“When the time is right, I, the Lord will make it happen.

▪ The fact that a person is a potential

INSURANCE LAW
sole heir of his parent’s estate does
not give him any existing interest
A. Basic concepts prior to the death of the decedent.

What is a Contract of Insurance? 2. An inchoate interest founded on an

existing interest; or
It is an agreement whereby one (insurer) undertakes
for a consideration to indemnify another (insured) ▪ Ex: a stockholder may insure the
against loss, damage or liability arising from an corporate property up to the extent
unknown or contingent event. of and in proportion to the value of
his shares in the corporation. The
Who may be an insurer? stockholder has inchoate right over
the corporate property which will
• Corporation ripen into ownership upon
• Partnership dissolution of the corporation.
• Association
3. An expectancy, coupled with an existing
Note: a natural person may not be an insurer. interest in that out of which the expectancy
arises.
Who may be insured?
▪ Ex: I entered into a contract with you
Anybody having an insurable interest in the thing or to buy the expected fruits of your
life insured, may be insured. trees. The fruits are still an
expectancy, but my expectancy is
Exception: a public enemy cannot be insured. founded on an existing interest as
the buyer of the fruits.
A public enemy is a nation, including its citizens,
with whom the Philippines is at war.

1. What may be insured A mere contingent or expectant interest in anything,

Any contingent or unknown event, whether past or
future, which may damnify a person having an
insurable interest, or create a liability against him,
may be insured against. (Sec. 3)
not founded on an actual right to the thing, nor upon
any valid contract for it, is not insurable.
When should a person have an insurable interest in
property insurance?

2. Insurable interest A person should have an insurable interest in

property insurance at two points in time:
Insurable interest means that the insured has such an
interest or relationship over the thing or life insured 1. At the time insurance is taken
that he shall benefit from its preservation and shall 2. At the time of loss, although in the
be damnified by its loss or destruction. meantime, it did not exist.

INSURABLE INTEREST IN PROPERTY Should the designated beneficiary have an

INSURANCE insurable interest over the property insured?

Yes. For the beneficiary to recover on the fire or

1. An existing interest;
▪ Ex: You can insure your own
property. As you own it, you have
an existing interest as owner.
property insurance policy, it is required that he must
have insurable interest in the property insured.
INSURABLE INTEREST IN LIFE INSURANCE

© Divina on Commercial Law | Transcribed Notes of Dean Abella by UST 4B 2022 | Insurance Notes by Libertas | Notes & Lecture on FRIA
by CSC Ortha II
 “When the time is right, I, the Lord will make it happen.”
Every person has an insurable interest in the life and
health:
1. Of himself, of his spouse and of his
children;
▪ A person has no insurable interest
on the life of his boyfriend or
girlfriend.
▪ A person who insures his own life
can designate anyone as beneficiary
except those disqualified to receive
donation under Art. 739 of the Civil
Code.
2. Of any person on whom he depends
wholly or in part for education or support,
or in whom he has a pecuniary interest;
3. Of any person under a legal obligation to
him for the payment of money, or
respecting property or services, of which
death or illness might delay or prevent the
performance; and
▪ Thus, a mortgagee may insure the
life of his mortgagor up to the extent
of the mortgage debt.
4. Of any person upon whose life any estate
or interest vested in him depends.
▪ Thus, a usufructuary can insure the
life of the naked owner.
When should a person have an insurable interest in
life insurance?
Unlike in property insurance, interest in the life or
health of a person insured must only exist when the
insurance takes effect, but need not exist thereafter
or when the loss occurs.
BENEFICIARIES IN LIFE INSURANCE
Should the designated beneficiary have an
insurable interest on the life of the insured?
No. There is no provision under the law requiring
that the beneficiary have an insurable interest in the
life of the insured.
Can everyone be designated as beneficiary?
Final Notes in Commercia Law for the 2022 Bar| 2 of 89
No. The law expressly provides that those
disqualified by law from making or receiving
donations inter vivos cannot be nominated as
beneficiary.
Who are those persons disqualified to become the
beneficiary?
ART. 739 of the Civil Code:
1. Those made between persons who were
guilty of adultery or concubinage at the time
of the donation;
2. Donation made between persons guilty of
adultery or concubinage, in consideration
thereof;
3. Donations made to public officers, his wife,
ascendants or descendants by reason of their
public office.
DESIGNATION OF A BENEFICIARY
➢ Revocable Beneficiary
o This is the general rule. Thus, if
nothing in the life insurance which
indicates that the designation of a
beneficiary is irrevocable, the
designation shall be deemed as
revocable.
o The effect is that the insured may
change the beneficiary during his
lifetime or add another beneficiary
without the consent of the revocable
beneficiary.
o Nevertheless, in the event the
insured does not change the
beneficiary during his lifetime, the
designation shall be deemed
irrevocable.
➢ Irrevocable Beneficiary
o The effect is that the insured cannot
replace the beneficiary with another
or he cannot add another one
without the prior written consent of
your beneficiary.
o In case of irrevocable designation,
the beneficiary has acquired a
 “When the time is right, I, the Lord will make it happen.”
vested right on the life insurance
policy including all its benefits.
o If the beneficiary was designated
irrevocable, the benefits of the
insurance have already transferred
to the beneficiary. Thus, when the
insured dies, the proceeds of the
insurance will not form part of his
estate.
Problem: A insured his life designating B as the
beneficiary. B killed A. Can he still get the proceeds
of life insurance?
No. Under the law, if you cause the death of the
insured, you will be incapacitated to receive the
proceeds of the insurance.
The interest of a beneficiary in a life insurance policy
shall be forfeited when the beneficiary is the
principal, accomplice, or accessory in willfully
bringing about the death of the insured. In such a
case, the share forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified. In the
absence of other beneficiaries, the proceeds shall be
paid in accordance with the policy contract. If the
policy contract is silent, the proceeds shall be paid to
the estate of the insured. (Sec. 12)
3. Double insurance and overinsurance
DOUBLE INSURANCE
Double insurance exists where the same person is
insured by several insurers separately in respect to
the same subject and interest.
When a person insures the same thing and the same
interest against the same risk with more than one
insurer, there is double insurance.
Co-insurance
When there is double insurance, the insurers are
called co-insurers.
In case of partial loss and there is co-insurance, the
amount of loss shall be borne pro rata. All the co-
insurers will have to contribute pro rata in
indemnifying the insured.
Is double insurance prohibited?
Final Notes in Commercia Law for the 2022 Bar| 3 of 89
No. Double insurance is valid. What is prohibited is
for the insured to recover more than his insurable
interest.
OVERINSURANCE
There is overinsurance when the person insures
property for more than the value of his insurable
interest.
What is the effect of overinsurance?
The excess is void.
Ex: If the value of your insurable interest is 1M and
you insured the property for 3M, yung 2M (excess)
is yung overinsurance and that is void. Hindi yung
buong 3M ang void but yung excess lang kasi yun
lang ang overinsurance.
If there is double insurance, is there necessarily
overinsurance?
NOT NECESSARILY. Even if a person insures with
different insurers but the totality of the amount
insured does not exceed the value of his insurable
interest, there is no overinsurance. But even if you
only have one insurer but you insured your property
for a value more than your insurable interest, there
is already overinsurance.
4. No fault, suicide, and incontestability clauses
NO FAULT INDEMNITY CLAUSE (SEC. 391)
It is a clause where the insurer is required to pay a
third party injured or killed in an accident without
the necessity of proving fault or negligence on the
part of the insured. There is a stipulated maximum
amount to be recovered.
Any claim for death or injury to any passenger or third-
party pursuant to the provisions of this chapter shall be
paid without the necessity of proving fault or negligence
of any kind: Provided, That for purposes of this section:
a) The total indemnity in respect of any person shall
not be less than Fifteen thousand pesos
(P15,000.00);
b) The following proofs of loss, when submitted
under oath, shall be sufficient evidence to
substantiate the claim:
1) Police report of accident; and
 “When the time is right, I, the Lord will make it happen.”
2) Death certificate and evidence sufficient
to establish the proper payee; or
3) Medical report and evidence of medical
or hospital
c) Claim may be made against one motor vehicle
only. In the case of an occupant of a vehicle,
claim, shall lie against the insurer of the vehicle
in which the occupant is riding, mounting or
dismounting from. In any other case, claim shall
lie against the insurer of the directly offending
vehicle. In all cases, the right of the party paying
the claim to recover against the owner of the
vehicle responsible for the accident shall be
maintained.
That said vehicle might not be the one that caused
the accident is of no moment since the law itself
provides that the party paying the claim may recover
against the owner of the vehicle responsible for the
accident. This is precisely the essence of "no fault
indemnity" insurance which was introduced to and
made part of our laws in order to provide victims of
vehicular accidents or their heirs immediate
compensation, although in a limited amount,
pending final determination of who is responsible
for the accident and liable for the victims’ injuries or
death.
SUICIDE CLAUSE (SEC. 183)
The insurer in a life insurance contract shall be liable in
case of suicide only when it is committed after the policy
has been in force for a period of two (2) years from the date
of its issue or of its last reinstatement, unless the policy
provides a shorter period: Provided, however, that suicide
committed in the state of insanity shall be compensable
regardless of the date of commission.
The parties may agree to have suicide as an excepted
peril. In such case, the insurer will not indemnify you
if the proximate cause of the loss or damage is
suicide. If suicide is not an excepted peril in the
insurance policy, the insurer shall be obliged to pay
the indemnity after two years from the effectivity of
the policy.
INCONTESTABILITY CLAUSE (SEC. 48)
Whenever a right to rescind a contract of insurance is
given to the insurer by any provision of this chapter, such
right must be exercised previous to the commencement of
an action on the contract.
Final Notes in Commercia Law for the 2022 Bar| 4 of 89
After a policy of life insurance made payable on the death
of the insured shall have been in force during the lifetime
of the insured for a period of two (2) years from the date of
its issue or of its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is rescindable by
reason of the fraudulent concealment or misrepresentation
of the insured or his agent.
In other words, within a period of 2 years from
issuance of the policy or the date of its last
reinstatement, the insurer may contest the
insurability of the insured if the insured had
committed a misrepresentation or concealment of a
material fact. Otherwise, the insurer can no longer
rescind the policy on account of concealment or
misrepresentation.
B. Perfection of the insurance contract
A contract of insurance is perfected only from the
time the applicant has knowledge of the acceptance
and approval by the insurer of his application.
General Rule: no policy or contract of insurance
issued by an insurance company is valid and binding
unless and until the premium thereof has been paid.
(Sec. 77)
Cash and Carry Rule – An insurance policy
is generally not binding unless the premium
thereof has been paid.
Can an insurance policy be binding even if the
premium is unpaid?
Yes, the law admits exceptions to the general rule.
1. In the case of a life or an industrial life policy
whenever the grace period provision
applies.
2. An acknowledgment in a policy or contract
of insurance or the receipt of premium is
conclusive evidence of its payment, so far as
to make the policy binding, notwithstanding
any stipulation therein that it shall not be
binding until the premium is actually paid.
3. If the parties agreed to the payment of
premium in installments and partial
employment has been made at the time of
the loss.
4. If the insurer has granted the insured credit
term for the payment of the premium and
 “When the time is right, I, the Lord will make it happen.”
the loss occurs before the expiration of the
term, recovery on the policy should be
allowed even the premium is paid after the
loss but within the credit term.
5. Estoppel in instances when the insurer had
consistently granted a credit term for the
payment of premium despite full awareness
of Section 77.
C. Rights and obligations of parties
Obligation of the insurer
To indemnify the insured in case of loss, damage, or
liability.
The insurer shall be obliged to pay the indemnity IF
the proximate cause of the loss or damage is the risk
insured against although the DIRECT or
IMMEDIATE cause of the loss or damage is NOT the
risk insured against.
Example: Nagpagawa ka ng bahay. You insured your
house against fire. One day, when there was a
thunderstorm, tinamaan ng kidlat yung poste ng meralco
tabi ng bahay nyo. The electric post got burned. So
tumawag ka ng bumbero. Mabagal sila rumesponde pero
pagdating nila agad naman nilang binaril ng tubig yung
poste ng meralco na nasusunog. Kaya lang sa sobrang
lakas ng pressure nung tubig dun sa hose, natumba yung
poste na nasusunog sa bahay mo causing the roofing of
your house to break. Kasi yung roof mo ceramic tiles kaya
nabasag nung nabagsakan ng poste. If no part of your
house got burned but your roofing got severely
damaged, shall the insurer be obliged to pay you
indemnity for your damage? YES. According to the
law, the insurer shall be obliged to pay the indemnity
if the proximate cause of the loss or damage is the
risk insured against although the direct or
immediate cause of the loss or damage is not the risk
insured against. Yung insurance mo is against fire not
collapsing of an electric post. Kaya lang nasira yung bahay
mo because of fire although hindi naman nasunog ang
bahay mo pero in that case the proximate cause of your
injury is fire although ang direct cause ay yung
pagcollapse ng electric post.
Who shall be entitled to the benefits of the
insurance policy?
The insurance proceeds shall be applied exclusively
to the proper interest of the person in whose name or
for whose benefit it is made unless otherwise
specified in the policy. (Sec. 53)
Final Notes in Commercia Law for the 2022 Bar| 5 of 89
Take note: the proceeds of the life insurance policy
do not form part of the estate of the insured.
D. Rescission of insurance contracts
What are the grounds for rescission of insurance
contracts?
1. Concealment
2. Misrepresentation
CONCEALMENT
It is a neglect to communicate that which a party
knows and ought to communicate.
Requisites of concealment:
1. A party knows the facts which he neglects to
communicate or disclose to the other
2. Such party concealing is duty bound to
disclose such fact to the other
3. Such party concealing makes no warranty of
the fact concealed
4. The other party has not the means of
ascertaining the fact concealed
5. It must be material
Is it necessary that concealment must be
intentionally done to warrant the rescission of the
contract by the insurer?
NO. Sec. 27 provides that whether the concealment
is intentional or unintentional, the insurer is entitled
to rescind the contract of insurance. By the word
“entitled” means that the insurer has the option to
rescind the contract or not. This means that where
there is concealment on the part of the insured, the
contract is not void but merely voidable.
Should fraud be proven to constitute concealment?
NO. The duty to communicate is independent of the
intention and is violated by the fact of concealment.
The reason for this is that it is impossible for the
insurance company to protect itself and its honest
policyholders against fraudulent and improper
claims.
Is the applicant duty-bound to disclose everything
at any time?
 “When the time is right, I, the Lord will make it happen.”
NO. Sec. 28 provides that the applicant has to
communicate in good faith all the facts within his
knowledge only when:
1. They are material to the contract.
2. The other has not the means of ascertaining
said facts.
3. As to which the party with the duty to
communicate makes no warranty.
Neither party to a contract of insurance is bound to
communicate information of the matters following,
except in answer to the inquiries of the other:
a) Those which the other knows;
b) Those which, in the exercise of ordinary care,
the other ought to know, and of which the
former has no reason to suppose him
ignorant;
c) Those of which the other waives
communication;
d) Those which prove or tend to prove the
existence of a risk excluded by a warranty,
and which are not otherwise material; and
e) Those which relate to a risk excepted from
the policy and which are not otherwise
material.
What is therefore the test in ascertaining the
existence of concealment?
If the applicant is aware of the existence of some
circumstances which he knows would influence the
insurer in acting upon his application, good faith
requires his to disclose that circumstance, though
unasked.
Sunlife Assurance Company of Canada vs. CA
and Spouses Rolando & Bernarda Bacani
Robert Bacani procured a life insurance contract
for himself from petitioner. The designated
beneficiary was his mother, Bernarda Bacani. The
insured died afterwards in a plane crash, and
Bernarda sought for the benefits of the insurance
policy. Petitioner conducted an investigation and
its findings prompted it to reject the claim.
Petitioner’s basis for the rejection was that the
Final Notes in Commercia Law for the 2022 Bar| 6 of 89
insured did not disclose the material facts relevant
to the issuance of the policy, rendering it viodable.
When asked if consulted any doctor within the
past 5 years, insured answered in the positive for
flu and cough complications. Asked whether he
had been admitted in the hospital, he answered in
the negative. Petitioner however discovered that 2
weeks prior to his application for insurance, the
insured was examined and confined at the Lung
Center where he was diagnosed for renal failure.
During his confinement, the insured was
subjected to urinalysis, ultra-sonography and
hematology tests.
The RTC and CA ruled in favor of the respondents
ruling that the health history of the insured was
immaterial since the insurance policy was “non-
medical” (there was concealment and
misrepresentation but the same was done in good
faith), and that the cause of death was unrelated to
the facts concealed by the insured.
Issue: Were the rulings of the RTC and CA
correct?
Ruling: NO. Sec. 31 explicitly states that
materiality is to be determined not by the event,
but solely by the probable and reasonable
influence of the facts upon the party to whom
communication is due, in forming his estimate or
in making his inquiries. The information which
the insured failed to disclose was material and
relevant to the approval and issuance of the
policy. The matters concealed would have
definitely affected petitioner’s action on his
application, either by approving it with the
corresponding adjustment for a higher premium
or rejecting the same.
“Good Faith” is no defense in concealment. The
insured’s failure to disclose the fact that he was
hospitalized for 2 weeks prior to his filing of
application raises grave doubts about his bona
fides. It appears that such concealment was
deliberate on his part. The argument that the
petitioner’s waiver of the medical exam debunks
the materiality of the facts concealed is untenable,
because the waiver of a medical exam renders
even more material the information required of
the applicant concerning previous condition of
health and diseases suffered, for such information
necessarily constitutes an important factor which
the insurer takes into consideration in deciding
whether to issue the policy or not.
 “When the time is right, I, the Lord will make it happen.”
MISREPRESENTATION
If a representation is false in a material point,
whether affirmative or promissory, the injured party
is entitled to rescind the contract from the time when
the representation becomes false.
Requisites of Misrepresentation
1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it
is untrue and with intent to deceive or which
he states positively as true without knowing
it to be true and which has a tendency to
mislead;
3. Such fact in either case is material to the risk.
Yosikadiri went to apply for a life insurance before
John Hancock, an insurance company. He
answered every detail of the information sheet of
the insurance application. In the information sheet,
he represented that he has not contracted any
disease or illness and suffers from no disease or
illness at present. It took 2 weeks before his
application was processed. However, the day
before the policy was issued by John Hancock,
Yosikadiri was diagnosed to be suffering from
brain cancer. At his hospital bed, Yosikadiri
received the policy of the insurance. He died 2
months after. John Hancock, as soon as he was
informed of the cause of death, rescinded the
contract of insurance. The beneficiaries of
Yosikadiri contested that there was no
misrepresentation as he was not yet diagnosed to
have brain cancer at the time he filed his
application for insurance. Decide.
A: John Hancock is rightful to rescind the contract on
the basis of misrepresentation. Sec. 37 of the
Insurance Code states that a representation may be
made at the time of, or before, issuance of the policy.
Thus, the claim that there was no misrepresentation
at the time that Yosikadiri filed his application is of
no moment. Misrepresentation of fact may be
committed not only at the time of application but
also at the time of, or before the issuance of the
policy.
In this case, misrepresentation was committed before
the issuance of the policy as when the policy was
issued, the statements he made in the application
were no longer true and correct. In other words, a
Final Notes in Commercia Law for the 2022 Bar| 7 of 89
representation is a “continuing representation” until
the contract takes effect.
Who determines materiality of the misrepresented
or concealed fact?
Materiality is determined indirectly by the insurer.
According to the law, materiality shall be
determined by influence that the misrepresentation
or concealment will have on the insurer in assessing
the risks it is to assume.
WHEN CAN THE INSURER RESCIND THE
CONTRACT
Whenever a right to rescind a contract of insurance
is given to the insurer by any provision of this
chapter, such right must be exercised previous to the
commencement of an action on the contract.
After a policy of life insurance made payable on the
death of the insured shall have been in force during
the lifetime of the insured for a period of two (2)
years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the
policy is void ab initio or is rescindable by reason of
the fraudulent concealment or misrepresentation of
the insured or his agent. (Sec. 48)
Essence of Incontestability Clause
The so-called incontestability clause precludes the
insurer from raising the defenses of false
representations or concealment of material facts
insofar as health and previous diseases are
concerned if the insurance has been in force for at
least two years during the insured’s lifetime.
The insurer has 2 years from the date of issuance of
the insurance contract or of its last reinstatement
within which to contest the policy, whether or not,
the insured still lives within such period.
After 2 years, the defenses of concealment or
misrepresentation, no matter how patent or well
founded, no longer lie.
“During the lifetime”
The phrase during the lifetime simply means that the
policy is no longer considered in force after the
insured has died. The key phrase in the second
paragraph is for a period of 2 years.
 “When the time is right, I, the Lord will make it happen.”
Q: A policy has been in force for 1 year and 5
months, before the insured died. Is the insurer
barred by virtue of the incontestability clause?
A: NO. Considering that the insured died before the
lapse of the 2-year period, respondent company is
not, therefore, barred from proving that the policy is
void ab initio by reason of the insured’s fraudulent
concealment or misrepresentation.
TRANSPORTATION LAW
A. Common carriers
1. Concept
Who is a common carrier?
Common carriers are persons, corporations, firms or
associations engaged in the business of carrying or
transporting passengers or goods or both, by land,
water, or air, for compensation, offering their
services to the public. (Art. 1732, NCC)
Does “public” mean general public?
No. Public does not need to be the general public. It
could be a narrow segment of the public. It is not the
number of clients that determines a common carrier.
What determines a common carrier is whether or not
the services are offered to the public.
Do you need a motor vehicle to be a common
carrier?
NO. You can be a common carrier without a motor
vehicle. Thus, a pipeline operator is considered a
common carrier.
Test to determine whether a person or entity is a
common carrier
The true test for a common carrier is not the quantity
or extent of the business actually transacted, or the
number and character of the conveyances used in the
activity, but whether the undertaking is a part of the
activity engaged in by the carrier that he has held out
to the general public as his business or occupation.
If the undertaking is a single transaction, not a part
of the general business or occupation engaged in, as
advertised and held out to the general public, the
Final Notes in Commercia Law for the 2022 Bar| 8 of 89
individual or the entity rendering such service is a
private, not a common, carrier.
Are school bus operators common carriers?
Yes. There is no question that the Pereñas as the
operators of a school bus service were: (a) engaged
in transporting passengers generally as a business,
not just as a casual occupation; (b) undertaking to
carry passengers over established roads by the
method by which the business was conducted; and
(c) transporting students for a fee. Despite catering
to a limited clientèle, the Pereñas operated as a
common carrier because they held themselves out as
a ready transportation indiscriminately to the
students of a particular school living within or near
where they operated the service and for a fee. (Sps.
Perena v. Sps. Nicolas)
2. Common carrier vs. private carrier
What is a private carrier?
A private carrier is one who, without making the
activity a vocation, or without holding himself or
itself out to the public as ready to act for all who may
desire his or its services, undertakes, by special
agreement in a particular instance only, to transport
goods or persons from one place to another either
gratuitously or for hire.
The diligence required of a private carrier is only
ordinary, that is, the diligence of a good father of the
family.
Private carrier vs. Common carrier
Much of the distinction between a "common or
public carrier" and a "private or special carrier" lies
in the character of the business, such that if the
undertaking is an isolated transaction, not a part of
the business or occupation, and the carrier does not
hold itself out to carry the goods for the general
public or to a limited clientele, although involving
the carriage of goods for a fee, the person or
corporation providing such service could very well
be just a private carrier.
Common Carrier Private Carrier
Bound to carry all who Can choose the persons
choose to employ it whom it may contract
with
 “When the time is right, I, the Lord will make it happen.”
Extraordinary diligence Ordinary diligence
A common carrier is exempt from the application of
the strict public policy governing common carriers
where the carrier is not acting as such but as a private
carrier. Such strict public policy has no force where
the public at large is not involved, as when the carrier
charters its bus totally for the use of a single party.
(Home Insurance Co. v. American Steamship Agencies &
Luzon Stevedoring Corp.)
3. Diligence required
In the transportation of goods and passengers, the
standard of care required by the Civil Code are as
follows:
1. Transportation of goods – extraordinary
diligence (Art. 1733)
2. Transportation of passengers – utmost
diligence of a very cautious person (Art.
1755)
B. Obligations and liabilities
1. Vigilance over goods
When should a common carrier transporting goods
exercise extraordinary diligence?
The extraordinary responsibility of the common
carrier lasts from the time the goods are
unconditionally placed in the possession of and
received by the carrier for transportation until the
same are delivered, actually or constructively, by the
carrier to the consignee, or to the person who has a
right to receive them, without prejudice to the
provisions of Article 1738.
The common carrier's duty to observe extraordinary
diligence over the goods remains in full force and
effect even when they are temporarily unloaded or
stored in transit, unless the shipper or owner has
made use of the right of stoppage in transitu.
The extraordinary liability of the common carrier
continues to be operative even during the time the
goods are stored in a warehouse of the carrier at the
place of destination, until the consignee has been
advised of the arrival of the goods and has had
reasonable opportunity thereafter to remove them or
otherwise dispose of them.
Final Notes in Commercia Law for the 2022 Bar| 9 of 89
When may the common carrier avoid liability for
loss or damage to goods? (Art. 1734)
Common carriers are responsible for the loss,
destruction, or deterioration of the goods, unless the
same is due to any of the following causes only:
1) Flood, storm, earthquake, lightning, or other
natural disaster or calamity;
▪ Fire does not exempt the carrier
from liability.
▪ Hijacking of goods is not considered
force majeure except when the
robbery or hijacking was attended
by grave or irresistible threat,
violence, or force.
2) Act of the public enemy in war, whether
international or civil;
3) Act of omission of the shipper or owner of
the goods;
4) The character of the goods or defects in the
packing or in the containers;
▪ Where the fact of improper packing
is known to the carrier but it accepts
the goods despite such condition, it
is not relieved of liability for loss or
injury resulting therefrom. (Southern
Lines Inc. v. CA)
▪ The common carrier must exercise
due diligence to forestall or lessen
the loss.
5) Order or act of competent public authority.
▪ The common carrier is not
responsible, provided said public
authority had power to issue the
order.
Note: It is required, however, that there must be no
unnecessary delay in the prosecution of the voyage.
The carrier should not have committed an improper
deviation.
If the proximate and only cause of the damage is
one of these 5, shall the carrier certainly be
absolved from liability?
 “When the time is right, I, the Lord will make it happen.”
NO. If the proximate and only cause of the loss or
damage is one of the 5, and you are the shipper or
consignee, you may still be able to recover from the
loss or damage, but the burden of proof will be on
you. You have to present evidence to prove that the
carrier failed to exercise extraordinary diligence.
If the proximate and only cause of the damage is
NOT one of the 5, if you are the carrier, shall it
certainly mean that you’ll be obliged to pay for the
loss or damage?
NO. However, the burden of proof will shift to you.
You have to prove that under the circumstances, you
were able to exercise extraordinary diligence.
When is the obligation of the common carrier to
observe extraordinary diligence reduced to
ordinary diligence?
1. When the seller exercised his right of
stoppage in transitu
2. If there is stipulation between the shipper
and carrier
3. For hand-carried baggage
4. If the loss, destruction, or deterioration of the
goods should be caused by the character of
the goods, or the faulty nature of the packing
or of the containers, the common carrier is
only required to exercise due diligence to
forestall or lessen the loss.
May the common carrier limit its liability to the
value of the goods?
Yes. A stipulation that the common carrier's liability
is limited to the value of the goods appearing in the
bill of lading, unless the shipper or owner declares a
greater value, is binding. (Art. 1749)
Pursuant to such provision, where the shipper is
silent as to the value of his goods, the carrier's
liability for loss or damage thereto is limited to the
amount specified in the contract of carriage and
where the shipper states the value of his goods, the
carrier's liability for loss or damage thereto is limited
to that amount. Under a stipulation such as this, it is
the duty of the shipper to disclose, rather than the
carrier's to demand the true value of the goods and
silence on the part of the shipper will be sufficient to
limit recovery in case of loss to the amount stated in
Final Notes in Commercia Law for the 2022 Bar| 10 of 89
the contract of carriage. (Eastern Steamship Co. v.
Great American)
Note: A stipulation that denies to the shipper the
right to declare the actual value of his cargoes and to
recover, in case of loss or damage, on that basis
would be invalid.
Additionally, the common carrier may also limit its
liability to a fixed amount. A contract fixing the sum
that may be recovered by the owner or shipper for
the loss, destruction, or deterioration of the goods is
valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed
upon. (Art. 1750)
2. Safety of passengers
The law requires common carriers to carry
passengers safely using the utmost diligence of very
cautious persons with due regard for all
circumstances. Such duty of a common carrier to
provide safety to its passengers so obligates it not
only during the course of the trip but for so long as
the passengers are within its premises and where
they ought to be in pursuance to the contract of
carriage.
The statutory provisions render a common carrier
liable for death of or injury to passengers (a) through
the negligence or wilful acts of its employees or (b)
on account of wilful acts or negligence of other
passengers or of strangers if the common carrier’s
employees through the exercise of due diligence
could have prevented or stopped the act or omission.
When should the common carrier start exercising
the required standard of care?
From the moment the carrier agrees to take in a
passenger, until the passenger reaches his
destination.
Utmost diligence starts once the passenger places
himself to, and is accepted by, and while he remains
under the proper care and charge of the carrier. It last
until such time that the passenger safely alights from
and is given reasonable opportunity to leave the
premises of the common carrier, including such time
that he looks for and claims his luggage.
A person, by stepping and standing on the platform
of the bus, was already considered a passenger and
was entitled to all the rights and protection
pertaining to a contract of carriage.
 “When the time is right, I, the Lord will make it happen.”
May the passenger and carrier validly stipulate a
standard of care less than that required by law?
NO. With respect to the safety of passengers, there
can be no compromise. The responsibility of a
common carrier for the safety of passengers as
required in Articles 1733 and 1755 cannot be
dispensed with or lessened by stipulation, by the
posting of notices, by statements on tickets, or
otherwise.
If a passenger is transported gratuitously, may the
common carrier and passenger validly stipulate
that the common carrier shall not be liable for
negligence or shall only be liable for a particular
amount?
Yes. When a passenger is carried gratuitously, a
stipulation limiting the common carrier's liability for
negligence is valid, but not for willful acts or gross
negligence.
Nonetheless, the reduction of fare does not justify
any limitation of the common carrier's liability.
Liability of common carrier on account of
employee’s negligence
Common carriers are liable for the death of or
injuries to passengers through the negligence or
willful acts of the former's employees, although such
employees may have acted beyond the scope of their
authority or in violation of the orders of the common
carriers.
This liability of the common carriers does not cease
upon proof that they exercised all the diligence of a
good father of a family in the selection and
supervision of their employees.
Liability of common carrier on account of willful
act or negligence of a stranger
A common carrier is responsible for injuries suffered
by a passenger on account of the willful acts or
negligence of other passengers or of strangers, if the
common carrier's employees through the exercise of
the diligence of a good father of a family could have
prevented or stopped the act or omission.
C. Defenses available to a common carrier
1. Proof of negligence
Art. 1735. In all cases other than those mentioned in Nos. 1, 2,
3, 4, and 5 of the preceding article, if the goods are lost,
Final Notes in Commercia Law for the 2022 Bar| 11 of 89
destroyed or deteriorated, common carriers are presumed to
have been at fault or to have acted negligently, unless they
prove that they observed extraordinary diligence as required
in Article 1733.
Art. 1756. In case of death of or injuries to passengers, common
carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed
extraordinary diligence as prescribed in Articles 1733 and
1755.
In an action for breach of contract of carrier, the
aggrieved party does not have to prove that the
carrier was at fault or negligent. All he has to prove
is the existence of the contract and the fact of its non-
performance by the carrier.
In the same vein, in case of such death or injury, by
simple proof of injury, the passenger is relieved of
the duty to still establish the fault or negligence of
the carrier or of its employees and the burden shifts
upon the carrier to prove that the injury is due to an
unforeseen event or to force majeure.
Ultimately, unless the presumption of negligence is
rebutted, the court need not even make an express
finding of fault or negligence on the part of the
common carrier.
2. Due diligence in the selection and supervision
of employees
Art. 1759. Common carriers are liable for the death of or injuries
to passengers through the negligence or willful acts of the
former's employees, although such employees may have acted
beyond the scope of their authority or in violation of the orders of
the common carriers.
This liability of the common carriers does not cease upon proof
that they exercised all the diligence of a good father of a family
in the selection and supervision of their employees.
The defense that the carrier exercised all the
diligence of a good father of a family in the selection
and supervision of their employees does not apply
in a breach of contract of carrier. Such defense is only
available in quasi-delict.
3. Fortuitous event
Art. 1174. Except in cases expressly specified by the law, or
when it is otherwise declared by stipulation, or when the nature
of the obligation requires the assumption of risk, no person shall
be responsible for those events which could not be foreseen, or
which, though foreseen, were inevitable.
 “When the time is right, I, the Lord will make it happen.”

A common carrier is not an insurer against all risks. 1.
It is not liable for acts or events which cannot be
foreseen or are inevitable, provided it exercised the
required diligence.
2.
If a fortuitous event or an act of God coincides with
a corresponding negligence on the part of the
common carrier, it cannot escape liability. 3.
4. Contributory negligence
Art. 1762. The contributory negligence of the passenger does
not bar recovery of damages for his death or injuries, if the
proximate cause thereof is the negligence of the common carrier,
but the amount of damages shall be equitably reduced.
If the defendant’s negligence is a concurrent
cause and which was still in operation up to
the time the injury was inflicted;
Where the plaintiff, a passenger, filed an
action against a carrier based on contract;
In case of collision, it applies only in a suit
between the owners and drivers of colliding
vehicles and not where a passenger
demands responsibility from the carrier to
enforce its contractual obligations.
D. Extent of liability
1. Recoverable damages

Effects of plaintiff’s contributory negligence When may a common carrier be made liable for
moral damages?
If the proximate cause of the injury is the
contributory negligence of the plaintiff, there can be 1. When a passenger dies
no recovery for damages. A plaintiff is barred from
recovering the damages for loss or injury caused by ▪ If the passenger dies while being
the negligence of defendant only when plaintiff's transported and the cause can be
negligence is the sole legal cause of the damage or attributed to the omission of the CC
the negligence of the plaintiff and some person or to exercise the minimum standard
persons other than the defendant or defendants was of care, the CC shall be liable for
the sole cause of the damage. moral damages.

If the proximate cause of the injuries is still the ▪ Based on the rulings of the SC,
negligence of the defendant despite the contributory moral damages shall be awarded to
negligence of the plaintiff, the latter can still recover the immediate members of the
damages from the former. However, damages will family, which includes the
be reduced due to the contributory negligence of the surviving spouse and children. If no
plaintiff. children, to legitimate parents or
ascendants.
5. Doctrine of last clear chance
▪ A foster parent can also recover
Doctrine of last clear chance moral damages for the death of its
foster child. No question if it is in the
Where both parties are negligent, but the negligent case of an adopter because in the
act of one is appreciably later than that of the other, eyes of the law the adoptee is
or where it is impossible to determine whose fault or considered legitimate child of the
negligence caused the loss, the one who had the last adopter.
clear opportunity to avoid the loss but failed to do so
is chargeable with the loss. ▪ Moral damages cannot be awarded
to brothers or sisters regardless if
This allows recovery to plaintiff who happen to have they are the only surviving relative
been negligent also, provided the defendant has the of the passenger.
last opportunity to avoid the accident but failed to do
so. 2. In case of physical injuries.

The doctrine will not apply: ▪ It shall only be awarded to the

injured party and not to the
members of his family.

Final Notes in Commercia Law for the 2022 Bar| 12 of 89

 “When the time is right, I, the Lord will make it happen.”
3. Due to the acts of discourtesy or
discrimination of the employee of the
common carrier against the passenger
Note: If there is no bad faith, there is no reason for
payment of moral damages. If there are no moral
damages, there can be no exemplary damages as
well. If there is no bad faith, there can be no
awarding of attorney’s fees as well.
2. Stipulations limiting liability
May a common carrier and shipper validly
stipulate on a standard of care less than
extraordinary?
Yes, but it must conform to the following
requirements:
1. In writing, signed by the shipper or owner;
2. Supported by a valuable consideration other
than the service rendered by the common
carrier; and
3. Reasonable, just and not contrary to public
policy.
Any of the following or similar stipulations shall be
considered unreasonable, unjust and contrary to
public policy:
1) That the goods are transported at the risk of
the owner or shipper;
2) That the common carrier will not be liable
for any loss, destruction, or deterioration of
the goods;
3) That the common carrier need not observe
any diligence in the custody of the goods;
4) That the common carrier shall exercise a
degree of diligence less than that of a good
father of a family, or of a man of ordinary
prudence in the vigilance over the movables
transported;
5) That the common carrier shall not be
responsible for the acts or omission of his or
its employees;
6) That the common carrier's liability for acts
committed by thieves, or of robbers who do
not act with grave or irresistible threat,
Final Notes in Commercia Law for the 2022 Bar| 13 of 89
violence or force, is dispensed with or
diminished;
7) That the common carrier is not responsible
for the loss, destruction, or deterioration of
goods on account of the defective condition
of the car, vehicle, ship, airplane or other
equipment used in the contract of carriage.
Even when there is an agreement limiting the
liability of the common carrier in the vigilance over
the goods, the common carrier is disputably
presumed to have been negligent in case of their loss,
destruction or deterioration.
Note: While there may be a provision in the Civil
Code allowing a shipper and CC to stipulate on a
standard of care less than extra ordinary diligence,
with respect to safety of passengers, there can be no
compromise.
INTELLECTUAL PROPERTY CODE
A. Patents
It is issued upon an invention, granting the exclusive
right to mass produce or license the mass production
of the invention.
1. Patentable vs. non-patentable inventions
PATENTABLE INVENTIONS
Any technical solution of a problem in any field of
human activity which is:
✓ NEW - Novel, no prior art, or disclosure
✓ INVENTIVE STEP - Not obvious to the
person skilled in the art
✓ INDUSTRIALLY APPLICABLE – Useful,
beneficial, and that it can be produced and
used
ELEMENTS OF PATENT
A. NOVELTY - means that an invention shall not
be considered new if it forms part of a prior art.
 “When the time is right, I, the Lord will make it happen.”
▪ It is considered new when it does not form
of a prior art.
▪ PRIOR ART is (a) Everything which has
been made available to the public anywhere
in the world, before the filing date or the
priority date of the application claiming
the invention; and (b) The whole contents
of an earlier published Philippine
application or application with earlier
priority date of a different inventor.
▪ The question is always, “meron na ba niyan?”
Illustration: B invented a ballpen with a cap.
Subsequently, C claimed that he invented a
ballpen that is clickable. Is C‟s invention
new or novel? YES. Even if the ballpens have
the same purpose, the fact is that, C‟s
ballpen is not yet carried out to the public.
NOTE: If one invented something, and after
application it was shown that there already
exists a similar technology, not necessarily
invention, and then it’s no longer novel and
cannot be granted a patent protection.
▪ Novelty is not something which can be
proved or established; only its absence can
be proved. Prior disclosure must not be
confidential or restricted.
B. INVENTIVE STEP - means that having regard
to prior art, it is not obvious to a person skilled
in the art at the time of the filing date or priority
date of the application claiming the invention.
▪ The question is always, “obvious ba yan?” If it
is “obvious‟, it is not inventive
▪ Exception: In the case of drugs and
medicines, there is no inventive step if the
invention results from the mere discovery
of:
a) a new form or new property of a
known substance which does not
result in the enhancement of the
known efficacy of that substance; or
b) the mere discovery of any new
property or new use for a known
substance; or
Final Notes in Commercia Law for the 2022 Bar| 14 of 89
c) the mere use of a known process
unless such known process results
in a new product that employs at
least one new reactant.
✓ INDUSTRIALLY APPLICABLE – Useful,
beneficial, and that it can be produced and
used.
NON-PATENTABLE INVENTIONS
1) Discoveries, scientific theories and
mathematical methods.
2) Schemes, rules and methods of performing
mental acts, playing games or doing
business, and programs for computers.
3) Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the human
or animal body. This provision shall not
apply to products and composition for use in
any of these methods.
4) Plant varieties or animal breeds or
essentially biological process for the
production of plants or animals. This
provision shall not apply to micro-
organisms and non-biological and
microbiological processes.
5) Aesthetic creations.
6) Anything which is contrary to public order
or morality.
NON-PATENTABLE DRUGS AND MEDICINES
1) new form or new property of a known
substance which does not result in the
enhancement of the known efficacy of that
substance
2) new property or new use for a known
substance (e.g. second medical use)
3) the mere use of a known process unless such
known process results in a new product that
employs at least one new reactant. Use of a
process for manufacturing drug A in the
manufacture of drug B.
2. Ownership of a patent
 “When the time is right, I, the Lord will make it happen.”
RIGHT TO A PATENT
1. The right to a patent belongs to the inventor,
his heirs, or assigns.
2. When two (2) or more persons have jointly
made an invention, the right to a patent shall
belong to them jointly.
3. The person who commissions the work shall
own the patent, unless otherwise provided
in the contract.
4. In case the employee made the invention in
the course of his employment contract, the
patent shall belong to:
a. The employee, if the inventive
activity is not a part of his regular
duties even if the employee uses the
time, facilities and materials of the
employer.
b. The employer, if the invention is the
result of the performance of his
regularly-assigned duties, unless
there is an agreement, express or
implied, to the contrary.
FIRST TO FILE RULE
If two (2) or more persons have made the invention
separately and independently of each other, the right
to the patent shall belong to the person who filed an
application for such invention, or where two or more
applications are filed for the same invention, to the
applicant who has the earliest filing date or, the
earliest priority date.
Although the Philippines adopts the First to File
Rule, it is still subject to the principle of good faith,
because if you are not the owner or you don’t have
the rights to the patentable product or process, the
same will not be granted to you. In other words, the
first to file rule will only apply if the two of you are
in good faith.
3. Grounds for cancellation of a patent
GROUNDS FOR CANCELLATION OF PATENT
Any interested person may file a petition for
cancellation of the patent or any claim included
therein, on the following grounds:
Final Notes in Commercia Law for the 2022 Bar| 15 of 89
a) That what is claimed as the invention is not
new or patentable;
b) That the patent does not disclose the
invention in a manner sufficiently clear and
complete for it to be carried out by any
person skilled in the art; or
c) That the patent is contrary to public order or
morality.
4. Patent infringement
TESTS OF PATENT INFRINGEMENT
1. LITERAL INFRINGEMENT
✓ The extent of protection conferred by the
patent shall be determined by the claims,
which are to be interpreted in the light of the
description and drawings.
✓ In using literal infringement, resort must be
had, in the first instance, to the words of the
claim. If accused matter clearly falls within
the claim, infringement is made out and that
is the end of it. To determine whether the
particular item falls within the literal
meaning of the patent claims, the Court must
juxtapose the claims of the patent and the
accused product within the overall context
of the claims and specifications, to determine
whether there is exactly identity of all
material elements. (Godines v. Court of
Appeals)
2. DOCTRINE OF EQUIVALENTS
✓ Same function, same means, same results.
✓ Account shall be taken of elements which are
equivalent to the elements expressed in the
claims, so that a claim shall be considered to
cover not only all the elements as expressed
therein, but also equivalents.
✓ Under the doctrine of equivalents, there is
infringement if two devices do the same
work in substantially the same way, and
accomplish substantially the same result,
even though they differ in name, form, or
shape. The reason for the doctrine of
equivalents is that to permit the imitation of
a patented invention which does not copy
 “When the time is right, I, the Lord will make it happen.”
any literal detail would be to convert the
protection of the patent grant into a hollow
and useless thing. (Godines v. The Honorable
Court of Appeals)
✓ The doctrine of equivalents provides that an
infringement takes place when a device
appropriates a prior invention by
incorporating its innovative concept and,
although with some modification and
changes, performs substantially the same
function in substantially the same way to
achieve substantially the same result; it
requires satisfaction of the function-means-
and-result test. (Smithkline Beckman
Corporation vs. Court of Appeals)
What are the cases to be filed in patent
infringement?
a) Civil action for infringement – you can also
pray for actual damage. You can also pray
for injunction to restrain the acts of
infringement while the case is pending.
b) Criminal action - there should be repetition
of a violation. For patent infringement, the
law says that there must be an act declared
as infringement by court. Once the court
declares that it amounts to infringement,
and the acts are repeated, then the acts that
are repeated will give rise to both criminal
and civil remedy.
Is a good faith a defense in patent infringement?
YES. Section 73 of the IP Code provides that any
prior user, who, in good faith was using the
invention or has undertaken serious preparations to
use the invention in his enterprise or business, before
the filing date or priority date of the application on
which a patent is granted, shall have the right to
continue the use thereof as envisaged in such
preparations within the territory where the patent
produces its effect.
B. Trademarks
A trademark is any visible sign capable of
distinguishing goods. It includes any word, name,
symbol, emblem, sign or device or any combination
thereof, adopted and used by a manufacturer or
merchant to identify his goods and distinguish them
from those manufactured, sold or dealt in by others.
Final Notes in Commercia Law for the 2022 Bar| 16 of 89
It symbolizes the goodwill and business reputation
of the owner of the product and is a property right
protected by law. (Mirpuri v. Court of Appeals)
1. Marks vs. collective marks vs. trade names
“Mark” means any visible sign capable of
distinguishing the goods (trademark) or services
(service mark) of an enterprise and shall include a
stamped or marked container of goods;
"Collective mark” means any visible sign designated
as such in the application for registration and
capable of distinguishing the origin or any other
common characteristic, including the quality of
goods or services of different enterprises which use
the sign under the control of the registered owner
of the collective mark. The owner is an association
or organization;
"Trade name” means the name or designation
identifying or distinguishing an enterprise.
2. Acquisition of ownership
a. Concept of actual use
ZUNECA PHARMACEUTICAL V.
NATRAPHARM INC. (2020; J. Caguioa)
The Supreme Court held that, under the
Intellectual Property Code of the Philippines, prior
use no longer determines the acquisition of
ownership over a mark. This landmark decision
overturns and abandons the rulings in previous
cases (Berris Agricultural Co., Inc. v. Abyadang and E.
Y. Industrial Sales, Inc. et al. v. Shen Dar Electricity
and Machinery Co., Ltd.) stating that the rights of a
prior user of a mark prevail over the rights of a first
registrant of a confusingly similar mark. The
decision unequivocally pronounced that, under
the Intellectual Property Code, the ownership of a
trademark is acquired by its registration.
The Supreme Court emphasized that the language
of the Intellectual Property Code (unlike its
predecessor, the Trademark Law) clearly conveys
the rule that ownership of a mark is acquired
through registration. Even if a mark was
previously used and not abandoned by another
person, a good faith applicant may still register the
same and thus become the owner thereof, and the
prior user cannot ask for the cancellation of the
latter’s registration. While the Intellectual Property
Code mandates that the applicant or registrant of a
 “When the time is right, I, the Lord will make it happen.”
mark must prove continued actual use of such
mark, this does not imply that actual use is still a
recognized mode of acquisition of ownership.
Rather, this requirement is put in place in order for
the registered owner of a mark to maintain his
ownership.
Similarly, the prima facie nature of the certificate
of registration is not indicative of the fact that prior
use is still a recognized mode of acquiring
ownership under the Intellectual Property Code.
Rather, it is meant to recognize the instances when
the certificate of registration is not reflective of
ownership of the holder thereof, such as when: (1)
the first registrant has acquired ownership of the
mark through registration but subsequently lost
the same due to non-use or abandonment; (2) the
registration was done in bad faith; (3) the mark
itself becomes generic; (4) the mark was registered
contrary to the Intellectual Property Code (e.g.,
when a generic mark was successfully registered
for some reason); or (5) the registered mark is being
used by, or with the permission of, the registrant
so as to misrepresent the source of the goods or
services on or in connection with which the mark
is used.
Nevertheless, under the Intellectual Property
Code, the existence of bad faith in trademark
registrations may be a ground for its cancellation
at any time by filing a petition for cancellation, bad
faith being defined as knowledge of prior creation,
use and/or registration by another of an identical
or similar trademark. Thus, the first-to-file
registrant must be in good faith to allow such
registrant to acquire all the rights in a mark. In the
same vein, prior users in good faith are also
protected under the Intellectual Property Code in
the sense that they will not be made liable for
trademark infringement even if they are using a
mark that was subsequently registered by another
person.
In arriving at this decision, the Supreme Court
considered the following undisputed facts:
1. Respondent Natrapharm was the
registrant of the “ZYNAPSE” mark which
was registered on 24 September 2007;
2. Petitioner Zuneca has been using the
“ZYNAPS” brand as early as 2004; and
Final Notes in Commercia Law for the 2022 Bar| 17 of 89
3. “ZYNAPSE” and “ZYNAPS” were
confusingly similar and both were used for
medicines.
It was clear that Respondent Natrapharm was the
first-to-file registrant of “ZYNAPSE” mark and
that Petitioner Zuneca was the prior user of a
confusingly similar mark, “ZYNAPS”.
What remained contentious was Respondent
Natrapharm’s good or bad faith in registering its
“ZYNAPSE” mark, and the Supreme Court
affirmed the findings of the lower courts that
Petitioner Zuneca failed to show Respondent
Natrapharm’s bad faith.
Since Natrapharm was not shown to have been in
bad faith, it was considered to have acquired all the
rights of a trademark owner upon the registration
of the “ZYNAPSE” mark. However, under the
Intellectual Property Code, a prior user in good
faith may continue to use its mark even after the
registration of the mark by the first-to-file
registrant in good faith, subject to the condition
that any transfer or assignment of the mark by the
prior user in good faith should be made together
with the enterprise or business or with that part of
his enterprise or business in which the mark is
used. Thus, the Supreme Court found that
Petitioner Zuneca was exempted from liability for
trademark infringement for being a prior user in
good faith.
While doubts have been expressed by Associate
Justices Leonen and Lazaro-Javier over the
supposed abandonment of the requirement of
actual use, the Supreme Court clarified that the
filing of the Declaration of Actual Use is not a
prerequisite for the acquisition of ownership of a
mark as it is only necessary to maintain ownership
over the registered Trademark. On the other hand,
the prima facie nature of the Certificate of
Registration is only meant to recognize the
instances when the COR is no longer reflective of
the ownership of the holder thereof, such as, but
not limited to, cases when the first registrant
subsequently lost its ownership due to non-use or
abandonment.
Essentially, the decision indisputably pronounced
that, under the IP Code, the ownership of a
trademark is acquired by its registration, with the
exception created by Section 159.1 of the IP Code.
 “When the time is right, I, the Lord will make it happen.”
b. Effect of registration
A certificate of registration of a mark shall be
prima facie evidence of the validity of the
registration, the registrant's ownership of the mark,
and of the registrant's exclusive right to use the
same in connection with the goods or services and
those that are related thereto specified in the
certificate. (§138)
PRINCIPLE OF SPECIFICITY
Once there is already a registered trademark, the rule
is there exist a prima facie evidence of ownership
and registration. Hence, there is a right to exclude
third persons from the usage of the particular
mark with respect to: same goods, related goods,
or goods and services within the zone expansion
of business. Therefore, as a general rule, if one
has registered trademark, the rights are just
limited to the abovementioned principle.
Illustration: If I have registered the trademark, for
example Sterling paper, such is specified goods,
which means no one is allowed to use or copy the
spelling of this trademark. More than that, related
good is included, e.g., envelope, folders, pens, etc.;
or even the zone expansion of business, e.g.,
bookstore.
PRINCIPLE OF TERRITORIALITY
As a general rule, protection afforded to
trademark is territorial, that is, it is only limited
to the territory of the country that recognizes the
same.
As a consequence, a mark that is not registered
in the Philippines will not get protection under the
legal mantle of trademark.
✓ Exception to the rule is in the case of a well-
known mark - a well-known mark is
protected for the identical goods and
services even if the same is not registered in
the country where it seeks protection.
EXCEPTIONS TO NON-REGISTRABILITY OF
DESCRIPTIVE MARKS, GEOGRAPHICAL
ORIGIN, SHAPES, AND COLORS
The prohibition is not absolute. If the element of
distinctiveness can be proven and the same is
Final Notes in Commercia Law for the 2022 Bar| 18 of 89
used in connection with goods for a period of time
required by law – it can be registered
Section 123.2 of the IPC: As regards signs or devices
mentioned in paragraphs (j), (k), and (l), nothing
shall prevent the registration of any such sign or
device which has become distinctive in relation to
the goods for which registration is requested as a
result of the use that have been made of it in
commerce in the Philippines. The Office may
accept as prima facie evidence that the mark has
become distinctive, as used in connection with the
applicant’s goods or services in commerce, proof of
substantially exclusive and continuous use thereof
by the applicant in commerce in the Philippines for
five (5) years before the date on which the claim of
distinctiveness is made.
DOCTRINE OF SECONDARY MEANING
This doctrine is to the effect that a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because
geographically or otherwise descriptive, might
nevertheless have been used so long and so
exclusively by one producer with reference to his
article that, in that trade and to that branch of the
purchasing public, the word or phrase has come to
mean that the article was his product. (Ang v.
Teodoro)
SHANG PROPERTIES REALTY CORP. V. ST.
FRANCIS DEVELOPMENT CORP.
The SC rules that St. Francis could not claim
secondary meaning on the word ‘St. Francis’ it being
a geographically descriptive term
Citing the case of Great Southern Bank V. First
Southern Bank, geographical terms are in the
public domain; every seller should have the right
to inform customers of the origin of his goods.
To determine whether the geographic term is
used descriptively, the question is: “Is the mark the
name of the place or region from which the goods
actually come?” If yes, it is probably used
descriptive sense and secondary meaning is required
for protection.
Secondary meaning is established when a
descriptive mark no longer causes the public to
associate the goods with the particular place but to
associate the goods with a particular source.
 “When the time is right, I, the Lord will make it happen.”
The more a geographical area is obscure and
remote, it becomes less likely that the public shall
have a goods/place association with it – mark may
not be deemed as geographically descriptive.
3. Well-known marks
A well-known mark is a mark which a competent
authority of the Philippines has designated to be
well-known internationally and in the Philippines,
whether or not it is registered here, as being already
the mark of a person other than the applicant for
registration.
In determining whether a mark is well-known,
account shall be taken of the knowledge of the
relevant sector of the public, rather than the public at
large, including knowledge in the Philippines which
has been obtained as a result of the promotion of the
mark.
If the well-known mark is not registered in the
Philippines:
A mark cannot be registered if it is identical with, or
confusingly similar to, or constitutes a translation of
an internationally well-known mark if used for
identical or similar goods or services. [Sec. 123.1(e)]
If the well-known mark is registered in the
Philippines:
A mark cannot be registered if it is identical with, or
confusingly similar to, or constitutes a translation of
an internationally well-known mark even if it is used
for goods or services which are NOT similar to those
with respect to which registration is applied. [Sec.
123.1(f)]
Other persons or entities cannot use the registered
well-known mark even for unrelated goods,
provided that:
1) The use of the mark in relation to those
goods or services would indicate a
connection between those goods or services,
and the owner of the registered mark; and
2) That the interests of the owner of the
registered mark are likely to be damaged by
such use. [Sec. 123.1(f)]
4. Rights conferred by registration
Final Notes in Commercia Law for the 2022 Bar| 19 of 89
The owner of a registered mark shall have the
exclusive right to prevent all third parties not having
the owner's consent from using in the course of trade:
i. Identical or similar signs or containers,
ii. For goods or services which are identical or
similar to those in respect of which the
trademark is registered,
iii. Where such use would result in a likelihood
of confusion.
5. Cancellation of registration
Certificate of registration may be cancelled in the
following cases:
1) Failure to file declaration of actual use
within 1 year from the fifth anniversary of
the trademark registration.
2) Failure to file declaration of actual use
within 3 years from filing of the application
for the trademark registration.
A petition to cancel a registration of a mark
may also be filed with the Bureau of Legal
Affairs by any person who believes that he is
or will be damaged by the registration of a
mark under the IPC as follows:
a. Within five (5) years from the date of the
registration of the mark.
b. At any time, if the registered mark
becomes the generic name for the goods
or services, or a portion thereof, for
which it is registered, or has been
abandoned, or its registration was
obtained fraudulently or contrary to the
provisions of IPC, or if the registered
mark is being used by, or with the
permission of, the registrant so as to
misrepresent the source of the goods or
services on or in connection with which
the mark is used.
3) At any time, if the registered owner of the
mark without legitimate reason fails to use
the mark within the Philippines, or to cause
it to be used in the Philippines by virtue of a
license during an uninterrupted period of
three (3) years or longer.
 “When the time is right, I, the Lord will make it happen.”
6. Trademark infringement
TRADEMARK INFRINGEMENT
Infringement takes place when the competing
trademark contains the essential features of another.
Imitation or an effort to imitate is unnecessary. The
question is whether the use of the marks is likely to
cause confusion or deceive purchasers. (Societe Des
Produits Nestle, S. A. vs. Martin T. Dy)
Elements of trademark infringement
1) The trademark being infringed is registered
in the Intellectual Property Office; however,
in infringement of trade name, the same
need not be registered;
2) The trademark or trade name is reproduced,
counterfeited, copied, or colorably imitated
by the infringer;
3) The infringing mark or trade name is used in
connection with the sale, offering for sale, or
advertising of any goods, business or
services; or the infringing mark or trade
name is applied to labels, signs, prints,
packages, wrappers, receptacles or
advertisements intended to be used upon or
in connection with such goods, business or
services;
4) The use or application of the infringing mark
or trade name is likely to cause confusion or
mistake or to deceive purchasers or others as
to the goods or services themselves or as to
the source or origin of such goods or services
or the identity of such business;
5) It is without the consent of the trademark or
trade name owner or the assignee thereof.
❖ Of these, it is the element of likelihood of
confusion that is the gravamen of trademark
infringement.
A crucial issue in any trademark infringement case is
the likelihood of confusion, mistake or deceit as to
the identity, source or origin of the goods or identity
of the business as a consequence of using a certain
mark. Likelihood of confusion is admit- tedly a
relative term, to be determined rigidly according to
the particular (and some- times peculiar)
circumstances of each case. Thus, in trademark cases,
Final Notes in Commercia Law for the 2022 Bar| 20 of 89
more than in other kinds of litigation, precedents
must be studied in the light of each particular case.
(Mighty Corporation vs. E. J. Gallo Winery)
Failure to present proof of actual confusion does not
negate their claim of trademark infringement.
Trademark infringement requires the less stringent
standard of “likelihood of confusion”only. While
proof of actual confusion is the best evidence of
infringement, its absence is inconsequential.
(McDonalds Corporation v. L. C. Big Mak Burger, Inc)
TAKE NOTE: Before, there are 2 tests in
determining the similarity of competing marks:
Dominancy test and Holistic test. However,
pursuant to the landmark case of Kolin v. Kolin, the
Holistic Test is now abandoned.
The only test now is DOMINANCY TEST: It
focuses on the similarity of the main, prevalent or
essential features of the competing trademarks
that might cause confusion.
Infringement takes place when the competing
trademark contains the essential feature of another.
Imitation or an effort to imitate is unnecessary. The
question is whether the use of the marks is likely to
cause confusion or deceive purchasers.
KOLIN V. KOLIN
(June 16, 2021; CAGUIOA, J.)
Considering the adoption of the Dominancy Test and
the abandonment of the Holistic Test, as confirmed
by the provisions of the IP Code and the legislative
deliberations, the Court hereby makes it crystal clear
that the use of the Holistic Test in determining the
resemblance of marks has been abandoned.
The SC rejected the application of Kolin Philippines
International, Inc. (KPII), to trademark “kolin”—
with a lowercase letter “k” and an italicized orange
letter “i”—for its television sets and DVD players
because of its similarity to the “KOLIN” mark owned
by Kolin Electronics Co., Inc. (KECI).
The SC summarized its discussion, to wit: (1) there is
resemblance between KECI’s “KOLIN“ and KPII’s
“kolin” marks; (2) the goods covered by KECI’s
“KOLIN“ are related to the goods covered by KPII’s
“kolin”; (3) there is evidence of actual confusion
between the two marks; (4) the goods covered by
KPII’s “kolin” fall within the normal potential
expansion of business of KECI; (5) sophistication of
 “When the time is right, I, the Lord will make it happen.”
buyers is not enough to eliminate confusion; (6)
KPII’s adoption of KECI’s coined and fanciful mark
would greatly contribute to likelihood of confusion;
and (7) KPII applied for “kolin” in bad faith.
Applying the “dominancy test,” the SC stressed that
KPII’s “kolin” mark sounded “exactly the same” as
KECI’s “KOLIN” mark, even if the former was
stylized differently.
The “dominancy test” focuses on the similarity of the
prevalent or main features of the competing
trademarks which might cause confusion or
deception. In other words, infringement already
takes place when the use of the marks is likely to
cause confusion or mistake in the mind of the public
or deceive purchasers. Similarity in just how the
marks look and sound would be enough.
Meanwhile, the “holistic test” requires that the
entirety of the marks be considered, not just the main
features. The minor features would have to be
looked at too, before there can be infringement. This
would assume that an observer would look at marks
with a discerning eye.
Without trademark registration, there can be no
trademark infringement but there can be unfair
competition. (Roberto Co v. Keng Huan)
Remedies available to the trademark registrant in
case of trademark infringement:
1) Action for trademark infringement with
claim for actual damages.
▪ Damages as the court may determine
based on the percentage of gross sales of
the defendant. If cannot be ascertained,
reasonable percentage of gross sales of
the defendant.
▪ Damages maybe doubled in case of
intent to deceive the public or defraud
the complainant.
▪ He may also recover Attorney's Fees &
Cost of litigation.
2) The civil action for trademark infringement
may include provisional remedies such as:
Final Notes in Commercia Law for the 2022 Bar| 21 of 89
a. Preliminary injunction to restrain any
act of infringement while the case is
pending.
b. Apply for a search and seizure order to
confiscate, seize, or impound all the
infringing materials such as
paraphernalia/ or any other material
used in infringement.
c. Once the judgement is rendered and
became final, then preliminary
injunction becomes a final injunction.
3) He may also file Criminal action for
trademark infringement.
4) He may also oppose any other application
for registration of the same trademark or a
dominant feature thereof, for the same
goods and services or goods and services
related thereto.
5) In case of issuance of certificate of trademark
registration in favor of another, he may file
petition for cancellation of registration.
Can the registrant of the trademark file a petition
for trademark cancellation with the IPO against a
subsequent registrant trademark and at the same
time an action for trademark infringement?
A: Yes, as long as the administrative proceedings are
commenced first, it does not bar the filing of
application for damages in trademark infringement
with appropriate court.
The application for administrative cancellation of
registered trademark does not preclude the first
registrant from filing an action for trademark
infringement. Such application cannot per se have
the effect of restraining or preventing the courts from
the exercise of their lawfully conferred jurisdiction.
Once an action for infringement is filed in court,
can the court declare the trademark as invalid, or
should it be the IPO?
A: Yes, the court may declare the trademark
registration invalid.
What if there is an action for trademark
infringement, can the respondent as a defense file
a petition for cancellation of trademark?
 “When the time is right, I, the Lord will make it happen.”
A: No, because once the court acquires jurisdiction
over the case, it bars administrative proceedings.
Thus, the defense or remedy available to respondent
is to file an answer or respond to the charge
accordingly. He may raise the same grounds for
cancellation of trademark as defenses in the action
for trademark infringement.
If trademark infringement is filed first, the remedy
available to defendant is not to file petition for
cancellation but to file an answer to the action for
infringement and the same answer invoked the same
defenses appropriate for cancellation of patent.
Let’s say the petition for trademark cancellation
filed by the respondent in the action for trademark
infringement became final. What will happen now
with the action for trademark infringement. Will it
be dismissed?
A: Once the IPO rules on the petition for cancellation
of trademark that acquired finality, then the action
for trademark infringement will have no more leg to
stand. The cancellation of registration of a trademark
has the effect of depriving the registrant of protection
from infringement from the moment the judgment or
order of cancellation has become final.
7. Unfair competition
UNFAIR COMPETITION
Unfair competition has been defined as the
passing off (palming off) or attempting to pass
off upon the public of the goods or business of
one person as the goods or business of another
with the end and probable effect of deceiving the
public. The essential elements of unfair competition
are (1) confusing similarity in the general appearance
of the goods; and (2) intent to deceive the public
and defraud a competitor. (Superior Enterprises, Inc.
vs. Kunnan Enterprises Ltd.)
Essential elements of an action for unfair
competition
1) confusing similarity in the general
appearance of the goods, and
2) intent to deceive the public and defraud a
competitor.
The confusing similarity may or may not result
from similarity in the marks, but may result from
other external factors in the packaging or
Final Notes in Commercia Law for the 2022 Bar| 22 of 89
presentation of the goods. The intent to deceive and
defraud may be inferred from the similarity of
the appearance of the goods as offered for sale to
the public. (McDonalds Corporation v. L. C. Big Mak
Burger, Inc.)
SHANG PROPERTIES REALTY CORP. &
SHANG PROPERTIES V. ST. FRANCIS DEVT.
CORP.
The "true test" of unfair competition has thus been
"whether the acts of the defendant have the intent of
deceiving or are calculated to deceive the ordinary
buyer making his purchases under the ordinary
conditions of the particular trade to which the
controversy relates." Based on the foregoing, it is
therefore essential to prove the existence of fraud, or
the intent to deceive, actual or probable, determined
through a judicious scrutiny of the factual
circumstances attendant to a particular case.
Here, the Court finds the element of fraud to be
wanting; hence, there can be no unfair competition.
The CA’s contrary conclusion was faultily premised
on its impression that respondent had the right to the
exclusive use of the mark "ST. FRANCIS," for which
the latter had purportedly established considerable
goodwill. What the CA appears to have disregarded
or been mistaken in its disquisition, however, is the
geographically descriptive nature of the mark "ST.
FRANCIS" which thus bars its exclusive
appropriability, unless a secondary meaning is
acquired.
As its use of the mark is clearly limited to a certain
locality, it cannot be said that there was substantial
commercial use of the same recognized all
throughout the country, as required by Section
123.2(a) of the IP Code in order to conclude that a
geographically-descriptive mark has acquired
secondary meaning. Neither is there any showing of
a mental recognition in buyers’ and potential buyers’
minds that products connected with the mark “ST.
FRANCIS” are associated with the same source —
that is, the enterprise of respondent. Thus, absent
any showing that there exists a clear goods/service-
association between the realty projects located in the
aforesaid area and herein respondent as the
developer thereof, the latter cannot be said to have
acquired a secondary meaning as to its use of the
“ST. FRANCIS” mark. Also, assuming that
secondary meaning had been acquired, this does not
automatically trigger the concurrence of the element
 “When the time is right, I, the Lord will make it happen.”

of fraud. There can be no unfair competition without subjects and by the persons, and on terms and
this element. conditions specified in the statute. Accordingly, it
can only cover the works falling within the statutory
TRADEMARK INFRINGEMENT vs. UNFAIR enumeration or description. (Pearl & Dean (Phil.),
COMPETITION Incorporated v. Shoemart, Incorporated)

The subject of copyright refers to finished works. The

TRADEMARK UNFAIR copyright does not extend to an idea, procedure,
INFRINGEMENT COMPETITION process, system, method of operation, concept,
principle, or discovery, regardless of the form in
The prior registration of Registration of the which it is described, explained, illustrated, or
the trademark is a trademark is not embodied in such work. (Joaquin, Jr. vs. Drilon)
prerequisite for the necessary.
action. The scope of copyright is confined to literary and
artistic works which are original intellectual
Fraudulent intent is not Fraudulent intent is creations in the literary and artistic domain protected
necessary. essential. from the moment of their creation.

Infringement of Unfair competition is A person to be entitled to a copyright must be the

trademark is the the passing off of one’s original creator of the work. He must have created it
unauthorized use of a goods for the goods of by his own skill, labor and judgment without directly
trademark. another. copying or evasively imitating the work of another.

Only the expression of an idea is protected by

Does the act of refilling empty LPG gas cylinder
tank bearing a registered trademark amount to
infringement or unfair competition or both?
Yes. The act of refilling empty LPG gas cylinder tank
bearing a registered trademark amount to both
trademark infringement and unfair competition.
(Republic Gas Corp. v. Petron Corp.)
Here, petitioners have actually committed
trademark infringement when they refilled, without
the respondents’ consent, the LPG containers
bearing the registered marks of the respondents.
Petitioners’ acts will inevitably confuse the
consuming public, since they have no way of
knowing that the gas contained in the LPG tanks
bearing respondents’ marks is in reality not the
latter’s LPG product after the same had been illegally
refilled. The public will then be led to believe that
petitioners are authorized refillers and distributors
of respondents’ LPG products, considering that they
are accepting empty containers of respondents and
refilling them for resale.
copyright, not the idea itself.
While works of applied art, original intellectual,
literary and artistic works are copyrightable, useful
articles and works of industrial design are not. A
useful article may be copyrightable only if and only
to the extent that such design incorporates pictorial,
graphic, and sculptural features that can be
identified separately from and are capable of existing
independently of the utilitarian aspects of the article.
(Ching vs. Salinas).
Functional components of useful articles, no matter
how artistically designed, have generally been
denied copyright protection unless they are
separable from the useful article. (Ching vs. Salinas)
1. Copyrightable works
COPYRIGHTABLE WORKS (SEC. 172)
a) Books, pamphlets, articles and other
writings;

b) Periodicals and newspapers;

C. Copyrights
c) Lectures, sermons, addresses, dissertations
Copyright, in the strict sense of the term, is purely a prepared for oral delivery, whether or not
statutory right. Being a mere statutory grant, the reduced in writing or other material form;
rights are limited to what the statute confers. It may
be obtained and enjoyed only with respect to the

Final Notes in Commercia Law for the 2022 Bar| 23 of 89

 “When the time is right, I, the Lord will make it happen.”
• If the lectures or sermons are given
in public assemblies, then no
copyright infringement is
committed by express provision of
law.
d) Letters;
• Text messages are akin to letters
that is why they are copyrightable.
Even if it may not be a letter, it falls
under “other literary or artistic
work”. Thus, the publication of
messages without the consent of
their writers constitutes copyright
infringement.
But if it is only “K”, “I love you”,
“were na u” ‐ these are not
copyrightable; not literary or
artistic.
• Who owns the letters? They are
owned by the beneficiary or
recipient but copyright belongs to
author or composer therefore in case
of publication of love letter by the
recipient without the consent of
author, then copyright infringement
was committed. Any act of violation
of economic or moral rights is
infringement of copyright.
e) Dramatic or dramatico-musical
compositions; choreographic works or
entertainment in dumb shows;
f) Musical compositions, with or without
words;
g) Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
works of art; models or designs for works of
art;
h) Original ornamental designs or models for
articles of manufacture, whether or not
registrable as an industrial design, and other
works of applied art;
• Denicola Test - Under the Denicola
test, if the design element can be
detached from the usefulness of the
article then the design element by
Final Notes in Commercia Law for the 2022 Bar| 24 of 89
itself is copyrightable. But if the
design element is a merger of
aesthetic or function consideration,
and it cannot be detached from the
usefulness of the article, then the
design is not copyrightable.
i) Illustrations, maps, plans, sketches, charts
and three-dimensional works relative to
geography, topography, architecture or
science;
• Hatch door design is copyrightable
but the hatch door itself is not
copyrightable.
j) Drawings or plastic works of a scientific or
technical character;
k) Photographic works including works
produced by a process analogous to
photography; lantern slides;
l) Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any process
for making audio-visual recordings;
m) Pictorial illustrations and advertisements;
n) Computer programs; and
o) Other literary, scholarly, scientific and
artistic works.
DERIVATIVE WORKS
Like the original work, derivative works are also
covered.
The following derivative works shall also be
protected by copyright as new works:
1) Dramatizations, translations, adaptations,
abridgments, arrangements, and other
alterations of literary or artistic works; and
2) Collections of literary, scholarly or artistic
works, and compilations of data and other
materials which are original by reason of the
selection or coordination or arrangement of
their contents.
As a rule, the author of a work is always presumed
to be the copyright owner. However, the copyright
 “When the time is right, I, the Lord will make it happen.”
owner may be different from the author of a work.
The author/creator will always be the author
forever; but not the copyright owner. This could
mean that the author is not the copyright owner.
Remember, COPYRIGHT IS A PROPERTY, so you
can sell, transfer or assign. But when it comes to
authorship, of course, the author is forever- it is one
of the moral rights, RIGHT OF ATTRIBUTION.
Illustration: JK Rowling wrote the book Harry Potter,
which is an original work. But being the copyright
owner of that original work, she has also the rights
over derivative works. You cannot make movies,
games, toys, etc., from Harry Potter book without the
consent of JK Rowling.
PEARL AND DEAN V. SHOEMART
Copyright protection is extended only to the
technical drawings. The actual transformation of the
light box is not copyrightable. The SC ruled that such
is functional. If petitioner wanted to protect it, they
must apply for utility model or patent.
There is no copyright infringement. The light boxes
cannot, by any stretch of the imagination, be
considered as either prints, pictorial illustrations,
advertising copies, labels, tags or box wraps, to be
properly classified as a copyrightable; what was
copyrighted were the technical drawings only, and
not the light boxes themselves. In other cases, it was
held that there is no copyright infringement when
one who, without being authorized, uses a
copyrighted architectural plan to construct a
structure. This is because the copyright does not
extend to the structures themselves.
A lightbox, even admitted by the president of
petitioner company, was neither a literary nor an
artistic work but an engineering or marketing
invention, thus not included under a copyright.
OLAÑO V. LIM ENG CO
The technical drawings of the hatch doors are not
copyrightable. In order to protect it, petitioner
should have applied for patent.
The hatch doors are not subject to copyright and
copyright infringement may not be committed.
What was copyrighted were their
sketches/drawings only, and not the actual hatch
doors themselves.
Final Notes in Commercia Law for the 2022 Bar| 25 of 89
Unlike a patent, a copyright gives no exclusive right
to the art disclosed; protection is given only to the
expression of the idea, not the idea itself. The
petitioners could not have manufactured such hatch
doors in substantial quantities had they not
reproduced the copyrighted plans/drawings
submitted by LEC to SK1-FB.
It is clear that the hatch doors were not artistic works
within the meaning of copyright laws. A
copyrightable work refers to literary and artistic
works defined as original intellectual creations in the
literary and artistic domain.
A hatch door, by its nature is an object of utility. It is
intrinsically a useful article is not eligible for
copyright.
A "useful article" defined as an article "having an
intrinsic utilitarian function that is not merely to
portray the appearance of the article or to convey
information" is excluded from copyright eligibility.
The only instance when a useful article may be the
subject of copyright protection is when it
incorporates a design element that is physically or
conceptually separable from the underlying product.
This means that the utilitarian article can function
without the design element. In such an instance, the
design element is eligible for copyright protection.
2. Non-copyrightable works
UNPROTECTED SUBJECT MATTER (SEC. 175)
I-N-I-G-T-A
1. Ideas, system, procedure, method discovery,
concept, principle
2. News of the day
3. Items of the pressed information
4. Works of the Government
5. Texts of legislative, administrative or legal
nature
6. Delivery of public Assembles
No protection shall extend to:
1) any idea, procedure, system, method or
operation, concept, principle, discovery or
mere data as such, even if they are
 “When the time is right, I, the Lord will make it happen.”
expressed, explained, illustrated or
embodied in a work;
✓ Note: While an idea is not
copyrightable, the expression of an
idea is protected by copyright.
✓ Lectures may be copyrightable, but
if it pertains to discovery, then it is
NOT copyrightable. So lectures are
qualified by non-discovery or
principle.
2) news of the day and other miscellaneous
facts having the character of mere items of
press information; or
✓ The event itself is not copyrightable
because that is the newsworthy
event. However, any footage
created from the event itself is an
intellectual creation which is
copyrightable.
News or the event itself is not
copyrightable. However, an event
can be captured and presented in a
specific medium. Copyright
protection extends to the reports
themselves, as distinguished from
the substance of the information
contained in the reports. Copyright
protects the manner of expression of
news reports, "the particular form or
collocation of words in which the
writer has communicated it." (ABS-
CBN v. Gozon)
3) any official text of a legislative,
administrative or legal nature, as well as any
official translation thereof.
4) WORKS OF THE GOVERNMENT - No
copyright shall subsist in any work of the
Government of the Philippines.
✓ However, if you want to compile,
reproduce and make money out of
these works, you have to get consent
from the concerned government
agency.
✓ Note: SCRA by Central Bookstore is
copyrightable. Mere compilation is
Final Notes in Commercia Law for the 2022 Bar| 26 of 89
not enough; there must be
originality also in the compilation
by reason of SELECTION,
COORDINATION, or
ARRANGEMENT.
N.B. The Government is not
precluded from receiving and
holding copyrights transferred to it
by assignment, bequest or
otherwise; nor shall publication or
republication by the Government in
a public document of any work in
which copyright is subsisting be
taken to cause any abridgment or
annulment of the copyright or to
authorize any use or appropriation
of such work without the consent of
the copyright owner.
5) Statutes, rules and regulations, and
speeches, lectures, sermons, addresses, and
dissertations, pronounced, read or rendered
in courts of justice, before administrative
agencies, in deliberative assemblies and in
meetings of public character.
3. Rights conferred by copyright
Protected from the moment of creation
Works are protected by the sole fact of their creation,
irrespective of their mode or form of expression, as
well as of their content, quality, and purpose.
1. Economic rights – includes the right to mass
produce the work or to license it and the right to
make other versions of the work.
2. Moral rights - these refers to the right of the
intellectual creator about his authorship.
Note: Copyright (Economic & Moral rights) shall be
protected during the lifetime of the author/creator
plus 50 years after his death. The 50 years shall
commence to run on the first day of the year
following his death.
ECONOMIC RIGHTS
Economic rights shall consist of the exclusive right to
carry out, authorize, or prevent the following acts:
(Sec. 177)
 “When the time is right, I, the Lord will make it happen.”
1. Reproduction of the work or substantial portion
of the work;
• The law does not necessarily require that the
entire copyrighted work, or even a large
portion of it, be copied. If so much is taken
that the value of the original work is
substantially diminished, there is an
infringement of copyright and to an
injurious extent, the work is appropriated. In
cases of infringement, copying alone is not
what is prohibited. The copying must
produce an "injurious effect". (Habana v.
Robles [1999])
2. Dramatization, translation, adaptation,
abridgment, arrangement or other transformation
of the work;
• These are derivative works. The author has
the exclusive privilege to carry out
derivative work of his original work. During
the term of copyright, the author may
authorize another person to carry out the
derivative work.
Example: Anything Harry Potter-related can
be the subject of copyright in various
forms—movies, songs, games, etc.
3. The first public distribution of the original and
each copy of the work by sale or other forms of
transfer of ownership;
• This is based on the “first sale doctrine.”
• Let’s say you bought 10 books for 2k and
decided to sell it for 8k. Is there
infringement of copyright? No, under the
first sale doctrine. The right of author
pertains on the first public distribution of the
original or each copy of the work. After the
first sale of the original copies, the owner
may use and re-sell the same. (It must be
compatible with Fair use)
If he purchased the book, photocopied it,
and shared it with his classmates, the
reproduction of book, or substantial portion,
then there is infringement of economic right
of author.
If he purchased certain numbers of copies,
and sold it for high price, first sale doctrine
will apply.
Final Notes in Commercia Law for the 2022 Bar| 27 of 89
4. Rental of the original or a copy of an audiovisual
or cinematographic work, a work embodied in a
sound recording, a computer program, a
compilation of data and other materials or a
musical work in graphic form, irrespective of the
ownership of the original or the copy which is the
subject of the rental; (n)
• The right of rental is a distinct economic
right which is not covered by the first sale
doctrine.
Example: Si Sir may CD album. Binili mo.
Wala nang pake si sir kung gagamitin o
hindi. But if you rent it out, you have to get
his permission. Same principle with digital
media.
5. Public display of the original or a copy of the
work;
6. Public performance of the work; and
7. Other communication to the public of the work
MORAL RIGHTS
1. Right of Attribution - to require that the
authorship of the works be attributed to him, in
particular, the right that his name, as far as
practicable, be indicated in a prominent way on the
copies, and in connection with the public use of his
work.
• This is the only right in perpetuity. Forever
he will be the author of the work. No one else
can claim ownership. If somebody claims
ownership other than the author, then there
is infringement of moral right of the author.
2. Right to Alter
3. Right to Withhold publication
• Supposing you are commissioned by
somebody, “I would like the ending to be
this way” or “I would like my
autobiography this way” and there is a
contract with that. And you decided not to
publish it because you are not happy with
your work. Can you be compelled by the one
who commissioned to you to publish the
work? No. The right to withhold publication
pertains to the author. The author may be
 “When the time is right, I, the Lord will make it happen.”
liable for breach of contract but he cannot be
compelled to publish his work since the
right to publish work is one of the economic
rights. And withholding publication is also a
moral right of author.
4. Right to Object - To object to any distortion,
mutilation or other modification of, or other
derogatory action in relation to, his work which
would be prejudicial to his honor or reputation.
5. Right against false attribution - To restrain the
use of his name with respect to any work not of his
own creation or in a distorted version of his work.
WAIVER OF MORAL RIGHTS
An author may waive his rights by a written
instrument, but no such waiver shall be valid where
its effects is to permit another:
a. To use the name of the author, or the title of
his work, or otherwise to make use of his
reputation with respect to any version or
adaptation of his work which, because of
alterations therein, would substantially tend
to injure the literary or artistic reputation of
another author; or
b. To use the name of the author with respect
to a work he did not create.
4. Ownership of a copyright
Rules on ownership of copyright
1. The copyright belongs to the intellectual
creator. Thus, if you are the one who made
the novel or compilation, you own the
copyright.
2. If two or more persons worked on the
intellectual creation together, in the absence
of any agreement, they become co-owners of
the copyright.
3. If a person purposely hired another for the
purpose of working in an intellectual
creation, in the absence of any agreement to
the contrary, copyright belongs to the
employer.
4. If a person hired another to do something
else, although the employee might have
Final Notes in Commercia Law for the 2022 Bar| 28 of 89
worked on the intellectual creation during
his working hours and may have even used
the materials of the employer, the copyright
belongs to the employee.
5. If a person commissioned another to do an
intellectual creation, in the absence of the
contrary, the work belongs to the owner but
the right or copyright belongs to the one
commissioned.
There is no first to file rule in copyright because the
moment you have an intellectual creation, you have
a copyright. Thus, there is no need for you to apply
for copyright.
5. Limitations on copyright
The performance of following acts will NOT give
rise or constitute to copyright infringement.:
1) The recitation or performance of a work,
once it has been lawfully made accessible to
the public, if done privately and free of
charge or if made strictly for a charitable or
religious institution or society;
2) The making of quotations from a published
work if they are compatible with fair use and
only to the extent justified for the purpose,
including quotations from newspaper
articles and periodicals in the form of press
summaries: Provided, That the source and
the name of the author, if appearing on the
work, are mentioned;
3) The reproduction or communication to the
public by mass media of articles on current
political, social, economic, scientific or
religious topic, lectures, addresses and other
works of the same nature, which are
delivered in public if such use is for
information purposes and has not been
expressly reserved: Provided, That the
source is clearly indicated;
4) The reproduction and communication to the
public of literary, scientific or artistic works
as part of reports of current events by means
of photography, cinematography or
broadcasting to the extent necessary for the
purpose;
 “When the time is right, I, the Lord will make it happen.”
5) The inclusion of a work in a publication,
broadcast, or other communication to the
public, sound recording or film, if such
inclusion is made by way of illustration for
teaching purposesand is compatible with
fair use: Provided, That the source and of the
name of the author, if appearing in the work,
are mentioned;
6) The recording made in schools, universities,
or educational institutions of a work
included in a broadcast for the use of such
schools, universities or educational
institutions: Provided, That such recording
must be deleted within a reasonable period
after they were first broadcast: Provided,
further, That such recording may not be
made from audio-visual works which are
part of the general cinema repertoire of
feature films except for brief excerpts of the
work;
7) The making of ephemeral recordings by a
broadcasting organization by means of its
own facilities and for use in its own
broadcast;
8) The use made of a work by or under the
direction or control of the Government, by
the National Library or by educational,
scientific or professional institutions where
such use is in the public interest and is
compatible with fair use;
▪ Ex: There is a memorandum circular
issued by the NTC regarding cable
companies who carry signals of local
channels which are within their
respective systems. Is that a
violation of copyright against the
local channels? NO, because the use
shall fall under the limitation which
is “the use made of a work by or
under the direction or control of the
Government for public interest”
9) The public performance or the
communication to the public of a work, in a
place where no admission fee is charged in
respect of such public performance or
communication, by a club or institution for
charitable or educational purpose only,
whose aim is not profit making, subject to
Final Notes in Commercia Law for the 2022 Bar| 29 of 89
such other limitations as may be provided in
the Regulations; (n)
10) Public display of the original or a copy of the
work not made by means of a film, slide,
television image or otherwise on screen or
by means of any other device or process:
Provided, That either the work has been
published, or, that the original or the copy
displayed has been sold, given away or
otherwise transferred to another person by
the author or his successor in title; and
11) Any use made of a work for the purpose of
any judicial proceedings or for the giving of
professional advice by a legal practitioner.
12) The reproduction or distribution of
published articles or materials in a
specialized format exclusively for the use of
the blind, visually reading-impaired
persons; Provided, that such copies and
distribution shall be made on a nonprofit
basis and shall indicate the copyright owner
and the date of the original publication.
NOTE: The foregoing is in the nature of Fair Use.
ABS-CBN BROADCASTING CORPORATION
VS. PHILIPPINE MULTIMEDIA SYSTEM, INC.
Retransmission is not rebroadcasting
Under the Rome Convention, rebroadcasting is “the
simultaneous broadcasting by one broadcasting
organization of the broadcast of another
broadcasting organization.” xxx
ABS-CBN creates and transmits its own signals;
PMSI merely carries such signals which the viewers
receive in its unaltered form. PMSI does not produce,
select, or determine the programs to be shown in
Channels 2 and 23. Likewise, it does not pass itself
off as the origin or author of such programs. Insofar
as Channels 2 and 23 are concerned, PMSI merely
retransmits the same in accordance with
Memorandum Circular 04-08-88. With regard to its
premium channels, it buys the channels from content
providers and transmits on an as-is basis to its
viewers. Clearly, PMSI does not perform the
functions of a broadcasting organization; thus, it
cannot be said that it is engaged in rebroadcasting
Channels 2 and 23.
 “When the time is right, I, the Lord will make it happen.”
RAPPLER VS. BAUTISTA
The Supreme Court recognized the right of Rappler
to live stream the 2016 Philippine Presidential
Debate covered by broadcasting companies subject
to certain clarifications.
According to the Supreme Court: “[T]hus, petitioner
may live stream the debate in its entirety by
complying with the ‘copyright conditions,’ including
the condition that ‘the source is clearly indicated’
and that there will be no alteration, which means that
the streaming will include the proprietary graphics
used by the Lead Networks. If petitioner opts for a
clean feed without the proprietary graphics used by
the Lead Networks, in order for petitioner to layer its
own proprietary graphics and text on the same, then
petitioner will have to negotiate separately with the
Lead Networks. Similarly, if petitioner wants to alter
the debate audio by deleting the advertisements,
petitioner will also have to negotiate with the Lead
Networks.”
“The presidential and vice-presidential debates are
held primarily for the benefit of the electorate to
assist the electorate in making informed choices on
election day. Through the conduct of the national
debates among presidential and vice presidential
candidates, the electorate will have the “opportunity
to be informed of the candidates’ qualifications and
track record, platforms and programs, and their
answers to significant issues of national concern.”
The political nature of the national debates and the
public’s interest in the wide availability of the
information for the voters’ education certainly justify
allowing the debates to be shown or streamed in
other websites for wider dissemination, in
accordance with the MOA.”
Therefore, the debates should be allowed to be live
streamed on other websites, including petitioner’s,
as expressly mandated in Part VI (C), paragraph 19
of the MOA. The respondent, as representative of the
COMELEC which provides over-all supervision
under the MOA, including the power to “resolve
issues that may arise among the parties involved in
the organization of the debates,” should be directed
by this Court to implement Part VI (C), paragraph 19
of the MOA, which allows the debates to be shown
or live streamed unaltered on petitioner’s and other
websites subject to the copyright condition that the
source is clearly indicated.”
6. Doctrine of fair use
Final Notes in Commercia Law for the 2022 Bar| 30 of 89
FAIR USE OF A COPYRIGHTED WORK
Fair use has been defined as a privilege to use the
copyright material in a reasonable manner without
the consent of the copyright owner or as copying the
theme or ideas rather than their expression. No
question of fair or unfair use arises however, if no
copying is proved to begin with. This is in
consonance with the principle that there can be no
infringement if there was no copying. It is only
where some form of copying has been shown that it
becomes necessary to determine whether it has been
carried to an “unfair,” that is, illegal, extent. (Habana
vs. Robles, G.R. No. 131522, 19 July 1999)
The fair use of a copyrighted work for criticism,
comment, news reporting, teaching including
limited number of copies for classroom use,
scholarship, research, and similar purposes is not an
infringement of copyright.
In determining whether the use made of a work in
any particular case is fair use, the factors to be
considered shall include:
a) The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purposes;
✓ Hence, commercial use of the
copyrighted work can be weighed
against fair use.
b) The nature of the copyrighted work;
✓ If the nature of the work is more
factual than creative, then fair use
will be weighed in favor of the user.
c) The amount and substantiality of the portion
used in relation to the copyrighted work as a
whole; and
✓ An exact reproduction of a
copyrighted work, compared to a
small portion of it, can result in the
conclusion that its use is not fair.
There may also be cases where,
though the entirety of the
copyrighted work is used without
consent, its purpose determines that
the usage is still fair. For example, a
parody using a substantial amount
of copyrighted work may be
 “When the time is right, I, the Lord will make it happen.”
permissible as fair use as opposed to
a copy of a work produced purely
for economic gain.
d) The effect of the use upon the potential
market for or value of the copyrighted work.
✓ If this court finds that the use had or
will have a negative impact on the
copyrighted work’s market, then the
use is deemed unfair.
7. Copyright infringement
What constitutes copyright infringement?
Copyright infringement occurs when there is a
violation of any of the exclusive economic or moral
rights granted to the copyright owner. It may also
consist in aiding or abetting such infringement.
A person infringes a right protected under this Act
when one:
▪ Directly commits an infringement.
▪ Benefits from the infringing activity of
another person who commits an
infringement if the person benefiting has
been given notice of the infringing activity
and has the right and ability to control the
activities of the other person.
o Vicarious liability; Elements
✓ Direct commission of
infringement
✓ Benefits from the infringing
activity
✓ The superior has the right
and control to stop the
infringing activity, but fails
to do so.
NOTE: In trademark infringement,
there is no vicarious liability.
▪ With knowledge of infringing activity,
induces causes or materially contributes to
the infringing conduct of another.
Final Notes in Commercia Law for the 2022 Bar| 31 of 89
▪ Sec. 217 of the IP Code provides for another
mode of copyright infringement - aiding or
abetting such infringement
ABS-CBN VS GOZON
Infringement under the Intellectual Property Code is
malum prohibitum. The Intellectual Property Code
is a special law.
Copyright is a statutory creation. The general rule is
that acts punished under a special law are malum
prohibitum. "An act which is declared malum
prohibitum, malice or criminal intent is completely
immaterial.”
In its current form, the Intellectual Property Code
is malum prohibitum and prescribes a strict liability
for copyright infringement. Good faith, lack of
knowledge of the copyright, or lack of intent to
infringe is not a defense against copyright
infringement. Copyright, however, is subject to the
rules of fair use and will be judged on a case-to-case
basis.
CHING VS. SALINAS
For the court to determine whether the crime for
copyright infringement is committed, applicant was
burdened to prove that:
(a) Complainant were the owners of
copyrighted material; and
(b) The copyrighted material was being
copied and distributed by the respondents.
Thus, the ownership of a valid copyright is essential.
Ownership of copyrighted material is shown by
proof of originality and copyrightability. By
originality is meant that the material was not copied,
and evidences at least minimal creativity; that it was
independently created by the author and that it
possesses at least same minimal degree of creativity.
Copying is shown by proof of access to copyrighted
material and substantial similarity between the two
works. The applicant must thus demonstrate the
existence and the validity of his copyright because in
the absence of copyright protection, even original
creation may be freely copied.
What are the remedies available to an owner of a
copyright against an infringer?
 “When the time is right, I, the Lord will make it happen.”
The copyright owner can file a criminal, civil or
administrative action for copyright infringement. A
criminal case for copyright infringement must be
filed in the court situated in the place where the
violation occurred. The administrative suit is filed at
the Bureau of Legal Affairs at the Intellectual
Property Office of the Philippines. A civil
infringement lawsuit is filed in the appropriate court
located at the place where the defendant resides/is
located, or where the plaintiff resides/is located, at
the option of the plaintiff.
Any person found guilty of copyright infringement
shall be liable:
a) To an injunction restraining such
infringement. The court may also order the
defendant to desist from an infringement,
among others, to prevent the entry into the
channels of commerce of imported goods
that involve an infringement, immediately
after customs clearance of such goods.
b) To pay to the copyright proprietor actual
damages, including legal costs and other
expenses, as he may have incurred due to the
infringement as well as the profits the
infringer may have made due to such
infringement, and in proving profits the
plaintiff shall be required to prove sales only
and the defendant shall be required to prove
every element of cost which he claims, or, in
lieu of actual damages and profits, such
damages which to the court shall appear to
be just and shall not be regarded as penalty.
c) To deliver under oath, for impounding
during the pendency of the action, sales
invoices and other documents evidencing
sales, all articles and their packaging alleged
to infringe a copyright and implements for
making them.
d) To deliver under oath for destruction
without any compensation all infringing
copies or devices, as well as all plates, molds,
or other means for making such infringing
copies as the court may order.
e) Such other terms and conditions, including
the payment of moral and exemplary
damages, which the court may deem proper,
wise and equitable and the destruction of
Final Notes in Commercia Law for the 2022 Bar| 32 of 89
infringing copies of the work even in the
event of acquittal in a criminal case.
REVISED CORPORATION CODE
A. General principles
A corporation is an artificial being created by
operation of law, having the right of succession and
the powers, attributes, and properties expressly
authorized by law or incidental to its existence.
1. Nationality of corporations
a. Control Test
The nationality of the corporation is determined by
the nationality of the majority of the stockholders on
whom equity control is vested on the theory that
they would be able to elect the majority of the BOD.
Note: The control test cannot overcome the place of
incorporation test.
This is applied when the entity or enterprise is
nationalized or partly nationalized.
Control test is the prevailing mode of determining
the nationality of a corporation engaged in
nationalized areas of activities provided for under
the constitution and other laws, where corporate
shareholders with alien shareholdings are present,
by ascertaining the nationality of the controlling
shareholder of the corporation.
If the capital of the investing corporation is at least
60% owned by Filipinos, then the entire
shareholdings of the investing Corporation shall be
recorded as Filipino-owned thus making both the
investing and investee-corporation a Philippine
National.
GAMBOA RULING
Mere legal title is insufficient to meet the 60 percent
Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the
 “When the time is right, I, the Lord will make it happen.”
outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation
is "considered as non-Philippine national[s]."
Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common
and preferred non-voting shares, at least 60 percent
of the common shares and at least 60 percent of the
preferred non-voting shares must be owned by
Filipinos. In short, the 60-40 ownership requirement
in favor of Filipino citizens must apply separately to
each class of shares, whether common, preferred
non-voting, preferred voting or any other class of
shares.
ROY III VS HERBOSA (J. CAGUIOA)
Section 2 of SEC-MC No. 8 clearly incorporates the
Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond requiring
a 60-40 ratio in favor of Filipino nationals in the
voting stocks; it moreover requires the 60-40
percentage ownership in the total number of
outstanding shares of stock, whether voting or not.
The SEC formulated SEC-MC No. 8 to adhere to the
Court's unambiguous pronouncement that “full
beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting
rights is required." As such, the SC held that SEC-MC
No. 8 cannot be said to have been issued with grave
abuse of discretion.
Thus, for purposes of determining compliance with
the constitutional or statutory ownership, the
required percentage of Filipino ownership shall be
applied to both the:
a) total number of outstanding shares of stock
entitled to vote in the election of directors;
and
b) the total number of outstanding shares of
stock, whether or not entitled to vote.
Thus, in the two tests provided by the SEC, voting
control does not merely pertain to election
directions, but in all instances where voting may be
required under the RCC.
b. Grandfather rule
Final Notes in Commercia Law for the 2022 Bar| 33 of 89
The Grandfather Rule is a method of determining
the nationality of a corporation, which is owned in
part by another corporation, by breaking down the
equity structure of the shareholder corporation.
The Grandfather Rule is applied if doubt exists as to
the locus of the “beneficial ownership” and “control”
of a corporation, even if the 60-40 Filipino to foreign
equity ratio is apparently met by the subject or
investee corporation.
It involves the computation of Filipino ownership of
a corporation in which another corporation, of
partly- Filipino and partly-foreign equity, owns
capital stock. The percentage of shares held by the
second corporation in the first is multiplied by the
latter’s own Filipino equity, and the product of these
percentages is determined to be the ultimate Filipino
ownership of the subsidiary corporation.
The Grandfather Rule must be applied to accurately
determine the actual participation, both direct and
indirect, of foreigners in a corporation engaged in a
nationalized activity or business.
"Doubt" refers to various indicia that the "beneficial
ownership" and "control" of the corporation do not
in fact reside in Filipino shareholders, but in foreign
stakeholders. The following are indicators of doubt:
a) That the foreign investors provide
practically all the funds for the joint
investment undertaken by these Filipino
businessmen and their foreign partner;
b) That the foreign investors undertake to
provide practically all the technological
support for the joint venture;
c) That the foreign investors, while being
minority stockholders, manage the company
and prepare all economic viability studies.
The Grandfather Rule applies only when the 60-40
Filipino foreign equity ownership is in doubt (i.e. in
cases where the joint venture corporation with
Filipino and foreign stockholders with less than 60%
Filipino stockholdings [or 59%] invests in another
joint venture corporation, which is either 60-40%
Filipino-alien or the 59% less Filipino).
Successive Application of the Tests
 “When the time is right, I, the Lord will make it happen.”
The Control Test can be applied jointly with the
Grandfather Rule to determine the observance of
foreign ownership restriction in nationalized
economic activities. They are not incompatible
ownership-determinant methods that can only be
applied alternative to each other.
The Grandfather Rule, standing alone, should NOT
be used to determine the Filipino ownership and
control in a corporation, as it could result in an
otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized
activities.
Hence, it is only when there is doubt, based on the
Control Test, that the Grandfather Rule is applied.
i. If the subject corporation’s Filipino equity
falls below the threshold 60%, the
corporation is immediately considered
foreign-owned, in which case, the need to
resort to the Grandfather Rule disappears.
ii. If a corporation that complies with the 60-40
Filipino to foreign equity requirement, it can
be considered a Filipino corporation, and if
there is no doubt as to who has the
“beneficial ownership” and “control” of the
corporation, there is no need for the
application of the Grandfather Rule.
iii. However, if there is doubt as to who has the
“beneficial ownership” and “control” of the
corporation (e.g. the Filipino-Owned
corporation subscribed to 60% of the capital
and the foreign corporation subscribed to
40%, but the subscription of the former is
only nominally paid-up and such
corporation entered into a financial
assistance agreement with the foreign-
owned corporation), the application of the
grandfather rule is necessary. [Narra Nickel
Mining and Dev. Corp v. Redmont Consolidated
Mines Corp.]
2. Doctrine of separate juridical personality
A corporation is a juridical person with a legal
personality separate and distinct from the persons
composing it. It may own properties, exercise rights,
and incur obligations independently of the persons
comprising it.
Final Notes in Commercia Law for the 2022 Bar| 34 of 89
A corporation has a personality distinct and separate
from its individual stockholders or members, and is
not affected by the personal rights, obligations and
transactions of the latter.
Legal consequences of Doctrine of Separate Legal
Entity
• Properties registered in the name of the
Corporation are owned by it. The
corporators are not entitled to the possession
of any definite portion of its property or
assets. They are not co-owners or tenants in
common of the corporate property.
• Directors, officers, or agents of a
Corporation cannot be held personally liable
for the obligations incurred by the
Corporation, unless it can be shown that
such director/officer/agent is guilty of gross
negligence or bad faith or committed an
unlawful act and that the same was clearly
and convincingly proven.
• The cause of action available to the
Corporation cannot be generally enforced by
its director, officer, or stockholder and vice
versa.
• The sale of shares at the level of the
stockholder resulting in a change of
ownership of the Corporation does not
extinguish the separate legal personality of
the Corporation.
The mere fact that two corporations have a common
director is not a sufficient basis for disregarding their
separate juridical personalities.
Its capacity for continued existence is not affected by
any changes in the composition of corporators.
May a corporation be liable for torts?
Yes. A corporation is civilly liable in the same
manner as natural persons for torts because the rules
governing the liability of a principal or master for a
tort committed by an agent or servant are the same
whether the principal or master be a natural person
or a corporation, and whether the servant or agent be
a natural or artificial person. A corporation is liable,
therefore, whenever a tortious act is committed by an
officer or agent under express direction or authority
from the stockholders or members acting as a body,
 “When the time is right, I, the Lord will make it happen.”
or, generally, from the directors as the governing
body. (PNB vs. CA)
TEAM PACIFIC CORP. vs. LAYLA PARENTE
(2020)
In case of dismissals, directors and officers of
corporations may only be held solidarily liable with
the corporation if they acted in bad faith or with
malice.
In Mandaue Dinghow Dimsum House, Co., Inc. v.
National Labor Relations Commission:
It must be emphasized that a corporation is invested
by law with a personality separate and distinct from
those of the persons composing it as well as from that
of any other legal entity to which it may be related.
Because of this, the doctrine of piercing the veil of
corporate fiction must be exercised with caution.
In Malayang Samahan ng mga Manggagawa sa M.
Greenfield v. Ramos, this Court reiterated the rule that
corporate directors and officers are solidarily liable
with the corporation for the termination of
employees done with malice or bad faith. It has been
held that bad faith does not connote bad judgment or
negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong; it
means breach of a known duty through some motive
or interest or ill will; it partakes of the nature of
fraud.
In MAM Realty Development Corporation v. National
Labor Relations Commission:
A corporation, being a juridical entity, may act only
through its directors, officers and employees.
Obligations incurred by them, acting as such
corporate agents, are not theirs but the direct
accountabilities of the corporation they represent.
True, solidary liabilities may at times be incurred but
only when exceptional circumstances warrant such
as, generally, in the following cases:
1. When directors and trustees or, in appropriate
cases, the officers of a corporation —
(a) vote for or assent to patently unlawful
acts of the corporation;
(b) act in bad faith or with gross negligence
in directing the corporate affairs;
Final Notes in Commercia Law for the 2022 Bar| 35 of 89
(c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders or
members, and other persons.
2. When a director or officer has consented to the
issuance of watered stock or who, having knowledge
thereof, did not forthwith file with the corporate
secretary his written objection thereto.
3. When the director, trustee or officer has
contractually agreed or stipulated to hold himself
personally and solidarity liable with the
Corporation.
4. When a director, trustee or officer is made, by
specific provision of law, personally liable for his
corporate action.
In labor cases, for instance, the Court has held
corporate directors and officers solidarily liable with
the corporation for the termination of employment
of employees done with malice or in bad faith.
Respondent failed to present clear and convincing
evidence that petitioners Garcia or Fernandez acted
in bad faith or with malice. They did not breach any
duty or were motivated by ill will. Absent proof, the
corporation's separate and distinct personality must
be respected.
OSCARES vs. MAGSAYSAY MARITIME CORP.
(2020)
Respondents, including Arnold Javier as the
President of Magsaysay Maritime Corporation, shall
be jointly and severally liable to Oscares in
accordance with Section 10 of Republic Act (RA) No.
8042, as amended by RA No. 10022, which provides
that "if the recruitment/placement agency is a
juridical being, the corporate officers and directors
and partners as the case may be, shall themselves be
jointly and solidarily liable with the corporation or
partnership for the aforesaid claims and damages."
In Gargallo v. Dohle Seafront Crewing (Manila), Inc., We
explained that corporate officers or directors cannot,
as a general rule, be personally held liable for the
contracts entered into by the corporation because the
corporation has a separate and distinct legal
personality. However, "personal liability of such
corporate director, trustee, or officer, along
(although not necessarily) with the corporation, may
validly attach when he is made by a specific
provision of law personally answerable for his
corporate action." As such, We upheld the joint and
 “When the time is right, I, the Lord will make it happen.”
solidary liability of the officer in that case following
Sec. 10 of RA No. 8042, as amended.
3. Doctrine of piercing the corporate veil
The doctrine of piercing the corporate veil is the
doctrine that allows the State to disregard, for certain
justifiable reasons, the notion that a corporation has
a personality separate and distinct from the persons
composing it.
Where it appears that business enterprises are
owned, conducted and controlled by the same
parties, law and equity will disregard the legal
fiction that these corporations are distinct entities
and shall treat them as one. This is in order to protect
the rights of third persons.
In order to justify the piercing of the corporate veil,
allegation or proof of fraud or other public policy
considerations is needed.
NOTE: This is an exception to the Doctrine of
Separate Corporate Entity.
Grounds for Application of Doctrine
1) Defeat of public convenience as when the
corporate fiction is used as a vehicle for the
evasion of an existing obligation;
2) Fraud cases or when the corporate entity is used
to justify a wrong, protect fraud, or defend a
crime; or
▪ At the time an unfair labor practice case
was pending against the corporation, its
officers and stockholders organized a
run-away corporation, engaged in the
same line of business, producing the
same line of products, occupying the
same compound, using the same pieced
of machinery, buildings, laboratory,
bodega, and sales and accounts
departments used by the first
corporation. It was held that this is
another instance where the fiction of
separate and distinct corporate entities
should be disregarded as the second
corporation seeks the protective shield
of a corporate fiction whose veil in the
present case could, and should, be
pierced as it was deliberately and
Final Notes in Commercia Law for the 2022 Bar| 36 of 89
maliciously designed to evade its
financial obligation to its employees.
(A.C. Ransom Labor Union-CCLU vs.
NLRC,)
3) Alter ego cases, where a corporation is merely a
farce since it is a mere alter ego or business
conduit of a person, or where the corporation is
so organized and controlled and its affairs are so
conducted as to make it merely an
instrumentality, agency, conduit or adjunct of
another corporation.
▪ The owner of a business terminated the
employment of his workers on the
pretext that there will be an impending
permanent closure of the business as a
result of an intended sale of the assets to
an undisclosed corporation, and that
there will be a change in the
management. Subsequent events,
however, revealed that the buyer of the
assets of their employer was a
corporation owned by the same
employer and members of his family.
Furthermore, the business re-opened in
less than a month under the same
management. Admittedly, mere
ownership by a single stockholder of all
or nearly all of the capital stock of the
corporation does not by itself justify
piercing the corporate veil. Nonetheless,
in this case, other circumstances show
that the buyer of the assets of petitioners'
employer is none other than his alter
ego. (Rosales et.al., vs. New A.N.J.H.
Enterprises)
4) When two business enterprises are owned,
conducted, and controlled by the same parties,
both law and equity will, when necessary to
protect the rights of third parties, disregard the
legal fiction that two corporation are distinct
entities and treat them as identical or one and the
same.
5) When the complaint alleges that the directors
and/or officers committed bad faith or gross
negligence in conducting the affairs of the
corporation.
▪ If the complaint alleges bad faith or
gross negligence against the directors of
the corporation, you should effect an
 “When the time is right, I, the Lord will make it happen.”
attempt to pierce the veil of corporate
fiction. So, whether successful or not,
you should attempt to pierce the veil of
corporate fiction. If he succeeds, the
directors and officers of the corporation
become one and the same with the
corporation. What is true for the
corporation becomes true for the
directors and officers. What is true for
the directors and officers becomes true
for the corporation. (Lanuza v. BF
Corporation)
GESOLGON vs. CYBERONE PH INC. (2020)
While it is true that CyberOne AU owns majority of
the shares of CyberOne PH, this, nonetheless, does
not warrant the conclusion that CyberOne PH is a
mere conduit of CyberOne AU. The doctrine of
piercing the corporate veil applies only in three basic
instances, namely: (a) when the separate distinct
corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the
evasion of an existing obligation; (b) in fraud cases,
or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime; or (c) is
used in alter ego cases, i.e., where a corporation is
essentially a farce, since it is a mere alter ego or
business conduit of a person, or where the
corporation is so organized and controlled and its
affairs conducted as to make it merely an
instrumentality, agency, conduit or adjunct of
another corporation.
We find that the application of the doctrine of
piercing the corporate veil is unwarranted in the
present case. First, no evidence was presented to
prove that CyberOne PH was organized for the
purpose of defeating public convenience or evading
an existing obligation. Second, petitioners failed to
allege any fraudulent acts committed by CyberOne
PH in order to justify a wrong, protect a fraud, or
defend a crime. Lastly, the mere fact that CyberOne
PH's major stockholders are CyberOne AU and
respondent Mikrut does not prove that CyberOne
PH was organized and controlled and its affairs
conducted in a manner that made it merely an
instrumentality, agency, conduit or adjunct of
CyberOne AU. In order to disregard the separate
corporate personality of a corporation, the
wrongdoing must be clearly and convincingly
established.
Final Notes in Commercia Law for the 2022 Bar| 37 of 89
Moreover, petitioners failed to prove that CyberOne
AU and Mikrut, acting as the Managing Director of
both corporations, had absolute control over
CyberOne PH. Even granting that CyberOne AU and
Mikrut exercised a certain degree of control over the
finances, policies and practices of CyberOne PH,
such control does not necessarily warrant piercing
the veil of corporate fiction since there was not a
single proof that CyberOne PH was formed to
defraud petitioners or that CyberOne PH was guilty
of bad faith or fraud.
Hence, the doctrine of piercing the corporate veil
cannot be applied in the instant case. This means that
CyberOne AU cannot be considered as doing
business in the Philippines through its local
subsidiary CyberOne PH. This means as well that
CyberOne AU is to be classified as a non-resident
corporation not doing business in the Philippines.
GENUINO AGRO-INDUSTRIAL
DEVELOPMENT CORP. vs. ARMANDO G.
ROMANO (2019)
Genuino Ice should be held solidarity liable with petitioner
Genuino Agro.
It is an elementary and fundamental principle of
corporation law that a corporation is an artificial
being invested by law with a personality separate
and distinct from its stockholders and from other
corporations to which it may be connected.
However, the corporate mask may be lifted and the
corporate veil may be pierced when a corporation is
just but the alter ego of a person or of another
corporation. Moreover, piercing the corporate veil
may also be resorted to by the courts or quasi-judicial
bodies when "[the separate personality of a
corporation] is used as a means to perpetrate fraud
or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or
to confuse legitimate issues." Furthermore, the veil of
corporate fiction may also be pierced as when the
same is made as a shield to confuse legitimate issues.
xxx
A deep scrutiny of the aforementioned
circumstances necessitates the application of the
doctrine of piercing the veil of corporate fiction. The
circumstances indubitably establish that both
Genuino Ice and the petitioner are using their
respective distinct corporate personalities in bad
 “When the time is right, I, the Lord will make it happen.”
faith and to confuse legitimate issues in the hope of
evading its obligation to the respondents.
The aforementioned circumstances show that both
Genuino Ice and the petitioner have taken turns in
representing each other's common cause and in
pursuing remedies to protect its common interest in
repelling the respondents' monetary claims.
Whenever a claim is directed against one of them, the
other admits the monetary liability so that the former
may be shielded and vice versa. This was
demonstrated, for example, when Genuino Ice
posted a bond for the appeal filed by the petitioner
with the NLRC. In the said surety bond, Genuino Ice
acknowledged its obligation to satisfy the monetary
awards granted to the respondents notwithstanding
the fact that it was not the one found liable for illegal
dismissal, but the petitioner. Petitioner, for its part,
assured the respondents that the bond it posted was
sufficient to answer for their monetary claims in the
event that the decision rendered in their favor
becomes final and executory. However, despite their
assurances, when the respondents went for the
appeal bond to satisfy their claims, Genuino Ice
opposed the move and through Carriaga, its
manager and who also happened to be the personnel
manager of the petitioner, argued that the funds
cannot be pursued for it belongs to Genuino Ice. Such
evasive maneuver clearly demonstrates bad faith on
the part of the petitioner and Genuino Ice, and is
clearly indicative of using the veil of corporate fiction
to unjustly elude the monetary obligation due to
respondents as adjudged.
As observed, when an "affiliate company" takes the
cudgels for another, it means that both have a
common interest. If indeed there was no
commonality or intertwining of an interest in
frustrating the respondents' monetary claims, the
petitioner and not Genuino Ice would have posted a
bond for its own appeal. The Court cannot allow its
intelligence to be insulted by Genuino Ice's
representation that it has a corporate personality
which is separate and distinct from the petitioner
because both companies have pursued legal
remedies and measures for the benefit of each other,
and made representations that clearly defrauded the
respondents. Hence, for purposes of this litigation
and for the satisfaction of the respondents' monetary
claims, both Genuino Ice and the petitioner shall be
treated as one and the same entity, and held liable
solidarity for the same.
Final Notes in Commercia Law for the 2022 Bar| 38 of 89
Should the court first acquire jurisdiction over the
corporation before its separate legal personality
may be disregarded?
There are six (6) cases on this issue, whether the court
can apply the doctrine of piercing the corporate veil
over a corporation not brought to the court's
jurisdiction after full-blown trial.
Four (4) cases are to the effect that there ought to be
a full-blown trial, that a corporation must be given a
chance to be heard in a full blown trial before its
corporate fiction may be pierced. These are the case
of Kukan International Corp. v. Reyes, Pacific Rehouse v.
CA, Pioneer Insurance Surety Corporation v. Morning
Star Travel and Tours and Mayor v. Tiu.
The two (2) cases: Gold Line Tours v. Lacsa and Livesey
v. Binswanger Philippines, state that there is no need
for a full-blown trial as long as you give the
corporation due process. Hence, the court has basis
to pierce the veil of corporate fiction.
So, if the question in the bar is similar to any of these
cases, then you apply the resolution accordingly.
But, if it is a question in general without reference to
the specific facts or case, the better view, to my mind
is, the corporate veil may be pierced without having
to conduct a full-blown trial as long as the
corporation was given the chance to be heard. And
based on the hearing, even though summary in
nature, evidence exist to warrant the piercing of the
veil of corporate fiction. So, this is needed to prevent
multiplicity of suits and to save the parties from
unnecessary expenses. You know that due process is
not always equated with full-blown trial. In fact, in
my book I said, "there are cases where the
corporation whose veil is being pierced cannot argue
violations of due process." (Dean Divina)
What are the effects of piercing the corporate veil?
Does it result in the dissolution of the corporation?
The piercing of the corporate veil does not dissolve
the corporation. It simply means that the stockholder
and/or director, and/or officer, whose action/s
became the basis for the application of the doctrine,
and the corporation shall be treated as one and the
same entity.
In traditional piercing the corporate veil, the
concerned stockholders, directors/trustees, and
officers become liable for the obligation of the
corporation.
 “When the time is right, I, the Lord will make it happen.”
In reverse piercing corporate veil, the corporation
becomes liable for the debts of the concerned
stockholders /members, directors/trustees, and
officers of the corporation.
In case the corporation is just an alter ego of another
corporation, both corporations become one and the
same entity.
B. De facto corporations versus corporations by
estoppel
DE FACTO CORPORATIONS (SEC. 19)
The due incorporation of any corporation claiming
in good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall not
be inquired into collaterally in any private suit to
which such corporation may be a party. Such inquiry
may be made by the Solicitor General in a quo
warranto proceeding.
The existence of a de facto corporation cannot be
assailed collaterally. It can only be questioned
through a quo warranto proceeding filed by the
Solicitor General.
A de facto corporation has all the powers and
authority of a de jure corporation until it is ousted of
its corporate existence. Its existence cannot be
assailed collaterally in a private suit but only in a quo
warranto proceeding. Thus, if a collection suit is
initiated by a de facto corporation, a motion to
dismiss filed on the ground that the corporation has
no power to sue, should not prosper. A de facto
corporation, like a de jure corporation, may sue and
that the existence of such de facto corporation cannot
be questioned in a collateral proceeding.
Dean Divina: Just keep this mind - A de facto
corporation has all the powers of a de jure
corporation. Whatever a de jure corporation can do,
a de facto corporation can also do until de facto
corporation is ousted of its corporate existence
through a quo warranto proceeding.
Requisites for de facto corporation
1) The Existence of a valid law under which the
corporation may be incorporated
2) Attempt in good faith to incorporate or
colorable compliance
Final Notes in Commercia Law for the 2022 Bar| 39 of 89
3) The actual use or exercise in good faith of
corporate powers.
If the law under which it is incorporated is declared
unconstitutional, there is neither de jure nor de facto
corporation.
Jurisprudence settled that "the filing of articles of
incorporation and the issuance of the certificate of
incorporation are essential for the existence of a de
facto corporation." In fine, it is the act of registration
with the SEC through the issuance of a certificate of
incorporation that marks the beginning of an entity’s
corporate existence. (Missionary Sisters of Our Lady of
Fatima v. Alzona, GR No. 224307, August 6, 2018)
The stockholders of a de facto corporation are liable
in the same way as stockholders of de jure
corporation. They are liable only to the extent of their
subscription to the corporation.
The SEC does not go beyond the representations
made by the incorporators in the articles of
incorporation. It cannot even inquire as to the
purposes of the corporation other than those other
than those set forth in the articles of incorporation. If
there are defects in its formation, the Corporation
will be considered de facto.
CORPORATION BY ESTOPPEL (SEC. 20)
A corporation by estoppel is one that exists when
two or more persons assume to act as a corporation
knowing it to be without authority to do so.
What are the liabilities under the doctrine of
corporation by estoppel?
All persons who assume to act as a corporation
knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it
as a corporation or on any tort committed by it as
such, it shall not be allowed to use its lack of
corporate personality as a defense. Anyone who
assumes an obligation to an ostensible corporation as
such cannot resist performance thereof on the
ground that there was in fact no corporation.
✓ It is not the corporation being made liable
because there is no legal personality.
Instead, those who claim to be a corporation
 “When the time is right, I, the Lord will make it happen.”
are liable as general partners. They are liable
beyond their supposed contribution to the
corporation by estoppel.
This doctrine applies to a third party only when he
tries to escape liability on a contract from which he
has benefited on the irrelevant ground of defective
incorporation. Verily, the doctrine can only be
invoked by the aggrieved party who relied on the
representations by others that they are legally
formed as a Corporation. It cannot be invoked by the
one who benefited from the transaction.
If there is no third party involved, the doctrine of
corporation by estoppel will not apply.
Are all those who subscribed for the stock of a
proposed corporation which was never legally
formed liable as general partners? Or in another
way to put it, what happens when the corporation
fails to materialize?
The doctrine of corporation by estoppel does not
apply against a person who takes no part except to
subscribe for stock in the proposed corporation
which was never legally formed, and hence, cannot
be liable as a partner of those who engaged in
business under the name of the pretended
corporation. However, a passive subscribe who
obtained benefit from a contract entered into by
others with whom the previously had an existing
relationship is deemed to be part of said association
and is covered by the scope of the doctrine of
corporation by estoppel.
Note: Only the active subscribers who claim
themselves as incorporators are liable general
partners.
In Lim Tong Lim vs Philippine Fishing Gear, it was held
that passive partner is not liable as a general partner
except or unless such passive subscriber obtains the
benefit from the association, with his allies, in the
ostensible corporation.
C. Corporate Powers
The Powers of a Corporation can be classified as
follows:
1) 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.
Final Notes in Commercia Law for the 2022 Bar| 40 of 89
2) Implied or incidental powers - These are the
corporations, 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.
3) 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 powers and
include those which a Corporation can
exercise by the mere fact of its corporate
existence.
What is the theory of general capacity?
Under this theory, 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:
Every corporation incorporated under this Code
has the power and capacity:
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;
d) To amend its articles of incorporation in
accordance with the provisions of this Code;
e) To adopt bylaws, not contrary to law, morals or
public policy, and to amend or repeal the same
in accordance with this Code;
f) In case of stock corporations, to issue or sell
stocks to subscribers and to sell treasury stocks
in accordance with the provisions of this Code;
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
 “When the time is right, I, the Lord will make it happen.”
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;
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;
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.
What is 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.
1. How powers are exercised
General Rule – The Board alone, without the
concurrence of the stockholders, may exercise the
corporate powers.
Exceptions:
1. There is a management contract
2. The powers of the board are delegated by the
majority to an executive committee.
The right to sue and be sued in its corporate name
Where the Corporation is the injured party, the
power to sue is lodged with the Board of directors or
trustees. It is not lodged with the president of the
Corporation.
If the real party in interest is a corporate body, an
officer of the Corporation can sign the certification
Final Notes in Commercia Law for the 2022 Bar| 41 of 89
against forum shopping so long as he has been duly
authorized by a resolution of its Board of directors.
The only instance that board resolution is not
necessary in filing legal action on behalf of the
Corporation is through a derivative suit.
In one case, it was ruled that while it is true that the
stockholder may have filed the suit on behalf of the
corporation, since he belongs to the majority, then
the remedy is for him to cause the BOD to adopt the
appropriate resolution to authorize the filing of an
action to remove the restaurant from the corporate
property. It is not a remedy for the majority
stockholder to file a derivative suit, it is a last resort
remedy available to the minority. Since board
sanctioned litigations take precedence over
derivative suits.
What if a minority files a derivative suit to question
acts of mismanagement on the part of the BOD,
does it need a board resolution?
No. Derivative suits do not require board approval.
Otherwise, no derivative suit will ever prosper. You
will render illusory the power of the minority to take
any action on behalf of the corporation. The essence
is, it is the majority who performed the wrongful acts
against the corporation or the corporation is
aggrieved by an act or transaction and yet the
majority or the BOD and officers refuse to take
action. By refusing to take action or rectifying the
acts they have done, it causes damage and harm to
the corporation and the whole body of stockholders.
That is why the minority stockholder has that
remedy to file suit on behalf and for the benefit of the
corporation to set aside the acts committed by the
majority directors and officers against the
corporation.
The only time that a board resolution is needed in
filing a derivative suit is if the stockholder suing,
is a corporate stockholder. If the plaintiff in a
derivative suit is a corporate stockholder, then it
needs the board resolution of the corporation, where
he is a corporate stockholder. But not the resolution
of the corporation whose acts are being assailed.
(Vito v. CA)
The power to deal with properties.
This is subject to the following limitations.
 “When the time is right, I, the Lord will make it happen.”
▪ It must be in furtherance of the purpose for
which is organized. It must be necessary and
convenient to the purpose of the
corporation.
▪ It is subject to constitutional limitations.
▪ It is subject to the provisions of special laws,
such as the bulk sales law, Philippine
Competition Act and other related laws.
The power to make donations.
The following are the requisites for a valid
donation by a corporation:
1. The donation must be reasonable.
2. It must be for a valid purpose, including
public welfare or for hospital, charitable,
cultural, scientific, civic or similar purposes.
3. The donation must bear a reasonable
relation to the corporation’s interests and
must not be so remote and fanciful.
Sec. 36. Power to extend or shorten corporate term.
Requirements for extending or shortening the
corporate term
1) At least majority vote of the board.
2) Ratification by the stockholders representing
at least 2/3 of the outstanding capital stock
or by at least 2/3 of the members in case of
non-stock corporations.
3) Written notice of proposed action and the
time and place of the meeting must be given
to stockholders or members. Residences
served personally or sent electronically.
4) The extension or shortening of corporate
term entails an amendment of the Articles of
incorporation. As 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.
5) The extension must be done during the
lifetime of the Corporation, but not earlier
than 3 years prior to the original or
Final Notes in Commercia Law for the 2022 Bar| 42 of 89
subsequent expiry date unless there are
justifiable reasons for an earlier extension as
maybe determined by the SEC.
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. A stockholder may also exercise
appraisal right in case of shortening of the corporate
term.
Extension of the corporate term shall take effect only
on the day following the original or subsequent
expiry date(s).
Sec. 37. Power to increase or decrease capital stock;
incur, create or increase bonded indebtedness.
What are the practical reasons for increasing the
capital stock of the corporation?
1) To obtain additional funds for the
corporation. To finance its operations and
for other purpose of the corporation.
2) To acquire corporate assets. Because the
increase in capital may be paid in cash or
property. Also, under Sec. 61 of the RCC,
property may be used as consideration for
issuance of shares. The property exchanged
for shares becomes part of the assets of the
corporation.
3) To support stock dividend declaration. If the
subscribed shares of the authorized capital
stock is 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 is not allowed
being an ultra vires act.
Ways of increasing/ decreasing the capital stock
a) By increasing or decreasing the number of
shares and retaining the par value;
b) By increasing or decreasing the par value of
existing shares without changing the
number of shares; or
 “When the time is right, I, the Lord will make it happen.”
c) By increasing or decreasing the number of
shares and increasing the par value.
Every increase in the capital stock has to comply with
the 25% subscription and 25% payment requirement.
The 25% payment requirement for the increase in
capital stock is imposed based on the totality of the
subscription. The law does not require each
subscriber to pay 25% of his subscription. The
amount of payment depends on the terms of the
subscription agreement. Thus, when the corporation
issues a mixture of shares, the 25% subscription
requirement may be applied to only one class of
shares.
In Central Textile Mills v. NWP, 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 capital stock and a
certificate of filing is issued by the SEC.
What is a bonded indebtedness?
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.
Bonds are securities and they should be registered
with the SEC.
The two principal elements are time duration, it is
long term in nature, and the division of the whole
debt into like aliquot part units of round number
denominations, represented by certificates of
indebtedness.
If the following features are not included in the
borrowing, you do not need stockholder’s approval
and majority of the bod. if the corporation would
borrow money regardless of the amount, against
general credit, without these characteristics or
features, it does not require stockholders’ approval,
it only requires majority of the quorum of the board.
But bonded indebtedness, which has the following
features, and in increasing the same, require majority
of the BOD and approval of 2/3s of the OCS.
Sec. 38. Power to deny preemptive right.
Final Notes in Commercia Law for the 2022 Bar| 43 of 89
Pre-emptive right is the right of the stockholder to
subscribe to any or all issuance of shares with the
purpose of preventing the stockholder’s share from
encountering diminution.
All stockholders of a stock corporation shall enjoy
preemptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings.
Are the holders of common shares entitled to
subscribe to the new preferred shares?
Yes, because it says, “any class”, then the holders of
common shares have the option to subscribe to the
new preferred shares.
Preemptive right shall not extend to:
a) Shares issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public;
b) Shares issued in good faith with the
approval of the stockholders representing
two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt.
c) In case the right is denied in the Articles of
Incorporation or an amendment thereto.
The denial of preemptive 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.
What is the remedy of the stockholder not in favor
of an amendment to the articles of incorporation to
deny preemptive right?
He can exercise his appraisal right. One of the
instances where appraisal right is available is in case
of an amendment to the articles of incorporation that
has the effect of changing or restricting the rights of
the stockholder or any shares. Denial of pre-emptive
right restricts his right to subscribe to the issuance of
shares by the corporation.
Sec. 39. Sale or other disposition of assets.
 “When the time is right, I, the Lord will make it happen.”
A corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage,
pledge, or otherwise dispose of its property and
assets, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds,
or other instruments for the payment of money or
other property or consideration, as its board of
directors or trustees may deem expedient.
This is subject to the provisions of Republic Act No.
10667, otherwise known as “Philippine Competition
Act”, and other related laws.
A sale of all or substantially all of the corporation’s
properties and assets, including its goodwill:
▪ must be authorized by the 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,
in a stockholders’ or members’ meeting duly
called for the purpose.
“Sale or all or substantially all properties” - If such
would render incapable of continuing the business
or accomplishing the purpose for which it was
incorporated.
▪ The determination of whether or not the sale
involves all or substantially all of the
corporation’s properties and assets must be
computed based on its net asset value, as
shown in its latest financial statements.
ASSET SALE VS STOCK SALE
In stock sale, it will not result to the sale of all or
substantially all of the assets because what was
changed is the personality of the stock holders. And
because a corporation has a right of succession, it
will not affect the corporation. Meanwhile, in an
asset sale, the sale of your one property can become
a sale of all or substantially all of your corporate
assets.
Example: There is a house in Forbes park, owned by
Corp. A. This corporation A has A,B,C,D,E as its
stockholders. If it is an asset sail, Corp. A will sell the
Forbes park mansion to the buyer. In a stock sale,
what will be sold is the shares of stock of A,B,C,D,E
sold to 5 other different stock holders so that these 5
people becomes the stockholders of Corp. A and
indirectly they become the owner of the Forbes Park
Property.
Final Notes in Commercia Law for the 2022 Bar| 44 of 89
Sec. 40. Power to acquire own shares.
Provided that the corporation has unrestricted
retained earnings in its books to cover the shares to
be purchased or acquired, a stock corporation shall
have the power to purchase or acquire its own shares
for a legitimate corporate purpose or purposes,
including the following cases:
a) To eliminate fractional shares arising out of
stock dividends;
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 said
sale; and
c) To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code.
General Rule: The corporation cannot own its own
shares.
Exception: When the corporation has unrestricted
retained earnings in its books to cover the shares to
be purchased or acquired and that no third part
should be prejudiced.
✓ 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 on their special circumstances
obtaining in the Corporation, such as when
there is a need for a special reserve for
probable contingencies.
Exceptions to the Exception: A Corporation may
acquire its own shares despite the absence of
unrestricted retained earnings in the following cases:
▪ Redemption of redeemable shares.
▪ Donation of shares to the Corporation.
▪ Levy or garnishment of shares to satisfy the
judgment in favor of the Corporation.
 “When the time is right, I, the Lord will make it happen.”

▪ Conveyance of shares to the Corporation in value of the shares

payment of a debt.
For a Corporation to be able to acquire its own
shares, the following conditions must be present:
1) It is for legitimate and proper corporate
purpose.
2) There should be an unrestricted retained
earnings to purchase the same and its capital
is not thereby impaired.
subject to availability
of surplus profits.
Sec. 42. Power to declare dividends.
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, property, or
in stock to all stockholders on the basis of
outstanding stock held by them.

o It is imperative that there must be
unrestricted retained earnings
before it may purchase its own
shares, otherwise, this would lead to
an unauthorized increase of shares
of stock as well as constitutes a
violation of the trust fund doctrine.
3) The Corporation acts in good faith and
without prejudice to the rights of creditors
and stockholders.
4) The conditions of corporate affairs warrant
it.
Sec. 41. Power to invest corporate funds in another
corporation or business or for any other purpose.
The funds of the Corporation may be invested in the
primary purpose or in the secondary purpose of the
Corporation as specified in the Articles of
Incorporation or in any other Corporation or
business other than the corporation's primary and
secondary purposes.
Any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent
stockholders until their unpaid subscription is fully
paid.
No stock dividend shall be issued without the
approval of stockholders representing at least two-
thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the
purpose.
Does that mean that the stockholders, once there
are unrestricted retained earnings, can compel you
as the board of directors to declare dividends?
No, declaration of dividends is a business
judgement. It is the prerogative of the board of
directors being the policy making body. However,
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.

While a stockholder cannot compel the company to

Funds invested for Funds invested for declared dividends if they are accumulating the
primary purpose secondary purpose retained earning without any reason, appropriation,
contracted debt, or justification; a stockholder has
Board of Directors 1. Board approval; the right to point that out because they would be
approval (majority of remiss of their obligation if they failed to appropriate
2. A meeting duly called
the quorum) suffices. or justify the accumulation.
for the purpose;
3. Approval of the Stock corporations are prohibited from retaining
stockholders holding surplus profits in excess of one hundred percent
at least 2/3 of the (100%) of their paid-in capital stock, except:
outstanding capital
stock; and a) when justified by definite corporate
expansion projects or programs approved
4. Corporation must
by the board of directors; or
pay dissenting
stockholder the fair

Final Notes in Commercia Law for the 2022 Bar| 45 of 89

 “When the time is right, I, the Lord will make it happen.”
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.
Other rules concerning dividends:
▪ Stockholders are entitled to dividends pro
rata based on the total number of shares and
not on the amount paid for the shares.
▪ Stockholders at the time of declaration are
entitled to dividends
▪ The stockholder’s right to be paid dividends
accrues as soon as the declaration is made in
accordance with the Corporation Code
▪ Stock dividends can be declared at a
premium
▪ Even unpaid subscriptions are entitled to
dividends.
▪ Cash dividends for the delinquent stock
shall be applied to the unpaid portion. If it is
a stock dividend, it is suspended until
removed from delinquency.
Sec. 43. Power to enter into management contract.
Management Contract – 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, operating agreements or
otherwise.
This power is subject to approval because it an
exception to the general rule that the exercising the
powers of the corporation, conducting of its affairs,
and holding all its assets are within the prerogative
of the board of directors.
a. Ultra vires doctrine
Final Notes in Commercia Law for the 2022 Bar| 46 of 89
No corporation shall possess or exercise corporate
powers other than those conferred by this Code or by
its articles of incorporation and except as necessary
or incidental to the exercise of the powers conferred.
Test whether or not an act is within the powers of
the Corporation
✓ Whether the act in question is in direct, an
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.
An ultra vires act is one committed outside the object
for which a corporation is created as defined by the
law of its organization and therefore beyond the
power conferred upon it by law.
Three types of ultra vires act
i. Acts done beyond the powers of the
Corporation as provided in the law or its
articles of incorporation.
ii. Acts entered into on behalf of the
Corporation by persons who have no
corporate authority or exceeded the scope of
their authority.
iii. Acts or contracts which are per se illegal as
being contrary to law.
WHEN IS THERE AN ULTRA VIRES ACT ON
THE PART OF THE:
1) Corporation
▪ No Corporation shall possess or exercise any
corporate power except those conferred by
the RCC or by the articles of incorporation
and except such as are necessary or
incidental to the exercise of power so
conferred. When the Corporation does an act
or engages in an activity that is outside of its
express, implied or incidental powers set out
in the RCC and its articles of incorporation,
the act is deemed to be Ultra vires.
2) The Board of Directors
▪ The Board commits an ultra vires act when
it engages in an activity or performs a
 “When the time is right, I, the Lord will make it happen.”
corporate act without the ratificatory or
affirmative vote of the stockholders in those
instances where the RCC or the bylaws
require such vote, or in cases where
corporate powers are reserved solely to the
stockholders.
3) Corporate Officers
▪ There is an ultra vires 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.
▪ A contract entered into by corporate officers
who exceed their authority generally does
not bind the corporation except when the
contract is ratified by the Board of Directors.
ULTRA VIRES ACTS ILLEGAL ACTS
Merely voidable which Void and cannot be
may be enforced by validated
performance,
ratification, or estoppel
An illegal act is necessarily ultra vires, but an ultra
vires act is not necessarily an illegal act if it is only
one that is outside the conferred powers of the
corporation.
An act that is ultra vires for being an illegal act
cannot be ratified. An ultra vires act, which is not
an illegal act, may be ratified by the stockholders
of the corporation.
Distinguished from Acts that do not comply with
formalities:
▪ If the Article of Incorporation or By-laws
prescribe a procedure in entering into
contracts and the same was not complied
with when the contract involved in the case
was executed, the contract may even be
valid to third persons who are not familiar
with the AOI or By-laws.
Final Notes in Commercia Law for the 2022 Bar| 47 of 89
▪ In this case, what is being described here is a
mere failure to observe formalities. It is still
within the scope, it is not ultra vires, but it
failed to follow the formalities.
What is the consequence of Ultra Vires Acts?
The contract is unenforceable against the
corporation.
What is the remedy of the stockholder against an
ultra vires act?
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.
b. Trust fund doctrine
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. (Ong vs. Tiu)
Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are
regarded as equity in trust for the payment of
corporate creditors which are preferred over the
stockholders in the distribution of corporate assets.
The distribution of corporate assets and property
cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of
the corporation unless the indispensable conditions
and procedures for the protection of corporate
creditors are followed. (Yamamoto v. Nishino Leather
Industries, Inc.)
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.
(Halley vs. Printwell, lnc.)
When is the trust fund violated?
a) The corporation has distributed its capital
among the stockholders without providing
for the payment of creditors.
 “When the time is right, I, the Lord will make it happen.”
b) It released the subscribers to the capital stock
from their unpaid subscriptions.
c) It transferred corporate property in fraud of
its creditors.
d) It distributed properties to stockholders
except by way of dissolution and
liquidation, the redemption of redeemable
shares, and reduction of capital stock.
e) When it declared dividends without
unrestricted retained earnings.
f) When it acquired its shares without
unrestricted retained earnings.
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?
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. (Ong Yong,
et al. vs. David S. Tiu)
HALLEY vs. PRINTWELL
The petitioner argues, however, that the trust fund
doctrine was in applicable because she had already
fully paid her subscriptions to the capital stock of
BMPI. She thus insists that both lower courts erred
in disregarding the evidence on the complete
payment of the subscription, like receipts, income tax
returns, and relevant financial statements.
The petitioner's argument is devoid of substance.
Final Notes in Commercia Law for the 2022 Bar| 48 of 89
The trust fund doctrine enunciates a -
xxx rule that the property of a corporation is a trust
fund for the payment of creditors, but such property
can be called a trust fund `only by way of analogy or
metaphor.' As between the corporation itself and its
creditors it is a simple debtor, and as between its
creditors and stockholders its assets are in equity a
fund for the payment of its debts.
The trust fund doctrine was adopted in our
jurisdiction in Philippine Trust Co. v. Rivera, where
this Court declared that:
It is established doctrine that subscriptions to the
capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can
maintain an action upon any unpaid stock
subscription in order to realize assets for the
payment of its debts.
We clarify that the trust fund doctrine is not limited
to reaching the stockholder's unpaid subscriptions.
The scope of the doctrine when the corporation is
insolvent 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. All assets and property belonging to the
corporation held in trust for the benefit of creditors
that were distributed or in the possession of the
stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in
satisfaction of its claim.
Also, under the trust fund doctrine, a corporation
has no legal capacity to release an original subscriber
to its capital stock from the obligation of paying for
his shares, in whole or in part, without a valuable
consideration, or fraudulently, to the prejudice of
creditors. The creditor is allowed to maintain an
action upon any unpaid subscriptions and thereby
steps into the shoes of the corporation for the
satisfaction of its 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 unpaid
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.
JENNIFER M. ENANO-BOTE vs. JOSE CH.
ALVAREZ (2020; Caguioa, J.)
 “When the time is right, I, the Lord will make it happen.”
The case of Halley recognized two instances when
the creditor is allowed to maintain an action upon
any unpaid subscriptions based on the trust fund
doctrine: (1) where the debtor corporation released
the subscriber to its capital stock from the obligation
of paying for their shares, in whole or in part,
without a valuable consideration, or fraudulently, to
the prejudice of creditors; and (2) where the debtor
corporation is insolvent or has been dissolved
without providing for the payment of its creditors.
The first instance finds no relevance in the present
case. It is the second which SBMA, as creditor, may
invoke to collect from CAIR's stockholders for their
unpaid subscriptions and apply the same to CAIR's
unpaid rentals. But, as stressed in Halley: "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 unpaid 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."
Unfortunately, SBMA has not even pleaded either
insolvency of CAIR or its dissolution. What is
evident in SBMA's complaint is that it is a simple
collection suit. Not only were the allegations of
SBMA's complaint insufficient to justify the
invocation and application of the trust fund doctrine
as appreciated in Halley, even the evidence adduced
by SBMA was solely to prove the uncollected rentals.
In short, SBMA failed to either allege or prove any of
the two grounds recognized in Halley when the trust
fund doctrine may be applied to compel the
stockholders to contribute to the payment of CAIR's
debts by compelling them to pay the unpaid balances
upon their subscriptions.
D. Board of directors and trustees
1. Basic principles
a. Doctrine of centralized management
Unless otherwise provided in this Code, the board of
directors or trustees shall exercise the corporate
powers, conduct all business, and control all
properties of the corporation.
The doctrine of centralized management means that
corporate powers are vested in a body, called board
of directors for stock corporation and board of
trustees for a non-stock corporation. Except in those
instances where the stockholders’ or members’
Final Notes in Commercia Law for the 2022 Bar| 49 of 89
approval is required for certain acts under the RCC
or the corporation’s bylaws, it is the board which
exercises corporate powers. The stockholders or
members, regardless of number, will have to
delegate the power to manage the corporation to the
board.
General Rule: The Doctrine of Centralized
Management states that all corporate powers are
exercised by the BOD or BOT.
The Board is the body which: (ExCoCo)
1. Exercises all powers provided for under the
Corporation Code;
2. Conducts all business of the corporation;
and
3. Controls and holds all the properties of the
corporation.
Exceptions:
1. In case of delegation to the Executive
Committee duly authorized in the by-laws;
2. Authorization pursuant to a contracted
manager which may be an individual, a
partnership, or another corporation; and
3. In case of close corporations, the
stockholders may manage the business of
the corporation instead of a board of
directors, if the articles of incorporation so
provide.
Tri-Level Hierarchy of Authority or Three Levels of
Control
i. Stockholders: have the residual power over
fundamental corporate changes, like
amendments of the AOI; exercise acts of
ownership; they elect and appoint the
members of the board of directors.
ii. Board of Directors: exercise the
management powers; responsible for
corporate polices and the general
management of the business affairs of the
corporation; they appoint the officers who’ll
implement these policies and plans adopted.
iii. Corporate Officers and other officers of the
corporation: in theory, execute the polices
 “When the time is right, I, the Lord will make it happen.”
laid down by the board, but in practice often
have wide latitude in determining the course
of business operations. (Citibank, N.A. v.
Chua)
In other words, stockholders or members
periodically elect the board of directors or trustees,
who are charged with the management of the
corporation. The board, in turn, periodically elects
officers to carry out the management function on a
day-to-day basis. As owners though, the
stockholders or members have residual powers over
fundamental and major corporate changes. Acts of
management pertain to the board and those of
ownership, to the stockholders or members. (Paul Lee
Tan v. Paul Sycip, et al.)
If they pertain to acts of management, they pertain to
the board. If they pertain to acts of ownership, they
pertain to the stockholders or members.
b. Business judgment rule
Questions of policy and management are left to the
sound discretion and honest decision of the officers
and directors of a corporation, and the courts are
without authority to substitute their judgment for
the judgment of the boards of directors. The board is
the manager of the corporation, and so long as it acts
in good faith, its orders are not reviewable by the
courts (Cua, Jr. v. Tan)
The courts have no power to replace the judgments
of the board of directors. The stockholders cannot
supplant the will of the board for the will of the
stockholders. As long as the board acts in good faith
and not contrary to laws, the acts of the board are not
reviewable by the courts and cannot be overturned
by the stockholders.
Stockholders cannot interfere with the board in
conducting the business affairs of the corporation.
They cannot, for instance, revoke resolutions of the
board or repudiate their acts on account of mere
disagreement. If the stockholders are not satisfied
with the way the board exercises its powers or
manages the corporation, their remedies consist of:
1. Replacing the board members upon
expiration of their term;
2. Vote for their removal under Section 27 of
the RCC (vote needed: 2/3 of the OCS); or
Final Notes in Commercia Law for the 2022 Bar| 50 of 89
3. File a derivative suit on behalf of the
corporation to set aside the board’s wrongful
acts
But not to supplant the board’s business judgment
for their own.
Save for the authority granted to them by law and
the bylaws, stockholders cannot exercise corporate
powers and have no management rights. In the
absence of gross negligence or bad faith, the board
may not even be held liable for mistakes or errors in
directing the affairs of the corporation.
The business judgment rule is not absolute.
Corporate acts cannot be justified under the business
judgment rule if they are contrary to law. For
instance, the board cannot invoke this rule to declare
dividends when there is no surplus profit or declare
dividends out of re-appraisal surplus, or to pay
compensation to directors, as this power is lodged
with the stockholders. It cannot be relied upon to
support a request for a new stock and transfer book
on the pretext that the original is lost (when in fact it
is not) and declare entries in the supposed lost stock
and transfer book as invalid. (Provident International
Resources v. Joaquin Venus, et al.)
Can the board of directors or trustees create
positions or committees?
Yes, the board has the power to create positions,
committees, or offices as may be necessary to
conduct the business affairs of the corporation. This
is covered by the business judgment rule. It was held
that the determination of the necessity for additional
offices and/or positions is a management
prerogative which courts are not wanting to review
in the absence of any proof that such prerogative was
exercised in bad faith.
The Board of Directors has the power to create
positions not provided for in Filport’s bylaws since
the board is the corporation’s governing body,
clearly upholding the power of its board to exercise
its prerogatives in managing the business affairs of
the corporation. (Filipinas Port Services v. Victoriano
Go)
NOTE: The board cannot create a corporate office. A
corporate office is created by the bylaws and not by
the board of directors.
 “When the time is right, I, the Lord will make it happen.”
AIRENE UNERA, ET AL. vs. SHIN HEUNG
ELECTRO DIGITAL INC. (2020)
The decision of Shin Heung to close its business or
cease operations was done in good faith.
The Court finds the totality of the circumstances
surrounding Shin Heung's decision to cease
operations as refutation of the claim of bad faith.
What the Court sees is a company struggling to stay
afloat or trying to get by. There is no indication to
defraud its employees of any of their deserving
rights. In fact, the company took a loan to pay its
employees separation pay despite the rule that
dispenses with such payment when the cause for
closure of business is due to serious losses.
Moreover, there was no union busting or any union
activity that the company sought to prevent.
To be clear, the resumption of Shin Heung's
operations was limited to the press, injection and
mold section of the company. It rehired its previous
employees who were working in the said sections
based on their availability to immediately return to
work. Moreover, the re-hired workers were given the
status of regular employees immediately upon their
first day of work on 19 August 2013. Unfortunately,
Shin Heung cannot rehire all of its workers,
especially those who worked in the now defunct
assembly section.
Similarly, Shin Heung had already sufficiently
proven substantial business losses on its part thereby
necessitating the closure of the company. Its decision
to continue a part of its previous operations did not
negate good faith in its decision to close shop, but is
seen as an exercise of its right to continue its
business. As long as no arbitrary or malicious action
on the part of the employer is shown, the wisdom of
a business judgment to implement a cost saving
device is beyond the court's determination. After all,
the free will of management to conduct its own
business affairs to achieve its purpose cannot be
denied.
2. Tenure and qualifications of directors or
trustees
Term of Directors and Trustees
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▪ Directors shall be elected for a term of one (1)
year from among the holders of stocks registered
in the corporation’s books.
▪ Trustees shall be elected for a term not exceeding
three (3) years from among the members of the
corporation.
▪ Each director and trustee shall hold office until
the successor is elected and qualified.
▪ A director who ceases to own at least one (1)
share of stock or a trustee who ceases to be a
member of the corporation shall cease to be such.
o Continuing Qualification: He must be a
stockholder in his own right. It must at
least be legal title and not just beneficial
title.
When directors disposed of all their shares through
assignment and delivery in favor of a trustee, they
ceased to own at least one share standing in their
names in the books of the corporation as required
under the Corporation Code. They also ceased to
have anything to do with the management of
enterprise. Hence, they can no longer be considered
as directors. (Lee vs CA)
Qualifications of Directors
1) Stock Corporation - must own at least one (1)
share capital stock of the corporation in his own
name; Nonstock corporation - must be a
member
2) He must be of legal age
3) He must possess other qualifications as may be
prescribed in the by-laws of the corporation
4) He must not possess any of the disqualifications
found in Sec 26 of the Revised Corporation Code
5) Requirements for Corporations vested with
Public Interest-Independent Directors
6) He must not possess any of the disqualifications
found in SEC MC No. 24 and SEC MC No. 10,
Series of 2019 for directors in Public Companies.
Independent Director
 “When the time is right, I, the Lord will make it happen.”
A person who, apart from shareholdings and fees
received from the corporation, is independent of
management and free from any business or other
relationship which could, or could reasonably be
perceived to materially interfere with the exercise of
independent judgment in carrying out the
responsibilities as a director.
Independent directors must be elected by the
shareholders present or entitled to vote in absentia
during the election of directors.
Corporations vested with Public Interest
requires: Independent Directors
The board of the following corporations vested with
public interest shall have independent directors
constituting at least twenty percent (20%) of such
board:
a) Corporations covered by Section 17.2 of
Republic Act No. 8799, otherwise known as
“The Securities Regulation Code,” namely
those whose securities are registered with
the Commission, corporations listed with an
exchange or with assets of at least Fifty
million pesos (P50,000,000.00) and having
two hundred (200) or more holders of shares,
with at least one hundred (100) shares of a
class of its equity shares;
b) Banks and quasi-banks, NSSLAs,
pawnshops, corporations engaged in money
service business, pre-need, trust and
insurance companies, and other financial
intermediaries; and
c) Other corporations engaged in business
vested with public interest similar to the
above, as may be determined by the
Commission, after taking into account
relevant factors which are germane to the
objective and purpose of requiring the
election of an independent director, such as
the extent of minority ownership, type of
financial products or securities issued or
offered to investors, public interest involved
in the nature of business operations, and
other analogous factors.
3. Election and removal of directors or trustees
Election of Directors or Trustees
Except when the exclusive right is reserved for
holders of founders’ shares under Section 7 of this
Code, each stockholder or member shall have the
right to nominate any director or trustee who
possesses all of the qualifications and none of the
disqualifications set forth in this Code.
Requirements:
1) Notice of the meeting to the stockholders in
accordance with the form and mode under
the by-laws
–
2) There will be present either in person or
through a representative authorized to act
by written proxy the owners of a majority of
the outstanding capital stock or majority of
the members entitled to vote
3) Presided by the Officer under the By-Laws
4) The stockholder may cast such number of
votes base on his shares registered in his
name in the books of corporation multiplied
by the directors to be elected.
5) When authorized by the By-Laws or by a
majority of the board of directors, the
stockholders may vote through remote
communication methods or in absentia.
✓ It is not necessary that the said provision
is in the by-laws, even if it is not in the
bylaws the board of directors can pass a
resolution in allowing the new provision
above.
✓ The right to vote through such modes
may be exercised in corporations vested
with public interest, notwithstanding
the absence of a provision in the by- laws
of such corporations.
Stockholder that are Qualified to Vote
▪ The Articles of Incorporation or by-laws may
require that you can only cast one vote in favor
of each candidate, if it is a nonstock corporation.
But in a stock corporation, general rule there is
cumulative voting; exception is if it is stated in
the Articles of Incorporation or by-laws.
▪ In stock corporations, the stockholders make cast
such number of votes based on the shares
registered in their names in the books of the
Final Notes in Commercia Law for the 2022 Bar| 52 of 89
 “When the time is right, I, the Lord will make it happen.”
Corporation at the time specified in the bylaws,
or by the Board of directors or trustees,
multiplied by the total number of directors to be
elected.
Illustration: if a stockholder owns 1000 shares and
there are 15 directors to be elected, said stockholder
is entitled to cast a total of 15,000 votes.
The stockholder may vote through: CUMULATIVE
VOTING or STRAIGHT VOTING
▪ Straight Voting – every stockholder “may
vote such number of shares for as many persons
as there are directors” to be elected.
▪ Cumulative Voting – he may cumulate said
shares and give one candidate as many votes
as the number of directors to be elected,
multiplied by the number of shares owned
or distribute them on the same principle
among as many candidates as may be seen
fit.
1. Cumulative Voting for One Candidate
- A stockholder is allowed to concentrate
his votes and “give one candidate as
many votes as the number of directors to
be elected multiplied by the number of
his shares shall equal.
2. Cumulative Voting by Distribution – a
stockholder may cumulate his shares by
multiplying also the number of his
shares by the number of directors to be
elected and distribute the same among
as many candidates as he shall see fit.
• The total number of votes cast
shall not exceed the number of
shares owned by the
stockholders as shown in the
books of the corporation
multiplied by the whole number
of directors to be elected.
• No cumulative method of
voting in non-stock
corporations, except as may be
otherwise provided in the
Articles of Incorporation or by-
laws.
QUORUM; In relation to the Right to Vote
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At all elections of directors or trustees, there must be
present, either in person or through a representative
authorized to act by written proxy, the owners of
majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members
entitled to vote.
Shares not Included in the Determination of
Majority of Outstanding Capital Stock
➢ Non-Voting shares
➢ Delinquent shares
➢ Treasury shares
BASIS OF QUORUM
▪ For stock corporations, the “quorum”
referred to in Section 51 of the RCC is based
on the number of outstanding voting stocks.
For non-stock corporations, only those who
are actual, living members with voting rights
shall be counted in determining the
existence of a quorum during members’
meetings. Dead members shall not be
counted. (Tan vs Sycip)
▪ Quorum is based on the totality of the shares
which have been subscribed and issued,
whether it be founders shares or common
shares. In the instant case, two figures are
being pitted against each other those
contained in the articles of incorporation,
and those listed in the stock and transfer
book. (Lanuza vs Court of Appeals)
Removal of Directors or Trustees
Only stockholders or members have the power to
remove the directors or trustees elected by them, as
laid down in Sec 27 of the Revised Corporation Code.
It cannot be exercised by the Board.
Requisites for Removal
1) There must be a previous notice of the
meeting to stockholders or members and the
procedures prescribed by the RCC and by
laws must be followed.
2) The notice of the meeting must specify the
intention to propose the removal of a
director.
 “When the time is right, I, the Lord will make it happen.”
3) The removal must be 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 stock
Corporation.
4) The director may be removed with or
without cause; However, if the removal is
intended to deprive the minority of their
representative, the removal has to be with
cause.
5) The call of the meeting must be made by the
proper officer.
▪ A special meeting of the stockholders or
members for the purpose of removing
any director or trustee must be call by
the secretary on order of the president,
or upon written demand of the
stockholders representing or holding at
least a majority of the outstanding
capital stock, or a majority of the
members entitled to vote.
▪ If there is no secretary, or if the secretary
despite demand, fails or refuses to call
the special meeting or to give notice
thereof, the stockholder or member of
the corporation signing the demand may
call for the meeting by directly
addressing the stockholders or members
▪ Removal of directors in a meeting called
by a committee not authorized to call a
meeting is void even if the removal was
approved by the required number of
stockholders.
▪ Notice of the time and place of such
meeting, as well as of the intention to
propose such removal, must be given by
publication or by written notice
prescribed in this Code.
The Commission shall, motu proprio or upon
verified complaint, and after due notice and hearing,
order the removal of a director or trustee elected
despite the disqualification, or whose
disqualification arose or is discovered subsequent to
an election. The removal of a disqualified director
shall be without prejudice to other sanctions that the
Commission may impose on the board of directors
or trustees who, with knowledge of the
Final Notes in Commercia Law for the 2022 Bar| 54 of 89
disqualification, failed to remove such director or
trustee.
4. Duties, responsibilities and liabilities for
unlawful acts
Sec. 30. Liability of directors, trustees or officers
General Rule: Corporate agents such as directors,
trustees or officers of a corporation are not solidarily
liable with the corporation they represent.
Exceptions: (a director, officer or trustee may be held
personally liable in the following cases)
1) Knowingly voting for or assenting to
patently unlawful acts of the corporation;
✓ 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.
2) Act in bad faith or with gross negligence 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. 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.
✓ However, before at director or officer of
a Corporation can be held personally
liable for corporate obligations, the
following requisites must concur:
i. 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.
ii. The complainant must
clearly and convincingly
prove such unlawful acts,
negligence or bad faith.
 “When the time is right, I, the Lord will make it happen.”
3) Acquiring any personal or pecuniary
interest in conflict with his duty as director
or trustee or officer, resulting in damage to
the Corporation;
✓ This conflict of interest must result in
damage to the Corporation. In relation
thereto, the doctrine of corporate
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
realized from the venture.
4) When a director has consented to the
issuance of watered stock or who, having
knowledge thereof, did not forthwith file
with the corporate secretary his written
objection thereto;
5) When the Director, Trustee or officer has
contractually agreed or stipulated to hold
himself personally and solidarily liable with
the corporation.
✓ The liability of the director or officer
depends 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
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.
6) When a director, trustee or officer is made,
by specific provisions of law, personally
liable for his corporate actions.
The above mentioned 6 circumstances where a
director or officer can be held personally liable for
corporate act or omission are exclusive.
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Sec. 31. Dealings of directors, trustees or officers
with the corporation.
General Rule: A contract of the corporation with (1)
one 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.
Exception: 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 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.
Sec. 32. Contracts between corporations with
interlocking directors.
The mere fact that there is a contract between two
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.
 “When the time is right, I, the Lord will make it happen.”
✓ Stockholdings exceeding twenty (20%)
percent of the outstanding capital stock shall
be considered substantial for purposes of
interlocking directors. – SUBSTANTIAL
INTEREST
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. It can only be valid
when the following conditions are present:
a) such presence of the director in the meeting
in which the contract was approved was not
necessary;
b) the vote was not necessary, and;
c) the contract is fair and reasonable
The foregoing requirements will not apply if the
interest of the interlocking director in the
corporations is both substantial or nominal.
But it is still subject to ratification when the first two
conditions are absent.
Which corporation should comply with the
procedure, the corporation wherein the director has
nominal interest or the corporation with
substantial interest?
It is the one with nominal interest. The potential
prejudice is with the company with nominal interest.
Sec. 33. Disloyalty of a director.
General Rule: Where a director, by virtue of such
office, acquires a business opportunity which should
belong to the corporation, thereby obtaining profits
to the prejudice of such corporation, the director
must account for and refund to the latter all such
profits.
Exception: The contract or act may be ratified by a
vote of the stockholders owning or representing at
least two-thirds (2/3) if the outstanding capital stock.
Doctrine of Corporate Opportunity
Under such doctrine, a director of the Corporation is
prohibited from competing with the business in
Final Notes in Commercia Law for the 2022 Bar| 56 of 89
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.
The obligation to account and remit is not excused
even if he risks his own funds, unless the act was
ratified by the stockholders representing at least 2/3
of the outstanding capital stock.
E. Stockholders and members
1. Rights and obligations of stockholders and
members
Rights of a Stockholder and Member
1) Proprietary rights - these rights pertain to
certain economic benefits that accrue to his
shares, such as:
a. right to receive dividends; and
b. right to participate in the assets of
the Corporation upon dissolution
and liquidation.
2) Management rights - This refers to
participation in the conduct of the business
of the Corporation exercised through the
following:
a. Right to vote on all corporate acts
requiring stockholders’ approval;
and
b. Right to elect the directors of the
Corporation.
3) Remedial rights - These refer to remedies
the stockholder may pursue depending on
the issues involved, such as:
a. Appraisal right
b. Preemptive right
c. Right to inspect.
d. Right the copy of the financial
statements of the company.
e. Right to file at derivative suit.
 “When the time is right, I, the Lord will make it happen.”
a. Doctrine of equality of shares
Doctrine of Equality of Shares
The doctrine of equality of shares means that all
stocks issued by the corporation are presumed equal,
with the same privileges and liabilities, provided
that the articles of incorporation is silent on such
differences. Stated otherwise, each share shall be
equal in all respects to every other share, except as
otherwise provided in the articles of incorporation
and the certificate of stock. (CIR v. CA; Section 6,
RCC.)
Thus, all shares have the same rights and privileges
unless classified differently in the Articles of
Incorporation, and such classification is not contrary
to law. Preferred shares, therefore, have the same
voting rights similar to common shares unless the
preferred shares are denied such right in the articles
of incorporation.
Any restriction on shares should also be stated in the
articles of incorporation, otherwise, it is not valid. In
a couple of cases, the Supreme Court held that any
lien on shares, like being held as security for
payment of dues and assessments, must be in the
articles of incorporation, not only in the bylaws,
otherwise, it is invalid.
2. Participation in management
Stockholders and members may vote in person or by
proxy in all meetings of stockholders or members.
When so authorized in the by-laws or by a majority
of the board of directors, the stockholders or
members of corporations may also vote through
remote communication or in absentia: Provided,
That the votes are received before the corporation
finishes the tally of votes.
a. Proxy
Proxy is a written instrument signed by the
stockholder authorizing 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.
Any natural person who has the legal capacity to act
may be a proxy. He is basically an agent with the
stockholder granting the proxy as his principal. A
stockholder disqualified to vote under the RCC or
Final Notes in Commercia Law for the 2022 Bar| 57 of 89
the bylaws of the Corporation may be appointed
proxy as long as he has the legal capacity. If the
stockholder is a natural person, the proxy will be
basically in the form of a power of attorney. In case
of corporate stockholder, the proxy will be in the
form of a board resolution authorizing another
person to exercise the stockholders’ voting rights in
the Corporation.
This is only available to stockholders and members,
not to directors or trustees, because directors and
trustees are appointed taking into account their
personal qualifications. Hence, they cannot be
represented by another person during the meeting.
Requisites of a Valid Proxy
1. It must be in writing
2. Signed by the stockholder or member of
record; and
3. Filed before the meeting with the Corporate
Secretary.
Limitations on 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 within a reasonable
time before the scheduled meeting.
▪ Unless otherwise provided in the proxy
form, it shall be valid only for the meeting
for which it is intended.
▪ 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.
▪ 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.
What can a proxy do?
He is more of an agent of a SH. The only thing
entrusted to him is to represent the SH in a meeting.
Proxy’s power is less than a trustee.
 “When the time is right, I, the Lord will make it happen.”
The rule on proxy is that, if the real owner (i.e., the
stockholder himself) attends the meeting, the proxy
is invalidated. The proxy only stands if the
stockholder is not available. The moment the
stockholder attends the meeting, the proxy will not
stand, so he cannot vote anymore.
b. Voting trust
One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring
upon a trustee or trustees the right to vote and other
rights pertaining to the shares.
What is a Voting Trust Agreement?
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 five years
at anytime.
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 of inspection,
which he can exercise concurrently with the voting
trustee, but having conveyed the legal title to the
Trustee, the transferring stockholder is disqualified
from being elected as a director.
If he executes the voting trust agreement during his
term as a director, he shall cease to be a director of
the Corporation. (Lee vs. CA)
Powers of the Voting Trustee
a) Entitled to all the rights of a stockholder
pertaining to the shares transferred subject
to the terms and conditions of the
agreement.
b) He may vote in person or by proxy unless
the agreement provides otherwise.
c) Having legal title to the shares, he is
qualified to be elected as a director.
d) He is not entitled to proprietary rights like to
receive dividends and assets of the
Corporation upon the solution and
liquidation.
Final Notes in Commercia Law for the 2022 Bar| 58 of 89
e) He may create a security interest over the
dividends of the transferring stockholder as
a security for a loan.
A voting trust agreement:
▪ Must be in writing and notarized, and shall
specify the terms and conditions thereof.
▪ Shall be valid for a period not exceeding five
(5) years at any time
▪ A certified copy of such agreement shall be
filed with the corporation and with the
Commission; otherwise, the agreement is
ineffective and unenforceable.
Period of Validity
GR: Should be entered in a period not exceeding 5
years. Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically
expire at the end of the agreed period. The voting
trust certificates as well as the certificates of stock in
the name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall
be reissued in the name of the trustors.
XPN: in the case of a voting trust specifically
required as a condition in a loan agreement, said
voting trust may be for a period exceeding five (5)
years but shall automatically expire upon full
payment of the loan.
c. Cases when stockholders’ action is required
i. By a majority vote
1. Election of directors (Sec. 23)
2. Filing of vacancies in the Board (Sec. 28)
3. Payment of compensation to directors (Sec. 29)
4. Power to Acquire Own Shares. (Sec. 40)
5. Power to Declare Dividends. (Sec. 42)
6. Power to Enter into Management Contract (Sec.
43)
7. Adoption of Bylaws (Sec. 45)
 “When the time is right, I, the Lord will make it happen.”
8. Amendment of bylaws (Sec. 46) & Revocation of
the delegation to amend bylaws to the Board
9. Voluntary dissolution where no creditors are
affected (Sec. 134)
ii. By a two-thirds vote
1. Amendment of Articles of Incorporation (Sec.
15)
2. Removal of Directors/Trustees (Sec. 27)
3. Extend or Shorten Corporate Term (Sec. 36)
4. Increase or Decrease Capital Stock; Incur, Create
or Increase Bonded Indebtedness (Sec. 37)
5. Deny Preemptive Right (Sec. 38)
6. Sale of all or substantially all of corporate assets
(Sec. 39)
7. Invest Corporate Funds in another Corporation
or Business or for Any Other Purpose (Sec. 41)
8. Declaration of Stock Dividends. (Sec. 42.)
9. Enter into Management Contract. (Sec. 43)
10. Merger or consolidation (Sec. 75)
11. Voluntary dissolution where creditors are
affected (Sec. 135)
3. Proprietary rights
a. Right to dividends
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, property, or
in stock to all stockholders on the basis of
outstanding stock held by them. (Sec. 42)
The law does not directly and categorically mandate
the corporation to declare or pay dividend.
However, a stockholder is entitled to payment once
a final dividend is declared on a shareholder’s share.
In case of non-payment, the aggrieved stockholder
can sue the corporation.
b. Right to inspect
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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 an incident of ownership of the
corporate property.
The right of inspection extends to all corporate
records, regardless of the form in which they are
stored. It covers the stock and chance for book
because it is part of corporate records.
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. (Terelay Investment and Dev. Corp. vs.
Cecilia Teresita Yulo)
Limitations on the stockholders’ right of inspection
1) It can only be exercise for a purpose germane
to his interests as a stockholder.
2) He must be acting in good faith or for a
legitimate purpose in making the demand to
examine or reproduce corporate records.
3) It must be exercised during reasonable hours
on business days.
4) Copies of corporate records or excerpts from
said records must be at the expense of the
requesting Director, trustee or stockholder.
5) It is subject to other applicable laws.
c. Pre-emptive right
Pre-emptive right is the right of the stockholder to
subscribe to any or all issuance of shares with the
purpose of preventing the stockholder’s share from
encountering diminution.
All stockholders of a stock corporation shall enjoy
preemptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings.
d. Right of first refusal
Right of first refusal is the option granted to the
corporation and/or its stockholders to purchase the
shares of transferring stockholder upon reasonable
terms and conditions.
 “When the time is right, I, the Lord will make it happen.”
The corporation and its stockholders have no right of
first refusal unless such restrictions on transfer is
embodied in the articles of incorporation, by-laws of
the corporation and stock certificate of the
corporation. This means that a stockholder may
freely convey his shares to any person without
having to offer the shares to the corporation and/or
the stockholders first, unless a right of first refusal is
granted to the latter.
4. Remedial rights
Appraisal right
It is the right of the stockholder to demand the
payment of the fair value of his shares after
dissenting against a proposed corporate act. In the
case is specified by law. In practical terms, it means
the right to get out of the Corporation and get back
his equity investment.
When the right of appraisal may be exercised
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;
o Ex: amendment to deny pre-emptive
right
2) In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all
or substantially all of the corporate property
and assets as provided in this Code;
3) In case of merger or consolidation; and
4) In case of investment of corporate funds for
any purpose other than the primary purpose
of the corporation.
Note: no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted
retained earnings in its books to cover such payment:
Provided, further, that upon payment by the
corporation of the agreed or awarded price, the
stockholder shall forthwith transfer the shares to the
corporation.
Final Notes in Commercia Law for the 2022 Bar| 60 of 89
5. Intra-corporate disputes (individual vs.
representative vs. derivative suits)
TWO TESTS TO DETERMINE EXISTENCE OF
INTRA-CORPORATE DISPUTE
❖ Relationship Test
A dispute is intra-corporate if it is:
1. Between the corporation, partnership or
association and the public;
2. Between the corporation, partnership or
association and the state insofar as its
franchise, permit or license to operate
isconcerned;
3. Between the corporation, partnership or
association and its stockholders,
partners, members or officers; and
4. Among the stockholders, partners or
associates themselves
❖ Nature of the Controversy Test
The dispute itself must be intrinsically connected
with the regulation of the corporation,
partnership or association.
The controversy "must not only be rooted in the
existence of an intra-corporate relationship, but
must also refer to the enforcement of the parties'
correlative rights and obligations under the
Corporation Code as well as the internal and
intra-corporate regulatory rules of the
corporation."
Remember: An intra-corporate controversy falls
within the jurisdiction of the RTC designated as
special commercial court.
REMOVAL OF AN OFFICER OF THE
CORPORATION
✓ If the holder is holding an office specified in
the charter or bylaws of the corporation, he
is a corporate officer and any issue about his
election, appointment or removal is always
an intra-corporate dispute cognizable by the
RTC.
✓ If he is not holding a bylaws position, he is
not a corporate officer. Any issue about his
 “When the time is right, I, the Lord will make it happen.”
removal is a labor dispute cognizable by the
Labor Arbiter.
INDIVIDUAL SUIT
An individual suit is filed when the cause of action
belongs to the individual stockholder personally,
and not to the stockholders 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)
A direct individual suit is not allowed when
derivative suit is proper.
REPRESENTATIVE SUIT
A representative suit is one filed by the shareholder
individually, or on behalf of a class of shareholders
to which he or she belongs, for injury to his or her
interest as a shareholder (Cua v. Tan).
It is proper where the wrong is done to a group of
stockholders, as where preferred stockholders’
rights are violated, a class or representative suit will
be proper for the protection of all stockholders
belonging to the same group (Ibid).
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.
An action filed a minority stockholder in the name
and in behalf of the corporation to enforce a
corporate right or action, or set aside the wrongful
acts of the directors and officers.
What are the elements of a derivative suit?
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;
➢ He has to be a stockholder in both
occasions—(1)when the transaction
occurred and (2) at the time of the filing
of the action. The only exception is if the
cause of action is continuing in nature,
in which case it is enough that he is a
Final Notes in Commercia Law for the 2022 Bar| 61 of 89
stockholder at the time of the filing of
the action.
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;
➢ If the articles and the bylaws and the
rules provide for the remedies to obtain
the relief that he desires, he have to
exhaust those remedies. You have to
allege in the complaint likewise that you
have exerted all reasonable efforts to
exhaust all those remedies. If there is an
arbitration agreement in the bylaws, the
derivative suit must allege that
arbitration procedure was exhausted
but to no avail.
c. No appraisal rights is available for the act or
acts complained of; and
d. The suit is not a nuisance or harassment suit.
In one case, it was held that a person who is merely
holding in trust the shares of stock in 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. CA)
F. Capital structure
1. Shares of stock
a. Nature of shares of stock
Share of stock refers to the fractional ownership of
the corporation in proportion to the total number of
shares issued by such corporation. Shares of stock so
issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. (Teng v.
Securities and Exchange Commission)
b. Consideration for shares of stock
Stocks shall not be issued for a consideration less
than the par or issued price thereof.
 “When the time is right, I, the Lord will make it happen.”
Consideration for the issuance 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 stated 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.
Where the consideration is other than actual cash,
or consists of intangible property such as patents or
copyrights:
✓ the valuation thereof shall initially be
determined by the stockholders or the board
of directors, subject to the approval of the
Commission.
Shares of stock shall not be issued in exchange for
promissory notes or future service. The same
considerations provided in this section, insofar as
applicable, may be used for the issuance of bonds by
the corporation.
The issued price of no-par value shares may be fixed
in the articles of incorporation or by the board of
directors pursuant to authority conferred by the
articles of incorporation or the bylaws,
➢ if not fixed: by the stockholders representing
at least a majority of the outstanding capital
stock at a meeting duly called for the
purpose.
c. Watered stock
Final Notes in Commercia Law for the 2022 Bar| 62 of 89
Watered stocks are those issued not in exchange
for its equivalent either in cash, property, share,
stock dividends, or services; thus, the issuance of
such stocks are prohibited. These include stocks:
1. Issued without consideration (bonus share)
2. Issued as fully paid when the corporation
has received a lesser sum of money than its
par or issued value (discounted share)
A director or officer of a corporation who:
a) consents to the issuance of stocks for a
consideration less than its par or issued
value;
b) consents to the issuance of stocks for a
consideration other than cash, valued in
excess of its fair value;
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 issuance of the stock and
the par or issued value of the same.
d. Situs of the shares of stock
The situs of the shares of stock is in the place where
the corporation was incorporated.
e. Classes of shares of stock
1. Common shares
✓ ordinarily and usually issued without
privileges or advantages, except that they
cannot be denied the right to vote.
2. Preferred shares
✓ may be given preference in the distribution
of dividends and in the distribution of
corporate assets in case of liquidation, or
such other preferences
✓ may be issued only with a stated par value.
 “When the time is right, I, the Lord will make it happen.”
✓ The board of directors, where authorized in
the articles of incorporation, may fix the
terms and conditions of preferred shares of
stock or any series thereof:
✓ such terms and conditions shall be effective
upon filing of a certificate thereof with the
Securities and Exchange Commission,
hereinafter referred to as “Commission”.
3. Par value shares
✓ Those with a fixed arbitrary amount
specified in the articles of incorporation and
in the stock certificate. It represents the
minimum amount of consideration for the
issuance of shares.
✓ It is neither the book value nor the fair
market value of the shares.
4. No par value shares
✓ It is a stock without par value on the face of
the stock certificate.
Shares of capital stock issued without par value
▪ shall be deemed fully paid and non-
assessable and the holder of such shares
shall not be liable to the corporation or to its
creditors in respect thereto
▪ no-par value shares must be issued for a
consideration of at least Five pesos (P5.00)
per share
▪ the entire consideration received by the
corporation for its no-par value shares shall
be treated as capital and shall not be
available for distribution as dividends.
▪ They cannot be issued as preferred stocks.
▪ They cannot be issued by banks, trust,
insurance, and preneed companies, public
utilities, building and loan associations, and
other corporations authorized to obtain or
access funds from the public, whether
publicly listed or not.
▪ The AOI must state that fact that it issued no
par value shares as well as the number of
said shares.
Final Notes in Commercia Law for the 2022 Bar| 63 of 89
5. Voting shares
✓ Shares which can vote on all corporate acts
requiring stockholders approval. The
Corporation should always have voting
shares. These are the common shares of
stock.
✓ Sequestered shares have voting rights if they
are common shares, or if they are preferred
or redeemable shares that are not denied the
right to vote in the articles of incorporation.
6. Non-voting shares
✓ These are shares that are denied the right to
vote in the articles of incorporation.
✓ Classification to comply with constitutional
or legal requirements.
7. Founder’s shares
✓ may be given certain rights and privileges
not enjoyed by the owners of other stocks.
✓ Where the exclusive right to vote and be
voted for in the election of directors is
granted, it must be for a limited period not
to exceed five (5) years from the date of
incorporation.
➢ Such exclusive right shall not be
allowed if its exercise will violate
Commonwealth Act No. 108,
otherwise known as the “Anti-
Dummy Law”; Republic Act No.
7042, otherwise known as the
“Foreign Investments Act of 1991”;
and other pertinent laws.
➢ The five year limitation is counted
from the date of incorporation and
not from SEC’s approval.
➢ Note that only the exclusive right to
vote and be voted for in the election
of directors is subject to a limited
period of five years from the date of
incorporation.
8. Treasury shares
✓ Shares of stock which have been issued and
fully paid for, but subsequently reacquired
 “When the time is right, I, the Lord will make it happen.”
by the issuing corporation through
purchase, redemption, donation, or some
other lawful means.
✓ Such shares may again be disposed of for a
reasonable price fixed by the board of
directors.
✓ Treasury shares shall have no voting rights
as long as such shares remain in the
Treasury. No dividends can be declared
thereon as corporations cannot declare
dividends to themselves.
9. Redeemable shares
✓ Shares which may be purchased by the
corporation from the holders of such shares
upon the expiration of a fixed period,
regardless of the existence of unrestricted
retained earnings in the books of the
corporation, and upon such other terms and
conditions stated in the articles of
incorporation and the certificate of stock
representing the shares, subject to rules and
regulations issued by the Commission.
✓ May be issued by the corporation only when
expressly provided in the articles of
incorporation.
✓ Reacquired redeemable shares are
considered retired and may no longer be
reissued unless otherwise stated in the
Articles of incorporation.
✓ URE is not necessary before shares can be
redeemed but there must be sufficient assets
to pay the creditors and to answer for
operations
10. Watered shares
11. Other classification as may be provided in the
Articles of incorporation; provided it is not
contrary to law.
Each share shall be equal in all respects to every
other share, except as otherwise provided in the
articles of incorporation and in the certificate of
stock. The shares in stock corporations may be
divided into classes or series of shares, or both.
There shall always be a class or series of shares with
complete voting rights.
Final Notes in Commercia Law for the 2022 Bar| 64 of 89
Holders of nonvoting shares shall nevertheless be
entitled to vote on the following matters:
(AASIIMID)
a) Amendment of incorporation;
b) Adoption and amendment of bylaws;
c) Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the
corporate property;
d) Incurring, creating, or increasing bonded
indebtedness;
e) Increase or decrease of authorized capital stock;
f) Merger or consolidation of the corporation with
another corporation or other corporations;
g) Investment of corporate funds in another
corporation or business in accordance with this
Code; and
h) Dissolution of the corporation.
2. Certificate of stock
a. Nature of the certificate
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. (Boyer Roxas vs. CA)
A certificate of stock is a written instrument signed
by the proper officer of a corporation stating or
acknowledging that the person named in the
document is the owner of a designated number of
shares of its stock. It is prima facie evidence that the
holder is a shareholder of a corporation.
b. Uncertificated shares
c. Negotiability; requirements for valid transfer of
stocks
Requisites for a valid transfer of stocks
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.
 “When the time is right, I, the Lord will make it happen.”
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 date of the transfer, the
number of the certificate or certificates, and
the number of shares transferred.
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the
books of the corporation.
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.
What is the effect of the transfer is not recorded in
the books of the Corporation?
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 a 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 nor be voted for, and
will not be entitled to dividends, and so far as the
assigned shares are concern.
Surrender of old certificate of stock
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 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)
If the question in the bar is, is the surrender of the
stock certificate of the seller stockholder required
to transfer the shares in the book of the corporation,
the answer is No. To require the surrender is to
impose a condition not required by the law. The law
only requires delivery, indorsement, and payment of
tax.
If the question is, can the stock certificate of the
seller be canceled and a new one be issued to the
Final Notes in Commercia Law for the 2022 Bar| 65 of 89
buyer without surrender of the old certificate, the
answer is No.
d. Issuance
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 mere inclusion as shareholder in the General
Information Sheet of Corporation is not sufficient
proof that one is a shareholder of such Corporation.
This stock certificate, once issued, is a continuing
affirmation or representation that the stock
described therein is valid and genuine and is at least
prima facie evidence that it was legally issued in the
absence of evidence to the contrary.
e. Lost or destroyed certificates
Read codal
3. Disposition and encumbrance of shares
a. Sale of shares
As personal property, shares of stock may be
transferred, either through sale, donation or
succession, or encumbered or otherwise be subject to
a security interest.
When is the sale of shares perfected?
Sale of share is perfected not upon the 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.
Is the consent of the corporation necessary or
required in case of sale of unpaid shares?
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 to 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.
 “When the time is right, I, the Lord will make it happen.”
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. An 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.
b. Allowable restrictions on the sale of shares
May the corporation impose restrictions on the
transfer of shares?
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.
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 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, the
existing stockholders or the corporation fails
to exercise the option to purchase, the
transferring stockholder may sell their
shares to any third person.
As a rule, a stockholder has an absolute right to
transfer, convey, assign, sell, or dispose of his shares.
He may freely sell his shares in a corporation to any
party without having to offer the same to the
corporation or to his stockholders, unless a right of
first refusal is granted in favor of stockholders and
Final Notes in Commercia Law for the 2022 Bar| 66 of 89
such right is embodied in the articles of
incorporation, bylaws, and stock certificate.
Note that third persons being transferees of shares
are not bound by the articles of incorporation and
bylaws of a corporation. As such, they can only be
bound by the right of refusal if incorporated in the
stock certificate.
c. Requisites of a valid transfer
d. Involuntary dealings
G. Dissolution and liquidation
Dissolution – extinguishment or cancellation of the
corporate franchise and the termination of its
corporate existence for business purposes.
Consequences of dissolution
✓ Corporation retains no juridical personality
to conduct its business, seem for those
directed towards corporate liquidation.
✓ The Corporation ceases to be a body
corporate for the purpose of continuing the
business for which it was organized. But it
shall 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.
✓ Dissolution = termination of juridical
personality. Any new business in which the
dissolved corporation would engage in,
other than those for the purpose of
liquidation, is a void transaction because of
the non-existence of the corporate party.
It is in the liquidation process that we return back to
the stockholders or the members their contributive
shares. It is in the dissolution process wherein we put
an end to the corporate existence.
The BOD is not rendered functus officio by its
dissolution. In fact, Sec. 122 authorizes the dissolved
corporation’s BOD to conduct its liquidation within
3 years from its dissolution. Jurisprudence has even
 “When the time is right, I, the Lord will make it happen.”
recognized the board’s authority to act as trustee for
persons in interest beyond the said 3-year period.
After dissolution, there is still a winding up process.
The BOD, if a separate trustee is not appointed,
would become the trustee of the corporation.
1. Modes of dissolution
A corporation formed or organized under the
provisions of this Code may be dissolved
voluntarily (initiated by the corporation, i.e. merger
and consolidation) or involuntarily (it is against the
will of the corporation or initiated by an aggrieved
party or the SEC.)
a. Voluntary and involuntary dissolution
SEC. 134. VOLUNTARY DISSOLUTION WHERE
NO CREDITORS ARE AFFECTED.
If dissolution of a corporation does not prejudice the rights
of any creditor having a claim against it, the
dissolution may be effected by 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 at a meeting to be
held upon the call of the directors or trustees.
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 this Code and shall state
that the purpose of the meeting is to vote on the
dissolution of the corporation.
A verified request for dissolution shall be filed
with the Commission 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
Final Notes in Commercia Law for the 2022 Bar| 67 of 89
e) Details of publication.
The corporation shall submit the following to the
Commission: (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.
Within fifteen (15) days from receipt of the verified
request for dissolution, and in the absence of any
withdrawal within said period, the Commission
shall approve the request and issue the certificate of
dissolution. The dissolution shall take effect only
upon the issuance by the Commission of a certificate
of dissolution.
No application for dissolution of banks, banking and
quasi-banking institutions, preneed, insurance and
trust companies, NSSLAs, pawnshops, and other
financial intermediaries shall be approved by the
Commission unless accompanied by a favorable
recommendation of the appropriate government
agency.
SEC. 135. VOLUNTARY DISSOLUTION WHERE
CREDITORS ARE AFFECTED; PROCEDURE
AND CONTENTS OF PETITION.
Where the dissolution of a corporation may prejudice the
rights of any creditor, a verified petition for
dissolution shall be filed with the Commission. The
petition shall 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. The
corporation shall submit to the Commission the
following: (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; and (2) a list of all its
creditors.
 “When the time is right, I, the Lord will make it happen.”
If the petition is sufficient in form and substance, the
Commission shall, by an order reciting the purpose
of the petition, fix a deadline for filing objections to
the petition which date shall not be less than thirty
(30) days nor more than sixty (60) days after the
entry of the order. Before such date, a copy of the
order shall be published at least once a week for
three (3) consecutive weeks in a newspaper of
general circulation published in the municipality or
city where the principal office of the corporation is
situated, or if there be no such newspaper, then in a
newspaper of general circulation in the Philippines,
and a similar copy shall be posted for three (3)
consecutive weeks in three (3) public places in such
municipality or city.
Upon five (5) days’ notice, given after the date on
which the right to file objections as fixed in the order
has expired, the Commission shall proceed to hear
the petition 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 dissolution shall take effect only upon the
issuance by the Commission of a certificate of
dissolution.
SEC. 136. DISSOLUTION BY SHORTENING
CORPORATE TERM.
A voluntary dissolution may be effected by
amending the articles of incorporation to shorten
the corporate term pursuant to the provisions of this
Code. A copy of the amended articles of
incorporation shall be submitted to the Commission
in accordance with this Code.
Upon the expiration of the shortened term, as stated
in the approved amended articles of incorporation,
the corporation shall be deemed dissolved without
any further proceedings, subject to the provisions of
this Code on liquidation.
In the case of expiration of corporate term,
dissolution shall automatically take effect on the
day following the last day of the corporate term
stated in the articles of incorporation, without the
need for the issuance by the Commission of a
certificate of dissolution.
Final Notes in Commercia Law for the 2022 Bar| 68 of 89
SEC. 138. INVOLUNTARY DISSOLUTION
A corporation may be dissolved by the Commission
motu proprio or upon filing of a verified complaint
by any interested party.
The following may be grounds for dissolution of
the corporation:
1) Non-use of corporate charter as provided
under Section 21 of this Code;
2) Continuous inoperation of a corporation as
provided under Section 21 of this Code;
3) Upon receipt of a lawful court order
dissolving the corporation;
4) Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
5) Upon finding by final judgment that the
corporation:
a. 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;
b. Committed or aided in the
commission of securities violations,
smuggling, tax evasion, money
laundering, or graft and corrupt
practices, and its stockholders
knew; and
c. 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 Commission
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,
 “When the time is right, I, the Lord will make it happen.”
and to the application of other penalty or sanction
under this Code or other laws.
The Commission shall give reasonable notice to, and
coordinate with, the appropriate regulatory agency
prior to the involuntary dissolution of companies
under their special regulatory jurisdiction.
2. Methods of liquidation
SEC. 139. CORPORATE LIQUIDATION.
Every corporation whose 1charter expires pursuant
to its articles of incorporation, is 2annulled by
forfeiture, or whose 3corporate 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.
At any time during said three (3) years, the
corporation is authorized and empowered to
convey all of its property to trustees 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
trustees, and the beneficial interest in the
stockholders, members, creditors or other persons-
in-interest.
Except as otherwise provided for in Sections 93 and
94 of this Code, upon the winding up of corporate
affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot
be found shall be escheated in favor of the national
government.
Except by decrease of capital stock and as otherwise
allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful
dissolution and after payment of all its debts and
liabilities.
Do liquidation and winding up of affairs of the
corporation automatically follow the dissolution of
the corporation?
Final Notes in Commercia Law for the 2022 Bar| 69 of 89
Generally, when you dissolve a corporation, the next
step is to wind up and settle the affairs of the
corporation. The SC said liquidation is not always
the necessary consequence of dissolution if winding
up is the activity of the dissolve corporation that
does not intend to incorporate anew. Especially if
there was a mistake/inadvertence that led to the
dissolution of the corporation, like there is a fixed
term and the corporate secretary failed to extend the
term of the corporation. There is an intention to wind
up but there is intention to incorporate anew. It is not
unlawful for the old Board to negotiate and transfer
the assets of the dissolved corporation to a new
corporation that they intend to create.
Can a property of a corporation be sold after
dissolution?
If the sale is an incident of dissolution, yes. If the sale
is for the purpose of generating funds to pay off the
creditors, then it is valid. But if the sale is for the
purpose of continuing the business of the
corporation, that sale is invalid.
May a corporation be allowed to dispose of its
remaining assets after 3 years from the time of
dissolution?
Yes. A Corporation may still dispose of its asset
despite the lapse of the 3-year period for liquidation
of assets provided under Section 139 of the RCC.
Because the purpose of selling the property is to
generate cash and pay off the creditors and then
distribute the remaining assets to the stockholders, if
any.
Can an appeal be taken on a decision adverse to the
corporation after 3 years from dissolution?
Yes. If a case was filed during the lifetime of the
corporation or against the corporation during its
lifetime, or even during the 3-year liquidation
period, and judgement is rendered only after the 3-
year liquidation period, then the appeal may still be
taken. This is in accordance with Sec. 184. An appeal
is a remedy in favor of a corporation which shall not
be impaired or removed due to dissolution.
As long as the case was filed during the lifetime of
the corporation or during the 3-year liquidation
period but concluded only after such 3-year period,
an appeal may be taken therefrom regardless of the
time such appeal is taken.
 “When the time is right, I, the Lord will make it happen.”
What if it is an action filed beyond the 3-year
period for liquidation?
In the case of Alabang Hills Development v. Alabang
Hills Association, the SC said that the corporation has
no more legal capacity to sue because it no longer
possesses legal personality 3 years after dissolution.
Hence, the action cannot prosper.
H. Other corporations
1. Close corporations
A close corporation, within the meaning of this
Code, 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 (1) 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 another corporation
which is not a close corporation within the meaning
of this Code.
Any corporation may be incorporated as a close
corporation, except:
▪ mining or oil companies,
▪ stock exchanges,
▪ banks,
▪ insurance companies,
▪ public utilities,
▪ educational institutions and
▪ corporations declared to be vested with
public interest in accordance with the
provisions of this Code.
Section 96. Articles of Incorporation.
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The articles of incorporation of a close corporation
may provide that the business of the corporation
shall be managed by the stockholders of the
corporation rather than by a board of directors. So
long as this provision continues in effect, no meeting
of stockholders need be called to elect directors:
Provided, That the stockholders of the corporation
shall be deemed to be directors for the purpose of
applying the provisions of this Code, unless the
context clearly requires otherwise: Provided further,
That the stockholders of the corporation shall be
subject to all liabilities of directors.
The articles of incorporation may likewise provide
that all officers or employees or that specified officers
or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
Section 97. Validity of restrictions on transfer of
shares
1. 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.
2. Said restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares of
the transferring stockholder with such
reasonable terms, conditions or period stated.
3. If upon the expiration of 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.
Section 98. Effects if issuance or transfer of stock
in breach of qualifying conditions.
a. If a stock of a close corporation is issued or
transferred to any person who is not eligible to
be a holder thereof under any provision of the
articles of incorporation, and if the certificate for
such stock conspicuously shows the
qualifications of the persons entitled to be
holders of record thereof, such person is
conclusively presumed to have notice of the fact
of the ineligibility to be a stockholder.
b. If the articles of incorporation of a close
corporation states the number of persons, not
 “When the time is right, I, the Lord will make it happen.”

exceeding twenty (20), who are entitled to be of corporate debts, unless the articles of
stockholders of record, and if the certificate for incorporation provide otherwise.
such stock conspicuously states such number,
and the issuance or transfer of stock to any
STOCK CLOSE
person would cause the stock to be held by more
CORPORATION CORPORATION
than such number of persons, the person to
whom such stock is issued of transferred is
Pre-emptive right in an Pre-emptive right in a
conclusively presumed to have notice of this fact.
ordinary Corporation close corporation shall
does not extend to extend to all stock to be
c. If a stock certificate of a close corporation
issuance of shares in issued, including
conspicuously shows a restriction on transfer of
exchange for property reissuance of Treasury
the corporation’s stock and the transferee
given for a corporate shares, whether for
acquires the stock in violation of such restriction,
purpose or in payment money, property or
the transferee is conclusively presumed to have
of debt made in good personal services, or in
notice of the fact that the stock was acquired in
faith, if approved by the payment of corporate
violation of the restriction.
stockholders, debts, unless the
representing at least articles of
d. Whenever a person to whom stock of a close
2/3 of the outstanding Incorporation provides
corporation has been issued or transferred has or
capital stock. otherwise.
is conclusively presumed under this section to
have notice of: (1) the person's ineligibility to be
a stockholder of the corporation; or (2) that the Section 103. Deadlocks.
transfer of stock would cause the stock of the
corporation to be held by more than the number
Notwithstanding any contrary provision in the close
of persons permitted under its articles of
corporation's articles of incorporation, bylaws, or
incorporation ; or (3) that the transfer violates a
stockholders' agreement, if the directors or
restriction on transfer of stock, the corporation
stockholders are so divided on the management of
may, at its option, refuse to register the transfer
the corporation's business and affairs that the votes
in the name of the transferee.
required for a corporate action cannot be obtained,
with the consequence that the business and affairs
e. The provisions of subsection (d) shall not be
that the votes required for that the business of the
applicable if the transfer of stock, though
corporation can no longer be conducted to the
contrary to subsections (a), (b) or (c), has been
advantage of the stockholders generally, the
consented to by all stockholders of the close
Commission, upon written petition by any
corporation, or if the close corporation has
stockholder, shall have the power to arbitrate the
amended its articles of incorporation in
dispute.
accordance with this Title.
In the exercise of such power, the Commission shall
f. The term "transfer", as used in this section, is not
have authority to make appropriate orders, such as:
limited to a transfer for value.
a) cancelling or altering any provision
g. The provisions of this section shall not impair
contained in the articles of incorporation,
any right which the transferee may have to either
bylaws, or any stockholder’s agreement;
rescind the transfer or recover the stock under
any express or implied warranty. b) cancelling, altering or enjoining a resolution
or act of the corporation or its board of
Section 101. Preemptive right in close directors, stockholders, or officers;
corporations.
c) directing or prohibiting any act of the
The preemptive right of stockholders in close corporation or its board of directors,
corporations shall extend to all stock to be issued, stockholders, officers, or other persons party
including reissuance of treasury shares, whether for to the action;
money, property or personal services, or in payment

Final Notes in Commercia Law for the 2022 Bar| 71 of 89

 “When the time is right, I, the Lord will make it happen.”

d) requiring the purchase at their fair value of income is used to carry out the purposes set
shares of any stockholder, either by the forth in the AOI and is not distributed to its
corporation regardless of the availability of incorporators, members, trustees, or officers.
unrestricted retained earnings in its books,
or by the other stockholders; (redeemable Section 87. Purposes.
shares - XPN to deadlocks)
Nonstock corporations may be formed or organized
e) appointing a provisional director;
for: (C3REPS3FLA)
f) dissolving the corporation; or ✓ charitable,
✓ religious,
g) granting such other relief as the
✓ educational,
circumstances may warrant.
✓ professional,
✓ cultural,
2. Non-stock corporations ✓ fraternal,
✓ literary,
A Nonstock Corporation is one where no part of its ✓ scientific,
income is distributable as dividends to its members, ✓ social,
trustees, or officers: ✓ civic service, or
✓ similar purposes like trade industry,
✓ Provided, any profit which a nonstock agricultural and like chambers, or
corporation may obtain incidental to its ✓ any combination thereof
operations shall, whenever necessary or
proper, be used for the furtherance of the
Section 88. Right to vote.
purpose or purposes for which the
corporation was organized, subject to the
provisions of this Title. The right of the members of any class or classes to
vote may be limited, broadened, or denied to the
The provisions governing the stock corporations, extent specified in the articles of incorporation or the
when pertinent, shall be applicable to nonstock bylaws.
corporations except as may be covered by specific
provisions of this Title. Unless so limited, broadened, or denied, each
member, regardless of class, shall be entitled to one
Most common characteristics of a non- stock (1) vote.
corporation
Unless otherwise provided in the articles of
▪ Any profit derived by it cannot be incorporation or the bylaws, a member may vote by
distributed as dividends to its members. proxy, in accordance with the provisions of this
Code. The bylaws may likewise authorize voting
▪ It may not lawfully engage in any business through remote communication and/or in absentia.
activity for profit.
STOCK NON-STOCK
▪ When incidental to the objects and purposes CORPORATION CORPORATION
of the Corporation and without the end of
making profits to be distributed to the The statutory right to No cumulative voting
members, it may engage in certain economic resort to cumulative unless allowed by the
activities stated in its AOI. voting. articles of incorporation
or bylaws.
▪ Do not issue stock and distribute dividends
to their members. Only preferred and Right to vote may be
redeemable shares can limited, broaden or
▪ The mere fact that a non-stock corporation
be denied the right to denied by the articles of
may earn profit does not make it a profit-
vote.
making Corporation where such profit or

Final Notes in Commercia Law for the 2022 Bar| 72 of 89

 “When the time is right, I, the Lord will make it happen.”
incorporation or
bylaws.
Regional or district Regional or district
voting of directors is voting of trustees is
not allowed. allowed.
Section 91. Election and term of trustees.
The number of trustees shall be fixed in the articles
of incorporation or bylaw which may or may not be
more than fifteen (15).
They shall hold office for not more than three (3)
years until their successors are elected and qualified.
Trustees elected to fill vacancies occurring before the
expiration of a particular term shall hold office for
the unexpired period.
Except with respect to independent trustees of
nonstock corporations vested with public interest,
only a member of the corporation shall be elected
as trustee.
Unless otherwise provided in the articles of
incorporation or the bylaws, the members may
directly elect officers of a nonstock corporation.
3. Foreign corporations
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.
It shall have the right to transact business in the
Philippines after obtaining a license for that purpose
in accordance with this Code and certificate of
authority from the appropriate government agency.
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.
a. What constitutes “doing business”
a) Soliciting orders, service contracts.
Final Notes in Commercia Law for the 2022 Bar| 73 of 89
b) Opening offices, whether called "liaison" offices
or branches.
c) Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a period or
periods totaling 180 days or more.
d) Participating in the management, supervision or
control of any domestic business, firm, entity or
corporation in the Philippines.
e) 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. (Sec. 3[d], FIA)
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. When a single
act or transaction of a foreign corporation is not
merely incidental or casual, but is of such character
as distinctly to indicate a purpose on the part of the
Foreign Corporation to do other business in the state,
such act will be considered as constituting doing
business.
What activities are specifically excluded under FIA
as doing business?
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;
 “When the time is right, I, the Lord will make it happen.”
e) Maintaining a stock of goods in the
Philipines solely for the purpose of having
the same processed by another entity in the
Philippine;
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
b. Necessity of a license to do business
Upon issuance of the license, such foreign
corporation may commence to transact business in
the Philippines and continue to do so for as long as it
retains its authority to act as a corporation under the
laws of the country or State of its incorporation,
unless such license is sooner surrendered, revoked,
suspended, or annulled in accordance with this Code
or other special laws.
What is the legal consequence if a foreign
corporation transacts business in the Philippines
without the corresponding license from the SEC?
No foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such
corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine
laws.
In other words, a foreign corporation doing
business in the country, without a license, cannot
sue but can be sued.
The lack of license is not a defense if the foreign
corporation is the one being sued. But the lack of
license prevents access to Philippine courts or
tribunals. What will confer legal capacity to the
foreign corporation to sue in the Philippines is the
license to do business, or when suing on a causal or
isolated transaction.
Final Notes in Commercia Law for the 2022 Bar| 74 of 89
What is the primary purpose of the license
requirement for a foreign corporation?
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. v. Design
International Selections, Inc.)
c. Requisites for issuance of a license
Read codal
d. Resident agent
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
be likewise be of sound financial standing and must
show proof that it is in good standing as certified by
the Commission.
Removal of the resident agent and failure to appoint
a replacement can be a ground for revocation or
suspension of its license to do business.
e. Personality to sue and suability
No foreign corporation transacting business in the
Philippines without a license, or its successor or
assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such
corporation may be sued or proceeded against before
the Philippine courts or administrative tribunals on
any valid cause of action recognized under
Philippine laws.
What are the principles governing the right to sue
and suability of foreign corporations?
 “When the time is right, I, the Lord will make it happen.”
i. If a foreign corporation does business in the
Philippines without a license, it cannot sue
before the Philippine courts;
ii. 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 merely
independent of any business transaction;
and
iii. If a foreign corporation does business in the
Philippines with the required license, it can
sue before Philippine courts on any
transaction.
Subsequent Compliance (securing license) will cure
the lack of capacity to sue at the time of the execution
of the contract (Home Insurance Company v. Eastern
Shipping Lines)
What are the instances when an unlicensed foreign
corporation may be allowed to sue?
1. If the Foreign Corporation is suing on a
casual or isolated transaction
2. Action to protect the good name, goodwill
and reputation of a foreign Corporation.
3. Where the contract provides the Philippine
Court as the exclusive venue for court action
to the exclusion of other courts.
4. A license to engage in business granted
subsequent to the transaction enables the
Foreign Corporation to sue on contracts
executed before grant of license.
5. When the unlicensed foreign corporation
has domestic Corporation as a Co-plaintiff
or petitioner.
6. Under the doctrine of estoppel, when the
counterparty is estopped or precluded from
questioning the lack of legal capacity of the
foreign Corporation.
4. One-person corporations
A One Person Corporation is a corporation with a
single stockholder. Only a natural person, trust, or
an estate may form a One Person Corporation.
Final Notes in Commercia Law for the 2022 Bar| 75 of 89
Who may not incorporate as One Person
Corporations?
▪ Banks and quasi-banks,
▪ preneed,
▪ trust,
▪ insurance,
▪ public and publicly-listed companies, and
▪ non-chartered GOCCs.
A natural person who is licensed to exercise a
profession may not organize as a One Person
Corporation for the purpose of exercising such
profession except as otherwise provided under
special laws.
May a foreign natural person organize a OPC?
Yes. The only requirement under the RCC is that he
or she must be of legal age. There is no provision on
any nationality requirement.
Characteristics of OPC
✓ Has a single stockholder.
✓ 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. (Sec. 117)
✓ The One Person Corporation is not required
to submit and file corporate bylaws. (Sec.
119)
✓ Required to indicate the letters “OPC” either
below or at the end of its corporate name.
(Sec. 120)
✓ The single stockholder shall be the sole
director and president of the OPC. (Sec. 121)
✓ 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 Commission in such a
sum as may be required. (Sec. 122)
✓ The single stockholder is required to
designate a nominee and an alternative
nominee, who shall, in the event of the single
stockholder’s death or incapacity, take the
place of the single stockholder as director
 “When the time is right, I, the Lord will make it happen.”

and shall manage the corporation's affairs. by the courts. Evidence

(Sec. 124)
✓ A sole shareholder claiming limited liability
has the burden of affirmatively showing that
the corporation was adequately financed.
Where the single stockholder cannot prove
that the property of the One Person
Corporation is independent of the
stockholder's personal property, the
stockholder shall be jointly and severally
liable for the debts and other liabilities of the
One Person Corporation. (Sec. 130)
✓ The principles of piercing the corporate veil
applies with equal force to One Person
Corporations as with other corporations.
I. Mergers and consolidations
1. Concept
of such merger must be
formally offered.
The parties to a merger or consolidation are called
constituent corporations.
In both cases, there is no liquidation of the assets
of the dissolved corporations and the surviving or
consolidated corporation acquires all of their
properties, rights, and franchises and their
stockholders usually become its stockholders.
The surviving or consolidated corporation
assumes automatically the liabilities of the
dissolved corporations regardless of whether the
creditors have consented or not to such merger or
consolidation.

What is a merger? MERGER ASSET SALE

A merger is the absorption of one or more The constituent Both the seller
corporations by another existing corporation, which corporations cease to corporation and buyer
retains its identity and takes over the rights, exist except the corporation continue to
privileges, franchises, properties, claims, liabilities surviving corporation exist. The seller
and obligations of the absorbed corporation(s). The which retains its corporation is not
surviving corporation continues its existence while corporate identity but dissolved even though
the life or lives of the other corporation(s) are acquires all the rights it may not have any
terminated. (Bank of Commerce v. RPN) and liabilities of the asset left.
acquired
What is consolidation? corporation/s.

Consolidation is the union of two or more existing The surviving The buyer, as a general
corporations to form a new corporation called the corporation assumes all rule, does not assume
consolidated corporation. It is a combination by the liabilities of the the liabilities of the
agreement between two or more corporations by absorbed corporation. seller.
which theirs rights, franchises, and property are
united and become those of a single, new
What is meant by de facto merger?
corporation, composed generally, although not
necessarily, of the stockholders of the original
De facto merger means that a corporation called the
corporations.
acquiring corporation acquired the assets and
liabilities of another corporation in exchange for an
MERGER CONSOLIDATION equivalent value of shares of stock of the acquiring
corporation making the other corporation a
All constituents except All the constituents are stockholder of the acquiring corporation. (Bank of
the surviving dissolved and absorbed Commerce v. Radio Philippines Network, Inc)
corporation are by the new
dissolved. Consolidated 2. Effects and limitations
Enterprise.
The merger of two
corporations cannot be Sec. 78. Effectivity of merger or consolidation.
taken judicial notice of

Final Notes in Commercia Law for the 2022 Bar| 76 of 89

 “When the time is right, I, the Lord will make it happen.”
The merger, however, does not become effective
upon the mere agreement of the constituent
corporations. Since a merger or consolidation
involves fundamental changes in the corporations as
well as in the rights of stockholders and creditors,
there must be an express provision of law
authorizing them.
For a valid merger or consolidation, the approval
by SEC of the articles of merger or consolidation is
required.
If the Commission is satisfied that the merger or
consolidation of the corporations concerned is
consistent with the provisions of this Code and
existing laws, it shall issue a certificate approving the
articles and plan of merger or of consolidation, at
which time the merger or consolidation shall be
effective.
If, upon investigation, the Commission has reason to
believe that the proposed merger or consolidation is
contrary to or inconsistent with the provisions of this
Code or existing laws:
It shall set a hearing to give the corporations
concerned the opportunity to be heard.
Written notice of the date, time, and place of hearing
shall be given to each constituent corporation at least
two (2) weeks before said hearing. The Commission
shall thereafter proceed as provided in this Code.
Sec. 79. 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 this Code;
d) The surviving or the consolidated corporation
shall possess all the rights, privileges,
Final Notes in Commercia Law for the 2022 Bar| 77 of 89
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 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; and
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 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.
ANTI-MONEY LAUNDERING ACT
COVERED INSTITUTIONS
1. Supervised or regulated by the Bangko
Sentral ng Pilipinas;
2. Supervised or regulated by the Insurance
Commission;
3. Supervised or regulated by the Securities
and Exchange Commission;
4. Jewelry dealers who deal with precious
metals, and precious stones for transactions
in excess of One Million Pesos
(P1,000,000.00);
5. Company service providers which, as a
business, provide any of the following
services to third parties:
a. Acting as a formation agent of
juridical persons;
b. Acting as (or arranging for another
person to act as) a director or
corporate secretary of a company, a
partner of a partnership, or a similar
 “When the time is right, I, the Lord will make it happen.”

position in relation to other juridical WHEN IS MONEY LAUNDERING COMMITTED

persons;
Money laundering is a crime whereby the proceeds
c. Providing a registered office,
of an unlawful activity are transacted thereby
business address or
making them appear to have originated from
accommodation, correspondence or
legitimate sources. It is committed by the following:
administrative address for a
company, a partnership or any other Money laundering is committed by any person who,
legal person or arrangement; and knowing that any monetary instrument or property
d. Acting as (or arranging for another represents, involves, or relates to the proceeds of any
person to act as) a nominee unlawful activity:
shareholder for another person; and
a) transacts said monetary instrument or
6. Persons who provide for any of the property;
following services:
a. Managing of client money, b) converts, transfers, disposes of, moves,
securities, or other assets; acquires, possesses or uses said monetary
instrument or property;
b. Management of bank, savings, or
securities account; c) conceals or disguises the true nature, source,
c. Organization or contribution for the location, disposition, movement or
creation, operation, or management ownership of or rights with respect to said
of companies; and monetary instrument or property;

d. Creation, operation or management d) attempts or conspires to commit money

of juridical persons or laundering offenses referred to in
arrangements, and buying and paragraphs (a), (b) or (c);
selling business entities;
7. Casinos, including internet and ship-based e) aids, abets, assists in or counsels the
casinos with respect to their casino cash commission of the money laundering
transactions related to their gaming offenses referred to in paragraphs (a), (b) or
operations. (c) above; and

Notwithstanding the foregoing, the term ‘covered f) performs or fails to perform any act as a
persons’ shall exclude lawyers and accountants result of which he facilitates the offense of
acting as independent legal professionals in money laundering referred to in paragraphs
relation to information concerning their clients or (a), (b) or (c) above.
where disclosure of information would compromise
Money laundering is also committed by any covered
client confidences or the attorney-client relationship:
person who, knowing that a covered or suspicious
Provided, That these lawyers and accountants are
transaction is required under this Act to be reported
authorized to practice in the Philippines and shall
to the Anti-Money Laundering Council (AMLC),
continue to be subject to the provisions of their
fails to do so.
respective codes of conduct and/or professional
responsibility or any of its amendments.
AUTHORITY TO INQUIRE INTO BANK
DEPOSITS
Illustration: You are a lawyer and your client
confessed that he is guilty of money laundering – are
The AMLC may inquire into or examine any
you required to disclose the information? NO. Because of
particular deposit or investment, including related
privilege communication rule. Non-reporting of
accounts, with any banking institution or non-bank
money laundering is not a crime for lawyers acting
financial institution upon order of any competent
as independent legal counselors.

Final Notes in Commercia Law for the 2022 Bar| 78 of 89

 “When the time is right, I, the Lord will make it happen.”
court. Nonetheless, the AMLC needs a ban inquiry
order to inquire into deposits.
The Bank Inquiry order allows the AMLC to inquire
and look into bank deposits regardless of the
currency. It will not matter if that is an “and/or”
deposit or trust funds nor if RA 8791 or RA 1405 will
apply.
May the AMLC examine the bank accounts of the
accused-public officials even without seeking a
prior court order?
The AMLC cannot examine the bank accounts of the
accused-public officials without seeking a prior court
order. Under the Anti-Money Laundering law, the
AMLC needs to obtain a bank inquiry order from the
Court of Appeals to inquire into funds and deposits
if there is probable cause they relate to unlawful
activity under AMLA. Bank inquiry order is not
necessary only if the predicate crime is any of
hijacking, kidnapping, terrorism, murder, arson and
violation of the Dangerous Drugs Law (Section 11 of
RA 9160, as amended). Here, the predicate crime,
graft and corrupt practice act, does not fall within the
exception.
Is the authority of the AMLC to undertake an
inquiry into certain bank accounts or deposits
arbitrary and as such, unconstitutional?
No. Taking into account Section 11 of the AMLA, the
Court found nothing arbitrary in the allowance and
authorization to AMLC to undertake an inquiry into
certain bank accounts or deposits. Instead, the Court
found that it provides safeguards before a bank
inquiry order is issued, ensuring adherence to the
general state policy of preserving the absolutely
confidential nature of Philippine bank accounts:
a) The AMLC is required to establish probable
cause as basis for its ex- parte application for
bank inquiry order;
b) The CA, independent of the AMLC's
demonstration of probable cause, itself
makes a finding of probable cause that the
deposits or investments are related to an
unlawful activity under Section 3(i) or a
money laundering offense under Section 4 of
the AMLA;
Final Notes in Commercia Law for the 2022 Bar| 79 of 89
✓ Thus, the ex parte issuance of bank
inquiry order does not violate the
due process clause.
c) A bank inquiry court order ex-parte for
related accounts is preceded by a bank
inquiry court order ex-parte for the principal
account which court order ex-parte for
related accounts is separately based on
probable cause that such related account is
materially linked to the principal account
inquired into; and the authority to inquire
into or examine the main or principal
account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the Constitution.
APPLICATION FOR A FREEZE ORDER
The authority to freeze deposits is lodged with and
based upon the order of the Court of Appeals.
Freeze order may be issued upon ex parte
application of the AMLC and after determination
that probable cause exists that any monetary
instrument or property is in any way related to an
unlawful activity as defined in Sec. 3(i) of AMLA.
The Freeze Order shall be effective immediately for
a period of 20 days. The CA shall conduct a summary
hearing within the period to determine whether to
modify, lift or extend the period. The total period of
the Freeze Order shall not exceed six (6) months.
Once the six months has lapsed, the freeze order is
deemed ipso facto lifted.
WHAT IS THE MEANING OF SAFE HARBOR
PROVISION UNDER AMLA?
No administrative, criminal or civil proceedings
shall lie against any person for having made a
covered transaction or suspicious transaction report
in the regular performance of his duties and in good
faith, whether or not such reporting results in any
criminal prosecution under the AMLA or any other
Philippine law.
E-COMMERCE LAW
What is an Electronic document?
 “When the time is right, I, the Lord will make it happen.”

It refers to information or the representation of
information, data, figures, symbols or other modes
of written expression, described or however
represented, by which a right is established or an
obligation extinguished, or by which a fact may be
proved and affirmed, which is received, recorded,
transmitted, stored, processed, retrieved or
produced electronically. It includes digitally signed
documents and any print-out or output, readable by
sight or other means, which accurately reflects the
electronic data message or electronic document. For
purposes of these Rules, the term "electronic
document" may be used interchangeably with
"electronic data message".
Electronic documents are the functional
equivalents of paper-based documents
Since an electronic document is the functional
equivalent of a paper-based document, whenever a
rule of evidence makes reference to the terms of a
writing, document, record instrument,
memorandum or any other form of writing, such
terms are deemed to include electronic documents. It
is, therefore, but logical to consider the rules on
evidence in the Rules of Court, including statutes
containing rules of evidence, to be of suppletory
application to the Rules on Electronic Evidence in all
matters not specifically covered by the latter.
GARCILLANO V. HRET
The publication of the Rules of Procedure in the
website of the Senate, or in pamphlet form available
at the Senate, is not sufficient under the Tañada v.
Tuvera ruling which requires publication either in
the Official Gazette or in a newspaper of general
circulation. The Rules of Procedure even provide
that the rules "shall take effect seven (7) days after
publication in two (2) newspapers of general
circulation," precluding any other form of
publication. Publication in accordance with Tañada
is mandatory to comply with the due process
requirement because the Rules of Procedure put a
person’s liberty at risk. A person who violates the
Rules of Procedure could be arrested and detained
by the Senate.
The invocation by the respondents of the provisions
of R.A. No. 8792, otherwise known as the Electronic
Commerce Act of 2000, to support their claim of
valid publication through the internet is all the more
incorrect. R.A. 8792 considers an electronic data
message or an electronic document as the functional
equivalent of a written document only for
evidentiary purposes. In other words, the law
merely recognizes the admissibility in evidence
(for their being the original) of electronic data
messages and/or electronic documents. It does not
make the internet a medium for publishing laws,
rules and regulations.
Given this discussion, the respondent Senate
Committees, therefore, could not, in violation of the
Constitution, use its unpublished rules in the
legislative inquiry subject of these consolidated
cases. The conduct of inquiries in aid of legislation
by the Senate has to be deferred until it shall have
caused the publication of the rules, because it can do
so only "in accordance with its duly published rules
of procedure."
Is a printout of a facsimile transmission an
electronic data message or electronic document?
NO. The terms “electronic data message” and
“electronic document,” as defined under the
Electronic Commerce Act of 2000, do not include a
facsimile transmission. Accordingly, a facsimile
transmission cannot be considered as electronic
evidence. It is not the functional equivalent of an
original under the Best Evidence Rule and is not
admissible as electronic evidence. (MCC Industrial
Sales Corp. v. Ssangyong Corp.)
ELECTRONIC CONTRACTS ARE VALID
Except as otherwise agreed by the parties, an offer,
the acceptance of an offer and such other elements
required under existing laws for the formation of
contracts may be expressed in, demonstrated and
proved by means of electronic data messages or
electronic documents and no contract shall be denied
validity or enforceability on the sole ground that it is
in the form of an electronic data message or
electronic document, or that any or all of the
elements required under existing laws for the
formation of contracts is expressed, demonstrated
and proved by means of electronic data messages or
electronic documents.
Electronic transactions made through networking
among banks, or linkages thereof with other entities
or networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or

Final Notes in Commercia Law for the 2022 Bar| 80 of 89

 “When the time is right, I, the Lord will make it happen.”
the debit of one account and the corresponding
credit to another, whether such transaction is
initiated by the depositor or by an authorized
collecting party: Provided, that the obligation of one
bank, entity, or person similarly situated to another
arising therefrom shall be considered absolute and
shall not be subjected to the process of preference of
credits.
HSBC V. CIR
Whether or not the electronic messages are considered
transactions pertaining to negotiable instruments that
warrant the payment of DST.
NO.
The Court agrees with the CTA that the DST under
Section 181 of the Tax Code is levied on the
acceptance or payment of “a bill of exchange
purporting to be drawn in a foreign country but
payable in the Philippines” and that “a bill of
exchange is an unconditional order in writing
addressed by one person to another, signed by the
person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to
order or to bearer.”
The Court further agrees with the CTA that the
electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local
or foreign currency accounts in the Philippines and
pay a certain named recipient also residing in the
Philippines is not the transaction contemplated
under Section 181 of the Tax Code as such
instructions are “parallel to an automatic bank
transfer of local funds from a savings account to a
checking account maintained by a depositor in one
bank.” The Court favorably adopts the finding of the
CTA that the electronic messages “cannot be
considered negotiable instruments as they lack the
feature of negotiability, which, is the ability to be
transferred” and that the said electronic messages
are “mere memoranda” of the transaction consisting
of the “actual debiting of the [investor-client-
payor’s] local or foreign currency account in the
Philippines” and “entered as such in the books of
account of the local bank,” HSBC.
The instructions given through electronic messages
that are subjected to DST in these cases are not
negotiable instruments as they do not comply with
Final Notes in Commercia Law for the 2022 Bar| 81 of 89
the requisites of negotiability under Section 1 of the
Negotiable Instruments Law.
The electronic messages are not signed by the
investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional
order to pay a sum certain in money as the payment
is supposed to come from a specific fund or account
of the investor-clients; and, they are not payable to
order or bearer but to a specifically designated third
party. Thus, the electronic messages are not bills of
exchange. As there was no bill of exchange or order
for the payment drawn abroad and made payable
here in the Philippines, there could have been no
acceptance or payment that will trigger the
imposition of the DST under Section 181 of the Tax
Code.
FINANCIAL REHABILITATION AND
INSOLVENCY ACT (FRIA)
NATURE OF PROCEEDINGS
▪ In Rem
▪ Jurisdiction is acquired by publication: 1
newspaper of general circulation in the PH
for 2 consecutive weeks.
WHO IS A DEBTOR UNDER FRIA? [So Pa Co In]
▪ Sole proprietorship registered with DTI;
o It has no separate personality on its
own but it is still considered a
juridical debtor under FRIA.
▪ Partnership registered with SEC; and
o Generally, partnership need not be
registered. However, for you to be
considered under FRIA, partnership
must be registered. Unregistered
partnership is not covered.
▪ Corporation organized and existing under
Philippine laws;
▪ Individual debtor who has become
insolvent.
o Natural person who is a resident
and citizen of the Philippines that
has become insolvent.
 “When the time is right, I, the Lord will make it happen.”
o Individual debtor is different with
sole proprietor with a sole
proprietorship registered with DTI.
Note: Banks, insurance companies, pre-need
companies, and national and local government
agencies or units are not considered debtors under
FRIA.
Government Financial Institutions other than banks
and GOCCs are covered by FRIA unless their charter
provides otherwise.
INSOLVENT
It refers to the financial condition of a debtor where
such debtor:
1. is generally unable to pay its or his liabilities
as they fall due in the ordinary course of
business; or
2. has liabilities that are greater than its or his
assets.
The second one is the traditional definition of
insolvent. So, if your assets are higher than your
liabilities, you are not insolvent.
HOWEVER, under FRIA, it does not matter whether
your assets are higher than your liabilities. If your
assets are not liquid [the first situation], i.e., you have
assets but you do not have cash to pay your liabilities
as they fall due in the ordinary course of business,
you can also be considered insolvent.
REMEDIES AVAILABLE TO INSOLVENT
DEBTORS
1. Suspension of payments
2. Rehabilitation
3. Liquidation
SUSPENSION OF PAYMENTS
It is an action available only for insolvent
individual debtors. It is an action for the insolvent
individual debtor to be declared in the state of
suspension of payments.
An insolvent corporation, for instance, cannot ask for
suspension of payments.
REHABILITATION
Final Notes in Commercia Law for the 2022 Bar| 82 of 89
Rehabilitation refers to the restoration of the debtor
to a condition of successful operation and solvency,
if it is shown that its continuance of operation is
economically feasible and its creditors can recover by
way of the present value of payments projected in
the plan, more if the debtor continues as a going
concern than if it is immediately liquidated.
▪ Illustration: There is a corporation in
financial trouble. If all its creditors will gang
up on that corporation, definitely that
corporation will not survive. Its death may
also cause prejudice even to some creditors
especially the unsecured ones. So what will
happen is we will help the corporation, hindi
muna sya sisingilin. Hopefully, it will
generate income then gaganda na yung
financial condition nya eventually and the
creditors will then be paid.
So essentially, in rehabilitation we find ways and
means to minimize the expenses of the distressed
debtor for the debtor to gradually regain or achieve
a sustainable operating form.
TYPES OF REHABILITATION:
For insolvent juridical debtors:
a. Court-Supervised Rehabilitation
➢ Buong proceedings, sa korte.
b. Pre-Negotiated Rehabilitation
➢ May portion na sa labas ng court,
then after we go to court.
c. Out-of-Court or Informal Restructuring
Agreements or Rehabilitation Plans
➢ Hindi dumadaan sa court.
For insolvent individual debtors:
a. Petition for Suspension of Payments
➢ CSC Ortha: In essence, suspension
of payments is the equivalent of
rehabilitation.
COURT-SUPERVISED REHABILITATION
The whole rehabilitation process is initiated in and
supervised by the court.
1. Voluntary
 “When the time is right, I, the Lord will make it happen.”

• Initiated by debtor itself via verified 4. Prohibit the debtor from making payment of
petition. liabilities outstanding as of the
commencement date.
2. Involuntary
• Meron namang mga pwede kang
• Initiated by creditors (aggregate bayaran as per the court. Example
claim of at least 1 million, or equal to yung mga administrative expenses.
25% of the subscribed capital stock Or yung mga oorderin mong
or partner’s contribution, whichever supplies for your business
is higher) subsequent to the stay order. So
yung mga dati mo ng inorder hindi
• Thus, not all creditors can file. The mo muna pwede bayaran yun,
requirement must be met. suspend muna. Pero pag tapos na
yung suspension order, nasa rehab
COMMENCEMENT ORDER ka na, yan papabayaran na yan.
Otherwise if di mo sila babayrana,
This is only available in a court-supervised wala ng magbebenta sayo.
rehabilitation.
Effects of commencement order:
If the court finds that the Petition for Rehabilitation
is sufficient in form and in substance, then it will 1. Vest the rehabilitation [receiver] with all the
issue a commencement order. It shall contain a powers and functions provided for under
commencement date and a stay or suspension order. the FRIA

Commencement date refers to the date on which the 2. Prohibit or otherwise serve as the legal basis
court issues the Commencement Order, which shall rendering null and void the results of any
be retroactive to the date of filing of the petition for extrajudicial activity or process to seize
voluntary or involuntary proceedings. Since the property, sell encumbered property, or
Commencement Order contains a Suspension Order, otherwise attempt to collection or enforce a
the effectivity of the latter also retroacts to the date claim against the debtor after
of filing of the petition. commencement date

Contents of a Stay or Suspension Order: 3. Serve as the legal basis for rendering null
and void any setoff after the commencement
1. Suspend all actions for the enforcement of date of any debt owed to the debtor by any
claims against the debtor; of the debtor's creditors
• So yung mga foreclosure sale, stop 4. Serve as the legal basis for rendering null
yan. So kahit kasuhan mo yung and void the perfection of any lien against
debtor, whether filed before or after the debtor's property after the
the filing of rehabilitation commencement date;
proceeding, that case will stop.
Hindi naman ididismiss. Suspend 5. Consolidate the resolution of all legal
lang. Thus, a collection case against proceedings by and against the debtor to the
the debtor, for instance, will have to court;
be suspended.
6. Exempt the debtor from liability for taxes
2. Suspend all actions to enforce any judgment, and fees, including penalties, interests and
attachment or other provisional remedies charges thereof due to the national
against the debtor; government or to LGUS.

3. Prohibit the debtor disposing its properties Some of the exceptions to the Stay or Suspension
except in the ordinary course of business; Order:

1. To cases already pending appeal in the

Supreme Court as of commencement date.

Final Notes in Commercia Law for the 2022 Bar| 83 of 89

 “When the time is right, I, the Lord will make it happen.”
• But once the SC ruled and the
decision became final and
executory, hindi mo pa pwede
singilin si insolvent debtor. Pupunta
ka sa rehabilitation court. Your
claim shall now be included under
the claims against the insolvent
debtor.
2. Subject to the discretion of the court, to cases
pending or filed at a specialized court or
quasi-judicial agency which, upon
determination by the court is capable of
resolving the claim more quickly, fairly and
efficiently than the court;
3. To the enforcement of claims against
sureties and other persons solidarily liable
with the debtor;
4. Any criminal action against individual
debtor or owner, partner, director or officer
of a debtor. Except: the enforcement of the
civil liability arising from the offense
charged, deemed instituted with the
criminal action, shall be covered by the Stay
Order.
REHABILITATION RECEIVER
Any qualified natural or juridical person may serve
as a rehabilitation receiver.
Note: If a juridical person, it must designate a natural
person as its representative. Both of them are
solidarily liable.
Grounds for appointment of a rehabilitation
receiver:
1. Necessary to preserve the rights of the
parties-litigants; and/or
2. Protect the interest of the investing public
and creditors.
Duties of a receiver:
▪ Preserving and maximizing the value of the
assets of the debtor during the rehabilitation
proceedings
▪ Determining the viability of the
rehabilitation of the debtor
▪ Preparing Rehabilitation Plan
Final Notes in Commercia Law for the 2022 Bar| 84 of 89
▪ Implementing the approved Rehabilitation
Plan.
Note: A rehabilitation receiver does not take over the
management and control of debtor BUT he may
recommend the appointment of a management
committee.
So, the receiver does not go to the office everyday to
see the daily operations, he does not sign checks,
does not necessarily enter into contracts. In short, he
merely oversees that everything is running
smoothly. He does not manage. However, if he
thinks that the debtor is not being managed
smoothly, then the receiver can recommend to the
court that a management committee be appointed.
The BOD or the management partner will have to
step aside. The management committee will be the
one to manage the juridical debtor.
Grounds for appointment of management
committee:
1. Actual or is imminent danger of dissipation,
loss, wastage or destruction of assets;
2. Paralyzation of business operations may be
prejudicial to the interest of minority
stockholders, parties-litigants or to the
general public;
3. Gross mismanagement of the debtor, fraud
or other wrongful conduct on the part of, or
gross or willful violation of the FRIA.
DETERMINATION OF CLAIMS
▪ Preliminary Registry of Claims
o To be established by the rehabilitation
receiver within twenty (20) days from
his assumption into office.
o So si receiver idedetermine kung sino
sino ba ang creditors, magkano ba ang
claims ng creditors.
o The rehabilitation receiver shall make
the registry available for public
inspection. Para makita ng creditors at
debtor if accurate ba yung nakalagay sa
registry. The period of inspection shall
not exceed 15 days from the last
publication.
▪ Opposition or Challenge of Claims
 “When the time is right, I, the Lord will make it happen.”
o Within 30 days from the expiration of
the period to inspect, the debtor,
creditors, stakeholders and other
interested parties may submit a
challenge to claim/s to the court.
Sasabihin nila, “Judge, hindi totoo yang
nakalagay sa registry of claims. Ang
utang ko lang is ganito. Ang utang nya
talaga sakin is ganito.”
o Upon the expiration of the 30-day
period, the rehabilitation receiver shall
submit to the court the registry of
claims which shall include the list of:
i. Claims that have not been
subject to challenge;
ii. Claims resolved by the
rehabilitation receiver after
these have been challenged; and
iii. Disputed but unresolved
claims.
▪ Appeal
o If you do not agree with the decision of
the court especially with respect to those
disputed but unresolved claims.
REHABILITATION PLAN
Refers to a plan by which the financial well-being
and viability of an insolvent debtor can be restored
using various means as a going concern, or setting-
up of new business entity as prescribed in Section 62
or other similar arrangements as may be approved
by the court or creditors.
In short, ilalatag natin doon how do you intend to
rehabilitate the corporation; how do you intend to
pay your creditors. We will do this and that.
Feasibility of Rehabilitation plan
It is imperative that a thorough examination and
analysis show that there is a real opportunity to
rehabilitate the corporation in view of the
assumptions made and financial goals stated in the
proposed rehabilitation plan.
The court shall allow the corporation to operate as an
on-going concern.
Final Notes in Commercia Law for the 2022 Bar| 85 of 89
Otherwise, the court may convert the proceedings
into one for liquidation.
CREDITOR APPROVAL OF REHABILITATION
PLAN
The rehabilitation receiver shall notify the creditors
and stakeholders that the Plan is ready for their
examination.
Within 20 days from the said notification, the
rehabilitation receiver shall convene the creditors,
either as a whole or per class, for purposes of voting
on the approval of the Plan.
The Plan shall be deemed rejected unless approved
by all classes of creditors whose rights are adversely
modified or affected by the Plan.
✓ Thus, all classes must approve. But it does
not require 100% approval.
The Plan is deemed to have been approved by a class
of creditors if members of the said class holding
more than 50% of the total claims of the said class
vote in favor of the Plan.
✓ So more than 50% lang ang kailangan mo. So
if you have different classes of creditors,
lahat ng classes dapat mag-approve. So for
example, sa isang class nag-approve 51%, sa
other class 70%, as long as it is more than
50% sa lahat ng class. BUT if for example one
class is 40% lang, hindi na agad maa-
approve yung plan mo. Nonetheless, the
rejection of the Plan will not result to the
dismissal of the petition.
Can the court confirm the Rehabilitation Plan
notwithstanding its rejection?
Yes, if all of the following circumstances are present:
a. Rehabilitation Plan complies with the
requirements;
b. Rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
[malaking weight ito]
c. The shareholders, owners or partners of the
juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan;
and
d. The Rehabilitation Plan would likely
provide the objecting class of creditors with
 “When the time is right, I, the Lord will make it happen.”
compensation which has a net present value
greater than that which they would have
received if the debtor were under
liquidation.
Submission of Rehabilitation Plan to the Court
If the Rehabilitation Plan is approved, the
rehabilitation receiver shall submit the same to the
court for confirmation.
Within 5 days from receipt of the Rehabilitation Plan,
the court shall notify the creditors that the
Rehabilitation Plan has been submitted for
confirmation, that any creditor may obtain copies of
the Rehabilitation Plan and that any creditor may file
an objection thereto.
Objections to Rehabilitation Plan
A creditor may file an objection to the Rehabilitation
Plan within 20 days from notice.
Grounds for Objections are limited to the following:
a. The creditors’ support was induced by
fraud;
b. The documents or data relied upon in the
Rehabilitation Plan are materially false or
misleading;
c. The Rehabilitation Plan is in fact not
supported by the voting creditors.
Confirmation of the Rehabilitation Plan
The court shall issue an order confirming the
Rehabilitation Plan in any of the following instances:
a. No objections are filed within the 20-day
period;
b. The court finds the objections lacking in
merit
c. The basis for the objection has been cured;
d. The debtor has complied with an order to
cure the objection.
Effects of Confirmation of Rehabilitation Plan
▪ Once the court confirms the plan, it is now
binding upon the debtor and all persons
who may be affected by it, including the
creditors, whether or not such persons have
participated in the proceedings or opposed
Final Notes in Commercia Law for the 2022 Bar| 86 of 89
the Rehabilitation Plan or whether or not
their claims have been scheduled (Cram
Down Rule);
o So, whatever happens to the
proceedings, you are bound by it.
Alam mo man o hindi. Kahit
nagobject ka pa sa plan. It will still
bind you. It binds everyone because
it is a proceeding in rem.
▪ The debtor shall comply with and carry out
the Plan;
▪ Payment to creditors in accordance with the
Plan;
▪ Contracts and other arrangements continue
to apply to the extent that they do not
conflict with Plan;
▪ Any compromises on amounts or
rescheduling of timing of payments by the
debtor shall be binding on creditors
regardless of whether or not the Plan is
successfully implemented; and
▪ Claims arising after approval of the Plan that
are otherwise not treated by the Plan are not
subject to any Suspension Order.
The court shall have a maximum period of 1 year
from the date of the filing of the petition to confirm a
Rehabilitation Plan. If no Rehabilitation Plan is
confirmed within the said period, the proceedings
may upon motion or motu proprio, be converted into
one for the liquidation of the debtor.
FAILURE OF REHABILITATION
If the termination of proceedings is due to failure of
rehabilitation or dismissal of the petition for reasons
other than technical grounds, the proceedings shall
be immediately converted to liquidation.
PRE-NEGOTIATED REHABILITATION
An action where a rehabilitation plan has already
been preapproved by the insolvent debtor and only
some of the creditors, but its enforcement is still
subject to court supervision.
Here, before going to court, they already have a
rehabilitation plan.
 “When the time is right, I, the Lord will make it happen.”
This is initiated only by the debtor.
The verified petition must be approved by:
a. creditors holding at least 2/3 of the total
liabilities of the debtor,
b. including secured creditors holding more
than 50% of the total secured claims of the
debtor and
c. unsecured creditors holding more than 50%
of the total unsecured claims of the debtor.
In short, both secured and unsecured creditors must
be represented.
Illustration:
o Secured Creditors = P40M (more than 20M
is required)
o Unsecured Creditors = P20M (more than
10M is required)
o Total: P60M (at least 40M is required)
The court shall have a maximum period of 120 days
from the filing of the petition to approve the
Rehabilitation Plan. If the court fails to act within the
said period, the Rehabilitation Plan shall be deemed
approved.
The effect of approval is the same with court-
supervised rehabilitation.
OUT-OF-COURT OR INFORMAL
RESTRUCTURING AGREEMENTS OR
REHABILITATION PLANS
This one is similar to a pre-negotiated rehabilitation
plan, but such plan has been pre-approved by a
larger majority of the debtor’s creditors.
The OCRA should be approved by the:
a. Debtor;
b. Creditors representing at least 67% of the
secured obligations of the debtor;
c. Creditors representing at least 75% of the
unsecured obligations of the debtor; and
d. It must be approved by creditors holding at
least 85% of the total liabilities, secured and
unsecured, of the debtor.
Illustration:
Final Notes in Commercia Law for the 2022 Bar| 87 of 89
o Secured Creditors = P40M (at least 26.8M is
required)
o Unsecured Creditors = P20M (at least 15M
is required)
o Total: P60M (at least 51M is required)
Note: hindi tayo nagbibilang ng dami ng creditors.
Binibilang natin yung amount ng obligation. So kahit
isa ka lang, if nameet mo yung threshold, pasok yan.
STANDSTILL AGREEMENT
An extrajudicial agreement whereby the interested
parties (debtor and creditors) to an OCRA agree on
the terms and conditions under which they will
negotiate and enter into an OCRA.
Here, bago pa kasi mag-OCRA, maguusap muna sila
eh. So magrereach out si debtor kay creditor. So
magooffer si debtor na mag OCRA. So they will
negotiate. But while nagnenegotiate sila, wala
munang gagalaw. Do not file collection suit,
foreclosure, etc.
It is valid if:
a. Approved by creditors representing more
than 50% of the total liabilities of the
debtor;
o We are not yet talking of the ocra
itself ha. This is just the standstill
agreement muna. While we are
talking about coming up with an
agreement [OCRA], let us have
standstill agreement.
b. Notice is published in a newspaper of
general circulation in the Philippines once a
week for 2 consecutive weeks;
c. The standstill period shall not exceed 120
days from the date of effectivity.
Note: The Standstill period shall be effective and
enforceable not only against the contracting parties
but also against other creditors.
Expiration of the Standstill Period
Whichever comes first among the following:
a. Lapse of the 120 days from the effectivity of
the standstill agreement;
b. Effectivity of the ocra; or
 “When the time is right, I, the Lord will make it happen.”

c. Termination of the negotiation for the ocra

as declared by creditors representing more Debtor Creditors
than 50% of the total liabilities of the debtor. initiates initiates

CRAM DOWN RULE VOLUNTARY LIQUIDATION (debtor initiates)

This applies to all types of rehabilitation. ▪ Insolvent juridical debtors - no amount is

required for one to initiate the liquidation.
The Rehabilitation Plan (including pre-negotiated
plans) confirmed by the court shall be binding upon ▪ Insolvent individual debtors - the threshold
the debtor and all persons who may be affected by it, amount of liabilities is 500,000.
including the creditors, whether or not such persons
have participated in the proceedings or opposed the INVOLUNTARY LIQUIDATION (creditor
Rehabilitation Plan or whether or not their claims initiates)
have been scheduled.
▪ Insolvent juridical debtors
It forces the creditors to accept the terms and
conditions of the rehabilitation plan, preferring long- o Initiated by 3 or more creditors
term viability over immediate but incomplete
o The aggregate claim is at least either
recovery.
1M or at least 25% of the subscribed
capital stock or partner's
LIQUIDATION
contributions of the debtor,
whichever is higher.
Liquidation Rehabilitation
o The contents of their petition must
show:
Corporations reserve Corporations have to
their assets in order to maintain their assets ▪ No genuine issue of fact or
sell them. Without these to continue business law on the claims/s;
assets, business operations.
operations are ▪ Due and demandable
effectively discontinued. payments have not been
The proceeds of the sale made for at least 180 days or
are distributed equitably debtor has failed generally
among creditors, and to meet its liabilities as they
surplus is divided, or fall due;
losses are re-allocated.
▪ No substantial likelihood of
Both cannot be undertaken at the same time. rehabilitation.

▪ Insolvent individual debtors – any group of

Types of Liquidation creditors with aggregate claim of at least
500,000.
1. Voluntary
2. Involuntary CONVERSION
3. Conversion
During the pendency of a court-supervised
VOLUNTARY INVOLUNTARY CONVERSION rehabilitation or pre-negotiated rehabilitation, such
rehabilitation proceedings may be converted into
liquidation proceedings.
Both the voluntary and applies only to
involuntary liquidation apply to insolvent Court-supervised rehabilitation may be converted:
both insolvent juridical and juridical
individual debtors. debtors 1. If the debtor acted in bad faith or if there is
no feasibility to cure the defect subject of the
objection, conversion is automatic.

Final Notes in Commercia Law for the 2022 Bar| 88 of 89

 “When the time is right, I, the Lord will make it happen.”

2. No rehabilitation plan is confirmed by the
court within 1 year from the filing of the
motion or action for confirmation,
conversion is automatic.
3. There is breach or failure of rehabilitation
plan, conversion is discretionary if based on
technical grounds.
4. Conversion is automatic if based on non-
technical grounds.
a. waive his security or lien, prove his claim in
the liquidation proceedings and share in the
distribution; or
b. maintain his rights under the security or lien.
DETERMINATION OF CLAIMS
Within 20 days from liquidator’s assumption into
office, he shall prepare a preliminary registry of
claims of secured and unsecured creditors.

Pre-negotiated rehabilitation may be converted:
1. If the debtor acted in bad faith or if there is
no feasibility to cure the defect subject of the
objection, conversion is discretionary.
2. In other cases where the debtor voluntarily
asked for the liquidation pending
rehabilitation.
LIQUIDATION ORDER
This is an order issued by the court upon finding that
liquidation is in order after voluntary, involuntary,
or conversion of rehabilitation into liquidation.
EFFECTS OF THE LIQUIDATION ORDER
1. The juridical debtor shall be deemed
dissolved and its corporate or juridical
existence terminated;
2. 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;
3. All contracts of the debtor shall be deemed
terminated and/or breached, unless the
liquidator, within 90 days declares
otherwise and the contracting party agrees;
4. No separate action for the collection of an
unsecured claim shall be allowed.
He shall make the registry available for public
inspection and provide publication notice to
creditors and debtors concerned.
All claims must be duly proven before being paid.
SUSPENSION OF PAYMENTS
▪ Available to: individual debtor who possess
sufficient property to cover all his debts but
foresees the impossibility of meeting them when
they respectively fall due.
▪ Venue of the petition: Court of the province or
city in which he has resides for 6 months prior to
the filing of his petition.
▪ Contents of the petition:
a. Schedule of debts and liabilities
b. Inventory of assets
c. Proposed agreement with his creditors
▪ The objective of suspension of payments is the
deferment of the payment of debts until such
time as the debtor, which possesses sufficient
property to cover all its debts, is able to convert
such assets into cash or otherwise acquires the
cash necessary to pay its debts.
Here, you go to court and ask the judge na please
wag ka muna magbabayad, bigyan ka ng breathing
space and hopefully you will be able to pay.

5. No foreclosure proceeding shall be allowed

for a period of 180 days.

Rights of secured creditors

The Liquidation Order shall not affect the right of a

secured creditor to enforce his lien in accordance
with the applicable contract or law. A secured
creditor may:

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