporation,
the basis in determining the presence of
quorum in nonstock corporations is the
numerical equivalent of all members who are
entitled to vote, unless some other basis is
provided by the bylaws of the corporation.
(Lim vs. Moldex)
The bylaws, for instance, may provide that
members who are delinquent in the payment
of their dues are not entitled to vote, in which
case, they are not included in the computation
of quorum. (SEC-OGC Opinion No. 31-19,
September 9,2019)
Stock Corporation
To be more precise: It is the majority of
outstanding voting stock, unless the bylaws
or the RCC provide otherwise.
Reason: There are certain cases where
preferred shares may vote and therefore, part
of the OCS. There are certain cases that they
cannot vote and therefore, not part of the
OCS.
For the purpose of electing directors: We
all know that non-voting preferred shares are
not included in the computation of majority
of OCS.
For the purpose of increasing the capital
stock or amending the AOI (any of the 8
cases enumerated in Sec 6 of the RCC):
Non-voting preferred shares are given the
right to vote and considered part of the OCS.
HENCE, TO BE MORE PRECISE, it is
the majority of the outstanding voting stock,
unless the bylaws or the RCC provide
otherwise.
Nonstock Corporation
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Quorum in NSC: numerical equivalent of all
members who are entitled to vote. In other
words, majority of the voting members,
unless the bylaws requires otherwise.
Q: Is it permissible for the bylaws to
provide quorum of stockholders’ meetings
which is less than a majority?
A: A corporation can state in its bylaws that
a quorum shall be less than the majority or
greater than what was provided for in the
RCC unless the RCC specifically provides
otherwise. (Sec. 51, RCC)
Worthy of note, however, is that the bylaws
provision on quorum will not apply in
instances where the RCC explicitly requires
a specific number of stockholders or
members necessary to resolve or carry out a
particular corporate proposal. (based on RCC
and SEC Opinion)
Q: What are the modes of voting in a
stockholders’ or members’ meeting under
the RCC?
A: The right to vote of stockholders or
members may be exercised in person,
through a proxy, or when so authorized in the
bylaws, through remote communication or in
absentia.
At all elections of directors or trustees, the
right to vote through remote communication
or in absentia may be exercised in
corporations vested with public interest,
notwithstanding the absence of a provision in
the bylaws of such corporations. A
stockholder or member who participates
through remote communication or in absentia
shall be deemed present for purposes of
quorum.

The board may allow such mode of voting
even if the bylaws are silent on such
provision. Should the board, however,
resolve to allow voting through remote
communication or in absentia, it has to
approve the guidelines and procedure
therefor.
Q: What is the effect of the stockholder’s
abstention during stockholders’ meetings?
A: In those cases specified by law on
instances of appraisal right, a stockholder
present in a meeting but abstains, is not
entitled to exercise such right. He cannot
demand payment of the fair value of his
shares, because one of the elements of
appraisal right is his vote against the
proposed corporate act. As such, abstention is
tantamount to a waiver of appraisal right.
Stockholders who abstain from voting are,
however, counted for quorum purposes.
Q: What are the requisites of a valid board
meeting?
A:
a. The meeting must be held on the date
specified in the bylaws or in accordance with
law;
b. Prior written notice of such meeting must
be sent to all directors/trustees;
c. It must be called by the proper party;
d. It must be held at the proper place; and
e. Quorum and voting requirements must be
met.
Q: What is the effect of failure to give
notice of the board meeting to even one
director?
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A: In Lopez Realty, Inc. vs. Spouses
Tanjangco, the Supreme Court held that such
board meeting is legally infirm considering
that there is a failure to comply with the
requirements or formalities of the law or the
corporation’s bylaws. As such, any action
taken during the said meeting may be
challenged. However, said action may be
subsequently ratified by the board.
Ratification can be made either expressly or
impliedly. Implied ratification may take
various forms – like silence or acquiescence,
acts showing approval or adoption of the act,
or acceptance and retention of benefits
flowing therefrom.
Q: What is the quorum for board
meetings?
A: Based on Section 52 of the RCC, a
majority of the directors or trustees as stated
in the AOI shall constitute a quorum to
transact corporate business, unless the AOI or
the bylaws provides for a greater majority.
Furthermore, every decision reached by at
least majority of the directors or trustees
constituting a quorum, except for the election
of officers which shall require the vote of a
majority of all the members of the board,
shall be valid as a corporate act.
Q: Under the Bylaws of the Corporation
A, its BOT is composed of five members,
two of whom are nominated and appointed
by the three original members. Further,
under Section 2, Article I of the Bylaws,
only a majority of the three original
members of the Board shall be necessary
at all meetings to constitute a quorum. Is
Section 2, Article I of the Bylaws of

Corporation A consistent with existing
Corporation laws?
A: Section 2, Article I of the Bylaws is not
consistent with the law for two reasons:
a. It is not in accord with Section 52
of the RCC.
As a general rule, the quorum in board
meeting is the majority of the number of
directors or trustees. However, under Section
52 of the RCC, the AOI or bylaws of the
corporation may fix a greater number than the
majority of the number of board members to
constitute the quorum necessary for the valid
transaction of business.
The formula in determining the “majority of
the number of directors” as quorum would be
one-half plus one of the number of directors
as fixed in the AOI notwithstanding the
existence of vacancies in the board at the
time.
Thus, the SEC opined that the AOI or the
bylaws cannot provide for a lesser number
than the majority provided in Section 52 of
the RCC. To provide that only a majority of
the three original members would be
necessary to constitute a quorum would be
repugnant to the directive of Section 52 of the
RCC.
Given the prevailing facts, if there are five
members of the Board of Trustees as fixed in
the AOI, the majority should be one-half plus
one of five, hence, at least three. If what was
provided for in the bylaws would be
followed, the majority of the three original
members of the board of trustees would only
be two, which is lesser than the majority of
the whole number of the trustees, as
contemplated by law.
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b. It is also conflicting with Section 91
of the RCC which allows nonstock
corporations to provide in their AOI
or bylaws the term of office of the
Board. While the term of directors or
trustees of nonstock corporations
may vary under the AOI or bylaws,
lifetime or unlimited term of the
Board is not allowed. A lifetime or
unlimited term of the Board
absolutely deprives other
stockholders or members of the
opportunity to participate in the
management of the corporation. To
provide that only the majority of the
original members of the board of
trustees is required to constitute a
quorum for all board meetings
implies that the original members will
be holding their office as members of
the board for an unlimited term.
Note that while the AOI or bylaws cannot fix
the quorum to less than the majority of the
board, or it may provide for a greater
majority. The case of Pena vs. CA provides
an example where the bylaws of a
corporation provided for a greater majority.
The Supreme Court held that when only three
out of five members of the board of directors
convened by virtue of a prior notice of a
special meeting, there was no quorum to
validly transact business since, under Section
4 of the amended bylaws of the corporation,
at least four members must be present to
constitute a quorum in a special meeting of
the board of directors.

Q: What are the corporate acts under the
RCC requiring only majority of the
quorum?
A: 1. Declaration of dividends (Sec. 42)
2. Entering into a management contract
(Sec. 43)
3. Fixing the issued price of no-par value
shares (Sec. 62)
4. And such other corporate acts which
under the RCC and the bylaws do not
require approval by at least majority of
the entire board.
This is because under Section 52 of the RCC
or the RCC, unless the RCC or the bylaws
require otherwise, every decision reached by
a majority of the directors or trustees
constituting a quorum shall be valid.
Thus, whenever the RCC or the bylaws
require board approval, as opposed to the
majority of the entire board, it means the
majority of the quorum of the directors.
Q: How can a director or trustee cast vote
in a meeting via remote communication?
A: The director or trustee in the meeting via
remote communication may cast his vote
through electronic mail, messaging service or
such other manner as may be provided in
internal procedures. The vote shall be sent to
the Presiding Officer and the Corporate
Secretary for notation. (Sec. 8, SEC Memo
Circular No. 6 series of 2020)
DEAN: There was a board meeting. I was the
Corporate Secretary. It was a very important
meeting because we needed to get the
approval for certain important measures.
Unfortunately, two (2) of our directors were
in the United States (1 in California, 1 in New
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York). The board meeting was 2pm (2am in
California, 11pm in New York). The
directors were already in their 80s.
Even before the RCC, teleconference and
videoconference were already allowed.
However, what are the mechanics in order
to conduct telecon/videocon?
1. The director must express his intention to
participate thru remote communication;
2. He must be identified during the meeting;
and
3. The meeting must be recorded all
throughout.
So as the CorSec, I asked:
“Mr. X do you confirmed and affirmed your
intention to participate through remote
communication?” YES
“Are you the director of the ABC
Corporation?” YES
And then we went on the meeting…
Even before I could reach that part of the
meeting where we needed their votes, they
already said “we are in favor of item 8.”
Hence, I have to redo the agenda and make
item 8 the first item.
Q: Is the director who abstained or
recused himself from voting on a
particular measure counted for quorum
purposes?
A: A director who abstained or recused
himself from voting should be considered as
present for quorum purposes. His abstention,
however, may have a bearing on the validity
of the board approval depending on whether
the RCC or the bylaws require the majority of
the entire board or simply, majority of the
quorum.
 4B & 4C 2020-2021
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For example, if there are fifteen board bylaws provide

members and only 8 are present, on matters otherwise.
where only a majority of the quorum is Directors/ At least 2 days
needed, the abstention of a director on a Trustees notice unless
particular item requiring board approval will bylaws provide
be immaterial. On the other hand, if the otherwise
approval of a majority of the entire board is Special Stockhold At least one-
required, the abstention of a director is Meeting ers/Memb week written
tantamount to a “No” vote and thus the ers notice unless
transaction cannot be effected. bylaws provide
otherwise
Q: Distinguish meetings of the board of Directors/ At least 2 days
directors/trustees from Trustees notice unless
stockholders/members’ meetings. bylaws provide
A: as discussed above but for ease of otherwise
reference, here are the distinctions between QUORUM REQUIREMENT
meetings of the board of directors/trustees Regular SH/M At least majority
and stockholders/members’ meetings. Meeting of the OCS or
majority of the
FREQUENCY members unless
Regular Stockhold Once a year the RCC or the
Meeting ers/Memb bylaws provide
ers otherwise. The
bylaws may
Board/Tru Once a month provide for less
stees unless the or greater than
bylaws provide majority in
otherwise determining
Special Stockhold Whenever quorum.
Meeting ers/Memb needed Special B/T At least majority
ers Meeting of the board of
Board/Tru Whenever directors or
stees needed trustees as fixed
NOTICE REQUIREMENT in the articles of
incorporation or
Regular Stockhold At least 21 days
bylaws. The
Meeting ers/Memb prior written
bylaws may
ers notice unless the
provide for a
greater but not

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lesser than Q: Who has the right to vote in the

majority of the following cases?
board members a. Shares under security interest
for quorum In case a stockholder grants security interest
purposes. in his or her shares in stock corporations, the
VENUE stockholder-grantor shall have the right to
SH/M Principal office attend and vote at meetings of stockholders,
of the unless the secured creditor is expressly given
corporation and by the stockholder-grantor such right in
if not practicable writing which is recorded in the appropriate
in the city or corporate books. (Sec. 54, RCC)
municipality DEAN: What if you have a chattel mortgage
where the agreement that is recorded in the Chattel
principal office Mortgage Register?
is located. Old Code: It binds the whole world.
D/T Anywhere unless So, when a chattel mortgage authorized a
otherwise mortgagee to vote the shares then the
provided in the corporation is bound to recognize it.
bylaws. RCC: the authority must be in writing and
MODES OF PRESENCE recorded in STB.
SH/M In person or by
proxy, or through b. Shares subject of a settlement of estate
remote proceedings or under receivership
communication Executors, administrators, receivers, and
or in absentia other legal representatives duly appointed by
when provided the court may attend and vote in behalf of the
by the bylaws. stockholders or members without need of any
D/T Proxy voting is written proxy. (Sec. 54, RCC)
not allowed. DEAN: Being an executor/administrator is
not enough. You must also be appointed by
-Discussion- the court.
Director’s Meeting: Does not need written
notice unless the bylaws provide. c. Shares under joint ownership
In case the bylaws is silent, where will be The consent of all the co-owners shall be
the venue of directors’ meeting? necessary in voting shares of stock owned
The board of directors, usually, will fix a jointly by two (2) or more persons, unless
venue for the meeting. The purpose of the there is a written proxy, signed by all the co-
Code is to give more flexibility to the board. owners, authorizing one (1) or some of them
or any other person to vote such share or

Page 94 of 351

shares: Provided, That when the shares are
owned in an “and/or” capacity by the holders
thereof, any one of the joint owners can vote
said shares or appoint a proxy therefor. (Sec.
55, RCC)
DEAN:
A and B = both must be present in order to
vote for the said shares
A and/or B = any can vote said shares
d. Treasury shares
Treasury shares shall have no voting right as
long as such shares remain in the treasury.
(Sec. 56, RCC)
Q: What is a proxy?
A: A proxy is the written instrument signed
by the stockholder authoring another person
to exercise the voting rights of the former. It
may also refer to the person exercising the
voting authority granted by the stockholder.
DEAN: Why do you need a proxy?
To ensure quorum.
There are many cases where stockholders
may not/cannot want to attend. They have
more important concerns to attend to than to
attend the stockholders’ meeting.
Through proxy the stockholder can
participate indirectly to the meeting.
Another purpose of proxy is to ensure
management control.
Q: What are the limitations on proxies?
A:
a. Proxies shall be in writing, signed and
filed, by the stockholder or member, in
any form authorized in the bylaws and
received by the corporate secretary on the
date fixed in the bylaws but not later than
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a reasonable time before the scheduled
meeting.
DEAN: So in case the CorSec rejects the
proxy, the stockholder must be given time to
contest it.
b. Unless otherwise provided in the proxy
form, it shall be valid only for the meeting
for which it is intended.
c. No proxy shall be valid and effective for
a period longer than five (5) years at any
one time. While the proxy cannot exceed
five years, a new proxy can always be
given with another five-year period.
d. No broker or dealer shall give any proxy,
consent or any authorization, in respect of
any security carried for the account of the
customer, to a person other than the
customer, without written authorization
of the customer. (This is found in the SRC
and not in the RCC.)
Q: What is a voting trust?
A: It is an agreement where one or more
stockholders of a stock corporation confer
upon a trustee or trustees the right to vote and
other rights pertaining to the shares for a
period generally not exceeding 5 years at any
time.
By its nature, a voting trust agreement creates
a dichotomy between the voting rights of the
stockholder and his other rights. (Lee vs. CA)
The transferring stockholder parts away with
his voting rights but retains equitable or
beneficial ownership over the stock. As such,
he has the right to receive dividends and
other rights a stockholder is entitled to, until
the dissolution and liquidation of the
corporation. He also retains his right to
inspection which he can exercise
 4B & 4C 2020-2021
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concurrently with the voting trustee. But, Does the demand of the Company tally
having conveyed the legal title to the trustee, with the concept of a Voting Trust
the transferring stockholder is disqualified Agreement? Explain briefly.
form being elected as a director. A: No, the demand of the Company does not
tally with the concept of a VTA. Under a
LEE VS. CA VTA, the transferring stockholder merely
conveys to the trustee the right to vote and
other rights of a stockholder over the
❖ What is the effect of VTA executed by
transferred shares except for proprietary
a director during his term?
rights.
If he executes the voting trust agreement
The consequence of the foreclosure of the
during his term as a director, he shall cease to
mortgaged properties is distinct and separate
be a director of the corporation.
from the VTA and its effects.
Why? Because he ceases to be a stockholder
owning legal title to the shares of the
DEAN: What is the purpose why a
corporation.
stockholder would convey legal title to the
shares and lose the right to vote those
Q: A distressed company (“Company”)
shares and render him disqualified for
executed a voting trust agreement for a
aspiring a director position?
period of three years over 60% of its
It is usually one of the requirements of
outstanding paid-up shares in favor of a
lenders.
bank to whom it was indebted, with the
bank named as trustee. Additionally, the
Q: What are the formalities and
Company mortgaged all its properties to
limitations on voting trust agreement?
the bank.
A:
Because of the insolvency of the company,
a. It should not exceed five years at any time,
the bank foreclosed the mortgaged
provided, that in case of a voting trust
properties and as the highest bidder,
specifically required as a condition in a loan
acquired said properties and assets of the
agreement, said voting trust may be for a
Company.
period exceeding five years but shall
The three-year period prescribed and the
automatically expired upon full payment of
Voting Trust Agreement having expired,
the loan.
the Company demanded the turn-over and
b. A VTA must be in writing and notarized
transfer of all its assets and properties,
and shall specify the terms and conditions
including the management and operation
thereof.
of the Company, claiming that under the
c. A certified copy of such agreement shall be
Voting Trust Agreement, the bank was
filed with the corporation and wit the SEC;
constituted as trustee of the management
otherwise, the agreement is ineffective and
and operations of the Company.
unenforceable.

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d. The certificate or certificates of stock bylaws unless the agreement provides

covered by the voting trust agreement shall otherwise.
be cancelled and new ones shall be issued in
the name of the trustee or trustees, stating that Q: Distinguish proxy from voting trust
they are issued pursuant to said agreement. agreement.
The books of the corporation shall state that
the transfer in the name of the trustee or PROXY VTA
trustees is made pursuant to a VTA.
e. The trustee or trustees shall execute and AS TO FORM
deliver to the transferor, voting trust It must be in It must be in
certificates, which shall be transferable in the writing, signed by writing, signed by
same manger and with the same effect as the stockholder and the stockholder and
certificate of stock. filed with the notarized. A copy of
f. The VTA filed with the corporation shall corporate secretary the VTA must be
be subject to the examination by any on the date fixed in submitted to the
stockholder of the corporation in the same the bylaws but not SEC, otherwise, it is
manner as any other corporate book or later than a not enforceable.
record: Provided, that both the trustor and the reasonable time
trustee or trustees may exercise the right of before the meeting.
inspection of all corporate books and records The RCC clarified
in accordance with the provisions of the that proxy may be in
RCC. any form as long as
g. No VTA shall be entered into for purposes the same is
of circumventing the laws against anti- authorized by the
competitive agreements, abuse of dominant bylaws.
position, anti-competitive mergers and AS TO THE RIGHTS CONFERRED
acquisitions, violation of nationality and A proxy is vested A trustee is vested
capital requirements, or for the perpetuation the right to vote. legal title to the
of fraud. shares and as such,
h. Unless expressly renewed, all rights No right to inspect may exercise not
granted in a VTA shall automatically expire is granted, unless only voting right but
at the end of the agreed period. The voting separately the right of
trust certificates, as well as the certificates of authorized for that inspection as well.
stock in the name of the trustee or trustees, purpose.
shall thereby be deemed cancelled and new A trustee is
certificates of stock shall be reissued in the A proxy cannot be qualified to be
name of the trustors. voted and cannot elected as director
i. The voting trustee or trustees may vote by qualify as director or trustee.
proxy or in any manner authorized under the of a corporation

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unless he is a All rights of a

stockholder in his stockholder may be It can be a subject of security interest.
own right. exercised by trustee Meaning, it can be assigned as security for a
EXCEPT loan transaction.
proprietary rights
(e.g. right to receive
dividends and to
receive the assets
upon dissolution
and liquidation of
the corporation.
AS TO TERM
Valid only for the Valid for a period
meeting intended, not exceeding 5
unless general and years. The voting
continuing in nature trust can be longer
but not to exceed 5 than 5 years if
years. executed pursuant
to a loan agreement,
The presence of but expires upon
stockholder or full payment of a
principal revokes loan.
the authority of the
proxy holder. The voting trust can
be extended if it is
co-terminus with
the loan agreement.

The presence of
trustor does not
revoke the authority
of the trustee.

What may the trustee do with respect to

the dividends? Because it belongs to the
transferee-stockholder.

By agreement, the trustee can have a lien on

the dividends.

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DECEMBER 1, 2020
STOCKS AND STOCKHOLDERS
Slide:
The rights of a stockholder may be
classified into proprietary, management, and
remedial rights.
a. Proprietary rights - these pertain to
certain economic benefits that accrue to his
shares such as:
i. Right to receive dividends; and
ii. Right to participate in the assets of
the corporation upon dissolution and
liquidation.
b. Management rights - these refer to
participation in the conduct of the business of
the corporation exercised through the
following:
i. Right to vote on all corporate acts
requiring stockholder's approval; and
ii. Right to elect the directors of the
corporation.
c. Remedial rights - these refer to remedies
the stockholder may pursue depending on the
issues involved, such as:
i. Appraisal right;
ii. Pre-emptive right;
iii. Right to inspect;
iv. Right to copy of the financial
statements of the company; and
v. Right to file a derivative suit.
Discussion: This has been asked twice in the
bar.
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Slide: What are the remedial rights
available to stockholders aggrieved by
certain wrongful acts of the board and
corporate officers?
Certain wrongful acts on the part of the
directors and corporate officers may give
rise to certain rights and the
corresponding types or kinds of suit, to
wit:
a. Individual Suit
b. Representative suit
c. Derivative suit
An individual suit is filed when the
cause of action belongs to the individual
stockholder as a group or to the corporation
(e.g. denial of the right to inspection and
denial of dividends to a stockholder).
Villamor vs. Umale G.R. Nos. 172843,
172881, September 24, 2014).
Discussion:
Wrongful acts of the board and
corporate officers may give rise to certain
rights and remedies. The remedy depends on
which right was violated.
We have three kinds of suits
depending on which right is violated:
individual suit, representative suit, and
derivative suit.
In individual suit, the aggrieved party
is the individual stockholder. An example is
when a stockholder is not allowed access to
the books of the corporation, when he is not
paid dividends, when his pre-emptive right is
violated.
It is important to stress that if it is
proper for individual suit, the stockholder
cannot resort to individual suit or vice

versa. As you will see, there were cases
decided by the Supreme Court where an
individual suit is pursued as a derivative suit
but there are elements of individual suit that
must be present before that remedy can be
pursued.
Therefore, if it is derivative suit, it
cannot be pursued as an individual suit or
vice versa.
For instance, if it is proper for a
derivative suit then the corporation must be
impleaded as a defendant. Otherwise, it is
dismissible. This is the case of Florete vs.
Florete.
FLORETE VS FLORETE
(G.R. No. 177275, J. Leonen).
❖ Should the derivative suit implead the
corporation as a defendant?
Yes. Otherwise, it is dismissible.
In the same way, we have the
representative suit in this case. The aggrieved
parties are stockholders similarly situated.
One good example is en masse violation of
pre-emptive right where the violation is not
limited to one stockholder but to all
stockholders of a corporation. Because all of
them are aggrieved parties, it will be one for
representative suit.
Discussion: If it is representative suit, the
parties are similarly situated. Can they
pursue a derivative suit?
Again, the answer is NO. The
aggrieved party in derivative suit is the
corporation, not the stockholders. Whereas
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the aggrieved party in a representative suit
are the stockholders similarly situated.
LIM VS. LIM-YU, IN HER CAPACITY AS A
MINORITY STOCKHOLDER OF LIMPAN
INVESTMENT CORPORATION
(G.R. No. 138343, Third Division,
February 19, 2001).
In one case, it was held that the suit
cannot be characterized as derivative,
because she was complaining only of the
violation of her pre-emptive right and was
merely praying that she be allowed to
subscribe to the additional issuance of stocks
in proportion to her shareholdings to enable
her to preserve ger percentage of ownership
in the corporation. She was therefore not
acting for the benefit of the corporation.
Quite the contrary, she was suing on her own
behalf, out of a desire to protect and preserve
her preemptive rights.
Slide:
Conversely, a direct individual is not
allowed when a derivative suit is proper. The
Supreme Court has cited various reasons for
not allowing direct individual suit.
i. ..."universally recognized doctrine
that a stockholder in a corporation has
no title legal or equitable to the
corporate property, that both of these
are in the corporation itself for the
benefit of the stockholders." On other
words, to allow a shareholder to sue
separately would conflict with the
separate corporate entity principle;
ii. ... that the prior rights of the creditors
may be prejudiced. Thus, our Supreme

Court held in the case of Evangelista v.
Santos, that the stockholders may not
directly claim those damages for
themselves for that would result in the
appropriation by, and the distribution
among them of part of the corporate
assets before the dissolution of the
corporation and the liquidation of its
debts and liabilities something which
cannot be legally done in view of
Section 16 of the Corporation Law ..."
iii. the filing of such suits would
conflict with the duty of the
management to sue for the protection of
all concerned;
iv. it would produce wasteful
multiplicity of suits; and
v. it would involve confusion in
ascertaining the effect of partial
recovery by an individual on the
damages recoverable by the
corporation for the same act. (Asset
Privatization Trust vs. Court of
Appeals, et. al., G.R. No. 121171,
December 29, 1998).
Q: What is a derivative suit?
Discussion:
This is yet to be discussed in the bar.
There have been many questions on
whether or not it is proper for a derivative suit
but so far, there has been no question yet in
the bar on what is a derivative suit.
A derivative suit is an action filed by
stockholder in the name and on behalf of the
corporation to enforce a corporate right or
cause of action to set aside the wrongful acts
of the corporation's directors and officers.
In Go Realty vs. Go, it is an action
filed by a minority stockholder in the name
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and on behalf of the corporation to enforce a
corporate right or cause of action to set aside
the wrongful acts committed by the board,
directors and officers.
Let us dissect that definition.
1. It is an action filed by a minority
stockholder.
Why by a minorty stockholder?
Because we learned in the case of Go Realty
vs. Go if the suing stockholder belongs to the
majority, then the remedy for him is to cause
the board of directors to pass the appropriate
resolution authorizing a corporate act.
Remember that case that a minority
stockholder constructed a restaurant on the
property of the corporation. A majority
stockholder on behalf of the corporation filed
a derivative suit to remove the improvements
on the property of the corporation.
The SC said it is not proper for the
derivative suit. It should be seen as a last
remedy and a board action should take
precedence over derivative suit. The remedy
is not to file a derivative suit but to issue a
resolution authorizing the removal of the
property that was constructed without
authority from the corporation.
2. It is filed in the name and on behalf of
the corporation.
Why? Because the aggrieved party
here is the corporation and the whole body of
stockholders. The harm is inflicted against
the corporation.
Q: How do you caption a derivative suit?
A: If it is not captioned properly, there have
been cases where the SC dismissed this kind
of suit because it was not properly couched.

It should be this way: The suing stockholder
like Juan dela Cruz on behalf of ABC
Corporation vs. The directors who performed
the wrongful act or refused to perform an act
against the rights of the corporation.
Q: Why is it not Juan dela Cruz vs. The
directors?
A: If that is the case, it is not a derivative suit
but an individual suit.
Q: Why is it not the corporation vs. The
directors?
A: It is not the corporation that is directly
pursuing the effort. It is the stockholder suing
on behalf of the corporation.
If the corporation is not impleaded as
a party in this kind of suit, the SC said it
should be dismissed. The real party in interest
is the corporation which is why it has to be
impleaded as a party.
Q: What if the stockholders are also
harmed by the wrongful act committed by
the directors and officers? When you come
to think about it, the wrong committed
against the corporation is indirectly also a
wrong inflicted upon the stockholders.
Does that disqualify the stockholder from
filing a derivative suit?
A: The SC said as long as in the main course
of action, the aggrieved party is the
corporation enforcing a cause of action of the
corporation then the indirect harm on the
stockholders does not disqualify the
stockholders from filing this kind of suit.
3. It is to set aside the wrongful acts of the
board.
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Q: What is the basic essence of derivative
suit?
A: The majority directors are the ones
who perform the wrongful acts against the
corporation. They are the ones guilty of the
wrongdoing against the corporation or they
refuse to take an act that harms the
corporation as a consequence.
Somebody then has to take the
coggles for the corporation to file that action
on behalf of the corporation. These are the
words of Justice Marvic Leonen:
Slide:
It concerns a wrong to the corporation
itself. The real party in interest is the
corporation, not the stockholders filing the
suit. The stockholders are technically
nominal parties but are nonetheless the active
persons who pursued the action for and on
behalf of the corporation. 2019 Bar Exam;
Florete vs. Florete, G.R. No. 174909,
January 20, 2016.
Q: What is the rationale of the derivative
suit?
A: A derivative suit is an exception to the
general rule that the corporation's power to
sue is exercised only by the board of directors
or trustees.
Individual stockholders may be
allowed to sue on behalf of the corporation
whenever the directors or officers of the
corporation refuse to sue to vindicate the
rights of the corporation or are the ones to be
sued and are in control of the corporation.
Discussion:

We saw this under Section 35 that the
power to sue or be sued is lodged with the
Board of Directors. This is an exception
because the suit is not authorized by the board
of directors but filed by a stockholder on
behalf of the corporation.
Slide:
Remedies through derivative suits are
not expressly provided for in our statutes -
more specifically, in the Corporation Code
and the Securities Regulation Code - but they
are "impliedly recognized when the said laws
make corporate directors and officers liable
for damages suffered by the corporation and
its stockholders for violation of their
fiduciary duties. They are not intended to
afford reliefs to stockholders in instances
where those responsible for running the
affairs of a corporation would not otherwise
act (Florete vs Florete, G.R. No. 174909,
January 20, 2016).
However, a derivative suit cannot
prosper without first complying with the
legal requisites for its institution. (Nestor
Ching vs. Subic Bay Golf and Country
Club, Inc., G.R. No. 174353, September 10,
2014).
WHAT ARE THE ELEMENTS OF A Corporate right or Cause of action
DERIVATIVE SUIT?
Rule 8, Section 1 of the Interim Rules
of Procedure for Intra-Corporate
Controversies ("Interim Rules") provides the
five (5) requisites for filing derivative suits:
"SECTION 1. Derivative action - A
stockholder or member may bring an
action in the name of a corporation or
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association, as the case may be,
provided, that:
a. He was a stockholder or member at
the time the acts or transactions
subject of the action occurred and at
the time the action was filed;
b. He exerted all reasonable efforts,
and alleges the same with particularity
in the complaint, to exhaust all
remedies available under the articles
of incorporation, bylaws, laws or rules
governing the corporation or
partnership to obtain the relief he
desires;
c. No appraisal rights is available for
the act or acts complained of; and
d. The suit is not a nuisance or
harassment suit."
Discussion:
I remember when I asked Carla (Atty.
Sena) to give a last minute lecture to our
students, I said out of thank you to Carla, i'm
gonna devise a mnemonic guide in your
honor. CSENA is our code.
Stockholder
Exhaustion of intra-corporate
remedies
Not a nuisance or harassment suit
Appraisal right is not available
When you read the provisions on the
Rules on Intra-Corporate Controversies, you
will notice that there are only four elements
of a derivative suit.
 4B 2020-2021
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However, the SC said in so many exhausted all the remedies that specified the
cases that it is implied that in every articles bylaws and rules of the Corporation
derivative suit that it is filed in the name then you can avail yourself of this remedy.
and on behalf of the corporation to enforce
a corporate right or cause of action. Q: You remember we also discussed the that
While you don't see it as an element the bylaws or the articles may contain an
in the rules, it is implied in every derivative arbitration agreement. So how do we
suit that it is a corporate cause of action. correlate now this element of derivative suit
to the presence of arbitration agreements in
As a rule, the plaintiff should be a the bylaws or articles of incorporation?
stockholder both at the time of transaction A: So it means that if you have an arbitration
and at the time the action was filed. UNLESS agreement in the bylaws or articles, you must
the cause of action is continuing in nature exhaust the arbitration procedure before you
in which case it is enough that he is a can resort likewise to this remedy. Otherwise,
stockholder at the time of filing of the your cause of action will be premature.
action.
YU VS. YUKAYGUAN
Q: There was one bar exam question:
(GR No. 177549, January 18, 2009)
supposing Juan dela Cruz became a
stockholder June 1, 2020. Can he question by
Q: The need to exert efforts for these
way of derivative suit payment of fees made
remedies. Is this available even for a closed
to a law firm before he became a stockholder
corporation?
on the ground that the fees were exorbitant?
A: When you come to think about it, this
A: Of course the answer is NO because he
should not apply to a closed corporation.
never became a stockholder when the act or
Why? Because in a closed corporation, there
transaction subject of the action occurred. He
is the remedy of appraisal right. At any time
became a stockholder a day after.
for any purpose or reason whatsoever, a
The exception is when the cause of
stockholder may demand the payment for fair
action is continuing in nature as when the
value of his shares in a closed corporation.
engagement of a law firm is continuing basis.
If you can demand for any purpose or
In that case, he can file the suit.
reason the payment of the fair value of these
shares that means the element of no appraisal
Q: Third exhaustion of intracorporate
right will not be present. Therefore, there
remedies. What does this mean?
should be no right to file this kind of suit in a
A: It means that if the articles or the bylaws
closed corporation.
or the rules of the corporation provide for the
However, the SC said the need to
remedies for the right violated then he must
exhaust intracorporate remedies also
allege with particularity exhaustion of those
applies to a closed corporation.
intra proper demolitions showed must be
seen as a last remedy and only if you have

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I think it is not a good decision given
the reason that I cited but in passing the bar,
you have to answer it that way.
Slide:
In case of a nuisance Or harassment suit. the
court shall forthwith dismiss the case. The
fifth requisite for filing derivative suit,
while not included in the enumeration, is
implied in the first paragraph of Rule 8.
Sect. 1 of the Interim Rules: The action
brought by the stockholder or member
must be 'in name of [the] corporation or
association to enforce a corporate right or
cause of action. (Oscar C. Reyes vs. Hon.
Regional Trial Court of Makati, Branch 142,
Zenith Insurance Corporation, and Rodrigo
C. Reyes, G.R. No. 165744, 11 August 2008;
Anthony Yu, et al., vs. Joseph Yukayguan, et
al., GR No. 177549, January 18, 2009;
Juanita Ang, for and In behalf of Sunrise
Marketing (Bacolod), Inc vs. Sps. Roberto
and Rachel Ang, G.R. No. 201675, June 19,
2013; Alfredo L. Villamor, Jr., vs. John S..
Umale, G.R. Nos. 172843 & 172881, 24
September 2014; Nestor Ching vs. Subic Bay
Golf And Country Club, Inc., et, al., G.R. No.
174353 September 10, 2014).
Q: Royal Links Golf Club obtained a loan
from a bank which is secured by a
mortgage on a titled lot where holes 1, 2, 3
and 4 are located. The bank informed the
Board of Directors ("Board") that if the
arrearages are not paid within thirty (30)
days, it will extrajudicially foreclose the
mortgage. The Board decided to offer to
the members 200 proprietary membership
shares, which are treasury shares, at the
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price of P175,000.00 per share even when
the current market value is P200,000.00.
In behalf and for the benefit of the
corporation, Peter, a stockholder, filed a
derivative not against the members of the
Board for breach of trust for selling the
shares at P25,000.00, lower than its market
value, and asked for the nullification of the
sales and the removal of the board
members. Peter claims the Club incurred
a loss of PS million. The Board presented
the defense that in its honest belief any
delay in the payment of the arrearages will
be prejudicial to the Club as the mortgage
on its assets will be foreclosed and the sale
at a lower price is the best solution to the
problem. Decide the suit and explain.
A: The derivative suit will not prosper
because while it was filed by a stockholder on
behalf of the corporation the complaint did
not allege the other elements of derivative
suit namely; a) exhaustion of intra corporate
remedies available under the articles of
incorporation, bylaws and rules and
regulations governing the corporation to
obtain the relief the stockholder desires; b) A
is not a nuisance suit; and c) appraisal right
not available. Ching vs. Subic Bay Golf and
Country Club, GR no. 174353. September
10, 2014.
Furthermore, there was no wrongful
act on the part of the Board of directors for
simply selling the treasury shares below
market value given the circumstances
obtaining M the corporation. The terms and
conditions of the sale of treasury shares are
reasonably determined by the board of
directors under the business judgment rule.
Under such rule, questions of policy and
management are left to the sound discretion

of the board of directors and their acts are
valid for as long as they acted In geed faith
and not contrary to law. 2016 Bar Exam.
Q: A became a stockholder of prime Real
Estate Corporation (°PREC") on July 10,
2018, when he was given one share by
another stockholder to qualify him as a
director. A was not re-elected director in
the July 1, 2019 annual meeting but he
continued to be a registered shareholder of
PREC.
When he was still a director, A discovered
that on January 5, 2018, PREC issued free
of charge 10,000 shares to X, a lawyer who
assisted in a court case involving PREC.
a. Can A now bring an action in the name
of the corporation to question the issuance
of the shares to X without receiving any
payment?
A: As a general rule, A cannot bring a
derivative suit in the name of the corporation
concerning an act that took place before he
became a stockholder because one of the
elements of a derivative suit is that he must
be a stockholder at the time the questioned
acts occurred and at the time of the filing of
the complaint. However, if the act
complained of is a continuing one, A may do
so. The act subject of the suit as indicated in
the problem is not, however, continuing in
nature. Hence, the suit should not prosper.
b. Can X question the right of A to sue him
on behalf of the corporation on the ground
that A has only one share in his name?
A: No. Since a stockholder filing a derivative
suit is not suing M his own behalf but in
behalf of the corporation, the fact that his
shareholding is significant does not preclude
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him from filing the suit. It is also not
necessary that a stockholder be a director to
be entitled to file a derivative suit. San
Miguel Corporation vs. Kahn, G.R.
No.85339, August 11, 1989.
In one case, A was held that a person
who is merely holding In trust the shares of
stock M her name cannot file a derivative suit
since she is not a stockholder in her own
right. And where the date of the issuance of a
stock certificate was antedated, the
stockholder cannot file a derivative suit to
question the transaction before the true date
of its issuance. Bitong vs. Court of Appeals,
G.R. No. 123553, July 13,1988.
Q: AA, a minority stockholder, filed a suit
against BB, CC, CC, and EE, the holders
of majority shares of MOP Corporation,
for alleged misappropriation of corporate
funds. The complaint averred, inter alia,
that MOP Corporation is the corporation
in whose behalf and for whose benefit the
derivative suit is brought. In their capacity
as members of the Board of Directors, the
majority stockholders adopted a
resolution authorizing MOP Corporation
to withdraw the suit. Pursuant to said
resolution, the corporate counsel filed a
motion to dismiss in the name of the MOP
Corporation.
Should the motion be granted or denied?
Reason briefly.
A: The motion should be denied. The
complaint is in the nature of derivative suit.
In Conmart (Phils.) Inc. vs. Securities and
Exchange Commission, it was held that to
grant to the corporation concerned the right
of withdrawing or dismissing the suit at the
instance of the majority stockholders and

directors who themselves are the persons
alleged to have committed the breach of trust
against the interest of the corporation would
be to emasculate the right of minority
stockholders to seek redress for the
corporation. Filing such action as a derivative
suit even by a lone stockholder is one of the
protections extended by law to minority
stockholders against abuses of the majority.
2000 Bar Exam.
Slide:
Cite jurisprudence where resort to derivative
suit was held to be improper for failure to
meet the fifth requisite for its filing — it
should be filed in the name of the corporation
to enforce a corporate right or cause of action.
a. A derivative suit filed by stockholders of a
corporation against the bank that foreclosed
the mortgage of the property of the
corporation, but without impleading the
corporation in the suit. Asset Privatization
Trust vs Court of Appeals, GR No. 121171,
December 29,1988
b. Whether as an individual or as a derivative
suit, the RTC—sitting as special commercial
court —has no jurisdiction to hear the
plaintiff's complaint since what is involved
determination and distribution of
successional rights to the shareholdings of his
mother, as the controlling shareholder of the
corporation. Plaintiff's proper remedy, under
the circumstances, is to institute a special
proceeding for settlement of the estate of the
deceased. The bare claim that the complaint
is a derivative suit will not suffice to confer
jurisdiction on the RTC (as special
commercial court) if he cannot comply with
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the requisites for the existence of a derivative
suit. Omar C. Reyes vs. Hon. Regional Trial
Court of Makati, Branch 142, Zenith
Insurance Corporation, and Rodrigo Reyes,
G.R. No.165744, 11August 2008.
c. Petitioners, members of the board for
2003-2004, sought the nullification of the
election composed of the new board of
directors for 2004-2005, who pushed through
with the election even it petitioners had
adjourned the meeting allegedly due to lack
of quorum. Petitioners are the injured party,
whose rights to vote and to be voted upon
were directly affected by the election of new
set of board of directors. The party-in-interest
are the petitioners as stockholders, who wield
such right to vote. The cause of action
devolves on petitioners, the condominium
corporation, which did not have the right to
vote. Hence, the complaint for nullification
of the election is a direct action by
petitioners, who were members of the Baord
of Directors of the corporation before the
election, against respondents, who are the
newly elected Board of Directors. Under the
circumstances, the derivative suit filed by
petitioners on behalf of the condominium
corporation is improper. Legaspi Towers 300,
Inc., vs. Muer, GR No.170783, June 18,
2012, 2014 Bar Exam.
Discussion:
An action to nullify the results of an
election is an election contest, not a
derivative suit. If you want to nullify the
elections as we saw in the case of Ricafort vs
Dicdican, it is an election contest.
To be clear, both election contests and
derivative suits are governed by the Rules on

Intra Corporate Disputes. Even though you
have one set of rules for this type of action,
each one is different from the other.
Slide:
d. The complaint filed by a stockholder to
compel another stockholder to settle his share
of the loan because non-payment would
affect the financial viability of the
corporation could not be considered as a
derivative suit because the loan was not a
corporate obligation but a personal debt of
the stockholders. There is no damage caused
to the corporation. The fact that the
stockholders attempted to constitute a
mortgage over their pro-indiviso share in a
corporate asset cannot affect the corporation
since shares only represent an aliquot interest
in the property of the corporation. The right
of a stockholder to the corporate property is
only inchoate which will ripen into full
ownership only upon dissolution and
liquidation of the corporation. Juanito Ang,
for and in behalf of Sunrise Marketing
(Bacolod), Inc. vs. Sps. Roberto and
Rachel Ang. G.R. No. 201675, June 19,
2013.
Discussion:
This was penned by Justice Tony Carpio.
Again, not yet asked in the bar.
ANG, FOR AND IN BEHALF OF SUNRISE
MARKETING (BACOLOD), INC. VS. SPS.
ANG
(G.R. No. 201675, June 19, 2013.)
Q: What happened in this case is we have
two brothers who are also stockholders of
Sunrise Marketing who obtained a loan
from their sister, secured by their share in
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the assets of Sunrise Marketing
Corporation.
On maturity of the loan, one of the
partners were willing to pay but the other
one is not. So the willing brother filed an
action on behalf of the corporation to
compel his other brother who is also
stockholder of the corporation to pay the
sister on the ground that non-payment of
the loan to the sister threatens the financial
viability of the corporation. Is it proper for
derivative suit?
A: NO. There is no loan obtained by the
corporation. It is a debt of the stockholder.
There is no damage to the corporation
whatsoever. There is no mortgage of
corporate property and the corporation did
not likewise guarantee the obligation.
Since there is no harm to the
corporation, it can never be proper for
derivative suit.
Q: What about the fact that the loan is
secured by the stockholder's share in the
assets of the corporation? Will it now
qualify for derivative suit because there
will be harm against the corporation?
A: Still NO. As we all know, the right of the
stockholder to property is only inchoate. It
will ripen into full ownership only upon
dissolution and liquidation of the
corporation.
It would have been different if the
loan is secured by the mortgage on the
property of the corporation. That is obviously
ultra vires and can be set aside. The
stockholder can have it nullified but none of
that is present because this case is simply a
loan of the stockholder where there will be no
damage whatsoever to the corporation.
 4B 2020-2021
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VILLAMOR VS UMALE been proper for a derivative suit but the suing
stockholder did not bring the action for
(G.R. No. 172843, September 24, 2014)
benefit of the corporation. Instead, he alleged
that the acts of the corporate directors were
This is yet to be asked in the bar.
detrimental to his individual interest as a
Q: The corporation has an option to lease a
stockholder. I
prime property in Ortigas. Do you know
In filing an action, therefore, his
Home Depot in Ortigas? This corporation has
intention was to vindicate his individual
the option to lease the valuable property. This
interest and not that of the corporation. He
Corporation assigned that lease option in
did not even allege that he was filing on
favor of Atty. Villamor.
behalf of the corporation. The nonderivative
Atty. Villamor assigned the lease
character of the respondent may also be
option and earned substantial income. Is this
gleaned horn his allegations in the trial court
proper for derivative suit? It could have been
complaint where he described the nature of
proper right? Since the aggrieved property is
his action as an action under Rule 1, Section
the corporation? That lease option could have
l(a)(l) of the Interim Rules, not an action
translated into income for the corporation. It
under Rule 1, Section 1(a)(4), of the Interim
was assigned without anything in return. That
Rules, which refers to derivative suits. Rule
is certainly a wrongful act against the
1, Section 1 (a)(1) of the Interim Rules refers
corporation. Would it be proper for derivative
to acts of the board, associates, and officers,
suit?
amounting to fraud or misrepresentation,
However, in the complaint, he alleged
which may be detrimental to the interest of
that the acts of the directors were detrimental
the stockholders. This is different from a
to his own interest.
derivative suit.
It would have been proper for a
derivative suit except that the suing
While devices and schemes of the board of
stockholder did not bring the action in the
directors, business associates, or officers
name and for the benefit of the corporation.
amounting to fraud under Rule 1, Section
He alleged the acts of the directors were
1(a)(1) of the Interim Rules are causes of a
detrimental to his own interests and not of the
derivative suit, it is not always the case that
corporation. Obviously in filing the action, he
derivative suits are limited to such causes or
does not want to vindicate the right of the
that they are necessarily derivative suits.
corporation but his own individual right. It is
Hence, they are separately enumerated in
not proper for derivative suit.
Rule 1, Section 1 (a) of the Interim Rules. See
Alfredo L. Villamor, vs. John S. Umale, G.R.
Slide:
Nos. 172843 172881, 24 September 2010,
e. In one case, the corporation, without any
valuable consideration, assigned its option to
The reliefs sought In the complaint, namely
lease a prime property in favor of another.
that of enjoining defendants from acting as
The assignee leased out the property and
officers and Board of Directors of the
earned substantial income. This could have

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corporation, the appointment of a receiver,
and the prayer for damages in the amount of
the decrease in the value of the shares of
stock, clearly show that the complaint was
filed to curb the alleged mismanagement of
the corporation. The causes of action pleaded
by petitioners do not accrue to a single
shareholder or a class of shareholders but to
the corporation itself.
While there were allegations in the
Complaint of fraud in their subscription
agreements, such as the misrepresentation of
the Articles of Incorporation, petitioners do
not pray for the rescission of their
subscription or seek to avail of their appraisal
rights. Instead, they ask that defendants be
enjoined from managing the corporation and
to pay damages for their mismanagement.
Petitioners' only possible cause of action as
minority stockholders against the actions of
the Board of Directors is the common law
right to file a derivative suit. However, a
derivative suit cannot prosper without first
complying with the legal requisites for its
institution. In this case, the requisite missing
is that the action was not filed on behalf of
the corporation. Nestor Ching vs. Subic Bay
Golf and Country Club, Inc., Et Al., G.R. No.
174353 September 10, 2014.
Discussion:
This is yet to be asked in the bar.
Basically what happened here is that
Subic Bay Golf and Country Club Board of
Trustees amended the certificate of
membership from proprietary to non-
proprietary.
What do you mean by proprietary and
non-proprietary? In proprietary, you enjoy all
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the benefits of membership and the right to
receive the assets upon dissolution and
liquidation of the corporation.
Make it not proprietary the enjoyment
of the benefits of membership but without
any right to receive the assets upon the
dissolution and liquidation. As a
consequence, the value of the share dropped.
Ching alleged mismanagement on the part of
the corporation's board of trustees. Is it
proper for derivative suit?
In the bar exam, every time you see
an allegation of mismanagement, the
question is could this be pursued as a
derivative suit? The answer should be yes
except that the way it was couched is what is
wrong in this case.
He is not suing on behalf of the
corporation. He is suing for his own interests.
So if the aggrieved party is the corporation, it
should be one for derivative suit but you have
to comply with the elements of derivative
suit. What is wrong here is "Ching vs Subic
Bay Golf and Country Club" should have
been "Ching on behalf of Subic Bay Golf and
Country Club vs. the trustees who
mismanaged the corporation.
g. There is no derivative suit where the action
is clearly not for the benefit of the
corporation, particularly where a judgment in
favor of the plaintiff, in his capacity as third
party mortgagor would mean recovery of his
own properties. Bangko Sentral ng Pilipinas
vs. Vicente Jose Campa, Jr. ,G.R. No. 1859
March 16, 2016.
h. .The action should be a proper derivative
suit even if the assailed acts do not pertain to
a corporation's transactions with third

persons. The pivotal consideration is whether
the wrong done as well as the cause of action
arising from it accrues to the corporation
itself or the whole body of its stockholders.
An action seeking to nullify and invalidate
the duly constituted acts [of a corporation]
entails a cause of action that "rightfully
pertains to the corporation itself and which
stockholders cannot exercise except through
a derivative suit. In this case, the Marcelino
Jr. Group prays for the cancellation of share
transfers, subscription to the capital stock of
the Rogelio Group, all intended to
reconfigure the capital structure of the
corporation to reflect a status quo ante.
Discussion:
Florete vs Florete is a very interesting
case because there are two decisions: one
under J. Leonen and the other one by our CJ
Peralta. Same facts, issues, ruling but
different ponentes.
Just like Reyes vs. RTC of Makati,
you have 2 brothers who inherited shares
from their parents, their parents are
controlling stockholders of a corporation
which owns PTV4 before it was acquired by
the government.
We have 2 groups: Marcelino group
and the Rogelio group. Rogelio group was
able to subscribe to the capital stock of the
corporation. Certain share transfers were
made likewise in favor of the Rogelio group.
As a consequence, the Marcelino group was
diluted.
The Marcelino group filed an action
to nullify the subscription and cancellation of
the share transfers. The intention is to
reconfigure or change the capital structure of
the corporation to reflect the status quo ante.
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The SC said if the objective is to
reconfigure the structure of the corporation's
status quo ante, this is for a corporation to
avail.
What is wrong in this case? The
corporation is not impleaded. The SC said it
should have been impleaded. If the wrong is
against the corporation, it should be
pursued as a derivative suit. In pursuing
that suit, the corporation should be
impleaded as a party. Without the
corporation, even if you nullify the share
transfers or subscription, will the
corporation ever be bound? No. You have
to implead the corporation. The failure to
implead the corporation is fatal to the
cause of action resulting in the dismissal of
the action.
Slide:
Accordingly, it was upon the corporation
itself that the causes of action now claimed
by Marcelino Jr. Group accrued. While in the
Marcelino Jr. Group were permitted to seek
relief, they should have done so not in their
unique capacity as individuals or as a group
of stockholders but in the place of the
corporation itself through a derivative suit.
As they instead sought relief in their own
individual capacity, they did so bereft a cause
of action. Likewise, they did is without even
the slightest averment that the requisites for
the filing a derivative suit. Since the
complaint lacked a cause of action and failed
to comply with the requirements of the
Marcelino Jr. Group's vehicle for relief, it
was only proper for the complaint to have
been dismissed.
 4B 2020-2021
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Erroneously pursuing a derivative suit as a PURCHASE OF SUBSCRIPTION OF

class suit not only meant that the Marcelino SHARES SHARES
Group lacked a cause of action; it also meant
Pertains to shares Pertains to unissued
that they failed to implead an indispensable
already issued by shares of the
party. In derivative suits, the corporation
the corporation. corporation.
concerned must he impleaded as a party.
Buyer/transferee Subscriber is
Hence, the Marcelino Jr. Group's complaint
cannot exercise the entitled to exercise
must fail for failure to implead the
rights pertaining to the rights of a
corporation.
the purchased sales stockholder even
without full without full
SUBSCRIPTION CONTRACTS payment of the payment of the
purchase price, subscription;
Q: What is a subscription contract? unless the sale provided the
A: Any contract for the acquisition of agreement subscriber is not
unissued stock in an existing corporation still otherwise provides. delinquent
to be formed shall be deemed a subscription, The creditor of the The creditor of the
notwithstanding the fact that the parties refer corporation cannot corporation may
to it as a purchase or some other contract. enforce payment of enforce payment on
It provides for the kind of shares to be the unpaid purchase the unpaid
issued, the consideration for the issuance of price for lack of subscriptions under
the shares, date and other terms of payment. privity to the the trust fund
contract. doctrine.
Discussion:
As long as the object of the Discussion:
transaction refers to unissued shares of the Purchase of shares or shares already
corporation, it is one of subscription contract issued are treasury shares because they are
even if denominated otherwise. existing shares.
The unissued shares can cover the If Juan dela Cruz buys 100,000
pre-incorporation subscription or in case of purchase of shares and pays 50% only, he
increase of capital stock. cannot be allowed to vote unless the
It is very important to know if it is agreement provides otherwise. What about
subscription or purchase because there are subscription? He can vote the entire 100,000
different rules and consequences depending shares for as long as he is not declared
on the type of transaction. delinquent.

Q: Distinguish purchase/transfer of shares Q: May the corporate creditors enforce

from subscription of shares. payment of the unpaid subscription?
A: A: Yes.
*skipped the slides because we already
discussed these.

Page 112 of 351


Halley vs Printwell, Inc. - no insolvency
proceedings but SC affirmed the right of the
creditor to enforce payment of the unpaid
subscription in the same collection suit
against the corporation.
PNB vs. Binutok Sawmill - creditor cannot
collect the unpaid subscription unless there is
an insolvency proceeding involving the
corporation.
*know distinctions
Q: May an obligation arising from non-
payment of stock subscription be offset
against a money claim of an employee
against the employer-corporation?
A: No. This is the case of Apocada vs. NLRC.
This was asked in the bar.
No. Unpaid subscriptions are not due
and payable until a call is made by the
corporation for payment, through a board
resolution, unless there is a due date specified
in the contract of subscription.
Once the subscription, however,
becomes due, the employer-corporation may
apply the unpaid subscription against the
money claim of the employee-stockholder
following the principles of legal
compensation under the Civil Code.
Q: What is a pre-incorporation
subscription? When is it irrevocable?
A: Pre-incorporation subscription refers to
subscription of shares in a corporation still to
be formed. This shall be irrevocable for a
period of at least six (6) months from the
date of subscription, unless:
a. all of the other subscribers
consent to the revocation; or
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b. the corporation fails to
incorporate within the same
period; or
c. within a longer period stipulated
in the contract of subscription.
No pre-incorporation subscription
may be revoked after the articles of
incorporation is submitted to the SEC.
Discussion:
A pre-incorporation subscription is
irrevocable because it is an agreement among
the subscribers to incorporate. Such
agreement has the force and effect of a law.
When you subscribe, there is an agreement to
incorporate. However, it is subject to some
exceptions.
Once the pre-incorporation
subscription is filed with the SEC, it becomes
absolutely irrevocable.
What happens when the incorporation
is rejected by the SEC?
In Fong vs Duenas, the SC ruled that
the parties' joint venture agreement to
incorporate a company, when not
implemented within the stipulated period,
maybe rescinded and necessitate the return of
the pre-incorporation subscription should
also be returned if the SEC rejected the
application for incorporation. G.R. No.
185592, June 15, 2015.
Q: What are the revisions under the RCC
on consideration for stocks?
A:
a. The RCC added shares of stock in
another corporation and other generally
accepted form of consideration in the
enumeration of consideration for stock
issuance.

b. Stockholders can now participate
in the determination of a consideration other
than actual cash.
Q: What are the allowable forms of
consideration for the issuance of shares of
stock?
A: Consideration for the issuance of shares of
stock may be:
a. Actual cash paid to the corporation;
b. Property, tangible or intangible,
actually received by the corporation and
necessary or convenient for its use and
lawful purposes at a fair valuation equal
to the par or issued value of the stock
issued;
c. Labor performed for or services
actually rendered to the corporation;
d. Previously incurred indebtedness of
the corporation;
e. Amounts transferred from unrestricted
retained earnings to stood capital;
f. Outstanding shares exchanged for
stocks in the event of reclassification or
conversion;
g. Shares of stock in another corporation;
and/or
h. Other generally accepted form of
consideration. Section 64, RCC.
*Discussion was about Steve Jobs but was
inaudible*
Discussion:
Payment to employees of stocks is
illegal. However, stock options are not
because it is an option given to the employee
to be paid stocks or not.
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If a creditor desires to convert the
debt to equity, what is needed? In order not
to violate the pre-emptive right of
stockholders, a vote of 2/3 of the outstanding
capital stock is needed.
So far, Bitcoin is not considered as a
generally accepted form of consideration.
Q: Under what conditions may a
corporation accept property as
consideration for the issuance of its shares
of stock?
A: A corporation may accept property as
consideration for the issuance of its shares of
stork under the following conditions:
a. It must be necessary or convenient
for use and lawful purposes.
b. It must be fairly valued, at least
equal to the par or issued value of the
stock issued.
c. The valuation thereof shall be
initially determined by the stockholders
or the board of directors.
d. The valuation is subject to the
approval of the SEC.
Discussion:
It is implied that the property must of
course be in the name of the corporation.
Regarding valuation, even the
stockholders can now participate in
valuation.
If the shares will not be issued in
favor of existing stockholders, the issuance
should be approved by the board of directors,
as well as by the stockholders representing at
least 2/3s of the outstanding capital stock,

otherwise, it will amount to a violation of the
pre-emptive right of the stockholders.
Q: What is the nature of shares of stock?
A: Shares of stock are units of capital stock.
Once issued, they are considered personal
property of the stockholder owning it. While
shares of stock constitute personal
property, they do not represent the
property of the corporation. The
corporation has property of its own. A
share of stock only typifies an aliquot part
of the corporation's property, or the right
to share in its proceeds to that extent when
distributed according to law and equity.
Boyer Roxas vs. Court of Appeals, G.R. No.
100866, July 14, 1992; Stockholders of F.
Guanson. vs. Register of Deeds of Manila,
G.R.No. L-18216, December 30,1962.
As personal popery, shares of stock
may be transferred, either through sale,
donation or succession or encumbered or
otherwise be subject to a security interest.
Discussion:
We have already discussed this.
Q: What are the requisites for a valid
transfer of stocks?
A: For a valid transfer of stoles, there must be
strict compliance with the mode of transfer
prescribed by law. The requirements are:
a. There must be a delivery of the
stock certificate;
b. The certificate must be endorsed
by the owner or his attorney-in-fact
or other persons legally authorized
to make the transfer; and,
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c. No transfer, however, shall be
valid, except as between the parties,
until the transfer is recorded in the
books of the corporation showing the
names of the parties to the
transaction, the data of the transfer,
the number of the certificate or
certificates, and the number of
shares transferred.
Q: What is the effect if the transfer is not
recorded in the books of the corporation?
A: It is not binding against the corporation
and the whole world but only binding
between the parties.
Thus, where an incorporator organized a
corporation and a certain number of shares
was issued to a stockholder but the certificate
of stock covering said shares was in the
possession of We incorporator who refused
to deliver the same to the heir of the
stockholder after the latter died, the
stockholder of record should be considered
the owner of the shares since he did not
indorse the certificate in favor of the
incorporator. The allegation that it was
delivered to him by the stockholder because
he was the one who paid for it does not hold.
Razon vs. Intermediate Appellate Court, G.R.
No. 74306, March 16, 1992.
The fact that the stock certificates
covering the shares registered in the names of
certain persons mere found in the possession
of another does not necessarily prove that the
latter owned the shares. A stock certificate is
merely a tangible evidence of ownership of
shares of stock. Its presence or absence does
not affect the right of the registered owner to
dispose of the shares covered by the stock

certificates. Republic vs Estate of Hans
Menzi, G.R. No 152578, November 23, 2005.
Discussion: This has been asked in the Bar.
Q: When is the sale of shares perfected?
A: Sale of share is perfected not upon
meeting of the minds by the parties on the
cause, consideration and object of the sale but
upon compliance with the formalities
prescribed by the RCC.
In one case, the buyer of the shares had fully
paid the purchase price but the stock
certificate was only delivered after close to
three years from the sale. The seller clearly
failed to deliver the stock certificates to the
buyer representing the shares of stock
purchased by the buyer, within a reasonable
time from the transaction. This was a
substantial breach of their contract that
entitles the buyer the right to rescind the sale
under article 1191 of the Civil Code. It is not
entirely correct to say that a sale had already
been consummated as the buyer already
enjoyed the rights a shareholder can exercise.
The enjoyment of these rights cannot suffice
where the law, by express terms, requires a
specific form to transfer ownership. Fil-
Estate Golf and Development, Inc. vs. Vertex
Sales And Trading, Inc., G.R. No.202021,
June 10,2013.
Discussion:
This has not yet been asked in the bar
so take note.
So this is the Corporation that put up
a golf course I think in Rizal. A very beautiful
golf course. Anyway, so the certificate when
he sold it to the contractor and the contractor
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sold it and then after that the buyer sold to
another party, Vertex Sales. So vertex sales
to each nominee allowed to enjoy all the
benefits of membership but because the
stocks were not delivered right away, Vertex
filed an action to rescind the same. Can the
sale be rescinded even though vertex has
enjoyed all the privileges and benefits of
membership?
Yes it because the sale has not been
consummated there was no delivery of the
sales certificate within a reasonable time
from transaction.
In this case, the binibigay ni seller
yung certificates but it does not cure the
defect. It should have been done within a
reasonable time and not anytime you like.
Q: This is not in the presentation but in my
book. Can the corporation whose shares
are the subject of said transaction be the
one to appeal the decision?
A: It is not the corporation whose shares were
sold that should appeal but the contracting
party aggrieved by the decision.
The corporation whose shares were
sold is not a party to the sale. Its appeal does
not toll the running of the period to file an
appeal.
Q: What is the nature of delivery that the law
contemplates for the transfer of shares?
A: The delivery contemplated in Section 63
(now 62 of the RCC), pertains to the delivery
of the certificate of shares by the transferor to
the transfere, that is, from the original
stockholder named in the certificate to the
person of entity the stockholder was
transferring shares to, whether by sale or

some other valid form of absolute
conveyance of ownership.
It Is the delivery of the certificate,
coupled with the endorsement by the owner
or his duly authorized representative that is
the operative act of transfer of shares from the
original owner to the transferee. Anna Teng
vs. Securities and Exchange Commission,
G.R. No.184332. February 17, 2016.
In another case, it was held that where
the teller indorsed the stock certificates but
did not deliver them, ownership of the shares
cannot be transferred to the buyer. For an
effective transfer of shares of stock, the mode
and manner or transfer as prescribed by law
should be followed Embassy Farms, vs.
Court of Appeals, G.R. No. 80682, August
13.1990.
Q: What other steps should the transferee
take for the registration of the transfer of
shares and the issuance of the stock
certificate in his favor?
A: He should pay the taxes due on the
transaction, if any, then obtain from the
Bureau of Internal Revenue a certificate
authorizing registration ("CAR"). The
transferee should present the CAR and the
document evidencing the conveyance, and
surrender the duly endorsed stock certificate
to the secretary of the corporation who shall
then cancel the stook certificate of the
transferor and issue a stock certificate to the
transferee.
In one case, the SC ruled that with
regard to the issuance of a new certificate of
stock, the surrender of the original certificate
of stock is necessary before the issuance of a
new one so that the old certificate may be
cancelled. A corporation is not bound and
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cannot be required to issue a new certificate
unless the original certificate is produced and
surrendered.
Surrender and cancellation of the old
certificates serve to protect not only the
corporation but the legitimate shareholder
and the public as well, as it ensures that there
is only one document covering a particular
share of stock. Anna Teng vs. SEC, ibid.
Q: Can the corporate secretary refuse the
record in the books of the corporation?
A: No. SC through Justice Reyes said that
under the Corporation Code, the
requirements for the transfer are
indorsement, delivery and taxes likewise paid
and if the shares are fully paid. To require the
surrender of the stock certificate of the seller
is to impose a condition not contemplated by
law.
Q: Can the buyer ask the corporation for the
issuance of a new stock certificate given that
the certificate of the seller should be
cancelled by reason of the same?
A: The buyer cannot require the certificate of
cancellation of the seller without a surrender
to the Corporate Secretary. Without
surrender of the certificate, you cannot ask
likewise for the issuance of a new one in
favor of the buyer-transferor.
It depends on how the question will
be couched. If the question is "is the
surrender of the certificate required for
recordation of the transfer books of the
corporation?" The answer is NO because
it adds a condition not contemplated by
law.

If the question is "can a new
certificate be issued to the buyer without
surrender of the stock certificate of the
seller?" The answer is NO under Teng vs.
SEC.
Q: Is the payment of the capital gains tax
on the part of the seller, assuming there
was a gain in the sale, a requirement for
the validity of the sale or assignment or
transfer of the shares to the buyer?
A: No. Non-payment of capital gains tax does
not affect the validity of the as between the
seller and the buyer. However, if the capital
gains tax is not paid, the sale or the transfer
of shares shall not be registered in the books
of the corporation by the transfer agent or
secretary of the corporation. Transfer of
Shares; Documentary Requirements, SEC-
OGC Opinion No. 06-07, April 19, 2007.
Discussion:
Payment of capital gains tax is not an
element for the validity of the sale or
assignment or transfer of shares to the buyer.
While this principle applies to capital
gains tax, the same principle holds whether it
is succession or donation.
Q: What if the transaction is not subject to
tax? Is there a need for proof of payment
of tax?
A: For peace of mind of the parties, they get
a CAR (Certificate Authorizing Registration)
from the BIR whether taxes have been paid
or it is not subject to tax for good measure.
Discussion:
We handled a similar case with the
BIR for exchange of shares of stock which is
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not subject to tax. Thereafter, the CTA issued
a ruling to the effect that there is no longer
the need to present proof of payment of tax
where it is sure that it is not subject to tax to
record the transfer.
Q: Who can validly register the transfer in
the books of the corporation?
A: Being the custodian of the corporate
records, the corporate secretary alone can
validly cause the registration of the
transfer in the books a the corporation.
Thus, in one use, the corpora. secretary
refused to perform his ministerial duty of
recording the transfer of shares. As a result,
the nominees of the controlling stockholder
could not qualify for the election of directors.
The controlling stockholder made the entries
himself in the stock a. transfer book to record
the assignment of shares to his nominees. The
Supreme Court ruled that the registration is
not valid. Torres vs. Court of Appeals, G.R.
No. 120138 Septembers, 1997.
The remedy of the controlling
stockholder, in this case, is to file a petition
for mandamus with prayer for the issuance of
a preliminary mandatory injunction to
compel the corporate secretary to cause the
transfer. He cannot take the law Into his own
hands.
The stock a. transfer agent, being an
extension of the office of the corporate
secretary may also cause the transfer of
shares of mask involving large corporations
or public companies.
Discussion:
In Torres vs. CA, the controlling
stockholder nominated persons to be
directors. Since you cannot have directors

who do not have a share in the corporations,
that is what he did. He transferred some
shares to his nominees.
However, the CorpSec refused. What
he did was the controlling stockholder
himself made entries in the stock and transfer
book to record the assignment to his
nominees. The SC said the registration is not
valid. He should have filed a petition for
mandamus with prayer for issuance of a
preliminary mandatory injunction to compel
the CorpSec to cause the transfer.
Q: What is the effect if the transfer is not
recorded in the books of the corporation?
A: The transfer is valid only between the
contracting parties but not effective and
binding as against the corporation and
third parties. The right of the transferee,
as stockholder, accrues only upon entry of
his name in the books of the corporation.
Consequently, the transferee cannot
enjoy the status of a stockholder, cannot vote
or be voted for and will not be entitled to
dividends insofar as assigned shares are
concerned. Parenthetically, the assignors
cannot, as yet, he deprived of their rights as
stockholders, until and unless the issue of
ownership and transfer of the shares in
question are resolved with finality. Rural
Rank of Lipa City, Inc., vs Court of Appeals
G.R. No. 124535, September 28, 2001; De
Erquiga vs. Court of Appeals, G.R. No.
42706, September 27, 1989.
The unrecorded transfer of a
proprietary ownership certificate is not valid
as against the judgment creditor of the
transferor who can, therefore, levy the shares
pursuant to a judgment despite the
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unrecorded transfer Garcia vs. Jomouad,
G.P. No. 133969, January 26, 2000.
Upon the death of a shareholder,
the heirs do not automatically become
stockholders of the corporation and
acquire the rights and privileges of the
deceased as shareholder of the
corporation. The stacks must be distributed
first to the heirs in estate proceedings, and the
transfer of the stocks must be recorded in the
books of the corporation. Joselito Musni
Puno vs. Punao Enterprises, Inc.,
represented by Jesusa Puno, No.177066,
September 11, 2009.
Discussion:
The SC said there are some
exceptions where the non-recording in the
stock and transfer book still produces effect.
In one case, where the transfer is
ministerial, meaning it should have been
recorded but was not, the non-recording in
the STB still produces effect against the
corporation and the whole world.
This is only an exception to the
general rule.
Q: How may partially paid shares be
transferred?
A: Because partially paid shares are not
covered yet by a stock certificate, and as
such, there is no certificate which can be
endorsed and delivered to the transferee as
required by Section 62 of the RCC, the
subscriber, as the owner of the shares, may
assign his right to the contract of
subscription in favor of the assignee.
The corporation, may, however,
refuse the transfer of shares based on Section
62 of the RCC which provides that the

corporation may refuse the transfer if it
holds unpaid claim over the shares. The
term "unpaid claim" means unpaid
subscription. China Banking Corporation
vs. Court of Appeals, and Valley Golf and
Country Club, Inc., G.R. No.117604, March
26, 1997.
Discussion:
Does this require the consent of the
corporation? The SC said YES. It requires the
consent of the corporation. The corporation
may refuse the transfer of shares.
What is the basis? Sec. 62 of the RCC.
The term unpaid claim means unpaid
subscription. We saw this in the case of China
Bank vs CA when we discussed bylaws. It
does include any indebtedness which a
subscriber or stockholder may owe the
corporation arising from any other
transaction.
Q: Is consent of the corporation necessary or
required in case of sale of unpaid shares?
A: If the subscription is fully paid, the
stockholder may sell or dispose of his
shares without having to secure the
consent of the corporation. In fact, the
corporation cannot require its consent for the
transfer of the shares. It will be contrary to
law and public policy. To be valid, the
restriction on transfer cannot be more
onerous than the option granted a stockholder
to purchase the shares of a transferring
stockholder on reasonable terms and
conditions, or simply, the right of first
refusal. Requiring the consent of the
corporation is certainly more onerous than
the right of first refusal.
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However, if the subscription is not
fully paid, the consent of the corporation is
necessary before the subscriber may
assign his right to the contract of
subscription. Assignment of shares with
unpaid subscription basically amounts to
novation as there will be a change of debtor
from the subscriber to the assignee. The
obligation to pay the balance of the
subscription will be assumed by the assignee.
To be valid, novation requires the consent of
the creditor which in this case is the
corporation.
Q: What is the nature of the obligation of
the corporate secretary to register the
transfer of shares assuming that all the
formalities have been complied with?
A: In transferring stock, the secretary of a
corporation acts in a purely ministerial
capacity. Anna Teng vs. SEC, ibid.
In another case, the Supreme Court
ruled that where a stockholder executed a
special power of attorney (SPA) in favor of
his wife who, pursuant to the SPA, sold the
shares but after the sale, the stockholder died,
the corporation cannot refuse to register the
shares in favor of the assignee on the pretext
that upon the death of the stockholder, his
shares of stock became the property of the
estate which should be settled and liquidated
first before any distribution could be effected.
It is the ministerial dirty of a corporation to
register the shares of stock which were
assigned in the name of assignees even if
there is a pending action in court questioning
the validity of the assignment. Rural Bank of
Salinas, I, vs. Court of Appeals, MN. No
96674, June 26, 1992.

Q: What is the appropriate legal remedy if
the corporation refuses to register the
transfer of shares?
A: Because it is a ministerial duty to
register the transfer of shares of the
corporation, if it refuses without good
cause to make such transfer, may be
compelled to do so by mandamus.
The only limitation imposed by
Section 63 of the OCC (now Section 62 of
the RCC) is when the corporation holds
any unpaid claim against the shares
intended to be transferred.
Q: The question is who can file the petition
for mandamus?
A: The transferor or the transferee.
Slide:
In Ponce vs. Alsons Cement
Corporation, though, the Supreme Court
ruled that only the transferor may file the
petition for mandamus. The transferee cannot
compel the corporate secretary to cause the
registration and issuance of a stock certificate
because the transferee has not acquired
standing yet in the books of the corporation
and that the transferee can only file such
petition if he has been authorized by the
transferor to cause such transfer. G.R. No.
139802, December 10, 2002.
Discussion:
This case is unfair because the
transferee is denied legal personality because
he has not acquired legal personality yet in
the books of the corporation which is why he
wants to file a mandamus because he wants
to be recognized in the books of the
corporation yet he cannot do so. It is absurd.
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After many years, the SC had the
opportunity to reassess Ponce.
In the case of Andaya vs Rural Bank
of Cabadbaran.
Slide:
Subsequently, in Andaya vs. Rural Bank of
Cabadbaran, the Supreme Court held that
transferees of shares of stock are real
parties in interest having a cause of action
for mandamus to compel the registration
of the transfer and the corresponding
issuance of stock certificates. In this case,
the transferee was able to establish that be is
a bone fide transferee of the shares of stock
as evidenced by the following documents: (1)
a notarized Sale of Shares of stocks; (2) a
Documentary Stamp Tax Declaration/
Return: (3) a Capital Gains Tax Return; and
(4) stock certificates covering the subject
shares duly endorsed by the transferor. There
is no doubt that the transferee had the
standing to initiate an action for mandamus to
compel the corporation to record the transfer
of shares in its stock and transfer book and to
issue new stock certificates in his name. G.R.
No.188769, August 3, 2016.
Discussion:
The SC said in Andaya that either
the transferor or the transferee can file a
petition for mandamus.
Slide:
In contrast, at the crux of this petition
are the registration of the transfer and the
issuance of the corresponding stock
certificates. Requiring petitioner to register
the transaction before he could institute a
mandamus suit in supposed abidance by the

ruling in Ponce was a palpable error. It led to
an absurd, circuitous situation in which the
petitioner was prevented from causing the
registration of the transfer, ironically
because the shares had not been registered.
With the logic resorted to by the RTC,
transferees of shares of stock would never be
able to compel the registration of the transfer
and the issuance of new stock certificates in
their favor. They would first be required to
show the registration of the transfer in their
names — the ministerial act that is the subject
of the mandamus suit in the first place.
Transferees of shares of stock are real parties
in interest then having a cause of action for
mandamus to compel the registration of the
transfer and the corresponding issuance of
stock certificates.
Q: When may a corporation refuse to
register the transfer of shares in the books
of the corporation?
A:
a. If the formalities prescribed by law
for the transfer of shares, which are
endorsement of the stock certificate
and delivery to the transferee, are not
complied with.
b. If the above-stated formalities have
been complied with but the
corresponding taxes for the transfer
have not been paid.
c. If the corporation holds any unpaid
claim on the shares.
Q: Does "unpaid claim", which justifies
the corporation to refuse the registration
of the transfer, include any obligation or
liability that the subscriber may owe to the
corporation?
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A: No the term "unpaid claim" only refers to
"any unpaid claim arising from unpaid
subscription. It does include any
indebtedness which a subscriber or
stockholder may owe the corporation arising
from any other transaction. It does not, for
instance, include monthly dues imposed by
the corporation for the use of its facilities.
China Banking Corporation vs. Court of
Appeals, and Valley Golf and Country Club,
Inc., G.R. No. 117604, March 26, 1997.
Discussion:
We already discussed this before. If a
stockholder owes money from the
corporation or even purchased property from
the corporation and has not paid in full the
purchase price, the corporation cannot refuse
to transfer because the term "unpaid claim"
should be understood as unpaid subscription.
Q: Are transactions where the shares of
stock are subjected to security interest or
encumbrance required to be recorded in
the books of the corporation in order to
make the transfer effective as against the
corporation and third persons?
A: Only the transfer of shares resulting in a
change of ownership is required to be
registered in the books of the corporation.
These include sale, donation or succession.
Encumbrances, like security interest on
shares, are not required to be registered to
bind the corporation and third persons. They
are binding and enforceable against third
persons if they are registered with the
appropriate registration registry under RA
11057, otherwise known as the Personal
Property Security Act.

Discussion:
What is required to be recorded are
sale, donation or succession because they
involve transfers. It does not include
encumbrances like security interest on shares
are binding and enforceable against third
persons and the corporation if they are
registered with the appropriate registration
security under the PPSA.
Q: May a corporation impose restrictions
on the transfer of shares?
A: The authority granted to a corporation to
regulate the transfer of its stock does not
empower it to restrict the right of a
stockholder to transfer his shares by means
of bylaws provisions, but merely authorizes
the adoption of regulations as to the
formalities and procedure to be followed in
effecting the transfer. Marsh Thomson vs.
Court of Appeals and the American Chamber
of Commerce of the Philippines, Inc., G.R.
No. 116631, October 28, 1998.
THE CORPORATION MAY THEN
IMPOSE RESTRICTIONS ON THE TRANSFER
OF SHARES BUT SUBJECT TO THE
FOLLOWING REQUISITES:
a. Restrictions on the right to transfer
shares must appear in the articles of
incorporation, in the bylaws, as well as
in the certificate of stock; otherwise,
the same shall not be binding on any
Purchaser in good faith;
b. Restrictions shall not be more
onerous than granting existing
stockholders or the corporation the
option to purchase the shares of the
transferring stockholder with such
reasonable terms, conditions or period
stated.
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c. Upon the expiration of the said
period, the existing stockholders or the
corporation fails to exercise the option
to purchase, the transferring
stockholder may sell their shares to any
third person.
Discussion:
Let us take a look at the first requisite
which says the restriction must appear in the
AOI, bylaws, and certificate of stock.
It must appear in the AOI and bylaws
to bind the other stockholders and the
corporation. The corporation and the
stockholder cannot complain of the right of
first refusal because he is bound by the
provision. He should not have joined the
corporation knowing the right to transfer is
subject to this restriction.
The buyer is bound by the restriction
in the certificate of stock. They are charged
with notice on these restrictions even if the
AOI or bylaws do not yet bind them.
Second, it cannot be more onerous
than granting existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated.
This is why we saw a while ago to
require the consent of the corporation before
the sale can be effected is void. The consent
is more onerous than the right of first refusal.
If you only have X number of days to
buy or not to buy but it is only 5 days. It is
not reasonable. It is void.

Q: The corporation's articles and bylaws
has the right of first refusal giving the
stockholder the option to buy the shares of
a certain stockholder for 50% above par
value.
Par value is P100. 50% above par value is
P150.
There is a buyer of the shares for
P200 per share. Can the stockholder
exercise the option to buy it at P150 even if
it is being sold for P200?
A: Yes. The law does not say upon the same
terms and conditions offered by the buyer but
only upon reasonable terms and conditions
stated in the offer.
Q: Does this restriction apply to mortgages
or involuntary dealing? Can a mortgagee
foreclose the mortgage without having
first to recognize the right of first refusal
of the stockholder?
A: Mortgage is not contemplated or covered
by this restriction. This only covers voluntary
transfer and not involuntary.
Q: Can a judgment creditor garnish the
shares of a judgment debtor stockholder
and acquire the shares in the sale without
having to recognize the right of first
refusal by the other stockholders? Or
should they give the other stockholders the
option to buy before it can be sold in
auction?
A: No. Involuntary dealings or
transactions are not covered by this
provision.
Discussion:
Although these restrictions are found
in the chapter on closed corporation, there is
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no reason why they cannot be applied to open
or regular corporations.
Q: Mr. A is a stockholder/founding
member of Rural Bank of Maria Aurora
Incorporated, (RBMAI for brevity).
Previously, he was able to sell shares of
stock of RBMAI.
However, at present, Mr. A could not sell
his shares to outsiders since the new
manager/majority stockholder imposed a
new policy that the shares should be sold
only to insiders, particularly, to the
employees who are also stockholders of
RBMAI. Mr. A is now questioning the new
policy since these employees/stockholders
buy at very low prices while there are
third-party buyers willing to buy his
shares at a higher price.
Is the restriction on the transfer of shares
to insiders a valid restriction?
A: The company policy restricting the
transferability of shares is not valid.
In order to be valid and enforceable,
any restriction on the transfer of shares of
stock must be explicitly provided for in the
articles of incorporation and in the certificate
of stocks.
Restrictions on the transfer of shares
are essentially contractual in nature between
the stockholders and the corporation. Hence,
such restrictions must be embodied in their
contract, i.e. the articles of incorporation.
Q: What are the remedies available to a
creditor, who is a successful bidder in an
auction sale of shares of stocks of a
corporation, in the event that the
corporate secretary refuses to issue
certificates of stock and record the auction

sale in the stock and transfer book in his
favor?
A: If the corporation wrongfully refuses to
issue a certificate of stock, the following are
the remedies available to an assignee or
transferee of shares of stock:
1. File a suit for specific performance
of an express or implied contract;
2. File for an alternative relief by way
of damages where specific performance
cannot be granted; and
3. File a petition for mandamus to
compel issuance of a certificate.
Refusal to Issue Certificates of Stock;
Remedies of a Successful Bidder In an
Auction Sale of Shares of Stock, SEC 000
Opinion No. 21-06, March 23, 2006.
Q: Is there any revision under the RCC on
the issuance of stock certificates?
A: Yes, the SEC may require corporations
whose securities are traded in trading markets
and which can reasonably demonstrate their
capability to do so to issue their securities or
shares of stocks in uncertificated or scripless
form in accordance with the rules of the SEC.
Discussion:
Uncertificated or scripless form is
important for public companies where shares
are traded in the stock exchange.
Shares actively traded in the stock
exchange is very cumbersome to follow the
usual formalities required. In this case, the
shares can be in uncertificated or scripless
form.
Shares can be in the name of the
broker where shares are held for the benefit
of the customer so that the customer can
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again sell without having to pull out the stock
certificate.
Q: What is a certificate of stock?
A: A certificate of stock is a written
instrument signed by the proper officer of a
corporation stating or acknowledging that
the person named therein is the owner of a
designated number of shares of its stock. It
indicates the name of the holder, the number,
kind and class of shares represented, and the
date of issuance.
Pertinently, it was held that the mere
inclusion as a shareholder in the General
Information Sheet of a corporation is not
sufficient proof that one is a shareholder of
such corporation. David C. Lao n vs. Dionisio
Lao, G.R. No. 170585, October 6, 2008.
Discussion:
Even in the absence of stock
certificates, you can still vote these stocks by
presenting the contract of subscription. It is
important to have a stock certificate but it is
not essential to the exercise of the right of a
stockholder.
Possession of the stock certificate is
not indispensable for the exercise of
stockholder's rights.
Q: This was asked in the bar. May a
corporation consider the portion paid by a
shareholder as full payment for the
corresponding number of shares and
cancel the subscription as to the rest?
A: Upon the acceptance of a stock
subscription by a corporation, the
subscription becomes a binding contract to
which the subscriber cannot withdraw.

Neither does the corporation have the
power to release an original subscriber from
its subscription, and as against the creditors.
A reduction of the capital stock can only take
place in the manner and under the conditions
prescribed by law or the charter of the
corporation. To do so would be violative of
the Trust Fund Doctrine since it does not fall
under any of the allowable instances where a
corporation may distribute its assets to its
creditors and stockholders. As such,
subscription contracts cannot be cancelled
by Board of Directors without justifiable
cause. This is tantamount to relieving an
original subscriber from the subscription,
contractual obligation, which a corporation
has no power to do so. Therefore, the
corporation may not condone subscription
receivables due from shareholders as it
violates the Trust Fund Doctrine.
Section 63 of the RCC, which
enunciates the 'Doctrine of indivisibility of
Subscription Contracts," provides that "no
certificate of stock shall be issued to a
subscriber until the full amount of the
subscription together with interest and
expenses (in case of delinquent shares), if any
is due, has been paid."
The SEC has consistently opined that
a subscription is one, entire and indivisible
whole contract. This indivisibility of
subscription , absolute as Section 63 of the
PCC speaks no exception.
Discussion:
Aside from violating the Trust Fund
Doctrine, the other reason is that a contract of
subscription is indivisible. You subscribe to
500,000, it cannot be chopped into parts.
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Slide:
The purpose of the doctrine is to prevent the
partial disposition of a subscription, which is
not fully paid, because if it is permitted and
the stockholder subsequently becomes
delinquent in the payment of his subscription,
the corporation may not be able to sell as
many of his subscribed shares as would be
necessary to cover the total amount from him
pursuant Section 67 of the RCC.
Applying the aforementioned
doctrine, a corporation cannot issue
certificates of stock for the portion of the
subscription that is paid and cancel the
portion which remains unpaid as it violates
the doctrine of indivisibility of subscription.
contracts. In effect, it is also condonation of
pan of the subscription of a stockholder,
which is violative of the Trust Fund Doctrine.
Re: Condonation of Subscriptions
Receivables or Cancellation of
Subscriptions, SEC-0GC Opinion No.50-19,
October 11, 2019,
Q: Can "Bearer" stock certificates be
issued by a corporation upon the request
of a subscriber?
A: NO. The issuance of "bearer" stock
certificates is not allowed under the law.
Certificates of stock may be issued only to
registered owners of stock in a corporation
upon full payment of subscription. Re:
Bearer Certificates, SEC Opinion No. 02-05,
January 31, 2005.
Q: Can a stock certificate be indorsed in
blank? Does indorsement in blank convert
it into a bearer instrument?
A: In Republic vs Sandiganbayan, a stock
certificate is not a negotiable instrument. He

who acquires a stock certificate acquires it
subject to all defenses that can be raised by a
stockholder against third persons.
In this case, the Marcoses left the
country but left in the Philippines various
stock certificates endorsed in blank. The
government argued that since they were
endorsed in blank, the government owns
these shares following the Law on Negotiable
Instruments.
The SC said the concept of holder in
due course and concept that indorsement in
blank converts it into a bearer instrument
finds no application in stock certificates.
They can only apply in negotiable
instruments which comply with Section 1 of
the Negotiable Instruments Law.
Q: What is a watered stock?
A: A watered stock is a stock issued for a
consideration less than the par or issued price
thereof or for a consideration in any form
other than cash, valued in excess of its fair
value.
"Water" in the stock represents the difference
between the fair value at the time of the
issuance of the stock and the par or issued
value of the said stock. Section 61, RCC;
2015 Bar Exam.
Discussion:
In definition of watered stocks, you
only use fair value when consideration given
is property. If in cash, watered stocks are
stocks issued below par value or issued value
of said stock
Q: What is the liability of directors or
officers relating to the issuance of watered
stocks?
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A: A director or officer of a corporation who:
(a) consents to the issuance of stocks
for consideration less than its par or
issued value; (b) consents to the
issuance of stocks for a consideration
in any form other than cash, valued in
excess of its fair value, or
(c) having knowledge of the insufficient
consideration, does not file a written
objection with the corporate secretary,
shall be liable to the corporation or its
creditors, solidarily with the
stockholder concerned for the
difference between the value received
at the time of the issuance of the stock
and the par or issued value of the same.
Applying the Trust Fund Doctrine,
the aggregate par value of the shares
subscribed, regardless if the consideration is
less than its par or issued value, is treated as
equity in trust of the corporation's creditors
As such, the subscription for less than the par
or issued value of the shares is violative of the
trust fund doctrine.
Q: Can the creditor enforce the watered
portion if the corporation is actively
operating and with assets that can pay the
claim of creditors?
A: NO. If you are a creditor, you can only
enforce the difference if the corporation has
assets to pay the obligation of the corporate
creditors.
While they are solidarily liable to the
creditors, it is in the premise that there are
not assets.
Q: Can treasury shares be sold for a price
below par value? If yes, are they not
considered watered shares?

A: Yes, treasury shares may be sold for a
price below par value; provided that such
price is reasonable under the circumstances
as determined by the board of directors. They
are not watered stocks because rule against
watered stocks only applies to the issuance of
original or primary shares and not
disposition of existing shares.
Q: When should the balance of subscription
be paid?
A: The balance of subscription should be paid
on the date specified in the contract of
subscription. In the absence of due date in the
contract of subscription, the board of
directors may, at any time, declare due and
payable to the corporation unpaid
subscriptions and may collect the same or
such percentage thereof, in either case, with
accrued interest, if any, as it may deem
necessary.
The due date for the payment of the
balance is either the stipulated date or in the
absence of such stipulation, the call or
demand by the Board of Directors.
Demand is not necessary to put the
subscriber in default if the due date of
payment is specified in the contract of
subscription based on Article 1169 of the
Civil Code that demand is not necessary to
put the debtor in default when the law so
declares.
Q: What are the legal consequences if the
balance of the subscription is not paid on
the due date?
A: Failure to pay the subscription on the due
date shall render the entire balance due and
payable and shall make the stockholder liable
for interest at the legal rate on such balance,
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unless a different interest rate is provided in
the subscription contract. The interest shall
be computed from the date specified, until
full payment of the subscription.
If no payment is made within thirty
(30) days from the said date, all stocks
covered by the subscription shall thereupon
become delinquent and shall be subject to
sale as hereinafter provided, unless the board
of directors orders otherwise.
The subscriber is also liable to pay
interest on the unpaid subscription.
Q: What are the remedies available to the
corporation to enforce the payment of the
unpaid subscription?
A:
a. The corporation may declare the shares as
delinquent and subject such delinquent shares
to sale; or
b. It may collect, through court action, the
unpaid subscription.
Discussion:
I have not seen a corporation file an
action for collection because it requires filing
fees. It is easier to have it the delinquent
shares sold.
When is filing an action for collection
a better option? If there is no bidder willing
to pay the balance of the subscription and the
corporation has no surplus profit.
Can it be sold on piece-meal basis?
The SEC said NO. The contract of
subscription is indivisible.
Q: Does the subscriber have any right as a
stockholder despite the failure to pay the
subscription?

A: The subscriber retains all his rights as
a stockholder despite his failure to pay the
balance of the subscription on the date
specified in the contract of subscription or
upon call made by the board of directors
("due date"). He is entitled to such rights
until his stocks become delinquent.
Stocks become delinquent only if
not paid within 30 days from due date. This
is consistent with Section 71 of the RCC
which states that holders of subscribed shares
not fully paid which are not delinquent shall
have all the rights of a stockholder.
If the stocks are delinquent, the
only right available to the subscriber is to
right to the dividends which should be
exercised in accordance with law. This
means the cash dividends due on
delinquent stack shall be applied against
the unpaid balance on the subscription
plus interest, cost and expenses while the
stock dividends shall be withheld until full
payment of the subscription.
Q: What are the effects of delinquency?
A: No delinquent stock shall be:
a. Voted for
b. Be entitled to vote
c. Be represented at any stockholder's
meeting
d. Nor shall the holder thereof be
entitled to any of the rights of a stockholder
except the right to dividends in accordance
with the provisions of the RCC, until and
unless payment is made by the holder of such
delinquent stock for the amount due on the
subscription with accrued interest, and the
costs and expenses of advertisement, if any.
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Q: Juan subscribed to 1,000,000 shares of
stock of ABC Corporation with par value
of Php 1.0o per share. The subscription
amount is Php 1,000,000. He paid Php
250,000.00.
a. When should Juan pay the balance of
the subscription?
He should pay on the date specified in
the contract of subscription, If the contract is
silent on the due date, the balance should be
paid upon call or demand made by the board
of directors,
b. Assume that the due date is June 15,
2020 and Juan failed the pay the balance
of subscription on such date. The
corporation called a regular stockholder's
meeting on June 30, 2020 to elect the board
of directors.
Can Juan vote his shares in the
corporation? If yes, how many shares can
he vote?
Yes, he can vote. Non-payment on
due date does not mean that the stocks
covered by the subscription have become
delinquent. Stocks become delinquent only if
not paid after 30 days from the due date of
payment. Under Section 71 of the RCC,
holders of unpaid shares that are not
delinquent have all the rights of a
stockholder.
He can vote the entire 1,000,000
share, The standing of the stockholder is
measured by his subscription and not on his
paid-up shares. He retains his rights based on
his subscription until the stocks become
delinquent.
c. Is Juan qualified to be elected as a
director of the corporation?

Yes, for the reasons stated above,
Juan remains to be a stockholder on the
election date and is qualified to be elected as
a director. However, once the shares become
delinquent, he should be deemed to have
forfeited his director position because share
ownership is a continuing requirement.
d. Assume further that on July 10, 2020,
the corporation declared cash dividends of
P1.00 per share, is Juan entitled to receive
the dividends? If yes, how many shares are
entitled to dividends?
Yes, Juan is entitled to dividends for
his entire 1,000,000 shares. This is for the
same reason stated above that holders of
unpaid shares that are not delinquent have all
the rights of a stockholder.
e. Can the corporation apply the cash
dividends against the unpaid
subscription?
The corporation cannot apply the
dividends against the unpaid subscription
unless the contract of subscription allows it.
This is because the corporation is only
allowed to apply the cash dividends against
the unpaid subscription only for delinquent
stocks.
In other words, cash dividends
cannot be withheld from the subscribers
who have not fully paid their subscriptions
unless they are delinquent on thew unpaid
subscriptions. The corporation may use the
cash dividends to pay off stockholders'
subscription but which have not been
declared delinquent only if the stockholders
concerned give their consent thereto. Re:
Indivisibility of Subscription Contract;
Payment of Balance of Unpaid Subscriptions;
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Delinquent Shares; Delinquency Sale, SEC-
CMC Opinion No. 0516, March 31, 2016.
Discussion:
When can the corporation apply the
cash dividends against the unpaid
subscription?
1. When the contract of subscription
allows it;
2. When the stockholders concerned
give their consent thereto; and
3. If the stocks are declared
delinquent
f. May stock dividends be used to pay the
balance of the unpaid subscriptions?
A stockholder's indebtedness to a
corporation under a subscription agreement
cannot be compensated with the amount of
shares given to him under a stock dividend
declaration, there being no relation of
creditor and debtor with regard to such
shares. Under Section 42 of the RCC, "stock
dividends shall be withheld from the
delinquent stockholder until full payment of
the subscription. In other words, under the
said provision, it is now allowed to apply
stock dividends to unpaid subscription.
Q: On June 15, 2019, Pedro subscribed to 1
million shares of XYZ Corporation in the
amount of Php 1,000,000. He paid P
250,000.00 and agreed to pay the balance on
June 15, 2020 as specified in the contract of
subscription. The contract stipulated that the
balance of the subscription shall earn 12%
interest from the date of the contract until full
payment. Pedro failed to pay on the due date.
Despite demands, the balance remained
unpaid after 30 days from June 15, 2020.

a. How much is the total amount of unpaid
subscription?
It should be Php 750,000 plus 12%
interest as stipulated in the contract of
subscription. Interest at the legal rate may
also be collected on the same amount of Php
750,000 from the due date until full payment
of the subscription. The first interest is due by
reason of stipulated while the second is by
reason of the default by the subscriber.
Discussion:
Similar to the Civil Code, this is akin
to moratory interest if there is a stipulation
and the other one is compensatory interest if
in case of default.
Moratory interest is computed from
due date until date of full payment. You can
collect the second kind of payment in the
absence of a stipulation but you can collect
the second in its absence.
b. How many shares are delinquent?
750,000 or 1,000,000 shares?
The 1,000,000 shares are considered
delinquent. Under Section 66 of the RCC, if
no payment is made within thirty (30) days
from the date specified in the subscription
contract or on the date stated in the call made
by the board, all stocks covered by said
subscription shall thereupon become
delinquent.
This is because, under Section 63 of
the RCC, no certificate of stock shall be
issued to a subscriber until the full amount of
his subscription together with interest and
expenses (in case of delinquent shares), if any
is due, has been paid. This implicitly sets
forth the doctrine that a subscription contract
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is one, entire and indivisible contract. It
cannot be divided into portions so that the
stockholder shall not be entitled to a
certificate of stock until full payment of his
subscription together with interest, and
expenses if any is due. Therefore, the entire
delinquent subscription cannot be voted for
or be entitled to vote. Delinquent Stocks,
Delinquency Sale, Effect of Delinquency,
SEC-OGC Opinion No. 15-10, April 23,
2010.
c. The board of directors adopted the
appropriate resolution to direct the sale of
the delinquent shares in public auction.
Assume that the total unpaid subscription
inclusive of interest, cost and expense is
Php 850,000. Three bidders who are
willing to settle Php 850,000 unpaid
subscription joined the auction sale. "A"
tendered a bid for 1,000,000 shares. "B"
submitted a bid for 850,000 shares, while
"C" made a bid for 750,000 shares.
Who among the three will be
considered the winner?
Under Section 67 of the RCC, the
delinquent stock shall be sold at a public
auction to such bidder who shall offer to pay
the full amount of the balance on the
subscription together with accrued interest,
costs of advertisement and expenses of sale,
for the smallest number of shares or fraction
of share.
The winning bidder is therefore "C"
because he offers to pay the full amount of
the balance of subscription plus interest, cost
and expense for the least number of shares.
The sale of delinquent shares is not the same
as execution or foreclosure sale of real
property where the winning bidder is the one

who offers the highest amount for the
purchase of property.
d. Does Pedro have any right to the shares
after the auction sale?
Under Section 67 of the RCC, the
stock so purchased during the public auction
shall be transferred to such purchaser in the
books of the corporation and a certificate for
such stock shall be issued in the purchaser's
favor. The remaining shares, if any, shall be
credited in favor of the delinquent
stockholder who shall likewise be entitled to
the issuance of a certificate of stock covering
such shares.
Therefore, C shall be issued a stock
certificate for 750,000 shares corresponding
to the stocks he purchased while Pedro will
be issued a stock certificate covering 250,000
shares.
Discussion:
It is not correct to say that the stock
certificate shall be cancelled because in the
first place, there is no stock certificate issued
yet there being no full payment of the
subscription.
What will happen is the corporation
will issue 2 certificates. One to the winning
bidder but only corresponding to the shares
he purchased during the bidding and the
difference in favor of the original
stockholder.
Slide:
In the event, however that the auction is
successful but there is only one bidder who
offered to pay the full amount for the entire
delinquent stocks, the corporation must issue
a certificate of stock covering the entire
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subscription and not for only the unpaid
portion of the subscription.
The principle of indivisibility of
subscription is absolute as Section 63 of the
RCC speaks of no exception. Thus, partial
payment to a subscription contract shall be
deemed forfeited and the whole subscription
shall be declared delinquent.
e. May the corporation participate in the
public auction for the sale of delinquent
shares?
The corporation may bid for the
delinquent shares only if there is no bidder at
the public auction who offers to pay the full
amount of the balance on the subscription
together with accrued interest, costs of
advertisement, and expenses of sale, for the
smallest number of shares or fraction of a
share. After the bid, the total amount due
shall be credited as fully paid in the books of
the corporation. Title to all the shares of stock
covered by the subscription shall be vested in
the corporation as treasury shares and troy Ise
disposed of by said corporation in accordance
with the provisions of the RCC.
Q: What is the remedy available to the
corporation in case of conflicting claims of
ownership over the same shares of stock
issued by the corporation?
A: The corporation may bring an action for
interpleader to compel the claimants to
interplead and litigate their claims between or
among themselves (Rule 62 of the 1997
Rules of Court). The corporation will
basically recognize the claimant who will be
adjudged by the court as the owner of the
shares.

Q: Juan is the registered owner of 100,000
shares of stock of ABC Corporation
covered by stock certificate no. 143. He
claims to have lost his stock certificate. He
fled an affidavit stating the circumstances
surrounding the loss of his certificate. The
affidavit further contains all the
information required by the Corporate
Secretary. The Corporation caused the
publication of the notice of loss once a
week for three consecutive weeks in a
newspaper of general circulation in the
city where the principal office of the
corporation is located. There being no
claimant after the one year publication
period, the Corporation cancelled the
stock certificate and issued a replacement
in favor of Joan.
Thereafter, Pedro came forward
claiming that the stock certificate was in
fact endorsed to him pursuant to a sale
transaction and asked the Corporation to
cancel the replacement certificate issued to
Juan.
a. Is the Corporation liable for
issuing a replacement certificate?
b. Can the corporation be
compelled to cancel the replacement
certificate?
a. No, except in case of fraud, bad faith, or
negligence on the part of the corporation and
its officers, no action may be brought against
any corporation which shall have issued
certificate of stock in lieu of those lost, stolen
or destroyed pursuant to the procedure laid
down in Section 72 of the RCC.
b. No, because in the books of the
corporation, the stock certificate of Juan as
purportedly sold to Pedro had already been
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cancelled and is no longer outstanding in the
books of the corporation. The remedy of
Pedro is to file an action against Juan.
c. Suppose Juan did not really lose the
stock certificate but had previously
endorsed it to Maria. After obtaining the
replacement stock certificate, Juan
endorsed it to Anna.
Who has a better right, Maria as endorsee
of the purportedly lost certificate, or
Anna, the endorsee of the replacement
stock certificate?
The endorsee of the replacement
certificate has a better right because the lost
certificate of Juan had already been cancelled
and is no longer outstanding in the books of
the corporation.
TITLE VIII
CORPORATE BOOKS AND
RECORDS
Q: What are the revisions under the RCC
on corporate records and stockholders'
right of inspection?
A:
a. It required all information about the
corporation to be preserved, and
expanded the list of records required to
be kept by the corporation at its
principal office.
b. Inspecting/reproducing party is
bound by confidentiality rules.
However, a person who is not a
stockholder or member of record, a
competitor, or who represents the
interests of a competitor is prohibited to
Inspect/reproduce corporate records.

c. A stockholder who shall abuse the
right to inspect/reproduce shall be
penalized under the provisions of the
following laws:
(a) RCC,
(b) Intellectual Property Code of
the Philippines; and
(c) Data Privacy Act of 2012.
d. The SEC may require the presence of
an independent transfer agent in case
the stock transfer corporation transfers
or trades stocks in secondary markets.
e. Expanded the remedies available to a
stockholder exercising his right of
inspection in that if the corporation
denies or does not act on a demand for
inspection and/or reproduction, the
aggrieved party may report such denial
or inaction to the SEC. Within five (5)
days from receipt of such a report, the
SEC shall conduct a summary
investigation and issue an order
directing the inspection or reproduction
of the requested records.
Q: What is the nature of the stockholders'
right to inspect corporate records?
A: Every stockholder has the right to
inspect the records of a corporation. The
stockholders' right of inspection of the
corporation's books and records is based
upon their ownership of the assets and
property of the corporation. It is, therefore,
an incident of ownership of the corporate
property, whether this ownership or interest
be termed an equitable ownership, a
beneficial ownership, or ownership. John
Gokongwei, Jr. vs. Securities and Exchange
Commission, G.R. No. L-45911, April 11,
1979.
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Discussion:
Obviously is you are a stockholder
you are an owner of the corporation. You
have a right to know what is happening in the
corporation.
Slide:
The Corporation Code has granted to
all stockholders the right to inspect the
corporate books and records, and in so doing
has not required any specific amount of
interest for the exercise of the right to inspect.
The right cannot be denied on the basis that
the inspection for a doubtful or dubious
reason. The right of the shareholder to
inspect the books and records should not be
made subject to the condition of a showing of
any particular dispute or of proving any
mismanagement or other occasion rendering
an examination proper, but if the right is to
be denied, the burden of proof is upon the
corporation to show that the purpose of
the shareholder is improper, by way of
defense. Terelay Investment and
Development Corporation V. Cecilia Teresita
J. Yulo; G.R. No. 160924, 05 August 2015.
Discussion:
This case is very important. It is yet to
be asked in the bar because the SC
enumerated the valid or proper purposes for
inspection.
In the slide above, it implies that the
right of inspection is not premised on any
mismanagement of the corporation. You can
only inspect the records if there is allege if
mismanagement is completely wrong or
erroneous.

REPUBLIC VS. SANDIGANBAYAN
G.R. Nos. 88809 & 88858 (Resolution),
July 10, 1991
❖ Who has the burden of proof in the
right of inspection?
The burden is on the corporation to
prove that the stockholder's action in seeking
examination of the corporate records was
moved by unlawful or ill-motivated design.
GRACE BORGONA INSIGNE VS. ABRA
VALLEY COLLEGES AND FRANCIS
BORGONA
G.R. No. 204089, July 2015.
❖ Is the stockholder's possession of a
stock certificate a condition precedent
for the exercise of the right of
inspection?
A: No, a stockholder may exercise his right
of inspection even though he is not In the
possession of stock certificate.
A stock certificate is prima facie
evidence that the holder is a shareholder of
the corporation, but the possession of the
certificate is not the sole determining factor
of one's stock ownership. It expresses the
contract between the corporation and the
stockholder, but it is not essential to the
existence of a share in stock or the creation of
the relation of shareholder to the corporation.
More so, if the stockholder being
denied the right of inspection is a former
director of the corporation, the corporation
would not have allowed his election as a
director if he was disqualified for lack of
stock ownership.
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Moreover, a stock certificate is issued only
upon full payment of the subscription and
holder of subscribed shares not fully paid
which are not delinquent has all the rights of
a stockholder, including the right of
inspection.
Discussion:
In this case, he was a former director
and even president of the corporation but he
had no stock certificate. When he was not re-
elected, the new group denied the former's
group the right of inspection on the ground
that they are not stockholders of the
corporation because they have no stock
certificate.
Sabi ng SC you elected him as
director. If you elected him as director, you
are admitting that he is a stockholder of the
corporation. You are estopped from
questioning that he is a shareholder of the
corporation.
In Insigne, the SC also enumerated
how a person may become a stockholder of
the corporation. How?
1. By subscription to the shares of
stock of the corporation;
2. If you buy shares from a selling
stockholder;
3. If you buy shares from the
corporation itself as in the sale of
treasury shares.
Q: Is your subscription required to be
recorded in the books of the corporation to
exercise your rights as stockholder?
A: What should be recorded are only
transfers of shares. Subscription need not be
recorded in the books to make it valid.

ADERITO Z. YUJUICO VS. CESAR T.
QUIAMBAO
G.R. No. 180416, 02 June 2014; Section
73, RCC.
❖ What is the extent or scope of the right
of inspection?
The right of inspection extends to all
corporate records, regardless of the form in
which they are stored. It covers the stock and
transfer book because it is part of corporate
records. Section 73, RCC.
JOHN GOKONGWEI JR. VS. SECURITIES
AND EXCHANGE COMMISSION
G.R. No. L-4S911, April 11, 1979.
❖ What about to wholly-owned
subsidiaries?
It also extends to books and records
of the corporation's wholly-owned subsidiary
which are in the corporation's possession
and control as it is more in accord with
equity, good faith and fair dealing to construe
the statutory right of a stockholder to cover
such books and records.
Q: Who are the persons allowed to inspect
corporate records?
A: Corporate records, regardless of the
form in which they are stored, shall be
open to inspection by any director, trustee,
stockholder or member of the corporation
in person or by a representative at
reasonable hours on business days, and a
demand in writing may be made by such
director, trustee or stockholder at their
expense, for copies of such records or
excerpts from said records.
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A requesting party who is not a
stockholder or member of record, or is a
competitor, director, officer, controlling
stockholder or otherwise represents the
interests of a competitor shall have no
right to inspect or demand reproduction of
corporate records.
Q: What is the penalty for unjustified
refusal to grant the right of inspection?
A: Any officer or agent of the corporation
who shall refuse to allow the inspection
and/or reproduction of records in accordance
with the provisions of the RCC shall be liable
to such director, trustee, stockholder or
member for damages, and in addition, shall
be guilty of an offense which shall be
punishable under Section 161 of the RCC.
If such refusal is made pursuant to a
resolution or order of the board of
directors or trustees, the liability under
this section for such action shall be
imposed upon the directors or trustees
who voted for such refusal.
Discussion:
The sanction is only a monetary fine
of 10,000-200,000. It can increase from
20,000-400,000 depending on the
circumstances.
Slide:
Under Section 161 of the RCC, the
unjustified failure or refusal by the
corporation, or by those responsible for
keeping and maintaining corporate records,
to comply with Sections 45, 73, 92, 128, 177
and other pertinent rules and provisions of the
RCC on inspection and reproduction of
records shall be punished with a fine ranging

from Ten thousand pesos (P10,000.00) to
Two hundred thousand pesos (P200,000.00),
at the discretion of the court, taking into
consideration the seriousness of the violation
and its implications. When the violation of
this provision is injurious or detrimental to
the public, the penalty is a fine ranging from
Twenty thousand pesos (20,000.00) to Four
hundred thousand pesos (P400,000.00).
Q: Did the RCC de-criminalize violation of
stockholder's right of inspection?
A: The RCC did not de-criminalize the
violation of stockholder's right of inspection.
It only removed the penalty of imprisonment
and limited the penalty to monetary fines.
Q: What are the requisites before the
penal provision may be applied in a case of
violation of a stockholder or member's
right to inspect the corporate
books/records?
The elements of the offense are:
First. A director, trustee, stockholder
or member has made a prior demand
in writing for a copy of excerpts from
the corporation's records or minutes;
Second. Any officer or agent of the
concerned corporation shall refuse to
allow the said director, trustee,
stockholder or member of the
corporation to examine and copy said
excerpts;
Third. If such refusal is made
pursuant to a resolution or order of
the board of directors or trustees, the
liability under this section for such
action shall be imposed upon the
directors or trustees who voted for
such refusal; and
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Fourth. Where the officer or agent of
the corporation sets up the defense
that the person demanding to
examine and copy excerpts from the
corporation's records and minutes
has improperly used any
information secured through any
prior examination of the records or
minutes of such corporation or of
any other corporation, or was not
acting in good faith or for a
legitimate purpose in making his
demand, the contrary must be shown
or proved.
Thus, in a criminal complaint for
violation of Section 74 of the Corporation
Code (now Section 73 of the RCC), the
defense of improper use or motive is M the
nature of a justifying circumstance that
would exonerate those who raise and are able
to prove the same.
Accordingly, where the corporation
denies inspection on the ground of improper
motive or purpose, the burden of proof is
taken from the shareholder and placed on the
corporation.
However, where no such improper
motive or purpose is alleged, and even
though so alleged, it is not proved by the
corporation, then there is no valid reason to
deny the requested inspection. Sy Tiong
Shiou, et al., vs Sy Chim, et. al., G.R. No.
179438, 30 March 2009.
Q: What are the remedies of a stockholder
if the corporation denies or does not act on
his demand for inspection?
A: The remedies are as follows:

a. If the corporation denies or does not
act on a demand for inspection and/or
reproduction, the aggrieved party may
report such denial or inaction to the
SEC. Within five (5) days from receipt
of such report, the SEC shall conduct a
summary investigation and issue an
order directing the inspection or
reproduction of the requested records;
b. He may file with a criminal
complaint for violation of his right of
inspection; and,
c. He may file a petition for inspection
of corporate records (Ruled of the
Rules of Procedure for Intra-Corporate
Controversies).
Discussion:
These remedies can be pursued
simultaneously.
Q: Is it correct to say that reporting to the
SEC is an administrative remedy that
must first be exhausted before you can file
a complaint for violation of the right of
inspection?
A: No. If your request with SEC is not acted
upon or denied, you remedy is a petition for
review under Rule 43.
Criminal complaint is therefore not
conditioned on reporting of inaction of the
SEC. The remedy can be pursued
simultaneously.
Q: Is an action to recover possession of a
stock transfer from the former secretary
of the corporation enforceable by criminal
prosecution based on violation of the
stockholder's right of inspection?
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No, a criminal action based on the
violation of a stockholder's right to examine
or inspect the corporate records and the stock
and transfer book of a corporation can only
be maintained against corporate officers or
any other persons acting on behalf of such
corporation.
A violation of Section 74 of the OCC
(now Section 73 of the RCC) contemplates a
situation wherein a corporation, acting thru
one of its officers or agents, denies the right
of any of its stockholders to inspect the
records, minutes and the stock and transfer
book of such corporation.
The proprietary right of the
corporation to the in possession of such
records and book though certainly legally
enforceable by other means, cannot be
enforced by a criminal prosecution based on
a violation of the Corporation Code.
Discussion:
An action to recover possession is not
enforceable criminally under the provisions
of the RCC. In criminal law, the crime
committed is theft because that STB is a
property of the corporation being withheld
from the corporation without its consent.
Q: What are the limitations on the
stockholder's right of inspection?
A: The right of inspection is not absolute. It
is subject to the following limitations:
a. It can only be exercised for a purpose
germane to his interest as a
stockholder;
b. He must be acting in good faith or
for a legitimate purpose in making the
demand to examine or reproduce
corporate records;

c. it must be exercised during
reasonable hours on business days;
d. Copies of corporate records or
excerpts from said records must be at
the expense of the requesting director,
trustee or stockholder; and
e. It is subject to other applicable laws.
Discussion:
In fishing expedition, the corporation
has the right to deny your right of inspection
because it is not a proper purpose.
The other applicable laws are IP
Laws, Data Privacy Act, RA 1405, etc.
Q: This was asked in the bar. 2
stockholders of a bank are debtor and
creditor of each other. The creditor wants
to find out from the bank if his debtor has
deposits with the bank so he can file an
action for collection with prayer for
preliminary attachment. Can he invoke his
right of inspection to examine the deposits
of the debtor or stockholder?
A: The answer is NO. That is covered by RA
1405 which is a special law that prevails over
the RCC, a general law.
WHAT ARE THE DEFENSES AVAILABLE TO A
CORPORATION AGAINST A PERSON
DEMANDING TO EXAMINE AND COPY
EXCERPTS FROM THE CORPORATION'S
RECORDS?
a. The stockholder demanding m
examine and copy excerpts from the
corporation, records and minutes has
improperly used information secured
through any prior examination of the
records or minutes of such corporation
or deny other corporation.
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b. The stockholder was not acting in
good faith or for a legitimate purpose in
making the demand to examine or
reproduce corporate records.
c. The person demanding inspection or
is a competitor, director, officer,
controlling stockholder or otherwise
represents the interests de competitor.
d. The purpose of inspection is not
germane to his interest as a
stockholder.
e. The right is not being exercised
during reasonable hours on a business
day.
f. The subject matter of the inspection
is a protected information under other
applicable laws Republic Act No.
8293, otherwise known as the
Intellectual Property Code of the
Philippines, as amended, and Republic
RA No.10173, otherwise known as the
Data Privacy of 2012, and Republic
Act No. 10173, otherwise known as
Law on Secrecy of Philippine Currency
Bank Deposits.
Discussion:
We handled a similar case for petition
for declaratory relief where we invoked trade
secrets such as names of suppliers,
customers, etc. to deny the right of
inspection.
We won. Our game plan for doing
that is when they file a criminal complaint,
we will invoke the declaratory relief as a
prejudicial question to suspend the criminal
proceedings to give way to the resolution of
the civil case.
The RTC ruled in our favor. They
went to the CA and the CA said we can make

the records available to you but your client
can't make a peek of the sensitive
information.
What is the point of giving access to
records but not to the ones you want? So
basically the CA affirmed the RTC ruling.
I was hoping they will go up to the SC
to enrich jurisprudence but they did not. So it
is only a CA decision that trade secrets
outweigh the right of inspection.
After a few years, I got my validation
not in a case we handled but a different case
Terelay Investment vs Yulo where the SC
ruled that trade secrets are outside the right
of inspection.
Q: Cite examples of legitimate purposes to
warrant the exercise of the right of
inspection.
A: Among the purposes held to justify a
demand for inspection are the following:
(1) to ascertain the financial condition
of the company or the propriety of
dividends;
(2) to determine the value of the shares
of stock for sale or investment;
(3) to determine whether there has been
mismanagement;
(4) in anticipation of shareholders'
meetings, to obtain a mailing list of
shareholders to solicit proxies or
influence voting;
(5) to obtain information in aid of
litigation with the corporation or its
officers as to corporate transactions.
Terelay Investment and Development
Corporation vs. Cecilia Teresita J.
Yulo; G.R. No. 160924, 05 August
2015,
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Q: Cite examples of improper purposes
which may justify denial of the right of
inspection.
A: Among the improper purposes which may
justify a denial of the right of inspection are:
(1) obtaining of information as to
business secrets or to aid a competitor;
(2) to secure business "prospects" or
investment or advertising lists;
(3) to find technical defects in
corporate transactions in order to bring
"strike suits" for purposes of blackmail
or extortion.
Q: Is the right of inspection extinguished
by the dissolution of the corporation?
A: The termination of the life of a juridical
entity does not, by itself, cause the extinction
or diminution of the rights and liabilities of
such entity nor those of its owners and
creditors. Thus, the revocation of the
corporation's registration does not
automatically strip off the stockholder of his
right to examine pertinent documents and
records of the corporation. Alejandro D.C.
Roque vs. People of the Philippines, G.R. No.
211108, June 7, 2017.
The rights and remedies against, or
liabilities of, the office shall not be
removed or impaired by reason of the
dissolution of the corporation. Corollary
then, a stockholder's right to inspect
corporate records subsists during the
period of liquidation. Accordingly, if the
stockholder was deprived of the exercise of
an effective right of inspection, offenses had
in fact been committed, regardless of lack of
criminal intent. Alfredo L. Chua vs. People of
the Philippines, G.P. No. 216146, August 24,
2016.

DECEMBER 03, 2020
TITLE IX
MERGER AND CONSOLIDATION
(Recit Questions)
Q: ABC Corp. and XYZ Corp. are both
banking institutions. They entered into
agreement whereby XYZ acquired all
assets of ABC in exchange for its
assumption of ABC’s liabilities. Should
XYZ Corp. absorbed employees of ABC?
A: No, XYZ is not obligated to absorbed the
employees of ABC. It’s not considered a
merger unless and until there is a certificate
of merger issued by the SEC.
Q: Is ABC considered dissolved?
A: No they’re still both existing and have
separate corporate personality.
Q: What is a de facto merger?
A: De facto merger happens when a
corporation acquires the assets and liabilities
of another corporation in exchange of shares
of stock in another corporation. It is not a de
jure merger.
Q: Judgment Creditor garnished the
deposits of judgment debtor with ABC.
ABC bank merged with XYZ bank. There
is no proof that the deposits of judgment
debtor with ABC bank were transferred to
XYZ pursuant to the merger. Is XYZ bank
bound to deliver garnished deposits if
ordered by the court?
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A: (Student: No. Because there is no
certificate of merger.
Dean: assume that there is a merger. In fact,
the question assumes that there is a merger.)
A: Yes, XYZ is bound to deliver. The
surviving corporation is duty bound to
recognized the garnished deposits and deliver
it even if there’s no proof that deposits were
transferred and absorbed by the surviving
bank. All the liabilities of absorbed
corporation are acquired as if they were
incurred directly by surviving corporation.
Q: A was employed with ABC, and then
seconded to XYZ, then eventually A filed a
constructive dismissal against both ABC
and XYZ. The LA found both liable
solidarily to pay laborer A. Thereafter
ABC merged with another corporation. So
A, judgment creditor would like to recover
the entire amount adjudged by the LA
against ABC and XYZ against the
Corporation that merged with ABC. The
contention of surviving corporation is that
it is only liable for the time that A was
employed with ABC not for the period that
he was employed by XYZ. Is the
contention of surviving corporation
correct?
A: No by virtue of the merger the surviving
corporation acquired the responsibilities and
liabilities imposed on ABC corporation. The
surviving corporation shall pay the entire
amount because the judgment against ABC
and XYZ is solidary. Anyone of them can be
made labile for the entire judgment. The right
of the surviving corporation if it pays the
whole amount of the judgment is to seek

proportionate reimbursement from the other
solidary debtors.
(End of Recit-start of PPT)
TITLE IX
MERGER AND CONSOLIDATION
Q: What are the revisions under the RCC
on merger and consolidation?
A: The articles of merger should now
include:
a. The carrying amounts and fair values
of the assets and liabilities of the
respective companies as of the agreed
cut-off date:
b. The method to be used in the merger
or consolidation of accounts of the
companies;
c. The provisional or proforma values,
as merged or consolidated, using the
accounting method; and
d. Such other information as may be
prescribed by the RCC.
Rationale: Stockholders of both surviving
and acquired corporation should know the
carrying amounts and fair values of assets as
agreed upon or proposed to them pursuant to
the merger so that they will assess for
themselves if it is fair and ideal to give them
to determine whether or not to approve the
merger. If they are not in agreement to the
amounts, they can dissent to the proposed
merged and exercise right of appraisal.
Q: What is a merger?
A: A merger is a reorganization of two or
more corporations that results in their
consolidating into a single corporation,
which is one of the constituent corporations,
one disappearing or dissolving and the other
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Notes for Merc Rev 1
surviving.
To put it another way, merger is the
absorption of one or more corporations by
another existing corporation, which retains
its identity and takes over the rights,
privileges, franchises, properties, claims,
liabilities and obligations of the absorbed
corporation(s). The surviving corporation
continues its existence while the life or lives
of the other corporation(s) is or are
terminated. Bank of Commerce v. RPN G.R.
No. 195615 April 21, 2014.
A + B = A or B
The surviving corporation retains its identity,
existence, rights and obligations, and
acquires the assets and obligations of
absorbed corporation.
Q: What is consolidation?
Consolidation is the union of two or more
existing corporations to form a new
corporation called the consolidated
corporation. It is a combination by agreement
between two or more corporations by which
their rights, franchises, and property are
united and become those of a single, new
corporation, composed generally, although
not necessarily, of the stockholders of the
original corporations. McLeod v. NLR SEC
First Division, G.R. No. 146667, January 23,
2007; PNB v. Andrada Electric and
Engineering Co. G.R. No. 142936, April 17,
2002.
In a consolidation, the legal personalities of
two constituent corporation cease to give way
to new corporation. Consolidated
corporation, is a new corporation that
acquires both the Assets and liabilities of the
constituent corporations.
A+B=C
The new corporation is not a constituent
corporation. It acquires all the assets and
 4B & 4C 2020-2021
Notes for Merc Rev 1

liabilities of both constituent corporation. absorbed the employees of the seller. But, the
buyer must give preference to the employees
Distinguish merger from asset sale of the seller corporation if they are qualified.
between corporations.
Merger Asset Sale Q: In 2015, Total Bank (“Total”) proposed
to sell to Royal Bank (“Royal”) its banking
the constituent both the seller business for P10 billion consisting of
cease to exist except corporation and specified assets and liabilities. The parties
the surviving buyer corporation reached an eventual agreement, which
continue to exist. they termed as "Purchase and Assumption
corporation which
The seller Agreement" (“P&A”) in which Royal
retains its corporate corporation is not
identity but acquires would acquire Total's specified assets and
dissolved even liabilities, excluding contingent claims,
all the rights and though it may not with the further stipulation that it should
liabilities of the have any asset left. be approved by the Bangko Sentral ng
acquired Pilipinas (“BSP”). BSP imposed the
corporation/s condition that Total should place in escrow
the surviving the buyer, as a Pl billion to cover for contingent claims
corporation general rule, does against it. Total complied. After securing
not assume the the approval of the BSP, the two banks
assumes all the
liabilities of the signed the agreement. BSP thereafter
liabilities of the issued a circular advising all bank and
seller.
absorbed non-bank intermediaries that effective
corporation January 1, 2016 the banking activities of
Total Bank and Royal Bank have been
Q: You have a publishing company that consolidated and the latter has carried out
wanted to be acquired because it is not their operations since then."
making money. You decides to sell it. The
buyer only bought the assets only not the Was there a merger and consolidation of
shares of the stockholders. Is it obligated the two banks in point of the Corporation
to absorbed the writers, editors staff of Code? Explain.
publishing company?
A: No. It is not a merger but simply a sale of A: There was no merger or consolidation of
assets, even all the assets of seller. the two banks in point of the Corporation
Code. The Supreme Court ruled in Bank of
The seller is justified in terminating the Commerce vs. Radio Philippine Network,
employment of his employees because he Inc. that there can be no merger if the
have no business. He shall pay the separation requirements and procedure for merger were
benefits. not observed and no certificate of merger was
issued by the SEC.
Q: Is the seller dissolved?
A: No, even though it may not have any In the actual case, the Supreme Court said
assets. You may have a corporation even that all the require specified in the law must
without a single asset. be complied with in order for the take effect.
Here, Traders Royal Bank (“TRB") and Bank
As to the buyer, the buyer is not obligated to of Commerce (“BOC") remained separate

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corporations with distinct personalities. What disposed of the sale in favor of bank of
happened is that TRB sold to BOC identified commerce. How will RPN 9 enforce its
recorded assets in consideration of BOC's judgment against TRB?
assumption of TRB’s identified recorded
liabilities, including booked contingent A: Remember there is an escrow? That could
accounts. There is no law that prohibits this be the source of fund for the judgment. But
kind of transaction especially when it is done bank of commerce is not liable because it is a
openly and with appropriate government pure sale.
approval.
Q: What is meant by a de facto merger?
BANK OF COMMERCE VS. RADIO Discuss.
A: De facto merger means that a corporation
PHILIPPINE NETWORK
called the Acquiring Corporation acquired
FACTS: In this case there is an acquisition of the assets and liabilities of another
all assets in exchange of assumption of corporation in exchange for an equivalent
liabilities. No cash consideration instead it value of shares of stock of the Acquiring
only acquire the assets and for buying those Corporation making the other corporation a
assets, it will pay the obligations particularly stockholder of the Acquiring Corporation.
Bank of Commerce v. Radio Philippines
to its depositors and set an escrow deposit to Network Inc. G.R. No. 195615, 21 April 2014
answer for the liabilities that are not specific
in the agreement. In the present case, there is no de facto
merger because the Acquiring Corporation
There was a judgment in favor of RPN acquired the assets and liabilities of the other
against TRB. RPN filed a motion for issuance corporation but not in exchange for stocks.
The assets were acquired in exchange for the
of writ of execution, it learned that assets of
assumption of liabilities.
TRB were acquired by bank of commerce.
Thus it filed a motion for issuance of writ of Distinguish merger from consolidation.
execution against bank of commerce. Merger Consolidation
union whereby one union of two or
ISSUE: Is bank of commerce liable to pay the
corporation absorbs more existing
judgment debt in favor of RPN.
one or more existing corporations to
corporations, and form a new
RULING: No. Because it is not a merger. It
the absorbing corporation called
is simply a sale of all of the assets. There is
corporation the consolidated
no merger because there is no certificate of
survives and corporation.
merger issued by the SEC. The certificate of
continues the
merger can be issued only upon compliance
combined business.
with the procedure for merger set by RCC.
all constituents, all the constituents
except the surviving are dissolved and
Q: If bank of commerce is not liable to pay
corporation, are absorbed by the new
RPN, from whom RPN 9 get payment?
TRB has no more assets since it has dissolved.

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consolidated shares of the stockholders. It’s

enterprise. not an exchange of shares
with the stockholders of
In both cases, however, there is no liquidation surviving corporation. Instead
of the assets of the dissolved corporations, new shares of surviving
and the surviving or consolidated corporation corporation will be issued for
acquires all their properties, rights and the shares of the absorbed
franchises and their stockholders usually corporation. So if the
become its stockholders. surviving corporation has
fully subscribed shares, there
The surviving or consolidated corporation must be an increase of shares.
assumes automatically the liabilities of the But if it has enough available
dissolved corporations, regardless of whether shares to be exchange with the
the creditors have consented or not to such stockholders of absorbed
merger or consolidation. John F. McLeod v. corporation, you don’t have to
NLR SEC First Division, G.R. No. 146667, amend the AOI or increase the
January 23, 2007. capital stock.
2. Swap or exchange ratio.
Q: What is the procedure for merger or For every one share of
consolidation? absorbed corporation, how
A: The RCC requires the following steps for many shares of stock of the
merger or consolidation: surviving corporation. It is not
by law, it is by agreement of
a. The board of each corporation draws the corporations. The fair
up a plan of merger or consolidation. value of assets and liabilities
Such a plan of merger or must be spelled out so
consolidation consists of: stockholders can make a
i. The names of the corporations decision whether it is a fair
proposing to merge or consolidate, swap or exchange, if not, they
hereinafter referred to as the can dissent and exercise their
constituent Corporations appraisal right
ii. The terms of the merger or 3. Principal office
consolidation and the mode of 4. BIR ruling: effectivity date
carrying the same into effect; (most of merger is upon issuance of
important terms: a ruling by BIR that
1. determine which one is exchanges of property shares
surviving and which one is the is exempt from tax. You can
absorbed corporation. If you undertake to get BIR ruling
are the stockholder of the after merger is approved by
absorbed corporation, you the SEC. The assets are
will become the stockholder acquired by the surviving and
of the surviving entity. The the shares of absorbed are
shares of absorbed corp. will swapped to the surviving
be swapped or exchange for corporation. It is not subject to
the shares of surviving corp. It any tax. Only issuance of
will not be taken from the shares is subject to tax, DST.)

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iii. A statement of the changes, if any,
in the articles of incorporation of the
surviving corporation in case of
merger: and in case of consolidation,
all the statements required to be set
forth in the articles of incorporation
for corporations organized under this
RCC;
1. Number of directors
allowed for a bank is 21
directors if there is a merger
or consolidation. If surviving
bank wanted to have 21
directors, it is the right time to
do so by amending the AOI to
reflect maximum number of
21 directors. It cannot be
pursued or availed of just
because the bank is a party to
merger. The number must be
reflected in the AOI.
2. Change venue residence/
principal office, do so in the
AOI.
iv. Such other provisions with respect
to the proposed merger or
consolidation as are deemed
necessary or desirable. ( Section 75,
RCC)
b. Upon approval by a majority vote of each
of the board of directors or trustees of the
constituent corporations of the plan of merger
or consolidation, the same shall be submitted
for approval by the stockholders or members
of each of such corporations at separate
corporate meetings duly called for the
purpose. (Sec. 76, RCC)
c. Notice of such meetings shall be given to
all stockholders or members of the respective
corporations in the same manner as giving
notice of regular or special meetings under
Section 49 of the RCC. The notice shall state
the purpose of the meeting and include a copy
or a summary of the plan of merger or
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consolidation. (Sec. 76, RCC)
Why? So stockholders can study or evaluate
the terms of merger, to guide them or aid
them in making the decision to approve or not
to approve the merger.
d. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock of each corporation
in the case of stock corporations or at least
two-thirds (2/3) of the members in the case of
non- stock corporations shall be necessary
approval of such plan. (Sec. 76, RCC) in a
meeting separately called for the purpose.
There is no joint meeting between absorbed
and surviving corporation.
e. After the approval by the stockholders or
members of the plan of merger or
consolidation, articles of merger or articles of
consolidation shall be executed by each of the
corporations to be signed by the president or
vice-preside certified by the secretary of each
corporation. (Sec. 77, RCC)
The contents of the articles of merger or
articles of consolidation shall include the
following:
i. The plan of the merger or the plan of
consolidation;
ii. As to stock corporations, the number of
shares outstanding or in the case of non-
stock corporations, the number of
members.
You can have a merger even for
nonstock corporation. It is not limited
to stock corporation. Stock and Stock,
allowed. Non stock and non stock,
allowed. Stock and non stock,,
difficult because where is the swap
ratio, but there is no prohibition.
Merger of law firms, “there can be
merger also. Let’s see what
happens.” 
iii. As to each corporation, the number of

shares or members voting for or against
such plan, respectively;
iv. The carrying amounts and fair values
of the assets and liabilities of the
respective companies as of the agreed cut-
off date;
v. The method to be used in the merger or
consolidation of accounts of the
companies;
vi. The provisional or pro forma values, as
merged or consolidated, using the
accounting method; and
vii. Such other information as may be
prescribed by the SEC.
f. The articles shall be submitted to the SEC
for its approval provided that in the case of
merger or consolidation of special
corporations governed by special laws, the
favorable recommendation of the appropriate
government agency shall first be obtained.
(sec. 78 RCC)
g. If upon investigation, the SEC has reason
to believe that proposed merger or
consolidation is contrary or inconsistent with
the provisions of the RCC or existing laws, it
shall set a hearing to give the corporations
concerned the opportunity to be heard. (Sec.
78, RCC)
h. Where the SEC is satisfied that the merger
or consolidation of the corporations
concerned is not inconsistent with the
provisions of the RCC and existing laws, it
shall issue a certificate of merger or
consolidation, at which time the merger or
consolidation shall be effective. (Sec. 78,
RCC)
Dean:
1. Plan of merger
2. Approved by majority of each of the board
3. Notice of stockholder’s meeting which
include purpose of the pl
4. Approval of stockholders of 2/3 OCS of
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both corporations
5. Preparation of articles of merger
6. Submission to the SEC and indorsement of
appropriate government agency
7. SEC either reject or approve the
application
8. If approves the same, upon approval issue
certificate of merger at which time the merger
or consolidation shall be effective
Q: What is the ratio of exchange between
shares of the stockholders in the absorbed
corporation and the shares of the
surviving corporation?
A: In a merger, the shares of stock held by the
stockholders of the absorbed corporation will
be exchanged for shares of stock of the
surviving corporation. The exchange or swap
ratio is spelled out in the plan of merger
taking into account the respective fair values
of the assets and liabilities of the constituent
corporations.
The RCC requires the articles of
incorporation to reflect items (d) to (f) to
allow the concerned shareholders or
members and the SEC to ascertain if the
exchange is fair and reasonable, considering
the pre-merger and post-merger or
consolidation information. The aggregate fair
value of shares that will be issued by the
surviving or consolidated corporation should
generally approximate the adjusted net asset
value of the constituent Corporation/s. The
same will be established using the carrying
amounts and fair value of the assets and
liabilities of the respective companies as of
the agreed cut-off date, vis-à-vis the method
to be used in the merger or consolidation of
accounts of the companies. The RCC:
Theories and Applications: Herbosa and
Recalde, 2019, p. 296
Importance: it is by agreement by the
corporations. It is not by law.

Q: What are the effects of merger or
consolidation? (SCPAL)
The following are the effects of merger or
consolidation:
a. The constituent corporations shall
become a single corporation which, in
case of merger, shall be the surviving
corporation designated in the plan of
merger; and, in case of consolidation, shall
be the consolidated corporation
designated in the plan of consolidation.
b. The separate existence of the
constituent corporations shall cease,
except that of the surviving or the
consolidated corporation
c. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities, and powers and
shall be subject to all the duties and
liabilities of a corporation organized under
the RCC
d. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and franchises of
each constituent corporation; and all real
or personal property, all receivables due
on whatever account, including
subscriptions to shares and other whatever
account including subscriptions to shares
and other choses in action, and every other
interest of, belonging to or due to each
constituent corporation, shall be deemed
transferred to and vested in such
surviving or consolidated corporation
without further act or deed. (assets)
Q: Is there a need to do a liquidation of
absorbed corporation in a merger?
A: No because assets are not given but
transferred to surviving corporation. This
is one case where dissolution is not
followed by liquidation. Usually when
there is dissolution it is followed by
liquidation except in merger or
consolidation.
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Register of deed wanted to see the transfer
of title from Equitable PCI bank to BDO
before BDO can sell to third party buyer.
That is expensive because there will be 2
set of taxes. BDO can sell property even
though the title is in the name of equitable
because the property is deemed
transferred to BDO. You present to the RD
even though the TCT is on the name of
Equitable PCI bank the certificate of
merger, the operative document.
e. The surviving or consolidated
corporation shall be responsible for all the
liabilities and obligations of each
constituent corporation as though such
surviving or consolidated corporation
had itself incurred such liabilities or
obligations; and any pending claim
action or proceeding brought by or against
any constituent corporation may be
prosecuted by or against the surviving
consolidated corporation. The rights of
creditors or liens upon the property of
such constituent corporations shall not
be impaired by the merger or
consolidation.
Q: Can a debtor of absorbed
corporation invoke the defense of
novation?
A: No, “rights of creditors or liens upon
the property of such constituent
corporations shall not be impaired by the
merger or consolidation.”
Q: Is merger a mode of dissolution?
A: Yes, because the absorbed corporation
ceases to exist upon approval by the SEC of
the merger.
Involuntary dissolution: No tax liability or no
need to declare tax clearance.
Voluntary dissolution: You have to settle the
tax liabilities before SEC can approve the

dissolution. There is an agreement between
SEC and BIR that SEC will not act upon the
dissolution without any proof of payment of
taxes.
Q: Should the absorbed corporation
undertake dissolution to transfer its assets
to the surviving corporation?
A: Although there is a dissolution of the
absorbed corporations, there is no winding up
of their affairs or liquidation of their assets,
because surviving corporation automatically
acquires all their rights, privileges and
powers, as well as their liabilities.
Q: Can the debtor of the absorbed bank
invoke novation against the surviving
corporation which demanded payment of
the debtor's loan?
A: A bank which merged with another bank
can sue the debtor of the absorbed bank
because it acquired the rights of the latter.
Novation (because of the change of creditor)
is not a valid defense because it is settled that
in a merger of two existing corporations, one
of the corporations survives and continues
the business, while the other is dissolved and
all its rights, properties and liabilities are
acquired by the surviving corporation. Babst
v. CA, G.R. Nos. 99398 & 104625, January
26, 2001.
The surviving or consolidated corporation
shall be responsible for all the liabilities and
obligations of each constituent corporation as
though such surviving or consolidated
corporation had itself incurred such liabilities
or obligations; and any pending claim, action
or proceeding brought by or against any
constituent corporation may be prosecuted by
or against the surviving or consolidated
corporation. The rights of creditors or liens
upon the property of such constituent
corporations shall not be impaired by the
merger or consolidation.
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Cite jurisprudence where the surviving
corporation was made to assume the
liabilities of the absorbed corporation.
a. Upon service of the writ of
garnishment, the garnishee becomes a
“virtual party" or "forced intervenor"
to the case. Citytrust, therefore, upon
service of the notice of garnishment
and its acknowledgment that it was in
possession of defendants' deposit
accounts, became a “virtual party" to
or a "forced intervenor" in the civil
case.
As such, it became bound by the
orders and processes issued by the
trial court despite not having been
properly impleaded therein.
Consequently, by virtue of its merger
with BPI, BPI as the surviving
corporation, effectively became the
garnishee, thus the "virtual party” to
the civil case. BPI cannot avoid the
obligation attached to the writ of
garnishment by claiming that the fund
was not transferred to it in light of the
rule on merger that all liabilities and
obligations of the absorbed
corporation (Citytrust) shall be
transferred to and become the
liabilities and obligations of the
surviving corporation (BPI) in the
same as if the BPI had itself incurred
such liabilities or obligations. BPI v.
Lee, G.R. No. 190144, August 1, 2012
BPI V. LEE
FACTS: BPI merged with Citytrust,
Citytrust was the garnishee of the deposits of
the judgment debtor. BPI is the surviving
creditor. There is no proof that the deposits of
judgment debtor were transferred to BPI. But
the agreement, plan of merger and the law
provides that BPI shall assume and acquire
all the liabilities of cityrtrust as if it was

incurred directly by surviving corporation.
ISSUE: Does BPI become party to the case?
RULING: Upon service of the writ of
garnishment, the garnishee becomes a
“virtual party" or "forced intervenor" to the
case. By virtue of its merger with BPI, BPI as
the surviving corporation, effectively became
the garnishee, thus the "virtual party” to the
civil case. If there is an order, as in this case,
that directs BPI to deliver the deposits to the
judgment creditor, can it argue validly that
because there was no showing of proof that
those deposit were transferred to BPI, BPI is
not liable for any of those deposits? No.
Under the law, and plan of merger signed by
parties, BPI should assume all the liabilities
as if it was incurred by the surviving
corporation.
b. In a case where an employee obtained
judgment against two corporations
holding them solidarily liable for
money claim and damages, the
surviving corporation, which
absorbed one of the judgment debtor-
corporations, assumes the same
solidary liability and not only for the
money claim corresponding to the
period the employee was employed
with the absorbed corporation.
One of the effects of a merger is that
the surviving company shall inherit
not only the assets but also the
liabilities of the corporation it merged
with. Sumifru (Philippines)
Corporation (Surviving Entity In A
Merger With Davao Fruits
Corporation and Other Companies)
v. Bernabe Baya, G.R. No. 188269,
April 17, 2017.
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SUMIFRU V. BAYA
FACTS: This is a case regarding 2
employers. The employee worked for 2
employer corporations that he sued and there
was a judgment rendered in favor of
employee. Judgment became final and
executory. The judgment directed solidary
liability and payment of damages by both
ABC and xyz employers in favor of
employee. Abc merged with other
corporation. The argument of the surviving
corporation is that it should only pay the
amount in the salary of A while employed
with ABC corp and not all those salaries and
benefits with XYZ, the other employer
corporation.
RULING: SC said it is wrong, since the
judgment is solidary liability this means
anyone, ABC or XYZ, may be asked to pay
the entire judgment amount. What was
acquired by the surviving corporation is also
solidary liability with the right to get
reimbursement from XYZ for its
proportionate share.
c. It is more in keeping with the dictates
of social justice and the State policy
of according full protection to labor to
deem employment contracts as
automatically assumed by the
surviving corporation in a merger,
even in the absence of an express
stipulation in the articles of merger or
the merger plan. By upholding the
automatic assumption of the non-
surviving corporation's existing
employment contracts by surviving
corporation in a merger, the Court
strengthens judicial protection of the
right to security of tenure of
employees affected by merger. BPI v.
BPI Employees Union-Davao
Chapter-Federation of Unions in BPI
Unibank GR164301 October 19,2011

BPI V. BPI EMPLOYEE
ISSUE: WON the surviving corporation has
the obligation to absorbed the employees of
acquired corporation if the plan of merger is
silent?
RULING: Initial decision is that unless the
plan of merger so provides, the surviving
corporation has no obligation to absorbed the
employees of absorbed corporation. When
the law in merger talks about assets and
liabilities acquired by the surviving
corporation, this refer to property rights and
liabilities. And human beings are not chattels
that can be transferred or absorbed by, unless
there is a plan of merger that says so.
Strong dissent from 2 justices became the
majority opinion. It is more in keeping with
the dictates of social justice and the State
policy of according full protection to labor to
deem employment contracts as automatically
assumed by the surviving corporation in a
merger, even in the absence of an express
stipulation in the articles of merger or the
merger plan or even plan of merger is silent.
The surviving corporation must absorbed all
employees of acquired corporation even if
the plan of merger is silent. Employment
contracts are liabilities, and liabilities are
assumed by surviving corporation.
d. The merger of a corporation with
another does not operate to dismiss
the employees of the corporation
absorbed by the surviving
corporation. This is in keeping with
the nature and effects of a merger as
provided under law and the
constitutional policy protecting the
rights of labor. The employment of
the absorbed employees subsists.
Necessarily, these absorbed
employees are not entitled to
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separation pay on account of such
merger in the absence of any other
ground for its award. The surviving
corporation, however, may terminate
employment for redundancies
resulting from the merger. The
Philippine geothermal, geothermal
Inc. v. Unocal Philippines Inc. (Now
Known as Chevron Geothermal
Philippines Holdings, Inc.) G.R. No.
190187, September 28, 2016.
THE PHILIPPINE GEOTHERMAL,
GEOTHERMAL INC. V. UNOCAL
PHILIPPINES INC
The surviving corporation has the obligation
to absorbed the employees of absorbed
corporation without prejudice to the right of
surviving corporation to lay off or terminate
employment on account of redundancies.
In merger, there will be redundancies, excess
of manpower requirement of surviving
corporation. You cannot have 2 CorSec.
Merger per se is not a ground to terminate
employment. Instead, the effect of merger,
the redundancy, will be the authorized cause.
Employees of absorbed corporation cannot
demand payment of separation benefits on
account of merger UNLESS and UNTIL they
are identified as redundant. Separation of
benefits on account of redundancy are tax
exempt, or causes not attributable to the will
of employee are tax exempt.
e. Since BSA incurred delay in the
performance of its obligations and
subsequently cancelled the omnibus
line without the mortgagor’s consent,
its successor BPI cannot be permitted
to foreclose the loan for the reason
that its successor BSA violated the
terms of the contract even prior to the

mortgagor’s justified refusal to
continue paying the amortizations. As
such BPI is liable for BSA its
predecessor. BPI did not only acquire
all the rights, privileges and assets of
BSA but likewise acquired the
liabilities and obligations of the latter
as if BPI itself incurred it. Spouses
Ong v. BPI Family Savings Bank,
G.R. No. 208638, January 14, 2018.
SPOUSES ONG V. BPI
FACTS: BSA granted a loan to Sps. Ong. It
was supposed to be an omnibus line – it is not
a one time draw down. The line is good for 1
year, and amount is 10M. For the entire 1
year, you can draw the P10M. The line is
secured by mortgage by the property of Sps.
Ong. BSA only released lets say, P1M out of
P10M, so contrary to the agreement and
expectation of Sps. Ong. BSA demanded
payment for the P1M obligation, but Sps.
Ong refused to pay arguing there is a breach
of agreement and that the entire amount
should be released. Since Sps. Ong did not
pay, BSA threatened to foreclose the
mortgage. Eventually BSA merged with BPI.
It was not BPI who was in bad faith or guilty
of delay.
ISSUE: Is BPI liable for the damages brought
about by the bad faith of BSA?
RULING: Yes. In merger, surviving
corporation does not only acquire the rights
and privileges, but also the obligations and
liabilities of absorbed corporation as if
surviving corporation itself incurred it. It is
like a marriage. Merger is basically a
marriage, except that it is a corporate merger.
You have 2 best persons on a stand-alone
individual basis but if they live together there
could be some incompatibilities. Like in
merger, if you merged a Makati based
institution with Binondo based bank.
Binondo based bank everything is based on
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hand shake, on trust. In Makati based
institution, you are not contented with a hand
shake. Everything should be with a
document. What does this case tells us? Just
like in a marriage, you take the good (assets)
and the bad(liabilities).
Q: When is merger or consolidation
effective?
A: The merger or consolidation is effective
upon issuance by the SEC of a certificate
approving the articles and plan of merger or
of consolidation. It is the operative fact by
which the merger or consolidation shall be
effective.
In case of merger of banks, it is not the
approval of the plan of merger by the BSP
that makes the merger effective but upon
issuance of by the SEC of the certificate of
merger or consolidation. Hence, prior to the
SEC approval, any payment of an obligation
by the debtor of the absorbed corporation in
favor of the surviving corporation is not
valid. The issuance of the certificate of
merger is crucial because not only does it
bear out SEC's approval but it also marks the
moment when the consequences of a merger
take place. By operation of law, upon the
effectivity of the merger, the absorbed
corporation ceases to exist but its rights and
properties, as well as liabilities, shall be taken
and deemed transferred to the surviving
corporation. Mindanao savings and loan
association v. Willkom, G.R. No. 178618, 11
October 2010.
Q: WON a merger of 2 banks is effective
upon the approval by the BSP? Or SEC?
Upon approval by the BSP of the merger,
can the debtor of absorbed bank start
paying the survived corporation?
A: Until approval by SEC, the merger is not
effective. Any payment by the debtor of
 4B & 4C 2020-2021
Notes for Merc Rev 1

absorbed bank to surviving bank will be the cases specified by law.

invalid. There is no valid payment because
surviving bank is not the creditor. FAIR VALUE:
Fir value means the value agreed upon by the
stockholders. If there is no agreement, it is
TITLE X
determined by appraisers appointed by the
APPRAISAL RIGHT corporation, stockholders, and chosen by the
nominees of the corporation and of the
stockholders. They must be disinterested
Q: What is appraisal right?
persons. The fair value is the value a day
It is the right of the stockholder to demand
before the vote was taken excluding any
the payment of the fair value of his shares
appreciation or depreciation in anticipation
after dissenting against a proposed corporate
of such corporate action.
act in the cases specified by law. In practical
terms, it means the right to get out of the
Q: What are the instances when appraisal
corporation and get back his equity
right may be exercised?
investment.
A: The appraisal right can be exercised by a
dissenting stockholder in the
In practical terms, the right to get out of the
following cases:
corporation and recover your equity
a. In case an amendment to the articles
investment. The stockholder must dissent or
of incorporation has the effect of
express his disagreement against the
changing or restricting the rights of
proposed corporate act. Abstention is not
any stockholder or class of shares, or
tantamount to dissent and thus, you cannot
of authorizing preferences in any
exercise appraisal right.
respect superior to those of
outstanding shares of any class, or of
In the cases specified by law means that he
extending or shortening the term of
can exercise appraisal right only on those
corporate existence;
cases specified by law involving fundamental
1. If AOI deny preemptive right
changes in the corporation. Mere
to a stockholder, thus you
disagreement with the board on the conduct
cannot subscribe to new
of the business of corporation (dissolution,
shares of corporation, thereby
decision of board, management decisions)
restricting the rights of any
does not justify appraisal right, except for
stockholders
close corporation because for any reason,
2. Increase of capital stock of
stockholders may demand payment of the fair
corporation does not entitle
value of the shares.
stockholder to exercise
appraisal right. Exception,
TRUST FUND DOCTRINE:
unless the increase results in
The subscriptions to capital stocks are funds
the issuance of shares that are
in trust for the benefit of the creditor. That’s
given preference in any
why you cannot return to the Stockholders
respect superior to those of
the subscriptions because it will violate the
outstanding shares of any
trust fund doctrine. The exception is the
class. If increase is in
Stockholders may get out of the corporation
preferred shares, exercise of
and get back his equity investment after
appraisal right is allowed. The
dissenting against proposed corporate act in

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rights of the stockholders are:
 can pass up the right to
subscribed to those
preferred shares
 subscribed to those
new preferred shares
exercising right of
preemption and
 exercise appraisal
right because those
new shares are given
preference superior to
those of outstanding
shares.
3. Extend or shorten the term of
corporation. Under Sec 36,
RCC. Appraisal right refers
only to extension of term.
Your basis in saying appraisal
right exist even for shortening
of term is this section, as long
as it does not mean
dissolution of the corporation.
If you shorten the term to
dissolve the corporation, it is
pointless and irrelevant to talk
about appraisal right because
you get the residual assets
after payment of the claims of
the creditor.
b. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all
of the corporate property and assets.
c. In case of merger or consolidation.
d. In case of investment of corporate
funds for any purpose other than the
primary purpose of the corporation.
e. In close corporation, a stockholder
may, for any reason, compel the said
corporation to purchase his share at
their fair value, which shall not be
less than their par or issued value,
when the corporation has sufficient
assets in its books to cover its debts
and liabilities exclusive of capital
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stock.
Q: May a stockholder compel the
corporation to purchase his shares
because of disagreement in the conduct of
the businesses affairs of the corporation?
Explain why.
A: No, appraisal right can only be exercised
in the cases provided by law. A stockholder
cannot compel the corporation to purchase
his shares in case of disagreement in the
conduct of the business affairs of the
corporation or for any reason whatsoever,
because this will violate the trust fund
doctrine. Buying the shares of a disgruntled
stockholder is tantamount to his subscription.
Subscriptions to stocks are funds in held in
trust for the benefit of the creditors.
Cite examples of the amendment to the
articles of incorporation that has the effect
of changing or restricting the rights of any
stockholder or class of shares, or of
authorizing preferences in any respect
superior to those of outstanding shares of
any class, which then warrants the
exercise of appraisal right.
a. Denial of pre-emptive right.
b. Creating shares which are given
preferences in payment of dividends
or in the distribution of assets or other
preferences as may be indicated in the
amendment to the articles of
incorporation provided they are not
contrary to law.
c. Converting non-voting preferred
shares to voting shares.
d. Making no-voting redeemable
preferred shares into convertible
voting shares in case of non-
redemption of the redeemable shares.
Q: Yenetic Corporation wants to increase
its Authorized Capital Stock (which is
currently fully subscribed and issued) to

be able to increase its working capital to
undertake business expansions.
The Board of Directors consults with you
as legal counsel or proper answers to the
following issues:
Can Yenetic's Articles of Incorporation
(“AOI”) be formally to remove the right of
appraisal on all dissenting stockholders in
all matters under the law which requires a
ratification vote of the stockholders?
A: Yenetic's AOI cannot be amended to
remove appraisal right of the stockholders on
matters requiring stockholders’ approval if
the law grants them such appraisal right, like:
1. In case an amendment to the articles
of incorporation has the effect of
changing or restricting the rights of
any stockholder or class of shares, or
of authorizing preferences in any
respect superior to those of
outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all
of the corporate property and assets.
3. In case of merger
4. In case of investment of corporate
funds for any purpose other than the
primary purpose of the corporation.
Appraisal right is a statutory right. It cannot
be denied to the stockholders in cases where
the law allows such right. 2018 Bar Exam.
Q: If the increase in Authorized Capital
Stock is formally submitted to the
stockholders in a meeting duly called for
the purpose, what is the vote necessary for
the stockholders' ratification, and may the
dissenting stockholders exercise their
appraisal right?
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A: Any provision or matter stated in the AOI
may be amended by a majority vote of the
board of directors and the vote or written
assent of the stockholders representing at
least 2/3 of the outstanding capital stock.
Stockholders cannot exercise any appraisal
right in case of amendment to the articles of
incorporation to increase capital stock
because this is not one of the cases allowed
by law where appraisal right may be
exercised unless the corporation is a close
corporation where a stockholder may
demand the payment of the fair value of his
shares for any reason whatsoever.
Q: What are the requisites for the valid
exercise of appraisal right?
The requisites are:
a. It can only be exercised in the cases
specified by law
b. The dissenting stockholder must have
voted against a proposed corporate
action specified by law.
c. The stockholder must make a written
demand on the corporation for the
payment of the fair value of shares
held within thirty (30) days from the
date on which the vote was taken
d. If the proposed corporate action is
implemented, the corporation shall
pay the stockholder, upon surrender
of the certificate or certificates of
stock representing the stockholder’s
shares, the fair value thereof as of the
day before the vote was taken,
excluding any appreciation or
depreciation in anticipation of such
corporate action.
e. The fair value must be determined in
accordance with the mechanism set
forth by law.
f. Within ten (10) days after demanding
payment for shares held, a dissenting
stockholder shall submit the
certificates of stock representing the
shares to the corporation for notation

that such shares are dissenting shares.
Failure to do so shall, at the option of
the corporation, terminate appraisal
right.
g. Availability of unrestricted retained
earnings.
Q: ABC Corporation proposed to amend
its articles of incorporation to deny the
pre-emptive right of its stockholders. In
the stockholders' meeting where the
matter was taken up, "X", a stockholder,
voted against the proposal. He thereafter
demanded the payment of his shares.
Unfortunately, when he made a demand
for payment, the Corporation had no
unrestricted retained earnings. Thus, his
demand for payment was not acted upon.
He filed a section suit. While the case was
pending, the corporation posted surplus
profit.
Is the exercise of appraisal right as a result
of the amendment of the articles of
incorporation correct?
A: Yes, because the amendment of the
articles of incorporation to deny pre-emptive
right restricts his right as a stockholder to
subscribe to issuance and disposition of
shares by the corporation. Under Section 80
of the RCC, such kind of amendment allows
for the exercise of appraisal right.
Q: Is "X" entitled to payment?
A: No, his demand for payment and
collection suit are premature at the time of
demand, the corporation had no available
surplus profit. The fact that the corporation
posted retained earnings during the pendency
of the case did not cure the prematurity of
cause of action. The availability of surplus
profit did not retroact to the date of demand
for payment. Turner v. Lorenzo Shipping
Corporation, G.R. No. 157479, November
24, 2010.
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Please note while the law requires that
demand for payment should made within 30
days the vote was taken, this is on the
assumption there are available unrestricted
retained earnings. Otherwise, the
stockholders must wait. Based on Turner vs.
Lorenzo Shipping Corporation, once surplus
profit is available, the stockholder must make
another demand for payment. Only if he is
refused that he can file the action in court to
enforce the payment of the fair value of his
shares.
Q: What is the effect of demand for the
payment of the fair value of the
stockholder's share?
A: From the time of demand for payment of
the fair value of a stockholder's shares until
either the abandonment of the corporate
action involved or the purchase of the said
shares by the corporation, all rights accruing
to such shares, including voting and dividend
rights, shall be suspended in accordance with
the provisions of the RCC, except the right of
such stockholder to receive payment of the
fair value thereof: Provided, That if the
dissenting stockholder is not paid the value of
the said shares within thirty (30) days after
the award, the voting and dividend rights
shall immediately be restored.
Q: When does the right to demand
payment cease? When are the rights of the
dissenting stockholder restored?
A: The right to demand payment of the fair
value of the shares ceases in the same cases
where his rights as a stockholder are restored.
These are:
a. demand for payment is withdrawn
with the consent of the corporation
b. if the proposed corporate action is
abandoned or rescinded by the
corporation or disapproved by the
SEC where such approval is
necessary.

c. if the SEC determines that such
stockholder is not entitled to the
appraisal right.
d. if the dissenting stockholder is not
paid the value of the said shares
within thirty (30) days after the
award, the voting and dividend rights
shall immediately be restored.
A-C, rights to dividends are retractive. It
includes the dividends that have accrued
during the period of appraisal. But if the
reason is D, it is prospective in nature.
Q: What if the shares under appraisal
right are sold. Can the buyer demand the
payment of the fair value of the shares?
A: It will never happen in the real world. If
you are the buyer of dissenting shares, why
will you buy those shares just to demand the
payment of fair value. You might as well not
buy the shares. You buy the shares because
you want to become a stockholder, to
exercise the right of stockholders. Anyway it
was asked in the Bar, the effects of dissent are
removed. Those shares become regular
shares and the buyer acquires all the rights of
a stockholder.
TITLE XI
NONSTOCK CORPORATION
Q: What are the revisions under the RCC
on non-stock corporation?
A:
a. It provides that non-stock
corporations shall, at all times, keep a
list of its members, and their proxies
in the form the SEC may require.
Further, the list shall be updated to
reflect the members and proxies of
record twenty (20) days prior to any
scheduled election.
b. It deleted the holding of office by the
trustees for three (3) batches and
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removed their staggered term.
c. It allows non-members to become
independent trustees in case of
nonstock corporations vested with
public interest.
Q: What is a non-stock corporation?
A: A non-stock corporation is one without a
capital stock and/or where no part of its
income is distributable as dividends to its
members, trustees, or officers, subject to the
provision on dissolution. Any profit which a
nonstock corporation may obtain incidental
to its operations shall, whenever necessary or
proper, be used for the furtherance of the
purpose or purposes for which the
corporation was organized.
“one without a capital stock and/or where no
part of its income is distributable as
dividends to its members”
- the only time that there will be a
distribution will be upon dissolution
of corporation and only to the extent
that the distributive rights of
members defined in the articles of
incorporation.
“Any profit which a nonstock corporation
may obtain incidental to its operations shall,
whenever necessary or proper, be used for
the furtherance of the purpose or purposes
for which the corporation was organized.”
- Q: Is it unlawful for a non-stock
corporation to obtain profit?
The definition of nonstock
corporation tells you that there is
nothing wrong for nonstock
corporation to obtain profit.
It is not unlawful for a non-stock
corporation to obtain profit provided
that the profit is only incidental to its
operations and shall, whenever
necessary or proper, be used only for
the furtherance of the purpose or

purposes for which the corporation
was organized. The profits cannot be
distributed as income to the members,
trustees or officers.
Q: Can a member of a nonstock received
the assets of nonstock corporation upon
dissolution?
A: If corporation is operating there can be no
distribution of assets or dividends to
members. If dissolved, the member is entitled
to get the assets of the nonstock corporation,
if their distributive rights are defined in the
AOI, have plan of distribution approved by
the majority of BOT and 2/3 of members.
Q: A foundation with P1B of deposit
shares of stock in various corporations
with 5 members. What if it is dissolved?
Should those 5 members get the deposits
and become stockholders or owner of the
shares of various corporations?
A: Only if their distributive rights are defined
in the AOI, you have plan of distribution
approved by the majority of BOT and 2/3 of
members. Otherwise the assets are forfeited
or escheated in favor of the national
government.
STOCK CORPORATION
One with capital stock divided into shares
and authorized to distribute dividends to the
stockholders based on shares held by them
and all the rest are nonstock corporations.
NONSTOCK CORPORATION
Sec 86, provides for the allowable purposes
for a nonstock corporation:
It may be formed or organized for charitable,
religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic
service, or similar purposes, like trade,
industry, agricultural and like chambers, or
any combination thereof, subject to the
special provisions governing particular
classes of non-stock corporations.
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A non-stock corporation cannot be organized
for profit since it is not engaged in business.
Neither can it be organized for political
purpose or end, otherwise, it should be
registered as a party with the Commission on
Elections.
Q: What are the most common
characteristics of a non-stock
corporation?
A: The following are the most common
characteristics of a non-stock corporation:
a. Any profit derived by it from any
authorized activity cannot be
distributed as dividends to its
members;
b. It may not lawfully engage in any
business activity for profit as it would
run counter to its very nature as a non-
profit entity;
c. When incidental to the objects and
purposes of the corporation and
without the end of making profits to
be distributed to the members, it may
engage in certain economic activities
stated in its articles of incorporation.
(including investment in shares of
stock)
d. Do not issue stock and distribute
dividends to their members; they are
created not for profit but for public
good and welfare; and
e. The mere fact that a non-stock
corporation may earn profit does not
make it a profit-making corporation
where such profit or income is used to
carry out the purposes set forth in the
articles of incorporation and is not
distributed to its incorporators,
members, trustees or officers.
Q: Can a nonstock corporation own shares
of stock? Invest in equity of other
corporation?
A: Yes if provided for or authorized by the

AOI because investment in shares is not a
business activity. As long as the income from
those investments are used to attain the
purpose of the corporation.
Foundation
It is a nonstock nonprofit corporation. It’s
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just that its allowed to use the word
foundation. If you use the word foundation as
part of your corporate name as nonstock
corporation, your subject to a higher capital
contribution from the members.
 4B & 4C 2020-2021
Notes for Merc Rev 1

DECEMBER 8, 2020
Discussion: According to the SEC, the
SORIANO
answer is YES. You have to keep in mind that
what Ayala intends to sell are products
Recit related to the purpose of the corporation – to
*No recording promote the culture of the Philippines. Online
*The question was about the case of Lim v. sale of these products is allowed because it is
Moldex found in pp. 478-479 of the book incidental to the purpose of the corporation.

NONSTOCK CORPORATION Q: What if Ayala Corporation will sell

products and properties of Ayala Land?
A: Not allowed because it is not incidental
Q: Ayala Foundation, Inc. ("AFI")'s
anymore to the purposes of the corporation.
online store will carry products that
feature the Philippine culture and the
Q: Five brothers and sisters put up a non-
works of art of Filipino artists as part of its
stock corporation to perpetuate the
initiative to make the appreciation of
memory of their parents who are national
Philippine art and culture more accessible
artists. They organized a museum. First
to the community it serves through
question, can it donate?
imaginative programs and through the use
A: Yes. Even a nonstock corporation can
of modern information technology. Can a
donate.
non-stock non-profit entity, such as AFI,
engage in a commercial activity like online
Q: Second question, can it organize or set
selling?
up a restaurant to cater to the patrons of
A: Though non-stock, non-profit
the museum?
corporations, as a general rule, are not
A: The answer is YES because it is related to
authorized to pursue commercial business
the purpose of the corporation. A restaurant
activities, they may do so when such income-
may be a commercial transaction but must be
generating activities are essential, incidental
read related to the purpose of the corporation.
or reasonably necessary to enable the
corporation to carry out powers expressly
Q: What if the question is can this
granted and for the furtherance of the
specialty restaurant cater to non-
purpose(s) for which the corporation was
customers of the museum?
established, and provided that income
A: NO. The answer will no longer be yes
realized or derived therefrom shall not be
because it will no longer be incidental to the
distributable to members or officers but are
purpose of the corporation.
used for the furtherance of the purpose(s) for
which the corporation was organized. Re:
Summary: According to the SEC, as long as
Online Retail; Secondary Purpose, SEC-
the commercial transaction is related to the
OGC Opinion No. 39-191 September 18,
purpose of the corporation and the income
2019.

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derived therefrom is used in furtherance of
the purpose of the corporation and cannot be
given or distributed to the members thereof.
Q: If profits cannot be distributed to the
members, trustees and officers of the
corporation, how are the profits treated?
A: Since profits that a non-stock corporation
earns cannot be distributed to the members,
trustees, or officers, such profits will form
part of the income of the corporation. The
income can be used to invest in shares of
stock, bonds and other securities provided
that such investment is allowed by the articles
of incorporation and income from such
investments is used in furtherance of the
purpose for which the non-stock corporation
was organized.
Q: Whether or not a nonstock corporation
can be a stockholder of stock corporation.
Can a foundation own various of stocks in
blue chip corporations?
A: Yes, as long as it is authorized in its AOI
and the income for that investment is used in
furtherance of the purpose of the corporation.
MEMBERS
Q: Discuss the right to vote of the members
of a non-stock corporation.
A: The right of the members of any class or
classes to vote may be limited, broadened, or
denied to the extent specified in the articles
of incorporation or the bylaws. Unless so
limited, broadened, or denied, each member,
regardless of class, shall be entitled to one (1)
vote.
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Unless otherwise provided in the articles of
incorporation or bylaws, a member may vote
by proxy, in accordance with the provisions
of the RCC. The bylaws may likewise
authorize voting through remote
communication and/or in absentia.
Discussion: That’s why it is common for a
nonstock corporation to have kinds of
members. They have regular members and
associate members. Regular members can
vote and associate members cannot vote. This
is one way of regulating regular members so
they can maintain control over the
corporation. They are allowed to accept
members. They can make members classified
as associate members only such that they do
not have the right to vote. That is allowed for
nonstock corporation.
In stock corporation, there are only 2 kinds of
shares to be denied the right to vote: preferred
and redeemable shares. Treasury shares need
not be denied the right to vote. By their very
nature, they cannot vote.
But for nonstock, no limitation AS LONG
AS THE BYLAWS SO PROVIDES.
Q: Is voting by district allowed for
nonstock corporation? Let’s say 5 trustees
to be selected from members in Visayas, 5
from Mindanao, 5 from Luzon. Is that
valid?
A: Yes, as long as it is provided for in the
bylaws of the corporation. Voting by district
or by region is a limitation in one’s right to
vote. As long as it is provided in the bylaws
of the corporation, then it is allowed.

Q: The Annual General Membership
Meeting of the members of One Oasis
Condominium Corporation ("OOCC")
for the purpose of electing the new
members of OOCC's Board of Trustees
was held on 8 June 2019. However, no
quorum was reached because the majority
of the unit owners are living abroad.
Similarly, in the previous elections held, no
quorum was also mustered. In order to
reach the required quorum, can there be
deemed a waiver of the member's right to
vote after three failed attempts of reaching
out to the unit owner? What are the other
alternative remedies to OOCC in order to
pursue the meeting of its members?
A: Exclude OOCC's member from the
computation of the required quorum should
said member/s fail to give their answers or
feedbacks after three (3) attempts of being
notified of a meeting or election is in the
nature of a restriction of their right to vote.
Section 88 of the RCC (previously Section 89
of the OCC) provides that "[t]he right of the
members of any class or classes to vote may
be limited, broadened, or denied to the extent
specified in the articles of incorporation or
the bylaws. Unless so limited, broadened, or
denied, each member, regardless of class,
shall be entitled to one (1) vote."
Stockholders or members of a corporation are
bound by the provisions of the corporation's
Articles of Incorporation ("A0I") and/or By-
Laws ("BL") regardless of whether they have
read the same or not. The fact that said
members opted to associate themselves with
said corporation despite the existing
restriction of their right to vote as contained
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in said AOI and/or BL is considered a waiver
of said right.
Thus, in the absence of any provision in the
AOI and/or BL of a non-stock corporation
restricting the right of its members to vote,
the said right must be respected.
Additionally, the members of OCC may file
the appropriate Petition to Conduct an
Election before the SEC. After a finding that
the non-holding of the election was
unjustified, the SEC may order the
Corporation to hold an election, as well as to
issue such orders as may be appropriate,
including orders directing the issuance of a
notice stating the time and place of the
election, designated presiding officer, and the
record date or dates for the determination of
members entitled to vote. For purposes of
Section 25 of the RCC, the attendants of the
election summarily ordered by the SEC who
are entitled to vote shall constitute a quorum
regardless of the required number of
attendants stated in the A01 or BL of the
corporation. Re: Remote Communication
in Stockholder's Meeting; Waiver of Right
to Vote, SEC-OGC Opinion No. 56-19,
November 28, 2019.
Discussion: That kind of arrangement is not
allowed. According to the SEC, that kind of
limitation is a restriction to one’s right to
vote. It is valid if it is in the bylaws of the
corporation but unfortunately, it is not in the
bylaws of the corporation.
Q: Given that it is not in the bylaws of the
corporation, what remedies can you

propose? Can you propose the amend the
bylaws?
A: You cannot because to amend the bylaws,
you need majority of the members and the
board. You cannot even afford to maintain a
quorum. How can you amend the bylaws.
Q: So what is the remedy?
A: The remedy here is the concept of
emergency quorum. Any member may ask or
petition the SEC to call a meeting and if the
SEC finds that there was unjustified holding
of the members’ meeting, then it may
authorize that member to call the meeting and
whoever is present in that meeting, regardless
of number or less than the majority required
in the bylaws of the corporation, will be your
quorum.
Q: What is the quorum for the members’
meeting?
A: To constitute a quorum, there should be
present a majority (50% plus 1) of the total
interest of all members who are entitled to
vote and not delinquent, unless the bylaws
provide otherwise. SEC-OGC OPINION
31-2019.
The majority of the quorum is needed to
approve a corporate act unless the law or by-
laws requires otherwise.
The basis in determining the presence of
quorum in non-stock corporations is the
numerical equivalent of all members who are
entitled to vote, unless some other basis is
provided by the bylaws of the corporation.
The qualification "with voting rights" simply
recognizes the power of a non-stock
corporation to limit or deny the right to vote
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of any of its members. To include these
members without voting rights in the total
number of members for purposes of quorum
would be superfluous for although they may
attend a particular meeting, they cannot cast
their vote on any matter discussed therein.
Usually, one member has one voting right.
So, if the corporation has 100 members who
all have voting rights, then the quorum is 51.
Majority of 51 members will be needed to
approve a corporate act unless the RCC
requires either majority or 2/3s of the entire
membership, or the bylaws require a number
greater than majority. In some cases though,
the bylaws may provide that one member
may have more than one voting right. This is
mostly true in condominium corporations. A
member will be counted as one for quorum
purposes but can have more than one voting
right corresponding to the number of
condominium units registered in his name.
Discussion: Quorum is generally the
majority of the voting members unless the
bylaws provide otherwise. The bylaws may
provide that quorum is less than majority of
total number of members for nonstock
corporation or less than the majority of the
outstanding capital stock in a stock
corporation. That is allowed for members or
stockholders’ meeting but not for board’s
meetings. For the board, quorum is the
majority of the number of the board as
indicated in the in the AOI unless the bylaws
prescribes a greater number.
For stockholder and members’ meetings, the
quorum may be less than the majority as long
 4B & 4C 2020-2021
Notes for Merc Rev 1

as it is provided in the bylaws of the owned and registered in the name of

corporation. Moldex?
A: According to the SC, what Moldex should
Q: If the bylaws is silent, what then is your have done is to have sent X number of unit
quorum? owners to give rise to majority of total
A: Majority of voting members. number of unit owners. The 10 do not speak
for the 220. The 10 are simply 10 for quorum
LIM v. MOLDEX purposes. So, there is no quorum in this case.
Facts: Moldex constructed a condominium
Slide: By way of example, if there are 100
and of course, sold various units to different
members in a non-stock corporation, 60 of
owners. Those owners are required under the
which are members in good standing, then
deed of restrictions to organize a
the presence of 50% plus 1 of those members
condominium corporation. A condo
in good standing will constitute a quorum.
corporation is a nonstock corporation. (It
Thus, 31 members in good standing will
cannot be a stock corporation because it is not
suffice in order to consider a meeting valid as
organized for profit. It is organized to manage
regards the presence of quorum. The 31
the common areas of the condominium.)
members will naturally have to exercise their
Only unit owners were the members of the
voting rights. It is in this instance when the
corporation.
number of voting rights each member is
entitled to becomes significant. If 29 out of
Q: Let’s say there are about 108 unit
the 31 members are entitled to 1 vote each,
owners or members of the condo
another member (known as A) is entitled to
corporation. Only 33 attended in the
20 votes and the remaining member (known
meeting that was called to elect the trustees
as B) is entitled to 15 votes, then the total
of the corporation. Is there a quorum?
number of voting rights of all 31 members is
A: There is no quorum because 33 is not the
64. Thus, the majority of the 64 total voting
majority of 108.
rights, which is 33 (50% plus 1), is necessary
to pass a valid act. Assuming that only A and
Q: When can 33 be considered quorum?
B concurred in approving a specific
A:
undertaking, then their combined votes are
1. If the bylaws says less than majority
more than sufficient to authorize such act.
of the number of members
Lim vs. Moldex Land, Inc.; G.R. No.
2. If 33 is majority of the voting rights
206038, January 25, 2017.
or voting members
3. The concept of emergency quorum
Discussion: In some cases, we make
distinctions between for quorum purposes
Q: Going back to the case, what if Moldex
and for quorum requirement if the bylaws so
sent 10 representatives representing 220
provides. Usually, 1 member has 1 vote for
unsold units pursuant to the bylaws of the
quorum and for voting requirement.
condo corporation that unsold units are

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consolidation of which shall be in

In some cases, as in condo corporations, 1 banks where the law multiples of five
member may have more than 1 voting right allows a maximum (5). (Section 106,
depending on the number of units owned. of twenty-one (21) RCC)
directors (Section
Going back to the slide, the majority of the 17, General Dean: A nonstock,
voting rights is only valid if the law does not Banking Law). nonprofit
require majority of the members. educational
institution is distinct
A corporation can send representatives to the from a nonstock
meetings but these representatives are not corporation
qualified to be elected as trustees unless they organized for
themselves are unit owners of the educational
condominium. The conclusion of the SC is purposes.
that the election of the boar is void.
In case of a
Remember Lee v. CA. He who has legal title nonstock
has the right to vote. corporation
organized for
Q: Distinguish stock corporation from educational
non-stock corporation purposes., an
example is review
STOCK NON-STOCK center. They cane
CORPORATION CORPORATION have more than 15
trustees. They are
Organized for profit Not organized for
not institutions
profit
contemplated by the
Education Act of
Dean: A non-stock
1982.
corporation can be
The board of the Allows a non-
organized for any
corporations vested member to become
other purpose
with public interest an independent
except for profit and
shall have trustee in case of
political purposes.
independent non-stock
The directors of a ganized as non-
directors corporations vested
stock corporation stock corporation
constituting at least with public interest.
must not be more where the number
twenty percent (Section 91, RCC)
than fifteen (15) of trustees shall not
(20%) of such
(Section 10, RCC) be less than five (5)
board. Independent
except in case of nor more than
directors should be
merger or fifteen (15) and

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stockholders of the of the corporation?

corporation. The consent of the That is valid
(Section 22, RCC) corporation is void because
Directors of a stock The trustees of a with respect to sale membership is
corporation are non-stock of fully paid shares. personal and non-
elected for a term of corporation shall be transferable
one (1) year until elected for a term UNLESS allowed
their successors are not exceeding three by its AOI or
elected and (3) years until their bylaws.
qualified. (Section successors are Stockholders have No cumulative
22, RCC) elected and the statutory right to voting unless
qualified. (Section resort to cumulative allowed by the
91, RCC) • Note method of voting. articles of
that the term can be (Section 23, RCC) incorporation or
less than three (3) bylaws. • Right to
years. Dean: This right vote may be limited,
Membership in a Membership in a cannot be denied to broadened or denied
stock corporation is non-stock a stockholder. If the by the articles of
not personal corporation and all same is denied, such incorporation or
because a rights arising denial is void for bylaws. (Section 88,
stockholder can therefrom are being contrary to RCC)
dispose of his shares personal- and non- law.
to anyone. Fully transferable, unless Dean: Cumulative
paid shares may be the articles of Only preferred and voting is not
transferred without incorporation or the redeemable shares allowed unless
the consent of the bylaws otherwise can be denied the allowed by the AOI
corporation. The provide. (Section right to vote but the or bylaws of the
only restriction that 90, RCC) law, nevertheless, corporation.
the corporation may vests in them voting
impose on transfer Dean: Can you rights those matters
of shares is the right assign your specified in Section
of first refusal or membership in a 6 of RCC.
any other less nonstock Regional or district Regional or district
onerous restriction. corporation? No. voting of directors voting of trustees is
(Section 97, RCC) is not allowed. • allowed. It is a form
Is it valid for the Stockholders may of limitation on the
Dean: A bylaws to say that vote through remote right to vote for a
stockholder can sell you cannot assign communication or non-stock
freely to anyone his your membership in absentia when corporation.
shares. without the consent authorized by the

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by-laws and even The by-laws may of the corporation is located. However,
when the by-laws likewise authorize located. the place of meeting
are silent, in case of members to vote shall be within
corporations vested through remote Any city or Philippine territory.
with public interest. communication municipality in (Section 92, RCC)
However, the and/or in absentia. Metro Manila,
election must be by Metro Cebu, Metro Dean: It can be held
ballot if requested Dean: Regional or Davao, and other anywhere as long as
by any voting district voting, as Metropolitan areas it is within
stockholder or long as it is are considered city Philippine territory.
member. (Section provided in the or municipality.
23, RCC) bylaws. It should be (Section 50, RCC)
allowed.
Dean: Venue is
There is no fixed by law.
distinction with Can you remove a A member may be
remote stockholder who is expelled for the
communication in fully paid? No. grounds specified in
the sense that There is no the bylaws.
members may provision to remove
participate also a stockholder under Can the bylaws
through remote the RCC. You can expel a member
communication remove a director without hearing if
and/or in absentia but never a he propagates
when authorized by stockholder. teachings contrary
the bylaws, by the to the tenets of his
board for those church? It is valid if
vested with public the ground is
interest. provided for in the
Stockholders' The by-laws may bylaws.
meetings shall be provide that the Assets of stock Assets of non-stock
held in the principal members of a non- corporation shall be corporation shall be
office of the stock corporation distributed in the distributed as
corporation as set may hold their following order: follows:
forth in the articles regular or special a. Payment of a. Payment of
of incorporation, or, meetings at any claims of claims of
if not practicable, in place even outside creditors who creditors;
the city or the place where the are not b. Assets held on
municipality where principal office of stockholders condition
the principal office the corporation is (based the requiring return

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provisions on upon dissolution incorporation or

concurrence and shall be returned bylaws;
preference of to; e. In case of
credit); c. Assets held default, assets
b. Payment of subject to shall be
claims of limitations distributed
stockholders permitting their pursuant to Plan
who are also use only for of Distribution
creditors; charitable, adopted by at
c. Residual assets religious, least majority of
are distributed benevolent, the board of
proportionately educational or trustees and
to preferred similar approved by at
shares, if any, purposes, but least 2/3s of
then to holders not held upon a members.
of the common condition (Sections 93 and
shares of stock. requiring return 94, RCC)
by reason of the
Dean: In the order dissolution, Dean: There are
of things, the first is shall be certain assets that
always to pay the transferred or cannot be
creditors of the conveyed to one distributed to the
corporation whether (1) or more members even
stock or non-stock. corporations, though their
societies or distributive rights
organizations are defined in the
engaged in dissolution plan.
activities in the What are those
Philippines assets?
substantially 1. Assets
similar to those which are
of the dissolving held on
corporation. condition
d. Other assets requiring
shall be return upon
distributed to dissolution.
the members if This should
their distributive be returned
rights are stated to the donor
in the articles of

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or the corporation.
grantor; Dean: The (Section 91, RCC)
2. Assets to be stockholders cannot
used only elect the officers of
for the corporation
religious,
benevolent, Q: May a non-stock corporation be
educational converted to a stock corporation by the
or similar mere amendment of the AOI?
purposes. A: No, this will amount to the distribution of
assets to the members of the corporation and
GR: The other subscription to the stock corporation out of
assets shall be these assets. This will then violate Section 86
distributed to the of the RCC which allows distribution of
members only if assets to the members of the non-stock
their rights to corporation only upon dissolution of the
distribution are corporation and only to the extent that their
stated in the AOI or distributive rights are defined in the articles
BL. of incorporation or pursuant to a plan of
XPN: When you distribution adopted by at least majority of
have a plan of the board of trustee and approved by at least
distribution 2/3s of members. The remedy is to dissolve
approved by the non-stock corporation, adopt a
majority of the distribution plan, distribute the assets to the
trustees and 2/3 of members based on such plan and use the
the members. assets as their contribution to the stock
corporation to be formed. 2001 Bar Exam.
What happens when
you don’t have any? Discussion: No. Why? The only way you can
So can members distribute the assets of a nonstock corporation
distribute the assets is through dissolution. Now, if you convert
to themselves? NO. nonstock to stock, in effect, you are
distributing the assets of the corporation to
What will happen? the members as their contribution to the stock
Forfeited to the corporation and short of dissolution.
national Therefore, you violate the norm that assets
government. can only be given to the members if you
The Board appoints The members can dissolve the corporation.
the officers of the directly elect the
corporation. officers of the

Page 169 of 351


Q: May a stock corporation be converted
to a non-stock corporation by the mere
amendment of the AOI?
A: Yes, provided that all the requirements for
amendment of the articles of incorporation
are complied with. In converting the stock
corporation to a non-stock corporation by a
mere amendment of the Articles of
Incorporation, the stock corporation is not
distributing any of its assets to the
stockholders. On the contrary, the
stockholders are deemed to have waived their
right to share in the assets of the corporation.
These assets are then made the basis of their
contribution to the non-stock corporation.
CLOSE CORPORATIONS
Q: What is a close corporation?
A: Under Section 95 of the RCC, a close
corporation is one whose articles of
incorporation provides that:
a. all the corporation's issued stock of all
classes, exclusive of treasury shares, shall be
held of record by not more than a specified
number of persons, not exceeding twenty
(20);
b. all the issued stock of all classes shall be
subject to one or more specified restrictions
on transfer permitted by this Title; and c. the
corporation shall not list in any stock
exchange or make any public offering of its
stocks of any class.
Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when
at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by
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another corporation which is not a close
corporation within the meaning of the RCC.
Discussion: From this definition, you can see
that the number of stockholders is not the
only criterion to be considered a close
corporation.
Q: Why is it important to us to determine
whether it is a close corporation or not?
A: Because there are certain formalities
which are waived in case of a close
corporation. You can have a transaction even
without the approval of the board in close
corporations. You can dispense with board
meetings in close corporations.
But you can never dispense board meetings
and you can never have a valid corporate in a
stock corporation without the approval of the
board.
Q: What makes it a close corporation
then?
A: Compliance with and possession of the
characteristics or features of a close
corporation under the RCC.
Q: Is it correct to say that a family
corporation is a close corporation?
A: No. It is only a close corporation if it has
all the characteristics or features of a close
corporation under the RCC.
Q: Is the narrow distribution of share
ownership the only criterion in
determining the nature of a close
corporation?
A: No, in one case, the Supreme Court held
that a corporation does not become a close

corporation just because a man and his wife
own 98.86% of its subscribed capital stock;
So too, a narrow distribution of ownership
does not, by itself, make a close corporation.
The features of a close corporation under the
Corporation Code must be embodied in the
Articles of Incorporation to make it as one.
San Juan Structural and Steel
Fabricators, Inc. vs Court of Appeals, GR
No. 129459, September 29,1998
Q: What corporation cannot be
incorporated as a close corporation?
A: (Mnemonic: MOSBIPEP)
Any corporation may be organized as a close
corporation except the following:
a. Mining or oil companies;
b. Stock exchanges;
c. Banks;
d. Insurance companies;
e. Public utilities;
f. Educational Institutions; and
g. Corporations declared to be vested
with public interest in accordance
with the provisions of the RCC.
Q: What is the main difference between a
close corporation and other corporations?
A: The main difference between a close
corporation and other corporations is the
identity of stock ownership and active
management, that is, all or most of the
stockholders of a close corporation are active
in the corporate business either as directors,
officers or other key men in management.
Where business associates belong to a small,
closely-knit group, they usually prefer to
keep the organization exclusive and would
not welcome strangers. Since it is through
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their efforts and managerial skill that they
expect the business to grow and prosper, it is
quite understandable why they would not
trust outsiders to come in and interfere with
their management of the business, and much
less share whatever fortune, big or small, that
the business may bring.
Discussion: In open corporations, acts of
management belong to the board. Acts of
ownership belong to the stockholder. In a
close corporation, you have a fusion of stock
ownership and management.
Q: What are the principal characteristics
of close corporations?
A: The principal characteristics of close
corporations are the following:
a. The business of the corporation may be
managed by the stockholders of the
corporation rather than by a board of
directors.
Stockholders who are actively involved
in the management of the corporation are
liable in the same manner as directors are
liable. They are personally liable for
corporate torts unless the corporation has
obtained reasonably adequate liability
insurance. An example of corporate tort
is the non-payment of separation benefits
of employees who were terminated due to
authorized cause. Sergio Naguiat and
Clark Field taxi, Inc. vs. NLRC, G.R. No.
116123, March 13, 1997.
While Section 97 of the Corporation
Code (now Section 96, RCC) only
specifies that "the stockholders of the
corporation shall be subject to all

liabilities of directors." Nowhere in that
provision do we find any inference that
stockholders of a close corporation are
automatically liable for corporate
debts and obligations.
It is true that the stockholders who are
actively engaged in the management or
operation of the business and affairs of a
close corporation, shall be personally
liable for corporate torts unless the
corporation has obtained reasonably
adequate liability insurance. But, as can
be read in that provision, several
requisites must be present for its
applicability.
Discussion: If it is not a close corporation,
who are liable to pay the separation benefit?
It is the corporation. Officers are liable only
if they acted in bad faith. But for close
corporation, those stockholders involved in
the management thereof are liable to pay the
separation benefits with the corporation.
Q: What are the consequences when
stockholders are actively involved in the
management of the corporation?
A:
1. They shall have the same liabilities as
directors of the corporation.
2. They are liable for corporate tort
unless the corporation has obtained
reasonably adequate liability
insurance.
Q: Can you have a close corporation with
a board of directors?
A: Yes.
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-continuation of the principal characteristics
of a close corporation-
b. If a corporation is classified as a close
corporation, a board resolution
authorizing the sale or mortgage of the
corporate property is not necessary to
bind the corporation for the action of its
president. Manuel R. Dulay Enterprises,
Inc. vs. Court of Appeals, G.R. No.
91889, August 27, 1993.
Dean: This is only when the corporation
is accustomed in not having a board
meeting or the stockholder waives the
meeting.
c. Quorum may be greater than a mere
majority.
d. Transfers of stocks to others which would
increase the number of stockholders to
more than the maximum are invalid.
e. Corporate actions may be binding even
without a formal board meeting, if the
director had knowledge or ratified the
informal action of the others, unless after
having knowledge thereof, the director
promptly files his written objection with
the secretary of the corporation.
f. Pre-emptive right extends to all stocks
issued, including re-issuance of treasury
shares, whether for money or for property
or personal services, or in payment of
corporate debts, unless the articles of
incorporation provide otherwise.
Dean: Remember, pre-emptive right
applies to the issuance of shares to a non-
stockholder.
 4B & 4C 2020-2021
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OPEN CLOSE A: Right of first refusal is the option granted

to the corporation and/or its stockholders to
Pre-emptive right May be waived only
purchase the shares of a transferring
may be waived by if provided under
stockholder upon reasonable terms and
approval of 2/3 of the AOI
conditions while pre-emptive right refers to
the stockholders
the right of the stockholder to subscribe to
any and all issuances and disposition of
g. Deadlocks in the board may be settled by
shares by the corporation.
the SEC, on written petition by any
stockholder.
The corporation and its stockholders have no
right of first refusal unless such restriction on
Dean:
transfer is embodied in the articles of
OPEN CLOSE incorporation, by-laws of the corporation and
SEC cannot The law allows the stock certificate of the corporation. This
interfere in the SEC to intervene in means that a stockholder may freely convey
management of the case of deadlock. his shares to any person without having to
corporation under offer the shares to the corporation and/or the
the business The SEC may even stockholders first, unless a right of first
judgment rule. appoint a refusal is granted to the latter.
provisional director,
may undo certain Pre-emptive right is available to all
acts of the stockholders unless such right is denied in the
corporation, may articles of incorporation or amendment
direct the payment thereto.
of the fair value of
the share, may Pre-emptive right pertains to stockholders by
suspend the efficacy law and does not require any statutory
of the AOI, bylaws enabling provision, the right of first refusal,
or even a board if not provided for by law or by the articles of
resolution. incorporation, does not exist at all. SEC-
OGC Opinion 51-19.
h. A stockholder may withdraw for any
reason and avail himself of his right of Q: What are the requisites for a valid
appraisal when the corporation has restriction on the right to transfer?
sufficient assets in its books to cover its A: The requisites are:
debts and liabilities exclusive of capital a. Restrictions on the right to transfer shares
stock. must appear in the articles of
incorporation, in the bylaws, as well as in
Q: Distinguish right of first refusal from the certificate of stock; otherwise, the
the pre-emptive right.

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same shall not be binding on any
purchaser in good faith.
b. 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, conditions or
period stated.
c. Upon the expiration of said period
(period to exercise the option to purchase
shares), the existing stockholders or the
corporation fails to exercise the option to
purchase, the transferring stockholder
may sell their shares to any third person.
Q: ABC Incorporated, a close corporation
provides for the following restriction on
the transferability of its shares in the
Articles of Incorporation, to wit:
"Encumbrance of Shares. The
shareholders may mortgage, pledge, or
otherwise encumber all or part of their
shares in the Corporation; provided that,
the other parties shall give their written
consent thereto; provided further that,
written notice to the other parties shall be
sufficient if the mortgagee or pledgee is a
banking or financial institution."
Is the aforementioned provision of the
Articles of Incorporation valid?
A: The restrictions on the transfer of shares
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, conditions or period stated therein.
The SEC has previously opined that the
reasonable option period may range from 30
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to 60 days or even more, depending on the
circumstances surrounding the case.
The disputed provision does not provide for
an option period for the existing
stockholders/corporation and the transferring
stockholder who desires to transfer/encumber
his stocks. It only provides that the other
parties shall give their written consent thereto
before such encumbrance can be realized.
The SEC had previously opined that a
restriction clause is not valid and enforceable
if it absolutely prohibits the sale or transfer of
stock without the consent of the Board of
Directors and/or stockholders, as this would
violate the general law on free alienability of
shares of stock as personal property.
In view of thereof, the provision on
encumbrance of shares in the articles of
incorporation of ABC Incorporated is not
valid. The provision, as it stands, does not
provide for an option period to be exercised
by the other stockholders or the corporation
vis-a-vis the transferring stockholder. The
result of the absence of such an option period
is to absolutely prohibit the mortgage, pledge
or encumbrance of such stock without the
written consent of the other stockholders.
This violates the general law on free
alienability of shares of stock as personal
property. Validity of Provision Restricting
Transferability of Shares in Close
Corporations, SEC-OGC Opinion No. 19-
061 March 13, 2006; Answer modified based
on RCC.
Q: The board of directors of the
corporation adopted a resolution that no
stock holder can sell his fully paid shares
in favor of any person without the prior

consent of the corporation. Is the
restriction valid?
A: It is void. While the corporation may
impose restrictions on share transfers, to be
valid, the restrictions should be embodied in
all of the articles of incorporation, by-laws
and stock certificate of the corporation and
cannot be more onerous than the right of first
refusal. In this case, the restriction is only by
way of board resolution. Most importantly,
securing the consent of the corporation prior
to the sale of fully paid shares is a restriction
more onerous than the right of first refusal.
Q: The bylaws of the corporation provide
that a stockholder has the option to
purchase the shares of a transferring
stockholder for a price equivalent to 25%
above par-value but the offer price of the
buyer of the shares of the selling
stockholder is 100% above the par value of
the share. Is such restriction valid?
A: It is void because the restriction is only in
the bylaws.
Q: Assuming that the restriction is
similarly incorporated in the AOI and
embodied in the stock certificate but the
offer price of the buyer of the shares of the
selling stockholder is 100% above the par
value of the share, may the existing
stockholder validly enforce the pricing
provision restriction?
A: Yes, the restriction may be enforced. The
selling stockholder cannot complain that the
offer of the buyer is higher than the option
price granted to existing stockholders
because he is bound by the restrictions as
appearing in the articles of incorporation and
bylaws of the corporation. The proposed
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buyer, while not bound by these documents,
is charged with notice because the restriction
also appears in the stock certificate.
Also, the restriction on pricing is not more
onerous than the right of first refusal. In fact,
the law does not require that the option to
purchase the shares of the transferring
stockholder be on the same price, terms and
conditions. It is enough they are based on
reasonable terms. The option to buy shares at
25% above par value is a reasonable
provision.
Q: When is any corporate action taken by
directors valid even without a meeting
called properly?
A: Section 100 of the RCC provides that any
action taken by the directors of a close
corporation without a meeting called
properly and with due notice shall
nevertheless be deemed valid, unless the
bylaws provide otherwise, if:
a. Before or after such action is taken, a
written consent thereto is signed by all the
directors; or
b. All the stockholders have actual or
implied knowledge of the action and
make no prompt objection in writing; or
c. The directors are accustomed to take
informal action with the express or
implied acquiescence of all the
stockholders; or
d. All the directors have express or implied
knowledge of the action in question and
none of them makes a prompt objection
in writing.

Q: Regarding the power of the President
of a close corporation, can he or she decide
on matters like needed renovations, major
or minor, of a property/building without
the approval of the Board and then just
have it ratified in the next meeting?
A: Yes, a President of a close corporation
may not even need later ratification of the
Board of Directors or Trustees for the acts
previously made.
Presidents of corporations are often given
general supervision and control of the
business as chief executive officers from
which is to be inferred that contracts or acts
made or done by the President in the ordinary
course of business are presumed to be duly
authorized unless the contrary appears.
Unless there is a charter or by-law provision
to the contrary, the President may, as a
general rule, bind the corporation on a
contract in the ordinary course of business,
provided that the same is reasonable under
the circumstances.
: In an ordinary corporation, the President's
power of general control and supervision
over the corporate business grants him an
apparent and/or implied authority to enter
into transactions on behalf of the corporation
in the ordinary course of business, unless
prohibited by the Articles of Incorporation or
the By-Laws. The acts, even if priorly
unauthorized, maybe later ratified by the
Board of Directors or Trustees, which
ratification cleanses the transaction of its
defects. In the case of close corporations, the
act of the President, who is also a Director,
may not need later ratification of the Board of
Directors or Trustees, provided that any of
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the conditions enumerated in the provision
cited above is present. Re: Close
Corporations; Powers of the President; Right
of Inspection, SEC-OGC Opinion No. 23-14,
ibid.
Q: How do you distinguish pre-emptive
right in ordinary corporation from the
same right in close corporation?
A: Pre-emptive right in an ordinary
corporation does not extend to issuance of
shares in exchange for property given for a
corporate purpose or in payment of debt
made in good faith, if approved by the
stockholders representing at least 2/3 of the
outstanding capital stock.
The pre-emptive right of stockholders in
close corporations shall extend to all stock to
be issued, including reissuance of treasury
shares, whether for money, property or
personal services, or in payment of corporate
debts, unless the articles of incorporation
provides otherwise.
Q: Distinguish between ordinary
corporation and close corporation.
OPEN CLOSE
CORPORATION CORPORATION
Number of Stockholders
No statutory limit. Not more than 20
stockholders
Corporate Powers
Exercised by the The business of the
board of directors. corporation may be
Stockholders are managed by the
not involved in the stockholders of the
management of the corporation rather
corporation.
 4B & 4C 2020-2021
Notes for Merc Rev 1

than by the board of the corporation has

directors. sufficient assets in
Board Meetings its books to cover its
Cannot be Dispensable if debts and liabilities
dispensed with. provided for in the exclusive of capital
articles of stock
incorporation, or by
acquiescence or Dean: Is “when the
lack of objection by corporation has
the stockholders sufficient assets in
Pre-emptive Right its book to cover its
Does not extend to Extends to debts and liabilities
issuance of shares in sale/issuance of exclusive of capital
exchange for shares for payment stock” same as
property or payment of debt, property, or URE? To be on the
of debt, if approved reissuance of safe side, cite what
by the stockholders treasury shares. the law says.
representing at least Liabilities
2/3s of the Dean: The only Generally, only the The stockholders
outstanding capital exception is when it corporation is liable who are actively
stock. is allowed by the for acts performed involved in the
AOI. by its corporate management of the
Dean: Pre-emptive representatives. The corporation are
right applies to Pre-emptive right directors and liable for corporate
treasury shares applies to treasury officers are not tort, unless they
because of the word shares by express liable under the have adequate
“disposition”. It is provision of law. doctrine of separate liability insurance.
just an opinion of legal entity They cannot invoke
the SEC. the doctrine of
Appraisal Right separate legal
Can be exercised Any stockholder of entity.
only in cases a close corporation Listing
provided by law and may, for any reason, Can be listed in Cannot be listed in a
subject to the compel the stock exchange stock exchange
availability of corporation to SEC Interference
unrestricted purchase shares The SEC cannot The SEC can
retained earnings held at fair value, interfere in the interfere in the
which shall not be management of the affairs of the
less than the par or affairs of the corporation if the
issued value, when corporation directors or

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 4B & 4C 2020-2021
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pursuant to the stockholders are so Q: How are educational corporations

business judgement divided on the organized?
rule. management of the A: Educational corporation maybe organized
corporation's as a stock or a non-stock corporation. They
business and affairs are governed by special laws and by the
that the votes general provisions of the RCC. The special
required for a law applicable to educational corporations is
corporate action RA 7798, otherwise known as the Education
cannot be obtained, Act of 1982, as amended.
with the
consequence that Q: What is the number and tem of trustees
the business and for educational corporations?
affairs of the A: Unlike in an ordinary noon-stock
corporation can no corporation where the number of trustees
longer be conducted may or may not be more than fifteen (15), the
to the advantage of number of trustees in educational institutions
the stockholders organized as non-stock corporations shall not
generally. be less than five (5) nor more than fifteen
(15): Provided, That the number of trustees
shall be in multiples of five (5).
SPECIAL CORPORATIONS

Also, while the term of the trustees can be

Q: What are educational corporations?
A: Educational corporations are those
organized for educational purposes,
particularly the establishment and
maintenance of a school, college or
university.
Discussion: That is the definition of an
educational corporation for them to be
subject to the rule that they should only have
not less than 5, not more than 15, in multiples
of 5 trustees.
Remember that a nonstock corporation
organized for educational purpose but not as
an educational corporation can have more
than 15 trustees.
less than three (3) years for ordinary non-
stock corporations, Section 106 of the RCC
provides that the botrd of trustees of
incorporated schools, colleges, or other
institutions of learning shall so classify
themselves that the term of office of one-fifth
(1/5) of their number shall expire every year,
Unless otherwise provided in the articles of
incorporation or by-laws. Trustees thereafter
elected to fill vacancies, occurring before the
expiration of a particular term, shall hold
office only for the unexpired period. Trustees
elected thereafter to fill vacancies caused by
expiration of term shall hold office for five
(5) years.
Although Sec. 108 of the Corporation Code
(now Section 106 of the RCC) sets the term
of the members of the Board of Trustees at

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five years, it likewise contains a proviso
expressly subjecting the duration to what
is otherwise provided in the articles of
incorporation or by-laws of the
educational corporation. That contrary
provision controls on the term of office.
Thus, it was held that at the time of the
removal of the University President, he was
already occupying the office in a hold-over
capacity, and could be removed at any time,
without cause, upon the election or
appointment of his successor. His insistence
on holding on to the office was untenable,
therefore, and with more reason when one
considers that his removal was due to loss of
confidence on the part of the Board of
Trustees.
For institutions organized as stock
corporations, the number and term of
directors shall be governed by the provisions
on stock corporations.
Discussion: Note that the law retained the
batching or staggered term in educational
corporations. That is not retained for
nonstock corporation but retained in
educational corporations organized as
nonstock corporations.
Take note that the term of a trustee in an
educational corporation may be less than 5
years when it is provided in the AOI or the
bylaws of the educational corporation.
Q: What are the classes of religious
corporations?
A: Religious corporations may be
incorporated by one (1) or more persons.
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Such corporations may be classified as
corporations sole or religious societies.
Q: How are religious corporations
governed?
A: They are governed by Chapter II, Title
XIII of the RCC and by the general
provisions on nonstock corporations insofar
as applicable.
Q: What is a corporation sole?
A: A corporation sole is one which is formed
by the chief archbishop, bishop, priest,
minister, rabbi, or other presiding elder of a
religious denomination, sect or church for the
purpose of administering and managing, as
trustee, the affairs, property and temporalities
of such religious denomination, sect or
church.
Discussion: So he has a lay character but he
can organize himself as a corporation sole.
Once he has organized as such, he becomes a
trustee to manage the affairs, property and
temporalities of such religious denomination,
sect or church. As such trustee, his nationality
is no longer relevant for the purpose of
determining whether or not his church can
acquire real property as long as the members
are Filipino citizens. A foreigner bishop or
head cannot own a property here in the
Philippines.
Q: What are the procedures for
incorporating a corporation sole?
A: In order to become a corporate sole, the
chief archbishop, bishop, priest, minister,
rabbi, or presiding elder of any religious
denomination, sect or church must do the
following:

a. He must file with the SEC articles of
incorporation setting forth the following:
i. That the applicant chief
archbishop, bishop, priest,
minister, rabbi, or presiding elder
represents the religious
denomination, sect or church
which desires to become a
corporation sole;
ii. That the rules, regulations and
discipline of the religious
denomination, sect or church are
consistent with becoming a
corporation sole and do not forbid
it;
iii. That such chief archbishop,
bishop, priest, minister, rabbi, or
presiding elder is charged with the
administration of the
temporalities and the
management of the affairs, estate
and properties of the religious
denomination, sect or church
within the territorial jurisdiction,
so described succinctly in the
articles of incorporation;
iv. The manner by which any
vacancy occurring in the office of
chief archbishop, bishop, priest,
minister, rabbi, or presiding elder
is required to be filled, according
to the rules, regulations or
discipline of the religious
denomination, sect or church; and
(Discussion: This is important
because whoever takes the place
of the presiding bishop due to the
latter’s death automatically
becomes the corporation sole.
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There is no need for further
amendment of the AOI. Just give
the notice of appointment to the
SEC.)
v. The place where the principal
office of the corporation sole is to
be established and located, which
place must be within the territory
of the Philippines.
The articles of incorporation may include any
other provision not contrary to law for the
regulation of the affairs of the corporation.
b. The articles of incorporation must be
verified, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister,
rabbi, or presiding elder, as the case may
be, and accompanied by a copy of the
SEC, certificate of election or letter of
appointment of such chief archbishop,
bishop, priest, minister, rabbi, or
presiding elder, duly certified to be
correct by any notary public.
c. From and after filing with the SEC of the
said articles of incorporation, verified by
affidavit or affirmation, and accompanied
by the documents mentioned in the
preceding paragraph, such chief
archbishop, bishop, priest, minister,
rabbi, or presiding elder shall become a
corporation sole and all temporalities,
estate and properties of the religious
denomination, sect or church theretofore
administered or managed as such chief
archbishop, bishop, priest, minister,
rabbi, or presiding elder shall be
personally held in trust as a corporation
sole, for the use, purpose, exclusive
benefit and on behalf of the religious

denomination, sect or church, including
hospitals, schools, colleges, orphan
asylums, parsonages, and cemeteries
thereof
(Discussion:
Q: Does it mean that upon filing of the
articles with the SEC, the presiding
bishop becomes a corporation sole
automatically?
A: Despite the language of the law, the
SEC said that it requires the approval of
the SEC. So the SEC must issue a
certificate likewise of incorporation.)
The procedure is a verbatim reproduction
of the OCC. While the law, then and now,
provides that after the filing of the articles
of incorporation with the SEC, the chief
archbishop, bishop, priest, minister, rabbi
shall become a corporation sole, the
incorporation becomes effective only
upon approval of the SEC and its issuance
of the certificate of incorporation.
Q: May a corporation sole acquire and
hold real property in the Philippines if its
presiding bishop, priest, minister or rabbi
is a foreigner?
A: Yes, a corporation sale, regardless of the
nationality of its presiding bishop, priest,
minister, rabbi or presiding elder, may
acquire real property in the Philippines;
provided that at least 60% of the members
of the religious denomination are Filipino
citizens and the real property is necessary
and convenient for the lawful use of the
corporation.
Q: Father X, an American priest who
came from New York, registered the
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Diocese of Bacolod of the Roman Catholic
Church which was incorporated as a
corporation sole. There were years when
the head of the Diocese was a Filipino, but
there were more years when the heads
were foreigners. Today, the head is an
American again. Y donated a piece of land
located in Bacolod City for use as a school.
Which statement is most accurate?
a. The Register of Deeds of Bacolod City
can refuse to register and transfer the title
because the present head of the
corporation sole is not a Filipino.
b. The nationality of a corporation sole
depends upon the nationality of the head
at any given time.
c. A corporation sole, regardless of the
nationality of the head, can acquire real
property either by sale or donation.
d. A corporation sole is not legally allowed
to own real property.
A: c. A corporation sole, regardless of the
nationality of the head, can acquire real
property either by sale or donation.
NB: This should be on the condition that at
least 60% of the members of the church are
Filipino citizens.
Discussion: We said basically that the
nationality of the presiding bishop is
irrelevant once he is organized into a
corporation sole as long as 60% of the
members are Filipino citizens.
Q: How does a corporation disposes of,
encumber or alienate real property held
by it?

A: A corporation sole may sell or mortgage
real property held by it by obtaining an order
for that purpose from the Regional Trial
Court of the province where the property is
situated upon proof that the notice of the
application for leave to sell or mortgage has
been made through publication or as directed
by the Court, and that it is in the interest of
the corporation that leave to sell or mortgage
be granted. The application for leave to sell
or mortgage must be made by petition, duly
verified, by the chief archbishop, bishop,
priest, minister, rabbi, or presiding elder
acting as corporation sole, and may be
opposed by any member of the religious
denomination, sect or church represented by
the corporation sole: Provided, That in cases
where the rules, regulations, and discipline of
the religious denomination, sect or church,
religious society, or order concerned
represented by such corporation sole regulate
the method of acquiring, holding, selling, and
mortgaging real estate and personal property,
such rules, regulations and discipline shall
govern, and the intervention of the courts
shall not be necessary.
In one case, the foregoing provision was
applied for the sale of real property by a
religious corporation. The sale was ruled to
be unenforceable because it was made by the
Supreme Bishop in contravention of the rule4
s of the corporation. Under the rules of the
corporation, the sale required the
concurrence of the laymen's committee and
other officials of the church, but which
approval was not given. Iglesia Filipina
Independiente vs. Heirs of Bernardino
Taeza, G.R. No. 179597, February 3, 2014.
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Discussion: Basically, the corporation must
petition to the court to sell, mortgage,
encumber or dispose of the property of the
corporation.
The only exception is if the rules of the
church regulate the method of acquiring,
holding, selling, encumbering such property
of the corporation. In which case, the
intervention of the court is no longer
necessary.
In the case of Iglesia Filipina, take note that
the sale was not void but only unenforceable.
Q: How is a corporation sole dissolved?
A: A corporation sole may be dissolved and
its affairs settled voluntarily by submitting to
the SEC a verified declaration of dissolution,
setting forth:
a. The name of the corporation;
b. The reason for dissolution and
winding up;
c. The authorization for the dissolution
of the corporation by the particular
religious denomination, sect or
church; and
d. The names and addresses of the
persons who are to supervise the
winding up of the affairs of the
corporation.
Upon approval of such declaration of
dissolution by the SEC, the corporation shall
cease to carry on its operations except for the
purpose of winding up its affairs.
Discussion:

Q: Is the corporation sole deemed
dissolved upon mere filing of the
declaration of dissolution?
A: According to the SEC, the dissolution of
the corporation sole requires the approval of
the SEC.
Q: What is the procedure for
incorporating religious societies?
A: Unless forbidden by competent authority,
the Constitution, pertinent rules, regulations,
or discipline of the religious denomination,
sect or church of which it is a part, any
religious society, religious order, diocese, or
synod, or district organization of any
religious denomination, sect or church, may,
upon written consent and/or by an affirmative
vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership,
incorporate for the administration of its
temporalities or for the management of its
affairs, properties, and estate by filing with
the SEC, articles of incorporation verified by
the affidavit of the presiding elder, secretary,
or clerk or other member of such religious
society or religious order, or diocese, synod,
or district organization of the religious
denomination, sect or church, setting forth
the following:
a. That the religious society or religious
order, or diocese, synod, or district
organization is a religious organization of
a religious denomination, sect or church;
b. That at least two-thirds (2/3) of its
membership has given written consent or
has voted to incorporate, at a duly
convened meeting of the body;
c. That the incorporation of the religious
society or religious order, or diocese,
synod, or district organization is not
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Notes for Merc Rev 1
forbidden by competent authority or by
the Constitution, rules, regulations or
discipline of the religious denomination,
sect or church of which it forms part;
d. That the religious society or religious
order, or diocese, synod, or district
organization desires to incorporate for the
administration of its affairs, properties
and estate;
e. The place within the Philippines where
the principal office of the corporation is
to be established and located;
f. The names, nationalities, and residence
addresses of the trustees, not less than
five (5) nor more than fifteen (15), elected
by the religious society or religious order,
or the diocese, synod, or district
organization to serve for the first year or
such other period as may be prescribed by
the laws of the religious society or
religious order, or of the diocese, synod,
or district organization.
Discussion: Basic principles are:
a. Their rules do not prohibit the setting up
of a religious society;
b. The setting up must be approved by at
least 2/3 of the members.
Q: What is the number and term of
trustees for religious societies?
A: Like in educational institutions, trustees of
religious societies shall not be less than five
(5) nor more than fifteen (15). Note, however,
that the term of these trustees can be one (1)
year or such other period as may be
prescribed by the laws of the religious society
or religious order, or of the diocese, synod, or
district organization.

RECIT
Q: What are the conditions so that the
liability of the stockholder of the OPC
shall not go beyond his contribution or
subscription to the corporation?
A:
a. There must be no commingling of the
funds of the OPC and the stockholder;
b. The OPC must be adequately financed;
and
c. There must be no ground to pierce the
corporate veil of the OPC.
Q: Can the OPC appoint a president other
than the sole stockholder?
A: No. Remember that you cannot be a
president unless you are a director and you
cannot be a director unless you are a
stockholder. There is only one stockholder.
Obviously, he is the only one qualified to
become a president of the corporation.
Q: Can he occupy the position of
treasurer?
A: Yes, provided that he will give a bond.
Q: How much is the bond?
A: Based on the graduated amount approved
by the SEC, redeemable every 2 years.
Dean: But he cannot be the president and
secretary at the same time.
Q: Can he be the compliance officer? Is it
required to have a compliance officer?
A: Only corporations which are vested with
public interest are allowed or required to have
a compliance officer. An OPC is not a
corporation vested with public interest.
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Therefore, it is not required to have a
compliance officer.
Q: If an OPC will sell a property, does it
need a resolution to authorize the sale of
the property?
A: No. The OPC or the president must still
pass or adopt a resolution to authorize the sale
of the property and such must be recorded in
the books of the minutes of the corporation.
This is because it is the corporation which is
selling and not the stockholder.
Q: Can a person own more than 1 OPC?
A1: Yes, provided that it has all the resources
to put up more than 1 OPC.
A2: Yes, there is no prohibition under the law
and the OPC has a separate and distinct
personality from that of the stockholder.
Dean: No opinion yet but there is no
prohibition so it is allowed as long as they do
not overlap.
LECTURE
Q: What is a One Person Corporation
(“OPC”)?
A: OPC is a corporation with a single
stockholder: Provided, that only a natural
person, trust, or an estate may form a OPC.
Q: What is the rationale for the RCC
provision on OPC?
A: The provision for OPC, aims to encourage
the formation of businesses in the country by
making it easier for entrepreneurs to start a
limited liability company. In turn, this will
benefit our economy where micro, small and

medium enterprises comprise the majority of
the business establishments and would
generate more jobs in the Philippines.
Discussion: Those in colorum businesses
may be recognized by law as a valid entity to
generate more taxes.
Q: May a foreign natural person
organized a OPC?
A: Yes. In case of a natural person the only
requirement under the RCC is that he/she
must be of legal age. There is no provision on
any nationality requirement. Thus, subject to
the applicable constitutional and statutory
restrictions on foreign participation in certain
investment areas or activities, a foreign
natural person may organize a OPC. Section
15, SEC MC No.7.
Discussion: As long as he is not engaged in
any nationalized activity.
Q: What is the “trust” referred to under
the RCC which can organize a OPC?
A: The “trust” as used by the law does not
refer to a trust entity, but to the subject being
managed by the trustee.
Discussion: For example, Juan dela Cruz
holds funds for Pedro Reyes. So, Juan dela
Cruz can put up an OPC as a trustee of the
funds he is managing for Pedro Reyes. Pedro,
of course, can organize his own.
Q: What is the additional requirement for
incorporation of a OPC if the single
stockholder is a trustee, administrator,
executor, guardian, conservator,
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custodian or any other person exercising
fiduciary duties?
A: If the single stockholder is a trustee,
administrator, executor, guardian,
conservator, custodian or any other person
exercising fiduciary duties, proof of authority
to act on behalf of the trust or estate must be
submitted at the time of incorporation.
Q: Which corporations are not allowed to
incorporate as OPC?
A: Banks and quasi-banks, preneed, trust,
insurance, public and publicly-listed
companies, and non-chartered government-
owned and -controlled corporations may not
incorporate as OPC: Provided, further, That a
natural person who is licensed to exercise a
profession may not organize as a OPC for the
purpose of exercising such profession except
as otherwise provided under special laws.
Q: Can a bank as a trustee organize an
OPC?
A: No. Not allowed.
Q: Can a natural person as trustee
organized an OPC?
A: Yes.
Q: Can a corporation, not a bank, as
trustee organized an OPC?
A: Yes.
GR: A natural person can organize an OPC.
XPN: A natural person cannot organize an
OPC for the purpose of exercising a
profession.
Q: Can you organize an OPC for the
practice of law?

A: No because it is not allowed by any law.
Q: What is the term of existence of a OPC?
A: Like other corporations, the term of
existence of the OPC shall be perpetual.
However, if the OPC is a trust or estate, the
term of existence shall be co-terminus with
the existence of the trust or estate.
Q: What are the characteristics of OPC?
A: A OPC has the following characteristics:
a. It has a single stockholder.
b. It is not required to have a minimum
authorized capital stock except as
otherwise provided by special law.
Further, no portion of the authorized
capital is required to be paid up at the
time of the incorporation, unless
otherwise required by applicable laws or
regulations. (Section 117 of the RCC and
Section 8 of MC No. 7)
c. It is not required to submit and file
corporate bylaws. (Section 119, RCC)
(Q: Why?
A: Because the single stockholder
administers the rules of his corporation)
d. It is required to indicate the letters "OPC"
either below or at the end of its corporate
name. (Section 120, RCC)
e. The single stockholder shall be the sole
director and president of the OPC.
(Section 121, RCC)
f. The single stockholder is required to
designate a nominee and an alternate
nominee who shall, in the event of the
single stockholder's death or incapacity,
take the place of the single stockholder as
director and shall manage the
corporation's affairs. (Section 124, RCC)
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(Dean: This is very important. The SEC
shall not act on the application of the OPC
unless the single stockholder designates a
nominee and an alternate nominee. When
the nominee becomes the single
stockholder in case of death or incapacity
of the single stockholder, the alternate
nominee becomes the nominee. )
g. The liability of the single stockholder
shall be limited to his subscription to the
corporation unless there is ground to
pierce the veil of corporate fiction.
(Section 130, RCC)
(Dean: It should also be adequately
financed and there is no commingling of
properties.)
Q: Distinguish sole proprietorship from
OPC.
A: Sole proprietorship has no separate legal
personality from the proprietor conducting
the business whereas a OPC has a legal
personality separate and distinct from the
sole stockholder of the corporation.
The assets of the sole proprietorship are
similarly owned by the proprietor conducting
the business whereas, in a OPC, the assets of
the OPC are not owned by its sole
stockholder and should be independent of the
stockholder's personal property.
The obligations that the sole proprietorship
incurred in conducting the business may be
enforced against the proprietor whereas, in
OPC, the obligations of the corporation
cannot be enforced against its sole
stockholder unless the situation warrants
piercing the veil of corporate fiction.

Sole proprietorship is registered with the DTI
while a OPC is registered with the SEC.
Q: What should the articles of
incorporation of a OPC contain?
A: OPC shall file articles of incorporation in
accordance with the requirements under
Section 14 of the RCC. It shall likewise
substantially contain the following:
a. If the single stockholder is a trust or an
estate, the name, nationality, and
residence of the trustee, administrator,
executor, guardian, conservator,
custodian, or other person exercising
fiduciary duties together with the proof of
such authority to act on behalf of the trust
or estate; and
b. Name, nationality, the residence of the
nominee and alternate nominee, and the
extent, coverage and limitation of the
authority.
The articles of incorporation should also state
the names, residence addresses and contact
details of the nominee and alternate nominee,
as well as the extent and limitations of their
authority in managing the affairs of the OPC.
The written consent of the nominee and
alternate nominee shall be attached to the
application for incorporation. Such consent
may be withdrawn in writing any time before
the death or incapacity of the single
stockholder.
Q: What happens when the consent is
withdrawn?
A: The single stockholder must designate
another nominee.
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Q: Who are the officers of a OPC?
A: OPC should appoint a treasurer, corporate
secretary, and other officers as it may deem
necessary, within fifteen (15) days from the
issuance of its certificate of incorporation and
should 1:ie reported to the SEC within five
(5) days from appointment.
The single stockholder may not be appointed
as the corporate secretary.
A single stockholder who is likewise the self-
appointed treasurer of the corporation shall
give a bond to the SEC in such a sum as may
be required: Provided, That the said
stockholder/treasurer shall undertake in
writing to faithfully administer the OPC's
funds to be received as treasurer, and to
disburse and invest the same according to the
articles of incorporation as approved by the
SEC. The bond shall be renewed every two
(2) years or as often as may be required.
Discussion: The single stockholder must be
the president. It is by law.
The SEC said that the single stockholder
cannot be the corporate secretary. Not just
may. He cannot be the corporate secretary.
Q: Who shall take the place of the single
stockholder in managing the affairs of the
corporation in case of the latter’s death or
incapacity?
A: The nominee and alternate nominee
designated by the single stockholder shall, in
the event of the single stockholder's death or
incapacity, take the place of the single
stockholder as director and shall manage the
corporation's affairs.

Q: What is the term of the nominee and
alternate nominee?
A: When the incapacity of the single
stockholder is temporary, the nominee shall
sit as director and manage the affairs of the
OPC until the stockholder, by self-
determination, regains the capacity to assume
such duties.
(Dean: Here, the nominee cannot say that the
stockholder does not have yet the capacity to
assume the duties. It is the stockholder who
determines whether or not he has regained the
capacity to assume the duties).
In case of death or permanent incapacity of
the single stockholder, the nominee shall sit
as director and manage the affairs of the OPC
until the legal heirs of the single stockholder
have been lawfully determined, and the heirs
have designated one of them or have agreed
that the estate shall be the single stockholder
of the OPC.
The alternate nominee shall sit as director and
manage the OPC in case of the nominee's
inability, incapacity, death, or refusal to
discharge the functions as director and
manager of the corporation, and only for the
same term and under the same conditions
applicable to the nominee.
Q: How may the single stockholder change
its nominee and alternate nominee?
A: The single stockholder may, at any time,
change its nominee and alternate nominee by
submitting to the SEC the names of the new
nominees and their corresponding written
consent. For this purpose, the articles of
incorporation need not be amended.
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Q: How does a OPC approve a corporate
act?
A: When action is needed on any matter, it
shall be sufficient to prepare a written
resolution, signed and dated by the single
stockholder, and recorded in the minutes
book of the OPC. The date of recording in the
minutes book shall be deemed to be the date
of the meeting for all purposes under the
RCC.
A OPC shall maintain a minutes book which
shall contain all actions, decisions, and
resolutions taken by the OPC.
Discussion: So it has to be approved by the
president sole stockholder. It may look
absurd but it has a purpose. It is there to
covey to the public and make it clear that it is
not the property of the stockholder being sold
but the property of the corporation.
Q: What are the requisites for the limited
liability of the single stockholder of the
OPC?
A: The liability of the sole stockholder shall
be limited to his subscription to the
corporation if the following requisites are
present:
a. The sole shareholder must show that the
corporation was adequately financed;
b. He must prove that the property of the
OPC is independent of the stockholder's
personal property; and,
c. There is no ground to pierce the veil of
corporate fiction.
Otherwise, the sole stockholder shall be
jointly and severally liable for the debts and
other liabilities of the OPC.

Q: When may an ordinary corporation be
converted to an OPC?
A: When a single stockholder acquires all the
stocks of an ordinary stock corporation, the
latter may apply for conversion into a OPC,
subject to the submission of such documents
as the SEC may require. If the application for
conversion is approved, the SEC shall issue a
certificate of filing of amended articles of
incorporation reflecting the conversion. The
OPC converted from an ordinary stock
corporation shall succeed the latter and be
legally responsible for all the latter's
outstanding liabilities as of the date of
conversion.
Q: If a single stockholder acquires all the
stocks of an ordinary stock corporation, is
it automatic that it gets converted to an
OPC?
A: Obviously, not. You can have a
corporation owning the controlling capital
stock or even 99.99% of a corporation but
that does not make it as an OPC. But the law
gives that option to be converted to an OPC.
Q: When may an OPC be converted to an
Ordinary Stock Corporation?
A: OPC may be converted to an Ordinary
Stock Corporation in the following cases:
a. After due notice to the SEC of such fact
and of the circumstances leading to the
conversion, and after compliance with all
other requirements for stock corporations
under the RCC and applicable rules. Such
notice shall be filed with the SEC within
sixty (60) days from the occurrence of the
circumstances leading to the conversion
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into an ordinary stock corporation. If all
requirements have been complied with,
the SEC shall issue a certificate of filing
of amended articles of incorporation
reflecting the conversion.
b. In case of death of the single stockholder,
the nominee or alternate nominee shall
transfer the shares to the duly designated
legal heir or estate within seven (7) days
from receipt of either an affidavit of
heirship or self-adjudication executed by
a sole heir, or any other legal document
declaring the legal heirs of the single
stockholder and notify the SEC of the
transfer.
Within sixty (60) days from the transfer of the
shares, the legal heirs shall notify the SEC of
their decision to either wind up and dissolve
the OPC or convert it into an ordinary stock
corporation.
The ordinary stock corporation converted
from a OPC shall succeed the latter and be
legally responsible for all the latter's
outstanding liabilities as of the date of
conversion.
Q: Whether or not a person can own more
than 1 OPC.
A: Since there is no prohibition, a person can
own more than 1 OPC subject to condition
that there must be no abuse or misuse of the
separate legal personality of each of the OPC.
If they are in different businesses, their
separate legal personality shall be
maintained.
 4B 2020-2021
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decreased from two-thirds

DECEMBER 10, 2020
(2/3) to a mere majority of the
outstanding capital stock or
majority of the members for
non-stock corporation in a
DISSOLUTION
meeting to be held upon the
Recit: call of the directors or
Q: Tell me if the following acts are trustees.
consistent with the action of the
b. The notice must be given to
corporation after dissolution, whether or
not these acts can be carried out by the each shareholder at least
corporation despite its dissolution: twenty (20) days prior to the
1. Renewal of a lease agreement - Not meeting instead of thirty (30)
compatible with liquidation because days. Also, the notice had to
it amounts to continuation of be published only once and
business.
not anymore for three (3)
2. Exercising option to lease a property-
Not compatible (PNB vs. CFI of consecutive weeks.
Rizal) c. c. To apply for dissolution
3. An action to be recognized as a with the SEC, a verified
stockholder - Compatible, such action request for dissolution must
does not mean continuance of be filed by the Corporation, in
business. Also for practical addition to a certified and
considerations, you have to know the
SHs who will participate in the assets countersigned copy of the
of the corporation after the resolution, proof of
dissolution and in the process of publication, and favorable
liquidation.(Aguirre vs. FQB+7) recommendation from the
4. Mortgage of Corporate appropriate regulatory
property/Redemption of foreclosed agency, when necessary. The
property - if the mortgage is void
SEC must also act within
consequently, redemption is also
void. But if the mortgage was done fifteen (15) days from receipt
before dissolution, then the of the request.
redemption can be carried out even d. It imposed additional
after the dissolution, within the 3 year documentary requirements for
liquidation period. dissolution.
e. It distinguished the effectivity
Slide:
of dissolution in case of
Q: What are the revisions under the RCC
expiration of shortened term
on Dissolution?
and expiration of the original
a. The affirmative vote of the
term. Upon the expiration of
stockholders needed to effect
the shortened term, as stated
a dissolution (where no
in the approved amended
creditors are affected) was

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 4B 2020-2021
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articles of incorporation, the a joint meeting of the board of

corporation shall be deemed directors or trustees and the
dissolved without any further stockholders or members for
the purpose of ascertaining
proceedings, subject to the
whether to proceed with
provisions of the RCC on dissolution; or (C) issue such
liquidation. In the case of other orders as it may deem
expiration of corporate term, appropriate.
dissolution shall g. It expanded the grounds for
automatically take effect on involuntary dissolution to
the day following the last day include:
i. Upon receipt of a lawful
of the corporate term stated in
court order dissolving the
the articles of incorporation, corporation;
without the need for the ii. Upon finding by final
issuance by the SEC of a judgment that the corporation
certificate of dissolution. procured its
incorporation through fraud;
iii. Upon finding by final
Discussion: judgment that the corporation:
When we say shortened term, there is a term 1) Was created for the
but the articles were amended to shorten it as purpose of committing,
opposed to the term set out originally in the concealing or aiding
AoI, assuming that the corporation opted not the commission of
to have perpetual existence. securities violations,
smuggling, tax evasion,
As we will discuss later, that should not be money laundering, or
construed to mean prejudice to the action for graft and corrupt
revival of corporate existence. practices;
2) Committed or aided in
Slide: the commission of
f. It includes a provision for securities violations,
withdrawal of request for smuggling, tax evasion,
dissolution. The withdrawal money laundering, or
shall be submitted no later graft and corrupt
than fifteen (15) days from practices, and
receipt by the SEC of the its stockholders knew;
request for dissolution. Upon and
receipt of a withdrawal of 3) Repeatedly and
request for dissolution, the knowingly tolerated the
SEC shall withhold action on commission of graft and
the request for dissolution and corrupt practices or
shall, after investigation: (a) other fraudulent or
make a pronouncement that illegal acts by its
the request for dissolution is directors, trustees,
deemed withdrawn; (b) direct officers, or employees.

Page 191 of 351


h. It allows the SEC to dissolve
the corporation motu proprio
or upon filing of verified
complaint by any interested
party for any of the
involuntary grounds for
dissolution.
i. It allows for forfeiture of
assets of those corporations
dissolved involuntarily for
commission of fraud and
other specified offenses.
Discussion:
As to letter H: it means that even one person
can petition the SEC to dissolve the
corporation involuntarily.
Slide:
Q: What is Dissolution?
A: Dissolution is the extinguishment or
cancellation of the corporate franchise and
the termination of its corporate existence for
business purposes.
Discussion:
So we have to qualify termination of
existence for business purposes, because as
we all know a dissolve corporation does not
mean it cannot perform any act. A dissolve
corporation retains its legal personality but
only for one purpose, that is to liquidate and
to wind up its corporate affairs, but it does not
exist anymore for the purpose of continuing
the business it was organized.
Slide:
Q: What is the consequence of dissolution?
A: A corporation that has already been
dissolved, be it voluntarily or involuntarily,
retains no juridical personality to conduct its
business save for those directed towards
corporate liquidation. In other words, the
corporation ceases to be a body corporate for
the purpose of continuing the business for
which it was organized. But it shall,
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nevertheless, be continued as a body
corporate for three years after the time when
it would have been so dissolved, for the
purpose of prosecuting and defending suits
by or against it and of enabling it gradually to
settle and close its affairs, to dispose of and
convey its property and to divide its assets.
Philippine National Bank vs. Court of First
Instance of Riza, et. al., GR No. 63201, May
27, 1992.
Discussion:
While here the SC says that for 3 years, as
you will see later, the process of liquidation
need not be concluded in 3 years, it can even
go over the 3 year period set by the Corpo
Code.
Slide:
This extended authority necessarily excludes
the purpose of continuing the business for
which it was established. The reason for this
is simple: the dissolution of the corporation
carries with it the termination of the
corporation's juridical personality. Any new
business in which the dissolved corporation
would engage in, other than those for the
purpose of liquidation, will be a void
transaction because of the non-existence of
the corporate party.
Thus, a real estate mortgage executed by a
corporation after its dissolution is void. The
redemption of the mortgaged property is
likewise void for being inconsistent with
liquidation. A real estate mortgage is not part
of the liquidation powers that could have
been extended to the corporation. It could not
have been 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.
Discussion:
This is the case that we discussed a while ago,
a REM or a mortgage on a property signed by

the corporation after dissolution is void, the
redemption of the property likewise is void
for being inconsistent with liquidation. A
REM is not part of the powers of liquidation
that would have been extended to the
corporation, because its not obviously for the
purpose of winding up and liquidating the
affairs of the corporation.
Now, it would have been different if the
mortgage was executed before the dissolution
of the corporation, in that case redemption
can be effected even after dissolution,
anyway it would not exceed 3 years because
redemption is only within 1 year from
registration of the sale, so the redemption of
the property that was mortgage before the
dissolution, SC said is valid.
Slide:
Consequently, any redemption exercised by
the Corporation pursuant to this void real
estate mortgage is likewise void, and could
not be given any effect. If real estate
mortgage agreement was entered prior to its
dissolution, then the redemption of the
subject property, even if already after its
dissolution (as long as it would not exceed
three years thereafter), would still be valid
because of the liquidation/winding up powers
accorded by the Corporation Code. Dr. Gil J.
Rich vs. Guillermo Paloma III, GR No.
210538, March 7, 2018.
A corporation whose term has expired and,
ipso facto, dissolved can no longer exercise
an option to lease a property because the
same is tantamount to the continuation of the
business. Philippine National Bank vs. Court
of First Instance of Rizal, et. al., GR No.
63201, May 27, 1992.
In another case, the Supreme Court affirmed
the validity and binding effect of executed
releases, waivers and quitclaims of
employees notwithstanding the revocation of
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the corporation's certificate of incorporation.
Even if said documents were executed years
after the dissolution of the corporation, the
same are still valid and binding upon the
parties and the dissolution will not erase its
consequences. Benigno M. Vigilla, et. al., Vs.
Philippine College of Criminology Inc. G.R.
No. 200094, June 10, 2013.
Discussion:
Now, Vigilla vs Philippine College of
Criminology, what happened in this case,
PCCR entered a contract with ABC labor
agency and this agency provided manpower
to PCCR, eventually that contract was
terminated so employees of the agency were
likewise terminated and they were able to
obtain their separation benefits from ABC
Labor Agency and they signed a quitclaim in
favor of the agency. Subsequently, they filed
a claim against PCCR claiming that they are
employees of PCCR and not of the agency.
To prove its arguments that these are not
employees of PCCR, they presented the
quitclaim signed by the personnel hired by
ABC.
Q: Are those waivers and quitclaims
signed six years after the dissolution of the
corporation, can those documents be given
probative value? Are they still valid and
binding despite the fact that they were
signed 6 years after dissolution?
A: SC said yes, emphasizing that no right or
remedy available to or against the
corporations, SHs or members will be
impaired on account of dissolution.
Slide:
Barn filed an action to enjoin SN Company's
Board of Directors from selling a parcel of
land registered in the corporation's name, to
compel the corporation to recognize Barn as
a stockholder with 50 shares, to allow him to
inspect the corporate books, and to claim

damages against the corporation and its
officers. Subsequently, the corporation and
the individual defendants moved to dismiss
the complaint since the corporation's
certificate of registration was revoked by the
SEC during the pendency of Barn's case on
the ground of non-compliance with
reportorial requirements. The special
commercial court granted the motion and
reasoned that only action for liquidation of
assets can be maintained when a cor-po-ra-
tion has been dissolved and Barn cannot seek
reliefs which in effect lead to the continuation
of the corporation's business. The court also
ruled that it lost jurisdiction over the intra-
corporate controversy upon the dissolution of
the corporation.
a. Was the court correct?
Discussion:
Here is a bar exam question based on Aguirre
vs. FQB+7. When we analyze the facts, there
are three questions or issues:
1. Whether or not an action to be recognized
as SH amounts to continuation of business. 2.
Whether or not the dissolution of the
corporation results in the court losing its
jurisdiction and the case should now move to
the liquidation court.
3. Whether or not a course of action is
changed or extinguished upon dissolution.
Slide:
The court is not correct. An action to be
recognized as a stockholder and to inspect
corporate documents is an intra-corporate
dispute which does not constitute a
continuation of the business. The dissolution
of the corporation simply prohibits it from
continuing its business. Moreover, under
Section 145 of the OCC (now Section 184 of
the RCC), no right or remedy in favor of or
against any corporation, its stockholders,
members, directors and officers shall be
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removed or impaired by the subsequent
dissolution of the corporation.
The dissolution does not automatically
convert the parties into strangers or change
their intra corporate relationship. Neither
does it terminate existing causes of action
which arose because of the corporate ties of
the parties. The cause of action involving an
intra-corporate controversy remains and must
be filed as an intra corporate dispute despite
the subsequent dissolution of the
corporation.
Discussion:
(As to first paragraph)
Whatever right or remedy available to the
corporation cannot be extinguished just
because the corp. is dissolved.
(As to second paragraph)
If it started as intra-corporate in nature, it
continues to be intra-corporate despite
dissolution of the corporation. So the course
of action is not changed, if it is intra-
corporate on the outset, it remains to be intra-
corporate despite dissolution.
Slide:
The foregoing bar exam question is based on
the case of Aguirre vs. FQB +7, Inc. In that
case, the Supreme Court said that the
complaint does not show any intention to
continue the corporate business of FQB+7. It
does not seek to enter into contracts, issue
new stocks, acquire properties, execute
business transactions, etc. Its aim is not to
continue the corporate business, but to
determine and vindicate an alleged
stockholder's right to the return of his
stockholdings and to participate in the
election of directors, and a corporation's right
to remove usurpers and strangers from its
affairs. Neither are these issues mooted by
the dissolution of the corporation. A
corporation's board of directors is not
rendered functus officio by its dissolution.
Since Section 122 of the OCC (now Section

139 of the RCC) allows a corporation to
continue its existence for a limited purpose,
necessarily there must be a board that will
continue acting for and on behalf of the
dissolved corporation for that purpose. Thus,
the determination of which group is the bona
fide or rightful board of the dissolved
corporation will still provide practical relief
to the parties involved. The same is true with
regard to the shareholdings in the dissolved
corporation. A party's stockholdings in a
corporation, whether existing or dissolved, is
a property right which he may vindicate
against another party who has deprived him
thereof. The corporation's dissolution does
not extinguish such property right.
Discussion:
There is also a practical reason why the case
should continue, you have to determine who
are the bona fide SH of the corporation to
determine the persons who will participate
in the dissolution and liquidation of the
assets of the corporation.
Slide:
b. Four years later, SN Company files
an action against Barn to recover
corporate assets allegedly held by the
latter for liquidation. Will this action
prosper?
Discussion:
Take note that it says "four years later"
Slide:
The action cannot prosper because the
corporation has no more legal capacity to sue
after three years from its dissolution. Alabang
Development Corporation vs. Alabang Hills
Village Association, GR no. 187456, June 2,
2014.
In a relevant case, Alabang Development
Corporation ("ADC") was the developer of
Alabang Hills Village and claimed that it still
owns certain parcels of land therein that are
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yet to be sold, as well as those considered
open spaces that have not yet been donated to
the local government of Muntinlupa City or
the Homeowner's Association. In September
2006, ADC learned that Alabang Hills
Village Association Inc. ("AHVAI”) started
the construction of a multi-purpose hall and a
swimming pool on one of the parcels of land
still owned by ADC without the latter's
consent and approval, and that despite
demand, AHVAI failed to desist from
constructing the said improvements. ADC
thus prayed that an injunction be issued
enjoining AHVAI from continuing with the
construction. In its Answer, AHVAI claimed
that the latter has no legal capacity to sue
since its existence as a registered corporate
entity had been revoked by the SEC.
Discussion:
Q: So basic question is if the corporation is
dissolved, can it still file an action?
A: Before we know, yes right?
Q: What if the action if filed after 3 years
from dissolution?
A: SC through Justice Peralta said: The
action should not prosper because 3 years
after dissolution, the corporation has no more
legal capacity to sue.
In this case likewise, the SC as you will see
in the next slide, one of the arguments of
ADC are the various jurisprudence upholding
the right of corporations to enforce whatever
remedy it has under the law, despite
dissolution, citing Sec. 145 , now 184, that no
right or remedy should be impaired on
account of dissolution.
Q: How was that argument addressed by
the SC?
A: It said that all of these cases that ADC
cited point to cases filed by the corporation
during its lifetime or after dissolution but not
exceeding 3 years from such dissolution.

These can all be maintained based on the
argument that no right or remedy shall be
impaired on account of dissolution. But in
this case, it was filed more than 3 years after
dissolution, so by that time the corporation
has no more legal capacity to sue.
Slide:
It was held that ADC filed its complaint not
only after its corporate existence was
terminated but also beyond the three-year
period allowed by Section 122 of the OCC
(now Section 139 of the RCC). Thus, it is
clear that at the time of the filing of the
subject complaint, ADV lacks the capacity to
sue as a corporation. To allow ADC to initiate
the complaint and pursue it until final
judgment, on the ground that such complaint
was filed for the sole purpose of liquidating
its assets, would be to circumvent the
provisions of the Corporation Code.
It would have been different if the complaint
was filed during the three year liquidation
period for in such case, the action may be
continued even thereafter.
Slide:
Q: What are the methods of dissolution?
A: Dissolution may be voluntary or
involuntary. It is voluntary if the dissolution
is initiated by the corporation and it is
involuntary, if it is against the will of the
corporation or initiated by an aggrieved party
or the SEC.
Q: What are the voluntary modes of
dissolution?
A: The voluntary modes of dissolution are:
a. Verified request for dissolution which
does not prejudice the rights of
creditors having a claim against it;
b. Petition for dissolution where
creditors are affected;
c. Shortening of the corporate term;
d. Merger or consolidation; and,
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e. Affidavit of dissolution by a
corporation sole. \
Discussion:
(A) As you know if no creditors are affected,
it is done via verified request for dissolution.
(B) If creditors are affected it is done through
petition for dissolution.
Again you remember the discussion, even
though a corporation may be dissolved by
mere affidavit of dissolution it likewise
requires the approval of the SEC.
Slide:
Q: State the procedure for the dissolution
of a corporation where creditors are not
affected.
A:
a. The dissolution must be effected by a
majority vote of the board of directors
or trustees, and by a resolution
adopted by the affirmative vote of the
stockholders owning at least majority
of the outstanding capital stock or
majority of the members for a non-
stock corporation in a meeting to be
held upon the call of the directors or
trustees.
b. At least twenty (20) days prior to the
meeting, notice shall be given to each
shareholder or member of record
personally, by registered mail, or by
any means authorized under its
bylaws, whether or not entitled to
vote at the meeting, in the manner
provided in Section 50 of the RCC
and shall state that the purpose of the
meeting is to vote on the dissolution
of the corporation.
c. Notice of the time, place, and object
of the meeting shall be
published once prior to the date of the
meeting in a newspaper published in
the place where the principal office of
said corporation is located, or if no
newspaper is published in such place,

in a newspaper of general circulation
in the Philippines.
d. A verified request for dissolution
shall be filed with the SEC stating:
(a) the reason for the dissolution; (b)
the form, manner, and time when the
notices were given; (c) names of the
stockholders and directors or
members and trustees who approved
the dissolution; (d) the date, place,
and time of the meeting in which the
vote was made; and (e) details of
publication.
e. The corporation shall submit the
following to the SEC: (1) a copy of
the resolution authorizing the
dissolution, certified by a majority of
the board of directors or trustees and
countersigned by the secretary of the
corporation; (2) proof of publication;
and (3) favorable recommendation
from the appropriate regulatory
agency, when necessary.
f. The application for dissolution of
banks, banking and quasi-
banking institutions, preneed,
insurance and trust companies,
NSSLAS, pawnshops, and other
financial intermediaries should be
accompanied by a favorable
recommendation of the appropriate
regulatory government agency.
g. Within fifteen (15) days from receipt
of the verified request for dissolution,
and in the absence of any withdrawal
within said period, the SEC shall
approve the request and issue the
certificate of dissolution. The
dissolution shall take effect only upon
the issuance by the SEC of a
certificate of dissolution.
Q: What do we mean by request for
dissolution where no creditors are
affected?
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A: This covers a situation where the
corporation has no creditors or with creditors
but without conflicting claims and the
corporate assets is enough to satisfy the
claims.
Slide:
Q: State the procedure for voluntary
dissolution where creditors are affected
A:
a. The dissolution should be adopted by
at least majority of the board of
directors or trustees and resolved
upon by the affirmative vote of the
stockholders representing at least two
thirds (2/3) of the outstanding capital
stock or at least two thirds ( 2/3s ) of
the members at a meeting called for
the purpose.
b. The verified petition for dissolution
should be signed by a majority of the
corporation's board of directors or
trustees, verified by its president or
secretary or one of its directors or
trustees, and shall set forth all claims
and demands against it, and that its
dissolution was resolved upon by the
affirmative vote of the stockholders
representing at least two-thirds (2/3)
of the outstanding capital stock or at
least two-thirds (2/3) of the members
at a meeting of its stockholders or
members called for that purpose. The
petition shall likewise state: (a) the
reason for the dissolution; (b) the
form, manner, and time when the
notices were given; and (c) the date,
place, and time of the meeting in
which the vote was made.
c. The petition should be filed with the
SEC. The corporation shall likewise
submit to the SEC the following: (1)
a copy of the resolution authorizing
the dissolution, certified by a majority
of the board of directors or trustees
 4B 2020-2021
Notes for Merc Rev 1

and countersigned by the secretary of corporation. The RCC establishes the

the corporation; and (2) a list of all its procedure and other formal requirements a
creditors. corporation needs to follow in case it elects
d. If the petition is sufficient in form and to dissolve and terminate its structure
substance, the SEC shall, by an order voluntarily. Teodoro B. Vesagas and Wilfred
reciting the purpose of the petition, D. Asis vs. the Honorable Court of Appeals
fix a deadline for filing objections to and Delfino Raniel and Helenda Raniel, G.R.
the petition which date shall not be No. 142924, December 5, 2001.
less than thirty (30) days nor more
than sixty (60) days after the entry of Discussion:
the order. Before such date, a copy of This should be construed to mean a voluntary
the order shall be published at least dissolution; a board resolution is not enough
once a week for three (3) consecutive to dissolve a corporation voluntarily because
weeks in a newspaper of general the Code establishes the other requirements
circulation published in the for dissolution. But as we have seen earlier,
municipality or city where the one person may file for the dissolution of the
principal office of the corporation corporation but based on involuntary
situated, or if there be no such grounds. So this case should be read in
newspaper, then in a newspaper of conjunction with the revision of the RCC, so
general circulation in the Philippines, there can be involuntary dissolution `or
and a similar copy shall be posted for dissolution of the corporation albeit
three (3) consecutive weeks in three involuntarily even though initiated by one
(3) public places in such municipality party or person.
or city.
e. Upon five (5) days' notice, given after Slide:
the date on which the right to Q: Distinguish between voluntary
file objections as fixed in the order dissolution where creditors are not
has expired, the SEC shall proceed to affected and creditors are affected
hear the petition and try any issue A:
raised in the objections filed; and if no
such objection is sufficient, and the
material allegations of the petition are
true, it shall render judgment Where creditors Where creditors
dissolving the corporation and are not affected are affected
directing such disposition of its assets  the dissolution  the dissolution
as justice requires, and may appoint a should be should be adopted
receiver to collect such assets and pay adopted by at by at least
the debts of the corporation. least majority of majority of the
f. The dissolution shall take effect only the board of board of directors
upon the issuance by the SEC of directors or and approved by
a certificate of dissolution. trustees and the stockholders
approved by the representing at
Q: May a corporation be dissolved upon stockholders least 2/3s of
mere resolution of the BOD? representing at outstanding
A: A resolution approved by the Board of least majority of capital or 2/3s of
Directors is not sufficient to dissolve a the outstanding the members in a

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capital stock or meeting called for published in the municipality or

majority of the the purpose. place where the city where the
members in non- principal office of principal office of
stock corporation said corporation is the corporation is
in a meeting to located, or if no situated, or if there
be called by the newspaper is be no such
board of published in such newspaper, then in
directors or place, in a a newspaper of
trustee. newspaper of general circulation
 verified request  a verified petition general circulation in the Philippines,
for dissolution for dissolution in the Philippines. and a similar copy
is filed with the is filed with the shall be posted for
SEC stating: (a) SEC. The petition three (3)
the reason for the should be signed consecutive weeks
dissolution; (b) the by a majority of in three (3) public
form, manner, and the corporation's places in such
time when the board of directors municipality or
notices were or trustees, city.
given; (c) names verified by its
of the stockholders president or
and directors or secretary or one of  the SEC should  the SEC shall
members and its directors or approve render judgment
trustees trustees, and shall the request for dissolving the
who approved the set forth all claims dissolution within corporation only
dissolution; (d) the and demands fifteen (15) days after hearing on
date, place, and against it. from receipt of the the petition and
time of the verified request determination that
meeting in which for dissolution, the material
the vote was and in the absence allegations in the
made; and (e) of any withdrawal petition are true.
details of within said period,
publication. the SEC shall
approve the
request and issue
 what is given to  what is published
the certificate of
the stockholders or is a copy of the
dissolution.
members is order setting the
written notice of date and time of
the meeting. the hearing on the Q: Discuss the right of incorporator,
Notice is given at petition. It shall be director, trustee, shareholder or member
least 20 days prior published at least to withdraw the request for dissolution of
to the meeting and once a week for the corporation in cases where the
should be three (3) creditors are not affected
published once consecutive weeks
A: The request for dissolution should be
prior to the date of in a newspaper of
verified by any incorporator, director, trustee,
the meeting in a general circulation
shareholder, or member but should be signed
newspaper published in the

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by the same number of incorporators, outstanding capital stock or 2/3 of the

directors, trustees, shareholders, or members members in case of non-stock corporation.
necessary to request for dissolution. This
means that the request should be signed by at Q: What is the procedure for the
least a majority of the board of directors or dissolution of the corporation through the
trustees and by the stockholders representing shortening of corporate term?
at least a majority of the outstanding capital
stock or majority of the members in Non-
stock Corporation.
A: The procedure is as follows:
The withdrawal should be submitted no later
a. The articles of incorporation should
than fifteen (15) days from receipt by the
be amended to shorten the corporate
SEC of the request for dissolution. Upon
term. (Section 36, RCC)
receipt of a withdrawal of request for
b. The amendment should be approved
dissolution, the SEC shall with hold action on
by at least the majority vote of
the request for dissolution and shall, after
the board of directors or trustees, and
investigation: (a) make a pronouncement that
ratified at a meeting by the
the request for dissolution is deemed
stockholders or members
withdrawn; (b) direct a joint meeting of the
representing at least two-thirds (2/3)
board of directors or trustees and the
of the outstanding capital stock or of
stockholders or members for the purpose of
its members in a meeting duly called
ascertaining whether to proceed with
for the purpose. (Section 36, RCC)
dissolution; or (c) issue such other orders as
c. A copy of the amended articles of
it may deem appropriate.
incorporation shall be submitted
to the SEC in accordance with the
Q: May a petition for dissolution, where RCC.
creditors are affected, be withdrawn? d. .Upon the expiration of the shortened
A: Yes, a withdrawal of the petition for
term, as stated in the
dissolution shall be in the form of a motion
approved amended articles of
and similar in substance to a withdrawal of
incorporation, the corporation shall
request for dissolution but shall be verified
be deemed dissolved without any
and filed prior to publication of the order
further proceedings, subject to the
setting the deadline for filing objections to
provisions of the RCC on liquidation.
the petition.
(Section 136, RCC)
Section 137, RCC; It is not clear under the
e. In the case of expiration of corporate
RCC who will sign the motion to withdraw
term, dissolution shall automatically
the petition for dissolution. But since the
take effect on the day following the
withdrawal should be signed by the same
last day of the corporate term stated in
required number of directors or trustees and
the articles of incorporation, without
stockholders or members who made the
the need for the issuance by the SEC
request for dissolution, then, for consistency,
of a certificate of dissolution.
the withdrawal of the petition for dissolution
(Section 136, RCC)
should likewise be signed by the same
required number of directors or trustees and
stockholders or members for filing the When the shortening of the corporate term
petition, that is, majority of a and has the effect of immediate dissolution, it is
stockholders representing at least 2/3 of the submitted that there should be publication

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similar to a request for dissolution where term to dissolve the corporation. G.R. No.
creditors are not affected. If creditors will be 63201, May 27, 1992.
affected, the rules similar to petition for
voluntary dissolution should be followed. Discussion:
The reason why I had to include this was
because it was asked in the bar. The case of
Q: Is there any distinction between PNB vs. CFI regarding the corporation
expiration of the original term and wanting to exercise an option to lease a
expiration of the shortened term as a property, the SC said that if the term expires
ground to dissolve the corporation? ipso facto, corporation is deemed dissolved
A: Expiration of the shortened term ipso facto
without having to file a petition for quo
results in the automatic dissolution of the
warranto or request for dissolution, no need
corporation. This is clear under Section 136
to file any document, basically, with the SEC
of the RCC which provides that upon the
when the term expires. Therefore, since it s
expiration of the shortened term, as stated in
dissolved, it cannot exercise the option to
the approved amended articles of
lease the property. So I say that, this case
incorporation, the corporation shall be
should now be construed to mean or to refer
deemed dissolved without any further
to corporations that shortened their term to
proceedings, subject to the provisions of the
dissolve the corporation not to a situation
RCC on liquidation. In the case of expiration
where the original term will expire, because
of corporate term, dissolution shall
of the provision of the RCC regarding the
automatically take effect on the day
corporation, the remedy of reviving the
following the last day of the corporate term
existence of the corporation.
stated in the articles of incorporation, without
the need for the issuance by the SEC of a
Q: So what are the grounds for
certificate of dissolution
involuntary dissolution?
A: A corporation may be dissolved by the
The expiration of term should be without
SEC motu proprio or upon filing of a verified
prejudice to the remedy available to the
complaint by any interested party. The
corporation to apply for a revival of its
following may be grounds for dissolution of
corporate existence. Since the law does not
the corporation:
prescribe the period to file it, the application
a. Non-use of the corporate charter as
may be filed prior to the liquidation of the
provided under Section 21 of
corporation.
the RCC.
Under Section 21 of the RCC, if a corporation
It is submitted that the Supreme Court
does not formally organize and commence its
decision in Philippine National Bank vs. The
business within five (5) years from the date
Court of First Instance of Rizal, Pasig, et al.
of its incorporation, its certificate of
that upon the expiration of the period fixed in
incorporation shall be deemed revoked as of
the articles of incorporation, the corporation
the day following the end of the five (5)-year
ceases to exist and is dissolved ipso facto and
period.
there is no need for the institution of a
proceeding for quo warranto to determine the
Discussion:
time or date of the dissolution of a
I'd like to refresh your memory, previously
corporation should now be construed to refer
it was 2 years, now its 5 years to organize
to corporations that shortened their corporate
and commence business.

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Next what about a situation where a
corporation enters a business but becomes
inoperative:
Slide:
b. Continuous in operation of a
corporation as provided under
Section 21 of the RCC.
Under Section 21 of the RCC, if a corporation
does not formally organize and commence its
business within five (5) years from the date
of its incorporation, its certificate of
incorporation shall be deemed revoked as of
the day following the end of the five (5)-year
period.
However, if a corporation has commenced its
business but subsequently becomes
inoperative for a period of at least five (5)
consecutive years, the SEC may, after due
notice and hearing, place the corporation
under delinquent status.
Q: What should the corporation do if
placed on delinquent status?
A: A delinquent corporation shall have a
period of two (2) years to resume operations
and comply with all requirements that the
SEC shall prescribe. Upon compliance by the
corporation, the SEC shall issue an order
lifting the delinquent status. Failure to
comply with the requirements and resume
operations within the period given by the
SEC shall cause the revocation of the
corporation's certificate of incorporation.
The grounds under (a) and (b) will lead to the
dissolution of the corporation unless the
corporation files a petition to set aside its
delinquency status and the SEC grants it.
c. Upon receipt of a lawful court order
dissolving the corporation.
This may involve or arise from a quo
warranto proceeding involving a de facto
corporation or a liquidation proceeding
involving an insolvent debtor under Republic
Act No. 10142, otherwise known as the
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Financial Rehabilitation and Insolvency Act
(FRIA). One of the effects of a liquidation
order under FRIA is to dissolve the
corporation.
d. Upon finding by final judgment that
the corporation procured
its incorporation through fraud;
This may happen when the corporation
misrepresented its purpose of incorporation
and/or the incorporators use fictitious names.
Discussion:
Q: When may a corporation receive a
lawful order dissolving a corporation?
A: Remember, quo warranto, regarding de
facto corporation: how do you question the
existence of a de facto corporation? Its not by
collateral proceeding but by direct
proceeding called quo warranto, that's one.
Second, which we'll take up after SRC, we'll
take up in FRIA, liquidation proceeding
involving an insolvent debtor under the law
on FRIA. One of the effects of liquidation
order under FRIA is to dissolve the
corporation. It shall automatically have the
effect of dissolving the corporation.
Slide:
e. Upon finding by final judgment that
the corporation:
i. Was created for the purpose
of committing, concealing or
aiding the commission of
securities violations,
smuggling, tax evasion,
money laundering, or graft
and corrupt practices;
ii. Committed or aided in the
commission of securities
violations, smuggling, tax
evasion, money laundering,
or graft and corrupt practices,
and its stockholders knew of
the same; and

iii. Repeatedly and knowingly
tolerated the commission of
graft and corrupt practices or
other fraudulent or illegal acts
by its directors, trustees,
officers, or employees.
If the corporation is ordered dissolved by
final judgment pursuant to the grounds set
forth in subparagraph (e) hereof, its assets,
after payment of its liabilities, shall, upon
petition of the SEC with the appropriate
court, be forfeited in favor of the national
government. Such forfeiture shall be without
prejudice to the rights of innocent
stockholders and employees for services
rendered, and to the application of other
penalties or sanctions under the RCC or other
laws.
The SEC shall give reasonable notice to, and
coordinate with, the appropriate regulatory
agency prior to the involuntary dissolution of
companies under their special regulatory
jurisdiction.
Discussion:
Its not automatic that just because they
committed those violations of special laws as
enumerated, the assets will be forfeited to the
national government, the SEC must file with
the appropriate court a petition to forfeit
those assets.
Q: What about the other grounds for
involuntary dissolution? Can the SEC file
a petition to forfeit those assets?
A: No, only for those three grounds under
subparagraph E:
Slide:
Note that it is only on the grounds specified
in paragraph (e) that the SEC may file a
petition with the appropriate court that the
assets be forfeited in favor of the national
government but without prejudice to the
rights of innocent stockholders and
employees for services rendered.
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Note further that while the three grounds
provided in paragraph (e) refer to
commission of graft and corrupt practices,
fraudulent or other illegal acts, these are
distinct from one another. Under the first
ground, the corporation was organized for the
purpose of creating, concealing or aiding in
the commission of the specified illegal acts.
Obviously, in this case, there was
misrepresentation too as to the purposes of
the corporation because the SEC will not
approve the incorporation if the articles of
incorporation, on its face, indicates as the
corporation's purposes the commission of
illegal acts. Under the second ground, the
corporation is lawfully organized and
conducting business but it committed or
aided in the commission of the same
specified illegal acts and its stockholders
knew about them. Under the third ground, the
corporation is created for lawful purposes
and legally conducting business but it
repeatedly and knowingly tolerated the
commission of graft and corrupt practices or
other fraudulent or illegal acts by its
directors, trustees, officers, or employees.
Q: Are there other grounds to dissolve the
corporation upon order of the SEC?
A: Yes.
The above-stated grounds under PD 902-A
were reinforced by Section 158 of the RCC
which provides that, if, after due notice and
hearing, the SEC finds that any provision of
the RCC, rules or regulations, or any of its
orders has been violated, the SEC may
impose any or all of the following sanctions,
taking into consideration the extent of
participation, nature, effects, frequency, and
seriousness of the violation:
a. Imposition of a fine ranging from
Five thousand pesos (P5,000.00) to
Two million pesos (P2,000,000.00),
and not more than one thousand pesos
(P1,000.00) for each day of
continuing violation but in no case to

exceed Two million
pesos (P2,000,000.00);
b. Issuance of a permanent cease and
desist order;
c. Suspension or revocation of the
certificate of incorporation, and
d. Dissolution of the corporation and
forfeiture of its assets under the
conditions in Title XIV of the RCC.
Discussion:
Regarding "D. Failure to file bylaws" its no
longer ground as we discussed previously.
Slide:
The SEC may also order the dissolution of a
close corporation when there is a deadlock in
the management of its affairs (Section 103,
RCC) or upon petition of a stockholder
whenever any acts of the directors, officers,
or those in control of the corporation is
illegal, fraudulent, dishonest, oppressive or
unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets are
being misapplied or wasted.
Q: What are the revisions under the RCC
on the liquidation of private corporations?
A:
a. It provided that the liquidation of
banks shall be covered by the New
Central Bank Act and the Philippine
Deposit Insurance Corporation
Charter.
b. In case of escheat, the properties shall
revert to the national government.
The OCC previously provided that
such properties will be escheated to
the city or municipality where such
are located.
Q: What is liquidation?
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A: Liquidation is the process of settling the
affairs of the corporation after its dissolution.
This consists of (1) collection of all that is
due the corporation, (2) the settlement and
adjustment of claims against it, and (3) the
payment of its debts and (4) the distribution
of the remaining assets, if any among the
stockholders thereof in accordance with their
contracts, or if there be no special contract,
on the basis of their respective interests. The
manner of liquidation or winding up may be
provided for in the corporate by-laws and this
would prevail unless it is inconsistent with
law.
The finds basis under Section 122 of the OCC
(now Section 139 of the RCC), which
empowers every corporation whose
corporate existence has been legally
terminated to continue as a body corporate
for three (3) years after the time when it
would have been dissolved. This continued
existence would only be for the purposes 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." Dr. Gil J. Rich vs
Guillermo Paloma III, GR No. 210538,
March 7, 2018.
Q: Within what period should the
liquidation of the corporation be
concluded?
A: Every corporation whose charter expires
pursuant to its articles of incorporation, is
annulled by forfeiture, or whose corporate
existence is terminated in any other manner,
shall nevertheless remain as a body corporate
for three (3) years after the effective date of
dissolution, for the purpose of prosecuting
and defending suits by or against it and
enabling it to settle and close its affairs,
dispose of and convey its property, and
distribute its assets, but not for the purpose of
continuing the business for which it was
established.

In the absence of a statutory provision to the
contrary, pending actions by or against a
corporation are abated upon the expiration of
the three-year period allowed by law for the
liquidation of its affairs. Mambulao Lumber
Company vs. Philippine National Bank, G.R.
No. L-22973, January 30, 1968.
Discussion:
But as you will see later on, the 3 year period
is not an absolute period. Meaning, what
happens if it is not done within 3 years? Does
it mean that everything is stopped? It used to
be Mambulao vs. PNB where everything is
abated after three years, finished or not
finished, pass your papers type of dissolution.
But not anymore, liquidation can go beyond
3 years from dissolution under various modes
as you will see in the next slides.
Slide:
Nevertheless, a corporation that has a
pending action and which cannot be
terminated within the three year period after
its dissolution is authorized under Sec. 139 of
the RCC to convey all its property to a trustee
to enable it to prosecute and defend suits by
or against the corporation beyond the three
year period. The trustee may commence a suit
which can proceed to final judgment even
beyond the three-year period.
Even if no trustee is formally appointed, the
directors of the dissolved corporation may be
permitted to continue as trustees to complete
the liquidation of the corporation. Clemente
vs. Court of Appeals, G.R. No. 82407, March
27, 1995.
Q: May a corporation be allowed to
dispose of its remaining assets after three
years from the time of its dissolution?
A: The SEC said that it is absurd and
ridiculous to say otherwise. A property may
be disposed incident to the liquidation that
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can be done even after 3 years from
dissolution of the corporation
Slide:
Yes, a corporation may still dispose of its
assets despite the lapse of the three-year
period for liquidation of assets provided
under Section 139 of the RCC.
Based on the above provision, there is, as a
general rule, no juridical personality after
dissolution. If there is, it is only a juridical
personality to serve but one purpose –
liquidation, culminating in the disposition
and distribution of the dissolved
corporation's remaining assets. As pointed
out, any matter entered into that is not for the
purpose of liquidation will be a void
transaction because of the non-existence of
the corporate party.
Discussion:
Is it not when you liquidate, you have to
maximize asset recovery, you have to
generate cash, you have to collect receivables
from debtors and you can sell property to
generate cash then use that cash proceeds to
pay the creditors and distribute the remaining
assets and cash to the SHs starting with
preferred to common. So it does not make
sense, therefore, to cut or to put a period in
selling a property if it is incidental to
liquidation.
Slide:
While Section 139 of the RCC gives a
dissolved corporation three (3) years to
continue as a body corporate for purposes of
liquidation, the disposition of the remaining
undistributed assets must necessarily
continue even after such period. This should
not, however, be construed to prevent a
corporation from pursuing activities which
would complete the final liquidation of a
dissolved corporation. Accordingly, it should
be allowed to continue liquidating its
remaining assets in order to complete the
process of dissolving the corporation.

Likewise, it should be allowed to distribute
the proceeds from the said disposition to its
stockholders or creditors if any. A contrary
interpretation would have unjust and absurd
results.
Discussion:
In Clemente vs. CA, under the Corporation
Code, as we have seen then and now, within
three years a corporation must appoint a
trustee, and the trustee appointed will be the
one to carry out the liquidation of the
corporation even beyond 3 years from
dissolution. The implication here seems to be
that if there is no trustee appointed, then the
corporation is bound by the three year period,
well not so, based on these cases:
1. Clemente vs. CA
Slide:
In Clemente vs. Court of Appeals, the
Supreme Court affirmed that if the three year
extended life has expired without a trustee or
receiver having been expressly designated by
the corporation within that period, the board
of directors (or trustees) itself, following the
rationale of the Supreme Court's decision in
Gelano vs. Court of Appeals, G.R. No. L-
39050, February 24, 1981, maybe permitted
to continue as "trustees" by legal implication
to complete the corporate liquidation. Still, in
the absence of a board of directors or trustees,
those having any pecuniary interest in the
assets including not only the shareholders but
likewise the creditors of the corporation,
acting for and its behalf, might make proper
representations with the SEC which has
primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final
settlement of the corporate concerns. See
SEC-OGC Opinion No. 31-09, December 9,
2009.
Discussion:
Its very cumbersome of course, if your
trustees will carry out the liquidation are the
very same BOD of the corporation.
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If you have 15 Directors for example, how
will you get a quorum if it is already
dissolved and they are not too motivated to
fulfill their duties as directors? So its best to
appoint a trustee, either 1 or 3. But it is not
good for the BOD to be trustees given the
difficulty of getting a quorum. But legally
speaking, SC said even without a trustee
formally appointed, the BOD shall serve as
trustees to carry out liquidation.
2. Gelano vs, CA, it is asked in the bar twice.
There was no trustee formally appointed but
the lawyer handled the case is deemed the
trustee with respect to this case and therefore
it can continue beyond the 3 year period.
Slide:
In the Gelano vs. Court of Appeals, the word
"trustee" as used in the corporation statute
must be understood in its general concept
which could include the counsel to whom
was entrusted in the instant case, the
prosecution of the suit filed by the
corporation. The purpose in the transfer of
the assets of the corporation to a trustee upon
its dissolution is more for the protection of its
creditor and stockholders. Carlos Gelano vs.
the Honorable Court of Appeals, et al., G.R.
No. L-39050 February 24, 1981.
Q: Do liquidation and winding up of
corporate affair automatically follow after
dissolution?
A: Not necessarily, we saw this in Chung Ka
Bio vs. IAC, regarding the term that expired
but instead of liquidating, the SHs put up a
new corporation and then the assets that
should have been distributed, were assigned
to the new corporation as a subscription to the
shares of stock.
Slide:
Generally, liquidation is the necessary
consequence of dissolution. However,
winding up is the sole activity of a dissolved
corporation that does not intend to

incorporate anew. If it does, however, it is not
unlawful for the old board of directors to
negotiate and transfer the assets of the
dissolved corporation to the new corporation
intended to be created as long as the
stockholders have given their consent. Chung
Ka Bio vs. Intermediate Appellate Court,
G.R. No. 71837, July 26, 1988.
Discussion:
Liquidation is a necessary consequence of
dissolution, but its not the automatic
consequence because the SHs may not want
to liquidate but put up a new corporation.
Q: May the following legal actions
involving the corporation be enforced by
or against the corporation beyond the
three-year liquidation period?
1. Action filed during the lifetime of the
corporation?
A:Yes
Slide:
The trustee (of a dissolved corporation) may
commence a suit which can proceed to final
judgment even beyond the three-year period
of liquidation. No reason can be conceived
why a suit already commenced by the
corporation itself during its existence, not by
a mere trustee who, by fiction, merely
continues the legal personality of the
dissolved corporation, should not be
accorded similar treatment – to proceed to
final judgment and execution thereof. Indeed,
the rights of a corporation that has been
dissolved pending litigation are accorded
protection by Section 145 of the OCC (now
Section 184 of the RCC) which provides "no
right or remedy in favor of or against any
corporation, its stockholders, members,
directors, trustees, or officers, nor any
liability incurred by any such corporation,
stockholders, members, directors, trustees, or
officers, shall be removed or impaired either
by the subsequent dissolution of said
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corporation. Rene Knecht and Knecht, Inc.,
vs. United Cigarette Corp., represented by
Encarnacion Gonzales Wong, and Eduardo
Bolima, Sheriff, Regional Trial Court,
Branch 151, Pasig City, G.R. No. 139370,
July 4, 2002.
Q: Can an appeal be taken from an
adverse ruling of the RTC if that appeal is
to be done after three years from
dissolution?
A: Yes
Slide:
A dissolved corporation may also maintain
actions in court for the protection of its rights
including the right to appeal from an adverse
decision. Paramount Insurance Corp. vs.
A.C. Ordoñez Corporation and Franklin
Suspine, G.R. No. 175109, August 6, 2008.
Discussion:
Same reason, no right or remedy shall be
impaired on account of dissolution.
Slide:
Generally, liquidation is the necessary
consequence of dissolution. However,
winding up is the sole activity of a dissolved
corporation that does not intend to
incorporate anew. If it does, however, it is not
unlawful for the old board of directors to
negotiate and transfer the assets of the
dissolved corporation to the new corporation
intended to be created as long as the
stockholders have given their consent. Chung
Ka Bio vs. Intermediate Appellate Court,
G.R. No. 71837, July 26, 1988.
2. Action filed during the three-year
liquidation period?
A: Yes, the trustee appointed by the
corporation may initiate a suit during the
three year liquidation period, which may
continue even beyond the said period. As
pointed out, in Gelano vs. Court of Appeals,
it was held that the lawyer handling the case
for the corporation is deemed a trustee with

respect to that case. In Clemente vs. Court of
Appeals, it was held that in the absence of a
trustee formally appointed, the board of
directors shall be deemed the trustees of the
corporation to carry out the liquidation of the
corporation.
Moreover, it is clear under Section 184 of the
RCC that "no right or remedy in favor of or
against any corporation, its stockholders,
members, directors, trustees, or officers, nor
any liability incurred by any such
corporation, stockholders, members,
directors, trustees, or officers, shall be
removed or impaired either by
the subsequent dissolution of said
corporation.
3. Action filed more than three years from
the dissolution of the corporation?
A: No, As previously expounded, an action
filed more than three years from the
dissolution of the corporation should be
dismissed since by that time the corporation
lacks the capacity to sue because it no longer
possesses juridical personality by reason of
its dissolution.
While there are cases that a corporation may
still sue, even after it has been dissolved and
despite the lapse of the three-year liquidation
period, the corporations involved in those
cases filed their respective complaints while
they were still in existence. In other words,
they already had pending actions at the time
that their corporate existence was terminated.
Alabang Corporation, Development vs.
Alabang Hills Village Association and Rafael
Tinio, G.R. No. 187456, 02 June 2014.
Slide:
Q: What are the methods of liquidation?
A: There are four methods of liquidation,
namely:
a) by the corporation itself;
b) by the trustee duly appointed by the
corporation;
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c) by the receiver that the SEC may
appoint upon judgment dissolving
the corporation after hearing the
corporation's petition for voluntary
dissolution; and
d) by the rehabilitation receiver or
liquidator appointed by the
court after judgment on a petition for
liquidation involving an insolvent
debtor.
a. By the corporation itself
Under Section 139 of the RCC, the
corporation is granted a period of three years
after dissolution, whether voluntary or
involuntary, to wind up it bffairs. Ideally, the
winding-up process should be completed in
three years. Otherwise, it should appoint a
trustee to carry out the liquidation even
beyond three years. But, in the absence of an
appointed trustee, the board of directors shall
be deemed the trustees of the corporation.
b. By the trustee appointed by the
corporation
Under Section 139 of the RCC, at any time
during said three (3) year liquidation period,
the corporation is authorized and empowered
to convey all of its property to a trustee for
the benefit of stockholders, members,
creditors and other persons in interest. After
any such conveyance by the corporation of its
property in trust for the benefit of its
stockholders, members, creditors and others
in interest, all interest which the corporation
had in the property terminates, the legal
interest vests in the trustee, and the beneficial
interest in the stockholders, members,
creditors or other persons-in-interest.
The trustee is not bound by the three-year
period. What is important is the completion
of the liquidation process so that creditors
will be paid and the residual assets are
distributed to the stockholders.
c. By the Receiver appointed by the
SEC

Under Section 135 of the RCC, the SEC shall
proceed to hear the petition (filed by a
corporation where creditors are affected) and
try any issue raised in the objections filed;
and if no such objection is sufficient, and the
material allegations of the petition are true, it
shall render judgment dissolving the
corporation and directing such disposition of
its assets as justice requires, and may appoint
a receiver to collect such assets and pay the
debts of the corporation.
The receiver represents the SEC, as well as
the stockholders and creditors. The receiver
is not bound by the three year liquidation
period. Pepsi Cola Products Philippines vs.
Court of Appeals, G.R. No. 145855,
November 24, 2004.
The appointment of a receiver operates to
suspend the authority of a corporation and its
directors and officers over its property and
effects, such authority being reposed in
the receiver. Thus, a corporate officer had no
authority to condone a debt. Victor Yam &
Yek Sun Lent, doing business under the name
and style of Philippine Printing Works vs. the
Court of Appeals and Manphil Investment
Corporation, G.R. No. 104726, February 11,
1999.
Discussion:
Q: In the case of BPI vs. Hong, who will
carry out the liquidation of the
corporation? is it the receiver appointed
by the SEC or the court?
A: Slide:
In Bank of the Philippine Islands vs. Eduardo
Hong, the Supreme Court held, however, that
while the SEC has jurisdiction to order the
dissolution of a corporation, jurisdiction over
the liquidation of the corporation now
pertains to the appropriate regional trial
courts. This is the correct procedure because
the liquidation of a corporation requires the
settlement of claims for and against the
corporation, which clearly falls under the
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jurisdiction of the regular courts. The trial
court is in the best position to convene all the
creditors of the corporation, ascertain their
claims, and determine their preferences. GR
No. 161771, February 15, 2012.
Discussion:
Q: Now is it the Special Commercial
Courts that has jurisdiction to ascertain
those claims?
A: There is one author that opined that it us
the SCA, but that's not me. It’s not the SCA,
its the RTC. Because those creditors may not
have intra-corporate relationship with the
corporation so its more correct to say, that
RTC and not those designated to hear intra-
corporate disputes.
Slide:
It should be noted that the power of the SEC
to appoint a receiver existed even under the
OCC and retained under the RCC despite the
ruling in Bank of the Philippine Islands vs.
Eduardo Hong. It is submitted that the
receiver may carry out the liquidation of the
corporation if the creditors and the
corporation are able to agree among
themselves on how the creditors' claims shall
be satisfied. Otherwise, the RTC should carry
out the liquidation process.
d. By the rehabilitation receiver or the
liquidator appointed by the
competent RTC in cases involving
insolvent debtor under FRIA.
The receiver who may be appointed by the
SEC is different from the rehabilitation
receiver that the competent Regional Trial
Court may appoint in cases involving the
rehabilitation of an insolvent debtor under
FRIA.
In cases falling under FRIA, the liquidation
of the debtor will be carried out by the
rehabilitation receiver or the liquidator
appointed by the court.

Under Section 25 of the FRIA, the
Rehabilitation Court may convert a petition
for rehabilitation to liquidation if there is no
showing that the debtor may be rehabilitated.
In which case, the Rehabilitation Receiver
may perform the functions of the liquidator.
The insolvent debtor may also file a petition
for voluntary liquidation or be the subject of
a petition for involuntary liquidation by his
creditors. In either case, if the petition is
sufficient in form and substance, the
Rehabilitation Court shall issue the Order of
Liquidation. Such order has the effect of
dissolving the corporation and title to the
properties of the debtor shall be transferred to
the Liquidator who will then carry out the
liquidation of the corporation.
Q: How are the assets of the corporation
distributed during the liquidation
process?
The assets of the corporation shall be used to
pay off the claims of various creditors based
on the law on concurrence and preference of
credit. The residual assets shall then be
distributed to the holders of the preferred
shares of stock, if any, then to the holders of
common shares based on their agreement, if
any, otherwise, in proportion to their
respective shareholdings in the corporation.
Note that SEC approval is not required in the
approval of the distribution or liquidation of
the assets of the dissolved corporation. This
falls within the authority of the directors and
stockholders or the duly appointed trustee or
receiver.
Any asset distributable to the creditor or
stockholder or member who is unknown or
cannot be found shall be escheated in favor of
the national government.
Q: X” Corporation shortened its corporate
life by amending its articles of
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incorporation. It has no debts but owns a
prime property located in Quezon City.
How would the said property be liquidated
among the five stockholders of
the said corporation?
A: The prime property of "X" Corporation
can be liquidated among the five
stockholders by dividing or partitioning it
among themselves in any of the following
ways:
a. By physical division or partition
based on the proportion of the values
of their stockholdings; or
b. Selling the property to a third person
and dividing the proceeds among the
five stockholders in proportion to
their stockholdings; or
c. After the determination of the value
of the property, by assigning or
transferring the property to one
stockholder with the obligation on
the part of said stockholder to pay the
other four stockholders the amount/s
in proportion to the value of the
stockholding of each. 2001 Bar
Exam.
Discussion:
So if you have 5 SHs and the property is
worth 50M, one of them will acquire it then
pay 10M (not sure, medyo inaudible) each to
the other SH in proportion to their
shareholdings.
In another bar exam question, there's another
option: whether or not the SEC will be the
one to decide on how to distribute - now that
option is clearly not allowed because as we
said the SEC has not participation, no
authority, no say in the liquidation of the
assets of the dissolved corporation.
Q: Are the rules on liquidation for private
corporations organized under the RCC
applicable for banks?

A: We took this up on SPCL, the case of
Bokod Benguet, the issue is: W/N a bank may
be dissolved and liquidated without obtaining
tax clearance.
Slide:
The rules on liquidation for corporations do
not apply for banks, which shall be covered
by the applicable provisions of Republic Act
No. 7653, otherwise known as "The New
Central Bank Act," as amended, and
Republic Act No. 3591, otherwise known as
the Philippine Deposit Insurance Corporation
Charter, as amended.
This provision of the RCC is based on the
Supreme Court decision in the case of in Re:
Petition for Assistance in the Liquidation of
the Rural Bank of Bokod (BENGUET) vs.
Bureau of Internal Revenue ("BIR"). In that
case, the BIR argued that Philippine Deposit
Insurance Corporation( "PDIC" ) could not
proceed with the dissolution and liquidation
of the bank without first securing tax
clearance as required under the Tax Code and
its agreement with the SEC. It was held that
Section 30 of the New Central Bank Act lays
down the proceedings for receivership and
liquidation of a bank. The said provision is
silent as regards securing a tax clearance
from the BIR. G.R. No. 158261, December
18, 2006.
The omission, nonetheless, cannot compel
the Supreme Court to apply by analogy the
tax clearance requirement of the SEC, as
stated in Section 52(C) of the Tax Code of
1997 and BIR-SEC Regulations No. 1, since,
again, the dissolution of a corporation by the
SEC is a totally different proceeding from the
receivership and liquidation of a bank by the
Bangko Sentral ng Pilipinas ("BSP"). The
Supreme Court cannot simply replace any
reference by Section 52(C) of the Tax Code
of 1997 and the provisions of the BIR-SEC
Regulations No. 1 to the “SEC” with the
"BSP." To do so would be to read into the law
and the regulations something that is simply
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not there, and would be tantamount to
judicial legislation. There are substantial
differences in the procedure for involuntary
dissolution and liquidation of a corporation
under the Corporation Code, and that of a
banking corporation under the New Central
Bank Act, so that the requirements in one
cannot simply be imposed in the other.
Besides, to require a tax clearance prior to the
dissolution, closure and liquidation of the
bank will impair the authority of BSP to close
a bank and of the PDIC to carry out the
liquidation of the closed bank.
Discussion:
Q: May congress dissolve private
corporations?
A: Yes, congress may dissolve all private
corporations even those organized under
special law. Why? because corporations are
creatures of law, the RCC governs the
formation of private corporations and special
laws are passed to organized GOCCs. If
congress repeals that special law, the special
corp is dissolves. Similarly if Congress
repeals RCC, then all corporations organized
under it is likewise dissolved but without
prejudice is to vested rights. While it can be
done by Congress, it does not mean that it
should be done.
Slide:
Q: Other than dissolution when else may
the assets or property of the corporation
be distributed?
A: For reduction of course of capital stock:
Except by decrease of capital stock and as
otherwise allowed by the RCC, no
corporation shall distribute any of its assets
or property except upon lawful dissolution
and after payment of all its debts and
liabilities

FOREIGN CORPORATIONS
Slide:
Q: What are the revisions under the RCC
on foreign corporations?
a. A foreign corporation, except if it is
a foreign banking or insurance
corporation, is required to deposit
shares of stock, debt securities that
are registered under Republic Act
No. 8799, otherwise known as the
Securities Regulation Code, or any
financial instrument determined
suitable by the SEC, within sixty (60)
days after the issuance of the license
to transact business in the
Philippines.
b. The actual market value of the
deposit requirement was increased
from P100,000.00 to P500,000.00.
The threshold within which the
foreign corporation must deposit
additional securities was also
increased from P5 Million to P10
Million
c. If the resident agent is a domestic
corporation, it must also be of
sound financial standing and must
provide a certification from the SEC
that it is in good standing
Q: What is a foreign corporation?
A: A foreign corporation is one formed,
organized or existing under laws other than
those of the Philippines and whose laws
allow Filipino citizens and corporations to do
business in its own country or State.
Discussion:
You remember that we discussed this, there
are 2 elements of a foreign corporation:
1. Place of organization
2. Element of reciprocity
Even without the element of reciprocity,
though, a foreign corporation is still
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considered foreign as long as it is formed,
organized and existing under foreign laws.
But if the laws of the foreign state, does not
permit or allow Filipinos to do business in its
own country or state then that foreign
corporation will not permitted likewise to do
business in the Philippines.
Slide:
Q: A corporation composed entirely of
Filipino citizens, if formed, organized and
existing under the laws of the USA. Is this
a foreign or domestic corporation?
A: It is a foreign corporation. Whether the
corporation is domestic or foreign is
determined by the country or State of
incorporation. Thus, a corporation is foreign
if it is formed, organized or existing under the
laws of a foreign country regardless of the
nationality of the stockholders.
Q: Can a foreign corporation be
considered a Philippine National?
Discussion:
A: Yes, but there are two conditions:
1. Doing business in the Philippines
2. Wholly owned by Filipinos
Slide:
The term "Philippine National" is defined
under Section 3 of the Republic Act No.
7042, as amended by Republic Act No.
8179, to wit:
"Philippine national shall
mean a citizen of the Philippines
or a domestic partnership or
association wholly owned by the
citizens of the Philippines; or a
corporation organized under the
laws of the Philippines of which
at least sixty percent (60%) of
the capital stock outstanding and
entitled to vote is owned and
held by citizens of the
Philippines, or a corporation
organized abroad and
 4B 2020-2021
Notes for Merc Rev 1

registered as doing business in Q: Is a corporation considered foreign if

the Philippines under the its laws do not allow Filipino citizens and
Corporation Code of which corporations to transact business in its
100% of the capital stock own country or State?
outstanding and entitled to vote A: It is still a foreign corporation for as long
is wholly owned by Filipinos or as it is formed, organized or existing under
a trustee of funds for pension or laws other than those of the Philippines but it
other employee retirement or will not be allowed to transact business in the
separation benefits, where the Philippines. License to engage in business in
trustee is a Philippine national the Philippines will only be granted to a
and at least sixty percent (60%) foreign corporation whose laws allow
of the fund will accrue to the Filipino citizens and corporations to do
benefits of the Philippine business in its own country or State, under the
nationals. .." (Emphasis principle of reciprocity.
supplied)
Q: Does a foreign corporation have the
Discussion:
right to transact business in the
Meaning it should have a license to do
Philippines?
business in the Philippines. You of course
A: A foreign corporation can only transact
know that investments in equity generally
business in the country or State where it is
does not mean having to procure a license
formed, organized or existing. It shall have
from the SEC because investment in equity is
the right to transact business in the
not tantamount to doing business. But if it is
Philippines only after obtaining a license for
a foreign corporation, wholly owned by
that purpose from the SEC in accordance
Filipinos, to be considered Philippine
with the RCC and a certificate of authority
National and therefore may invest in equity
from the appropriate government agency.
or do business in the Philippines that foreign
corporation should obtain a license from the
Q: What is the legal consequence if a
SEC, so that should include to invest in
foreign corporation transacts business in
equity. Other than that, no need to secure a
the Philippines without the corresponding
license if you are just investing shares of a
license from the SEC?
domestic corporation.
A: No foreign corporation transacting
business in the Philippines without a license,
Slide:
or its successors or assigns, shall be permitted
Q: ABC Corporation was organized in
to maintain or intervene in any action, suit or
Malaysia but has a branch in the Philippines.
proceeding in any court or administrative
It is entirely owned by Filipino citizens. Can
agency of the Philippines; but such
you consider ABC Corporation a Philippine
corporation may be sued or proceeded
national?
against before Philippine courts or
A: Yes, it is considered a Philippine national
administrative tribunals on any valid cause of
as long as it is registered as doing business in
action recognized under Philippine laws.
the Philippines under the Corporation Code.
In other words, a foreign corporation doing
Section 1 of RA 7042, as amended by Section
business in the country, without a license,
1 of RA 8179
cannot sue but can be sued.

Page 213 of 351


Q: What is the primary purpose of the
license requirement for a foreign
corporation?
A: The primary purpose of the license
requirement is to compel a foreign
corporation desiring to do business within the
Philippines to submit itself to the jurisdiction
of the courts of the State and to enable the
government to exercise jurisdiction over it
for the regulation of its activities in this
country. If a foreign corporation operates a
business in the Philippines without a license,
and thus does not submit itself to Philippine
laws, it is only just that said foreign
corporation be not allowed to invoke them in
our courts when the need arises. Steelcase,
Inc. vs. Design International Selections, Inc.,
G.R. No. 171995, April 18, 2012.
By securing a license, the foreign entity
would be giving assurance that it will abide
by the decisions of our courts, even if adverse
to it. Eriks PTE. Ltd. vs. Court of Appeals,
G.R. No. 118843, February 6, 1997.
Q: State the principles governing the right
to sue and suability of foreign corporations
A: The following principles governing a
foreign corporation's right to sue in local
courts have long been settled, to wit:
a. if a foreign corporation does business
in the Philippines without a license, it
cannot sue before the Philippine
courts;
b. if a foreign corporation is not doing
business in the Philippines, it
needs no license to sue before
Philippine courts on an isolated
transaction or on a cause of action
entirely independent of any business
transaction; and,
c. if a foreign corporation does business
in the Philippines with the required
license, it can sue before Philippine
courts on any transaction.
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Q:So what confers upon a foreign
corporation the legal capacity to sue in
Philippine Courts?
Discussion:
A: 2 things either obtain a license from SEC
or it is suing on a casual or isolated
transaction. That is why if the foreign
corporation is suing in the Philippines, the
complaint must allege any of the two things
otherwise a motion to dismiss shall be filed
Slide:
It is not the absence of the prescribed license
but the "doing (of) business” in the
Philippines without such license which
debars the foreign corporation from access to
our courts. MR Holdings, Ltd. vs. Sheriff
Carlos P. Bajar, Sheriff Ferdinand M.
Jandusay, Solidbank Corporation, and
Marcopper Mining Corporation, G.R. No.
138104, April 11, 2002.
Tersely, the issue on whether a foreign
corporation, which does not have a license to
engage in business in the Philippines can seek
redress in Philippine courts depends on
whether it is doing business or it merely
entered into an isolated transaction. A foreign
corporation that is not doing business in the
Philippines must disclose such fact if it
desires to sue in Philippine courts under the
isolated transaction rule because, without
such disclosure, the court may choose to deny
it the right to sue. Llorente vs. Star City Pty
Limited GR Nos. 212050 & 212216, January
15, 2020.
LLORENTE VS. STAR CITY PTY LIMITED
Discussion:
 What happened in the case of
Llorente, the bank lost this case.
Llorente is a gambler, Star City is
located in Australia, it has no branch
in the Philippines. Llorente, when he
was in the Philippines, he purchased a
draft from Banco de Oro, thus the

latter issued a draft payable to the
order of Llorente.
 That draft was drawn against a bank
in Sydney. So Llorente is the payee,
he went to Australia, in Star City, to
play in their casino, and to be
upgraded and given certain privileges
he negotiated that draft to Star City,
thus the latter became the holder of
the draft.
 Llorente claims that Star City,
cheated him, so he issued a stop
payment order to Banco de Oro, and
the latter directed the drawee of the
draft not to pay Star City.
 So when Star City presented the draft
it was dishonored. Star City now filed
an action to the Philippines to enforce
the liability of Equitable PCI bank as
drawer of the draft and Llorente.
Q: Can Star City enforce the liabilities of
Banco de Oro?
A: Even though it has no license to do
business in the Philippines, the SC said that it
is a casual or an isolated transaction. The
enforcement of the warranties of a drawer is
a casual or isolated transaction, departed,
divorced or detached from the usual business
of Star City. Thus, it does not need a license
to sue in the PH.
Slide:
Q: What confers upon the foreign
corporation the legal capacity to sue in the
Philippines?
A: The foreign corporation has the legal
capacity to sue if it has procured from the
SEC a license to do business or it is suing on
a casual or isolated transaction.
For purposes of acquiring jurisdiction by way
of service of summons, there is no need to
prove first the fact that the defendant is doing
business in the Philippines. Where a
complaint alleges that the defendant has an
agent in the Philippines, summons can
validly be served thereto even without prior
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evidence of the truth of such factual
allegation. If in fact, a foreign corporation
does not do business here, that is a matter that
should be ventilated in the trial on the merits
but not in a motion to dismiss. Signetics
Corp. vs. Court of Appeals, G.R. No. 105141
(Resolution), August 31, 1993.
It does not follow that the insurer, as
subrogee, has also no capacity to sue in this
jurisdiction simply because the insured party
(which is a foreign corporation) has no legal
capacity to sue in the Philippines. The rights
inherited by the insurer pertain only to the
payment it made to the insured and which
amount it now seeks to recover from the
shipping company which caused the loss
sustained by the insured. The capacity to sue
is a right personal to its holder. It is conferred
by law and not by the parties. The insurer has
satisfactorily proven its capacity to sue, after
having shown that it is not doing business in
the Philippines, but is suing only under an
isolated transaction, i.e under the one marine
insurance policy issued in favor of the
consignee/insured. Lorenzo Shipping Corp.
vs. Chubb and Sons, G.R. NO. 147724, June
8, 2004.
Q: When is a foreign corporation deemed
doing business in the Philippines?
A: The term "doing business" is not
specifically defined by the OCC and the
RCC. There are certain activities, however,
which are deemed as doing business under
Republic Act No. 7042, otherwise known as
the Foreign Investments Act of 1991 (“FIA").
Under the FIA, doing business shall include:
a. soliciting orders;
b. service contracts;
c. opening offices, whether called
"liaison" offices or branches;
d. appointing representatives or
distributors domiciled in the
Philippines or who in any

calendar year stay in the country for
a period or periods totaling one
hundred eighty (180) days or more;
e. participating in the management,
supervision or control of any
domestic business, firm, entity or
corporation in the Philippines, and
f. any other act or acts that imply a
continuity of commercial dealings or
arrangements, and contemplate to
that extent the performance of acts or
works, or the exercise of some of the
functions normally incident to, and
in progressive prosecution of,
commercial gain or of the purpose
and object of the business
organization.
Discussion:
(A) Soliciting orders:
This is the case of BMW vs Hahn. Before
BMW entered into contracts with distributors
in the Philippines, a person accepts orders on
behalf of BMW and once a customer places
an order with this person it is faxed or sent to
Germany and BMW will send or ship the car
to the buyer.
Q: So is that doing business?
A: Yes, soliciting orders is doing business.
(B) Service Contracts:
Rendering services post-sale or after sale of
the product owned, manufactured and
produced by the foreign corporation.
(C) Opening offices:
Whether it is a liason office or a branch,
subsidiary, bottom line: the presence of the
foreign corporation in the Philippines by
opening offices is tantamount to doing
business.
(D) Appointment of Distributors:
Take note that there are 2 conditions so that
the appointment of a distributor warrants the
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conclusion that the foreign corporation is
doing business:
1. The distributor or Rep. is domiciled in
the PH for 180 days or more.
2. The Dist. or rep. is exclusive to the
foreign corporation without any
dependent operations.
The moment that the distributor has
dependent operations or not exclusive to the
FC then the presence of the distributor on
behalf of the FC does not mean that it is doing
business in PH
(E) Participation in the management:
Take note what amounts to doing business is
to participate in the management, supervision
or control, not just to become a SH of the
corporation. So passive investment in the
equity, be a SH of a domestic corp, exercise
the right of SH, enforcement of those rights
in case of violation, all of those can be
pursued by FC despite of lack of license.
Voting, receiving dividends, right of pre-
emption is violated so FC sued to enforce this
right, no need for a license
Q: What should the FC contend with if it
is just investment in equity? What is the
hurdle?
A: W/N the investment exceeds or within the
limit allowed by law for a certain type of
economic activity.
(F) Any other act or acts:
It says any other act, not necessarily more
than one act.
Q: So is it possible then that one act of a
FC means doing business?
A: SC said yes, SEC likewise said yes, the so-
called characterization test. If that one act is
of such a character that it shows the
intention of the FC to obtain the purpose of
incorporation here in the PH then that FC
needs the license from the SEC.
The classic example: The case of Hutchinson
vs, SBMA, 2000

HUTCHINSON VS. SBMA
Discussion:
FACTS:
 Hutchinson is a port operator, it is a
FC organized under the laws of Hong
Kong. It participated in the bidding
conducted by SBMA to operate the
Subic Bay port, local corporations
likewise participated.
 So basically, the committee awarded
the project to Hutchinson.
 On appeal, however, to the SBMA
Board, it reversed the committee and
granted the award to a local
corporation.
 It went to the OP which affirmed the
SBMA Board. So Hutchinson filed an
action to the RTC of Olonggapo with
prayer for issuance of injunction to
restraint SBMA from granting the
award to the local corp.
 SBMA moved to dismiss the
complaint on the ground that
Hutchinson has no license to do
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business in the PH and therefore
cannot have access to PH Courts.
 The argument of Hutchinson, we
have not won the bidding yet, we
have not been given the award to
operate the Subic Bay Port, we just
participate in the bidding, if we win
that's the time that we get a license.
ISSUE:
 W/N mere participation in the bidding
to operate Subic Bay Port by
Hutchinson is doing business in the
PH
RULING:
 Yes. As you can see that is only one
act, but it shows the intention of the
foreign corporation to obtain the
purpose of incorporation. It does not
stop there, in other words, it implies a
continuity if dealings.

DECEMBER 15, 2020
RECITATION
Recitation
Q: An investor purchased shares of stock
of ABC corporation, ABC sold securities
to investors and investors in our example
purchased shares from ABC Corporation
based on the statement made by the issuer
company in its registration statement,
basically highlighting the profits of ABC
corporation. It turns out that there was an
understatement of the loss and there and
overstatement of the income of the issuer
corporation, basically there is
misrepresentation. Well, the question is
what are the remedies available to Juan
dela cruz as a stockholder who bought
stocks based on false misrepresentation?
A: The remedy of the investor is to file a
complaint before the SEC for violation of the
RCC.
DD: So file a complaint, alright, with the
SEC?
A: The investor may file before the RTC
because it is an intra-corporate dispute.
DD: So he may file a petition which is
intra-corporate in nature, so what would
the relief be prayed for in the petition?
A: Collection for damages?
DD: Shouldn’t it be with the regular civil
courts?
A: The special commercial court has
jurisdiction because it is mere incidental.
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DD: What is your principal action to make
it corporate in nature?
A: It is the misrepresentation.
DD: It is the basis, the misrepresentation
but what will be your relief when you file a
petition with the RTC for intracorporate
controversy?
A: Reimbursement
DD: To get a REFUND to get the value of
the shares, on the value of the investment
and that cannot be done or and or
damages
DD: Can you not file a claim for refund
with the SEC for the value of the shares?
A: No, because the refund or refund is mere
incidental to the intracorporate dispute
DD: Can you ask the RTC to impose upon
the corporation who sold the shares based
on false representation?
A: The SEC can impose admin sanctions
DD: So you can file a petition with the
RTC to file a refund, but the RTC cannot
impose admin sanctions, on or against the
corporation, the directors, officers,
responsible for the violation. Can you not
ask the RTC to dissolve the corporation?
A: No, you cannot.
SECOND PERSON RECITATION
DD: Do you agree with [] that the remedies
available to the investor are to file a
petition with the RTC to refund the value
of the shares of investment plus damages,
and that the damages are only incidental
to the claim for refund and will not affect

the intracorporate nature of the petition
and second the RTC cannot impose
administrative sanctions, but it is the SEC
and the remedy is to likewise file a
complaint for violation of the SRC and the
imposition of the corresponding admin
sanctions?
A: Yes, I agree
DD: This is a cased penned by justice
leonen. When you want sanctions against
the corporation, you don’t ask it from the
RTC
A: Yes, you file it before the SEC because the
SEC has jurisdiction over administrative
cases over the corporation
Q: Does the filing of the petition for
intracorporate controversy preclude the
investor from filing a complaint with the
SEC for violation of the SRC and the
imposition of corresponding sanctions?
A: No, because the remedies under the SEC
are administrative in nature
Q: What are the remedies available to the
SEC against the corporation and
responsible directors and officers?
A:
1. The SEC may investigate the
corporation for
fraud/misrepresentation by
corporation or the persons, the
employees, the president, the BOD
2. Issue subpoenas in aid of the
investigation in order to have its
findings
3. If the SEC has reasonable basis that
the person or corporation has violated
or is about to violate the SRC the SEC
4B & 4C 2020-2021
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may impose sanctions after notice and
hearing
Q: What are the sanctions that may be
imposed under section 158 of the RCC?
A: The SEC may issue a monetary fine
Q: Is there a limit or a cap on the monetary
fine?
A: From 5,000 pesos to 2M pesos
Q: So there is a cap of 2M? So it can be
certain amount on a continuing basis but
not to exceed X amount. What else?
A: The temporary CDO may be made
permanent Cease and desist order
Q: What else?
A: It may suspend or revoke the certificate of
registration.
Q: What else?
A: It may dissolve the corporation.
Q: What else?
A: it may impose other than the admin
charges, the sec may endorse the evidence to
the DOJ to file a criminal complaint
the
the Q: What about sanctions applicable to the
directors and officers responsible for the
violation?
A: The persons may be held criminally liable.
Q: Can the SEC remove and suspend
them?
Page 219 of 351

A: Yes, the SEC can remove them from
service, and charge them criminally
DD: The evidence as adduced by the SEC
will be transmitted to the DOJ for the
conduct of criminal prosecution. Can the
SEC file directly to the court?
A: No.
Q: Can the SEC be a private complainant
against the corporation and responsible
directors instead of the private offended
party?
A: Yes. It may be the complainant
FOREIGN CORPORATIONS
Slide:
In Menthalatum Co Inc V. Anacleto
Mangaliman, the supreme court laid down
the jurisprudential test of what constitutes
“doing business” in the Philippines for
foreign corporations known as the “Twin
characterization Test”. Under this test, a
foreign corporation is considered to be
“doing business” in the Philippines when:
a. The foreign corporation is
maintaining or continuing in the
Philippines, the body or substance of
the business or enterprise for which it
was organized or whether it had
substantially returned from it and
turned it over to another
b. The foreign corporation is engaged in
activities which necessarily imply “a
continuity of commercial dealings
and arrangements, and contemplates,
to that extent, the performance of acts
or works or the exercise of some of
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the functions normally incidental to,
and in progressive prosecution of, the
purpose and object of its
organization”
Dean Divina:
This is very important because if a FC is
doing business in the Philippines, it needs a
license from the SEC, to transact business,
without it, it cannot have access to Philippine
courts, it will never have the legal capacity to
sue in the Philippines.
The first test in Mentolatum The FC is
engaged in activities that are intended to
accomplish the purpose for its incorporation.
It may be one act or series of acts, so long as
it is intended to achieve to the purpose of the
foreign corporation.
That’s why if the transaction is detached or
not related to the purpose of the corporation,
it is casual or isolated in nature which is why
the SC does not need a license to sue based
such transaction
SLIDE:
SCEH is deemed considered doing business
in the Philippines and thus, required to obtain
a license to do business from the SEC.
The activities SCEH proposes to undertake
shall be considered as “doing business” in the
Philippines since the twin characterization
test is satisfied in this case. First, the
following activities indicated that SCEH will
be continuing the body or substance of the
business of SCEH for which it was organized
in the Philippines to wit: (i) funding of the
SEN online wallet; (ii) offering and selling
SEN services (iii) accepting online payments
for using SEN in any currency, including
Philippine currency; (iv) marketing or
advertising and (v) hiring independent
contractors for marketing or advertising of its
products and the selling of prepaid cards in
relation to its online gaming services

Discussion of dean divina:
So the first test is the twin characterization
test is supported by SEC opinion and
jurisprudence.
The other test the sliding scale test is only an
SEC opinion not a supreme court decision
yet. If the FC has interactive website that is
intended to foster commercial interaction
with residents of country or state, it is doing
business, the FC does not need to have
physical presence.
For such reason, the FC needs a license
before it sues in the Philippines.
In W. Land v. Starwood: Starwood owns W
for W hotel and W. Land owns building in
BGC with W all over it. So W. Land filed a
trademark registration with IPO, opposed by
starwood because starwood used the W mark
first. W. land holding filed a petition to
abandon the W mark as there is no W hotel in
the Philippines, then there is no use of
trademark in the Philippines and it should be
deemed abandoned.
And the SC said, it may not have a hotel in
the Philippines but starwood offers its
services through the interactive website. So
since starwood offers this service, it
tantamounts to actual use, there is no reason
to declare as abandoned the trademark W. It
has the same application as the sliding scale
test.
Slide:
Second, the above-mentioned enumerated
activities are transactions consummated
within the Philippines although they are done
in a virtual plane.
Currently, most courts in the United States
apply a Sliding Scale Test tailored to internet
activities to determine the level or types of
activities that will constitute “minimum
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contracts” for jurisdictional purposes. This
sliding scale test is based on the premise that
“the likelihood that personal jurisdiction can
be constitutionally exercised is directly
proportionate to the nature and quantity of
commercial activity that an entity conducts
over the internet.
At one end of the scale are “passive”
websites, which alone generally do not
generate sufficient contacts with a foreign
state to establish personal jurisdiction since
they are only used to post information
therein. At the other end of the scale are
“active” websites, which generate sufficient
business over the internet to establish
personal jurisdiction. Interactive websites fall
in the center of the scale since they are hybrid
sites that contain elements of both passive
and active websites, and courts determine
whether to exercise personal jurisdiction over
the interactive website owner on a case-by-
case basis.
Slide:
Applying the sliding scale test, the SCEH has
“minimum contracts” with the Philippines.
The SEN online platform cannot be
considered as a passive website considering
that there will be sufficient contracts with the
SEN account users in the Philippines and
such platform is not used to merely post
information. In which case, the SEN online
platform should be considered as an “active
website” which, as above stated generates
sufficient contacts and business over the
internet since it offers for sale and is engaged
in the selling of the SEN content and services
to SEN account holders in the Philippines,
and, in the process, allows the funding of the
SEN online wallet by the SEN account holder
who is located in the Philippines. Clearly,
there exists in this case sufficient “minimum
contracts” between the foreign corporation
SCEH and the Philippines. Online Gaming,
SEC OGC Opinion No. 03-17 April 4, 2017

In sum, based on this SEC opinion, if a
foreign corporation has interactive website
intended to foster or facilitate commercial
interaction with Philippine residents is
considered as doing business and should,
therefore, procure a license from the SEC in
order to acquire the legal capacity to sue.
Slide:
Under the law on trademarks, the SC ruled
that offering hotel services through
interactive websites amounts to the actual use
of the trademark in the Philippines even
though the registrant may not have a hotel
actually operating in the Philippines. It is
only fair and just that the same principle is
applied to foreign corporations.
The differing treatment of investment in a
corporation and investment in a partnership is
based on a substantial distinction between the
said two forms of organization. In a corporate
setting, the stockholders, save in specified
rare instances when their concurrence is
necessary, do not manage the affairs of the
corporation, a function which belongs to the
Board of Directors/Trustees.
In contract, all the partners in a partnership
have an equal right in the management of the
business, each of them being considered as
agent who could bind the partnership, except
when the manner of management has been set
in the articles of partnership or in the case of
a limited partnership.
Thus, investment in a partnership does not
necessarily mean exemption from doing
busines since being a partner generally
entails management, supervision or control
of the partnership. W land holdings v.
Starwood hotels and resorts worldwide
Slide:
Investment in a partnership will only be akin
to an investment corporation that is exempt
from doing business rule only when the
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foreign corporation is exclusively a limited
partner and takes no part in the management
and control of the business operation of the
limited partnership. SEC OGC OPINION No.
01-14
Discussion of dean divina:
Investment of equity does not require a
license from the SEC. So mere passive
investment in equity does not need a license
from the SEC, what the FC needs to comply
with is the law on certain foreign ownership
allowed by law in nationalized activities
Investment in a partnership is not allowed if
it is a general partnership, thus a foreign
corporation cannot be allowed in the
management of the corporation if it is
involved in the management, it needs to get a
license
But if it is a limited partnership, no need to
get a license.
Q: May one act or transaction be
considered as doing businsess?
A: There is no general rule or governing
principle laid down as to what constitutes
“doing” or “engaging in” or “transacting”
business in the Philippines. Each case must
be judged in the light of it peculiar
circumstances. Thus, it has often been held
that a single act or transaction may be
considered as doing business when a
corporation performs acts for which it was
created or exercises some of the functions for
which it was organized. The amount or
volume of the busines sis of no moment, for
even a singular act cannot be merely
incidental or casual if it indicates the foreign
corporation’s intention to do business. A
foreign corporation engaged in ports
operation which participated in bidding to
operate the subic bay ports is considered as
doing business in the Philippines even though

it is only one transaction because it shows the
intention of the foreign corporation to attain
the purpose of its incorporation. Hutchinson
Ports Limites v. Subic metropolitan
Authority.
Discussion of dean divina:
In Litton Mills v. CA, a FC made a 1 time
purchase of soccer uniforms but involving
more than 3,000 pieces and since the FC is
engaged in sale of the jerseys, the one time
purchase is considered as doing business.
Slide:
Q: What activities are specifically
excluded under FIA as doing business?
A:
Under the FIA, the phrase “doing business”
shall not be deemed to include the following
activities:
a. Mere investment as a shareholder in a
domestic corporation duly registered
to do business and/or the exercise of
rights as such investor
b. Having a nominee director or officer
to represent its interest in such
corporation
c. Appointing a representative or
distributor domiciled in the
Philippines which transacts business
in its own name and for its own
account
d. Publication of a general
advertisement through any print or
broadcast media
Discussion of dean divina:
For letter a discussion:
To be a SH of a DC does not require a license
To vote the shares of stock in a corporation,
also does not require license
For letter b discussion:
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The rights of the director of the FC are
violated, it can be enforced even without a
license
If the rights of a stockholder are violated such
as the right of preemption, inspection,
financial right, appraisal right if these rights
of the FC may enforce those rights in the
Philippines without a license from the SEC
Any suit that is related to the enforcement to
the right of the FC as a stockholder does not
need to have a license
For letter c discussion:
There are two requisites so that the
appointment by the FC of a distributor in the
Philippines will be considered as an act of
doing business . First, The distributor
transacts business in the Philippines and the
distributor is exclusive to the foreign
corporation
In this situation, the distributor transacts
business for its own name and on its own
account, so it is not exclusive to the FC, so it
has its own business, so the appointment to a
distributor per se does not amount to doing
business. The distributor is just an extension
of the FC.
Slide:
e. Maintaining a stock of goods in the
Philippines solely for the purpose of
having the same processed by another
entity in the Philippines;
f. Consignment by FC of equipment
with a local company to be used in the
processing of products for export;
g. Collecting information in the
Philippines; and
h. Performing services auxiliary to an
existing isolated contract of sale
which is not on a continuing basis.
Discussion of dean divina: SLIDES WERE
JUST READ
 4B & 4C 2020-2021
Notes for Merc Rev 1

Slide: e. Where a foreign corporation engaged

in the manufacture and sale of
Cite jurisprudence where the supreme electronic products appointed a local
court ruled that the foreign corporation is electronics firm to be its local
doing business in the Philippines. technical representative and to create
a service center for the former’s
a. When a foreign corporation has
products sold locally and the latter
installed different products in several
was obliged to provide the foreign
Philippine corporations, registered its
corporation with a monthly report
tradename with the Philippine patents
detailing the failure and repair of the
office and has made it known that it
products and to the requisition
has as designated distributor in the
monthly the materials and
Philippines. Wang Laboratories Inc
components needed to replace stock
v. Mendoza
consumed. The arrangements with the
local entity indicate the foreign
b. When it solicited orders, purchase or
corporation’s purpose to bring about
service contracts through its Manila
the situation among its customers and
branch Marubeni Nederland v.
the general public that they are
Tensuan
dealing with the foreign corporation.
The provisions of the agreement are
also highly restrictive in nature thus
c. When it performs acts pursuant to its
reducing the local firm to a mere
primary purpose and functions as
extension or instrument of the foreign
regional/area head quarters for its
corporation. Communication
home office. George Grotjahn GBBH
materials and design inc v CA
& Co v. Isnani
f. The filing of collection suits by a
d. When a foreign corporation engaged
foreign corporation by a foreign
in the manufacture of uniforms
corporation, as an assignee to claims,
purchased thousands of soccer jerseys
does not constitute doing business in
from the Philippines since the
the Philippines. Aetna Casualty and
purchase was within its ordinary
Surety Co v. Pacific Star Line
course of business. When a single act
or transaction of a foreign corporation
is not merely incidentally or casual
but is of such character as distinctly to g. The mere act of exporting from one’s
indicate a purpose on the part of the own country, without doing any
foreign corporation to do other specific commercial act within the
business in the state, such act will be territory of the importing country,
considered as constituting doing cannot be deemed as doing business
business. Litton Mills inc v CA in the importing country.

Page 224 of 351


Otherwise, Philippine exporters by
the mere act alone of exporting their
products, could be considered by the
importing countries to be doing
business in those countries. This will
require Philippine exporters to secure
a business license in every foreign
country where they usually export
their products, even if they do not
perform any specific commercial act
within the territory of such importing
countries. Such a legal concept will
have a deleterious effect not only on
Philippine exports, but also on global
trade. Van Zuiden Bros Ltd.
h. A foreign company that merely
imports goods from a Philippine
exporter without opening an office or
appointing an agent in the
Philippines, is not doing business in
the Philippines. Cargill inc v Intra
strata Assurance corporation
i. The appointment of a distributor in
the Philippines is not sufficient to
constitute doing business unless it is
under the full control of the foreign
corporation. If the distributor is an
independent entity which buys and
distributes products, other than those
of the foreign corporation, doing
business for its won name and
account, the latter cannot be
considered as doing business. Steel
Case v. Design International
Selection.
Slide:
j. A foreign corporation may file a
petition to enforce a foreign arbitral
award even though it is not licensed
to do business in the Philippines.
When a party enters, into a contract
containing a foreign arbitration clause
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and submits itself to arbitration, it
becomes bound by the contract, by
the arbitration and by the result of
arbitration, conceding thereby the
capacity of the other party to enter
into contract, participate in the
arbitration and cause the
implementation of the result. Tuna
Processing Inc v. Philippine
Kingford. – so the foreign
corporation does not need a license
to file for the enforcement of the
arbitration award. Because by
entering into arbitration, the DC
agreed to be bound by the result.
k. A foreign corporation, if it is a holder
in due course of a draft, can file a suit
in the Philippines to enforce the
warranties of the drawer and endorser
after the drawee dishonored the
instrument. Llorente v. Star city pty
limited
Discussion of dean divina:
In all of these cases what are the common
denominators
1. Casual transactions/ isolated
transactions that are not intended to
accomplish the main purpose of the
foreign corporation for which it was
organized – they are independent and
detached by which the FC was
organized
2. No activities being undertaken or
done in the Philippines
These are indications that the FC is not doing
business in the Philippines.
Q: What are the cases when an unlicensed
FC may be allowed to sue?
A:

The following are instances when an
unlicensed foreign corporation may be
allowed to sue in the Philippine courts
a. If the foreign corporation is suing on
a casual isolated transaction
An isolated transaction will not result
in the enterprise being deemed as
doing business in the Philippines. The
phrase isolated transaction has a
definite and fixed meaning, a
transaction or series of transactions
set apart from the common business
of a foreign enterprise in the same
sense that there is no intention to
engage in a progressive pursuit of the
purpose and object of the business
organization. Lorenzo Shipping Corp
v. Chubb and sons
The ascertainment of whether a
foreign corporation is merely suing
on an isolated transaction or is
actually doing business in the
Philippines requires the elicitation of
atleast a preponderant set of facts, it
simply cannot be answered through
conjectures or acceptance of
unsubstantiated allegations.
Rimbunan Hiajau Group of
companies v. Oriental wood
processing.
Discussion:
In a complaint, you need to allege that it has
a license to transact business or it is suing on
an isolated transaction
Slide:
b. Action to protect the good name,
goodwill and reputation of a foreign
corporation
Foreign corporation not doing business in
the Philippines may sure here even if not
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licensed in order to protect intellectual
property rights. Under the Paris Convention
for the Protection of Intellectual Property
Rights, the Philippines is obligated to assure
nationals of countries of the Paris Convention
that they are afforded effective protection
against violation of their intellectual property
rights in the Philippines in the same way that
their own countries are obligated to accord
similar protection to Philippine nationals.
Converse Rubber Corporation v. Universal
rubber products.
Our obligation under the Paris
Convention is incorporated in section 3 of
RA 8293, otherwise known as the intellectual
property code.
Discussion of dean divina:
In the case of Harvard regarding the
trademark Harvard. Harvard is a well-known
mark, it belongs to the university in
Caimbridge.
Assuming Harvard is not registered in the
Philippines, can a college or university adopt
the trade name or trademark Harvard for the
name of the school? For the products or
goods of the school?
No. Because it is a well-known mark, and
being a well-known mark, it is entitled to
protection. So even if it is not registered in
the Philippines, Harvard can oppose the
registration of the trademark of Harvard for
related products or if a domestic corporation
uses the name, Harvard may file a case for
infringement.
This is because we have an obligation to
enforce the treaty of the paris convention and
since it since Harvard is owned by USA who
is a signatory to the Paris convention and it
is incorporated to the local statute, section 3
of the IPL we are bound to respect it.

Slide:
c. Where the contract provides the
Philippine court as the exclusive
venue for court action, to the
exclusion of other courts
Stipulation as to venue which is not
permissive but exclusive in nature is
binding to the parties.
Discussion:
If it is exclusive, then the foreign corporation
has no other option but to file in the
Philippines, otherwise a motion to dismiss on
improper venue may be filed.
Slide:
d. A license to engage in business
granted subsequent to the transaction
enables the foreign corporation to sue
on contracts executed before grant of
license.
In one case, the supreme court rules that
a contract entered into by a foreign
corporation not licensed to do business in
the Philippines is not void even as against
the erring foreign corporation. The lack
of capacity at the time of execution of the
contracts was cured by the subsequent
grant of a license to engage in business.
It was likewise held in this case that while
the grant of the license retroacts to the
date of the transaction, this is without
prejudice to criminal prosecution against
the foreign corporation for doing business
without a license. The basis of criminal
liability is section 144 of the OCC now
section 170 of the RCC THAT ANY
VIOLATION of the provisions of the
corporation code or its amendments not
otherwise specifically penalized therein
shall be punished by a fine or by
imprisonment (The RCC retained the
language but removed the penalty of
imprisonment)
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Discussion:
Contract entered into FC without a license is
not void, it is merely voidable and the defect
can be cured by getting a license.
While the contracts may be cured by the act
of obtaining a license, it is without prejudice
to criminal prosecution for doing business
without a license.
Slide:
In IENT v. Tullett Prebon, the supreme court
however, rules that its declaration in Home
insurance company v. Eastern shipping lines
that ”the prohibition against doing business
without first securing a license is now given
a penal sanction which is also applicable to
other violations of the corporation code under
the general provisions of section 144 of the
code” is unmistakably an obiter dictum. The
issue in the Home Insurance case was
whether or not a foreign corporation
previously doing business here without a
license has the capacity to sue in the courts
when it had already acquired the necessary
license at the time of the filing of the
complaints. The statement regarding the
supposed penal sanction was not essential to
the resolution of the case as none of the
parties was being made criminally liable.
Slide:
e. When the unlicensed foreign
corporation foreign corporation has
domestic corporation as a co-
plaintiff/petitioner
This is necessary to prevent multiplicity of
suits.
Discussion:
Let’s say we have a domestic borrower that
obtained loans from various lenders. Let’s
say the single borrower’s limit of a lender
bank, is not enough to accommodate the

single borrower’s unit for the borrower so
they need a group of lenders, it’s called a
syndicated loan agreement which means a
loan facilitated by various lenders its because
the loan is so huge that the SBL of a single
lender is not enough, so a pool is needed. one
of those lenders is a foreign corporation
There is a loan agreement signed by the
borrower and various lenders and it is
violated and one of the lenders filed in the
Philippines and the FC split the cause of
action and filed abroad it is impractical, so
the foreign corporation can join the lender
that filed here in the Philippines, and it does
need a license to avoid multiplicity of suits.
Slide:
Slide:
F. Under the doctrine of estoppel when the
counterparty is estopped or precluded from
questioning the lack of legal capacity of the
foreign corporation, as held in the following
cases:
A foreign corporation which licensed a
domestic corporation to manufacture and
market its products and equipment is doing
business in the Philippines and cannot sue the
domestic corporations if it has no license to
do business in the Philippines and cannot sue
the domestic corporations if it has no license
to do business in the Philippines. For being in
pari delicto, the domestic corporation cannot
ask the courts to prohibit the foreign
corporation from terminating its contact and
giving the license to produce and market its
products to another. Top-Weld
Manufacturing, Inc. vs. Eced, S.A., G.R. No.
L-44944, August 9, 1985; See also Granger
Associates vs. Microwave Systems, Inc., G.R.
No. 79986. September 14, 1990
Slide:
A foreign corporation doing business in the
Philippines may sue in the Philippine courts
although it has no license to do business here
against a Philippine citizen who had
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contracted with and been benefited by said
corporation where such party is aware that
the foreign corporation is doing business in
the Philippines without a license and received
benefits from transacting business with it,
under the principle of estoppel. Merril Lynch
Future, Inc. vs. Court of Appeals, GR NO.
97816, July 24, 1992
A party is estopped from challenging the
personality of a corporation after having
acknowledged the same by entering into a
contract with it. The principle is applied to
prevent a person contracting with a foreign
corporation from later taking advantage of its
non-compliance with the statutes, chiefly in
cases where such person has received the
benefits of the contract. Global Business
Holdings, Inc., vs. Surecomp Software, B.V.,
G.R. No. 173463, October 13, 2010;
Steelcase, Inc., vs. Design International
Selections, Inc., G.R. No. 171995, April 18,
2012.
Slide:
Q: Who may be a resident agent ?
A: A resident agent may be either an
individual residing in the Philippines or a
domestic corporation lawfully transacting
business in the Philippines: Provided, that an
individual resident agent must be of good
moral character and of sound financial
standing: Provided, further, That in case of a
domestic corporation who will act as a
resident agent, it must likewise be of sound
financial standing and must show proof that
it is in good standing as certified by the SEC.
Note that the removal of the resident agent
and the failure to appoint a replacement can
be a ground for revocation or suspension of
its license to do business. 2012 Bar Exam.
Discussion:
For a grant of a license in favor of a FC the
SEC requires that there must be a nomination
of a resident agent, he is authorized to receive

summons and other court processes, there is
a need to appoint so that the FC is subject to
the jurisdiction of the court and subject to
regulation by the SEC.
Q: Is the resident agent of a foreign
corporation doing business in the
Philippines necessarily authorized to
execute the requisite certification against
non-forum shopping?
A: The resident agent of a foreign corporation
doing business in the Philippines is not
necessarily authorized to execute the
requisite certification against forum
shopping. Under the Corporation Code, (then
and now) the resident agent was not
specifically authorized to execute a
certificate of non-forum shopping as required
by the Rules of Court. This is because while
a resident agent may be aware of actions filed
against his principal, such resident agent may
not be aware of actions initiated by its
principal, whether in the Philippines, against
a domestic corporation or private individual,
or in the country where such corporation was
organized and registered, against a Philippine
registered corporation or a Filipino citizen.
Expertravel & Tours, Inc. vs. CA, G.R. No.
152392. May 26, 2005.
Q: When may the SEC revoke or suspend
the license of a foreign corporation to
transact business in the Philippines?
A: Without prejudice to other grounds
provided under special laws, the license of a
foreign corporation to transact business in the
Philippines may be revoked or suspended by
the SEC upon any of the following grounds:
a. Failure to file its annual report or pay
any fees as required by the RCC;
b. Failure to appoint and maintain a
resident agent in the Philippines as required
by this Title;
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c. Failure¸ after change of its resident
agent or address, to submit to the SEC a
statement of such change as required by this
Title;
d. Failure to submit to the SEC an
authenticated coy of any amendment to its
articles of incorporation or bylaws or of any
articles of merger or consolidation within the
time prescribed by this Title;
e. A misrepresentation of any material
matter in any application, report, affidavit or
other document submitted by such
corporation pursuant to this Title;
f. Failure to pay any and all taxes,
imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or
any of its agencies or political subdivisions;
g. Transacting business in the
Philippines outside of the purpose or
purposes for which such corporation is
authorized under its license;
h. Transacting business in the
Phillipines as a agent of or acting on behalf
of any foreign corporation or entity not duly
licensed to do business in the Philippines; or
i. Any other ground as would render it
unfit to transact business in the Philippines.
Discussion:
It is long enumeration but to summarize:
1. Violation by the terms of its license
2. violation of the laws or rules issued
by the SEC governing FC
3. violation of foreign laws in so far as it
affects the foreign license of the
Philippines
Slide:
Upon the revocation of the license to transact
business in the Philippines , the SEC shall
issue a corresponding certificate of
revocation, furnishing a copy thereof to the
appropriate government agency in the proper
cases.

The SEC shall also mail the notice and copy
of the certificate of revocation to the
corporation, at its registered office in the
Philippines
TITLE XVI
Investigations, Offenses and Penalties
Slide:
F. Under the doctrine of estoppel when the
counterparty is estopped or precluded from
questioning the lack of legal capacity of the
foreign corporation, as held in the following
cases:
A foreign corporation which licensed a
domestic corporation to manufacture and
market its products and equipment is doing
business in the Philippines and cannot sue the
domestic corporations if it has no license to
do business in the Philippines and cannot sue
the domestic corporations if it has no license
to do business in the Philippines. For being in
pari delicto, the domestic corporation cannot
ask the courts to prohibit the foreign
corporation from terminating its contact and
giving the license to produce and market its
products to another. Top-Weld
Manufacturing, Inc. vs. Eced, S.A., G.R. No.
L-44944, August 9, 1985; See also Granger
Associates vs. Microwave Systems, Inc., G.R.
No. 79986. September 14, 1990
Slide:
A foreign corporation doing business in the
Philippines may sue in the Philippine courts
although it has no license to do business here
against a Philippine citizen who had
contracted with and been benefited by said
corporation where such party is aware that
the foreign corporation is doing business in
the Philippines without a license and received
benefits from transacting business with it,
under the principle of estoppel. Merril Lynch
Future, Inc. vs. Court of Appeals, GR NO.
97816, July 24, 1992
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A party is estopped from challenging the
personality of a corporation after having
acknowledged the same by entering into a
contract with it. The principle is applied to
prevent a person contracting with a foreign
corporation from later taking advantage of its
non-compliance with the statutes, chiefly in
cases where such person has received the
benefits of the contract. Global Business
Holdings, Inc., vs. Surecomp Software, B.V.,
G.R. No. 173463, October 13, 2010;
Steelcase, Inc., vs. Design International
Selections, Inc., G.R. No. 171995, April 18,
2012.
Slide:
Q: Who may be a resident agent ?
A: A resident agent may be either an
individual residing in the Philippines or a
domestic corporation lawfully transacting
business in the Philippines: Provided, that an
individual resident agent must be of good
moral character and of sound financial
standing: Provided, further, That in case of a
domestic corporation who will act as a
resident agent, it must likewise be of sound
financial standing and must show proof that
it is in good standing as certified by the SEC.
Note that the removal of the resident agent
and the failure to appoint a replacement can
be a ground for revocation or suspension of
its license to do business. 2012 Bar Exam.
Q: Is the resident agent of a foreign
corporation doing business in the
Philippines necessarily authorized to
execute the requisite certification against
non-forum shopping?
A: The resident agent of a foreign corporation
doing business in the Philippines is not
necessarily authorized to execute the
requisite certification against forum
shopping. Under the Corporation Code, (then
and now) the resident agent was not
specifically authorized to execute a

certificate of non-forum shopping as required
by the Rules of Court. This is because while
a resident agent may be aware of actions filed
against his principal, such resident agent may
not be aware of actions initiated by its
principal, whether in the Philippines, against
a domestic corporation or private individual,
or in the country where such corporation was
organized and registered, against a Philippine
registered corporation or a Filipino citizen.
Expertravel & Tours, Inc. vs. CA, G.R. No.
152392. May 26, 2005.
Q: When may the SEC revoke or suspend
the license of a foreign corporation to
transact business in the Philippines?
A: Without prejudice to other grounds
provided under special laws, the license of a
foreign corporation to transact business in the
Philippines may be revoked or suspended by
the SEC upon any of the following grounds:
a. Failure to file its annual report or pay
any fees as required by the RCC;
b. Failure to appoint and maintain a
resident agent in the Philippines as required
by this Title;
c. Failure¸ after change of its resident
agent or address, to submit to the SEC a
statement of such change as required by this
Title;
d. Failure to submit to the SEC an
authenticated coy of any amendment to its
articles of incorporation or bylaws or of any
articles of merger or consolidation within the
time prescribed by this Title;
e. A misrepresentation of any material
matter in any application, report, affidavit or
other document submitted by such
corporation pursuant to this Title;
f. Failure to pay any and all taxes,
imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or
any of its agencies or political subdivisions;
g. Transacting business in the
Philippines outside of the purpose or
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purposes for which such corporation is
authorized under its license;
h. Transacting business in the
Phillipines as a agent of or acting on behalf
of any foreign corporation or entity not duly
licensed to do business in the Philippines; or
i. Any other ground as would render it
unfit to transact business in the Philippines.
Slide:
Upon the revocation of the license to transact
business in the Philippines , the SEC shall
issue a corresponding certificate of
revocation, furnishing a copy thereof to the
appropriate government agency in the proper
cases.
The SEC shall also mail the notice and copy
of the certificate of revocation to the
corporation, at its registered office in the
Philippines.
TITLE XVI
Investigations, Offenses and Penalties
Q: Did the transfer of jurisdiction over
intra-corporate disputes from the SEC to
the RTC deprive the SEC of its
jurisdiction to determine if administrative
rules are violated?
A: Intra-corporate controversies, previously
under the SEC’s jurisdiction, are now under
the jurisdiction of RTCs designated as
commercial courts. However, this does not
oust the SEC of its jurisdiction to determine
if administrative rules and regulations were
violated.
The SEC vs. Subic Bay Golf case involves
the right to a refund of the value of shares
based on the Issuers’ alleged failure to abide
by their representations in their prospectus.
Specifically, the investors alleged in their
letter-complaint that the world-class golf
course that was promised to them when they
purchased shares did not materialize. This is
an intra-corporate matter that is under the
designated Regional Trial Court’s

jurisdiction. It involves the determination of
a shareholder’s rights under the Corporation
Code or other intra-corporate rules when the
corporation or association fails to fulfill its
obligations.
Slide:
However, even though the complaint filed
before the SEC contains allegations that are
intra-corporate in nature, it does not
necessarily oust the SEC of its regulatory and
administrative jurisdiction to determine and
act if there were administrative violations
committed.
The SEC is organized in line with the policy
of encouraging and protection investments. It
also administers the SRC.
Slide:
In relation to securities, the SEC’s regulatory
power pertains to the approval and rejections,
and suspension or revocation, of applications
for registration securities for, among others,
violations of the law, fraud, and
misrepresentations.
To ensure compliance with the law and the
rules, the SEC is also given the power to
impose fines and penalties. It may also
investigate motu proprio whether
corporations comply with the Corporation
Code and SRC, and rules implemented by the
SEC.
When the investors alleged in their letter-
complaint that the Issuers commited
misrepresentations in the sale of their shares,
nothing prevented the SEC from taking
cognizance of it to determine if the Issuers
commited administrative violations and were
liable under the SRC. The SEC may
investigate activities corporations under its
jurisdiction to ensure compliance with the
law.
Slide:
However, the SEC’s regulatory power does
not include the authority to order the refund
of the purchaser price of the investors’ shares
in the golf club. The issue of refund is intra-
corporate or civil in nature. Similar to issues
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such as the existence or inexistence of
appraisal rights, pre-emptive rights, and the
right to inspect books and corporate records,
the issue of refund is an intra-corporate
dispute that requires the court to determine
and adjudicate the parties’ right based on law
or contract. Injuries, rights, and obligations
involved in intra-corporate disputes are
specific to the parties involved. They do not
affect the SEC or the public directly. SEC vs
Subic Bay, ibid.
Slide:
In one case, the Supreme Court even affirmed
the power of the SEC to create a management
committee to perform and discharge, for a
period of one month, the functions of the
Management Committee under the Interim
Rules on Intra-Corporate Controversy
despite the fact that this is one of the powers
transferred to the RTC under the SRC. In this
case, the SEC acted on a letter-compliant of
one of the stockholders of Capitol Hills Golf
and Country Club alleging anomalies in the
corporation. The Management Committee
was created to prevent the paralyzation of the
corporation and preserve its assets and
protect the interest of the minority
stockholders. The Supreme Court ruled that
the SEC, as a regulator, has broad discretion
to act on matters that relate to its express
power of supervision over all corporations,
partnerships or associations who are the
grantees of the primary franchise and/or
license or permit issued by the Government.
Such a grant of an express power of
supervision necessarily includes the power to
create a management committee following
the doctorine of necessary implication.
Slide:
Q: What is the doctrine of primary
jurisdiction?
A: Under the doctrine of primary jurisdiction,
courts will not determine a controversy
involving a question within the jurisdiction of
the administrative tribunal, where the

question demands the exercise of sounds
administrative discretion requiring the
specialized knowledge and expertise of said
administrative tribunal to determine technical
and intricate matters of fact. The Securities
Regulation Code (“SRC”) is a special law. Its
enforcement is particularly vested in the
SEC. Hence, all complaints for any violations
of the SRC and its implementing rules and
regulations should be filled with the SEC.
Discussion: So you need to file it first with
the SEC if it is criminal in nature and if the
SEC finds that there is a violation, it will refer
it to the DOJ. There are some exceptions to
this case.
You Cannot bypass the SEC when it comes
to criminal violations like the SRC, if you do
so it will be dismissed.
The doctrine of primary jurisdiction is not
applicable to civil liabilities, you can directly
file it to the RTC no need to go to the SEC
first.
Slide:
In the case of Manuel Baviera vs. Standard
Chartered Bank, et al., Baviera was the
former head of the HR Service Delivery and
Industrial Relations of Standard Chartered
Bank-Philippines (“SCB”). SCB is a foreign
banking corporation duly licensed to engage
in banking, trust, and other fiduciary
business. It solicited from local residents
foreign securities called “GLOBAL THIRD
PARTY MUTUAL FUNDS” (“GTPMF”),
denominated in the US dollars. These
securities were not registered with the SEC.
Baveria entered into an Investement Trust
Agreement with SCB wherein he purchased
securities upon the bank’s promise of a 40%
return on his investment and a guarantee that
his money is safe. Unfortunately, Baveria
learned that the value of his investment went
down. After a few months, he demanded the
return of his investment but SCB rejected it
claiming Baviera’s investment is regular.
Baverie filed a criminal complaint against
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SCB and certain officials for violation of the
SRC. The DOJ dismissed Baviera’s
complaint for violation of the doctrine of
primary jurisdiction. Both the Court of
Appeals and the Supreme Court sustained the
Department of Justice.
Slide:
Q: What are the revisions under the RCC
on the powers and functions of the SEC?
A:
a. The SEC may investigate an alleged
violation of the RCC or any of its own rules,
regulations, or orders.
b. It may publish its findings, orders,
opinions, advisories, or information
concerning any such violation, as may be
relevant to the general public or to the parties
concerned, subject to the provisions of
Republic Act No. 10173, otherwise known as
the “Data Privacy Act of 2012”, and other
pertinent laws. The SEC, however, shall give
reasonable notice to and coordinate with the
appropriate regulatory agency prior to any
such publication involving companies under
their regulatory jurisdiction.
c. The SEC, through its designated
officer, may administer oaths and
affirmations, issue subpoena and subpoena
duces tecum, take testimony in any inquiry or
investigation, and may perform other acts
necessary to the proceedings or to the
investigations.
d. Whenever the SEC has reasonable
basis to believe that a person has violated, or
is about to violate the RCC, a rule, regulation,
or order of the SEC, it may direct such person
to desist from committing the act constituting
the violation.
Slide:
The SEC may issue a cease and desist order
ex parte to enjoin an act or practice which is
fraudulent or can be reasonably expected to
cause significant, imminent, and irreparable
danger or injury to public safety or welfare.
The ex parte order shall be valid for a
maximum period of twenty (20) days,

without prejudice to the order being made
permanent after due notice and hearing
Thereafter, the SEC may proceed
administratively against such person in
accordance with Section 158 of the RCC,
and/or transmit evidence to the Department
of Justice for preliminary investigation or
criminal prosecution and/or initiate criminal
prosecution for any violation of the RCC,
rule, or regulation.
e. It may cite for contempt, after notice
and hearing, any person who, without
justifiable cause, fails or refuses to comply
with any lawful order, decision, or subpoena
issued by the SEC and fined in an amount not
exceeding Thirty thousand pesos
(P30,000.00). When the refusal amounts to
clear and open defiance of the SEC’s order,
decision, or subpoena, the SEC may impose
a daily fine of One thousand pesos
(P1,000.00) until the order, decision, or
subpoena is complied with.
f. If, after due notice and hearing, the
SEC finds that any provision of the RCC,
rules or regulations, or any of the SEC’s
orders has been violated, the SEC may
impose any or all of the following sanctions,
taking into consideration the extent of
participation, nature, effects , frequency and
seriousness of the violation:
I. Imposition of a fine ranging from
Five thousand pesos (P5,000.00) to Two
million pesos (P2,000,000.00). and not more
than One thousand pesos (P1,000.00) for
each day of continuing violation but in no
case to exceed Two million pesos
(P2,000,000.00);
II. Issuance of a permanent cease and
desist oder;
III. Suspension or revocation of the
certificate of incorporation; and
IV. Dissolution of the corporation and
forfeiture of its assets under the conditions in
Title XIV of the RCC
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g. Certain violations of the RCC are
explicitly considered criminal offenses.
h. The penalty of imprisonment was
removed for violations of right of inspection
and other violation of the RCC. The
imposable penalty is a fine.
i. If the offender is a corporation, the
penalty may, at be discretion of the court, be
imposed upon such corporation and/or upon
its directors, trustee, stockholders, member,
officers, or employees responsible for the
violation or indispensable to its commission.
j. Anyone who shall aid, abet, counsel,
command, induce, or cause any violation of
the RCC, or any rule, regulation, or order of
the SEC shall be punished with a fine not
exceeding that imposed on the principal
offenders, at the discretion of the court, after
taking into account their participation in the
offense.
Discussion:
If these provisions are familiar to you, you
have read them in the SRC, about CDO,
subpoena, about fine of course the data
privacy are new most of these provisions are
found in the SRC, they are not a duplication.
These provisions are intended to enforce the
RCC, the same provisions in SRC are
intended to strengthen the powers of the SEC
to enforce and implement the SRC.
Q: What are the administrative sanctions
that the SEC may impose if it finds that
any provision of the RCC or any of the
SEC’s orders has been violated?
A: The SEC may impose administrative
sanctions against the corporation any or all of
the following sanctions, taking into
consideration the extent of participation,
nature, effects, frequency and seriousness of
the violation.
a. Imposition of a fine ranging from
Five thousand pesos (P5,000.00) to Two
million pesos (P2,000,000.00), and not more
than One thousand pesos (P1,000.00) for

each day of continuing violation but in no
case to exceed Two million pesos
(2,000,000.00);
b. Issuance of a permanent cease and
desist order;
c. Suspension or revocation of the
certificate of incorporation; and
d. Dissolution of the corporation and
forfeiture of its assets under the conditions in
Title XIV of the RCC.
It should be noted that the SEC also has the
authority to punish for contempt, issue
subpoena and summons, impose fines, and
suspend, revoke, after proper notice and
hearing, the franchise or certificate of
registration of the corporation under the SRC.
But these are distinct from the similar powers
and authority granted to the SEC under the
RCC. Obviously, the said powers of the SEC
under the SRC are for the purpose of
implementing the provisions of the SRC, its
rules and regulations while the similar
authority granted to the SEC under the RCC
is intended to enforce the RCC, its rules and
regulations.
Q: Is the involuntary dissolution imposed
when a corporation commits a violation of
the RCC a form of criminal sanction?
A: No, it is an administrative penalty.
Q: In what cases may SEC issue a cease
and desist order under the RCC?
A: The RCC contains two provisions
granting authority to the SEC to issue a cease
and desist order.
The first is Section 156, to wit:
“Whenever the SEC has reasonable
basis to believe that a person has violated, or
is about to violate this Code, a rule,
regulation, or order of the SEC, it may direct
such person to desist from committing the act
constituting the violation”
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The SEC “may issue a cease and
desist order ex parte to enjoin an act or
practice which is fraudulent or can be
reasonable expected to cause significant,
imminent, and irreparable danger or injury to
public safety or welfare” and the ex parte
order shall be valid for a maximum period of
twent (20) days. Said order may also become
permanent after due notice and hearing.”
Discussion:
The ex parte nature of the issuance of the
CDO seems to pertain only to restrain an act
which is fraudulent and unless that act is
restrained, it will cause danger to the public.
However, it is my submission that the
issuance of a CDO to restrain a possible
violation must be done ex parte, otherwise it
is too late
Slide:
While the RCC explicitly allows the issuance
of a cease and desist order ex parte only when
the act sought to be restrained is fraudulent or
can be reasonable expected to cause
significant, imminent and irreparable danger
or injury to public safety or welfare, it is
submitted that a cease and desist order may
also be issued by the SEC ex parte to enjoin
an actual or threatened violation of the RCC
any rule, regulation or order of the SEC,
consistent with the thrust of the RCC to
strengthen the regulatory powers of the SEC.
The other is Section 179 (f) which allows the
issuance of a cease and desist orders ex parte
to prevent imminent fraud or injury to the
public. This is almost identical though with
Section 156.
Slide:
Q: Is the power of the SEC to issue cease
and desist orders under the RCC the same
as its authority to issue similar orders
under the SRC?

A: They are different. The SRC is a different
sourcr of authority for the SEC to issue a
cease and desisit order.
The grounds under the CDO under SRC and
SEC are almost the same bu in the case of
GSIS v CA.
Slide:
In GSIS v. CA, GSIS was a stockholder of
Merlaco. It was able to obtain a cease and
desist order from the SEC to enjoin the Lopez
family, then the controlling stockholder of
Merlalco, from using and voting the proxies
in the election of directors, for alleged
violation of the SRC rules on proxy
solicitation. The CDO signed by only one
SEC commissioner, did not accordingly state
the exact provision of the SRC which was
violated. It was held that there are three
distinct bases for the issuance by the SEC of
the cease and desist order. The first, under
Section 5(i) of the SRC, is predicated on a
necessity “to prevent fraud or injury to the
investing public” No other requisite or detail
is tied to this CDO authorized under Section
5(i) SRC
Discussion:
We know what a CDO is it is basically an
injunction that the SEC issues to enjoin the
performance of an act but don’t call it an
injunction it has the same effect as an
injunction but from the perspective of the
regulator it is a cease and desist order. Even
though you have provisions on the issuance
of the CDO under the RCC you likewise have
the same provisions of issuance under the
SRC, they are almost identical. But the SC
said in the GSIS case that under the SRC
there are three provisions governing the
issuance of the CDO 5.i, 53.3, and 64.1
Slide:
The second basis, found in Section 53.3 of the
SRC, involves a determination by the SEC
that “any person has engaged or is about to
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engage in any act or practice constituting a
violation of any provision of the SRC, any
rule, regulation or order thereunder, or any
rule of an exchange, registered securities
association, clearing agency or other self-
regulatory organization.
The provision additionally requires a finding
that “there is a reasonable likelihood of
continuing [or engaging in] further or future
violations by such person.” The maximum
duration of the CDO issued under section
53.3. is 10 days
Slide:
The third basis for the issuance of a CDO is
section 64 of the SRC, This CDO is founded
on a determination of an act or practice,
which unless restrained, will operate as a
fraud on investors or is otherwise likely to
cause grave or irreparable injury or prejudice
to the investing public.
Discussion:
Even if there are three grounds for the
issuance of a CDO the SC said for the CDO
to be valid must specify the provision
applicable, is it under 5.1? 53.3? 64.1?
There is no such thing as a shotgun CDO. It
must be specified what law is violated.
Following gsis v ca, If the CDO is issued
under the SRC, the specific provision must be
mentioned, without reference to the provision
violated, it is void.
Also the CDO, it must be signed also by 3 out
of 5 commissioners, at least majority if
signed by one only as in the GSIS case, it is
void.
Slide:
Section 64.1 plainly provides three
segregrate instances upon which the SEC
may issue the CDO under this provision (1)
after proper investigation or verification (2)
motu propio or (3) upon verified complaint

by any aggrieved party. While no lifetime is
expressly specified for the CDO under
Section 64, the respondent to the CDO may
file a formal request for the lifting thereof,
which the SEC must hear within 15 days from
filing and decide within 10 days from the
hearing.
Slide:
It appears that the CDO under Section 5 (i) is
similar to the CDO under section 64.1. Both
require a common finding of a need to
prevent fraud or injury to the investing
public. At the same time, no mention is made
whether the CDO defined under Section 5 (i)
may be issued ex parte, while the CDO under
Section 64.1 requires grave and irreparable
injury, language absent in Seection 5 (i).
Notwithstanding the similarities between
Section 5 (i) and section 64.1, it remains clear
that the CDO issued under Section 53.3 is a
distinct creation from that under Section 64.
The CDO as contemplated in Section 53.3 or
in section 64, may be issued ex parte under
section 53.3. or without necessity of hearing
under section 64.1, Nothing in these
provisions impose a requisite hearing before
the CDO may be issued thereunder.
Nontheless, there are indentifiable requisite
actions on the part of the SEC that must be
undertaken before the CDO may be issued
either under section 53.3 or section 64. In the
case of section 53.3, the SEC must make two
findings: (1) that such persons has engaged in
any such act or practice, and (2) that there is
a reasonable likelihood of continuing or
engaging in further or future violations by
such person. In the case of Section 64, the
SEC must ajudge that the fact, unless
restrained will operate as a fraud on investors
or is otherwise likely to cause grave or
irreparable injury to the investing public.
Discussion of dean divina:
Background of the case: [Discussion of
Dean Divina]
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GSIS was a stockholder of Meralco together
with landbank and SSS, the government had
more shares than the Lopez family in meralco
but despite having more shares, the lopez
control Meralco and have more board seats
than the government. Hence, they control
Meralco because the minority SH and the
EEs who hold shares for meralco give the
proxies to the Lopez family, so if you add the
proxies to the shares owned by Lopez, the
Lopez had more shares and more proxies
The GM was Winston Garcia and so he asked
me how will he be able to accomplish the
objective of the lopez family ceasing control.
I said we should invalidate those proxies, so
the lopez family will be restrained from using
those proxies.
If you recall our discussion on RCC, what are
the limitations on the issuance of a proxy?
1. Must be in writing
2. Signed by the Stockholder
3. Filed with the corpsec before the
meeting
4. Only for the meeting intended
5. Not general, unless it is the intention
6. Not to exceed five years
7. For those shares held by the SB for
the benefit of their customers, it can
only be given with the consent of the
beneficial owners
8. The SRC provides that the solicitation
of the proxy, if done publicly must
comply with the proper requirements
In this case, the requirements under #8 were
not complied with, so now we have a ground
to invalidate the proxies
Q: So where do you go now? The SEC or
RTC?
A: initially it was filed with the RTC of pasay
where GSIS is located, just to confuse the

enemy so the RTC pasay has no jurisdiction
because this is not an ordinary civil dispute
so it is the rules on intra-corporate
controversy applies, so it should be filed in
the RTC of the city where the principal office
of Meralco is located or the SEC.
We filed it in Pasay first, withdrew it to
prevent forum shopping just to confuse the
enemy and we filed it before the SEC in the
afternoon, and a CDO was issued by the SEC
to restrain the Lopez family from voting by
the use of proxies that it would cause fraud
and irreparable injury to the public.
The Lopez family defied the CDO in this
case, arguing that the SEC has no jurisdiction
to issue a CDO to restrain the use of proxies.
That’s your ruling GSIS v. CA
Slide:
A singular CDO could not be founded on
Section 5.1, Section 53.3 and Section 64
collectively. At the very least, the CDO under
section 53.3 and under Section 64 have their
respective requisites and terms. It is an error
on the part of the SEC in granting the CDO
without stating which kind of CDO as it is an
act that contravenes due process of law.
Also, the fact that the CDO was signed, much
less apparently deliberated upon by only one
commissioner likewise renders the order
fatally infirm. The SEC is a collegial body
composed of a chairperson and 4
commissioners. In order to constitute a
quorum to conduct buisness the presence of
at least three commissioners is required.
Slide:
It is also in this case that the Supreme Court
rules that if the proxies were obtained on
matters which are intra-corporate in nature,
like the election of directors or determination
of quorum for the election of directors, any
issue about the validity and legality of the
proxies partakes of an election contest,
falling under the rules on intra-corporate
controversy and outside the jurisdiction of
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the SEC even though the petition may
ostensibly raise a violation of the SRC. If the
proxies were sought to be voted on any non-
intra-corporate matter, such as approval of
certain corporate acts under the RCC, the
SEC had jurisdiction to rule on issues related
to validation of proxies. This ruling was
reiterated in Securities and exchange
commission v. Omico and CA.
Discussion of dean divina:
To simplify the SC said: if the proxies will be
used in relation to election of directors, it is
an election contest it is cognizable by the
RTC by city where the principal office is
located if proxies will be used in non-
intracorporate items or any corporate acts
which require stock holders approval, the
SEC has jurisdiction.
Under the rules on intracorporate
controversy, the validation of proxies is part
of an election contest and is under
intracorporate use, thus if proxies are used in
the election of directors, it is cognizable by
the RTC.
The ruling was reiterated in Omico. The
corsec accepted as valid the proxies of
stockbrokers even if there was no written
consent from the beneficial owner. So those
proxies were admitted in favor of one
stockholder group, so the other sh group
claimed there was a violation because there
was a violation since there was no written
consent
The SC said that the proxies were used to
elect the directors of the corporation it is
cognizable by the RTC
If they are sought and be used on an
intracorporate matter, it is the RTC otherwise
the SEC will have jurisdiction.
Slide:
 4B & 4C 2020-2021
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allow their for keeping discretion

Q: What are the acts penalized under the inspection and of the court,
RCC and their corresponding sanctions or maintaining taking into
reproductio corporate considerati
Provision Violation Penalty n penalties records to on the
Section Unauthorized Fine comply with seriousness
159. use of a ranging sections 45, of the
Unauthoriz corporate from 73, 92, 128, violation
ed use of name P10,000 to 177 and other and its
corporate P200,000 pertinent rules implication
name; and s. When the
penalties provisions of violation of
Section When despiteFine the RCC on this
160. the ranging inspection provision is
Violation knowledge offrom and injurious or
of the existence
10,000 to reproduction detrimental
disqualifica of a ground 200,000 at of records to the
tion for the public, the
provision; disqualificati
discretion penalty is a
penalties on as
of the court, fine
provided in and ranging
section 26 of
permanent from
the RCC, thedisqualifica P20,000 to
director, tion form P400,000
trustee or
being a
officer. director, The
trustee or penalties
officer of imposed
any under this
corporation section
; if the shall be
violation is without
injurious or prejudice to
detrimental the SEC’s
to the exercise of
public, the its
fine ranges contempt
from powers
20,000 to under
400,000 Section 157
Section Unjustified Fine hereof.
161. failure or ranging Section Willful Fine
Violation refusal by the from 162. certification ranging
of duty to corporation, P10,000 to Willful of a report from
maintain or by those P200,00 at certificatio under the P20,000 to
records, to responsible the n of RCC, P200,000;

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incomplete, knowing that if the Obtaining for the from

inaccurate, the same wrongful corporate formation of a P200,000
false or contains certificatio registration corporation to
misleading incomplete, n is through through fraud P2,000,000
statements inaccurante, injurious or fraud; or who ; if the
or reports; false or detrimental penalties assisted violation of
penalties misleading to the directly or this
information public, the indirectly provision is
statements auditor or therein. injurious or
the detrimental
responsible to the
person may public, the
also be penalty is a
punished fine
with a fine ranging
ranging from
from P400,000
P40,000 to to
P400,000. P5,000,000
Section An Fine Section Conduct of Fine
163. independent ranging 165. the ranging
Independen auditor who, from Fraudulent corporation’s from
t auditor in collusion 80,000 to conduct of business P200,000
collusion; with the 500,000; if business; through fraud to
penalties corporation’s the penalties P2,000,000
director’s or statement ; if the
representratat or report violation of
ives certifies certified is this
the fraudulent provision is
corporation’s or has the injurious or
financial effect of detrimental
statements causing to the
despite injury to the public, the
containing general penalty is a
false of public, the fine raning
misleading auditor or from P400,
statements responsible 000 to
officer may P5,000,000
be punished Section A corporation Fine
with a fine 166. Acting used for ranging
ranging as fraud, or for P100,000
from P100, intermediar committing or to
000 to ies for graft concealing P500,000.0
P600,000 and corrupt graft and 0
Section Those Fine practices; corrupt
164. responsible ranging penalties practices as

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defined under be
pertinent prima
statutes facie
eviden
When there is ce of
a finding that corpor
any of its ate
directors, liabilit
officers, y
employees, under
agents or this
representative sectio
s are engaged n
in graft and Section A corporation Fine
corrupt 167. that appoints ranging
practices, the Engaging an from
corporation’s intermediar intermediary P100,000
failure to ies for graft who engages to
install and corrupt in graft and P1,000,000
practices; corrupt .00
a) Safeg penalties practices for
uards the
for the corporation’s
transp benefit or
arent interest
and Section A director, Fine
lawful 168. trustee or ranging
delive Tolerating officer who from
ry of graft and knowingly P500,000
servic corrupt fails to to
es; practices; sanction, P1,000,000
and penalties report or file
b) Polici the
es, appropriate
code action with
of proper
ethics, agencies,
and allows or
proce tolerates the
dures graft and
agains corrupt
t graft practices or
and fraudulent
corrup acts
tion committed by
shall a

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corporation’s penalized by a
directors, therein corporation
trustees, , the same
officers or may, after
employees notice an
Section Any person At the dhearing,
169. who, discretion be
Retaliation knowingly of the court, dissolved in
against and with be punished appropriate
whistleblo intent to with a fine proceeding
wers retaliate, ranging s before the
commits acts from SEC:
detrimental to P100,000 Provided,
a whistle to that such
blower such P1,000,000 dissolution
as interfering shall not
with the preclude
lawful the
employment institution
or livelihood of the
of the appropriate
whistleblower action
against the
A director,
whistleblower trustee, or
refers to any officer of
person who the
provides corporation
truthful responsible
information for said
relating to the violation:
SEC or Provided,
possible SEC further that
of any offense nothing in
or violation this section
under the shall be
RCC construed
Section Violations of Dine not to repeal
170. Other any of the less than the other
violations other P10,000 causes for
of the code; provisions of but not dissolution
separate the RCC or its more than of a
liability amendments P1,000,000 corporation
not otherwise ; if the provided in
specifically violation is the RCC.
committed Liability

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for any of This is based on the case of IENT v. Prebon,

the section 144 now 170 any violation of the code
foregoing other than those specifically penalized
offenses herein, those enumerated punishable by up to
shall be 1M pesos.
separate
from any Are the following penal in nature?
other
administrat Are they penal in nature?
ive, civil or
criminal Can you impose X amount against, directors?
liability Officers? The corporation itself?
under the
RCC and The supreme court said these are not penal in
other laws nature.

Q: What violations of the RCC are not Slide:

penal in nature?
A:
a. Persons who assume to act as a
corporation when they have no legal
authority to do so (Section 20, RCC)
– doctrine of corporation by
estoppel
b. Non-use of the corporate charter and
continuous non-operation for five
years (Section 21, RCC)
c. Acquiring an interest in conflict with
his duty as director or officer (Section
30, RCC)
d. Acquiring an opportunity which
belongs to the corporation (Section
34, RCC) – breach of corporate
opportunity is NOT a crime
e. Issuance of watered stocks (Section
64, RCC)
f. Failure to pay interest on subscription
(Section 65 RCC)
g. Failure to pay the balance of
subscription (Section 66, RCC)
h. A foreign corporation engaging in
business without a license (Section
150, RCC)
Discussion of dean divina:
Even though they are violations of the RCC,
they are not criminal in nature in the absence
of a clear legislative intent to criminalize
these acts.
In fact this is my submission, based on the
IENT case, it is submitted that all violations
of the RCC, save for those expressly
penalized under Section 159-169 of the RCC,
are not penal in nature. James IENT v Tulett
Prebon, supra.
Q: If the offender is a corporation, to
whom will the penalty be imposed?
A: Under section 171 of the RCC, if the
offender is a corporation, the penalty, may, at
the discretion of the court, be imposed upon
the corporation and/or its directors, trustees,
stockholders, members, officer or employees
responsible for the violation or indispensable
to its commission.
Moreover, anyone who shall aid, abet,
counsel command, induce or cause any
violation of the RCC, or any rule, regulation
or order of the SEC shall be punished with a
fine not exceeding that imposed on the
principal offenders, at the discretion of the

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court, after taking into account their
participation in the offense.
Slide:
Q: Does the SEC have prosecutorial power
to file information in court?
A: No, the SEC has no prosecutorial power.
If the SEC has reasonable basis to believe that
a person ahs violated the RCC or any of its
rules, and regulations, it may transmit the
evidence to the DOH for preliminary
investigation or criminal prosecution and/or
to initiate criminal prosecution for such
violation. By initiating criminal prosecution,
it mans that SEC will be the complainant
against the offender.
The only sanctions that SEC may impose are
administrative, not penal in nature
Discussion of Dean Divina:
The SEC like the BSP has no prosecutorial
power.
So either, it is endorsed by the SEC to the
DOJ where the complainant is a private
offended party or the SEC is the complainant
itself.
There was a group that accepted lab
donations and they issued certain certificates
the SEC claimed that this violates the rule on
selling unregistered securities.
There was no private complainant but the
SEC thinks it is a violation of the sale of
unregistered securities, so the SEC was the
complainant. The only sanctions the SEC
may impose are administrative in nature,
NOT penal.
So if you want to file a complaint for
violation of right of inspection, and the
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penalty is a fine, you file the complaint with
the prosecutor’s office.
What about the other provisions which have
a “fine”, You file a complain with the
prosecutor’s office, not with the SEC. Admin
may place fine through admin sanctions
under the SEC.
SECURITIES AND REGULATION
CODE
SRC
Recitation:
Q: Are the following securities?
Educational plans
A: Yes. They are securities, Primanila Plants
v. SEC: Pre-need plans, educational plans are
securities so they cannot be sold or offered to
the public without being registered with the
SEC. The SEC issued a CDO against the
company for selling educational plans
without being registered. There was no
complainant, motu proprio the SEC issued
the CDO because it may result to an injury to
the investing public
Q: Are checks securities?
A: Generally no if they are used to pay for an
obligation but if checks are used to obtain
funds for an investment, they can be.
In Gabionza v. CA: Generally no, if they are
used to obtain funds from the public, they
become securities thus, they cannot be sold to
the public without being registered with the
SEC.
Q: Are time shares securities?
A: Because the SRC enumerates what are
securities, so where will it fall

They are not shares of stock, not notes, not
debentures, what about asset back securities?
Will it fall under that category? No
Investment contracts? Investment contracts is
investment of money to an enterprise to
expect profits from the efforts of another
If you are a timeshare holder, it is not an
investment contract you do not earn profits,
you only use the facilities without earning
income
A: Time shares will fall under certificate of
membership, as proprietary or non-
proprietary. We took this up in the golf-club
case, it is proprietary if in addition to the
enjoyment of the privileges of membership,
the member is allowed to receive the assets
upon dissolution and liquidation if non-
proprietary not allowed to receive assets
upon dissolution, but in both cases they are
not entitled to income because it is non-stock,
so no income but they are securities by
express provision of law.
Q: Sale of condo unit, is the instrument
evidencing the sale a security?
A: It is not a security. It only discloses the
rights and obligations of the parties.
Q: What are securities?
A: [The answer is in the latter discussion in
the slides so I took the answer nalang from
the brief explanation]
It is participation or interest in the
corporation, commercial enterprise or any
profitmaking venture evidenced by any
contract, certificate of written instrument or
electronic venture
That’s why the sale of a condo unit is not a
security given that it is not a share,
participation of interest in a profit making
venture even though evidenced by a written
instrument
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Q: What about this scheme, a developer
constructed condo units and sold the same
to various owners, now these unit owners
have the option to surrender possession of
the units to the subsidiary of the
development corporation and the
subsidiary in turn will offer the condo
units and the income generated by the
scheme is shared between the subsidiary
for managing to units surrendered to them
and the owner of those units who
purchased and surrender possession back
to the subsidiary corporation. Is that
scheme, considered a security?
A: This is the case of Camp John Hay Corp
v. SEC. It was considered as an investment in
this case.
The purchase of the units is not a security but
the option to transfer the share for the
subsidiary is considered as a security.
Q: Is this scheme an investment contract?
A: Yes. The developer constructs, sells units
and the owner surrenders possession back to
the subsidiary and the subsidiary manages
and offers it for belithing to guests or
interested parties, they pay and then the
income deducting expenses shared by the
subsidiary and the owners of those units.
Q: What are the elements of the Howey
Test?
A: There is a contract, there is investment of
money, made in common, there is
expectation of profits primarily from the
efforts of another.
These elements are present in the scheme that
was described.

This what the supreme court said in the camp
john hay case, the SEC issued a CDO in this
case, it has the power to issue CDO because
it is an investment contract.
Q: What are the liabilities of a corporation
that sells securities that are not registered
with the SEC?
A: Civil, criminal and administrative
liabilities.
Q: What are those liabilities? Meaning, if
I sell unregistered securities, what are the
consequences?
So company sold securities that are not
registered, what are the civil liabilities?
Can the buyer get the money back?
A: The buyer can get the buyer back with
damages
Q: What about criminal liability?
What are the sanctions? Is it
probationable?
Is it more than 6 years or less than 6 years?
What is the range of the penalty?
A: It is not more than 7-21 years and a fine,
or both at the option or discretion of the court
Q: What about admin liabilities?
A: Same sanctions that may be imposed by
the SEC, the sanctions are the same but now
it is the violation of the SRC. Fine not
exceeding 2M pesos, CDO, dissolution,
suspension revocation, sanction against
officers
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LECTURE
SLIDE
Q: What are the ends sought to be
achieved by the enactment of the
Securities and Regulation Code (herafter,
SRC)
A: The ends sought to be achieved by the
enactment of SRC are embodied in the
declaration of State Policy under section 2
thereof which provides: The State shall
establish a socially conscious, free market
that regulates itself, encourage the widest
participation of ownership in enterprises,
enhance the democratization of wealth,
promote the development of the capital
market, protect investors, ensure full and fair
disclosure about securities, minimize if not
totally eliminate insider trading and other
fraudulent or manipulative devices and
practices which create distortions in the free
market.
Discussion of Dean Divina:
“free market that regulates itself” – means
that a market that is able to police its own
ranks, able to get rid by itself those who
commit shenanigans
“encourage the widest participation of
ownership in enterprises” – based on data and
statistics compared to new York, hongkong,
Tokyo not even 10% of our population are
involved in capital market. How many of us?
Not even 10%
“enhance the democratization of wealth” –
increase the wealth
Let’s take a look at insider trading, the law
acknowledges that it is impossible to

eliminate insider trading, it starts with the
aspiration to MINIMIZE it.
The declaration should say “eliminate”
insider trading, but here it’s as if that insider
trading cannot really be eliminated.
In sum, these ends can be divided into two:
(1) the development of the capital market
and (2) to protect the investing public
The development of the capital market, it is
subsumed by the first one, establish a socially
conscious and enhance wealth distribution –
all of these are for the development of the
capital market
And then to protect investors, why is there a
need to ensure full and fair disclosure about
securities, minimize if not totally eliminate
insider trading and other manipulative
devices and practices which create distortions
in the free market – to promote the investing
public
SLIDE
Q:What is the principal purpose of laws
and regulations governing securities in the
Philippines?
A: The principal purpose of laws and
regulations governing securities in the
Philippines is to protect the public against
nefarious practices of unscrupulous brokers
and salesmen in selling securities and to
protect the public against the imposition of
worthless ventures and the sale of securities
which have no basis at all.
Hence, securities law provide for a system of
registration of securities, registration of
brokers and dealers of securities, prohibitions
against manipulations and practices
detrimental to the investing public and
measures for the protection of investors.
Discussion of dean divina:
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There is our SRC and former securities act
patterned after the blue sky law, it is blue sky
law because beneath the blue sky there is
nothing but hollow clouds.
Q: How do we translate this into securities,
what is the most important provision of the
SRC?
A: That is as securities as defined by law shall
not be offered to the public unless registered
with the SEC.
Q: What does “registered” means
A: it means you need to apply for registration
with SEC, you need to get a permission to sell
securities from the SEC to the public,
securities as defined by law
Q: And how is the permit to sell issued by
the government?
A: When you comply with the requirements
for registration.
That’s why the law says you need to file a
registration statement – you need to apply for
registration of securities in so doing you need
to disclose all information about the issuer,
the one who will issue and sell the securities
and the securities that you will issue to the
public.
Therefore you need to include the name of the
issuer, who are the persons involved, the
directors, officers, nature of operations,
performance for the past five years, how the
proceeds of the funds to be generated how
will it be used, how will the funds be
deployed?
What is the nature of the securities? Are they
shares of stocks, bonds, notes?
Describe them, if they are SS are they
preferred? If they are preferred are they

participating? Non-participating? All the
things discussed in corpo will now come into
play when you discuss the nature and kind of
securities
The purpose is to inform the public so they
can make a decision whether or not they will
buy or sell those securities.
The law does not guarantee that the public
will make money when they invest in the
securities that the issuer will sell what the law
guarantees is that the public will be informed
before making a decision whether or not to
buy the securities offered by the issuer
This is accomplished by the system of
registration, making sure that the only
persons credited by SEC can deal with
securities, so brokers, dealers salesmen must
be accredited by the SEC
Without the system of registration, the public
will be deceived into buying securities which
are worthless, that are beautiful in the surface
but nothing in the surface
That’s why it’s Blue sky law, it is beautiful
but beneath it nothing but empty clouds.
EXAMPLE:
Let’s say a corp pre-covid would like to
construct a theme park that will rival
Sentosa in Singapore and ocean park in
HK, before covid but there is no point in
constructing a theme park now, Disney
land just laid off 38,000 employees because
very few go to the themed resorts. So
before covid, they wanted to construct a
theme park that will rival the best theme
parks in asia. And based on their estimate,
they need some legacy 3 billion pesos to
have the theme park, based on the specs
they want. They have 1-2 billion internally
generated but they need 1 billion more
from the public to finish the theme park.
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Can they just invite investors? Anyone
interested to become a member of this
theme park association later on? So you
will have the right to use the theme park to
be constructed, you will have an income
from the venture once it is fully
operational. Can this be done? Can you
just issue brochures? Invitations?
Through internet? Print media, to entice
the public to invest and join you in having
the best theme park? Can you do that? But
those are securities to sell in the public
because they will be entitled to have a
share or a participation interest in a profit
sharing venture. You need to apply first a
registration and get a permit to sell from
the SEC, you need to disclose all info about
you and the securities to be sold, you need
to do this otherwise, you will violate the
law, despite the best intentions
Slide
Q: Why is the SRC called a “truth in
securities law”?
A: The SRC is called truth in securities law
because it requires the issuer to make full and
fair disclosure of information about securities
being sold or offered to be sold within the
Philippines and penalizes manipulative and
fraudulent acts, devices and schemes. (Bar
2015)
Discussion of dean divina: Read lang the
slide
Slide:
Q: What are the salient features of the
SRC that are intended to protect the
investing public?
A:
The following are the salient features of the
SRC that are intended to protect the investing
public

1. Registration of securities prior to the
public sale (Sec. 8)
2. Rejection and revocation of
registration and securities (Section
13)
3. Regulation of preneed plans (Sec 16)
4. Protection of shareholder interests
(Sec 19)
5. Prohibitions on fraud, manipulations
and insider trading (Sec 24)
6. Regulations of securities market
professional (Sec 28) DD: Only those
accredited by SEC can deal with
securities
7. Revocation, refusal or suspension of
registration of brokers, dealers and
salesmen and associated persons (Sec
29)
8. Restrictions on “over the counter”
markets (Sec 32) – DD: over the
counter means to buy and sell
securities outside the facilities of the
stock exchange
Q: Can you buy and sell securities outside
the stock exchanged?
A: Yes, but it is expensive because it is
subject to CGT of 50% in excess of 100k, but
if inside the facilities of the stock exchange,
lower – it is less expensive.
What is not allowed is to buy and sell
securities in your own exchange, using an
exchange that is NOT accredited by the SEC.
It is only the Philippine stock exchange that
is accredited, you can trade here.
9. Self-regulation of associations of
securities, brokers, dealers and other
securities related organizations (Sec
39) - DD: They are supposed to be
self regulating but not yet, they are
still regulated by the SEC. The
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intention is to make them self
regulating
10. Registration of clearing agencies (Sec
42)
11. Limitations on margin trading (Sec
49) – margin trading: bibili ka ng
shares through credit to be extended
by the broker, there is a limit to the
amount of loan to be extended
12. Civil liabilities from false statement
in the registration (Sec 56) –
DD: registration: whatever you put
on the registration, in the prospectus
(#13) it is what you give to
prospective buyers
To repeat, you applied to registration
you signed a document and applied
for registration for and if there is
falsity in the disclosure there is civil
liability
13. Civil liabilities from false statements
or omissions in the prospectus,
communications and reports (Sec 57)
– DD: There is a selling material you
give to the investors, the application
is with the SEC but the prospectus is
given to the investors, and there is
falsity in the prospectus, there is
likewise civil liability
14. Protection against
a. Manipulation of security prices,
manipulative and deceptive devices
(Section 59)
b. Fraud in pre-need plans and
commodities future contracts
(Section 60)
c. Fraudulent transactions (Sec 58)

d. Insider’s trading (Sec 61)
Establishment of trust fund to
compensate investors for extraordinary
losses or damage they may suffer
Slide:
Q: What are securities?
A: Securities are shares, participation or
interests in a corporation or in a commercial
enterprise of profit-making venture and
evidenced by a certificate, contract,
instruments, whether written or electronic in
character. It includes:
a. Shares of stocks, bonds debentures,
notes, evidences of indebtedness,
asset-backed securities;
b. Investment contracts, certificates of
interest or participation in a profit
sharing agreement, certificate of
deposit for a future subscription
Discussion of DD:
The most important provision of the SRC, we
need to know what are securities because
they cannot be sold or offered to be sold
without filing an RS with the SEC and permit
to sell issued by the SEC, issued only upon
filing of the proper Registration statement.
So even if it is a computer generated print –
out, if it is commercial it is a security.
The first sentence is the perfect definition of
securities but the same section also
enumerates what are securities, it also
enumerates the kinds and you need to commit
this into memory because this was already
asked twice in the bar. In case you don’t
remember all, at least the first sentence. If the
question is about an example or a nature of a
document whether or not it is a security, go
with the first sentence if you need to give an
example then you have to enumerate
accordingly the law as enumerated.
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B Discussion:
10 partners have exhausted their funds as
well as the funds of the partnership, they want
to expand the operations of the company but
they ran out of funds so they decided to issue
certificates of participation to potential
investors of the company, the public was
invited to be involved in the company, they
will not be considered partners but they will
have a right to receive income from the
partnership, before the partners and are
issued certificated of participation. This
cannot be done as they are securities so they
must be registered with the SEC.
Somebody asked me this question, what
about rappler what about PDRs – phil
depositary receipts
Are these shares of stock? This could be a
potential question because of ABS CBN
violation.
It is true that the shares daw of ABS CBN,
well ABS CBN is mass media, it should be
wholly owned by fiipinos but there are PDRS
but entitle the holders to certain rights and the
conclusion is that such PDRS are SS, thus
there is a violation of the constitutional
provision that mass media is wholly owned
by Filipinos
PDR – The concept is it will only entitle the
holder to receive income of the corp ahead of
the SH. This was first used by Jollibee, it was
engaged in retail, so before foreigners cannot
come be SH in so Jollibee, before this was not
allowed except when there is 2.5M capital.
So Jollibee issued PDRS, it will entitle the
holders even foreigners to share in the
income ahead of the preferred and common
share holders,

Are those SS? No, because if they have no
voting rights, they are not shares of stocks,
they are securities, just right to share to PDRs
cannot be issued without the permit to sell,
without the registration filed with the SEC
Q: what if it’s called PDRs but they will
have the same rights as stockholders? Like
they have the right to veto, where there
votes are needed to execute certain acts?
This is the story of rappler.
A: So the SEC said while these are PDRs in
name but given the rights of SH in reality
they are shares of stock bottomline is this, if
they are called PDRs in name but given rights
as stockholders, they are SS but if only right
to receive income, they cannot be sold
without being registered with the SEC.
Certificate of deposit for a future
subscription:
You remember the case of Republic v.
Securities and Credit Acceptance Corp – the
corp is allowed by its AOI to extend credit,
not allowed to solicit deposits of the public,
only allowed to extend credit.
It put branches around the country and
solicited deposits from various individuals
and they were cited by bsp, so central bank
claimed that this corporation was engaged in
banking without authority from central bank
so central bank initiated quo warranto
proceedings to oust the corp for exercising
banking powers
The bank argues they are not engaged in
banking because the deposits are only
deposits for future subscriptions, they are not
used for loans
Evidence shows that these were used for
loans, an element of banking was loans
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SC then said that even assuming if not used
for loans, only used for deposits for future
subscriptions, there is another law violated,
The SRC as these are securities and before
sold should be registered with the SEC
Slide:
c. Fractional undivided interests in oil,
gas or other mineral rights;
d. Derivatives like option and warrants;
e. Certificates of assignments,
certificates of participation, trust
certificates, voting trust certificates or
similar instruments – DD: We took
this up in SRC, what does the
stockholder whose shares of stock
subject of a voting trust agreement
(VTA) get in return for the
cancellation of the stock certificate
because when a VTA is entered into,
the stock certificates are cancelled,
well those VTA are considered
securities under the law
f. Proprietary or non-proprietary
membership certificates in
corporations; and
g. Other instruments as may in the
future be determined by commission
Slide:
Q: What are shares of stock?
A: Shares of stock are forms of securities
representing equity ownership of a
corporation, divided up into units which
indicate that the holder thereof has
proportionate interest in the issuing
corporation.
Slide:
Cite examples of evidence of indebtedness,
other than, notes, bonds and debentures.

Other examples include commercial paper,
also called CP which is a short-term debt
instrument issued by companies to raise
funds generally for a time period up to one
year. They are typically issued by large
corporations to cover short-term receivables
and meet short-term financial obligations.
Discussion of DD: So if it is commercial
paper it is subject to registration thus if not
registered it cannot be sold.
Slide:
Q: Are checks considered as securities?
A: Checks constitute mere substitutes for
cash if so issued in payment of obligations in
the ordinary course of business transactions.
But when they are issued in exchange for a
big number of individual non-personalized
loans solicited from the public, numbering
about 700 in this case, the checks ceased to
be such. In such a circumstance, the checks
assume the character of evidence of
indebtedness. Gabionza v CA
DD: When a corp issues checks as a means
of obtaining funds from the public, it is not a
mere substitute for cash but becomes an
indebtedness and should be registered with
the SEC
Slide:
Q: What are asset-backed securities?
A: It is a security whose income payments
and hence value are derived from and
collateralized by a specified pool of
underlying assets. For instance, when
consumers take out loans, their debts become
assets on the balance sheet of the lender.
The lender, in turn, can sell these assets to a
trust or “special purpose vehicle which
packages them into an asset-backed security
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that can be sold in the market. The SPV buys
it a discount then sells to the public
participations in the pool of underlying
assets. As the consumers pay their debts,
payments are proportionately distributed to
the holders of the ABS.
Discussion of DD:
It is called asset-backed because its security,
the value of which is based on the underlying
assets.
Example:
Warren buffet said that these ABS is a
weapon of mass destruction it was the
downfall of Liman brothers and various
investment houses and other banks that dealt
with institutions all over the world. That’s
why you have the 2007 financial crisis.
When you borrow money from the bank, the
bank conducts a credit investigation about
your background, about your capacity to pay,
about your means of payment and the bank
will only lend you if you can pay based on
investigation and if you have collateral
Let’s say a bank has 1B of loans, receivables
so the bank will collect based on the PN
So someone from wall street thought of an
idea, why can’t he buy 1B receivables from
the bank but it is bought at a discount, say
900M dollars, so this is what the liman
brothers did so it is true that there is a
discount but the bank need to extend effort to
collect and they have cash right away so what
will liman brothers do with these pool of
receivables?
They will sell it ng tingi tingi, sold in retail to
the counter parties of liman brothers, what do
you mean counterpaties those who deal with
liman brothers. Now these coumterparties
will sell to their own clients.
BDO is a counterpart of the Liman brothers
in the Philippines they will buy a portion and
sell it tingi tingi to various customers in the

Philippines, as the Original borrowers pay
their loan, then the payments are distributed
to the holders to the certificate of
participation
The banks in the states became lenient, they
did not conduct a thorough investigation and
resulted in the sub-prime mortgage since it is
packaged and sold to investment houses who
will sell to counter parties who will sell to
customers all over in the world. The banks
became very lenient in granting loans even to
those who cannot afford it.
If you are an investor in the Philippines, and
you are dealing with someone who is
reputable, Liman brothers were highly rated
and well known, they were insured by the
biggest insurer, and it was triple A rated so
what else can go wrong you have the biggest
insurer, so you can never go wrong
So what happened thereafter, it exploded,
those borrowers were not able to pay their
loans, and holder of the holders of certificate
of deposits were just holding empty
certificates
They stopped for a while and resurrected and
called it under a different name
In the Philippines, this cannot be sold unless
registered by the SEC
Slide:
Q: What is an investment contract?
A: Investment contract is an investment of
money in a contract, transaction or scheme
with the expectation of profits primarily from
the efforts of another.
Slide: TRUE or FALSE
The Howey Test is relevant in cases wherein
a person invests money in a common
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enterprise and is led to expect profits
primarily from the efforts of others.
DD: It is true. If it is principally based on the
efforts, That’s not howey test it must be
primarily
Slide:
The business scheme of power homes
unlimited corporation (power homes) is
that an investor will enroll under its
program, and the latter would be entitled
to recruit other investors and receive
commissions from the investments of those
directly recruited by him. Is power homes
engaged in the sale of securities which
must be registered?
A: Yes. A corporation allowing a principal
investor to enroll in its program by paying a
certain amount, which in turn entitles him to
be paid a certain amount if the recruit was
able to get a minimum recruitment of four (4)
investors, is engaged in the sale or
distribution of an investment contract.
DD: Why is it an investment contract?
A: because all the elements of an investment
contract are present in this case (1)
investment of money in an enterprise (2)
expectation of profits from various efforts of
another
Slide:
It must be registered with the SEC before its
sale or offer for sale or distribution to the
public, otherwise, the SEC cannot protect the
investing public from fraudulent securities is
founded on the premise that the capital
markets depend on the investing public’s
level of confidence in the system (Power
homes unlimited corporation v SEC GR
no.164182, February 26, 2008) 2010 bar
Slide:

Propsperity.com, Inc (PCI) sold computer
software and hosted websites without
providing internet service. It devised a
scheme in which a buyer could acquire from
it an internet website with 15-MB capacity.
At the same time, by referring to PCI his own
down-line buyers, a first-time buyer could
earn commissions, interest in real estate and
insurance coverage. Is PCI’s scheme
considered an investment contract which
requires registration?
A:
No. For an investment contract to exist, the
following elements refereed to as the Howey
test must concur (1) a contract, transaction or
scheme (2) an investment of money (3) the
investment is made in common enterprise (4)
expectation of profits (5) profits arising
primarily from the efforts of others. Network
marketing, a scheme adopted by companies
for getting people to buy their products
outside the usual retail system where
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products are bought from the store’s shelf and
where the buyer can become a down-line
seller, earning commissions from purchases
made by new buyers from whom he refers to
the person who sold the product to him, is not
an investment contract (Securities and
Exchange Commission v Prosperity Com Inc
GR No. 164197 January 25, 2012)
Discussion of DD:
The difference with powerhouse is that in this
case, it is just a pure referral scheme and just
investment of money. You refer a customer,
you get a commission and you get insurance
coverage, you can use the wifi privilege of
the company. No need to register with the
SEC.
In the first one, it is an investment contract
because you need to invest money first before
you get commission for the recruits you refer
to the company.
 4B & 4C 2020-2021
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A: No. They are covered by the insider

DECEMBER 17, 2020
trading.

Q: What is the consequence in case of a

RECITATION short swing transaction? Is there a crime
committed if the director, officer, or
stockholder engages in short swing
Q: Distinguish Insider Trading from Short
transaction? Is there a penal sanction
Swing Transaction.
because a director buys or sells shares of
A: Elements of Insider Trading:
stock within 6 months? How can it be a
1.) Buying or selling by an insider
crime?
2.) Buying or selling happened while the
insider has non-public material
Q: Is the rule on short swing transaction
information
intended to prevent fraud or just the
unfair use of information by directors,
In Short Swing Transaction, it is not
officers, or stockholders?
necessarily insider trading; but the director,
A: It is the unfair use.
officer, or the shareholder in the corporation,
Dean: It’s not about fraud but the unfair use
there is buying or selling of securities in the
of information obtained by directors,
span of 6 months.
stockholders, officers. That’s why it is not a
criminal offense.
Q: Who are covered by the rule on Short
Swing Transaction?
Q: What is the consequence if a person –
A: Directors, officers, and stockholders of the
director, officer, stockholder of the
corporation.
corporation engages in short swing
transaction?
Q: Stockholders owning what percentage
Dean: It pertains to the recovery of the profit
of the outstanding capital stock? Does it
earned – the short swing profit which should
cover all stockholders?
inure to the benefit of the issuer.
A: Controlling stockholders owning atleast
more than 10%.
Q: Can a stockholder file an action to
Dean: The coverage of insider trading is
recover profit from a short swing
broader than the persons covered insofar as
transaction on behalf of the issuer
short swing transactions.
corporation?
A: Yes.
Q: What about persons who have access to
material non-public information who are
not directors, officers, stockholders? Are
they likewise covered by the rule on short
Q: What are the conditions to enable a
swing transaction?
stockholder to file a suit on behalf of the

Page 255 of 351


issuing corporation to recover short swing
transaction profits?
Dean: 2 years from the discovery of the date
of transaction.
SECURITIES REGULATION CODE
Slide: Westmont Investment Corporation
(Wincorp) offered to the public “sans
recourse” transactions with the following
mechanics: Wincorp enters into a Credit
Line Agreement for a specific amount with
a corporation needing financial assistance
which the latter can draw upon in a series
of availments over a period of time. The
agreement stipulates that Wincorp shall
extend a credit facility on “best effort”
basis and that every drawdown by the
accredited borrower shall be evidenced by
a promissory note executed in favor of
Wincorp and/or the investor/s who
has/have agreed to extend the credit
facility. Wincorp then scouts for investors
willing to provide the funds needed by the
accredited borrower. The investor is
matched with the accredited borrower. An
investor who provides the fund is issued a
Confirmation Advice which indicates the
amount of his investment, the due date, the
term, the yield, the maturity and the name
of the borrower.
Are the “sans recourse” transactions
offered by Wincorp securities that must
registered with the Securities and
Exchange Commission (SEC)?
Discussion: This case is about whether or not
this arrangement is an investment contract.
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Wincorp basically enters into a credit line
agreement with a potential borrower, so that
the latter can draw or borrow X amount
within a certain period of time. That is why
there’s a period to draw on the line, and
borrow or obtain a loan.
Slide:
Yes. In this jurisdiction, the Supreme Court
employs the Howey test to determine
whether or not the security being offered
takes the form of an investment contract.
Under the Howey test, the following must
concur for an investment contract to exist:
(1) A contract, transaction, or scheme;
(2) An investment of money;
(3) Investment is made in a common
enterprise;
(4) Expectation of profits; and
(5) Profits arising primarily from the
efforts of others. Indubitably all of the
elements are present in the extant
case.
First, Wincorp offered what it purported to
be “sans recourse” transactions wherein the
investment house would allegedly match
investors with pre-screened corporate
borrowers in need of financial assistance.
Second, Ng Wee invested the aggregate
amount of P213,290,410.36 in the “sans
recourse” transactions through his trustees, as
embodied in the Confirmation Advices.
Third, prior to being matched with a
corporate borrower, all the monies infused by
the investors are pooled in an account
maintained by Wincorp. This ensures that
there are enough funds to meet large draw
downs by single borrowers.

Fourth, the investors were induced to invest
by Wincorp with promises of high yield.
In Ng Wee’s case, his Confirmation Advices
reveal that his funds were supposed to earn
13.5% at their respective maturity dates.
Fifth, the profitability of the enterprise
depended largely on whether or not Wincorp,
on best effort basis, would be able to match
the investors with their approved corporate
borrowers.
Apparent then is that the factual milieu of the
case at bar sufficiently satisfies the Howey
test. The “sans recourse” transactions are, in
actuality, investment contracts wherein
investors pool their resources to meet the
financial needs of a borrowing company.
(Virata v. Ng Wee, G.R. Nos. 220926,
221058, 221109, 221135 & 221218, July 5,
2017)
Discussion:
Basically, this is an investment contract that
should be registered first with the SEC.
Somebody asked me: “Why can’t Wincorp
just be the one to lend directly to the
borrower? Why facilitate or act as
middleman between the lender and the
borrower?” It’s because this type of
arrangement is subject to documentary
stamp tax and subject to reserve
requirement, if you are a bank. Only banks
can accept deposits from the public.
However, it is subject to reserve requirement
– a percentage of the deposit should be kept
by way of reserves in the form of government
securities. It is also subject to withholding tax
of 15%. Basically, Wincorp wants to save on
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taxes for the clients. But it forgot that there is
a law applicable – the SRC. It says that if all
of the elements of investment contract are
present, and the Howey test is present, then
such arrangement needs the approval of the
SEC before it can be launched to the public.
That approval can only be given upon filing
with the SEC of a registration statement
that contains all the information about the
issuer and the type of securities it will release
to the public.
Slide:
What is a Derivative?
It is a financial security with a value that is
reliant upon or derived from an underlying
asset or group of assets.
What are the kind of options?
1. Call option – it is an option but not
an obligation to buy assets at an
agreed price at a particular date
2. Put option – it is an option but not an
obligation to sell assets at an agreed
price at a particular date
3. Straddle – combination of both put
and call options
Discussion: Remember, derivatives like
options and warrants are securities. Let’s say
a person has the option to buy the shares of
ABC Corporation at P10 after 3 years. On the
third year, upon the period to exercise the
option, the security is worth P20 in the
market. So, he has the option to buy at P10
from the issuer company. Does it make sense
for him to exercise the option to buy at P10 if
it is doing P20 in the market? Yes. Because it
is cheaper.

What if it’s the other way around? The price
is P10 but doing only P5 per share on the
exercise date. Does it make sense to exercise
the option?
What about Put Option: PS, put option or
profit share – option to sell. Let’s say a person
buys an option to sell securities, shares of
stock of ABC Corporation for P10 per share
after 3 years. On the third year, it is doing at
P20 per share. Does it make sense for him to
sell share at P10 to ABC, if he can sell it to
the market for P20? It doesn’t make sense. He
would rather sell it to the market than sell it
to the issuing company.
Anyway, the issuer of the options must
register with the SEC because options are
considered securities.
Slide:
What is a warrant?
It gives the holder the option, but not the
obligation to subscribe shares of stock of a
company at a fixed price at a pre-agreed date.
Discussion:
This is warrant in the context of SRC, not
criminal procedure of course.
Slide:
What is the distinction between warrant
and option?
If warrants are exercised, the company will
issue new stocks thereby causing dilution of
existing stockholders. Exercising a call
option does not involve issuing new stock
since a call option is derivative instrument on
existing shares of the company.
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Discussion: Usually, warrants are linked or
tied up to debt instruments like a bond. Let’s
say ABC Corporation will issue a bond with
a yield in the market is at 8% interest per
annum. Now, this particular company or
conglomerate will issue a bond but will offer
to pay interest only at 4% per annum. Of
course, when this company is only offering
4% while it is doing 8% in the market, then
nobody will subscribe, nobody will invest.
But, if the bond is linked to a warrant that
gives the bondholder the option to subscribe
to shares of stock of the company, then that
4% may be attracted even though lower than
the market. The kicker(?) is that after X
period, the bondholder has the option but no
the obligation to subscribe to the shares of
stock of the company. So if the exercise price
is cheaper than market, then it makes sense to
exercise that option.
Slide:
What is a timeshare? Is it a security?
A timeshare sometimes called vacation
ownership is a property with a divided form
of ownership or use rights. These properties
are typically resort condominium units, in
which multiple parties hold rights to use the
property and each owner of the same
accommodation is allotted their period of
time.
Timeshare is a form of certificate of
membership therefore considered a security.
Slide:
Is a corporation registered with the SEC
authorized to sell timeshares to the public?

No. Corporate registration is just one of the
several requirements before it may deal with
timeshares. Under Sec. 8 of B.P. Blg. 178 or
the Revised Securities Act, all securities
required to be registered shall be registered
through the filing by the issuer or by any
dealer or underwriter interested in the sale
thereof, with the SEC, of a sworn registration
statement with respect to such securities.
Prior to fulfillment of all the other
requirements of Sec. 8, corporations are
absolutely proscribed under Sec. 4 from
dealing with unregistered timeshares, thus:
No securities, except of a class exempt under
any of the provisions of Section 5 hereof or
unless sold in any transaction exempt under
any of the provisions of Section 6 hereof,
shall be sold or offered for sale or distribution
to the public within the Philippines unless
such securities shall have been registered and
permitted to be sold as hereinafter provided.”
(Timeshare Realty Corporation v. Cesar
Lao 544 SCRA 254, February 11, 2008)
Discussion: The argument is: because the
company is registered with the SEC, then it is
also allowed to sell timeshare. As we know,
these are two different things. You need a
certificate of incorporation to be recognized
as a corporation. You need the approval of
the SEC to acquire legal personality. But you
need a separate permit or authority to be
able to sell timeshare to the public.
The company that popularized timeshare was
Fontana in Pampanga. At that time, they had
this concept of a waving pool just like the one
in Disney Resort in Florida. It caught the of
fancy of families that’s why they bought
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timeshare offered by Fontana. Now, it’s no
longer as it used to be. It lost its appeal.
Anyway, at the time it was issued, it needed
the approval of the SEC because timeshare is
a certificate of membership which is
considered as a security under the law.
Slide:
Philippine Palaces Realty (PPR) had been
representing itself as a registered broker
of securities, duly authorized by the
Securities and Exchange Commission
(SEC). On October 1996, PPR sold to
spouses Leon and Carina one (1)
timeshare of Palacio del Boracay for
US$7,500.00. However, its Registration
Statement became effective only on
February 11, 1998 after the SEC issued a
resolution declaring that PPR was
authorized to sell securities, including
timeshares.
On March 30, 1998, Leon and Carina
wrote PPR rescinding their purchase
agreement and demanding the refund of
the amount they paid, because the Palacio
del Boracay timeshare was sold to them by
PPR without the requisite license or
authority from the SEC. PPR contended
that the grant of the SEC authority had the
effect of ratifying the purchase agreement
(with Leon and Carina) of October 6, 1996.
Is the contention of PPR correct? Explain.
(2009 Bar)
No. The contention of PPR is not correct.
Timeshare certificates are considered
securities (Timeshare Realty vs. Lao, GR No.
158941, February 11, 2008) Under Section 8

of the Securities Regulation Code, no
securities shall be sold or offered for sale or
distribution in the Philippines without a
registration statement duly filed and
approved by the SEC. The permit to sell
should be issued before the actual sale or
distribution of the securities. The permit does
not retroact to the date of the actual sale.
Slide:
X has the following plans:
a. Organized the Tagaytay Country
Club, Incorporate.
b. Let the club buy a 10-hectare land
for P10M which will be developed
into a sports and health club
complete with an Olympic size
swimming pool, tennis and pelota
courts, bowling lanes, poo rooms,
etc.
c. Five of the P10M needed to develop
the club will be raised thru the sale
of certificates of membership.
d. The certificate of membership shall
give the purchaser the right to use
all club facilities, and shall be
transferable. It shall not, however,
give the purchaser any right in the
income or assets of the club. The
purchaser must also pay monthly
dues.
X wants to know whether the certificate of
membership is an investment contract and
hence, a security within the meaning of the
Revised Securities Act. What is your
opinion?
The certificate of membership, although not
providing for a right of income or right over
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club assets, gives, however, to the holder
thereof privileges on the use of club facilities,
that are of value and transferable. The
certificate is thus a security within the
meaning of the Revised Securities Act. (BAR
1982)
Discussion:
A certifiate of membership is not an
investment contract but a security within the
definition of the SRC. Remember the 6th
enumeration by Section 3 of the SRC:
Proprietary or nonproprietary membership
certificates incorporations; is considered as a
security independent of an investment
contract.
Slide:
What are the kinds of securities?
 Non-exempt securities
o These are securities that can
not be sold or distributed
within the Philippines unless
registered with the SEC.
 Exempt securities
o Dean: they can be issued,
sold, or distributed within the
Philippines even without the
registration statement filed
with the SEC.
 Securities sold on exempt
transaction
Slide:
What is the rule regarding sale or
distribution of securities within the
Philippines?

Securities shall not be sold or offered for sale
or distribution within the Philippines, without
a registration statement duly filed with and
approved by the Commission. Prior to such
sale, information on the securities, in such
form and with such substance as the
Commission may prescribe, shall be made
available to each prospective purchaser.
(Section 8.1, SRC). “Registration Statement”
is the application for registration of securities
required to be filed with the Commission
(Section 3.12, SRC)
Discussion: RS is not what you distribute to
the prospective buyers of the securities. It is
what you apply with the SEC. The
application must contain all the material
information about the issuer and the type of
securities that it will issue – director, officer,
stockholder, officers, nature of the business,
income for the last X years, how proceeds of
the funds are being deployed or utilized, and
other information as may be prescribed by the
SEC.
The prospectus is the document that also
contains all the information about the issuer
and the type of security to be issued to be
distributed to the buyer.
Slide:
Philippine Palaces Realty (PPR) had been
representing itself as a registered broker
of securities, duly authorized by the
Securities and Exchange Commission
(SEC). On October 6, 199, PPR sold to
spouses Leon and Carina one (1)
timeshare of Palacio del Boracay for
US$7,500.00. However, its Registration
Statement became effective only on
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February 11, 1998 after the SEC issued a
resolution declaring that PPR was
authorized to sell securities, including
timeshares.
On March 30, 1998, Leon and Carina
wrote PPR rescinding their purchase
agreement and demanding the refund of
the amount they paid, because the Palacio
del Boracay timeshare was sold to them by
PPR without the requisite license or
authority from the SEC. PPR contended
that the grant of the SEC authority had the
effect of ratifying the purchase agreement
(with Leon and Carina) of October 6, 1996.
Is the contention of PPR correct? Explain.
No. The contention of PPR is not correct. It
is settled that no securities shall be sold or
offered for sale or distribution in the
Philippines without a registration duly filed
and approved by the Commission. Corporate
registration is one of the requirements under
Section 8 of BP Blg. 178. (BAR 2009)
Slide:
“Securities” issued to the public are required
by law to be registered with –
a.) The Bangko Sentral ng Pilipinas;
b.) The Philippine Stock Exchange;
c.) The Securities and Exchange
Commission
d.) The Securities and Exchange
Commission and the Philippine Stock
Exchange
Slide:
ABC Corp. is engaged in the pawnshop
business involving cellphones, laptops and
other gadgets of value. In order to expand
its business and attract investors, it offered

to any person who invests at least
P100,000.00 a “Promissory Note” where it
obligated itself to pay the holder a 50%
return on investment within one month.
Due to the attractive offer, many
individuals invested in the company but
not one of them was able to realize any
profit after one month.
Has ABC Corp. violated any law with its
scheme? Explain.
Yes. ABC Corporation violated the
provisions of the Securities Regulation Code
that prohibits sale of securities to the public,
like promissory notes, without a registration
statement filed with and approved by the
Securities and Exchange Commission. (2016
Bar)
Slide:
Andante Realty, a marketing company
that promotes and facilitates sales of real
property through leverage marketing,
solicits investors who are required to be a
Business Center Owner (BCO) by paying
an enrollment fee of $250. The BCO is then
entitled to recruit their two other investors
who pay $250 each. The BCO receives $90
from the $250 paid by each of his recruits
and is credited a certain amount for
payments made by investors through the
initial efforts of this Business Center. Once
the accumulated amount reaches $5,000,
the same is used as down payment for the
real property chosen by the BCO.
b. What procedure must be followed under
the Securities Regulation Code to
authorize the sale or offer for sale or
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distribution of an investment contract?
(2010 Bar)
Prior to the sale or offering for sale or
distribution to the public of an investment
contract, the Issuer must file a registration
statement with and obtain a permit to sell
from the Securities and Exchange
Commission in accordance with Section 8 of
the Securities and Regulation Code.
Slide:
c. What are the legal consequences of
failure to follow this procedure?
The failure to follow this procedure shall give
rise to criminal, civil and administrative
liabilities. The penal sanction, upon
conviction, includes a fine P50,000 to
P5,000,000 and/or imprisonment of 7-12
years. It carries also civil liabilities such that
the purchaser can recover from the seller
(i) the consideration paid with
interest thereon, less the amount
of any income received on the
purchased securities, upon the
tender of such securities, or
(ii) damages if the purchaser no
longer owns such securities.
Furthermore, the Securities and Exchange
Commission may issue a cease and desist
order to enjoin the sale of the unregistered
securities and impose administrative
sanctions against the Issuer and its
responsible directors, officers and agents.
Slide:
What are exempt securities?
These are securities that can be sold or
distributed within the Philippines without

generally the requirement of registration
under SRC. These are the following:
(G2RIBO)
(a) Any security issued or guaranteed by the
Government of the Philippines, or by any
political subdivision or agency thereof, or by
any person controlled or supervised by, and
acting as an instrumentality of said
Government.
Dean: Need not be issued, but can
only be guaranteed by the
Government. That’s why Treasury
Bills can be sold to the public without
the need of registration. The
Katipunan Bonds issued to the public
by the Caloocan government. The
GSIS Retail Bonds.
Rationale: The government can never
go bankrupt. The public is adequately
protected.
(b) Any security issued or guaranteed by the
government of any country with which the
Philippines maintains diplomatic relations, or
by any state, province or political subdivision
thereof on the basis of reciprocity: Provided,
That the Commission may require
compliance with the form and content for
disclosures the Commission may prescribe.
Discussion: USA: Brady bonds,
Yankee bonds, JAPAN: Samurai
bonds
What if Taiwan will issue a bond here
in the Philippines? It will not be
exempt because we don’t have
diplomatic relations with Taiwan. We
only have diplomatic relations with
the People’s Republic of China.
(c) Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the
proper adjudicatory body.
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(d) Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, Housing and
Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.
(e) Any security issued by a bank except its
own shares of stock. (Section 9, SRC)
Discussion: That’s why banks can
issue certificates of deposits to
thousand of depositors. It can even
issue deposit certificates to a foreign
country.
If you notice, there’s a common denominator:
1. Issued or guaranteed by the
government
2. Issued or guaranteed by a corporation
supervised already by another
government agency
Slide:
The SRC exempts from registration the
securities issued by banking or financial
institutions mentioned in the law. Does this
exemption include reportorial
requirements?
No. Nowhere does it state or even imply that
the Bank, as a listed corporation is exempt
from complying with the reports required by
the assailed RSA Implementing Rules. The
exemption from the registration requirement
enjoyed by the bank does not necessarily
connote that it is exempted from reportorial
requirements. Having confined the
exemption enjoyed by the bank merely to the
initial requirement of registration of
securities for public offering, and not to the
subsequent filing of various periodic reports,
the SEC, as the regulatory agency, is able to
exercise its power of supervision and control
over corporations and over the securities
market as whole. Otherwise, the objectives of

the “Full Material Disclosure” policy would
be defeated since the petitioner corporation
and its dealings would be totally beyond the
reach of the Commission and the investing
public. (Union Bank of the Philippines v.
Securities and Exchange Commission,
G.R. No. 138949, June 6, 2001)
Discussion: These are two different things.
The exemption enjoyed by banks is just the
initial requirement of registration of
securities; not the various reports required by
the SEC as a regulatory body. Without the
filing of these reports like the GIS, financial
statements, reports of transactions, the SEC
cannot exercise fully its power of supervision
and control over corporations. The full and
fair disclosure policy will be defeated if the
bank in this case and its dealings will be
totally beyond the reach and knowledge of
the SEC and the investing public.
Slide:
What are transactions exempt from the
requirement of registration under the
SRC?
JF Is Selling Cake Sam BEST Quality. O?
(a) At any judicial sale, or sale by an
executor, administrator, guardian or receiver
or trustee in insolvency or bankruptcy.
Discussion: No matter how many
shares may be involved.
(b) By or for the account of a pledge holder,
or mortgagee or any other similar lien holder
selling or offering for sale or delivery in the
ordinary course of business and not for the
purpose of avoiding the provisions of this
Code, to liquidate a bona fide debt, a security
pledged in good faith as security for such
debt.
Discussion: This means to foreclose
a mortgage or a debt.
(c) An isolated transaction in which any
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security is sold, offered for sale, subscription
or delivery by the owner thereof, or by his
representative for the owner’s account, such
sale or offer for sale, subscription or delivery
not being made in the course of repeated
and successive transactions of a like
character by such owner, or on his account
by such representative and such owner or
representative not being the underwriter of
such security.
Discussion: This is different from
what we discussed on foreign
corporations. In the context of the
SRC, if you sell securities to 19 only,
exempt from registration. If you keep
on doing it to 19 only, and this 19 will
be the one in turn, to subsell another
19, it is no longer isolated. Also, if the
first 19 will also subsell, then it is no
longer isolated.
(d) The distribution by a corporation, actively
engaged in the business authorized by its
articles of incorporation, of securities to its
stockholders or other security holders as a
stock dividend or other distribution out of
surplus.
Discussion: If you are to issue stock
dividends to thousands of
stockholders, no need for registration.
(e) The sale of capital stock of a corporation
to its own stockholders exclusively, where no
commission or other remuneration is paid or
given directly or indirectly in connection
with the sale of such capital stock.
Discussion: You don’t sell capital
stock. You sell treasury sells. How do
we understand this transaction? It
means subscription to the
unsubscribed portion of the
authorized capital stock. So if you
have 100M pesos authorized capital
stock, and your subscribed shares is
50M pesos, the unsubscribed portion
is 50M, the issuance of those shares

taken from the unsubscribed portion
is not subject to registration as long
as the issuance of shares is made to
stockholders and no commission is
paid in connection with such sale.
Therefore, if the shares are to be sold
or issued to non-stockholders, it is
subject to registration. It is not
exempt.
What if issued to stockholders but the
corporation engaged an underwriter
to be the one to arrange for the
issuance and sale of securities? The
moment commission is paid, it is no
longer an exempt transaction.
(f) The issuance of bonds or notes secured by
mortgage upon real estate or tangible
personal property, where the entire mortgage
together with all the bonds or notes secured
thereby are sold to a single purchaser at a
single sale.
(g) The issue and delivery of any security in
exchange for any other security of the same
issuer pursuant to a right of conversion
entitling the holder of the security
surrendered in exchange to make such
conversion: Provided, That the security so
surrendered has been registered under this
Code or was, when sold, exempt from the
provisions of this Code, and that the security
issued and delivered in exchange, if sold at
the conversion price, would at the time of
such conversion fall within the class of
securities entitled to registration under this
Code. Upon such conversion the par value of
the security surrendered in such exchange
shall be deemed the price at which the
securities issued and delivered in such
exchange are sold.
Discussion: Let’s say ABC
Corporation will issue preferred shares to
non-stockholders (hence, subject to
registration). Supposing, the preferred shares
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have the following features: convertible if not
redeemed after 3 years. On the 3rd year, they
were not redeemed so the holder decided to
convert those preferred shares into common
shares. And because it is an obligation on the
part of the issuer, it will now have to issue
common shares in exchange of the preferred
shares. Question: Is the issuance of the
common shares in exchange for the preferred
shares subject to registration? Not anymore.
Because the issuance in this case is subject to
a right of exchange.
(h) Broker’s transactions, executed upon
customer’s orders, on any registered
Exchange or other trading market.
(i) Subscriptions for shares of the capital
stock of a corporation prior to the
incorporation thereof or in pursuance of an
increase in its authorized capital stock under
the Corporation Code, when no expense is
incurred, or no commission, compensation or
remuneration is paid or given in connection
with the sale or disposition of such securities,
and only when the purpose for soliciting,
giving or taking of such subscriptions is to
comply with the requirements of such law as
to the percentage of the capital stock of a
corporation which should be subscribed
before it can be registered and duly
incorporated, or its authorized capital
increased.
Discussion: These are subscriptions
to comply when you incorporate or
when you increase your capital stock.
(j) The exchange of securities by the issuer
with its existing security holders exclusively,
where no commission or other remuneration
is paid or given directly or indirectly for
soliciting such exchange.
Discussion: Let’s say magmamature
na yung securities ng issuer, so gusto
nya i-refinance. Kukunin niya yung

nagmature na in exchange for another
security.
(k) The sale of securities by an issuer to fewer
than twenty (20) persons in the Philippines
during any twelve-month period.
(l) The sale of securities to any number of the
following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement
plan maintained by the
Government of the
Philippines or any political
subdivision thereof or
managed by a bank or other
persons authorized by
the Bangko Sentral to engage
in trust functions;
(v) Investment company; or
(vi) Such other person as the
Commission may by rule
determine as qualified buyers,
on the basis of such factors as
financial sophistication, net
worth, knowledge, and
experience in financial and
business matters, or amount of
assets under management.
Discussion: Because they know what
it means to invest.
Slide:
Able Corporation sold securities to 21 non-
qualified buyers during a 15-month
period, without registering the securities
with the Securities and Exchange
Commission. Did Able Corporation violate
the Securities Regulation Code? Explain.
Yes. Under the SRC, securities shall not be
sold or offered to be sold to the public within
the Philippines unless the securities are
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registered with and approved by the
Securities and Exchange Commission. Public
means 20 or more investors. The fact that the
securities were sold during a 15-month
period is immaterial. (BAR 2015)
TRUE or FALSE?
The issuance by a corporation of
previously authorized but unissued capital
stock to exisying stockholders is not
automatically exempt from registration
and requires an application from
exemption with the Securities and
Exchange Commission.
True. (Nestle Philippines, Inc. v. Court of
Appeals, 203 SCRA 504, Under the Rules
and Regulations Implementing the SRC,
however, notice of confirmation of
exemption and payment of the fee in case of
exempt sale transactions are sufficient)
Discussion: What do you need to do if it’s an
exempt transaction? You have to give a
notice of confirmation of an exemption with
the SEC and pay the corresponding filing fee.
Securities issued by the Philippine
government are “exempt securities” and,
therefore, need not be registered with the
Securities and Exchange Commission
prior to their sale or offering to the public
in the Philippines. What is the rationale
behind this exemption?
The rationale for the exemption is that the
public is amply protected even without the
registration of the securities to be issued by
the government. (BAR 2015)

Assume that Greater Manila Telephone
and Telegraph Company, Incorporated
has 10,000 employees. It has a policy of
encouraging stock ownership among its
employees. Its Board of Directors, intends
to sell P2M worth of common stocks to
either (a) its managerial employees only
numbering about 1,000 or (b)
indiscriminately to all its 10,000
employees. In case it decides to sell to its
managerial employees only, does it have to
register its securities? How about if the
intended sale is to all employees?
Exempt transactions are those that do not
rewuire registration either because the law
itself exempts them therefrom or the SEC
finds that the enforcement of the registration
requirement is not necessary in the public
interest and for the protection of investors by
reaason of the amount involved or the limited
character of the public offering. The
proposed sales stated in the problem do not
strictly fall under any of the exempt
transactions in the law itself. (BAR 1989)
What is the distinction between exempt
securities and securities sold on exempt
transactions?
Any person applying for exemption shall file
with the SEC a notice identifying the
exemption relied upon on such form and at
such time as the SEC by the rule may
prescribe and with such notice shall pay to a
fee equivalent to one-tenth (1/10) of one
percent (1%) of the maximum value
aggregate price or issued value of the
securities.
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Exempt securities may be sold or distributed
within the Philippines, not subject to the
foregoing requirement.
Discussion: Basically, when you are certain
(absolutely sure) that your transaction falls
within the exempt transactions, you don’t
need to register with the SEC. You just need
to file a notice of exemption.
What if you are not sure?
The issuer will get a confirmation of
exemption from the SEC. They will apply
for a confirmation from the SEC itself that
this transaction is not subject to registration.
What if you think it’s exempt but it turns out
that it is not exempt?
Then, you are subject to all sanctions –
criminal, civil, administrative liabilites.
Slide:
Discuss the procedure for registration of
securities.
Preferred Shares Issuance
Discussion: Let’s take a look at issuance of
preferred shares given by a bank:
1. File an application for registration
statement with the SEC. This RS
contains a prospectus – the selling
 4B & 4C 2020-2021
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material that will be distributed to the permit to sell is the period

public once approved by the SEC. when the company can start
selling and distributing.
The RS must be signed by the Note: In some bond or security
following: issuances, the day after the issuance,
 CEO they will report to the public that its
 COO 12x oversubscribed. This is very
 CFO typical for conglomerates right after
 Controller the issuance. How can it be? You only
 Principal Accounting Office got the permit to sell and then right
 Corporate Secretary away it’s oversubscribed? It’s
because there can be pre-selling
 Expert, if any.
before the actual permit to sell.
 Selling stockholder (if any)
There’s no violation there as long as
the payments are not credited to the
Can the board of directors pass a
account of the issuer. It is just in the
resolution that the chairman will
account of the investment
be the one to sign the RS? No. The
manager/issuer.
law is clear on who will sign the
RS.
Listing - let’s say the preferred shares
Rationale: To ensure
have to be listed in the stock
completeness, materiality,
exchange. The registration of
truthfulness of the information
securities is independent from listing.
alleged in the application for
Listing is in the Philippine Stock
registration. These are the person
Exchange. By listing the shares, it
who will be responsible if it turns
only means you can trade the shares
out there is falsity,
using the facilities of the PSE.
misrepresentation, or omission on
a statement or information in the
So, when you issue to the public, you
application.
have to get the approval of the SEC.
Now, if you want to trade those
2. The SEC has 45 days to act on the
securities in the stock exchange, you
application. It may either reject,
have to apply for listing of shares in
approve, or require
the PSE.
correction/amendment. This can go
back and forth.
Keep this in mind: You don’t sell to
 Rejected: The grounds for
the PSE. You don’t buy from the PSE.
rejection pertained to the
The PSE is a marketplace for buying
issuer or the RS.
and selling of securities. That’s why
 Approved: A permit to sell
we have stock brokers accredited by
will be issued. The date of the

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PSE to do the buying and selling of
securities.
Section 13. Rejection and Revocation of
Registration of Securities.
13.1. The Commission may reject a
registration statement and refuse registration
of the security there-under, or revoke the
affectivity of a registration statement and the
registration of the security there-under after
the due notice and hearing by issuing an order
to such effect, setting forth its finding in
respect thereto, if it finds that:
All securities required to be registered under
Subsection 8.1 shall be registered through the
filing by the issuer in the main office of the
Commission, of a sworn registration
statement with respect to such securities, in
such form and containing such information
and documents as the Commission shall
prescribe. The registration statement shall
include any prospectus required or permitted
to be delivered under Subsections 8.2, 8.3
and 8.4. (Section 12, SRC)
In promulgating rules governing the content
of any registration statement (including any
prospectus made a part thereof or annexed
thereto), the Commission may require the
registration statement to contain such
information or documents as it may, by rule,
prescribe. It may dispense with any such
requirement, or may require additional
information or documents, including written
information from an expert, depending on the
necessity thereof or their applicability to the
class of securities sought to be registered.
(12.2)
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The information required for the registration
of any kind, and all securities, shall include,
among others, the effect of the securities
issue on ownership, on the mix of ownership,
especially foreign and local ownership. (12.3,
SRC)
The registration statement shall be signed by
the issuer’s executive officer, its principal
operating officer, its principal financial
officer, its comptroller, principal accounting
officer, its corporate secretary or persons
performing similar functions accompanied
by a duly verified resolution of the board of
directors of the issuer corporation. 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. Where the
registration statement includes shares to be
sold by selling shareholders, 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 also be filed. (Section
12.4, SRC)
(a) Upon filing of the registration statement,
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. The Commission shall prescribe
by rule diminishing fees in inverse proportion
to the value of the aggregate price of the
offering.
(b) Notice of the filing of the registration
statement shall be immediately published by
the issuer, at its own expense, in two (2)
newspapers of general circulation in the
Philippines, once a week for two (2)

consecutive weeks, or in such other manner
as the Commission by rule shall prescribe,
reciting that a registration statement for the
sale of such security has been filed, and that
the aforesaid registration statement, as well
as the papers attached thereto are open to
inspection at the Commission during
business hours, and copies thereof,
photostatic or otherwise, shall be furnished to
interested parties at such reasonable charge
as the Commission may prescribe. (Section
12.5, SRC)
Within forty-five (45) days after the date of
filing of the registration statement, or by such
later date to which the issuer has consented,
the Commission shall declare the registration
statement effective or rejected, unless the
applicant is allowed to amend the registration
statement as provided in Section 14 hereof.
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, is on its face
complete and that the requirements have been
complied with. (12.6, SRC)
The SEC may impose such terms and
conditions as may be necessary or
appropriate for the protection of the
investors.
Upon effectivity of the registration statement,
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. Any untrue
statement of fact or omission to state a
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material fact required to be stated therein or
necessary to make the statement therein not
misleading shall constitute fraud. (12.7,
SRC)
What are the grounds for rejection of
securities?
I-VER-C
a. The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provisions of this
Code, the rules promulgated pursuant thereto,
or any order of the Commission of which the
issuer has notice in connection with the
offering for which a registration statement
has been filed;
(iii) Has been or is engaged or is about to
engage in fraudulent transactions;
(iv) Has made any false or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities;
(v) Has failed to comply with any
requirement that the Commission may
impose as a condition for registration of the
security for which the registration statement
has been filed; or
(b) The registration statement is on its face
incomplete or inaccurate in any material
respect or includes any untrue statement of a
material fact or omits to state a material fact
required to be stated therein or necessary to
make the statements therein not misleading;
or
(c) The issuer, any officer, director or
controlling person of the issuer, or person
performing similar functions, or any
underwriter has been convicted, by a
competent judicial or administrative body,
upon plea of guilty, or otherwise, of an

offense involving moral turpitude and/or
fraud or is enjoined or restrained by the
Commission or other competent judicial or
administrative body for violations of
securities, commodities, and other related
laws.
For purposes of this subsection, the term
“competent judicial or administrative body”
shall include a foreign court of competent
jurisdiction as provided for under the Rules
of Court. (Section 13, SRC)
The SEC may compel the production of all
the books and papers of such issuer, and may
administer oaths to, and examine the officers
of such issuer or any other person connected
therewith as to its business and affairs. (13.2,
SRC)
If any issuer shall refuse to permit an
examination to be made by the Commission,
its refusal shall be ground for the refusal or
revocation of the registration of its securities.
(13.3, SRC)
Slide:
What are the prohibited acts relating to
manipulation of security prices?
It shall be unlawful for any person acting
for himself or through a dealer or broker,
directly or indirectly:
(a) To create a false or misleading appearance
of active trading in any listed security traded
in an Exchange or any other trading market
(hereafter referred to purposes of this Chapter
as “Exchange”):
(i) By effecting any transaction in
such security which involves no change in the
beneficial ownership thereof; (washed sale)
Discussion: Before Solaire, City of Dreams,
or Resorts World, there was one BW(?) who
was allowed to put up a casino. He partnered
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with Stanley Ho, the king of casinos in
Macau. BW listed its share in the stock
exchange. After listing, the price went up
from P3 per share to P128 in a span of 4
months. This is because they created an
illusion of active trading. It turns out, the ones
buying and selling are the same dummy
accounts owned by the business man and
persons allied with him. From P128, it
reached down to rock bottom of 70 centavos
per share.
(ii) By entering an order or orders for
the purchase or sale of such security with the
knowledge that a simultaneous order or
orders of substantially the same size, time
and price, for the sale or purchase of any such
security, has or will be entered by or for the
same or different parties; (improperly
matched order) or
Discussion: When you buy or sell, there is a
corresponding match order or buy order.
What’s wrong is that this is resorted to to
create an appearance of active trading.
(iii) By performing similar act where
there is no change in beneficial ownership.
Discussion: There could be other schemes or
other arrangements that could be devised in
the future which is not a washed sale or
improperly matched order, but the effect is
the same.
Discussion: Basically, a person or group of
persons create the illusion of active trading
thereby inducing the buying and selling of the
security through washed sale, improperly
matched order, and performing similar act
where there is no change in beneficial
ownership.
(b) To effect, alone or with others, a series of
transactions in securities that:
(i) Raises their price to induce the
purchase of a security, whether of the same
or a different class of the same issuer or of a

controlling, controlled, or commonly
controlled company by others;
(ii) Depresses their price to induce the
sale of a security, whether of the same or a
different class, of the same issuer or of a
controlling, controlled, or commonly
controlled company by others; or
(iii) Creates active trading to induce
such a purchase or sale through manipulative
devices such as marking the close, painting
the tape, squeezing the float, hype and dump,
boiler room operations and such other similar
devices.
(c) To circulate or disseminate information
that the price of any security listed in an
Exchange will or is likely to rise or fall
because of manipulative market operations of
any one or more persons conducted for the
purpose of raising or depressing the price of
the security for the purpose of inducing the
purchase or sale of such security.
(d) To make false or misleading statement
with respect to any material fact, which he
knew or had reasonable ground to believe
was so false or misleading, for the purpose of
inducing the purchase or sale of any security
listed or traded in an Exchange.
(e) To effect, either alone or others, any series
of transactions for the purchase and/or sale of
any security traded in an Exchange for the
purpose of pegging, fixing or stabilizing the
price of such security, unless otherwise
allowed by this Code or by rules of the
Commission.
No person shall use or employ, in connection
with the purchase or sale of any security any
manipulative or deceptive device or
contrivance. Neither shall any short sale be
effected nor any stop-loss order be executed
in connection with the purchase or sale of any
security except in accordance with such rules
and regulations as the Commission may
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prescribe as necessary or appropriate in the
public interest or for the protection of
investors. (24.2, SRC)
Discussion: It’s a long enumeration but the
common denominator is: you cannot engage
in any activity device, scheme, arrangement
to fix, manipulate, peg the price of security.
The price of security must be left to market
forces to decide. Not for a group of
stockholders or brokers to fix or manipulate.
Suppose “A” is the owner of several
inactive securities. To create an
appearance of active trading for such
securities, “A” connives with “B” by which
“A” will offer for sale some of his securities
and “B” will buy them at certain fixed
price, with the understanding that
although there would be an apparent sale,
“A” will retain the beneficial ownership
thereof.
(a) Is the arrangement lawful?
No. The arrangement is not lawful. It is
an artificial manipulation of the price of
securities. This is prohibited by the
Securities Regulation Code.
(b) If the sale materializes, what is it
called?
If the sale materializes, it is called a wash
sale or simulated sale. (BAR 2001)
What is a wash sale?
Define the following terms:
 Marking the Close – buying and
selling securities at close market in an
effort to alter the closing price of the
security

 Painting the Tape – engaging in the
series of transactions that are reported
publicly to give impression of activity
or price movement in a security
 Squeezing the Float – taking
advantage of a shortage of securities
in the market by controlling demand
side and exploiting market congestion
during such shortages to create
artificial prices
 Hype and Dump – engaging in
buying activity at increasingly higher
prices and then selling the securities
in the market at higher prices
 Improper Matched Orders –
engaging in transactions where both
the buy and sell orders are entered at
the same time with the same price and
quantity by different but colluding
parties
 Boiler Room Operations – a well-
organized operation where in a room
there would be well-trained salesmen
operating over several phones and
using high pressure sales talk to get
investors to invest in securities
offered
 Scalping – where a person, like an
investment advisor, purchases
securities for his own account before
recommending that security then
selling the share at a profit upon a rise
in the market price following the
recommendation
 Daisy Chain – a pattern fictitious
trading activity by a group of persons
who lure innocent people into the
scheme
 Flipping – operated when one office
buys a particular stock for customers
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while another office simultaneously
recommends that its customers sell
the stock, with the stock being shifted
from one office to another, and the
firm makes profit and the brokers
earn their commissions.
1. By the circulation or dissemination of
information that the price of any
security listed in the Exchange will or
is likely to rise or fall because of
manipulative market operations.
2. To make, regarding any security
registered on an exchange, any
statement which is false or misleading
with respect to any material fact, and
which he knew or had reasonable
ground to believe is false or
misleading.
3. To effect series of transactions for the
purpose of pegging, fixing or
stabilizing the price of such security
traded in an Exchange, unless
otherwise allowed by this Code or by
the rules of the Commission.
 Short Sale – a contract for sale of
shares of stock which the seller does
not own, or certificates which are not
within his control
 Stop-loss Order – direction by a
customer to his broker that if the
commodity touches the price named,
the broker shall close the trade at the
best available price.
What would be considered as unlawful
Acts in the Sale of any Equity Security?
It is unlawful for any beneficial owner,
director, or officer, directly or indirectly,
to sell any equity security of such issuer if

the person selling the security or his
principal does not own the security sold; or
a. If owning the security, does not
deliver it against such sale within
twenty (20) days thereafter, or does
not within five (5) days after such sale
deposit it in the mails (Sec. 23.3,
SRC)
b. No person shall be deemed to have
violated this subsection if he proves
that notwithstanding the exercise of
good faith he was unable to make
such delivery or deposit within such
time, or that to do so would cause
undue inconvenience or expense.
Discussion: This is what we call Short
Selling. Why will a person do short selling?
Halimbawa: he will speculate as to the price
of the security. He will sell at P100 per share
and he will get the proceeds of the sale. He
will then speculate that the price will go down
to P90 per share. He will use the generated
funds from the sale of the security that he
does not own to buy the securities he will
deliver later on it. The concept is selling of
securities that you do not own or can’t
deliver.
A complaint was filed with the SEC
against Abacus Securities Corporation,
Sapphire Securities Inc., and several other
persons, including Jose Maximo Cuaycong
III and Mark Angelo Cuaycong. It was
alleged that Jose Maximo engaged in
fraudulent and deceitful activities with the
complicity of Abacus, Saphire and the
other defendants. The complainants
prayed that all defendants be held jointly
and severally liable for all damages.
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Meanwhile, while the complainants and
Jose Maximo and Mark Angelo entered
into a compromise agreement. Can this
compromise agreement absolve Jose
Maximo and Mark Angelo from the civil
case?
Under the SRC, what is the Margin
Trading Rule?
Under the Margin Trading Rule, no
registered broker or dealer, or member of an
exchange shall extend credit on any security
an amount greater than whichever is higher
of:
a. 65% of the current market price of the
security;
b. 100% of the lowest market price of
the security during the preceding 36
calendar months, but not more than
75% of the current market price.
The purpose of the Margin Trading Rule is to
prevent excessive use of credit for the
purchase of securities. It is a counter to the
broker’s desire to generate more sales by
encouraging clients to buy securities on
credit. (BAR 2009)
What is meant by “Over-the-Counter
Markets” as provided in the Revised
Securities Act?
The term “Over-the-Counter Markets”
refers to markets made or created for the
purchase and sale of securities other than on
a security exchange. The SEC may provide
rules and regulations of transactions therein,

a violation of which renders the same or the
trading therein unlawful. (BAR 1982)
What is insider trading?
Insider trading is the buying or selling of a
security by an insider while in possession of
a material non-public information. (BAR
2015)
Discussion: The only instance where there
can be insider trading despite no buying or
selling is if an insider communicates material
non-public information to another who by
virtue of that disclosure becomes an insider
himself if the actual insider has reason to
believe that the person who received the
information will buy or sell the security.
Actual Insider –
 issuer, director, officer, person
controlling the issuer/stockholder
 any person who by reason of past or
current relationship gave or gives an
access to material nonpublic
information - lawyers, accountants,
financial advisers
 Official of the exchange (?)
 The SEC
 Any person who receives by
communication the foregoing
material nonpublic information from
any of the foregoing insider
 Tippee – he must receive material
nonpublic information by
communication. If he stumbles only
to a document that shows material
nonpublic information, that’s not
communication contemplated by law
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Constructive Insider
It shall be unlawful for an insider to sell or
buy a security of the issuer, while in
possession of material information with
respect to the issuer or the security that is not
generally available to the public, unless:
(a) The insider proves that the
information was not gained from such
relationship
(b) Other party selling to or buying
from the insider is identified, the
insider proves:
(i) that he disclosed the
information to the other party,
or
(ii) that he had reason to
believe that the other party
otherwise is also in possession
of the information. (Sec. 27.1)
What are the elements of insider trading?
The elements of insider trading are as
follows:
a. Purchase or sale of a security
b. The purchase or sale of the security
was done by an insider as defined by
law

c. The purchase or sale was done by the
insider while in the possession of
material non-public information.
Discussion:
Material – Likely to influence the
decision of a reasonable person to buy
or sell a security. The law does not
equate materiality with the amount of
the transaction.
Ex. Merger, President
resigns/replaced, declaration of
dividends, losses incurred, being part
of a suit
Nonpublic – it has not been disclosed
yet to the public. Even though
disclosed, the public has not the
chance to absorb the impact of the
information.
Ex. Director discloses the information
to the SEC and PSE, after 1 minute he
bought or sold securities. In that case,
it is nonpublic because the public has
not had the chance to absorb the
impact of the information.
We can be considered as insiders
because as lawyers, advisers, we are
given access to material nonpublic
information.
Slide:
Is there a violation of the rule against
insider trading if the insider did not make
any purchase or sale of security?
Generally, there can be no unlawful insider
trading without the purchase and/or sale of
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securities. Nevertheless, it shall be unlawful
for any insider to communicate material
nonpublic information about the issuer or the
security to any person who, by virtue of the
communication, becomes an insider as
defined in Subsection 3.8, where the insider
communication the information knows or has
reason to believe that such person will likely
buy or sell a security of the issuer while in
possession of such information. Section 27.3,
SRC)
Discussion:
Example, a lawyer assisting a client handling
the plan of merger between another
corporation. The lawyer calls up the wife
saying, “I’ll be home late. We are working on
the merger of these two companies.” What if
the wife buys after learning the impending
merger? There’s no doubt that the wife is an
insider because she received a material non-
public information from the husband who is
an insider. What about the husband? No,
because he has no reason to believe that his
wife will buy. He only made the disclosure
because he will be late for dinner. If he
discloses to his good friend broker, he will be
liable with the broker because he has reason
to believe that such person will likely buy.
Who is an insider?
“Insider” means: (a) the issuer; (b) a director
or officer (or person performing similar
functions) of, or a person controlling the
issuer; (c) a person whose relationship or
former relationship to the issuer gives or gave

him access to material information about the
issuer or the security that is not generally
available to the public; (d) a government
employee, or director, or officer of an
exchange, clearing agency and/or self-
regulatory organization who has access to
material information about an issuer or a
security that is not generally available to the
public; or (e) a person who learns such
information by a communication from any of
the foregoing insiders. (Section 3.8, SRC)
When is an information considered
material nonpublic for the purpose of
insider trading?
For purposes of insider trading, information
is “material non-public” 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;
or
(b) would be considered by a reasonable
person important under the circumstances in
determining his course of action whether to
buy, sell or hold a security. (Section 27.2,
SRC)
What are the penalties for unlawful
insider trading?
Unlawful insider trading renders the
violators civilly, criminally and
administratively liable.
a. Civil liability
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Any insider who violates Subsection 27.1 and
any person in the case of a tender offer who
violates Subsection 27.4 (a)(i), or any rule or
regulation thereunder, 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, contemporaneously
with the purchase or sale of securities that is
the subject of the violation, purchased or sold
securities of the same class unless such
insider, or such person in the case of a tender
offer, 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. (Section 61, SRC)
An insider who violates the rule against
insider trading by communicating material
non-public information, shall be jointly and
severally liable with, and to the same extent
as, the insider, by reason of his purchase or
sale of a security. (Section 61.2, SRC)
All suits to recover damages shall be brought
before the Regional Trial Court, which shall
have exclusive jurisdiction to hear and decide
such suits. The Court is hereby authorized to
award damages in an amount not exceeding
triple the amount of the transaction plus
actual damages.
Exemplary damages may also be awarded in
cases of bad faith, fraud, malevolence or
wantonness in the violation of this Code or
the rules and regulations promulgated
thereunder.
The Court is also authorized to award
attorney’s fees not exceeding thirty
percentum (30%) of the award.

b. Administrative sanctions
(i) Suspension, or revocation of any
registration for the offering of securities;
(ii) A fine of no less than Ten thousand pesos
(P10,000.00) nor more than One million
pesos (P1,000,000.00) plus not more than
Two thousand pesos (P2,000.00) for each day
of continuing violation;
(iii)Disqualification from being an officer,
member of the Board of Directors, or person
performing similar functions, of an issuer
required to file reports under Section 17 of
this Code or any other act, rule or regulation
administered by the Commission;
(iv) Other penalties within the power of the
Commission to impose.
c. Criminal liability
The imposition of the foregoing
administrative sanctions shall be without
prejudice to the filing of criminal charges
against the individuals responsible for the
violation. (Section 54.2, SRC)
Ms. OB was employed in MAS Investment
Bank. WIC, a medical drug company,
retained the Bank to assess whether it is
desirable to make a tender offer for DOP
Company, a drug manufacturer. OB
overhead in the course of her work the
plans of WIC. By herself and thru
associates, she purchased COP stocks
available at the stock exchange price at
P20 per share. When WIC’s tender offer
was announced, DOP stocks jumped to
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P30 per share. Thus, OB earned a sizable
profit.
Is OB liable for breach and misuse of
confidential or insider information gained
from her employment? Is she also liable
for damages to sellers or buyers with
whom she traded? If so, what is the
measure of such damages? Explain briefly.
OB is an insider (as defined in Subsection
3.8(3) of the SRC since she is an employee of
the Bank, the financial adviser of DOP, and
this relationship gives her access to material
information about the issuer (DOP) and the
latter’s securities (shares), which information
is not generally available to the public.
Accordingly, OB is guilty of insider trading
under Section 27 of the SRC, which requires
disclosure when trading in securities. OB is
liable for damages to sellers or buyers with
whom she traded. Under Subsection 63.1 of
the SRC, the damages awarded could be an
amount not exceeding triple the amount of
the transaction plus actual damages.
Exemplary damages may also be awarded in
case of bad faith, fraud, malevolence, or
wantonness in the violation of the SRC or its
implementing rules. The court is also
authorized to award attorney’s fees not
exceeding 30% of the award. (BAR 2004)
Discussion: What is debatable in this case is
that he only overheard. He did not receive the
information by communication. This is not an
actual case but a bar exam question.
X, who is the Executive VP of ABC
Corporation, a listed company, can be held
liable or guilty of insider trading if, he –
(BAR 2012)

a. Bought shares of ABC Corporation
when it was planning to acquire
another company to improve its asset
base, the news of which increased the
price of the shares in the Stock
Exchange.
b. Bought shares of XYC Corporation, a
sister company of ABC Corporation
when he learned that XYC
Corporation was about to also list its
share in the Philippine Stock
Exchange;
c. Bought shares of ZZZ Corporation
when he learned that ABC
Corporation would acquire ZZZ
Corporation;
d. All of the above.
Are persons whose relationship or former
relationship to the issuer gives or gave
them access to a fact of special significance
(material nonpublic information) about
the issuer or the security that is generally
not available, and one who learns of such
fact from an insider knowing that the
person from whom he learns the fact is
such an insider included in the definition
of “insiders”? What is an insider’s duty?
Yes. These people are insiders and have the
duty to disclose material facts which are
known to them by virtue of their position but
which are not known to persons with whom
they deal and which, if known, would affect
their investment judgment. (Securities and
Exchange Commission v. Interport
Resources Corporation, et al, G.R. No.
135808, October 6, 2008)
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You are a member of the legal staff of a law
firm doing corporate and securities work
for Coco Products Inc., a company with
unique products derived from coconuts
whose shares are traded in the Philippine
Stock Exchange. A partner in the law firm,
Atty. Buenexito, to whom you report, is the
Corporate Secretary of Coco Products.
You have long been investing in Coco
Products stocks even before you became a
lawyer.
While working with Atty. Buenixto on
another file, he accidentally gave you the
Coco products file containing the
company’s planned corporate financial
rehabilitation. While you knew you had
the wrong file, your curiosity prevailed
and you browsed through the file before
returning it. Thus, you learned that a
petition for financial rehabilitation is
imminent as the company could no linger
meet its obligations as they fall due.
Soon after, your mother is rushed to the
hospital for an emergency operation, and
you have to raise money for her hospital
bills. An immediate option for you is to sell
your Coco Products shares. The sale would
be very timely because of the price of the
company’s stocks is still high.
Would you sell the shares to raise the
needed funds for your mother’s
hospitalization? Take into account legal
and ethical considerations.
The sale if the shares does not constitute
insider trading. Although Atty. Buenixto, as
corporate secretary of Coco products, Inc.

was an insider, the information was not
obtained regarding planned corporate
rehabilitation by a communication from him.
The file was just accidentally given.
It would be unethical to sell the shares. Rule
1.01 of the Code of Professional
Responsibility provides, “A lawyer shall not
engage in unlawful, dishonest, immoral or
deceitful conduct.”
A lawyer should not only refrain from
performing unlawful acts. He should also
desist from engaging in unfair deceitful
conduct to conceal from the buyer of the
shares the planned corporate rehabilitation.
(BAR 2013)
Yenkell Cement Corporation (YCC) is a
public corporation whose shares are listed
at the PSE. It is 60% owned by Yenkell
Holdings Corporation (YHC) and 20% by
Yengco Exploration Inc. (YEI). The
remaining 20% is held by the public. YHC
is a private non-listed corporation which,
in turn, is 60% owned by Yatlas Mines Inc.
(YMI), and 40% by Yacnotan
Consolidated Inc. (YCI). On August 8,
2008, the Board of Directors of YEI passed
a resolution approving the acquisition of
50% and 25% of the shares held by YMI
and YCI, respectively, in the authorized
capital stock of YHC.
Yolly, one of the staff members in the
office of the Corporate Secretary of YEI,
was immediately asked to type the
resolution and file the disclosure with the
PSE and the Securities and Exchange
Commission (SEC). Before doing that, she
secretly called her brother who works with
a stock brokerage company, to purchase,
in the name of Yolly's husband, 5,000
shares in YCC. After the acquisition was
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disclosed to the SEC and the PSE, the
market price of YCC increased by 50%.
Can Yolly be held liable for insider
trading? (2018 Bar)
Yolly cannot be held liable for insider
trading. Insider trading is the buying and
selling by an insider while in the possession
of a material non-public information. While
Yolly is an insider because by reason of her
relationship with the Issuer, she has access to
material non-public information. However,
Yolly did not but the shares. She is liable
under in that an insider he discloses the
information to broker WHO presumably will
buy the shares.
Mr. P., the president of JKL, Inc. which
shares are listed in the Philippine Stock
Exchange, was notified that the
corporation has just been awarded a
P5,000,000,000.00 construction contract
by a reputable private company. Before
this information could be disclosed to the
public, Mr. P called his stockbroker to
purchase 20,000 shares of JKL, Inc. He
also mentioned the transaction to his
brother, Mr. B. Mr. B, who was not
involved at all in the business of JKL, Inc.,
also brought 50,000 shares of JKL, Inc.
because of the tip disclosed to him by Mr.
P.
a. Is the information disclosed by Mr.
P to Mr. B considered as material
non-public information for
purposes of insider trading?
Explain.
Yes, the information that the corporation has
just been awarded a P5 billion construction

contract by a reputable private company is
material non-public information. 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 or would be considered by a
reasonable person important under the
circumstances in determining his course of
action whether to buy, sell or hold the
security. (Section 27.2 of the SRC)
b. Should Mr. P and Mr. B be held
liable for insider trading? Explain.
P is liable for insider trading because he
bought the shares of the company, thru his
broker, while in the possession of material
non-public information.
B is also liable for insider trading. B became
an insider after having received by
communication a material non-public
information from P, who as President of JKL
is an actual insider. (Sections 3.8 and 27 of
SRC). B is liable because he bough the shares
of JKL while in the possession of material on-
public information.
In Securities Law, what is “shortswing”
transaction?
A “shortswing” transaction is one where a
person makes a combined buying and selling
of securities within a period of 6 months.
State the rules on shortswing transaction
For the purpose of preventing the unfair use
of information which may have been
obtained by a person who is directly or
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indirectly beneficial owner of more than ten
percent of any equity security, director or
officer by reason of his relationship to the
issuer, any profit realized by the latter from
any purchase or sale, or any sale or purchase,
of any equity security of such issuer within
any period of less than (6) months unless such
security was acquired in good faith in
connection with a debt previously contracted,
shall inure to and be recoverable by the
issuer, irrespective of any intention of
holding the security purchased or of not
repurchasing the security sold for a period
exceeding six months.
Suit to recover such profit may be instituted
before the Regional Trial Court by the issuer,
or by the owner of any security of the issuer
in the name and in behalf of the issuer if the
issuer shall fail or refuse to bring such suit
within sixty (60) days after request or shall
fail diligently to prosecute the same
thereafter, but no such suit shall be brought
more than two (2) years after the date such
profit was realized. (Section 23.2, SRC)
What are the sale and purchase
transactions excepted by the rule on
shortswing transaction?
1. Purchase and sale of security that was
acquired in good faith in connection
with a debt previously contracted
(ibid)
2. Purchase and sale, or sale and
purchase, and purchase of an equity
security not then or thereafter held by
him in an investment account, by a
dealer in the ordinary course of his
 4B & 4C 2020-2021
Notes for Merc Rev 1

business and incident to the non-public within a six-month

establishment or maintenance by him information. period.
of a primary or secondary market, Insider trading covers Shortswing
otherwise than on an Exchange, for both the actual and transaction only
such security. (Section 23.4, SRC) constructive insiders. covers a stockholder
who is the beneficial
owner of more than
10% of the equity
3. This Subsection shall not be
security of the issuer,
construed to cover any transaction
director and officer of
were such beneficial owner was not the issuer.
such both time of the owner or the Violation of insider In a shortswing
sale, or the sale of purchase, of the trading rule renders transaction, the only
security involved, or any transaction the offender liable to legal consequence is
or transactions which the criminally, civilly, that the beneficial
Commission by rules and regulations and administratively owner, director or
may exempt as not comprehended liable. officer should deliver
within the purpose of this subsection. to the shortswing
profit to the issuer of
the security.

Distinguish insider trading from

shortswing transacation.

INSIDER SHORTSWING
TRADING TRANSACTION
Insider trading is the Shortswing
buying or selling by transaction is one
an insider of a involving the
security while in the combined purchase
possession of material and sale of security

Page 282 of 351


DECEMBER 22, 2020
HUA MULAN
Recitation
Dean: ABC has 299 stockholders each one
owning 100 shares each with the assets of
more than 50M php. Let’s say X purchase
35% of the shares of A in ABC corporation.
Does the purchaser have any obligation with
respect to the other stockholders under the
SRC?
Student: Yes dean. He has to make a tender
offer po
D: when you say tender offer what exactly do
you mean?
S: he has to publicly announce his intention
to acquire the equity securities of the
company
D: How is it down?
S: he must announce publicly his intentions
D: First what made you say that the purchaser
of 35% stake in ABC Corporation is required
to make a mandatory tender offer
S: Sir because the 35% is the ceiling Sir
D: What do you mean by ceiling? What are
the basic conditions or elements for the
application of the mandatory tender rule? If
first it applies to the public company, right?
It only applies to a public company. Is ABC
a public company, given that its shares are
not listed in the stock exchange?
S: Yes sir
D: Why?
S: Because it has 50M assets and 200
stockholder who owns 100 shares each
D: Yes. More than 50M in fact in my
example. So, I think we have discussed
before there are 2 kinds of public company.
1. Whose shares are listed in the stock
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exchange. 2. Even if not listed, has more than
50M shares, 200 stockholders each one
owning shares each. Basically, we have
established that there is an obligation to make
a tender offer. Now How is it exactly
implemented? How is it done? How does the
acquirer make a tender offer to the other
stockholders of ABC Corporation? So, tell
how is it operationalized. Does he has to
publish is intention to buy the shares of the
other stockholders?
S: Yes sir
D: Does he has to notify the SEC his intention
to purchase the shares of other stockholders?
S: he has to buy the shares of other
stockholders
D: Are all stockholders obligated to tender
their shares to the acquirer of 35%? Are they
required to sell their shares?
S: Only the dominant stockholders
Dean repeats the question
S: No dean. Only option/
D: Assuming all of them decides to sell. How
many should the acquirer purchase? All of
them?
S: Yes
Dean calls another student. Do you agree?
S: I disagree.
D: How many shares should the acquirer
purchase from the other stockholders of all of
them tender their shares?
S: up to 35%
D: equivalent to the purchase. So, what will
happen now?
S: if all the stockholders tender their shares,
the 35% will proportionately divided among
them.
D: For what price will the new dominant
stockholder buy the share of other
stockholders?

S: under the same terms and conditions that
X acquire the shares of A.
D: Let’s say the par value is 10php, the book
value is 50php. Bu the acquirer, acquire the
shares of the dominant stockholder for
100php per share.
S: 100 php
D: What if the acquirer finds the 100php too
expensive? Can he offer a price lower than
100php?
S: No dean because the acquirer now is
mandated to purchase the shares tendered by
the other stockholders at the same terms so
that this minority stockholders will be placed
in equal footing with company A.
D: Does the law not afford the acquirer the
option to offer a price not equivalent to the
price he purchased to the dominant
stockholder? As long as that price is fair and
reasonable?
S: if the stockholders agree
D: Of course, they will not agree to the
amount less than 100php. Supposing the
acquirer says he will buy them for 90php per
share. And 90php is a fair price. Is that
allowed?
S: I think no because it must be the same
D: Are you sure? The law says for a price
supported by fairness (opinion?). so
therefore, not necessary the same price.
Ideally same price. Because if the acquirer
offers to buy the shares for the same price
then the objective of the tender offer is
accomplished. To allow the minority
stockholders to exit the company with the
same terms and condition for which the
dominant stockholder got out of the
company, right?
S: Yes dean.
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D: But the law also afford the acquirer the
option to buy those tendered shares for a price
that may not be the same as the price he
acquired the dominant shares as long as long
the price is for fairness opinion. So, if the
same price for sure its fair. But it can be
lower. Now it can be justified and approved
by the SEC if that is supported by fairness
opinion prepared by whom?
S: The independent accountant
D: The independent party, financial advisor
or equivalent party. So not a nominee of the
acquirer but independent 3rd party financial
advisor, right? So, 35% triggers mandatory
tender offer but the acquirer is only required
to buy 35% assuming all the share will be
tendered. So, let’s say after 2 years, the
acquirer acquires additional shares that will
bring his stake to 50% + 1. So, let’s say on
the first transaction, the 35%, not all the
stockholders tender their shares. So, they
want to see first how will the new stockholder
perform, if the new dominant stockholder
will be able to do well for the company … the
stake. Then thereafter this stockholder the
acquirer, acquire additional shares after 2
years from the time he acquired the 35%
bringing his stake to 50% + 1. What is his
obligation under the tender offer rule of
SRC?
S: He must offer it to all stockholders
D: he must make a bid to buy the remaining
shares regardless of the period he acquired
the shares that increases the stake to more
than 50%. What is the threshold number? Is
it 50% + 1 or over 50% or 51%?
S: 50%
D: Are you sure? There is a difference
between 50% and over 50%.
S: over 50%

D: what if 50.1. 50% + 1 share. It used to be
51% but the rule was amended so it’s now
over 50%. So, if the acquirer acquires shares
of stock in a public company that will
increase his stake to 51%. Regardless of the
period he acquired those shares that brough
the stake to 50% or more than 50% he is
required to make a tender offer to all
stockholders of the public company. If they
tender their shares, the acquired has now the
option, cannot refuse the tender shares. He
must buy those shares for a price that is
afforded by fairness opinion prepared by 3rd
party advisor of financial advisor or
equivalent party.
Lecture
Let’s distinguish insider trading from short
swing transaction. This is yet to be ask in the
bar.
INSIDER TRADING SHORTSWING
TRANSACTION
Buying or selling by an insider of a security
while in the possession of material non-
public information One involving the
combined purchase and sale of security
within a 6-month period
Covers both the actual and constructive
insiders Only covers a stockholder
who owns more than 10% of the equity
security of the issuer, director and officer of
the issuer.
Therefore, shortswing transaction rule does
not cover lawyers, advisers, persons who
received information from the issuer, director
and officer. So, it is limited in scope to
stockholders owning more than 10%
Violation of insider trading rule renders the
offender liable criminally, civilly and
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administratively. There is no criminal
liability. The only legal consequence the
beneficial owner director or officer involve in
the transaction should deliver the shortswing
profit to the issuer of the security.
If they don’t deliver accordingly, the issuer
may file an appropriate action to the
corporate(?) if the issuer refuses then the
stockholder on behalf of the issuer may file
an action to the recover shortswing profit. As
long as of course that action is filed of the
request to take action is not acted upon within
60 days and the suit is filed not more than 2
years from the time the profit is realized by
the director, officers, stockholder concern.
What are the other prohibited transaction for
such beneficial owner, director or officer of
the issuer?
So, this is what we call short selling right? No
director, officer, stockholder shall sell
securities that it does not own. Or owning the
security that it does not or cannot deliver
against share within 20 days thereafter.
What is the rationale behind the prohibition
on short selling?
To prevent speculation on the price of the
stock. Let’s say director, officer, stockholder
sells hundred thousand shares for P10 per
share about P1M. Does he have the shares,
what he intends to do he will use the money
he will generate from the sale of those shares
to buy the shares hoping or speculating rather
the price will go down from P10 to P9 per
share. Thereby in the process he makes 10%.
So, he used the same money does not have
the shares, he will use the same money to buy
the share that will be delivered later on. That
prohibition applies to director, stockholder

owning more than 10% and officers of the
issuer.
Protection of Investors
This is a subtopic in your syllabus. We have
seen the features in the SRC intended to
protect the investing public. But for your
syllabus, so the provision to protect minority
or the investors limited to tender offer rule
and the rules on proxy solicitation. We will
focus our discussion to tender offer rule and
proxy solicitation.
What is tender offer under the SRC?
Tender offer is a publicly announced
intention by a person acting alone or in
concert with other to acquire the outstanding
equity securities of a public company or
outstanding equity securities of the associate
or related company of such public company
that controls said public company.
Let’s dissect the definition. It’s a publicly
announced intention. It does mean published
in a newspaper and likewise made known to
the SEC by a person acting alone or as a
group, meaning in concert with others to
acquire the outstanding equity securities. So,
the tender offer rule only applies to purchase
of shares not purchase of debt instruments, or
other securities as defined under the SRC. Si
it excludes everything except shares of stock.
Shares of stock, not of any company, but a
public company.
Now what is a public company again?
Either the shares of stock are listed in the
stock exchange or with the more than 50M
assets, 200 stockholders each one owning
100 shares each. Therefore, company outside
this 2 not subject to tender offer rule.
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That was the original definition of tender
offer. But the SEC added the second part. The
outstanding equity securities of an associate
or related company of such public company
that control said public company. This is
offshoot of the Semco vs Tacio life insurance
case.
What could be a common term for a tender
offer?
It simply means to bid. Bid for the shares of
stockholders of public company.
Under the SRC mandatory tender offer
includes
1. Any person or group of persons
acting in concert who intend to acquire 15%
of equity securities in a public company in
one or more transactions within a period of
12 months shall file a declaration to that
effect with the SEC.
Take note if you acquire 50% or if you want
to acquire 50% and you succeed, you don’t
have any obligation to buy the other shares or
to buy the remaining shares. You have no
obligation to invite the others to tender their
shares. If the first one is not hardly done. If
the person wants to buy shares in a public
company does not have to announce to the
SEC. He can just deal directly with any
private stockholder owning 50% or he can
buy in the market. Just to clarify while 50%
is the threshold figure under the SRC to
trigger mandatory tender offer, the SEC
increase the threshold limit or amount to
35%. And that is valid because the SRC
allows to issue rules and regulations to
implement the SRC. So far there has been no
contest or suit filed to question whether or not
the new threshold is valid. Or contrary to the
SRC.

2. Any person or group of persons
acting in concert who intend to acquire 35%
of the outstanding voting shares or
outstanding voting shares sufficient to gain
control of the board in a public company, in
one or more transactions with the period of
12 months shall disclose such intention and
contemporaneously make a tender offer for
the percentage sought to all stockholders of
such securities within the said period.
So, a person says I would like to buy 35% of
the company. If he makes known his
intention he files, publishes it makes it know
to the SEC and then the stockholders tender
their shares or sell their shares good for him.
Now what if all of the stockholders tender
their shares or willing to sell their shares to
the acquirer. It has to be distributed
proportionately. Because he is only interested
to buy 35%. Again, in the real world, this
does not happen. Why will you subject
yourself to mandatory tender offer? You can
just buy 34.99. it has the same effect of 35%.
But you are not subject to tender offer.
3. A person acquiring or intends to
acquire 35% of voting shares that is sufficient
to gain control of the board in a public
company this time directly from one or more
stockholders required to make tender offer
for all the outstanding shares.
What is not included here, although often
times asked in the bar and be implemented in
practice by the SEC is what if a person
acquires 35%? At the outset from any
stockholder of a public company. Or 50%
now and then additional shares of 35% in 1
year, within 12 months. What is his
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obligation that is not reflected here but being
implemented by the SEC? if the person either
alone or in concert with others acquires 35%
either singly or in series of transaction within
the 12-month period he is required to make a
tender offer to other stockholders. Of the
public company.
What does it mean? He makes a bid. He is
required to make a bid to buy the shares of
the other stockholders. If all of those
stockholders tender their shares meaning all
interested to sell their shares to the acquirer
of 35% what will be the obligation of the
acquirer, the new dominant stockholder of
the public company.
The only obligation of the acquirer of the
35% is to by 35% more. Not all of the shares
tendered but 35% more. So equivalent to
what he purchases, the 35%. So, what will
happen then to all tendered shares? These
shall be distributed proportionately among
the tendering stockholders including the
stockholder with whom the new dominant
stockholder may have private negotiation.
At what price? Should the acquirer buy the
tendered shares?
Presumably or supposedly for the same price
he acquired the shares of the former
stockholder. Because the reason of the tender
offer rule is to able the minority stockholders
to exit of the company for the same price,
terms and conditions offered to the former
dominant stockholder. However, the SEC
and the SRC allow the acquirer to submit or
recommend a price that may not be the same
as the price he acquired the dominant share.
The law says at a price supported by a
fairness opinion. So, it may not be the same
price. If he offers the same price, there is no
doubt that it is a fair price. But if he is not

willing to buy for the same price, it is too
expensive for him, he can recommend to the
SEC a price lower than the price he acquired
the dominant shares. And the SEC may
accept it if that price is supported by fairness
opinion prepared by independent financial
advisor or equivalent party.
4. If any acquisition would result in
ownership of over 50%, previously it is 51%
now over 50% the acquirer shall be required
to make a tender offer for the outstanding
equity securities to all remaining
stockholders if the said company at a price
supported by a fairness opinion provided by
an independent financial advisor or
equivalent third party.
So, this time regardless. Let’s say he acquire
only 34%, not required to make tender offer.
But after 2 years acquired 70% more.
Increasing his stake to 51%. So, he has no
obligation to make tender offer to other
stockholders. If all of them tender their
shares, he has no choice but to buy them. for
a price supported by fairness opinion.
Let’s say X acquires the shares of Corp 1 in
ABC. As we said he is required to make a
tender offer to other stockholders of ABC
Company. To all of them. a bid to buy all of
those shares for a price supported by fairness
opinion. If all of them tender their shares all
of them willing to sell their shares to the
acquirer of Corp 1, the acquirer is only
required to buy 33% more. That should be
distributed proportionately to all tendering
stockholders. Now this rule does not obligate
the minority stockholders to sell. But they
have the option to sell. And the acquirer must
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buy those shares for a price supported by
fairness opinion.
X acquires the shares of Corp 1 in ABC 13%,
not required to make tender offer. After 2
years, he acquires the shares of Corp 2 in
ABC. So, increasing his stake to 51%. What
is his obligation? Mandatory tender offer, to
buy the shares of the remaining stockholders.
If all of them tender their shares, this time the
acquirer has no shares but to buy everybody
for the same price supported by fairness
opinion.
And the last one the one asked in the bar,
Cemco vs National Life insurance Company.
Corp 2 acquired the shares of P and J in Corp
1. Is it required to make a tender offer?
Yes. Because Supreme Court said, direct or
indirect acquisitions that will increase the
stake of the stockholder to the threshold
number referred to under the SRC rule. Over
50%. So, before the case of Cemco the tender
offer rule only applies If you buy the shares
of the stockholder in the public company.
Then, so only to the purchase of the shares of
the public company and not to the share of the
stockholder in the company owns the public
company. Cemco change all of that. That’s
why in the definition adds “or outstanding
equity securities of an associate of the public
company that controls the public company”
Why do we say that Corp 2 has the obligation
to make a mandatory tender offer? Let’s do
our math, it owns 9% of Corp 1. It acquires J
and P for 50% making it stake at 59% let us
say 60%. 60% of 60% is 36% indirect
acquisition. You add that 36% to the 17% it
directly owns it means 53% direct and direct
owning shares of ABC company.

Therefore, it is required to make a tender
offer, to whom? The stockholders of ABC,
because ABC is a public company. Corp 1 is
not a public company.
What is the purpose of the Tender Offer
Rule?
1. All of them, ensure an even playing
field for stockholders of the company in
terms of the opportunity to sell their
shareholdings
2. Ensure that minority stockholders of
the public company are protected in the sense
that they will equally have the same chance
as the majority stockholders in terms of
selling their shares.
3. Ensure that the stockholders who
would want to sell their shareholdings will
have the opportunity for a better price
4. All of the above.
So basically, the stockholders of a public
company may invest their money because of
the dominant stockholder. Let’s say the Sy
family for example. If the Sy family decides
to exit the company, then the minority
stockholders should be given the same
chance to exit for the same price, terms and
conditions as offered to the dominant
stockholder. Presumably it should be for the
same price but the law also allows the
acquirer to recommend to the SEC a price
that is supported by fairness opinion. If you
will submit the same price, there will be no
more issue. If it is lower than the price
acquired the dominant shares then he has to
get the approval of the SEC and then
convince the SEC that it is a fair price and
supported by the independent third-party
financial advisor.
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Exemptions from Tender Offer
What are the transactions not covered by the
tender offer rule?
1. Purchase of securities from the
unissued capital stock. So, the subscribed
portion of the authorized capital stock. As
long as the acquisition will not result to 50%
or more ownership of securities by the
purchaser or such percentage sufficient to
gain control of the board.
While the law says purchase, it means
subscription. You don’t purchase unissued
shares. You subscribe to unissued shares. But
the regulation uses the term purchase.
2. Purchase of securities from an
increase in authorized capital stock
If you compare the 1st and 2nd exemption, if
you subscribe to the shares of a public
company as a result of the increase to the
authorized capital stock regardless of the
shares the subscriber end up owning in the
public company. He is not required to make a
tender offer. So, if it purchased from original
authorized capital stock the subscribed
portion it will be subject to tender offer if so
purchasing or acquiring the shares he ends up
owning 50% or more of the securities of the
public company. But in case of increase,
regardless if the shares he ends up owning, he
is not subject to tender offer.
3. Purchase in connection of foreclosure
proceedings on a pledge or mortgage that is
constituted on a share of stock.
There is no more pledge or chattel mortgage
in security arrangement. It means that the
grantor of the security interest or let’s call
him the mortgagee. The mortgagee may
foreclose the mortgage on the shares. Even
though he ends up acquiring 51% of the

public company. He is not required to make a
tender offer. Because he is only exercising
his right as a security creditor. It’s not a
voluntary purchase, it’s an involuntary
transaction. Otherwise, you impair the
interest and right of the creditor to enforce his
lien on shares.
4. Purchase undertaken in connection
with a privatization undertaken by the
government of the Philippines.
What do you mean by privatization? To make
a government owned and controlled
corporation own by private individuals. To
allow the government to divest its equity
ownership in the company. One example is
the UCPB. It is 90% owned by the
government and UCPB has been trying to
privatize the bank for quite some time. Let’s
say the governments auctioned of UCPB
shares as a, result of its privatization effort.
Let’s say BDO wants to buy 51% of the bank.
Or let’s say the government owns 51% and
the private company acquires all of those
shares of the government in the corporation.
So even if the acquirer ends up owning 51%,
he is not required to make a tender offer as
long the sale of the share by the government
is pursuant to a privatization efforts.
5. Purchase in connection with
corporate rehab under court supervision.
One of the material features of a rehab plan is
a material financial commitment of the
debtor to fund the rehabilitation. So, it could
mean the stockholders, infusing new capital
into the corporation or getting a 3rd party
investor to infuse capital to the corporation.
What if the stockholders all exhausted their
funds that’s why the debtor went to rehab, but
they were able to find a white knight investor
willing to buy the shares of the stockholders
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and infuse more capital to the corporation.
But this investor would like to acquire only
51%. Or end up owning 51% as part of the
rehab plan approved by the court. Is it
required to make a tender offer to the
stockholders? No. otherwise if you insist or
require the acquirer to do tender offer it may
not imperil any chance of rehabilitating the
distressed debtor.
6. Purchase in open market.
Meaning in the stock exchange, prevailing
market price.
7. Merger or consolidation
Regardless of how many shares a stockholder
ends up owning after the merger is not
required to make a mandatory tender offer.
Violation
What happens in case of violation of the rules
on tender offer?
If equity securities of a public company are
purchased at threshold amount without
complying with the tender offer rule, the SEC
upon complaint, nullify such purchase and
order the conduct of a tender offer, without
prejudice to the admin sanctions that the SEC
may impose.
Where should a civil action for violation of
the SRC be filed? SRC or RTC?
Pua vs Citibank. Civil suits to enforce
liability of the issuer or directors and officers
like selling unregistered securities or selling
securities based on false registration
statement are cognizable by the RTC. So,
they are under the sole original jurisdiction of
the RTC. Not subject to the doctrine of
primary jurisdiction. So, you don’t have to go
to the SEC as a condition to enforce the civil
liability of the issuer. You can go straight to

the RTC. It is when you file a criminal case
against the directors and officers of the
issuer, that you are required to go to the SEC
first under the doctrine of primary
jurisdiction.
What damages may be awarded in case of
sale of unregistered securities or sale of
securities based on false RS?
Just like insider trading, the court is
authorized to award damages in amount not
exceeding triple the amount of the transaction
plus actual damages. Exemplary damages in
case of bad faith, fraud, malevolence or
wantonness in the violation of this code or the
rules and regulations implementing the code
and the attorney’s fees not to exceed 30% of
the award.
What are the prescriptive periods for any
action that may be filed under 56 and 57 of
the SRC?
So, there are 2 liabilities refer to in this
section
56 – sale based on false RS
57 – sale of unregistered securities.
These 2 must concur: 2 years with respect to
sale based on false RS. 2 years from
discovery of falsity or misrepresentation or
incompleteness of the RS. But not more than
5 years after the security was bona fide
offered to the public. So, it’s not actual sale
but bona fide offered to the public. Although
in reality if there is bona fide offer, there is a
sale. But you have to be careful with the
words. You have to adapt the words as they
couched.
With respect to sale based on false RS – 2
years from discovery of falsity or
untruthfulness or incompleteness. But not
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more than 5 years after the security was bona
fide offered to the public.
Sale of unregistered security – 2 years from
discovery of the violation upon which the
cause of action is based. But not more than 5
years from the sale of the securities.
What happens if the discovery of the
untruthfulness or falsity was made after 5
years from the sale?
In that case the cause of action is lost on
prescription because these 2 must concur.
Philippine Chromite, after registration of its
securities, sold P10M worth of common
stock to the public at P0.1 per share. In its RS,
it alleged that it holds a perfected mining
claim on 100 hectares of chromite land in
Botolan Zmabales. X, a Botolan resident
bought P50,000 worth of stocks of the
corporation from the stock exchange. After
its public offering, the value of stocks
dropped to half its price. X made some
investigations and discovered that the mining
claims of the corporations had not been
perfected at the time of the issuance of its
securities. The stock however rallied and
after 2 years commanded a price of 1 ½
centavo per share. On its third year, the
company collapsed and its stocks became
totally valueless. What is the remedy of X.
So, we know that X cannot enforce the civil
liability of the issuer because the remedy of
X for damage sis lost by prescription. Any
suit to enforce civil liability based on sale on
false registration statement must be filed
within 2 years from the discovery of the
falsity. But not more than 5 years after the
bona fide offer of the securities to the public.
So, 2 years it rallied, on 3rd year from

discovery the price has dropped. So, 2 years
has lapsed from the discovery. Therefore, the
suit is lost by prescription. However, X can
invoke the regulatory powers of the SEC to
impose sanctions against the issuer,
responsible directors and officers.
Who are liable for damages assuming it was
filed within the prescriptive period?
All of the directors and all of the officers
signed the RS. CEO, COO, Financial Officer,
Comptroller, Corporate Secretary, signing
stockholder and expert if any.
The issue in this case to summarize, it’s a
long narrative, is what about the criminal
liability for selling unregistered securities or
sale based on false RS? When does it
prescribe?
Supreme Court said that 2 and 5 periods
under the SRC pertains to the enforcement of
civil liability of the issuer. Not to criminal
liability. Given that SRC does not contain a
prescriptive period to enforce criminal
liability, we apply special law, Act no. 3326.
It is the law applicable to offenses under
special law like the SRC. Under 73 of the
SRC, violation of its provision is punishable
the imprisonment of not less than 7 but not
more than 21 years. Applying this special
law, criminal prosecution for violation of
SRC prescribes in 12 years.
Even an employee that offers a brochure to
potential investors, held liable for violation of
SRC.
Complaint was filed against Oudine Santos,
an investment consultant of Performance
Investment Products Corporation for
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violation of 28 of the SRC. Complainants
were allegedly enticed to invest with PIPC
with a promise of higher income and lower-
risk investment program. Turn out that
neither PIPC nor its officers, employees and
agents were registered brokers/dealers.
Santos denied defrauding the complainants,
claiming she was a mere employee of and
subsequently independent information
provider for PIPC. Will the complaint against
santos prosper?
Supreme Court Justice Pepe Perez said Yes.
A person is liable for violating 28 where
acting as a broker or salesman is in the
employ of the corporation which sold or
offered for sale unregistered securities in the
Philippines.
Can you imagine, he is an employee, wala
siyang broker’s license, wala siyang dealer’s
license … namimigay ng mga brochure,
sumasagot sa mga tanong ng mga investor
but made liable in this case.
When may the SEC exercise its power of
investigation?
When it deems necessary to determine
whether or not the person has violated or
about to violate the SRC.
Can the SEC issue a CDO without a formal
charge?
This CDO in relation to SRC, we have seen a
CDO to implement the SRC. We discussed
the provisions on CDO in the SRC we
compared the CDO under the RCC. While
both laws allow SEC to issue CDO so they
are treated separately.
Can the SEC issue a CDO motu proprio, even
without complaint?

The Supreme Court said Yes. Primamanila
Plans vs Sec. What happen in this case,
Primanila plans was selling educational plan?
Everybody happy, nobody complaining.
Then the SEC issued a CDO to stop the sale
of the preneed plan, educational plans. The
issue is, can the SEC without any complaint
from the public issue a CDO. So, whether or
not educational plans are securities? Supreme
Court said Yes. Educational plans are
securities. They cannot be issued or cannot be
sold or offered to be sold unless registered
with the SEC. So, by selling unregistered
educational plans, it causes harm to the
investing public. Therefore, the SEC may
issue a CDO to stop the sale even though
there is no complaint from any private
offended party.
If offender is a corporation, impose of course
the liability upon the responsible director,
person and officers. In case of alien, deported
without further proceedings after service of
sentence.
What are the rules on proxy solicitation? I
combine the rules under the SRC and RCC
1. The proxies must be issued and proxy
solicitation must be made in accordance with
the rules and regulations of the commission.
When you solicit proxy from the public, you
have to comply with the regulations of the
SEC. You have to file a proxy statement with
the SEC. you have to attach a proxy form to
the proxy statement. You have to disclose
your intention to solicit proxy in the public.
The proxy form has to conform to certain
measurement, size.
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2. Proxy must be in writing, signed by
the stockholder filed with the CorSec before
the meeting.
This is RCC.
3. Unless otherwise provided in the
proxy, valid only for the meeting intended.
No proxy shall be valid for any other meeting
unless it is General and continuing which
should not be longer than 5 years at one time.
This is RCC
4. No broker or dealer shall give any
proxy, consent or authorization, in respect of
any security carried for the account of the
customer, to a person other than the
customer, without written authorization of
such customer.
This is SRC. Pertains to shares held by broker
for the benefit of another stockholder. If the
broker does not own the shares, he has no
right to give proxy those shares. Even though
it is in his name, he is not the rea owner. He
holds it for the benefit of the customer.
Therefore, under the SRC, he must get the
written consent of the customer before giving
the proxy those shares. If the broker or the
dealer owns the shares, they can give the
proxy because they own it. But if they are
only acting on behalf of another, they have to
get the consent of the person they represent.
5. A broker or dealer who holds or
acquire the proxy for at least 10% or such
percentage that the SEC may prescribe of the
outstanding share of the issuer, shall submit a
report to identify the beneficial owner of the
shares within 10 days from the acquisition.
So, there is an additional requirement for
broker, acting in behalf of another. He must
file a report to identify the actual beneficial
owner after such acquisition if the acquisition
results in at least 10% or more of the

outstanding equity securities of the company
or any percentage that the SEC may
prescribe. And then there’s recent regulation,
kung foreigners, regardless of the shares to be
disclosed to the SEC. pag non foreigners
more than 10%, pag foreigners kahit ilang
shares pa … to be disclosed to the SEC.
6. Person intends to solicit proxy, must
file a proxy statement and pay corresponding
fees with the SEC.
Who has the power to investigate violation of
SEC rules on proxy solicitation or to set aside
the action taken by the CorSec relating to the
validation of proxies?
GSIS vs CA; SEC vs CA.
Which government agency has jurisdiction?
SEC or RTC? Which body can act on a
complaint to nullify the resolution of the
CorSec in accepting or denying a proxy?
The person who will determine if the proxy is
valid or not, is the CorSec. CorSec makes a
ruling, proxy valid or proxy invalid. Where
would the stockholder go?
Supreme Court said if the proxy is used in
relation to election of directors or to
determine the quorum to elect directors, then
the RTC has jurisdiction. Even though the
petition may raise violation of SRC, like
violation of proxy solicitation. So even
though on its face a petition may allege
violation of the SRC if the proxy is use for
election of directors or to determine the
quorum to elect directors or any intra
corporate matter, RTC has jurisdiction. Why?
Because election contest falls under the RTC.
Election contest includes validation of proxy.
What of the proxy will be used for non intra
corporate matter like increase of capital
stock, appointment of auditor or approval or
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corporate acts? The CorSec accepts proxy
with irregularity. Proxy will be use for
corporate acts requiring stockholders
approval then you go to SEC to question the
action taken by the CorSec.
What is Disclosure Obligation?
It requires public companies to disclose to the
SEC and to the company shareholders
financial data on a regular basis as well as
material information about the company.
It is applicable only to public company.
What companies are subject to SEC
disclosure rules?
Companies that are privately owned are not
required by law to disclose detailed financial
and operating information. They enjoy wide
latitude in deciding what types of information
to make available to the public. Public
Companies, on the other hand are subject to
detailed disclosure regulations about their
financial condition, operating results,
management compensation and other areas of
their business.
Financial Rehabilitation and Insolvency Act
of 2010 (RA No 10142)
Lecture
Is there life for insolvent debtor?
Yes. That’s why there is a law for the benefit
of insolvent debtors, and that when FRIA
comes in. What then are the remedies
available to a juridical insolvent debtor under
FRIA.
a. Rehabilitation
a.1. Court Supervised

I. Voluntary – filed by the debtor
II. Involuntary – filed by the creditors
a.2. Pre-negotiated
a.3. Out of court or informal restructuring
agreement
b. Petition for Liquidation
It used to be petition for insolvency.
I. Voluntary
II. Involuntary
What about the remedies available to
individual debtor?
So earlier, remedies available to juridical
insolvent debtor, this time individual debtors.
So, who are your juridical debtors? We have
sole proprietorship, partnership and
corporation. An individual debtor who is not
registered as sole proprietorship has this
remedy. Now it is very important to stressed
it. Individual debtor cannot file petition for
rehab. So individual debtor can only file:
a. Suspension for payment
b. Voluntary Liquidation
c. Involuntary Liquidation
So, if you are a sole proprietorship, you don’t
file suspension of payment. You file petition
for rehabilitation. Rehabilitation includes a
stay order and a stay order enjoins an
enforcement of claim. But you have different
voting requirements in rehabilitation and
suspension of payment. When you talk about
liquidation whether juridical debtor or
individual debtor, it is voluntary the premise
is, it is initiated by the debtor for actual
insolvency and then involuntary liquidation
filed by the creditors.
Why do you mean by insolvent debtor in the
context of FRIA?
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Insolvency refers to the financial condition of
a debtor that is generally unable to pay its or
his liabilities as they fall due in the ordinary
course of business or has liabilities that are
greater than its or his assets.
Now from this definition of insolvency you
can see that there are 2 kinds.
1. Technical Insolvency – debtor has
more assets than liabilities, but cannot pay his
obligations as they fall due in the ordinary
course of business.
2. Actual Insolvency – the assets are less
than the liabilities.
Under FRIA, even if the debtor is actually
insolvent, he or it, can file petition for
rehabilitation. Under the old rule, only the
technically insolvent debtor can file petition
for rehab. Not anymore. So, if a debtor has
more liabilities than assets. He can try to
convince the court that despite actual
insolvency he or it can be rehabilitated. With
the production of a rehab plan that contains
features to rehabilitate the debtor, to be
approved by the court.
If the court is not convinced that the debtor
can be rehabilitated, it can convert the
rehabilitation into liquidation. But at least we
must give even the actual insolvent debtor a
chance to be rehabilitated. If it thinks it can
be rehabilitated. But if the course of the
proceedings turns to be otherwise then the
court be converted the proceedings from
rehabilitation to liquidation.
There’s this case of New Frontier vs
Equitable. It’s the case that we handled.
Supreme Court said that a solvent debtor
cannot file a petition for rehab. New Frontier
conveyed all of its assets to Equitable Bank
by way of Dacion en Pago. Thereafter, filed
a petition for rehab. We opposed it because

we argue that it is already insolvent and that
it has no more assets, and insolvent debtor
has only 1 remedy under the old rules and that
is to file a petition for liquidation. The
Supreme Court sustain our argument. That
ruling will no longer hold because FRIA
covers both actually and technically insolvent
debtor.
The term debtor does not include banks,
insurance companies, pre-need companies,
national and lock government agencies or
units.
You remember our discussion in SPCL. If a
bank is under rehabilitation or financially
distressed, what are the remedies available?
BSP will appoint a conservator in case of
liquidity or a receiver in case of insolvency.
But never to go on behalf with the court. RTC
has no jurisdiction over banks, when it comes
to rehabilitation. It is lodged by law with the
BSP. A bank cannot be placed under a control
of a management committee because it
violates the Central bank. Only BSP may
appoint a conservator or receiver of a
financially distressed bank. Insolvency is
equated with receivership and liquidity with
conservatorship.
We also discussed Apex Bancrights vs
Bangko Sentral ng Pilipinas. If a receiver is
appointed because the bank is insolvent and
the receiver which is the PDIC, determines
that rehabilitation is no longer feasible, the
monetary board of BSP is obligated to simply
notify in writing the bank’s board and
proceed right away to liquidation. Direct the
PDIC to liquidation. So, the court will only
be involved after the liquidation of the bank.
That’s why PDIC will file a petition for
assistance in liquidation with the court to
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convince the court to carry out the liquidation
of the bank. But before liquidation, it is the
BSP who has supervision over financially
distressed banks.
What is the objective of rehabilitation?
Corporate rehab contemplates a continuance
of corporate life and activities in an effort to
restore and reinstate the corporation to its
former position of successful operation and
solvency, the purpose being to enable the
company to gain a new lease on life and allow
its creditors to be paid their claims out of its
earnings. So, the basic questions and issues in
rehab concerns the viability of continuing the
business of the distressed corporation. so, it’s
not to end it, not to close it. But to continue
the business as a growing concern, through
adoption of a viable rehabilitation plan
intended to restore the corporation to its
former state of solvency and successful
operations.
That’s why the question to be asked is this:
Given the various stakeholder of the debtor,
the stockholders. Creditors and the state, is it
better to rehabilitate the debtor than to carry
out its liquidation. Is the present value
recovery better than if the debtor will go on
liquidation within 120 days from filing of the
petition?
What do you call this?
It is called the liquidation analysis. On every
rehab plan, must include this analysis.
Without this plan, feature of the plan rather
the court will have to dismiss the petition and
deny or disapprove the proposed
rehabilitation plan.
The answer is it’s better to allow it as
business concern(?) rather to liquidate it
within 120 days from filing of the petition.

This is a case penned by Justice Marvic
Leonen, Viva shipping vs Keppel Philippines
Mining. So, the court took note of the
characteristics of an economically feasible
rehabilitation plan.
1. The debtor has assets that can
generate more cash if used in its daily
operations than if sold.
2. Liquidity issues (meaning the cash
requirement) can be addressed by a
practicable business that will generate
enough cash to sustain daily operations.
3. The debtor has a definite source of
financing for the proper and full
implementation of Rehab plan anchored on
realistic goals and assumptions.
This is a case BPI Family Savings vs St.
Michael Medical Center. Case penned by
Justice Bernabe. Purpose behind
rehabilitation is to restore the debtor to its
former state of solvency and operations.
Supreme Court said Rehab assumes that the
corporation has been operational but for
some reasons like economic crisis or
mismanagement had become distressed or
insolvent. The petition for rehab should be
denied if the debtor had never been in
position of successful operation and solvency
prior to the filing of the petition. While the
debtor had indeed commenced business
through the preparatory act of opening a
credit line with the bank to finance the
construction of a new hospital building for its
future operations, the debtor corporation
itself admits that it has not formally operated
nor earned any income since its
incorporation. This simple means that there
exist no viable business concern to be
restored. So, the petition was dismissed.
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St. Michael Medical Center, those of you
who live in Meycauayan. That time very
profitable, so the owners wanted to construct
a bigger and better hospital. So, the owners,
put up a corporation to buy the land and
construct the bigger hospital adjacent to its
existing that corporation obtained a loan from
BPI Family Savings Bank. The money was
used to buy the land and started the
construction of the bigger hospital building.
While the hospital was almost finished it was
not fully operational nor earned any income
since its incorporation. Unable to pay its
obligation because of mismanagement and
some economic issues or concerns, this
corporation file a petition for rehabilitation.
So, the question is will you grant the petition
for rehab of this corporation, not ST. Michael
Medical Center but the corporation that was
organized to borrow money from the bank
and use the money to buy property and
construct a bigger hospital. Should the
petition be given due course?
Supreme Court said No because there is
nothing to restore. The company has never
been fully operational. No income was ever
earned by that corporation. so, if it is not a
viable business concern then there is nothing
to restore, so it is not a viable candidate for
rehabilitation.
How is the objective attained?
There are 3 ways of restoring the debtor to its
former state of solvency and successful
operation. First is the effect of stay order.
1. During the pendency of
rehabilitation, enforcement of claims against
the debtor are generally suspended. So, they
are stayed. For what reason or purpose? To
give the debtor and rehab receiver the time to

rehabilitate the company undistracted by
court suits.
Can you imagine if the creditors are allowed
to file cases against the debtor wanting to go
to rehabilitation? Then the receiver’s efforts
will be dissipated. Instead of focusing on
rehabilitating the debtor it will be very busy
defending the debtor against the bar suits
filed against the debtor. While the case is
pending, while rehab is pending, generally is
no clams against the debtor. To focus on
rehabilitating debtor.
2. Second the so-called cram down
effect of FRIA. What do you mean by cram
down effect? Remember there is a rehab plan
that the debtor proposes to the court. That
plan spells out the features, the roadmap on
how the debtor may be rehabilitated. That
rehab plan if approved by the court is binding
on the debtor and all creditors affected by the
proceeding even those who did not take part
or even those who oppose the rehab. In what
sense? The court may impose the rehab plan
even over the objection of creditors if the
objection is manifestly unreasonable.
The creditor will say “I don’t like the rehab
plan, its not good for me”. No no no no. if the
court approves the rehab plan, its good for
everybody, for the stakeholders of the debtor
then the objection can be nullified by the
court if the objection is based on
unreasonable grounds. That’s why it’s called
cram down, to rum to the throats of the
creditor. To impose it upon them despite and
against their will. The objection can be set
aside if that objection is manifestly
unreasonable.
3. National and Local taxes are waived
until approval of the rehabilitation plan or its
termination.
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What is the objective of liquidation of
juridical debtors?
To resolve and adjust competing claims and
property rights of the creditors and the
debtor, meaning which claims are valid
which claims are enforceable, or are not
binding or which claims are to be preferred
ahead of the others.
To maximize asset recovery. In what sense?
Gather all the assets of the debtor. Collect
receivable of the debtor. Sell property to
generate cash to pay off the creditors of the
corporation.
Lastly, the end result, to equitably distribute
the properties to the creditors based on the
rules on concurrence and preference of credit.
What about the suspension of payment?
What is the objective?
It’s simply deferment of the payment of the
obligation. As the name connotes, suspension
meaning deferment only. The debtor does not
ask for discharge. He is not asking the court,
that all obligations be considered paid or be
extinguished.
So, these are the only properties I have. Come
take these properties. Whatever is left, sorry.
That’s not the objective of suspension of
payment. Simply as the name connotes,
deferment the payment of obligation to give
him time to be back on his feet.
What about voluntary liquidation of
individual debtor?
The objective is to be discharged from his
obligation and to start afresh.
If these are the only properties available or in
the possession or owned by the individual
insolvent debtor, for the creditors partake all

of his assets among themselves. Because I am
insolvent, my assets are not enough to pay all
of my obligation. What happens to those
obligations that are not paid, not settled
because of my limited property? They are
extinguished. And the improvement of
financial condition will not revive those
claims against the individual debtor who
obtained discharge from the court.
How do we distinguish voluntary from
involuntary liquidation of individual debtors?
We talk about liquidation from the standpoint
of individual debtor not juridical debtor,
because these are governed by different rules.
Voluntary liquidation is filed by the debtor
whose assets are less that liabilities.
Involuntary liquidation filed by 3 or more
creditors (not anymore) whose aggregate
claim is at least 500,000 if the debtor
commits an act of insolvency (basically
fraudulent act to defeat the rights of creditor.
So, if you say voluntary liquidation of
individual debtor or even for juridical debtor,
the premise is if its voluntary the assets are
less than liabilities. For individual debtor the
threshold amount is more than 500,000. What
about involuntary liquidation? It is filed by
creditors even though the assets of the debtor
may be more than his liabilities. The basic
premise of involuntary liquidation of
individual debtor is by the commission of an
act of insolvency. But this remedy, is not
applicable to juridical debtor. You have a
different ground to file involuntary
liquidation for juridical debtor. So, this is
more for individual debtor. So juridical
debtor cannot commit an act of insolvency
basically. All individual debtor can.
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Who can file a petition for rehab?
1. Sole proprietorship
2. Partnership, when the filing is
approved by at least majority of the partners.
3. Corporation when approved by at
least majority of the board and 2/3 of the
outstanding capital stock.
Why is it that the petition for rehab must be
approved by the board, at least majority vote
and stockholders owning 2/3 of the
outstanding capital stock?
So that the stockholders are bound by
whatever rehab plan the court may approve.
If the rehab plan as approve by the court
entails the conversion of debt to equity. Let’s
say, the court says you creditors, you convert
your debt to equity. But if they convert what
happens? The corporation will be issuing
new shares to non-stockholders. What right is
violated? Preemptive right. But if the
issuance of shares in payment of a debt, is
approve by the stockholders at least, no
preemptive right is violated. So, at the outset
the law requires that the stockholders owning
2/3 must approve and in fact sign the petition
for rehabilitation.
What is the procedure for debtor-initiated
rehabilitation?
1. File a petition for rehab in the RTC of
the city where the principal office is located.
Must be under oath, verified to establish the
insolvency of the debtor, whether actual or
technical insolvency and the viability of its
rehabilitation. It shall include among others a
rehab plan and names of at least 3 nominees
to the rehab receiver position to implement
the rehab plan.
The court is not bound of course to choose
from the nominees proposed by the debtor

but usually the court chooses from the
nominees starting from the first. But under
the law the court is not bound by the
nominations made by the debtor.
2. If the court finds the petition to be
sufficient in form and substance, (it says
establishes the insolvency of the debtor and
there’s a rehab plan attach to the petition), it
shall within 5 working days issue a
commencement order and if the petition
needs further amendment because not
sufficient in form and substance then the
court may give time to petitioner to make it
sufficient in form and substance.
What’s the significance of the
commencement order?
That is what commences the rehabilitation
procedure. That commencement order
includes the appointment of the rehab
receiver, sets the case for initial hearing and
more importantly it includes a stay order.
A stay order that has the effect of suspending
all action or proceedings to enforce claims
against the debtor and actions to enforce any
judgment or attachment or provisional
remedy against the debtor, prohibits
disposition or encumbrance of property
except in the ordinary course of business and
prohibit debtor from making any payment
except when authorized by the rules.
CJAPDEP
What do you mean suspend enforcement of
claims?
Because the law makes a distinction, the
claims cover both secured and unsecured
obligations. That’s why a creditor cannot
collect payment of the obligation. A
mortgagee cannot foreclose a mortgage. A
pledgee before a security act cannot enforce
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a pledge. The grantee of security interest
cannot enforce security interest over the
property. While the stay order is subsisting.
Pal vs Kurangking (?)
Residents of Marawi city, plaintiffs in this
case, went to Mecca for their pilgrimage.
They boarded Philippine Airlines aircraft.
Went back home, likewise boarded
Philippine airline aircraft after deplaning they
discovered that their luggage was missing.
They filed an action for damage to recover
the missing luggage against PAL in RTC
Marawi. In the meantime, PAL went on
Rehab and filed a petition for rehab in I think
QC if I’m not mistaken at that time. Anyway,
the RTC issued a stay order. The question
now is what happens to the action to recover
the missing luggage.
Supreme Court said that action is likewise
suspended given that an action to recover the
missing luggage has an equivalent monetary
value. Can you imagine, even that action to
recover the missing luggage is suspended by
the issuance of the rehab or of a stay order.
Policy holder cannot enforce against pre-
need company. Labor to certain extent,
execution pending appeal, can be enjoined.
Enforcement of any judgment. If there is a
judgment rendered against the debtor outside
the rehabilitation meaning a different case.
Can a judgment be enforced against the
debtor on the theory or argument that anyway
it is rendered by a different court? No. That
judgment ought to be stayed. Because of the
stay order.
Attachment, another court issued a writ of
attachment of the property of the debtor.
Debtor went on rehab and got a stay order
from the rehab court. The attachment is
enjoined.

Injunction, likewise enjoined as a provisional
remedy.
Also prohibit sale and encumbrance of
property except in the ordinary course of
business and prohibits to make any payment
to any creditor because it would be giving
preference to the creditor over other creditor.
The only payment allowed is the payment
authorized by the rules.
Justice Helen Gutierrez, icon of UST, former
Supreme Court Justice, former JBC member
and now chairperson of the MCLE. When she
was a member of the JBC, she was
interviewing the other members, applicants
to the Supreme Court position one of the
questions she asked this applicant is whether
or not a lessor can enforce payment of rent
against a debtor who file rehab petition and
obtain a stay order. And the applicant said,
well the stay order then all claims are
suspended. Well, that’s wrong, because
supreme court decision payment is allowed
when authorized by the rules. And payment
of rentals is allowed by the rules. So, it’s not
covered by the stay order. But any other
payment especially to creditors obviously not
allowed. So, the idea is all of you in equal
footing, don’t enforce your claim yet while
the case is pending. If the debtor is allowed
to make payment to one of the creditors, it
defeats the vey objective or purpose of the
rehabilitation.
Now what is not included by the stay order?
SSQ SIAC
1. Case on appeal with SC
2. Case falling with a specialized court
or quasi-judicial agency like the SEC,
NWRB,
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3. Enforcement of claims against surety
and other persons solidarily liable with the
debtor and third party or accommodation
mortgagors as well as issuers of LC, unless
the property subject of third-party mortgage
is needed for the rehabilitation of the debtor
as determined by the court
4. Criminal action against the debtor
Except for criminal action against the debtor,
People vs Padillo(?) Can the persons who
signed the bounced checks on behalf of the
debtor corporation under rehab, can they be
prosecuted criminally for violation of BP 22?
Yes.
Can a person or officers of a corporation who
signed a TR agreement and that debtor
corporation filed a petition for rehab. What
will happen to the enforcement of the
criminal liability of those who signed the
agreement? Is that stayed?
No. The criminal action against the debtor
and its officers may continue. That’s now
part of FRIA.
On issuer of LC, you remember the
discussion on Daway. MWSC vs Daway.
Issuers of LC are not covered by stay order
because it’s not the assets of the bank that
issued the LC that is subject of rehab, but the
assets of the debtor and the liability of the
issuing bank is direct, primarily and solidary.
After the hearing, the court will direct the
creditors to give their comments to the
petition and rehab plan. And the rehab
receiver to submit report to the court on
whether debtor can be rehabilitated.
Within 10 days from submission of the
report, the court may give due course to the
petition or convert the proceedings into one

for liquidation. So, the court has the option to
convert at the recommendation of the
receiver or on its own may convert the rehab
into one of liquidation if debtor is insolvent
and no substantial likelihood that it can be
rehabilitated.
If the petition is given due course, the court
again shall direct the receiver to review,
revise and/or recommend action on the rehab
plan.
Receiver consults with debtor and creditors
again.
Submits the rehab plan to the court.
Court directs creditors to give comments to
the rehab plan.
The court finally approves the rehab plan
upon recommendation of receiver and even
over the objection of creditors if objection is
manifestly unreasonable.
The court has 1 year, generally, from filling
of petition to approve the rehab plan.
Proceedings terminated by order of the court
declaring successful implementation of the
rehab plan or failure of rehab
Had there been cases of successful rehab?
So many. PAL. PAL went on rehab again.
They filed chapter 11 petition to the states but
before this covid, decades ago, PAL went on
rehab and was successful, got out of rehab,
until the covid. And the company owns
tectile building in Ortigas, it filed rehab
petition and became successful. One of our
clients, went on rehab, almost in liquidation
mode, insolvent na, went on rehab, now
successful, the 7th biggest taxpayer of the
country. So, there are success stories. Of
course, there are horror stories, rehab plan not
working out.
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When is there a failure of rehab? In ascending
order.
1. Dismissal of the petition of the court.
Because its not sufficient in form and
substance.
2. Debtor fails to submit a rehab plan.
No rehab plan attached to the petition or by
the order of the court, despite such order, no
plan was submitted.
3. There is a plan submitted by the
debtor to the court but that plan showed that
there is no substantial likelihood that the
debtor can be rehabilitated within a
reasonable period.
4. There’s a rehab plan. Approved by
the court. But in the implantation of the rehab
plan, debtor fails to perform its obligation
thereunder or there is failure to realize the
objectives, targets or goals set forth therein,
including timeliness and conditions for the
settlement of the obligations due to the
creditors and other claimants.
5. Fraud in securing a rehab plan or its
amendment.
Like colluding with the rehab receiver.
6. Other analogous circumstances as
may be defined by the rules of procedure.
Upon failure of rehab the court may issue an
order converting the proceedings to a
liquidation.
What is the rationale for the stay order?
Rational is based on equalities, equity
principle of rehab.
What do you mean by Doctrine of Equality is
equity in relation to stay order?
All creditors of the debtor are in equal footing
with one another the mortgagee losses

preference to unsecured creditors. Not
anyone of them, even secured creditors
should be paid ahead of the others.
Whether or not a policy holder of an
educational plan then under SEC may
enforce that plan or may not if the preneed
company went on rehab and got a stay order?
The argument of the policy holders, these are
not your money. These are our money.
You’re just trustee of our funds. We put our
money so we can tap or draw on our funds in
case of need in the future. But the Supreme
Court said No. the stay order issued by the
court enjoins enforcement of claim. And
claim includes all claims or demands of
whatever nature or character against the
debtor or its property whether for money or
otherwise. Creditor means holder of a claim.
Thus, the claim of the plan holder against the
educational company is included in the
definition of claims under the Interim rules.
And still carried over under FRIA.
Important points
1. Stay order covers claims of pecuniary
nature
2. It does not cover surety, issuers of LC
and third-party mortgagors except if property
of latter needed for rehab of the debtor.
This is the case that we lost. Situs vs Asia
Trust. In this presentation, there are about 4
cases in our discussion. 3 of them we won,
this one we lost. Why do we lose this case?
We are not the original counsel. The original
counsel lost it so the counsel recommended
to his client that they get us. For whatever
reason, anyway maybe they are not expert in
FRIA or corporate matters. so, their client
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upon the recommendation of the counsel
hired us to file a motion for recon. What
happen in this case?
Situs development obtain a loan from Asia
Trust Bank secured by a mortgage on the
property of its principal stockholder. The
loan was not paid. The bank foreclosed the
mortgage. Then came FRIA. Our argument is
FRIA takes effect prospectively.
Commencement order retroacts to the date of
the filing of the petition. Our argument is
even though the mortgage is foreclosed after
or before FRIA under the old rules, the next
steps like registration of the sale, 1-year
redemption period, consolidation of title and
issuance of writ of possession, all of these
next steps, are suspended given that under
FRIA the commencement order retroacts to
the day of the filing of the petition.
Supreme Court said, well you are correct if
the foreclosure was done under FRIA. But
the foreclosure was done under the old rule.
Therefore, we don’t follow FRIA. We follow
the old rules. What is the conclusion? FRIA
takes effect prospectively not retroactive.
This is a case penned by Justice Marvic
Leonen, the interim rules before FRIA did
not allow the joint filing of rehab petition.
Isa-isa lang. Under FRIA pwede na yung
related companies, filing one rehab petition,
joining rehab petition.
The rehab plan should be feasible, contains
liquidation analysis and material financial
commitment of the debtor to make it work.
What do you mean by economic feasibility?
Characteristics

1. The debtor has assets that can
generate more cash if used in its daily
operation than if sold.
2. Liquidity issues can be addresses by a
practicable business plan that will generate
enough cash to sustain daily operations.
3. The debtor has a definite source of
financing for the proper and full
implementation of a rehab plan based on
realistic goals and assumptions.
This is the case of Viva Shipping Lines
penned by Justice Marvic. The vessels are
fully depreciated. No longer serviceable. But
there’s a plan to sell the vessels to a sister
company. Are these allegations enough for
the court to approve the proposed rehab plan?
The Supreme Court said if the assets are no
longer serviceable, vessel fully depreciated,
and the plan only indicates a plan to sell the
vessels of the company, that’s not enough.
Because the sister company may not buy the
vessels. You need a firm commitment to fund
the rehabilitation.
Material Financial Commitment
Keppel case. There has to be a material
financial commitment of the debtor to fund
the rehabilitation whether cash infusion from
the stockholders of the corporation or new
capital from third party investor.
Readiness, Ability and Willingness (RAW)
to fund the rehabilitation.
‘we are in talks with a possible investor’, ‘we
are exploring merger with more solid (?)
institution’, ‘we intend to get, recover,
proceeds, insurance from the insurance
company’ is not a material financial
commitment.
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You have to convince the court that you are
ready, willing and able to fully fund the
rehab. Without this commitment, the rehab
plan will be disapproved.
This is the case that we handled PAGT vs
Fastech penned by Justice Bernabe. In this
case what happened?
The court approved the rehab plan because of
the glowing recommendation of the rehab
receiver. As a consequence, we cannot fully
enforce a right as a mortgagee. Because if
there is a stay order, the mortgagee cannot
foreclose the mortgage and cannot do the
next step of the foreclosure. This case went
up to the supreme court eventually. And we
were sustained by the Supreme Court on 2
important point.
1. Despite the glowing recommendation
of the receiver, despite her sterling
qualifications, the bottom line is that the plan
lacks those features we discussed awhile ago.
No liquidation analysis. There’s no material
financial commitment. All it has is a waiver
of penalty interest and charges. Di mo
pwedeng sabihin na “di kayo pwedeng
mangolekta ah mga charges interest, mga
penalty. If you will not collect
makakabangon kami. “. That’s free ride. The
supreme court said that’s not enough, you
have to show readiness, willingness and
commitment of und the rehab. So, if you only
asked for waiver of interest, the rehab plan
should be denied. So, the supreme court
reversed the court of appeals and allow our
client PAGT to foreclose the mortgage and
consolidate title to the property.
2. The court is not bound by the report
of the receiver. Despite of the glowing
recommendation of the receiver, the court on

its own must study the rehab plan. Without
the features we discussed awhile ago the
court must dismissed and deny the rehab
plan.
Important points
g. Commencement order retroacts to date of
petition.
Remember day 1 is the filing of petition for
rehab. Court has 5 days to determine if the
petition is sufficient in form and substance. If
not, may require amendment to the petition
until it is sufficient in form and substance.
After being convinced, the court will issue
commencement order. So filing is day 1, day
5 commencement order. What happens in
between? What if a creditor sets off deposit
with the debtor? What if there’s an
attachment during that period.
Any process during that period between
filing and issuance of commencement order
is nullified. Because the commencement
order retroacts to the date of filing of the
petition.
The case of Sarabia Manor. This is a case
penned by justice Bernabe, expert on FRIA.
This illustrates the power of the court to
overrule an objection if the objection is
manifestly reasonable. An objection that is
based only on reduction of interest, the
interest rate quoted or approved by the court,
does not give us benefit or mean loss for the
creditor. If that is the only basis of the
objection, invariably the court will have to
deny or overrule the objection. Taking into
account the interest of all stakeholders of the
corporation. What happen in this case?
Sarabia Manor, the biggest hotel in ilo-ilo,
wanted to expand, have it bigger and better
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hotel, obtained a loan from BPI.
Unfortunately, plans did not materialize
because of economic difficulties, unable to
pay its obligations to BPI and other banks, the
creditors. Sarabia Manor filed a petition for
rehab. The rehab plan accepted by all
creditors except BPI. The rehab plan reduced
the interest rate that the creditor may charge
against the debtor while the pendency of the
rehab proceedings to 6% per annum. So sabi
ng court “oh kayo ireduce nyo yung interest
rate nyo ah 6% ok na yan. 6% more than
enough to meet you cost of funds – interest
that the bank pays on the deposit”. BPI
objected, because the interest rate of BPI is
16%. Tama naman 16% bawasan mo ng 6,
lugi pa din.
Sabi ng court, yung objection mo ay
unreasonable. Dahil 6% naman is enough to
meet your cost of funds. So, this is an
illustration of the cram down clause.
What is the basis of the cram down clause?
Police Power of the state. Taking into
account all the stakeholders of the debtor.
Not just the interest of 1 stakeholder, like 1
creditor in this case.
Bar exam Questions
Debtor Corporation and its principal
stockholders filed with SEC a petition for
rehabilitation and declaration of a state of
suspension of payments under PD 902-A.
The objective was for SEC to take control of
the corporation and all its assets and
liabilities, earnings and operations and
rehabilitating the company for the benefit of
investors and creditors.

Generally, the unsecured creditors had
manifested willingness to cooperate with
Debtor Corporation. The secured creditor,
however, expressed serious objections and
reservations.
1st Bank initiated judicial foreclosure on the
property of debtor
2nd Bank foreclosure on third-party
mortgage on the assets of the principal
stockholders.
3rd Bank filed a suit against the principal
stockholders who had held themselves liable
jointly and severally for the loans of Debtor
Corporation with the said Bank.
After hearing, the SEC directed the
appointment of Rehab receiver and ordered
the suspension of all actions and claims
against the debtor corporation as well as
against the principal stockholders.
a. Whether or not the order of the SEC
is valid.
SEC has no more authority or jurisdiction to
hear and entertain petition for rehab. Transfer
to the RTC of the city where the principal
office is located.
Let’s assume that the order is issued by the
RTC, is the order of suspension valid?
Its only valid with respect to the corporation
and not with respect to stockholders who are
not part of rehab.
b. Is the order of suspension, assuming
by the RTC on judicial foreclosure
proceedings, valid?
Its is valid. Because stay order covers both
the secure and unsecured creditors. So even
if secured creditor cannot foreclose the
mortgage.
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c. Whether or not the 2nd bank can
foreclose the mortgage on the property of the
stockholders who acted as third-party
mortgagor.
Under FRIA, Generally, the stay order does
not enjoin the foreclosure of mortgage on the
property of third-party mortgagor because its
not part of the rehab unless it can be shown
and approve by the court that the property of
the third-party mortgagor is necessary to
rehabilitate the debtor.
What about the 3rd bank?
The 3rd bank can file the collection suit
against the sureties. Because they are not
covered by the stay order.
When may creditor/s commence involuntary
proceedings?
Any creditor or group of creditors with a
claim of at least 1M or at least 25% of
subscribed capital stock or partner’s
contribution whichever is higher, may initiate
involuntary proceedings against the debtor by
filing a petition for rehabilitation with the
court.
So, the threshold amount is P1M unpaid. You
know what made the old insolvency law,
obsolete?
Because the threshold amount is P1,000.
FRIA committed the same mistake. In what
sense? There’s no automatic adjustment of
the threshold. 10 years ago, 1M is a lot of
money. But now, 1M is small. If that would
be the threshold amount for rehabilitation.
But that is enough, that there is a claim of at
least P1M, it must be coupled with the
following:
a. There is no genuine issue of fact on
law on the claim of petitioner. (meaning there

is no doubt whatsoever, that the petitioner has
an outstanding claim) and that due and
demandable payments have not been made
for at least 60 days or debtor failed generally
to meet his liabilities as they fall due
b. A creditor, other than the petitioner
has initiated foreclosure proceedings against
the debtor that will prevent the debtor from
paying its debts as they become due or will
render it insolvent.
What about free negotiated rehabilitation?
Pre -negotiated meaning, nagkasundo na,
outside the court yung debtor at creditors.
Hindi na kelangan maghearing pa ng
matagal. Nag usap na kami. Ito court
aprubahan mo nalang. So, when this may be
resorted to?
Insolvent debtor, by itself or jointly with any
of its creditors, may file a verified petition
with the RTC for approval of a pre-negotiated
Rehab Plan which has been endorsed or
approved by creditors holding at least 2/3 of
the total liabilities of the debtor, including
secured creditors holding more than 50%of
the total secured claims of the debtor and
unsecured creditors holding more than 50%
of the total unsecured claims of the debtor.
The petition shall include the pre-negotiated
rehab plan, including the names of at least 3
qualified nominees for rehab receiver.
Here, it’s not based on number of creditors.
Its based on the amount of liabilities.
What happens to the remaining 1/3? Are they
bound by the rehab plan?
Yes. Cram down effect. This plan when
approved by the court may be imposed
against the remaining 1/3 creditors.
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This has not been asked in the bar but very
practical solution.
Out of Court or Informal restructuring
agreement
Out of court meaning we don’t need court
approval for the agreement. Its among the
creditors. You go to court for enforcement of
the agreement if its violated. But for
implementation, you don’t need to go to
court.
Terms or approval requirements for Out of
Court or Informal restructuring agreement?
1. Debtor and creditor must agree of
course to the out of court or informal
restructuring agreement.
2. It must be approved by creditors
representing at least 67% of secured claims,
75% of unsecured claims and 85% of total
liabilities.
What happens to 15%?
Bound under the cram down effect doctrine.
What do you mean by standstill agreement?
It is a remedy afforded by FRIA. It means that
pending the negotiation of out of court or
informal restructuring agreement, so debtor
is discussing with creditor of out of court
agreement, there can be a standstill
agreement for 120 days. In the sense that no
creditor can enforce the claim against the
debtor within the 120 days standstill period.
As long as that agreement is approved by
creditors representing more than 50% of total
liability and notice is published in newspaper
of general circulation once a week for 2
weeks and period does not exceed 120 days
from the date of effectivity.
So, this is a counterpart of a stay order.
Except that there’s no order from the court. If

you are the debtor you have so many
creditors, you just need 120 days. While you
are working out the restructuring agreement.
You don’t want to go to court. Its expensive.
Get 1 creditor or 2 as the case maybe, if that
1 or 2 creditors represent at least 50% of total
liabilities. Then the rest of creditors cannot
enforce their claims until finalization or non-
finalization of out of court or informal
restructuring agreement.
When may an insolvent juridical debtor file a
petition for voluntary liquidation?
Where the juridical debtor, insolvent or
individual debtor the premise is assets less
than liabilities initiated by the debtor.
Therefore, the petition for liquidation must
show or contain the
1. schedule of assets and liabilities
including list of creditors with addresses,
amounts of claims and collaterals or
securities if any.
2. An inventory of all its assets
including receivables and claims against third
parties
3. Names of at least 3 nominees to the
position liquidator.
So, it must show based on the schedule that
there are more claims than liabilities. If the
petition is sufficient in forms and substance,
the court shall issue a liquidation order.
Is the issuance of an order, declaring
petitioner in voluntary liquidation proceeding
insolvent mandatory upon the court?
Yes. If the petition is sufficient in form and
substance meaning it shows that the assets are
indeed liabilities the court has no choice but
to adjudicate the person as insolvent. And the
court has no discretion. The court cannot say
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I’m not in favor of your insolvency. No no no
no. It’s the remedy available afforded by law
to insolvent debtor. So, if you are insolvent
and the petition really shows that you are.
Then the court will have no choice but to
adjudicate you as insolvent.
One of my classmates, I hope this will not
happen to you, incurred various credit card
charges and had to borrow money from
institutions umabot ng 15M-20M and
kanyang utang. This is a less for all of you. If
you use your credit card please pay in full.
Don’t pay only the minimum charge. Why?
That minimum charge will earn interest. It’s
gonna kill you. Pag minimum palaki ng
palaki interest kasi yung next charge mo if
you only pay a minimum charge and the
interest maccarry over sa next billing mo,
until such time you can’t afford even the
minimum charge. So, if you cannot afford it
don’t get a credit card. If you have a credit
card pay in full. That’s the bottom line.
My classmate, good friend of mine, had to
use credit card to buy supplies of the children,
tuition fee and household requirements and
so on until the obligation ballooned to a 20M.
A very good position, she cannot afford her
creditors knocking at her door if they filed
case against her, she may be fired by the
company that she’s connected with. Sabi
sakin “Nilo what should I do, my husband
also, financial problems… what do I do?”
well I said “ok, what are your obligation, blah
blah blah,” so merong cheke. So pag merong
cheke unahin mo yung cheke kasi pwede
kang makulong dun. Pwede ka ma BP22. So
unahin naten kako yung cheke. I have to lend
money para ma ano yung cheke. Ok still
Malaki pa din natira. So, I said you have no

choice but to file a petition for liquidation.
What do you mean? We go to court and the
court will declare you as bankrupt. Declare
you insolvent. What are your assets? I have
an old car. Anything else? That’s it. Ok, so let
those creditors partake off that decrepit car of
yours.
So, we, of course not me, because we
represent the conglomerates are banks. In
fact, some of the creditors are banks. That’s
why we cannot represent her, it will be
conflicted. But I ask a friend, a former student
to handle the case for her. She filed a petition
for liquidation, now she is a free person. All
of those debts are discharged. They can no
longer run after her. She’s starting a life all
over again. It can happen to anyone but I hope
it will not happen to you. There’s always a
remedy. Insolvent under FRIA.
It is uncommon in the Philippines as
individual debtor, to acknowledge to the
whole world that I am insolvent. I am
bankrupt. We have so much pride that we’ll
never admit to anyone that we are insolvent.
That we are heavy on debts. But in the states,
it’s something very common, it’s called
Chapter 11. So, Allan Iverson filed a petition,
can you imagine Allan Iverson, at one point a
billionaire, one of the best players in
Philadelphia, had to go to court and declare a
bankruptcy. His wife asked for support. Can
you imagine the wife asking for support? And
you have to say “I can’t even afford to buy
McDonalds” and the wife threw $100 to
Iverson, here is $100 buy your McDonalds.”
Anyway, bottom line is this is very common
in states. So many actors, actresses have gone
to the bankruptcy court. Saten hindi
masyadong common.
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Who may file petition for involuntary
liquidation?
This time it is involuntary liquidation of
juridical debtor. This premises conditions
pertain to involuntary liquidation of juridical
insolvent debtor. So being involuntary it is
filed by creditors.
3 or more creditors the aggregate claim is at
least 1M or at least 25% of the subscribed
capital stock or partner’s contribution
whichever is higher, may apply for and seek
the liquidation of an insolvent debtor by
filing a petition for liquidation premised on
the following conditions:
1. If there is no genuine issue of fact or
law on the claims of the petitioners and that
the due and demandable payments not made
for 180 days or debtor failed generally to
meet its obligation as they fall due.
Rehab, not made for 60 days.
2. There is no substantial likelihood that
debtor may be rehabilitated.
If the petition is sufficient in form and
substance, the court shall issue an order
directing the publication of the petition,
directing the debtor, creditors who are not
petitioners to file their comment on the
petition. If after going over those comments
filed, the court determine that petition is
sufficient in form and substance and
meritorious, the court shall issue the
liquidation order.
Can a distresses corporation file a petition for
rehab after the dismissal of its earlier petition
for insolvency?
Yes, the dismissal of a petition for insolvency
does not preclude the distressed corporation
from filing a petition for rehab. Dismissal of

petition for insolvency only means that the
corporation may still be restored to solvency.
Can the corporation file a petition for rehab
first and after it is dismissed file a petition for
liquidation?
Not necessary anymore. Under FRIA, the
petition for rehab, either upon the
recommendation of the receiver or by the
court’s order on its own can convert the rehab
into one of liquidation, if there’s no
substantial likelihood that the debtor can be
rehabilitated.
When may an individual debtor file a petition
for suspension of payments?
This is available to individual debtor, not to a
sole proprietorship. What is the basic premise
for suspension of payment of individual
debtor?
He has sufficient property to cover his debts
but foreseeing the impossibility of meeting
those debts as they respectively fall due. So,
he may file then under oath a petition for
suspension of payment in the city or province
in which he resided 6 months prior to the
filing of petition. He shall attach the petition
of course, the assets, liabilities, inventory of
assets and proposed agreement with his
creditor. Meaning how many months or years
will he propose the creditors and under what
terms.
Who are not covered by the court order and
proceedings on suspension of payment?
When a debtor files a petition for suspension
of payment, mere filing suspends claims.
Except the following:
The debtor has 3 months to get an agreement
with the creditors on suspension of payment.
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If there is no agreement in 3 months from
filing, then those claims can now be enforced.
What if, there’s an agreement by the debtors
and creditors, and the court issued an order
approving suspension of payment?
So, despite the order of the court approving
the suspension of payment these creditors
may enforce their claims against the debtor.
They are not covered by the order of
suspension of payment.
1. So those creditors having claims for
personal labor, maintenance like the
contractor, foreman, expense of last illness
and funeral of the wife or children of the
debtor incurred in the 60 days before the
filing of the petition. So, take note ascendants
are not included. Wife and children only of
the debtor.
2. Secured creditors
3. Creditors whose claims are not listed
in the petition
What are the requisites for the approval of the
petition by the court?
This is very important the so-called Double
Majority Rule in suspension of payments.
So, the petition for suspension of payment
must be approved by 2/3 of creditors
representing at least 3/5 of total liabilities. It
is only in this kind of remedy that number of
creditors is important. In other remedies we
have seen is the amount of liabilities is
critical, not the number of creditors. But for
suspension of payment, number of creditors
is important.
Example
The total amount of liabilities owing to A B
C D E F is 250M. The amount due to each
AB C is 150M. that is 3/5 of 250. In the

creditors meeting, the 3 agreed to the petition
but not the remaining creditors. Will the
petition prosper then?
It cannot prosper. The court cannot approve
it. Because even though 150 is 3/5 of 250
only 3 out of 6 approved the petition. It
should have been 4 out of 6 or 2/3.
Sole proprietorship cannot file suspension of
payment but can file rehab. Is he subject to
the double majority rule?
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No. Because in rehab, the test is whether or
not the rehab plan is sufficient to rehabilitate
the debtor. You don’t need to get the decision
of the majority. But if an individual debtor
who is not a sole proprietorship, he cannot go
on rehab. But he can go on suspension of
payments. That petition should be approved
by double majority of creditors. Otherwise,
the court cannot approve it.

DECEMBER 29, 2020
LIQUIDATION
Slides:
Q: One day jerry haw, doing business
under the name Starlight Enterprises, a
sole proprietorship, finds himself short on
cash and unable to pay his debts as they
fall due although he has sufficient
property to cover such debts. He asks you,
as his retained counsel, for advice on the
following queries:
a.) Should he file a petition with the
SEC to be declared in a state of
suspension of payments in view of
the said financial condition he
faces? Explain your answer.
A: I would counsel Jerry Haw to file the
Petition for Suspension of Payment with the
ordinary courts, rather than the SEC. SEC's
jurisdiction over such cases is confined only
to petitions filed by corporations and
partnerships under its regulatory powers.
NB Jurisdiction of SEC over petition for
rehabilitation transferred to the RTC.
Suspension of payments as a remedy is part
of the commencement order in a petition for
rehabilitation insofar as juridical persons are
concerned. Natural persons may file petition
for suspension of payments.
Q: Distinguish petition for liquidation
from suspension of payment
A: The distinctions are as follows:
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 In liquidation, the liabilities of the
debtor are more than his assets, while
in suspension of payments, assets of
the debtor are more than his liabilities
but that the debtor foresees the
impossibility of paying his debts as
they fall due.
 In liquidation, the assets of the debtor
are to be converted into cash for
distribution among his creditors,
while in suspension of payments, the
debtor is only asking for time within
which to convert his frozen assets into
liquid cash with which to pay his
obligations when the latter fall due.
 There is discharge in voluntary
liquidation of individual debtor but
there is no discharge in suspension of
payment.
 The court order in petition for
suspension of payments does not
include secured creditors whereas in
petition for liquidation, foreclosure
proceedings shall not be allowed for a
period of 180 days from issuance of
the liquidation order.
Q: When may an individual debtor file a
petition for liquidation?
A:
 An individual debtor whose
properties are not sufficient to cover
his liabilities, and owing debts
exceeding Five hundred thousand
pesos (Php500,000.00), may apply to
be discharged from his debts and
liabilities by filing a verified petition
with the court of the province or city
in which he has resided for six (6)
months prior to the filing of such
petition. He shall attach to his petition
a schedule of debts and liabilities and
an inventory of assets. The filing of

such petition shall be an act of
insolvency.
 If the court finds the petition
sufficient in form and substance it
shall, within five (5) working days
issue the Liquidation Order.
Q: A debtor who has been adjudged
insolvent is given his discharge by the
court after his properties have been
applied to his debts. A year later, with
those debts still not fully paid, he wins in
the sweepstakes and comes into a large
fortune. His creditors sue him for the
balance.
Would the suit prosper? Reasons.
A:
Discussion:
So we know that once there is an order of
discharge, basically, whatever properties
available to the debtor are distributed to the
creditor and even though they may not have
been fully paid given that the assets are less
than the liabilities, those obligations are
deemed extinguished. But there are debts
that are not discharged. These are the debts
that subsist despite the order of discharged
issued by the liquidation court:
Slides:
The suit will not prosper on debts that are
properly discharged in insolvency. Those that
are not discharged, assuming that a discharge
can be obtained, include:
1. Taxes and assessments due the
government, national or local;
2. Obligation arising from
embezzlement or fraud;
3. Obligations of any person liable to the
insolvent debtor for the same debt;
4. Alimony or claim for support;
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5. In general, debts that are not provable
against the estate of the insolvent or
not listed in the schedule submitted
by the insolvent debtor. (BAR 1988)
Q: When may creditor/s file a petition for
involuntary liquidation against an
individual debtor?
A: Any creditor or group of creditors with a
claim of, or with claims aggregating at least
Five hundred thousand pesos (Php500,
000.00) may file a verified petition for
liquidation with the court of the province or
city in which the individual debtor resides
alleging that the debtor committed an act of
insolvency.
Discussion:
It used to be at least 3 creditors under the old
Insolvency Law. Now, under FRIA even 1
creditor may file a petition to place the debtor
under involuntary liquidation if he commits
an act of insolvency. So the basic premise of
involuntary liquidation for individual debtor
is the commission of an act of insolvency by
the debtor, this is not proper, as you know, for
juridical debtor. So a juridical debtor cannot
commit an act of insolvency, it is limited to
an individual debtor.
Slides:
Q: Distinguish between voluntary
liquidation and involuntary liquidation of
individual debtors.
A:
 In voluntary liquidation, it is the
debtor himself who files the petition
for insolvency, while in involuntary
liquidation, a creditor or group of
creditors are the ones who file the
petition for liquidation against the
insolvent debtor.
 In voluntary liquidation, the filing of
the petition is by itself the act of
insolvency whereas in involuntary
liquidation filed by creditor/s against

the individual, the latter must have
committed an act of insolvency.
 The required amount of debt for the
debtor to file the petition for
voluntary liquidation should exceed P
500,000 whereas in involuntary
liquidation, the creditor/s claims
should be at least P 500,000.
Q: May the following be declared insolvent
assuming that the petition for liquidation
is sufficient in form and substance?
(1) Married woman;
(2) Partnership;
(3) Insane person
Explain your answer.
A:
 Yes, a married woman may be
declared insolvent in respect to her
own debts.
 Under FRIA, a partnership may be
declared insolvent, either in a
voluntary or involuntary liquidation
proceeding.
 An insane person cannot file a
petition for voluntary liquidation
because he lacks legal capacity to
act.
Discussion:
I change the answer given by the committee,
their answer is that an insane person cannot
be the subject of voluntary liquidation but can
be the subject of involuntary liquidation. To
me, that's wrong, because the basic premise
of involuntary liquidation is the commission
of an act of insolvency.
So how can an insane person commit an act
of insolvency when he does not have full
control of his faculties and senses? does not
have the capacity to act?
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So either way, to me, an insane person cannot
file or cannot be the object of petition for
voluntary liquidation or cannot be the object
of involuntary liquidation.
Q: What are considered acts of insolvency
under FRIA?
A: The following shall be considered acts of
insolvency:
a) That such person ( debtor) is about to
depart or has departed from the
Republic of the Philippines, with
intent to defraud his creditors;
b) That being absent from the Republic
of the Philippines, with intent to
defraud his creditors, he remains
absent;
c) That he conceals himself to avoid the
service of legal process for the
purpose of hindering or delaying the
liquidation or of defrauding his
creditors;
d) That he conceals, or is removing, any
of his property to avoid its being
attached or taken on legal process;
e) That he has suffered his property to
remain under attachment or legal
process for three (3) days for the
purpose of hindering or delaying the
liquidation or of defrauding his
creditors;
f) That he has confessed or offered to
allow judgment in favor of any
creditor or claimant for the purpose of
hindering or delaying the liquidation
or of defrauding any creditors or
claimant;
g) That he has willfully suffered
judgment to be taken against him by
default for the purpose of hindering or
delaying the liquidation or of
defrauding his creditors;

h) That he has suffered or procured his
property to be taken on legal process
with intent to give a preference to one
or more of his creditors and thereby
hinder or delay the liquidation or
defraud any one of his creditors;
i) That he has made any assignment,
gift, sale, conveyance or transfer of
his estate, property, rights or credits
with intent to hinder or delay the
liquidation or defraud his creditors;
j) That he has, in contemplation of
insolvency, made any payment, gift,
grant, sale, conveyance or transfer of
his estate, property, rights or credits;
k) That being a merchant or tradesman,
he has generally defaulted in the
payment of his current obligations for
a period of thirty (30) days;
l) That for a period of thirty (30) days,
he has failed, after demand, to pay
any moneys deposited with him or
received by him in a fiduciary; and
m) That an execution having been issued
against him on final judgment for
money, he shall have been found to
be without sufficient property subject
to execution to satisfy the judgment.
Discussion:
Q: The first 10 you may have noticed, what
is the common denominator?
A: There is fraud. The act amounts to
hindering or preventing the liquidation of the
debtor, or defrauding any or more creditors.
The last three are acts of insolvency that are
not based, premised or conditioned on fraud.
I wrote an article titled "Shaming the
Shameless Debtor" what do I mean by that?
The debtor has more assets than liabilities but
committed an act of insolvency. In this case,
what is shaming? You file for a petition for
involuntary liquidation.
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Slides:
Q: “X”, owner of a general merchandise
store, departed from the Philippines with
intent to defraud her creditors and has
remained absent from the country. While
she has liabilities totaling P100,000, her
assets, however, are worth P120,000.
May “X” be declared an insolvent?
Reason.
A: Yes, X may be declared insolvent. Under
the Insolvency Law, although the debtor has
more than sufficient property to pay all his
creditors, yet if she would commit any act of
insolvency, she should be declared insolvent.
One of the acts of insolvency out of the 13
enumerated by the Insolvency Law, is: that
being absent from the Philippines, with intent
to defraud his/her creditors, he/she remains
absent. (Sec. 20, Insolvency Law)
Q: Juan opened a coffee shop using money
borrowed from financial institutions.
After 3 months, Juan left for the USA with
the intent of defrauding his creditors.
While his liabilities are P1.2 M, his assets,
however are worth P1.5. M.
May Juan be declared insolvent?
A: No. Juan may not be declared insolvent if
he was the one who filed the petition for
liquidation because his assets worth P1.5 M
are more than his liabilities worth P1.2 M.
However, his creditors may file a petition for
involuntary liquidation since he committed
an act of insolvency (BAR 1998)
Q: What does Liquidation Order contain?
A: The Liquidation Order shall:
a) declare the debtor insolvent;
b) order the liquidation of the debtor
and, in the case of a juridical debtor,
declare it as dissolved;

c) order the sheriff to take possession
and control of all the property of the
debtor, except those that may be
exempt from execution;
d) order the publication of the petition or
motion in a newspaper of general
circulation once a week for two (2)
consecutive weeks;
e) direct payments of any claims and
conveyance of any property due the
debtor to the liquidator;
f) prohibit payments by the debtor and
the transfer of any property by the
debtor;
g) direct all creditors to file their claims
with the liquidator within the period
set by the rules of procedure;
h) authorize the payment of
administrative expenses as they
become due;
i) state that the debtor and creditors
who are not petitioner/s may submit
the names of other nominees to the
position of liquidator; and
j) set the case for hearing for the
election and appointment of the
liquidator, which date shall not be less
than thirty (30) days nor more than
forty-five (45) days from the date of
the last publication.
Discussion:
It’s a long enumeration but basically the
phases of liquidation. You collate the
properties of the debtor that is why he cannot
dispose of or encumber properties. And then,
he cannot make payment to any creditor,
because we give preference to creditors over
the others and defeat the basic objective of
liquidation which is to distribute equitably
the properties of the debtor.
Now, the properties of course are given to the
liquidator, so that he may be the one to
distribute the properties in payment of the
various claims of the creditors.
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Q: What are the effects of the Liquidation
Order?
A: Upon the issuance of the Liquidation
Order:
a) the juridical debtor shall be deemed
dissolved and its corporate or
juridical existence terminated;
b) legal title to and control of all the
assets of the debtor, except those that
may be exempt from execution, shall
be deemed vested in the liquidator or,
pending his election or appointment,
with the court;
c) all contracts of the debtor shall be
deemed terminated and/or breached,
unless the liquidator, within ninety
(90) days from the date of his
assumption of office, declares
otherwise and the contracting party
agrees;
d) no separate action for the collection
of an unsecured claim shall be
allowed. Such actions already
pending will be transferred to the
Liquidator for him to accept and settle
or contest. If the liquidator contests or
disputes the claim, the court shall
allow, hear and resolve such contest
except when the case is already on
appeal. In such a case, the suit may
proceed to judgement, and any final
and executor judgement therein for a
claim against the debtor shall be filed
and allowed in court; and
e) no foreclosure proceeding shall be
allowed for a period of one hundred
eighty (180) days.
Discussion:
The right to foreclose is not lost, it is only
stayed.
Q: What are the remedies of the secured
creditor in liquidation proceeding?
A: Basically he can file a money claim in the
liquidation proceeding but waive the

mortgage lien or it can foreclose the
mortgage.
Slides:
During liquidation proceedings, a secured
creditor may waive its security or lien, prove
its claim, and share in the distribution of the
assets of the debtor, in which case it will be
admitted as an unsecured creditor; or
maintain its rights under the security or lien,
in which case:
1. [T]he value of the property may be
fixed in a manner agreed upon by the
creditor and the liquidator. When the
value of the property is less than the
claim ... the [creditor] will be
admitted .. . as a creditor for the
balance. If its value exceeds the claim
... the liquidator may convey the
property to the creditor and waive the
debtor's right of redemption upon
receiving the excess from the
creditor;
2. [T]he liquidator may sell the
property and satisfy the secured
creditor's entire claim from the
proceeds of the sale; or
3. [T]he secured creditor may enforce
the lien or foreclose on the property
pursuant to applicable laws.
It is worth mentioning that under Republic
Act No. 10142, otherwise known as the
Financial Rehabilitation and Insolvency Act
(FRIA) of 2010, the right of a secured
creditor to enforce his lien during liquidation
proceedings is retained. A secured creditor,
however, is subject to the temporary stay of
foreclosure proceedings for a period of 180
days, upon the issuance by the court of the
Liquidation Order. Metropolitan Bank and
Trust Company vs. S.F. Naguiat
Enterpises, G.R. no. 178407, 18 March
2015, J. Leonen
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Discussion:
This is a case penned by Justice Marvic, he
reiterated that under FRIA the right of the
secured creditor to enforce lien is not lost, it
is retained. However, it is subject to a
temporary stay of 180 days from issuance.
Slides:
Q: Distinguish the remedies of the secured
creditors in rehabilitation proceedings,
suspension of payment and liquidation
proceedings.
A: In rehabilitation, the stay order suspends
enforcement of the mortgage lien until
termination of the rehabilitation proceedings.
The order of the court in suspension of
payment does not cover secured creditors
while in liquidation, the secured creditor can
only enforce his lien after 180 days from
issuance of the liquidation order.
Q: What will guide the liquidator in
carrying the liquidation of the insolvent
debtor?
A: The Liquidator shall submit to the court a
Liquidation Plan. The Plan shall take into
account the rules on concurrence and
preference of credit unless a preferred
creditor voluntarily waives his preferred
right. Once approved, the Plan shall be
carried out to settle the claims against the
debtor.
Q: What are the procedural remedies
under FRIA?
A:
 Decisions of the Regional Trial Court
on rehabilitation are immediately
executory and shall be appealable to
the Court of Appeals under Rule 43 of

the Rules of Court. Motion for
reconsideration of the decision is not
allowed.
 A party may file a motion for
reconsideration of a suspension of
payment order or any order issued by
the court prior to its order confirming
or disapproving the proposed
agreement to suspend payment, as
well as any order of issued by the
court prior to the issuance of the
liquidation order.
 No relief can be extended to the party
aggrieved by the court's order on the
motion through a special civil action
for certiorari under Rule 65 of the
Rules of Court.
 The court's dismissal of the petition
for suspension of payment on the
ground of insufficiency in form and
substance resulting in the non-
issuance of the suspension order and
its order confirming or disapproving
the proposed suspension of payment
agreement, as well as the liquidation
order and the order approving or
disapproving the liquidation plan can
only be reviewed through a petition
for certiorari to the Court of Appeals
under Rule 65 of the Rules of Court
within 15 days from notice of the
decision or order.
PHILIPPINE COMPETITION ACT
(RA 10667 – Salient Features)
What is the state policy for the
enactment of Republic Act No. 10667,
otherwise known as the "Philippine
Competition Act" ("PCA")?
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The efficiency of market competition as a
mechanism for allocating goods and
services is a generally accepted precept.
The State recognizes that past measures
undertaken to liberalize key sectors in the
economy need to be reinforced by
measures that safeguard competitive
conditions. The State also recognizes that
the provision of equal opportunities to all
promotes entrepreneurial spirit,
encourages private investments,
facilitates technology development and
transfer and enhances resource
productivity. Unencumbered market
competition also serves the interest of
consumers by allowing them to exercise
their right of choice over goods and
services offered in the market.
Q: What are the ends or the objectives of the
State in promulgating this law?
You know that there is no antitrust suit in the
Philippines. This is not equivalent to the
antitrust suit in America.
This law is against monopoly, or any
agreement, activity in restraint of trade.
Pursuant to the constitutional goals for the
national economy to attain a more
equitable distribution of opportunities,
income, and wealth; a sustained increase
in the amount of goods and services
produced by the nation for the benefit of
the people; and an expanding productivity
as the key to raising the quality of life for
all, especially the underprivileged and the
constitutional mandate that the State shall
regulate or prohibit monopolies when the
public interest so requires and that no
combinations in restraint of trade or
unfair competition shall be allowed, the
State shall:

To be more precise, under this law, the State
endeavors to:
a. Enhance economic efficiency and
promote free and fair competition in
trade, industry and all commercial
economic activities, as well as establish
a National Competition Policy to be
implemented by the Government of the
Republic of the Philippines and all of its
political agencies as a whole;
b. Prevent economic concentration which
will control the production, distribution,
trade, or industry that will unduly stifle
competition, lessen, manipulate or
constrict the discipline of free markets;
and
c. Penalize all forms of anti-competitive
agreements, abuse of dominant position
and anti-competitive mergers and
acquisitions, with the objective of
protecting consumer welfare and
advancing domestic and international
trade and economic development.
Discussion for (a): There was a time there
was only one telecom company in the
Philippines – PLDT. It was a complete
monopoly. You have no choice, despite
complaints of inefficiency, poor service, high
billing, you cannot do anything about it
because it was the only telecom provider.
Now we have Globe and Smart, but even that,
many were still complaining; the duopoly
being complained by many. Probably better
service, better efficiency cannot be provided
by these two companies that is why there is
now a third player.
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This is one of the objectives of this law – to
promote free and fair competition, which
encourages the players to improve their
service.
More importantly, you give the public wider
choices or options.
Discussion for slide: Keep these three in
mind because these are the prohibited acts
under the PCA – anti-competitive agreement,
abuse of dominant position, and ant-
competitive mergers and acquisitions, as you
will see in the next slides.
What is the scope and application of the
PCA?
The PCA shall be enforceable against any
person or entity engaged in any trade,
industry and commerce in the Republic of
the Philippines. It shall likewise be
applicable to international trade having
direct, substantial, and reasonably
foreseeable effects in trade, industry, or
commerce in the Republic of the
Philippines, including those that result
from acts done outside the Republic of the
Philippines.
The PCA shall not apply to the
combinations or activities of workers or
employees nor to agreements or
arrangements with their employers when
such combinations, activities, agreements,
or arrangements are designed solely to
facilitate collective bargaining in respect of
conditions of employment.

Discussion for slide: Here you can see that
the PCA has territorial application
What is the role of the Philippine
Competition Commission (“PCC”)?
The PCC is an independent quasi-judicial
body mandated to implement the national
competition policy, and enforce the PCA,
which serves as the primary competition
law in the Philippines for promoting and
protecting market competition.
The PCC institutes a regulatory
environment for market competition to:
a. Protect consumer welfare by giving
consumers access to a wider choice
over goods and services at lower prices;
and
b. Promote competitive businesses and
encourage market players to be more
efficient and innovative. Competition
also benefits small and medium
businesses.
Discussion for slide: The PCC has basically
two main functions:
1. It is a quasi-judicial body
- It can adjudicate disputes for
violations of the PCA
2. It is a regulatory body
- Ensures compliance with the PCA
- In case of non-compliance,
imposes appropriate
administrative sanctions.
The PCC is a quasi-judicial body that
implements the provisions of the PCA.
What are some of the powers of the PCC
as a quasi-judicial body?
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a. Original and primary jurisdiction over
the enforcement and implementation of
the provisions of the PCA (i.e. original
and primary jurisdiction on all
competition-related issues on trade,
industry and all commercial economic
activities).
b. It may summarily punish for contempt
by imprisonment not exceeding thirty
(30) days or by a fine not exceeding one
hundred thousand pesos (Pl00,000.00),
or both.
c. It may issue subpoena duces tecum and
subpoena ad testificandum.
d. It may conduct administrative
proceedings and impose administrative
fines.
a. Original and primary jurisdiction over the
enforcement and implementation of the
provisions of the PCA (i.e. original and
primary jurisdiction on all competition-
related issues on trade, industry and all
commercial economic activities).
NOTE: Interpretation of the provisions of
the PCA must also be included.
If it is competition-related issues on
trade, can you go to the RTC?
No. It has no jurisdiction. You go to the
PCC because the law says “original and
primary jurisdiction” when it comes to
enforcement and implementation of PCA
provisions.
To enforce, however, civil and criminal
liability, obviously, the PCC has no
jurisdiction. You have to go to the court;

but to interpret, enforce, and implement
the provisions of the PCA, it is the PCA
that has the original and primary
jurisdiction.
b. It may summarily punish for contempt by
imprisonment not exceeding thirty (30)
days or by a fine not exceeding one
hundred thousand pesos (Pl00,000.00), or
both.
NOTE: This is at the option of the PCC.
c. It may issue subpoena duces tecum and
subpoena ad testificandum.
d. It may conduct administrative proceedings
and impose administrative fines.
NOTE: ONLY administrative fine. It
cannot impose penal sanctions.
Where can the decision of the PCC be
appealable?
Decisions of the PCC shall be appealable
to the Court of Appeals in accordance with
the rules of court.
Q: What is your mode of appeal, is a
petition for review or petition for
certiorari?
A: The law is not clear.
A commissioner wanted to answer petition
for certiorari. Why? Because the threshold or
premise for such petition is grave abuse of
discretion, which is difficult to prove. It
requires a higher degree of evidence to show
that there was lack of jurisdiction or excess of
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jurisdiction on the part of the PCC, as
opposed to a petition for review where you
only point out to the CA the error of the PCC
in appreciation of facts and of the law.
However, the law says “in accordance to the
rules of court”, therefore, it should be petition
for review, not petition for certiorari.
In the same way, how do you appeal a
decision of the SEC, one that is also a quasi-
judicial body, to the CA? It is through a
petition for review, not petition for certiorari.
Therefore, the answer is through a petition
for review under Rule 43 of the Rules of
Court.
Does the PCC have fact-finding
authority?
A: Yes.
The PCC has the sole and exclusive
authority to initiate and conduct a fact-
finding or preliminary inquiry for the
enforcement of the PCA. Section 31, PCA
It may conduct inquiry, investigate, and
hear and decide on cases involving
violation of the PCA and other existing
competition laws motu proprio, upon
receipt of a verified complaint from an
interested party, or upon referral by the
concerned regulatory agency. Section
12(a), PCA
Q: Can the PCC conduct inquiry,
investigation motu proprio or upon
complaint only of any interested party?

A: The law is very clear – the PCC may
conduct examination, investigation, inquiry
either motu proprio or upon receipt of
verified complaint of any interested party or
referral by the concerned regulatory agency.
This is what happened to Grab and Uber.
There were no complaints. Grab acquired
Uber in the Philippines. Despite of the fact
that there was no complaint received by the
PCC, it conducted its own investigation and
thereafter imposed sanctions against the
parties for noncompliance to the PCA
provisions.
Does PCC have the authority to institute
court proceedings for violation of
competition laws?
The PCC has the power to institute the
appropriate civil or criminal proceedings
for violation of the PCA and other existing
competition laws. Section 12(a), PCA
Note that any other person who suffers
direct injury by reason of any violation of
the PCA may also institute a separate and
independent civil action after the PCC has
completed its preliminary inquiry. Section
45, PCA
NOTE: Any person who suffers direct injury
from a violation of the provisions of the PCA
is also allowed to institute a separate and
independent civil action, but only after the
PCC has completed its own preliminary
inquiry.
This is akin to the doctrine of primary
jurisdiction.
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Does the Regional Trial Court (''RTC'')
have jurisdiction for violations of the
PCA?
The RTC of the city or province where the
entity or any of the entities whose business
act or conduct constitutes the subject
matter of a case, conducts its principal
place of business, shall have original and
exclusive jurisdiction, regardless of the
penalties and fines herein imposed, of all
criminal and civil cases involving
violations of the PCC and other
competition-related laws. If the defendant
or anyone is charged in the capacity of a
director, officer, shareholder, employee, or
agent of a corporation or other juridical
entity who knowingly and willfully
authorized the commission of the offense
charged, the RTC of the city or province
where such corporation or juridical entity
conducts its principal place of business,
shall have jurisdiction. Section 44, PCA
There are civil and criminal liabilities for
violation of the PCA. For those liabilities you
go to the RTC, as described above.
What is the statute of limitations for
violations of the PCA?
This refers to the prescriptive period.
Any action arising from a violation of any
provision of the PCA shall be forever
barred unless commenced within five (5)
years from:
a. For criminal actions, the time the
violation is discovered by the offended
 4B & 4C 2020-2021
Notes for Merc Rev 1

party, the authorities, or their agents; c. Prohibited Mergers and Acquisitions.

and (Sections 16-23, PCA)
b. For administrative and civil actions, the
time the cause of action accr1ues. Anti-Competitive Agreements
There are two kinds of anti-competitive
Can the Department of Justice (''DOJ'') agreements:
conduct investigation and prosecution of a. Violations per se
criminal offenses under the PCA? b. Not violation per se but become
violations if they have the effect of
The Office for Competition ("OFC") under preventing, restricting or lessening
the DOJ shall only conduct preliminary competition.
investigation and undertake prosecution of
all criminal offenses arising under the PCC What are the anti-competitive
and other competition-related laws. agreements which are considered
Section 13, PCA violations per se?

If the evidence so warrants, the PCC may There are two kinds:
file before the DOJ criminal complaints for The following agreements, between or
violations of the PCC or relevant laws for among competitors, are per se
preliminary investigation and prosecution prohibited:
before the proper court. The DOJ shall a. Restricting competition as to price, or
conduct such preliminary investigation in components thereof, or other terms of
accordance with the Revised Rules of trade.
Criminal Procedure. Section 31, PCA b. Fixing price at an auction or in any
form of bidding including cover
Just like the SEC, the PCC is not a bidding, bid suppression, bid rotation
prosecutorial agency. It may only conduct and market allocation and other
initial investigation, and then refer the matter analogous practices of bid
to the DOJ which will be the one to conduct manipulation. Section 14, PCA
preliminary investigation and prosecution
before the proper court. These two are per se violations regardless of
the effect on competition:
What are the general classifications of a. Price fixing
violations under the PCA? b. Bid-rigging (*as enumerated in the
above slide)
There are three:
a. Anti-Competitive Agreements. What are the anti-competitive
(Section 14, PCA) agreements which are not considered
b. Abuse of Dominant Position. (Section violations per se?
15, PCA)

Page 323 of 351


The other kind, as we said, under anti-
competitive agreements are those not
considered violations per se, but if these
agreements between and among competitors
have the object or effect of substantially
preventing, restricting, or lessening
competition then they are prohibited. (Take
not of PRLC – preventing, restricting, or
lessening competition)
The following agreements, between or
among competitors which have the object
or effect of substantially preventing,
restricting or lessening competition shall
be prohibited:
a. Setting, limiting, or controlling
production, markets, technical
development, or investment.
b. Dividing or sharing the market,
whether by volume of sales or
purchases, territory, type of goods or
services, buyers or sellers or any other
means.
Any other agreements other than those
which have the object or effect of
substantially preventing, restricting or
lessening competition shall also be
prohibited: Provided, Those which
contribute to improving the production or
distribution of goods and services or to
promoting technical or economic progress,
while allowing consumers a fair share of
the resulting benefits, may not necessarily
be deemed a violation of the PCA.
What is price fixing?
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Remember that price-fixing is per se
violation.
This involves restricting competition as to
price, or components thereof, or other
terms of trade. This happens when
competitors agree on the prices of goods or
services, rather than independently setting
their respective prices.
This occurs, for example, when competitors
agree to set the price of goods or services
rather than letting the market be the one to
determine the price of those goods or
services.
What is bid-rigging?
This is again a per se violation.
This involves fixing prices at an auction or
any form of bidding, including cover
bidding, bid suppression, bid rotation, and
market allocation, among others. Bid-
rigging usually occurs when parties
participating in a tender coordinate their
bids rather than submit independent
proposals.
When you do a bidding you’re not supposed
to know the bid of the others, but in bid-
rigging, they (the participants) agree or
collude or coordinate with one another as to
who will win the bidding rather than submit
their independent proposals.
What is supply restriction?
This is not per se violation, but prohibited if
it has the effect of (PRLC) preventing,

restricting or lessening competition.
This is an agreement by two or more
competing businesses to set or limit
production levels and create an artificial
supply shortage, thereby raising prices.
Similar forms of anti-competitive
agreements include restrictions in markets,
technical development and investment.
For example, Company A is assigned to
produce 10,000 sacks of rice, Company B
20,000, thereby creating artificial supply
shortage.
What is market sharing?
This is not per se violation, but prohibited if
it has the effect of (PRLC) preventing,
restricting or lessening competition.
This is a collusive agreement by two or
more competing businesses to divide or
allocate the market. Market sharing not
only includes territories, but also
customers, volume of sales or purchases,
and type of goods or services, among other
considerations.
Company A for Luzon, Company B for
Visayas, and B for Mindanao.
What is a cartel?
A cartel involves businesses in the same
industry colluding with one another to
substantially prevent, restrict, or lessen
competition by entering into agreements to
fix prices, rig bids, restrict output, and
allocate markets, among others.
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For a cartel, it is a business in the same
industry. Examples are rice cartel, cement
cartel. Here, the same players in the same
industry collude with one another for these
purposes.
Abuse of Dominant Position
The second prohibited act or practice is
Abuse of Dominant Position (The first one is
anti-competitive agreement, as discussed
earlier)
Is it illegal to have a dominant position in
the market?
It is not illegal to have a dominant position
in the market; however, it is illegal to abuse
one's dominance. The acquisition,
maintenance, and increase of market share
does not violate the PCA if:
a. it is acquired through legitimate means,
such as having superior skills,
rendering superior service, producing
or distributing better-quality products,
having business acumen, and using and
enjoying intellectual property rights;
and
b. It does not substantially prevent,
restrict, or lessen competition in the
market.
What are example of acts constituting
abuse of dominant position?
Abuse of dominant position refers to
actions of a dominant player to exploit its
dominant position in the relevant market,

or to exclude competitors in a manner that
harms the competition process.
Dominant position refers to a position of
economic strength that an entity or entities
hold which makes it capable of controlling
the relevant market independently from
any or a combination of the following:
competitors, customers and suppliers.
Section 4(g), PCA
There shall be a rebuttable presumption of
market dominant position if the market
share of an entity in the relevant market is
at least fifty percent (50%), unless a new
market share threshold is determined by
the PCC for that particular sector. Section
27, PCA
Here are more examples:
The following acts constitute abuse of
dominant position:
a. Predatory pricing - the pricing of
goods or services at such a low level
that other suppliers cannot compete and
are forced to leave the market.
b. Dumping - a term used when a country
or company exports a product at a price
that is lower in the foreign importing
market than the price in the exporter's
domestic market.
c. Limit pricing - a pricing strategy
where products are sold by a supplier at
a price low enough to make it
unprofitable for other players to enter
the market.
d. Tying - an often illegal arrangement
where in order to buy one product, the
consumer must purchase another
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product that exists in a separate market.
(e.g., if a particular brand of car
requires the use of a particular brand of
tires).
e. Price discrimination - a selling
strategy that charges customers
different prices for the same product or
service based on what the seller thinks
they can get the customer to agree to. In
price discrimination, the seller charges
each customer the maximum price he
or she will pay. Forms of price
discrimination include age discounts,
occupational discounts, gender based
pricing.
f. Imposing barriers to entry - acts that
prevent competitors from growing
within the market in an anticompetitive
manner, except those that develop in
the market as a result of, or arising from
a superior product or process, business
acumen, or legal rights or laws.
g. Monopsony - directly or indirectly
imposing unfairly low purchase prices
for the goods or services of, among
others, marginalized agricultural
producers, fisherfolk, micro, small, and
medium enterprises (MSMEs), and
other marginalized service providers
and producers.
Predatory pricing is what you call “bagsak
presyo” to wipe out competition.
Dumping: Let’s say price in China is P100
per bag of cement. When it’s sold in the
Philippines, it will be for P75 per bag.
Tying: “Pinagba-bundle”. Here, you
basically deprive the others the option for

other brand of tires. In the States there is now
an attempt to unbundle Facebook from
Instagram, Messenger. There is an antitrust
suit filed against Facebook.
Price discrimination: Example, when price is
set higher for elderly people than for young
people. This is not allowed.
d. Tying - an often illegal arrangement where
in order to buy one product, the consumer
must purchase another product that exists in
a separate market. (e.g., if a particular brand
of car requires the use of a particular brand of
tires).
e. Price discrimination - a selling strategy that
charges customers different prices for the
same product or service based on what the
seller thinks they can get the customer to
agree to. In price discrimination, the seller
charges each customer the maximum price he
or she will pay. Forms of price discrimination
include age discounts, occupational
discounts, gender based pricing.
f. Imposing barriers to entry - acts that
prevent competitors from growing within the
market in an anti-competitive manner, except
those that develop in the market as a result of,
or arising from a superior product or process,
business acumen, or legal rights or laws.
g. Monopsony - directly or indirectly
imposing unfairly low purchase prices for the
goods or services of, among others,
marginalized agricultural producers,
fisherfolk, micro, small, and medium
enterprises (MSMEs), and other
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marginalized service providers and
producers.
Q: The Enforcement Office of PCC filed
Statement of Objections with the PCC
alleging that Urban Deca Homes
Manila Condominium Corporation
("UDH Manila”) and 8990 Holdings, Inc.
("8990 Holdings") abused its dominant
position in the provision of property
management services by preventing
internet service providers other than Fiber
to Deco Homes ("FDTH") from providing
fixed- line Internet service to residents of
UDH Manila. The Enforcement Office and
Urban Deca filed a Joint Motion for
Settlement setting out the commitments,
terms, and conditions to address the
alleged conduct and admitting abuse of
dominant position of UDH Manila
and 8990 Holdings. The commitments
include perpetual desistance from anti-
competitive conduct.
a. When is an entity in a dominant
position?
A: An entity is in dominant position in the
market if it is in a position of economic
strength which makes it capable of
controlling the relevant market
independently from any or a combination of
the following: competitors, customers,
suppliers, or consumers.
It should be emphasized that an entity's
dominance in a market is not per se anti-
competitive. However, Section 15 of the
PCA, prohibits abuse of such dominance that
would substantially prevent, restrict, or
lessen competition. (Competition
Enforcement Office of the Philippine
Competition Commission vs. Urban Deco
homes Manila Condominium Corporation
and 8990 Holdings, Inc., PCC Case No. E-
2019-001, September 30, 2019.)

Q: b. The PCC needs to determine
whether the proposed measures will: 1)
cease the anti-competitive conduct and
prevent its recurrence; 2) restore
competition; and 3) effect deterrence. Are
the commitments, conditions, and terms
set out sufficient to remedy the harms
arising from the abuse of dominant
position?
A: Yes. The commitment of UDH Manila
and 8990 Holdings to cease conduct,
allow current FTDH customers to opt out of
the- in period and invite and allow other
internet service providers to offer and
provide services sufficiently addressed the
harm to the condominium's tenants and
resident who were deprived of choices or
alternatives to FTDH's fixed- line Internet
services. In such a way, competition will be
restored. Also, the monitoring requirements
will impose a continuing obligation to make
good of the commitment to perpetually cease
from the same anti-competitive conduct.
The commitment to issue a public apology
and payment of fine serve as a deterrent that
will discourage other entities, which enjoy a
dominant position in the respective markets,
from committing the same violation and
exercise, instead, a higher degree of
prudence in their commercial affairs.
PROHIBITED ACTS
3. Anti-Competitive Agreements
a. Violation per se
b. Not violation per se
4. Abuse of Dominant Position
5. Anti-Competitive Mergers and
Acquisition
Q: What are the prohibited mergers and
acquisitions?
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A: M&A agreements that substantially
prevent, restrict or lessen competition in the
relevant market or in the market for goods
or services as may be determined by the
PCC shall be prohibited.
Q: Under what circumstances are the
parties required to notify the PCC of a
M&A?
A: If it is an M&A, whether sale of shares of
another company, there is requirement to
notify the PCC before you consummate
transactions. There are 2 thresholds that
should be present to trigger the compulsory
notification to PCC before the execution of
definitive agreement relating to transaction.
The agreement without first notifying the
PCC may conduct appropriate investigations,
whether or not this M&A will substantially
prevent, restrict or lessen competition.
The initial threshold is 1B, whether size of
the person test or transaction test.
TWO THRESHOLDS
1. Size of the person (parties to the M&A)
2. Size of the transaction test
The size of the person must be 1B and the
size of the transaction should also be 1B,
then you have to notify the PCC accordingly
before you consummate transaction. (OLD)
NOTE: On March 1, 2020, the PCC issued a
Resolution adjusting the thresholds for
compulsory merger and acquisition
notification to Php6 Billion for the Size of
Person Test, and to Php2.4Billion tor the
Size of Transaction Test. If these tests

concur. compulsory notification must be
given to the PCC. otherwise, the
transaction shall be void.
PCC Memorandum Circular No. 18-001
issued in 2018 established the
automatic annual adjustment of the merger
thresholds based on the nominal gross
domestic product growth of the previous
year rounded up to the nearest hundred
millions. This ensures that the thresholds
maintain their real value over time and
relative to the size of the economy.
SLIDE:
Under Section 17 of the PCA, parties to a
M&A agreement, wherein the value of the
transaction exceeds one billion pesos (PHP
1B), are prohibited from consummating the
agreement until thirty (30) days after
providing notification to the FCC.
Section 2, Rule 4 of the Implementing Rules
and Regulations of Republic Act No. 10667
("PCA Rules") further provides that parties to
a MBA that satisfy the threshold for
compulsory notification are required to notify
the PCC before the execution of the definitive
agreements relating to the transaction.
Note that based on Section 19 of the PCA, the
PCC has the authority to adjust the threshold
for compulsory notification. As to be
discussed below, the one billion pesos initial
threshold under the PCA has already been
adjusted by the FCC.
Q: What are the tests used to determine if
compulsory notification of M&A to PCC?
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A: Notification of M&A agreement to PCC
"Size of Person Test" and "Size of
Transaction Test" concur:
a. Size of Person Test
i. Aggregate annual gross revenue in, into or
from the Philippines ("PH"), exceeds PHP1
Billion; or
ii. Value of the assets in the PH of the
Ultimate Parent Entity ("UPE") of at least the
acquiring or acquired entities, including that
of all entities that the UPE controls, directly
or indirectly, exceeds PHP1B.
b. Size of Transaction Test.
Value of the transaction exceeds PHP1B, as
determined by the following table.
Q: Who are the notifying entities to the
PCC for compulsory notification?
A:
a. Parties to a merger or
acquisition that satisfy the
compulsory notification
thresholds are required to notify
the PCC before the execution of
the definitive agreements relating
to the transaction.
b. If notice to the PCC is required to
the Merger or Acquisition, then
all acquiring and acquired pre-
acquisition ultimate parent
entities or any entity authorized
by the ultimate parent entity to
file notification on its behalf must
each submit a Notification form
and comply with the procedure
for notification with the PCC
under PCA Rules. The parties
shall not consummate transaction
 4B & 4C 2020-2021
Notes for Merc Rev 1

before the expiration of the

relevant periods provided in the NOTE:
PCC Rules. Days to conduct review:
c. In the formation of a joint venture Sufficient: 30 days
(other than in connection with a Not sufficient: 60 days
merger or consolidation), the
contributing entities shall be Q: How much is the filing fee for the
deemed acquiring entities, and the notification and review of M&A by the
joint venture shall be deemed the PCC?
acquired entity.
A: The following fees shall apply:
Q: What are the procedures for
notification? a. Upon filing of the Notification Form:
Php250.000.00.
A: b. Commencement of Phase 2 Review:
1% of the 1% of the value of the transaction
which shall not be less than PHP1B nor
exceed PHP5B.

Q: What is the repercussion/s if

compulsory notification to PCC is not
observed by the parties to a M&A?

A: An agreement consummated in violation

of the notification requirement shall be
considered void and subject the parties to an
administrative fine of 1% to 5% of the value
of the transaction.

Q: Grab bought assets and driver

contracts of Uber across South East Asia,
including the Philippines, through a
regional purchase agreement
("Transaction"). In exchange for its assets,
Uber would receive shares equivalent to
27.5% of the ownership in Grab's entire
operations. As admitted by the parties,
Uber is barred from re-entering the ride-
hailing market in Southeast Asia,
including the Philippines, for a prescribed

Page 330 of 351


period. The Mergers and Acquisition
Office of the PCC found, in its preliminary
assessment, that the Transaction has
resulted and will likely to result in
substantial lessening of competition in the
relevant market.
a. What interim measures can the PCC
impose pending the motu propio review of
the Transaction?
A: Section 12(f) of the PCA grants the PCC
express powers to impose interim measures
such as show cause orders and cease and
desist orders after due notice and hearing in
accordance with the PCA’s implementing
rules and regulations. Under Rule 2.13 of the
Merger Procedure, the interim measures may
include ordering a party, its subsidiaries or
affiliates, including their respective directors,
officers, agents or employees, to temporarily
cease or desist from the performance of
certain acts.
NOTE: While PCC has the power to issue
interim measure while conducting the motu
proprio review, it cannot be done ex parte.
There must be notice and hearing in
accordance to the rules of PCA.
Q: Mergers and Acquisitions Office
("MAO") of the PCC issued a Statement
of Concerns detailing the potential
competition issues arising from the
acquisition of Goldilocks. A major finding
by the review undertaken by MAO is the
possibility of partial or total foreclosure in
the supply of retail spaces in SM Malls
to competitors of Goldilocks after its
acquisition by the SM Group (SM Retail,
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Notes for Merc Rev 1
SM Prime Holdings, Inc., and SM
Investments Corporation). Another
concern identified by MAO is the potential
sharing of competing mall tenant's
business information to Goldilocks. SM
Group, then, submitted a comprehensive
undertaking to address competition
concerns. Are the undertaking and
conditions sufficient to address the
competition concerns raised?
A: Yes. As to the first competition concern,
SM Prime Holdings, Inc. undertake to treat
Sill mall tenants and lease applicants engaged
in the sale of Goldilocks-like products or
those in the same relevant product market in
a fair, reasonable, and non- discriminatory
manner. Likewise, it will not refuse
Goldilocks' competitors from locating in SM
malls nor foreclose its spaces.
As to the second, it shall maintain data
protection protocols and firewall systems
which will prevent the ability of SM Group
to access detailed sales data or information of
SM Prime Holdings tenants. The tenant sales
data in possession shall not be used and will
never be used for any purpose outside the
computation of rent due from such 5M malls
tenant. Also, SM Group obliged itself to
comply with its commitment to submit
reports to the PCC and acknowledge the
authority of the PCC's monitoring team.
(Acquisition by SM Retail, Inc. of goldilocks
Bakeshop, Inc., Commission Decision No.
42-M-017/2017, December 29, 2017.)
Q: Is PCC allowed to forbear the
application of the PCA?

A: The PCC may forbear from applying the
provisions of the PCC, for a limited time, in
whole or in part, in all or specific cases, on
an entity or group of entities, if in its
determination:
a. Enforcement is not necessary to the
attainment of the policy objectives of the
PCA;
b. Forbearance will neither impede
competition in the market where the entity
or group of entities seeking exemption
operates nor in related markets; and
c. Forbearance is consistent with public
interest and the benefit and welfare of the
consumers.
A public hearing shall be held to assist the
PCC in making this determination.
The PCC's order exempting the relevant
entity or group of entities under this section
shall be made public. Conditions may be
attached to the forbearance if the PCC deems
it appropriate to ensure the long-term interest
of consumers.
In the event that the basis for the issuance
of the exemption order ceases to be valid the
order may be withdrawn by the PCC.
11TH NEGATIVE LIST
Discussion:
Under the Foreign Investment Act, the
executive is required to draw up a list of
foreign corporations which are allowed to
investment or not.
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Slide:
On 29 October 2018, President Rodrigo
Duterte signed Executive Order No. 65 ("EC
65") to issue the 1lth Foreign Investment
Negative List ("11th Negative List"), The
11th Negative List updates the 10th Negative
List, which was promulgated more than 3
years ago under Executive Order No. 184.
Compared to the 10th Negative List. the 11th
Negative List is less restrictive since it now
allows full foreign participation in 5
investment areas or activities and relaxes
foreign equity restrictions by allowing up to
40% foreign participation in 3 sectors. The
following table outlines the changes
introduced by the11th Negative List in the
following investment areas:
10TH NEGATIVE 11TH NEGATIVE
LIST LIST
Internet Business. which refers to internet
access providers that merely serve as
carriers for transmitting messages. rather
than being the creator of the
message/information.
(Dean: Before foreigners are not allowed.
Now, 100% allowed. Internet businesses
do not create content but transmit
messages only)
0% 100%
Carved out as an
exception to mass
media, which is
strictly restricted to
Filipino nationals
Teaching at higher education levels
provided that the subject being taught is
 4B & 4C 2020-2021
Notes for Merc Rev 1

a not a professional subject (Le. included a. Infrastructure/development

in a government board examination or bar projects covered In Republic Act
examination). No. 7718
0% 100% b. Projects which are foreign funded
Carved out as an or assisted and required to
exception to undergo international competitive
practice of bidding.
pratessions, which Up to 25% Up to 40%
is strictly restricted Private radio communications network.
to Filipino Up to 20% Up to 40%
nationals.
Training Centres engaged in short-term
high-level skills development that do not
DATA PRIVACY ACT
form part of the formal educational system.
Up to 40% Up to 100%
Carved out as an Introduction
exception to A time magazine article commented that data
educational is now more valuable than gold. Data can be
institutions, which utilized to determine customer preference,
are still restricted analyze market behavior, monitor acts of
only up to 401% competitor, appeal to voters during election,
foreign equity. create false news, alter behavioral patterns
Insurance adjustment companies, and for a variety of other purposes, from
lending companies, financing noble to sinister.
companies, and Investment houses.
Our personal data are like cherished
(Dean: most important change) possessions. We hold on to them tightly and
Up to 40% for Up to 100% only share with persons who enjoy our trust
adjustment and confidence. We thus Foment and
companies complaint if our personal data are collected,
Up to 49% for altered, removed, blocked or simply used for
lending companies unintended purposes. Our Philippine
Up to 60% for Constitution guarantees, no less, the citizens
financing right to privacy. Special laws have been
companies and passed to further strengthen such right. One
investment houses of them, and the most recent, is the Data
Wellness centres Privacy Act (DPA).
Up to 40% Up to 100%
Q: What are the types of privacy?
Contracts for the construction and repair of
A: There are two types of privacy, viz:
locally funded public works, except:

Page 333 of 351


a. Decisional Privacy which involves the
right to independence in making certain
important decision's; and
Dean: Examples of Decisional Privacy:
- What school would I go to for
law?
- What law firm I will join after law
school?
- Who is the person I will marry?
b. Informational Privacy which refers to
the interest in avoiding disclosure of
personal matters. (Disini v. Department
of Justice. G.R. No. 203335, February
11, 2014)
Data privacy (or Data Protection under EU
Law) is synonymous to informational
privacy.
Q: Does disclosure of case details violate
the Data Privacy Act?
A: Note that disclosure of details of a case
does not violate Republic Act No. 10173,
otherwise known as the "Data Privacy Act of
2012" ("DPA"), provided that there is no
personal information and personal sensitive
information included in the disclosure. The
disclosure, however, will violate the laver-
client confidentiality rule.
Discussion: So this law prohibits the
disclosure of personal information and
personal sensitive information. So as long as
these are not included in the disclosure, there
is no violation of the Data Privacy Act.
Q: Which government agency is
responsible for the implementation of the
DPA?
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Notes for Merc Rev 1
A: The National Privacy Commission
("NPC") is an independent body mandated to
administer and implement the DPA, and to
monitor and ensure compliance of the
country with international standards set for
personal data protection, (Section 8, OP A
Rules)
Q: Who is a data subject?
A: Data subject refers to an individual whose
personal information is processed. Data
subject is the party sought to be protected by
the DPA.
Discussion: A data subject can be any
person, natural or juridical, whose
information is being processed. You and me
are the data subjects.
Q: Who are the parties required to comply
with the rules on data processing under the
DPA?
A:
a. Personal Information Controllers
("PIC") refers to a person or
organization who controls the collection,
holding, processing or use of personal
information, including a person or
organization who instructs another
person or organization to celled, hold,
process, use, transfer or disclose personal
information on his or her behalf.
Examples are schools, offices, whether
government or private, law firms,
hospitals, HMOs, search engines like
Google, social media platforms like
Facebook. Twitter.

b. Personal Information Processors
("PIP”) refers to any natural or juridical
person to whom a personal information
controller may outsource the processing
of personal data pertaining to a data
subject.
Examples are business processing offices
and testing renters.
Discussion: The person to whom the PIC
outsource the processing of personal data
referring to the data subject. The PIC
subcontracts the processing of the
information to the PIP.
Q: What is processing?
A: Processing refers to any operation or any
set of operations performed upon personal
information including, but not limited to, the
collection, recording, organization, storage,
updating or modification, retrieval,
consultation, use, consolidation, blocking,
erasure or destruction of data. Section 3(j),
DPA.
Discussion: Personal information and
personal sensitive information shall not be
processed without consent of the data subject
except in the cases allowed by law. If the
processing is unauthorized, it constitutes a
violation of the right to privacy of the data
subject under the Data Privacy Act.
Keyword for Processing: MR CROS
CUCUBED
M - MODIFCATION
R- RECORDING
C - CONSOLIDATION
R - RETRIEVAL
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Notes for Merc Rev 1
O - ORGANIZATION
S - STORAGE
C - COMBINATION
U-UPDATING
C - CONSULTATION
U - USE
B - BLOCK
E - ERASURE
D - DESTRUCTION
Therefore, you cannot do any of the acts (MR
CROS CUCUBED) without the consent of
the data subject.
Q: What is outsourcing or subcontracting
in the context of data privacy law?
A: Outsourcing or subcontracting is the
disclosure or transfer of personal data by a
personal information controller to a personal
information processor. The purpose of such
disclosure is for the personal information
processor to perform processing activities on
the personal data upon the instructions of the
personal information controller.
A personal informational controller, from the
name itself, controls the processing activities
and decides on what information shall be
collected, or the purpose or extent of its
processing. A personal information
processor, on the other hand, refers to any
natural or juridical person or any other body
to whom a personal information controller
may outsource or instruct the processing of
personal data pertaining to a data subject.
The processing by a personal information
processor must be governed by a contract or
other legal act that binds the personal
information controller to the personal
 4B & 4C 2020-2021
Notes for Merc Rev 1

information processor. For the protection of

the parties, the best document to clearly Slide:
indicate their legal rights and obligations By its definition, the parties involved in data
under an outsourcing arrangement is an sharing are all personal information
outsourcing agreement. Such agreement must controllers even if the transferor is a personal
comply with the provisions of the law on information processor since the letter's act of
outsourcing as provided in Section 44 of the disclosing personal data is upon the
Implementing Rules and Regulations. instructions of the personal information
controller. Each party in a data sharing
The National Privacy Commission does not agreement has its own purpose or use for
require the submission of the outsourcing personal data involved.
agreement for approval prior to execution.
However, it may require the submission of Parties to data sharing may either be private
said document in case of a compliance check entities or government agencies. In both
or an investigation. cases, data sharing must be governed by a
data sharing agreement which is subject to
Q: What is data sharing? the review of the National Privacy
A: Data sharing is the disclosure or transfer Commission.
to a third party of personal data under the
custody of a personal information controller Discussion: Take note that data sharing
or personal information processor, in the case agreement is subject to review of the NPC
of the latter, such disclosure or transfer must and an outsourcing agreement is not subject
have been upon the instructions of the to review by the NPC.
personal information controller concerned.
Data sharing is allowed when expressly Q: Distinguish between outsourcing and
authorized by law, provided there are data sharing.
adequate safeguards for data privacy and DATA SHARING OUTSOURCING
security, and processing adheres to principles
First, all parties to a The parties have to
of data privacy.
data sharing be at least one
Example: Data sharing between the Registry
agreement are personal
of Deeds and the BIR. What are the
considered personal information
transactions involving the sale of property?
information controller and one
Who are the persons involved? Data is shared
controllers personal
with the BIR for the BIR to compute or
information
determine the parties to be charged. That is
processor
data sharing agreement and not outsourcing
Second, in terms of A personal
agreement.
objective, each information
party to a data processor has no
Data sharing is allowed as long as it is
sharing agreement other reason for
allowed by the Data Privacy Law.
has its own purpose processing the

Page 336 of 351


for processing the personal data other
personal data than that as
involved instructed by the
personal
information
controller
Lastly, data sharing Outsourcing is best
shall be governed evidenced by an
by a data sharing outsourcing
agreement agreement
Data sharing and outsourcing agreements
must comply with the principles of
transparency, legitimate purpose, and
proportionality as well as general principles
in collection, processing, and retention of
personal data.
Q: Do the following activities constitute
data sharing or outsourcing?
a. When a school discloses to an entity the
entire student data for archiving or
recording purposes;
b. When a bank transfers to a third party
personal data of clients for purposes of
loan or credit rating:
c. When a telecommunications company
discloses personal data of its subscribers
which it obtained for purposes of
marketing to a bank for the letter's
purpose of credit rating and vice versa?
A: The first two activities are outsourcing
while the third is data sharing.
Q: What is personal information?
A: Personal information refers to any
information whether recorded in a material
farm or not, from which the identity of an
individual is apparent or can be reasonably
and directly ascertained by the entity holding
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Notes for Merc Rev 1
the information, or when put together with
other information would directly and
certainly identify an individual. Section 3(g),
DPA.
Thus, the image of a person recorded by a
camera constitutes personal data.
Examples: owner of the car with a particular
plate number, the person with this telephone
number
Discussion:
Gist of data privacy act: Personal information
will not be processed without the consent of
data subject except in cases allowed by law.
Keyword: to identify an individual. Any
information that will identify an individual is
personal information.
Q: What is the scope of the application of
the DPA?
A: This DPA applies to the processing of all
types of personal information and to any
natural and juridical person involved in
personal information processing including
those personal information controllers and
processors who, although not round or
established in the Philippines, use equipment
that are located in the Philippines, or those
who maintain an office, branch or agency in
the Philippines.
Dean: DPA has extraterritorial or cross-
border application.
The DPA and its IRR explicitly state that they
apply to the processing of personal data even
if the act or practice is performed outside of
 4B & 4C 2020-2021
Notes for Merc Rev 1

the country, provided that the personal data
relates to a Filipino citizen or a resident of the
Philippines, and/or the personal information
controller (PIC) or personal information
processor (PIP) has an established link to the
Philippines. Thus, as long as any of the
foregoing conditions are met, processing of
personal data, whether involving a cross-
border dimension, will be covered by the
DPA, the IRR and other applicable issuances
by the NPC.
Discussion:
Example: Let's say the one processing the
data is a company in Singapore. The data
subject is a citizen or resident of the
Philippines but processing is being done
outside the country. Does DPA apply?
A: Yes. As long as the data relates to a
Filipino citizen or a resident of the
Philippines or the processor has link to the
Philippines.
Q: What is sensitive personal information?
A: Sensitive personal information refers to
the following personal information:
a. an individual's race, ethnic origin, marital
status, age, color, and religious,
philosophical or political affiliations;
Dean: The keyword is REMCARPP
(race, ethnic origin, marital status, color,
age, religious, philosophical or political
affiliations)
b. an individual's health, education, genetic
or sexual life of a person, or to any
proceeding for any offense committed or
alleged to have been committed by such
person, the disposal of such proceedings,
or the sentence of any court in such
proceedings:
Dean: Health is SPI. The only institution
allowed to disclose if you have COVID is
the DOH. Even employers are not
allowed to disclose when they have
employees who have COVID.
Education. That is why we cannot post
online your grades because grades are
SPI.
Any offense committed or alleged to have
been committee. Di pwedeng sabihin na
may admin case.
c. Issued by government agencies peculiar
to an individual which includes, but not
limited to, social security numbers.,
previous or current health records,
licenses or its denials, suspension or
revocation, and tax returns: and
d. Those specifically established by an
executive order or an act of Congress to
be kepi classified. Section 3(I), DPA.
Q: What are main differences between
personal information (PI) and sensitive
personal information (SPI)?
A:
PI SPI
As to Processing
Processing of PI is Processing of SPI is
allowed if not prohibited unless
otherwise at least one ground
prohibited by law, for lawful
and when at least processing exists.

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one ground for
lawful processing
exists (e.g.. consent
of data subject)
As to Penalty
There are penalties Penalties for
for unlawful acts unlawful acts
involving PI. involving SPI are
more severe.
Q: What are the general data principles
that govern the processing of personal
information?
A: The processing of personal information
shall be allowed, subject to compliance with
the requirements of the DPA and other laws
allowing disclosure of information to the
public and adherence to the following
principles:
a. Transparency - The data subject must be
aware of the nature, purpose, and extent
of the processing of his or her personal
data, including the risks and safeguards
involved, the identity of personal
information controller, his or her rights as
a data subject, and how these can be
exercised. Any information and
communication relating to The
processing of personal data should be
easy to access and understand, using clear
and plain language. Section 17(a), DPA
Rules
b. Legitimate Purpose - The processing of
information shah be compatible with a
declared and specified purpose which
must not be contrary to law, morals, or
public policy, Section 17(b), DPA Rules
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c. Proportionality - The processing of
information shall be adequate, relevant,
suitable, necessary, and not excessive in
relation to a declared and specified
purpose. Personal data shall be processed
only if the purpose of the processing
could not reasonably be fulfilled by other
means. Section 17(c), DPA Rules
Discussion:
Q: There is this case. The issue is whether
or not an employer may keep the 201 file
of its former employees in perpetuity in
contemplation of a possible future use to
be determined. 201 file is the record of the
employee. Can the employer keep this file?
A: No due to the principle of proportionality.
The employer would not need such file at a
certain point. But this only in contemplation
of a possible future use to be determined.
Q: What are the criteria for the lawful
processing of personal information?
A: The processing of personal information
shall be permitted only if not otherwise
prohibited by law, and when at least one of
the following conditions exists:
a. The data subject has given his or her
consent;
b. The processing of personal information is
necessary and is related to the fulfillment
of a contract with the data subject or in
order to take steps at the request of the
data subject prior to entering into a
contract;
Thus, an employer may process personal
it of a job applicant preparatory to the
execution of an employment contract.

c. The processing is necessary for
compliance with a legal obligation to
which the personal information controller
is subject.
Example of dormant accounts to the
national treasurer for the purpose of
initiating escheat proceedings.
d. The processing is necessary to protect
vitally important interests of the data
subject, including life and health;
HMOs may process personal information
of its members for the purpose of
providing health and medical services.
e. The processing is necessary in order to
respond to national emergency, to
comply with the requirements of public
order and safety, or to fulfill functions of
public authority which necessarily
includes the processing of personal data
for the fulfillment of its mandate;
f. The processing is necessary for the
purposes of the legitimate interests
pursued by the personal information
controller or by a third party or parties to
whom the data is disclosed, except where
such interests are overridden by
fundamental rights and freedoms of the
data subject which require protection
under the Philippine Constitution.
Who are qualified for promotion, job
assignments
Q: May the Mandatory Continuing Legal
Education Office (MCLE Office) legally
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publish the names of the MCLE non-
compliant lawyers who have not executed
any waiver relative to RA 10173 or the
DPA?
A: The posting or publication of the names of
MCLE non-compliant lawyers is permitted
even without the consent of the lawyer
pursuant to Section 12(l) of the DPA, to wit:
"SECTION 12, Criteria for Lawful
Processing of Personal Information. - The
processing of personal information shall be
permitted only if not otherwise prohibited by
law, and when at least one of the following
conditions exists: xxx
The processing is necessary for the purposes
of the legitimate interests pursued by the
personal information controller or by a third
part/ or parties to whom the data is disclosed,
except where such interests are overridden by
fundamental rights and freedoms of the data
subject which require protection under the
Philippine Constitution,"
In order to rely on legitimate interests as basis
for lawful processing, the Personal
Information Controller (PIC) must be able to
satisfy its key elements which can be broken
down into a three-part test, as follows:
1. Purpose test: Are you pursuing a
legitimate interest?
2. Necessity test: Is the processing
necessary for that purpose?
3. Balancing test: Do the individual's
interests override the legitimate
interest?
Here, there is a legitimate interest in the
posting or publication of the names of MCLE
non-compliant lawyers, the main purpose of

which is to simply inform the lawyers that
they are non-compliant and cannot sign
pleadings: as well as inform the public on
their status in the most transparent and
practical way.
Likewise, the posting is necessary for the
purpose as these lawyers are most probably
already eagerly waiting for the results of their
application for exemption or compliance
registration. It adheres to the principle of
proportionality under the DPA because the
processing is deemed necessary, adequate,
and not excessive in relation to the purpose.
Finally, the balancing test means taking into
account if the interests or fundamental rights
and freedoms of the data subject do not
override the PIC's interests.
Presumably, when a lawyer takes up MCLE
to continue to engage in the practice of law,
which involves submitting forms with his or
her personal information, and subsequently
taking the required seminars, the lawyer is
aware that the MCLE provider will process
the personal information, particularly his or
her name for purposes that are relevant to his
or her MCLE compliance, such as
publication of those who are non-compliant.
This means that the lawyer could reasonably
expect that his or her name may be posted on
the bulletin board or website of the MCLE
provider if one has successfully earned or not
the required number of units.
From the foregoing discussions on the
legitimate interests provision as the basis for
lawful processing, It is clear that the said
posting or publication is permissible under
the DPA.
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Q: To repeat, when can you process
personal information?
A: upon consent, law, contracts, interest of
life and health, national emergency, public
order and to pursue legitimate interest.
Q: The privacy statement of ABC
Corporation contains a conforme portion
where its client is asked to indicate his
conformity to the processing of personal
information. The Conforme reads as
follows:
By signing, I hereby certify that the
information given in this application is
true and correct to the best of my
knowledge and I confirm that I have read
the Terms and Conditions of the General
and Special Provisions on Deposits and
have fully understood and agreed to be
governed by the provisions thereof, as well
as the rules and regulations of the Bank,
Bangko Sentra! ng Pilipinas, Anti-Money
Laundering Council, Bankers Association
of the Philippines and the Bureau of
Internal Revenue with respect to taxes
imposed on interests on deposits and bank
commission/charges relative to the
establishment of operations of the
account/s opened, I hereby grant consent
to ABC, Inc. and its subsidiaries, affiliates,
otherwise known as ABC Group, on the
general use and sharing of my personal
data within the ABC Group, obtained
from me in the course of my transaction/s,
business or other form of contractual or
commercial relationship, I acknowledge,
understand, and agree that ABC and/or Its
agents may process, obtain, collect, record,

organize, store, update, modify, use,
access, share and/or disclose to any
member of the ABC Group my personal
data for regular business use such as but
not limited to relationship management,
marketing products or services including
cross-selling and direct marketing,
profiling, automated decision making,
researching, survey, internal policy, legal
and regulatory compliance. I likewise
acknowledge to have read and understood
ABC's Data Privacy Statement which was
made available to me upon account
opening and posted in the ABC's website
www.abc.com.ph
Signature Over Printed Name"
Dean: All PICs are required to have a privacy
statement on how they will handle or deal
with personal information.
Q: Is this sufficient to indicate the consent
of the data subject to the processing of
his/her personal information?
A: Under Section 3(b) of Republic Act No.
10173 or the "Data Privacy Act of 2012"
(DPA), and Section 3(d) of the Implementing
Rules and Regulations (IRR), consent is
defined as follows:
Consent of the data subject refers to any
freely given, specific, informed indication of
will, whereby The data subject agrees to the
collection and processing of personal
information about and/or relating to him or
her. Consent shall be evidenced by written.
electronic or recorded means. It may also be
given on behalf of the data subject by an
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agent specifically authorized by the data
subject to do so."
From the definition provided above, it is
clear that consent may be evidenced by
written, electronic, or recorded means.
Any of the three MI formats provided may
be adapted by a personal information
controller (PIC) relative to the collection
and processing of personal data. The NPC
currently does not maintain any preference
among the three. Nonetheless, it is worth
emphasizing that regardless of the format of
the consent given by the data subject, it must
be freely given, specific, and informed.
It is evident that the consent contemplated by
the law is an express consent wherein the data
subject voluntarily assents to the collection
and processing of personal information rather
than an implied or inferred consent,
Likewise, consent should be specific. The
limitation emphasizes that consent cannot
be overly broad for this would undermine
the very concept of consent.
Dean: So, bundled consent is not allowed. It
should be specific and voluntary and in
writing. With respect to the above Conforme,
it can be seen that:
1. ABC requires the consent of the members
for the following:
a. general use and sharing of the
personal data within the ABC
Group;
b. for regular business use such as
but not limited to relationship
management, marketing products
or services including cross-selling
and direct marketing, profiling,

automated decision making,
researching, survey, internal
policy, legal and regulatory
compliance.
2. The ABC Group is identified as the group
of entities which may process the
personal data of the data subjects.
3. The types of processing involved are
enumerated,
4. The purposes of processing are indicated.
Thus, the requirement of the law that the
consent be freely given, specific, and
informed has been satisfied.
Note that in some cases, to enhance the
adherence of your consent form to the spirit
of the general principles of data privacy, a
tick box for each item of processing is
indicated to ensure that the data subject
explicitly consented to each processing, with
the distinct purposes therefor being separated
and not bundled together. This will give the
data subject a genuine choice as he or she will
not be bound to sign off on the entire
provision in toto.
Q: What are the criteria for processing
sensitive personal information and
privileged information?
A: The processing of sensitive personal
information and privileged information shall
be prohibited, except in the following cases:
a. The data subject has given his or her
consent, specific to the purpose prior to
the processing, or in the case of
privileged information, all parties to the
exchange have given their consent prior
to processing:
b. The processing of the same is provided
for by existing laws and regulations
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Provided, That such regulatory
enactments guarantee the protection of
the sensitive personal information and the
privileged information: Provided, further,
that the consent of the data subjects are
not required by law or regulation
permitting the processing of the sensitive
personal information or the privileged
information;
A school can develop an online system
wherein feedback about students
involved in violation of school policies
may be accessed by teachers of the
concerned students pursuant to the
disciplinary power of the school under
the Education Act of 1982 provided that
the processing of any personal
information and personal sensitive
information comply with the basic
principles of processing transparency,
legitimate purpose and proportionality.
c. The processing is necessary to protect the
life and health of the data subject or
another person, and the data subject is not
Legally or physically able to express his
or her consent prior to the processing:
d. The processing is necessary to achieve
the lawful and noncommercial objectives
of public organizations and their
associations: Provided, That such
processing is only confined and related to
the bona fide members of these
organizations or their associations:
Provided, further, That the sensitive
personal information are not transferred
to third parties: Provided, finally. That
consent of the data subject vas obtained
prior to processing;

Dean: if you notice, the requirements are
the same in the processing of SPI:
consent, law, contract, interest, life and
health. The only distinction is letter (d).
e. The processing is necessary for purposes
of medical treatment, is carried out by a
medical practitioner or medical treatment
institution, and an adequate level of
protection of personal information is
ensured; or
f. The processing concerns such personal
information as is necessary for the
protection of lawful rights and interests of
natural or legal persons in cowl
proceeding, or the establishment,
exercise or defense of legal claims, or
when provided to government or public
authority. Section 13, DPA
A person subpoenaed as a witness may
testify as to what he knows about a
criminal offense committed by the
accused.
Q: May the Human Resource Department
of a corporation disclose personal and/or
sensitive personal information gathered
from an employees' exit interview to the
former employee's direct superior and to
the departments in the company?
A: The lawful disclosure to a non-HR
personnel of a former employee's personal
and/or sensitive personal information
gathered from their exit interviews would be
dependent on the existence of any of the
above circumstances, and on the company's
strict compliance with the basic principles of
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processing: transparency, legitimate purpose,
and proportionality.
For instance, the company can disclose
personal information when it is necessary and
is related to the fulfillment at a contract with
the data subject (the employee), such as a
contract for employment. This would include
computation and payment of salaries arid
other benefits, determination of career
movements and facilitation of work-related
requirements.
Dean: In sum, it has to be consistent with any
of the criteria of lawful processing of SPI and
always compliant with the principles of
transparency, legitimate purpose and
proportionality.
Q: Can the PIC invoke the principle of
privileged communication against the
NPC?
A: Personal information controllers may
invoke the principle of privileged
communication over privileged information
that they lawfully control or process. Subject
to existing laws and regulations. any
evidence gathered on privileged information
is inadmissible. Section 15, DPA
When the NPC inquires upon communication
claimed to be privileged, The personal
information controller concerned shall prove
the nature of the communication in an
executive session. Should The
communication be determined as privileged,
it shall be excluded from evidence, and the
contents thereof shall not form part of the
records of the case: Provided, that where the
privileged communication itself is the subject

of a breach, or a privacy concern or
investigation, it may be disclosed to the PCC
but only to the extent necessary for the
purpose of investigation, without including
the contents I hereof in the records. Section
23, DPA Rules
Dean: Can we tell NPC the disclosures of
our clients?
A: No. That is privileged communication.
Q: What are the rights of a data subject?
(Keyword: I-BAR-OP-C-Dean)
a. Right to be informed, Section 34(a),
DPA Rules
i. The data subject has a right to be
informed whether personal data
pertaining to him or her shall be, are
being, or have been processed,
including the existence of automated
decision-making and profiling.
ii. The data subject shall be notified and
furnished with information indicated
hereunder before the entry of his or
her personal data into the processing
system of the personal information
controller, or at the next practical
opportunity:
a) Description of the personal data to be
entered into the system;
b) Purposes for which they are being or
will be processed, including
processing for direct marketing,
profiling or historical, statistical or
scientific purpose;
c) Basis of processing, when processing
is not based on the consent of the data
subject
d) Scope and method of the personal
data processing;
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e) The recipients or classes of recipients
to whom the personal data are or may
be disclosed;
f) Methods utilized for automated
access, if the same is allowed by the
data subject, and the extent to which
such access is authorized, including
meaningful information about the
logic involved, as well as the
significance and the envisaged
consequences of such processing for
the data subject;
g) The identity and contact details of the
personal data controller or its
representative:
h) The period for which the information
will be stored; and
i) The existence of their rights as data
subjects, including the right to access,
correction, and object to the
processing, as well as the right to
lodge a complaint before the NP.
Websites resort to publishing a Privacy
Notice page, to respect the right to be
informed of their data subjects. Similar
privacy notices should be made in public
establishments equipped with security
CCTVs.
b. Right to object
The data subject shall have the right to object
to the processing of his or her personal data,
including processing for direct marketing,
automated processing or profiling. The data
subject shall also be notified and given an
opportunity to withhold consent to the
processing in case of chances or of y
amendment to the information supplied or

declared to the data subject in the preceding
paragraph.
When a data subject objects or withholds
consent, the personal information controller
shall no longer process the personal data,
unless:
i. The personal data is needed pursuant to a
subpoena:
ii. The collection and processing are for
obvious purposes, including, when it is
necessary for the performance of or in
relation to a contract or service to which
the data subject is a party, or when
necessary or desirable in the context of an
employer-employee relationship between
the collector and the data subject; or
iii. The information is being collected and
processed as a result of a legal obligation.
The right to object is most specifically
applicable when organizations or personal
information controllers are processing
data without consent of the data subject
for the following purposes:
i. Direct marketing purposes. When
business organizations give sales
materials about products and services,
they must explicitly inform or remind
The data subject of his right to object.
If the data subject feel uncomfortable
to being target of a direct marketing
campaign, he must be able to easily
invoke his right to object.
ii. Profiling purposes. Businesses
customarily resort to profiling, or the
creation of profiles of individual
customers and clients without their
consent. This is done either for
marketing or customer care purposes.
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The cross-referencing of customer
information to product marketing
brings about practical advantages to
both the buyer and seller in any
potential business transaction. Under
DPA, however, profiling of this
requires consent of the data subject as
customer, or else the data subject is
justified in invoking his right to
object. The right of state agents to do
profiling for law enforcement
purposes, however, may override the
right to object.
iii. Automated processing purposes. In
technology-driven industries, such as
banking and finance, many decisions
affecting individuals are arrived al
electronically via automatic data
processing systems based on personal
information stored in computerized
data files. This reduces the business
transaction process dawn to a few
seconds and facilitates a speedy
exchange of economic value,
Potentially, however, it may also
inadvertently arrive at decisions
prejudicial to the interests of data
subject and lead to the weakening of
his positon as a transacting party. As
such, organizations are required to
notify the data subject whether his
personal data will undergo automatic
processing, and inform him that he
has a right to object.
c. Right to access
The data subject has the right to reasonable
access to, upon demand, the following:
i. Contents of his or her personal data
that were processed;

ii. Sources from which personal data
were obtained;
iii. Names and addresses of recipients of
the personal data;
iv. Manner by which such data were
processed;
v. Reasons for the disclosure of the
personal data to recipients, if any:
vi. Information on automated processes
where the data will, or is likely for be
made as the sole basis for any
decision that significantly affects or
will affect the data subject;
vii. Date when his or her personal data
concerning the data subject were last
accessed and modified; and
viii. The designation, name or identity,
and address of the personal
information controller.
Some exceptions may disallow the exercise
of an individual's right to access to balance
the right to privacy of on individual versus
the needs of civil society. Here are some
examples:
i. A criminal suspect is not allowed
access to the personal data held about
him by law enforcement agencies as
it may impede investigation,
ii. A person is not allowed access to
information about himself as
contained in communications
between a lawyer and his or her
client, if such communication is
subject to legal privilege in court.
d. Right to rectification
The data subject has the. right to dispute. the
inaccuracy or error in the personal data and
have the personal information controller
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correct it immediately and accordingly,
unless the request is vexatious or otherwise
unreasonable, if the personal data has been
corrected, the personal information controller
shall ensure the accessibility of both the new
and The retracted information and the
simultaneous receipt of the new and the
retracted information by the intended
recipients thereof: Provided, That recipients
or third parties who have previously received
such processed personal data shall be
informed of its inaccuracy and its
rectification, upon reasonable request of the
data subject.
e. Right to erasure or blocking
The data subject shall have the right to
suspend, withdraw or order the blocking,
removal or destruction of his or her personal
data from the personal information
controller's filing system.
This right may be exercised upon discovery
and substantial proof of any of the following:
i. The personal data is incomplete,
outdated, false, or unlawfully
obtained:
ii. The personal data is being used for
purpose not authorized by the data
subject;
iii. The personal data is no longer
necessary for the purposes for which
they were collected;
iv. The data subject withdraws consent
or objects to the processing, and there
is no other legal ground or overriding
legitimate interest for the processing;
v. The personal data concerns private
information that is prejudicial to data
subject, unless justified by freedom of

speech, of expression, or of the press
or otherwise authorized
vi. The processing is unlawful;
vii. The personal information controller
or personal information processor
violated the rights of the data subject.
The personal information controller may
notify third parties who have previously
received such processed personal
information.
The right to erasure or blocking has been
applied in the following cases:
■ Melvin vi Reid, as published in:
"In Melvin v. Reid, decided in 1931, for
example, o homemaker, who had once
worked as a prostitute and who had been
wrongly accused of murder, became the
subject of a feature film ("The Red Kimono")
seven years after her acquittal based on the
facts of her trial_ Although not specifically
referencing a right to be forgotten, the court,
permitting suit against the film-maker, noted:
'One of the major objectives of society as it is
now constituted, and of the administration of
our penal system, is !he rehabilitation of the
fallen and the reformation of the criminal."
The court held that the unnecessary use of the
plaintiff's real name inhibited her right to
obtain rehabilitation
f. Right to damages
The data subject shall be indemnified for any
damages sustained due to such inaccurate,
incomplete, outdated, false, unlawfully
obtained or unauthorized use of personal
data, taking into account any violation of his
or her rights and freedoms as data subject.
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g. Right to file a complaint
This right is subject to exhaustion of
remedies. Otherwise, the complaint is
dismissible. Thus, no complaint shall be
entertained unless
i. The complainant must have first
informed, in writing, the personal
information controller or concerned
entity of the privacy violation or
personal data breach to allow for
appropriate action on the same; AND
ii. the personal information controller or
concerned entity did not take timely
or appropriate action on the claimed
privacy violation or personal data
breach, or there is no response from
the personal information controller
within fifteen (15) days from receipt
of information from the complaint;
AND
iii. the complaint is filed within six (6)
months from the occurrence of the
claimed privacy violation or personal
data breach, or thirty (30) days tram
the last communique with the
personal information controller or
concerned entity, whichever is
earlier.
h. Right to data portability
This right gives data subjects the mechanism
to obtain their personal data in an electronic
or structured format from personal
information controllers. if such personal data
is being processed through electronic means,
and enables the further use of such personal
data by the data subjects.

The Congress recently enacted the Mobile
Number Portability Act (RA 11202) which
allows a mobile or prepaid subscriber of
mobile phone services to retain their existing
mobile number even if they move from one
service provider lo another and even if they
change their subscription from postpaid to
prepaid, or vice versa, provided the
subscriber has no existing financial
obligations to his/her current service
provider.
i. Transmissibility Rights of the Data
Subject
The lawful heirs and assigns of the data
subject may invoke the rights of the data
subject to which he or she is an heir or an
assignee, at any time after the death of the
data subject, or when the data subject is
incapacitated or incapable of exercising the
rights as enumerated in the immediately
preceding section.
(Note: not included in the keyword.)
Q: What are the limitations to the rights of
a data subject?
A: The rights of a data subject shall not be
applicable if the processed personal data are
used only for the needs of scientific and
statistical research and, on the basis of such,
no activities are carried out and no decisions
are taken regarding the data subject;
Provided, that the personal data shall be held
under strict confidentiality and shall be used
only for the declared purpose. The said
sections are also not applicable. to the
processing of personal data gathered for the
purpose of investigations in relation to any
criminal. administrative or tax liabilities of a
data subject_ Any limitations on the rights of
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the data subject shall only be to the minimum
extent necessary to achieve the purpose of
said research or investigation.
Q: What are the obligations of PIC or PIP
under the DPA?
A:
a. Security Personal Information
The personal information controller must
implement reasonable and appropriate
organizational, physical and technical
measures intended for the protection of
personal information against an accidental or
unlawful destruction, alteration and
disclosure, as well as against any other
unlawful processing.
b. Accountability for transfer of Personal
Data
A personal information controller shall be
responsible for any personal data under its
control or custody, including information that
have been outsourced or transferred to a
personal information processor or o third
party for processing, whether domestically or
internationally, subject to cross-border
arrangement and cooperation.
A personal information controller shall be
accountable for complying with the
requirements of the DPA, the EPA Rules, and
other issuances of the NPC, it shall use
contractual or other reasonable means to
provide a comparable level of protection to
the personal data while it is being processed
by a personal information processor or third
party.
In relation thereto, a personal information
controller may subcontract or outsource the
processing of personal data: Provided, that

the personal information controller shall use
contractual or other reasonable means to
ensure that proper safeguards are in place, to
ensure the confidentiality, integrity and
availability of the personal data processed,
prevent its use for unauthorized purposes,
and generally, comply with the requirements
of the DPA, DPA Rules, other applicable
laws for processing of personal data, and
other issuances of the NPC.
c. Data breach notification
The NPC and affected data subjects shall be
notified by the personal information
controller within seventy-two (72) hours
upon knowledge of, or when there is
reasonable belief by the personal information
controller or personal information processor
that, a personal data breach requiring
notification has occurred.
Dean: Non-notice to the NPC is a violation
of the DPA.
Notification of personal data breach shall
be required when sensitive personal
information or any other information that
may, under the circumstances, be used -o
enable identity fraud are reasonably believed
to have been acquired by an unauthorized
person, and the personal information
controller or the NPC believes that such
unauthorized acquisition is likely to give rise
to a real risk of serious harm to any affected
data subject.
In case an associate inadvertently shares the
case details containing personal and sensitive
personal information to an unauthorized
person, the breach should be reported to NP.
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4B & 4C 2020-2021
Notes for Merc Rev 1
Q: What are the punishable acts under the
DPA?
A:
a. Unauthorized Processing of Personal
Information and Sensitive Personal
Information. (Section 25, DPA)
b. Accessing Due to Negligence of Personal
Information and Sensitive Personal
Information. (Section 26, DPA)
c. Improper Disposal of Personal
Information and Sensitive Personal
Information. (Section 27, DPA)
d. Processing for Unauthorized Purposes of
Personal Information and Sensitive
Personal Information. (Section 28, DPA)
e. Unauthorized Access or Intentional
Breach. (Section 29, DPA)
f. f, Concealment of Security Breaches
Involving Sensitive Personal
Information. (Section 30, DPA)
g. g. Malicious Disclosure (Section 31.
DPA), Unauthorized Disclosure of
Personal information Sensitive Personal
Information. (Section 32, DPA)
Q: What is the right to be forgotten? Is this
right recognized under the DPA?
A: The right to be forgotten is a right
recognized by the Court of Justice of the
European Union ("CJEU") allowing a data
subject to request a search engine operator
such as Google], as a data controller, to have
the particular information about him (which
appears when his name is searched via the
search engine) no Ionger be linked to his
name by a list at results displayed following
a search made on the basis of his name" on
the ground "that information appears, having
regard to all the circumstances of the case, to
 4B & 4C 2020-2021
Notes for Merc Rev 1

be inadequate, irrelevant or no longer

relevant, or excessive in relation to the
purposes of the processing at issue carried out
by the operator of the search engine, the
information and links concerned in the list of
results must be erased." Google Spain SL,
Google Inc. v Agenda Espanola de
Proteccien de Datos (AEPD), Mario Costeja
Gonzalez, 2014♦

Example, a lawyer and dean charged with

violation of anti-hazing law has the right to
ask that his name no longer be linked with
reference to said charges.
(Dean: This lawyer dean has the right to ask
google that when his name is searched, the
charges of murder be removed. He has the
right to be forgotten. It only applied to a
search engine operator.)

Note that the website that published or has the

information sought to be removed is NOT
covered by the right to be forgotten because
to them, the freedom of expression applies.

The right to be forgotten is part of the

right to block or to erase data.

The right to be forgotten is recognized in the

form of "right of erasure or blocking" under
the DPA in that the data subject may to
'suspend, withdraw or order the blocking,
removal or destruction of his or her personal
information from the personal information
controller's filing system upon discovery and
substantial proof that the personal
information are incomplete, outdated, false,
unlawfully obtained, used for unauthorized
purposes or are no longer necessary for the
purposes for which they were collected."

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