Notes Commercial Law and Taxation Law

PARTNERSHIPS

1. Partnership
a. Definition
a. By the contract of partnership:
1. Two or more persons bind themselves to contribute to a common fund:
a. Money
i. Must be legal tender.
ii. Checks, drats, promissory notes, and other mercantile
documents are not money, UNLESS have been cashed.
b. Property
i. Credit or good will may be contributed as property.
ii. Real or personal property, corporeal is also acceptable.
c. Industry
i. Means active cooperation, the work of the party
associated, which may be either personal manual effort
or intellectual, and for which he receives a share in the
profits (not salary) of the business.
2. With the intention of dividing the profits among themselves.
b. Two or more persons may also form a partnership for the exercise of a profession.
c. GR: Any person capacitated to contract may enter into a contract of partnership.

EX: the following persons cannot enter into a contract of partnerhip

a. Person suffering from civil interdiction
b. Minors
c. Insane or demented person
d. Deaf-mutes who do not know how to write
e. Incompetent who are under guardianship
f. Those who are prohibited from giving each other any donation or advantage
cannot enter into a universal partnership.
d. A corporation cannot enter into a partnership in the absence of express authorization by
statute or charter.
e. Void donation
a. Every donation or grant of gratuitous advantage, direct or indirect, between the
spouses during the marriage shall be void. This prohibition also apply to
common law spouses living together as husband and wife without a valid
marriage.
f. Under the Revised Corporation Code (RCC), every corporation incorporated under the
RCC has the power and capacity to enter into a partnership, joint venture, merger,
consolidation, or any other commercial agreement with natural and juridical persons.

There is no prohibition against a partnership being a partner in another partnership.

 g. Rule on After-Acquired Properties. A stipulation for the common enjoyment of any
other profits may also be made. However, the property which the partners may acquire
subsequently by inheritance, legacy or donation cannot be included in such stipulation,
except the fruits thereof.

Only the usufruct over the property of the partners passes to the partnership.
h. Effects when the object is unlawful.
a. Contract is void.
b. Once dissolved by judicial decree
1. Profits shall be confiscated in favor of the state
2. Instruments or tools and proceeds of the crime shall also be forfeited in
favor of the state.
i. Form
a. GR: No required form is necessary.

EX:
a. Where immovable property or real rights are contributed to the
partnership, a public instrument is necessary. Otherwise, the
contract of partnership is void.
b. Every contract of partnership having a capital of 3K or more, in
money or property, shall appear in a public instrument, the
instrument shall be recorded in the Office of the Securities and
Exchange Commission. Failure to comply shall not affect the
liability of the partnership and the members thereof to 3 rd
persons.
b. Mutual Agency
1. All partners shall be considered agents and whatever any one of them
may do alone shall bind the partnership.
2. Every partner is an agent of the partnership for the purpose of its
business, and the act of every partner binds the partnership.
3.
2. Rules in determining partnership.
a. When the intent of the parties is clear, such intent shall govern.
b. When the intent of the parties does not clearly appear, the following rules apply.
a. Persons who are not partners to each other are not partners as to 3 rd persons,
subject to the provisions on partnership by ESTOPPEL.
b. GR: Co-ownership or co-possession does not of itself establish a partnership,
even when there is sharing of profits in the use of the property.

EX: The co-ownership of inherited properties is automatically converted into an

unregistered partnership the moment said common properties and/or income
derived therefrom are used as COMMON FUND WITH INTENT TO PRODUCE
PROFITS FOR THE HEIRS IN PROPORTION TO THEIR RESPECTIVE SHARES IN THE
INHERITANCE AS DETERMINED IN A PROJECT PARTITION.
 c. Sharing of gross returns does not of itself establish a partnership, even when the
parties have joint or common interest in any property form which the returns
are derived.
d. GR: The receipt by a person of a share in the profits of a business is prima facie
evidence that he is a partner.

Exceptions: No such inference is drawn if the profits are received in payment:

1. As a debt by installments or otherwise.

2. As wages of an employee or rent to a landlord.
3. As an annuity to a widow or representative of a deceased partner.
4. As interest on a loan, though the amount of payment vary with the
profits of the business.
5. As the consideration for the sale of a goodwill of a business or other
property by installments or otherwise.
3. Term of Partnership
a. A partnership begins from the moment of the execution of the contract, UNLESS it is
otherwise stipulated.
b. As to the period, a partnership may either be:
a. For a fixed term or particular undertaking; or
b. At will, the formation and dissolution of which depend on the mutual desire and
consent of the parties. Any one of the partners may, at his sole pleasure, dictate
the dissolution of the partnership, even in bad faith, subject to liability for
damages.
c. A partnership term may be extended by:
a. Express renewal
b. Implied renewal, when the following requisites concur:
1. The partnership is for a fixed term or particular undertaking.
2. It is continued after the termination of the fixed term or particular
undertaking without any express agreement.
4. Partnership by ESTOPPEL
a. Definition of Estoppel – estoppel is a bar which precludes a person from denying or
asserting anything contrary to that which has been established as the truth by his own
deed or representation, either express or implied.
b. Partnership by estoppel – a partner by estoppel is a person who, by words spoken or
written or by conduct: (1) represents himself as a partner or (2) consents to another
representing him to anyone as a partner in an existing partnership; or with one or more
persons not actual partners.
c. A partnership by estoppel is liable in the following manner:
a. He is liable as though he was a partner when:
1. There is an existing partnership;
2. All the partners consented to the representation; and
3. A partnership liability results
 b. He is liable jointly and pro rate (as though he was a partner in fact) with those
who consented to the representation when:
1. There is an existing partnership but not all the partners consented; or
2. There is no existing partnership and all those represented as partners
consented to the representation.
c. He is liable separately when:
1. There is an existing partnership but none of the partners consented to
2. There is no existing partnership and not all those represented as
partners consented to the representation.
d. Partnership by estoppel is not created by law between the partners, instead, the law
creates partnership by estoppel for the benefit of 3 rd persons, who in good faith, believe
on the partners’ supposed representation.
5. Partnership vs. Joint Venture
a. Partnership as distinguished from Joint Venture

Partnership Joint Venture

Operates with firm name and legal Does not operate with a firm name and
personality. legal personality.
Generally, relates to a continuing Limited to a single transaction.
business of various transactions of a
certain kind.

b. A joint venture is an agreement between two parties to enter into a commercial

undertaking. It may fall under a partnership with a limited purpose.
c. Under the Philippine law, a joint venture is a form of partnership and should thus be
governed by the laws of partnership.
6. Professional Partnership
a. Formed by persons for the sole purpose of exercising their common profession, NO PART
OF THE INCOME OF WHICH IS DERIVED FROM ENGAGING IN ANY TRADE OR BUSINESS.
b. As distinguished from an Ordinary Partnership
a. Distinction between a partnership and a General Professional Partnership (GPP)
is material in taxation.
1. A GPP is not taxable as an entity.
2. The income tax is imposed not on the professional partnership, which is
tax exempt, but on the partners themselves in their individual capacity
computed on their distributive shares of partnership profits.
7. Management of Partnership
a. The property rights of a partner are:
a. His right in specific partnership property
b. His interest in the partnership
c. His right to participate in the management
b. Management of the partnership is primarily governed by the agreement of the partners
in the articles of partnership.
c. It may be stipulated that the partnership will be managed by:
 a. All the partners
b. A number of partners appointed as managers which may be appointed
1. In the Articles of Partnership
2. After the constitution of the partnership.
d. Scope of Powers of a Managing Partner
a. GR: The partner designated as “managing partner” in the articles may execute
all acts of administration, despite opposition by the other partners.

EX: He cannot do so when he acts in bad faith.

e. Managing Partner’s Power to Revoke
a. GR: Power is irrevocable without just or lawful cause.

EX:
a. There is just or lawful cause for the revocation.
b. The partners representing the controlling interest revoke such
power.
b. If appointed after the constitution of the partnership, at any time and for any
cause.
c. In case of Two or more managing partners
1. Each one may separately execute all acts of administration.
2. If any of them opposes the acts of the others, the decision of the
majority prevails.
3. In case of a tie, the partners owning the controlling interest will decide.
f. Stipulation of Unanimity
a. GR: In case there is a stipulation that none of the managing partners shall act
without the consent of the others
1. The concurrence of all is necessary for the validity of the acts, and
2. The absence or disability of one cannot be alleged.

EX: there is imminent danger or grave or irreparable injury to the partnership.

g. When manner of management was not agreed upon.
a. When there is no agreement as to the manner of management, the following
rules apply:
1. All the partners are considered agents (mutual agency). Whatever any
one does alone bind the partnership unless there is a timely objection to
the act.
2. Any important alteration in the immovable property of the partnership,
even if useful to the partnership, requires UNANIMITY. If the alteration is
necessary for the preservation of the property, consent of the other is
not required. If the refusal is manifestly prejudicial to the partnership,
court intervention may be sought.

NOTE: consent need not be express. It may be presumed from the fact
of knowledge of the alteration without interposing any objection.
8. Rights and Obligations of Partnerships and Partners
a. Contribution of Money or Property
1. Effect of Failure to Contribute: Makes the partner ipso jure a
debtor of the partnership even in the absence of
demand. The remedy is not rescission but an action for
specific performance with damages and interest.
2. Amount of Contribution:
a. GR: Partners are to contribute equal shares to the capital
partnership.

EX: When there is an agreement to the contrary and in cases of

Industrial partners.

NOTE: A partner who refuses to contribute an additional share

to the capital, except an industrial partner, to save the venture
shall be obliged to sell his interest to the other partners, UNLESS
there is an agreement to the contrary.

Requisites:

i. There is an imminent loss of the business of the

partnership.
ii. The majority of the capitalist partners are of the opinion
that an additional contribution to the common fund
would save the business.
iii. The capitalist partner refuses deliberately (not because
of financial inability) to contribute an additional share to
the capital.
iv. No agreement that even in case of imminent loss of the
business, the partners are not obliged to contribute.
b. Obligation to Apply Sums Collected Pro rata
a. GR: A partner (a) authorized to manage (b) who collects a demandable sum
owed to him in his own name from a person who also owes the partnership a
demandable sum, is obliged to apply the sum collected to both credits pro rata,
even if he issued a receipt for his own credit only.

EX:

1. In case the receipt was issued for the account of the partnership credit
only, however, the sum shall be applied to the partnership credit alone.
 2. When the debtor declares at the time of making the payment, to which
debt the sum must be applied, and if the personal credit of the partner
is more onerous to him, it shall be so applied.
c. Obligation to Compensate for Damages
a. RULE: every partner is responsible to the partnership for damages suffered by it
through his fault.
b. Set-Off liability:
1. GR: The liability for damages cannot be set-off or compensated by
profits or benefits which the partner may have earned for the
partnership by his industry because a partner is both a credit and a
debtor at the same time in the partnership.

EX: court may equitably lessen the liability if, through his extraordinary
efforts in other activities of the partnership, unusual profits were
realized.
d. Obligation to account and act as trustee
a. Every partner must
1. Account to the partnership for any benefit and
2. Hold as trustee for it any profits derived by him without the consent of
the other partners:
a. From any transaction connected with the formation, conduct, or
liquidation of the partnership,
b. From any use by him of its property.
b. GR: The partner cannot use or apply exclusively to his own
benefit partnership assets or results of the knowledge or
information gained by him as a partner to the detriment of the
partnership.

EX: If the taking by the partner is with the consent of all other
partners.

NOTE: the duty to account and act as trustee for the

partnership still exist even when the partner issued a receipt
for his share only.
9. Obligations of the Partners among themselves
a. Obligation to render true and full information.
a. By “information”, it means that which can be used for partnership purposes, it is
in the sense of a property which the partnership has a valuable right.
b. Obligation not to engage in another business
a. Industrial partners
1. GR: an industrial partner cannot engaged in business for himself.
Otherwise, the capitalist partners, as well as other industrial partners
may either:
 a. Exclude him from the firm.
b. Avail themselves of the benefit which he may have obtained
with a right to damages.

NOTE: An action for specific performance to compel the

partner to perform the promised work is not available
as a remedy because this will amount to involuntary
servitude.

EX: he may engage in business for himself when the partnership

expressly permits him to do so.
b. Capitalist Partner
1. GR: the prohibition on engaging in another business
extends only to any operation which is of the same or
similar kind of business in which the partnership is
engaged.

EX: unless there is a stipulation to the contrary. If the capitalist partner

violates this prohibition, he shall:

a. Bring to the common funds any profit accruing to him for his
transaction.
b. Personally bear all the losses.
10. Obligation to share in the profit/losses.
a. Rules for distribution of profits and losses
a. They shall be distributed in conformity with the agreement.
b. If only the share in the profits has been stipulated, the share in the losses shall
be in the same proportion.
c. In the absence of any stipulation.
1. The share in the profits of the capitalist partners shall be in proportion
to their contribution.
2. The losses shall be borne by the capitalist partners, also in proportion to
the contribution.
3. The share of the industrial partners in the profits is that share as may be
just and equitable. If he also contributed capital, he will receive a share
of the profits in proportion to his contribution.
4. The industrial partner, who did not contribute capital, is not liable for
losses.
b. GR: a stipulation excluding one or more partners from any share in the profits or losses
is void.

EX: a stipulation exempting an industrial partner from losses is valid, since, if the
partnership fails to realize profits, he can no longer withdraw his work or labor. But
this does not exempt the industrial partner from liability insofar as
 third persons are concerned. He may, however, recover what he has
given to third persons from the other partners, for he is exempted by
law from losses.

11. Obligations of the Partners to 3rd Persons

a. Liability for Partnership debts - Upon exhaustion of its assets, all partners
are liable pro rata with all their property. Any partner may enter a
separate obligation to perform a partnership contract.
b. Nature of Individual subsidiary liability
a. GR: The partners are liable subsidiarily. It only arises upon
exhaustion of partnership assets.

EX:
1. A third person who transacted with the partnership can
hold the partners solidarily (rather than subsidiarily)
liable for the whole obligation if there’s a wrongful act
or omission and misapplication of money or property by
a partner in the ordinary course of business.
2. A person admitted as a partner into an existing
partnership is liable for all the obligations of the
partnership arising before his admission, except that
his liability shall be satisfied only out of partnership
property, unless there is a stipulation to the contrary. In
short, he is not personally liable.
c. Pro rata
a. The partners are liable pro rata. This liability is not increased
even when a partner:
1. Has left the country and the payment of his share of the
liability cannot be enforced.
2. His liability is condoned by the creditor.
b. Stipulation against Individual Liability
1. Any stipulation against pro rata liability is void against
third persons but valid among the partners.
2. A stipulation which excludes one or more partners from
any share in the profits or losses is void

NOTE: The exemption of the industrial partner to pay

losses relates exclusively to the settlement of the
partnership affairs among the partners themselves and
has nothing to do with the liabilities of the parties to 3 rd
persons.
c. Liability of Partners for Partnership contracts
 1. GR: The partnership is liable for any act of a partner
which is apparently for the carrying on of the usual
business of the partnership, including the execution of
any instrument in the partnership name.

EX: The partnership is not bound when the following concur:

a. The partner has in fact no authority to act; and

b. The person with whom he deals has knowledge of such fact.
2. GR: Acts of a partner which is not apparently for carrying on of the usual
business does not bind the partnership.

EX: the partnership is bound if the other partners authorized him to do

the act.
d. Acts of Strict Dominion
a. GR: One or some of the partners have no authority to do the following acts of
strict dominion.
1. Assign the partnership property in trust for creditors or on the
assignee’s promise to pay the debts of the partnership.
2. Dispose of the goodwill of the business
3. Do any other acts which makes it impossible to carry on the ordinary
business of the partnership
4. Confess judgement
5. Enter into a compromise concerning a partnership claim or liability
6. Submit a partnership claim or liability to arbitration
7. Renounce a claim of the partnership.

EX: they may do so if:

a. Authorized by all the partners.

b. The other partners have abandoned the business.
b. Acts in contravention of a restriction
1. Any act of a partner in contravention of a restriction on authority does
not bind the partnership to persons having knowledge (actual or
presumptive) of the restriction, whether or not the acts are for
apparently carrying on in the usual business of the partnership.
e. Solidary liability
a. All partners are solidarily liable with the partnership for its
liabilities. This is without prejudice to the guilty partner being
liable to the other partners. However, as far as third persons
are concerned, the partnership is answerable.
f. Applicability of Vicarious liability
 a. The rule on Vicarious Liability (respondeat superior) applies to the law on
partnership in the same manner as other rules governing the agency
relationship.
b. It is not only the partners who are liable in solidum, it is also the partnership.
c. The injured party may proceed against the partnership or any partner
d. REASON: public policy.
12. Liability of an incoming partner
a. A person admitted as a partner is liable for obligations incurred
subsequent to his admission as the other partners are liable. This is
because he is already part of the partnership.

The partner is liable for obligations incurred before his admission,

but will be satisfied only out of the partnership property, unless
otherwise stipulated that he fully assumes such obligations.
13. Dissolution and Winding up.
a. Dissolution – it is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on of the business. Dissolution does not
terminate the partnership, until the winding up of partnership affairs is completed.

The partnership, although dissolved, continues to exist until its termination, at which
time the winding up of its affairs should have been completed and the net partnership
assets are partitioned and distributed to the partners.

b. Winding up – it means the administration of the assets of the partnership for the
purpose of terminating the business and discharging the obligations of the partnership.

c. Termination – it means the end of the partnership.

d. The following are causes of dissolution of the partnership.

a. Without violation of the agreement between the partners

b. In contravention of the agreement between the partners
c. By operation of law
d. By decree of court
e. Who may wind up?
a. Those designated in an agreement
b. Those who have not wrongfully dissolved the partnership
c. Legal representative of the last surviving partner, who was not insolvent

Any partner or his legal representative or assignee may obtain winding up by the
court, upon cause shown.

NOTE: When dissolution is caused by expulsion, the expelled

partner may be discharged from all partnership liability in the
 same manner as above, but he shall receive in cash only the
net amount due him from the partnership.
14. Limited Partnership
a. Definition
a. A partnership
b. Formed by 2 or more persons
c. Having members:
1. One or more general partners (liable to creditors); and
2. One or more limited partners (do not manage the business and are not
personally liable for partnership obligations beyond their capital
contributions).

NOTE: the limited partners as such shall not be bound by the obligations of the
partnership, EXCEPT to the extent of their capital contributions.
b. A limited partnership has the following advantages:
a. For general partners – to secure capital from others while retaining control and
supervision for the business.
b. For limited partners – to have a share in the profits without risk of personal
liability.
c. General and Limited Partners Distinguished

General Partner Limited Partner

Extent of Liability
Personally, but subsidiarily liable for Liable only to the extent of his capital
obligations of the partnership. contributions
Right to Participate in Management
Have the right to participate No right to participate in management
Nature of Contribution
Cash, property or industry Cash and property only.
Proper Party in proceedings by or against partnership
Proper Party Not a proper party
Firm Name
Name may appear in the firm name Name must not appear in the firm name.

NOTE: Otherwise, if a limited partner

whose surname appears in a partnership
name is liable as a general partner to the
partnership creditors.
Effect of Retirement, death, insanity, or insolvency
Dissolves partnership Does not dissolve partnership; rights
transferred to executor, administrator for
selling his estate
Assignability of Interest
Not assignable without the consent of Freely assignable.
the other partners.
 Creation
May be constituted in any form. Partners must:

1. Sign and swear to a certificate in

compliance with the Civil Code
2. File the certificate for record in
the SEC.

Effect when there is failure to

substantially comply:

a. In relation to 3rd persons, the

partnership is general, unless
they recognize that the firm is a
limited partnership.
b. As between the partners, the
partnership remains limited,
since they are bound by their
agreement.

d. General and Limited Partner at the same time

a. A person may be a (1) general; and (2) limited partner in the same partnership at
the same time.
b. This fact must be stated in the certificate to be filed with the SEC.
e. Rules
a. GR: Only general partners have the right to manage the partnership.

EX: If a limited partner takes part in the control of the business, he becomes
liable as a general partner.

b. GR: A limited partner is not liable as a general partner. His liability is limited to
the extent of his contributions.

EX: The limited partner is liable as a general partner when:

a. His surname appears in the partnership name, with certain

exceptions (i.e., it is also the surname of a general partner; OR
prior to the time when the limited partner became such, the
business has been carried on under a name in which the
surname appeared)
b. He takes part in the control of the business
c. The certificate contains false statement of which he knows and
which he was relied upon, resulting in loss.
f. Obligations of a limited partner
a. Obligations related to Contribution.
 1. The contribution of a limited partner may be cash or other property, but
not services. If a limited partner contributes services, he will be liable for
partnership obligations.
g. Return of Contribution in the Form of Cash
a. GR: A limited partner, irrespective of the nature of his contribution, has only the
right to demand and receive cash in return for his contribution.

EX: he may receive his contribution in a form other than cash when:

1. There is a statement in the certificate to the contrary; OR

2. All the members of the partnership consent
h. Right to Assign Interest
a. The interest of a limited partner is assignable.
b. The assignee may become:
1. A substituted limited partner; or
2. A mere assignee
c. Rights and limitations of an Assignee
1. An assignee is only entitled to receive the share of the
profits or other compensation by way of income, or the
return of contribution, to which the assignor would
otherwise be entitled (had the assignor not died or
assigned his interest). He has no right:
a. To require any information or account of the
partnership transactions;
b. To inspect the partnership books
2. An assignee has the right to become a substituted
limited partner if:
a. All the partners consent thereto; or
b. The assignor, being empowered to do so by the
certificate, gives him that right.
3. An assignee becomes a substituted limited partner
when the certificate is appropriately amended.
i. Upon the death of a limited partner, his executor or administrator
shall have:
a. All the rights of a limited partner for the purpose of settling
his estate; and
b. The power to constitute an assignee as a substituted limited
partner, if the deceased was so empowered in the certificate.
j. The estate of a deceased limited partner shall be liable for all his
liabilities as a limited partner.
15. Amendment or Cancellation of Certificate
a. Cancellation of Certificate
a. The certificate shall be cancelled when:
 1. The partnership is dissolved
2. All limited partnership ceases to be such limited.
b. Amendment of certificate
a. A certificate shall be amended when:
1. Change in the name of the partnership or in the amount
of the contribution of any limited partner.
2. Substituted as a limited partner
3. Additional limited partner
4. A general partner retires, dies, becomes insolvent or
insane, or is sentenced to civil interdiction and the
business is continued.
5. Change in the character of the business of the
partnership.
6. False or erroneous statements in the certificate.
7. Change in the time.
c. In case of refusal to execute the amendment or cancellation;
remedy
a. The court shall order the SEC to record the cancellation or
amendment if it finds that the petitioner has a right to have
the writing executed.
 Corporation Law

16. Definition of a Corporation

a. It 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 incident to its
existence.
b. Upon coming to existence, a corporation is invested by law with a personality separate
and distinct from those persons composing it as well as from any other legal entity to
which it may be related.
c. Mere consent of the parties to form a corporation is not sufficient. The state must give
its consent either through a special law (in cases of government corporations) or a
general law (i.e., Revised Corporation Code in cases of private corporations).
d. A corporation comes into existence upon the issuance of the
certificate of incorporation. Then, and only then, will it acquire
juridical personality to sue and be sued, enter contracts, hold or
convey property or perform any legal act in its own name.
17. Classes of Corporations
a. Stock Corporation
a. It is a corporation which have capital stock divided into
shares and are authorized to distribute to the holders of such
shares, dividends or allotments of the surplus profits based on
shares held.
b. It is organized for profit.
c. The governing body of stock corporation is usually the Board
of Directors (BOD)
d. A corporation is considered a stock corporation if they have
the power to declare dividends. Hence, so long as the
corporation has capital stocks and unrestricted retained
earnings and there is no prohibition in its AOI or in its by-laws
for it to declare dividends, such corporation is a stock
corporation.
b. Non-Stock Corporation
a. It is a corporation where no part of the income is distributable
as dividends to its members, trustees, or officers.
b. The governing body of non-stock corporation is usually the
Board of Trustees (BOT)

Stock Corporation Non-Stock Corporation

Have a capital stock divided into shares.
Composed of stockholders
For profit
Authorized to distribute to the holders of
No part of its income is distributable as
dividends to its members, trustees, or
officers.
Composed of members
Not for profit
Any profit obtained in its operations shall
 such shares. be used for the furtherance of its
purpose.

Not authorized to distribute such shares.

Term of Directors is 1 year Term of Trustees is 3 years
May always vote by proxy Vote by proxy can be denied in the AOI or
BL.

c. Nationality Principle of Corporation

a. Then nationality of a corporation serves as a legal basis for subjecting an
enterprise or its activities to the laws, the economic and fiscal powers and the
various social and financial policies of the State.
b. Test of determining the nationality of the corporation
1. Control Test
a. Determined by the citizenship of the controlling stockholders.
b. Under the liberal control test, there is no need to further trace
the ownership of the 60% or more Filipino stockholdings of the
investing corporation since a corporation which is at least 60%
Filipino-owned is considered as Filipino.

Absent of any doubt, the Control Test shall be used in

determining the nationality of a corporation specially in cases
where foreign ownership restrictions apply.
c. Control Test is applied in the following:
i. Exploitation of natural resources
ii. Public Utilities
iii. Mass Media (NOTE: Control Test does not apply to Mass
Media. Grandfather rule applies)
iv. Advertising Industry (70%)
v. Any industry or activity where foreign ownership is
prohibited or restricted under the Foreign Investment
Negative List.
2. Grandfather rule
a. It determines the actual Filipino ownership and control in a
corporation by tracing both the direct and indirect shareholding
in the corporation. (NOTE: 60% & 40% rule)
b. It is applied if doubt exists as to 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.
c. Examples of whereby Grandfather rule applies:
i. the foreign investors provide practically all
the funds for the joint investment
 undertaken by these Filipino businessmen
and their foreign partner.
ii. the foreign investors undertake to provide
practically all the technological support for
the joint venture.
iii. the foreign investors, while being minority
stockholders, manage the company and
prepare all economic viability studies.
d. 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.

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.

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.

e. Corporate Juridical Entity

a. A private corporation organized under the RCC commences its
corporate existence and juridical personality from the date
the SEC issues the certificate of incorporation under its
official seal.

Persons desiring to incorporate must submit to the SEC:

1. Intended corporate name for verification.

2. AOI & by-laws.

NOTE: One-person corporation are not required to submit and

file “by-laws.”

18. Doctrine of Separate Juridical Personality

 a. GR: Due to the corporation’s separate juridical personality, a
stockholder may not be made to answer for acts or liabilities of said
corporation, and vice-versa.

EX: The corporation’s separate juridical personality cannot be invoked to escape liability
when:
1. to defeat public convenience, justify wrong, protect
fraud, defend crime, confuse legitimate legal or judicial
issues, used as a vehicle for the evasion of an existing
obligation, perpetrate deception or otherwise
circumvent the law.
2. The corporate entity is a mere alter ego, adjunct, or
business conduit for the sole benefit of the
stockholders or of another corporate entity

b. Property
a. Corporate property is owned by the corporation as a juridical
person, and the stockholders have no claim on corporate
property as owners. The latter only have a mere expectancy
or inchoate right to the same upon dissolution of the
corporation and after all corporate creditors have been paid.
Such right is limited only to their equity interest.
c. Liability of Tort and Crime
a. The corporation itself cannot be arrested and imprisoned;
thus, it cannot be penalized for a crime punishable by
imprisonment. However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is a fine.
b. Being an entity with a separate juridical personality, a
corporation can be held liable for torts committed by its
officers under express direction from the stockholders or
directors, acting as a body.
c. Criminal action is limited to the corporate agents guilty of an
act amounting to a crime and never against the corporation
itself.
d. Recovery of Moral Damages
a. GR: A corporation, being an artificial person, has no feelings,
emotions nor senses; therefore, it cannot experience physical
suffering and mental anguish, which are bases for moral
damages under the Civil Code.

EX: when the corporation has a reputation that is debased,

resulting in its humiliation in the business realm.
19. Doctrine of Piercing the Veil of the Corporate Fiction
a. A corporation will be looked upon as a legal entity as a general rule
but when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law
will regard the corporation as an association of persons.

Piercing the veil of corporate entity is an equitable remedy

developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful
purposes.
b. Doctrine of Limited Liability and Piercing the Corporate Veil also
applies to a One Person Corporation.

Single stockholder must prove that the property of the One Person
Corporation is independent of the stockholder's personal property,
otherwise the stockholder shall be jointly and severally liable for the
debts and other liabilities of the One Person Corporation.
c. Effect of Piercing the Corporate Veil
a. Liability will directly attach to the stockholders or to the other corporation.
d. GR: The doctrine of piercing the veil of corporate entity can only be
raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the
court by way of service of summons or what passes as such
Service.

EX: When an aggrieved laborer is unable to attach the properties of

the corporation, the Labor Arbiter may thereafter “amend” its
decision by ordering that the individuals responsible be impleaded
and their properties levied. Provided that such individuals were
impleaded and had the opportunity to be heard.

NOTE: A sheriff may not pierce the corporate veil because such power only belongs to
the court.
e. Piercing the veil of corporate entity has been applied to the
following contexts:
a. When the liability belongs to the corporation, but the plaintiff
seeks to hold the individual liable.
b. Where the liability is personal to the individual and he seeks
to evade it by hiding behind a corporate vehicle.
c. The instrumentality or alter ego rule.
d. Successor corporation rule – it is a situation where a
corporation feigns dissolution or cessation but really
continues in existence organized under another name.
(Successor corporation rule usually applies in labor cases)
20. Capital Structures
a. Number and Qualifications of Incorporators
a. Number:
1. Not more than 15
2. A corporation with a single stockholder is considered a One Person
Corporation.
b. Qualifications
1. Any person, natural or juridical, may organize a corporation. (i.e.,
partnership, association, or corporation, singly or jointly with others) are
now permitted to be incorporators and not merely subscribers.
2. The following are not allowed to organize as a corporation, except as
provided under special laws.
a. Natural persons who are licensed to practice a profession.
b. Partnership or associations organized for the purpose of
practicing a profession.
b. Natural persons must be of legal age.
c. Each incorporator must subscribe to at least one share of the capital stock.

NOTE: The RCC removed the Philippine residency requirement for the majority of the
incorporators.

d. Subscription requirements
a. No minimum capital requirement.
b. Subscription agreements
1. Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed
subscription contracts. This is notwithstanding the fact that the parties
may refer to it as a purchase or some other contract.
c. Nature of subscription contract
1. Indivisible.
2. Where stocks were subscribed and part of the subscription contract
price was not paid, the whole subscription shall be considered
delinquent, and not only the shares which correspond to the amount
not paid.
e. Types of Subscription Contracts
a. Pre-incorporation subscription – it is a subscription for shares of stocks of a
corporation still to be formed.
b. Post-incorporation subscription – entered into after incorporation.
f. Rules on Pre-incorporation subscription
a. For a period of at least 6 months from the date of subscription.
1. GR: a pre-incorporation subscription is IRREVOCABLE.

EX:

a. All of the other subscribers consent to the revocation, or

 b. The incorporation fails to materialize within 6 months or within
a longer period as may be stipulated in the contract of
subscription.
b. After the submission of the Articles of Incorporation to the SEC
1. Interest on Unpaid Subscription.
a. GR: A stockholder is NOT liable to pay interest on his unpaid
subscription. He is not considered a corporate debtor for the
unpaid amount of his subscription.

EX: If expressly stipulated in the subscription contract.

21. Corporate Term
a. GR: Perpetual existence. The AOI of existing corporations shall be deemed amended to
reflect their perpetual term.

EX: the AOI provides for a specific period.

NOTE: A corporation already existing upon effectivity of the RCC may

opt out of the rule on perpetual existence by:
a. Obtaining the vote of its stockholders representing majority of
the Outstanding Capital Stock, without prejudice to the
appraisal right of dissenting stockholders
b. b. Notifying the Commission that it elects to retain its specific
corporate term, as provided in its AOI.
b. Extending or shortening the corporate existence
a. GR: If a corporation wishes to extend its corporate term, it may
amend its AOI at least 3 years prior to the expiration of its
term.

EX: When there exists justifiable reasons for an earlier

extension, to be determined by the SEC.

Requisites: A private corporation may extend or shorten its term as stated in the
AOI when:

1. Approved by a majority vote of the BOD or BOT; and

2. Ratified at a meeting by the stockholders or members representing at least
2/3 of the outstanding capital stocks or of its members.

NOTE: In case of extension of corporate term, a dissenting stockholder may

exercise the right of appraisal.
c. Revival of Corporate Existence
a. Corporation with an expired term upon the effectivity of the RCC, may apply
with the SEC for revival of its corporate existence giving it perpetual existence,
 with all the rights and privileges and subject to all the duties, debts and liabilities
prior to revival.

NOTE: this benefit does not extend to corporations whose dissolution was
decreed by the SEC or the courts.
d. Summary of Changes

For Newly established corporations GR: Automatic perpetual existence

EX: AOI provides a specific corporate term

For existing corporations GR: AOI shall be deemed amended to
reflect a perpetual term.

EX: the corporation opts out and elects to

For corporations with expired terms
retain their existing term; requires majority
vote of shareholders/members.
GR: May apply with the SEC for the revival
of the corporation. Upon approval, they
will have perpetual term.

EX: their application indicates a fixed term.

For corporations with a limited term GR: May file an application for EXTENSION
of such term 3 years prior to the expiration
of the term.

EX: there are justifiable reasons for an

earlier extension.

22. Classification of shares

a. Nature of Shares of Stocks
a. It represents of the holder to participate in the management of the corporation,
to share proportionally in the profits of the business and upon liquidation, to
obtain an aliquot part of corporate assets after all corporate debts have been
paid.

GR: No share may be deprived of voting rights.

EX:
1. Preferred non-voting shares
2. Redeemable shares
3. Provided by the code (treasury shares)

b. Doctrine of Equality of shares – each share shall be equal in all respect to every other
share, except as otherwise provided in the AOI and stated in the certificate of stock.

c. Classes of shares of stock

a. Classification of shares
1. Preferred shares vs. Common shares
a. Preferred shares are always given preference in the dividends,
distribution of assets in case of liquidation etc. over Common
Shares.

Unless otherwise provided, preferred stocks are non-

participating which means, after getting the fixed dividend
preference, they have no more right to share in the remaining
dividends with common stocks.
b. Common shares represent the residual ownership interest in the
corporation. It is issued without extraordinary rights or
privileges and entitles the shareholder to a pro-rata division of
profits.
c. Preferred shares may be deprived of voting rights; while
common shares is vested with exclusive right to vote
(management of the corporation)
2. Scope of voting rights subject to classification
a. GR: Non-voting shares are not entitled to vote.

EX:
1. Amendment of the AOI
2. Adoption & amendment of by-laws
3. Sale, lease, exchange, other disposition of all or substantially
all of corporate property
4. Incurring, creating or increasing bonded indebtedness.
5. Merger & consolidation
6. Investment of corporate funds in another corporation or
business
7. Dissolution of the corporation.
3. Founder’s share
a. Given certain rights and privileges not enjoyed by the owners of
other stocks.
b. May be given special preferences in voting rights and dividend
payments.
c. Where exclusive right to vote and be voted for in the election of
directors is granted, such right must be for a limited period not
to exceed 5 years, subject to the approval of the SEC, the 5 year
period shall commence from date of approval by SEC.
4. Redeemable share
a. may be deprived of the right to vote.
b. 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.
c. Limitations
i. May be issued only when expressly provided for in the
AOI.
ii. Terms and conditions affecting said shares must be
stated both in the AOI and in the certificate of stock.
iii. Redemption cannot be made if such redemption will
result in insolvency or inability of the corporation to
meet its obligations.
iv. Unrestricted retained earnings are NOT
necessary before shares can be redeemed,
but there must be sufficient assets to pay
the creditors and to answer for operations.

The corporation is required to maintain a

sinking fund to answer for redemption price
if the corporation is required to redeem.
5. Treasury share
a. shares which have been issued and fully paid for,
but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or
through some other lawful means. Such shares
may again be disposed of for a reasonable price
fixed by the BOD.
6. Par value shares vs. no-par value shares
a. Par value shares
i. shares with a stated or fixed value set out
in the Articles of Incorporation, which
remains the same regardless of the
profitability of the corporation. This gives
rise to financial stability, and is the reason
why banks, trust corporations, insurance
companies and building and loan
associations must always be organized
with par value shares.
b. No par value shares
i. Shares without a stated value in the AOI. They are
without nominal value.
ii. Limitations
1. Cannot have an issue price of less than P5.00
per share.
 2. Once issued, they shall be deemed fully paid
and non-assessable, and the holders of such
shares shall not be liable to the corporation or
to its creditors in respect thereto.
3. The AOI must state the fact that the corporation
issues no-par shares and the number of shares.
4. Cannot be issued as preferred stock.
5. Cannot be issued by banks, insurance
companies, public utilities and building and loan
associations.

23. Incorporation and Organization

a. Promoter
a. persons who, acting alone or with others, take initiative in
founding and organizing the business or enterprise of the
issuer and receives consideration therefor.
b. Liability of Promoter
1. GR: The promoter binds himself personally and assumes
the responsibility of looking to the proposed corporation
for reimbursement.
a. the promoter binds himself to ensure that the
corporation, once formed, will ratify the contract
entered into its name.
b. Otherwise, he becomes personally liable for such
contract in the event that the corporation does
not ratify.

EX:

a. Express or implied agreement to the contrary

b. Novation, not merely adoption or ratification of the contract.
b. Liability of Corporation for Promoter’s Contracts
a. GR: A corporation is NOT bound by the contract. A corporation,
until organized, has no life and no legal existence. It could not
have had an agent [the promoter] who could legally bind it.

EX: A corporation may be bound by the contract if it makes the contract its own
by:
1. Adoption or ratification of the entire contract after incorporation.
2. Novation or the intent to novate the original contract is required to
adopt or ratify the pre-incorporation contract.
3. a contract made by the promoters of a corporation on its behalf may be
adopted, accepted or ratified by the corporation when organized.
4. Acceptance of benefits under the contract with knowledge of the terms
thereof.
 5. Performance of its obligations under the contract.
24. Subscription contract
a. any contract for the acquisition of unissued stock in an existing
corporation, or corporation still to be formed.
b. Notwithstanding the fact that the parties refer to the contract as a
purchase or some other contract, it shall be deemed a subscription
as long as it involves the acquisition of unissued stock in an
existing corporation or a corporation still to be formed.
25. Pre-incorporation Subscription agreements
a. It is a type of promoter’s contract for the acquisition of unissued stock in a corporation
still to be formed.
b. Subscription of shares of stock of a corporation still to be formed shall be irrevocable for
a period of at least 6 months from the date of subscription, UNLESS
a. All of the subscribers’ consent to the revocation; OR
b. The corporation fails to incorporate within the same period (6 months) or within
a longer period stipulated in the contract of subscription.
c. No pre-incorporation subscription may be revoked after the AOI is submitted to the SEC.
26. Consideration for Stocks
a. Stocks shall not be issued for a consideration LESS THAN the par or issued price thereof.
Consideration for the issuance of stock may be:
a. Actual cash paid to the corporation
b. Property, tangible or intangible, which must be:
1. Actually received by the corporation; and
2. Necessary or convenient for its use and lawful purposes.
3. At 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 stocks in another corporation.
h. Other generally accepted form of consideration.
b. The following are INVALID CONSIDERATION:
a. The following CANNOT be exchanged for the issuance of shares of stocks:
1. Promissory note
2. Future service
c. Where the consideration is other than actual cash, or consists of intangible property, the
valuation thereof shall initially be determined by the stockholder or the BOD, subject to
the approval of the SEC.
d. In case a subscription contract contemplates “unlawful consideration” in exchanged for
shares of stock:
a. The subscription contract would be valid and binding on both the corporation
and subscriber
 b. But, the provision on such unlawful consideration is deemed void, such that the
subscription agreement would be construed to be for cash.
27. Articles of Incorporation
a. it is a contract defining the charter of the corporation and serves as the basis by which to
judge whether it exists for legal purposes.
b. Contents
a. Corporate Name
b. Purpose clause
c. Principal office
d. Corporate term if the corporation has not elected perpetual existence
e. Incorporators
f. Trustees/Directors
g. For stock corporation
1. The authorized capital stocks
2. Number of shares into which it is divided
3. The par value of each share
4. Names, nationalities, and residence addresses of the original subscribers
5. Amount subscribed and paid by each on the subscription
6. A statement that some or all of the shares are without par value, if
applicable.
h. For non-stock corporations
1. Amount of its capital
2. The names, nationalities, and residence addresses of the contributors
and amount contributed by each
3. Other matters including arbitration agreement.
c. Corporate Name; Limitations on Use of Corporate Name
a. A corporation only has such powers as are EXPRESSLY stated by law and the AOI.
b. The purpose clause in the AOI limits the powers that a corporation may exercise.
c. Prohibited Purposes and activities.
1. A corporation may not be formed for the purpose of practicing a
profession (i.e., law, medicine, or accountancy)
2. Foreign corporations are prohibited from giving donations in aid of any
political party or candidate or for purposes of partisan political activity.
d. Summary

Corporate Name Incorporators undertake to change the

name of the corporation immediately upon
receipt of notice form SEC that another
corporation, partnership or person has
acquired prior right to its use, that the name
has been declared not distinguishable from
a name already registered or reserved for
the use of another corporation, or that it is
contrary to law, public morals, good
 customs or public policy.
Purpose clause A corporation can only have one (1) primary
purpose. However, it can have several
secondary purposes.

A corporation has only such powers as are

expressly granted to it by laws & by its AOI,
those which may be incidental to such
conferred powers, those reasonably
necessary to accomplish its purpose & those
which may be incident to its existence.

Corporation may not be formed for the

purpose of practicing a profession like law,
medicine or accountancy.
Principal office 1. Must be within the Philippines
2. Must contain specific address of
their principal office (i.e., street
number, street number, brgy. or city,
and if applicable, name of the
building, number the building and
name or number of the room or
unit.
3. PURPOSE: venue in action by or
against the corporation or in
determining the venue where a
chattel mortgage of shares should
be registered.
Term of existence Perpetual existence, unless AOI provides
otherwise.
Incorporators and Directors/Trustees 1. Names, nationalities and residences
of the incorporators, directors, and
trustees.
2. Treasurer who has been chosen by
the pre-incorporation
subscribers/members to receive on
behalf of the corporation, all
subscription/contribution paid by
them.
Capital Stocks 1. Amount of its authorized capital
stocks in lawful money of the
Philippines.
2. Number of shares into which it is
divided.
3. In case the shares are par value
shares, the par value of each.
4. Names, nationalities and residences
 of the original subscribers, and the
amount subscribed and paid by
each on his subscription, and if
some or all of the shares are
without par value, such fact must be
stated.
5. For a non-stock corporation, the
amount of its capital, the names ,
nationalities and residences of the
contributors and amount
contributed by each.
6. The provision on minimum
subscribed and paid up capital has
been repealed.
Other matters 1. Classes of shares into which the
shares of stock have been divided;
preferences of & restrictions on any
such class; and any denial or
restriction of the pre-emptive right
of stockholders should also be
expressly stated in the AOI.
2. If the corporation is engaged in a
wholly or partially nationalized
business activity, the AOI must
contain a prohibition against a
transfer of stock which would
reduce the Filipino ownership of its
stock to less than the required
minimum.
3. Transfer restrictions
4. Arbitration agreement.

28. The following are amendable items

a. Amendable items are:
a. Change of name of the corporation; adding business name
b. Adding to or changing the purpose
c. Change of principal office
d. Change in the number of directors or trustees
e. Increase or decrease in authorized capital stock classifying shares in the
authorized capital stock
f. Adding or reserving transfer restrictions.
b. Requirements for making amendments to AOI
a. Majority vote of the BOD or BOT
1. 2/3 of the outstanding capital stocks, without prejudice to the right of
dissenting stockholders of their right of appraisal.
2. 2/3 of the members if it be a non-stock corporation.
 b. Unless the AOI provides for a higher number of voting requirements.
29. The following are non-amendable items
a. The names, nationalities and residences of the incorporators (to allow an amendment
would mean going against the definition of “incorporators”)
b. Treasurer-in-trust
c. First set of directors or trustees.
d. Original stock subscriptions and paid-in-capital.
e. Place and date of execution
f. Witnesses.
30. Corporate Name and Limitations on its use
a. Corporate Name (shall contain the word “Corporation” or “Incorporated” or the
abbreviations “Corp.” or “Inc.”)
b. One Person Corporation (shall contain the word “OPC” at the end of its corporate name)
c. Partnership (shall bear the word “Company” or “Co.” and if it’s a limited partnership, the
word “Limited” or “Ltd.”)
d. Professional Partnership (may bear the word “Company” “Associates” or “Partners”)
e. Foundation (shall use the word “foundation”)
f. The corporate name of all non-stock, non-profit corporations, including non-
governmental organizations and foundations, engaging in micro
finance activities shall use the word "Microfinance" or
"Microfinancing"

NOTE: Amendment of a corporation’s Articles of Incorporation to change

its corporate name does not extinguish the personality of the original
corporation. It is the same corporation with a different name, and its
character is not changed. Consequently, the “new” corporation is still
liable for the debts and obligations of the “old” corporation.

NOTE: Rules of Corporate Names of Dissolved Corporations

GR: The name of a corporation or partnership that has been dissolved or

whose registration has been revoked shall not be used by another
corporation or partnership.

1. Within 5 years from the approval of the dissolution.

2. Within 5 years from the date of revocation,

EX: its use has been allowed at the time of the dissolution or revocation
by the stockholders, members or partners who represent a majority of
the outstanding capital stock or membership of the dissolved
corporation or partnership, as the case may be.

31. Registration, Incorporation, and commencement of corporate existence

a. A private corporation organized under the RCC commences its
corporate existence and juridical personality from the date the SEC
issues the certificate of incorporation under its official seal.
 b. AOIs do not become binding as the charter of the corporation unless
they have been filed and registered with, and certified by the SEC.

Documents to be filed with the SEC

1. AOI and by-laws

2. Certification concerning the amount of capital stock
subscribed and/or paid.

NOTE: The OLD Corporation Code requiring that at least 25% of

amount subscribed be paid, and a minimum paid-up capital upon
incorporation, was removed under the RCC

c. The law no longer requires a bank certificate of deposit covering the

paid-up capital if payment for shares is made in cash; where the
capital stock is paid by a combination of cash and property, only the
portion paid by way of property will require the submission of
supporting documents.
d. For corporation governed by special laws (banks, insurance companies, public utilities
and education institutions, preneed companies, pawnshop, quasi-banking, and other
financial intermediaries) the AOI must be accompanied by a favorable recommendation
from the appropriate government agency.
32. Election of Directors or Trustees
a. GR: Each stockholder or member shall have the right to nominate any director or trustee
who possesses all the qualifications and none of the disqualifications.

EX: when the exclusive right to nominate directors or trustee is reserved for holders of
founder’s shares
b. Required participation
a. At all elections of directors or trustees, there must be present, either in person
or through a representative authorized to act by written proxy.
b. Stock Corporations: the owners of majority of the outstanding capital stocks
c. Non-stock corporations: a majority of the members entitled to vote.
c. Voting via Remote Communication/In Absentia
a. The stockholders or members may also vote through remote communication or
in absentia:
1. By a resolution of the majority of the board of directors; Provided, that
the resolution shall only be applicable for a particular meeting.
2. Notwithstanding the absence of a provision in the by-laws of the
corporation, the right to vote through such mode may be exercised in
corporations vested with public interest.
d. Voting in Stock Corporation
a. Stockholders entitled to vote shall have the right to vote the number of shares
of stock standing in their own names in the stock books of the corporation.
b. The stockholder may:
 1. Vote such number of shares for as many persons as there are directors
to be elected.
2. Cumulate said shares and give one (1) candidate as many votes as the
number of directors to be elected multiplied by the number of the
shares owned; or
3. Distribute them on the same principle among as many candidates may
be seen fit: Provide that:
a. The total number of votes cast shall not exceed the number of
shares owned by the stockholders.
b. No delinquent stock shall be voted.
e. Voting in Non-Stock Corporation
a. GR: Members of non-stock corporations may cast as many votes as there are
trustees to be elected but may not cast more than 1 vote for 1 candidate.

EX: Unless otherwise provided in the AOI or in the by-laws.

f. Report to SEC
a. Within 30 days after the election of the directors, trustees and officers of the
corporation, the Corporate Secretary, or any other officer of the corporation
shall submit to the SEC their GIS.
33. Adoption of By-Laws
a. By-Laws are regulations, ordinances, rules or laws adopted by an association or
corporation for its internal governance, including rules for routine matters such as calling
meetings.
b. By-Law may be done either:
a. Prior to incorporation – approved and signed by all the incorporators and
submitted to SEC together with AOI
b. After incorporation – the requirement of adoption of by-laws 1 month after
receipt of the notice of issuance of certificate of incorporation has been deleted
in the RCC.
c. One Person Corporation (OPC) are not required to have by-laws.
d. Effect of failure to file the by-laws.
a. Does not imply the “demise” of the corporation. By-laws may be required by law
for an orderly governance and management of corporations BUT they are NOT
essential to corporate birth.
b. Nonetheless, failure to file them within the period required by
law by no means tolls the automatic dissolution of a
corporation.
c. Contents of the By-Laws
1. Time, place and manner of calling and conducting regular or special
meetings of the directors an trustees.
2. Time and manner of calling and conducting regular or special meetings
and mode of notifying the stockholders or members thereof.
3. The required quorum in meetings of stockholders or members and the
manner of voting.
 4. Modes by which a stockholder, member, director or trustee may attend
and cast their votes.
5. Manner of election or appointment and the term of office of all officers
other than directors and trustees.
6. Penalties and violation of the by-laws.
d. NOTE: In close corporation – restrictions on the right to transfer shares must
appear in both the articles of incorporation and the by-laws as well as in the
certificate of stocks. Otherwise, restrictions shall not be binding on any
purchases of good faith.
e. BINDING EFFECT –
1. When binding – only from the date of issuance of SEC of a certification
that the by-laws are not inconsistent with the code. Pending such
approval from SEC, they cannot bind stockholders or corporations.
2. Effect on third parties – mere internal rules among stockholders cannot
affect or prejudice 3rd persons who deal with the corporation, unless
they have knowledge of the same.
f. Amendments
1. Who can make amendments in the by-laws? BOD and majority vote of
owners of the outstanding Capital Stock or members.
2. Delegation to BOD of power to amend representing 2/3 of the
outstanding capital stocks or 2/3 of the members thereof.
34. Effects of Non-Use of Corporate Charter
a. Failure to Organize
a. If a corporation does not formally organize and commence its
business within five (5) years from the date of its
incorporation, its certificate of incorporation shall be deemed
revoked as of the day following the end of the five (5) year
period.
b. Continuous Inoperation
a. If a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five
(5) consecutive years, the Commission may, after due notice
and hearing, place the corporation under delinquent status.
b. A delinquent corporation shall have a period of two (2) years
to resume operations and comply with all requirements that
the Commission shall prescribe.
35. Corporate Powers
a. General Powers: Theory of General Capacity
a. Every Corporation has the power and capacity:
1. To sue and be sued in its corporate name
2. To have perpetual existence:
a. Unless the certificate of incorporation provides
otherwise.
3. Adopt and use a corporate seal.
 4. Amend its AOI
5. Adopt by-laws and amend or repeal the name
6. In case of stock corporation: issue or sell stocks to
subscribers and to sell treasury stocks. To admit
members to the corporation.
7. Purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such
real and personal property
8. Enter with natural or juridical persons, into a:
a. Partnership
b. Joint venture
c. Merger
d. Consolidation
e. Any other commercial agreement.
9. Make reasonable donations.
b. Specific Powers: Theory of Specific Capacity (corporation cannot
exercise powers those expressly/impliedly given)
a. Extend or shorten corporate term
b. Increase or decrease capital stock.
c. Deny pre-emptive rights
d. Sell or dispose corporate assets
e. Acquire own shares
f. Invest corporate funds
g. Declare dividends
h. Enter into management contract
i. Amend AOI.
36. Power to extend or shorten Corporate Term
a. GR: A private corporation may extend or shorten its corporate term as stated in the AOI.
b. Perpetual existence under RCC applies to existing corporation. AOI shall be deemed
AMENDED to reflect its perpetual existence, unless the corporation elects to retain its
limited term.
c. When exercised
a. Period to extend the corporate term has been reduced by the RCC to 3 years
before expiration.
b. When the term expires, its not ipso facto dissolved but may apply for revival of
its corporate existence.

37. Exercise of Appraisal Right

a. In case of extension of corporate term, a dissenting stockholder may exercise
the right of appraisal.
 REASON: An extension of a corporate term actually novates the corporate
contract with each shareholder by extending the corporate relationship beyond
the original term.
b. Shortening the corporate term DOES NOT trigger the right of appraisal because
there would be NO NOVATION OF THE ORIGINAL CONTRACTUAL INTENT, since
shortening would mean the early realization of the value of the shares of a
dissenting stockholder with the dissolution of the corporation.
c. In cases of Increase or decrease of Capital stock
1. The right of appraisal can be exercised in cases of increase of capital
stock because it has the potential effect of diluting the proportionate
interest of a stockholder in the corporation.
2. The right of appraisal cannot be exercised in cases of decrease in capital
stock since the decrease would result in returning part of the investment
of the stockholder, including the dissenting stockholders.
d. In cases of incurring, creating or increasing bonded indebtedness
1. The appraisal right cannot be exercised by dissenting stockholders. To
allow them to do so would drain the financial resources of the
corporation.
38. Power to Deny Pre-emptive Rights
a. What is pre-emptive?
a. The preferential right of shareholders to subscribe to all “issues” or disposition
of shares of any class in proportion to their present shareholdings.
b. What is the purpose?
a. to enable the shareholder to retain his proportionate control
in the corporation and to retain his equity in the surplus.
c. What is the RULE?
a. GR: All shareholders of a stock corporation have the
preemptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings.

EX:

1. pre-emptive right is denied by the AOI or an instrument

thereto.
2. When circumstances call for its denial, specifically
when:
a. Shares to be issued are to comply with laws
requiring stock offerings by the public.
b. Shares to be issued are in good faith with the
approval of the stockholders representing 2/3 of
the outstanding capital stocks in exchange for
property needed for corporate purposes.
 c. Shares to be issued are issued in payment of
previously contracted debts.
d. In case the right is denied by the AOI.
e. Waiver of the right by the stockholder.
39. Power to Sell or Dispose Corporate Assets
a. A corporation may sell, lease or exchange, mortgage, pledge, or
otherwise dispose of its property and assets
b. Requisites
a. Vote of the stockholders representing 2/3 of the outstanding
capital stocks or at least 2/3 of the members
b. Vote of at least majority (2/3) of the trustee in office in a
nonstock corporation.
c. Notice requirement to stockholder, members
c. NOTE: Where only the approval of a quorum of the BOD/T is required
a. Corporation is not restricted in its power to sell or dispose of
its assets without the authorization of shareholders or
members:
1. If the same is necessary in the usual and regular course of business
of the corporation or
2. If the proceeds of the sale will be appropriated for the
conduct of its remaining business
3. If the transaction does not cover all or substantially all
of the assets
d. Exercise of Appraisal right
a. Any stockholder who disagree with the sale, lease, exchange,
mortgage, pledge and any other disposition may exercise his
appraisal right.
40. Power to Acquire own shares
a. GR: The corporation may only acquire its own stocks in the
presence of Unrestricted Retained Earnings (URE).

RATIONALE:

1. The repurchase of shares is a method of distribution or

withdrawal of assets, and is subject to abuse, as
creditors have a right to assume that so long as there
are debts and liabilities, the Board will not use
corporate assets to purchase its own stock
2. Treasury shares may be availed of to perpetrate control
of the enterprise without the expensive requisite of a
majority voting stock
b. EXCEPTIONS
a. Redeemable shares
 b. In case that the corporation conveys its stocks in payment of debts
c. In a close corporation, a stockholder may demand the payment of the fair value
of shares regardless of existence of retrained earnings for as long as it will not
result to the insolvency of the corporation.
41. Power to Invest Corporate Funds in Another Corporation or Business
a. GR: The corporation is not allowed to engage in a business different from those
enumerated in its AOI.

EX: The purpose will be amended to included the desired business activity among its
secondary purpose.
b. RULES IN CASE A CORPORATION WANTS TO INVEST IN AN UNDERTAKING
a. Investment of a corporation in a business which is in line with
its primary purpose requires only the approval of the board.
b. Investment of assets for any of its secondary purposes requires
the prior approval of its shareholders/members.
c. If the investment is outside the purpose/s for which the
corporation was organized, Articles of Incorporation must be
amended first, otherwise it will be an Ultra Vires act.
c. Exercise of Appraisal Right
a. Any stockholder who disagrees with the investment of
corporate funds in another corporation or business may
exercise his appraisal right.
42. Power to declare dividends
a. Requirements
a. Must be distributed out of Unrestricted Retained Earnings
(URE)
b. Payable in cash, property, or in stock to all shareholders on
the basis of outstanding stock held by them.
c. Resolution by the Board.
b. RULES
a. Shares of Stock – a corporation may legally issue a Shares of
Stock in consideration of services rendered to it by a person
not a stockholder. (shares of stocks should be part of the
original capital stock of the corporation)
b. Stock dividends – can only be issued to a stockholders
because only stockholders are entitled to dividends.
43. Power to Enter into Management Contract
a. GR: No management contract shall be entered into for a period longer than 5 years for
any one term.

EX: service contract or operating agreement which relates to exploration, development,

exploitation or utilization of natural resources may be entered into for such periods as
may be provided in the pertinent laws and regulations.
44. Doctrine of Individuality of Subscription
a. It states that a subscription is one entire and indivisible whole contract. It cannot be
divided into portions.
b. Consequently, where stocks were subscribed and part of the subscription contract price
was not paid, the whole subscription shall be considered delinquent, and not only the
shares which corresponds to the amount not paid.
45. Doctrine of Equality of Shares
a. It states that all stocks issued by the corporation are presumed equal with the same
privileged and liabilities, provided that the AOI is silent on such differences.
b. There is a presumption of equality of rights and features when nothing is expressly
provided to the contrary.
c. Although a corporation has the power to classify its shares of stock, provide for
preferences and other conditions, no presumption should exist to distinguish one share
from another.
d. RCC now requires that the distinguishing features be stated also not only in the AOI but
also in the Certificate of Stocks.
46. Ultra Vires Doctrine
a. Is an act which a corporation is not empowered to do or perform because they are
outside or beyond the express and implied powers conferred by its AOI or by the Revised
Corporation Code (RCC) or not necessary or incidental to the exercise of the powers so
conferred.
b. Type of Ultra Vires Act
a. Acts done beyond the powers of the corporation as provided in the law or its
AOI.
b. Ultra Vires Act of officers and not of the corporation.
c. Acts or contracts, which are per se illegal as being contrary to law.
c. Kinds of Ultra Vires acts by reason
a. By reason of lack of authority (ultra vires acts)
b. By reason of illegality (illegal acts)
d. Summary

Basis Ultra Vires Acts Illegal Acts

Lawfulness Lack of authority; not Illegality; unlawful;
necessary unlawful, but against law, morals, public
outside the powers of the policy and public order.
corporation
Ratification Can be ratified Cannot be ratified
Binding Power Can bind the parties if Cannot bind the parties;
wholly or partially void and cannot be
executed. validated.
Enforceability Voidable (becomes binding Void
and enforceable when
ratified by stockholders)
 e. Remedies in case of Ultra Vires Acts
a. State
1. Dissolution of the corporation thru a quo warranto proceeding
2. Injunction
3. Suspension or revocation of the certificate of registration by the SEC.
b. Stockholders
1. Injunction
2. Derivative suit
3. Ratification (except when a 3rd party is prejudiced or the act is illegal)
c. Creditors – nullification of contract in
1. Fraud of creditors
47. Trust Fund Doctrine
a. It states that the capital stock, properties, and other assets of a corporation are regarded
as equity in trust for the payment of corporate creditors.
b. All funds received by the corporation in payment of the shares of stock shall be held in
trust for the corporate creditors and other stockholders of the corporation.
c. GR: The corporation cannot buy its own shares using the subscribed capital as the
consideration therefore.

EX:

1. Reedemable shares (for as long as it will not result to the insolvency of

the corporation)
2. Corporation conveys its stocks in payment of a debt.
3. In a close corporation, a stockholder may demand the value of shares
regardless of existence of retained earnings for as long as it will not
result to the insolvency of the corporation.
4. Rescission of a subscription agreement is not allowed since it will result
in the unauthorized distribution of the capital assets and property of the
corporation.
d. Trust Fund Doctrine is not limited to reaching the stockholder’s unpaid subscriptions, it
also encompasses other property and assets generally regarded in equity as trust fund
for the payment of corporate debts. 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 shoe of the corporation for the satisfaction of its debt.
e. 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.
 f. 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 issue price of the stocks of the
corporation.
48. Stockholders and members
a. Fundamental Rights of a Stockholder
a. Direct or indirect participation in management
b. Voting rights
c. Right to remove directors
d. Proprietary rights
1. Right to dividends
2. Appraisal rights
3. Right to issuance of stock certificate for fully paid
shares.
4. Proportionate participation in the distribution of assets
in liquidation
5. Right to transfer of stocks in corporate books
6. Pre-emptive right
e. Right to inspect books and records
f. Right to be furnished with the most recent financial
statements/reports
g. Right to recover stocks unlawfully sold for delinquent
payment of subscription
h. Right to file individual suit, representative and derivative suits
b. Nature of the Rights of members
a. In a non-stock corporation, the right of members of any class
to vote “may be limited, broadened or denied to the extent
specified in the AOI or the by-laws”.
c. Participation in Management
a. Proxy
1. For stock corporation, the right to issue a proxy cannot
be denied, though it may be regulation under the by-
laws since it is an aspect of ownership interest of
stockholders.
2. For non-stock corporation, the right of members to vote
by proxy may be denied under the AOI or by-laws.
3. Period of effectivity of proxy
a. Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is
intended.
 b. No proxy shall be valid and effective for a period
longer than 5 years at any one time.
b. Voting Trust
1. It is an agreement created by one or more stockholders
for the purpose of conferring upon a trustee or trustees
the right to vote and other rights pertaining to the
shares for a period not exceeding 5 years at any time.
Unless, required as a condition in a loan agreement.
2. Under a voting trust agreement, a stockholder of a
stock corporation parts with the nakes or legal title,
including the power to vote, of the shares and only
retains the beneficial ownership of the stock.
3. Limitation of a Voting Trust Agreement
a. No voting trust agreement shall be entered into
for the purposes of circumventing the laws
against:
i. Anti-competitive agreements
ii. Abuse of dominant position
iii. Anti-competitive mergers and acquisitions
iv. Violations of nationality and capital
requirements
v. Fraud.
d. Cases when stockholders’ action is required
a. Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend or
vote in behalf of stockholders without need of any written
proxy, unless otherwise provided in the AOI or declared
delinquent under the RCC.
49. Manner of Voting
a. By majority of vote in cases of:
a. Power to enter into management contracts.
b. Amendments to by-laws
c. Revocation of delegation to the BOD of the power to amend or repeal or adopt
by-laws.
d. Granting compensation other than per diems to directors.
e. Fixing the consideration for no-par shares
f. Voluntary dissolution of a corporation where no creditors are affected.
g. Revocation of delegation to the BOD of the power to amend/repeal/adopt by-
laws
h. Calling a meeting to remove directors or trustees
b. By 2/3 vote in cases of
a. Removal of directors or trustees
b. Amendment of AOI.
 c. Amendment of AOI of incorporation of close corporation
d. Delegating the power to amend or repeal by-laws or adopt new by-laws
e. Extending or shortening corporate term.
f. Increasing/decreasing capital stocks
g. Incurring, creating, increasing bonded indebtedness.
h. Issuance of shares not subject to pre-emptive right
i. Sale/disposition of all or substantially all corporate assets.
j. Investment of funds in another business.
k. Stock dividend declaration
l. Power to enter into management contract.
m. Ratifying contracts with respect to dealings with directors/trustees.
n. Ratifying acts of disloyalty of a director
o. Plan or merger or consolidation.
p. Plant or distribution of assets in non-stock corporation
q. Incorporation of religious society.
r. Voluntary dissolution of a corporation where creditors are affected.
s. By cumulative voting.
c. By cumulative voting
a. Election of Directors or Trustees, strockholders entitled to vote may:
1. Vote such number of shares for as many persons as there are directors
to be elected (Straight voting)
2. Cumulate said shares & give 1 candidate as many votes as the number
of directors to be elected multiplied by the number of the shares owned
(Cumulative voting for 1 candidate)
3. Distribute them on the same principle among as many candidates as
may be seen fit (Cumulative Voting by Distribution)
b. No delinquent stock shall be voted.
c. Members of a non-stock corporation may cast as many votes as there are
trustees to be elected but may not cast more than 1 vote for 1 candidate.
50. Proprietary Rights
a. Rights to Dividends - that portion of the corporation set aside, declared, and ordered by
the directors to be paid ratably to the stockholders on demand or at a fixed time. It is a
payment to the stockholders as a return upon their investment.
51. Appraisal Right
a. What is appraisal right? – it is the right to withdraw from the corporation and demand
payment of the fair value of the shares after dissenting from certain corporate acts
involving fundamental changes in corporate structure.
b. Mere silence or abstention does not suffice. The stockholder must have voted against
the corporate action.
c. Stockholder must make a written demand on the corporation within 30 days after the
vote was taken for payment of the fair value of his shares. Failure to make demand
within such period shall be deemed waiver of the appraisal right.
 d. Stockholder must submit his certificate of stock to the corporation for notation within 10
days after demand for payment. Otherwise, right of appraisal may be terminated at the
option of corporation.
52. Right to inspect
a. A stockholder’s right of inspection is based on his ownership of the assets and property
of the corporation. Therefore, it is an incident of ownership of the corporate property.
b. Such right is predicated upon the necessity of self-protection.
c. Remedies when inspection is refused:
a. Mandamus
b. Injunction
c. Action for damages
d. File an action to impose a penal offense by fine.
53. Preemptive Right
a. Preemptive Right – an option or privilege of an existing stockholder to subscribe to a
proportionate part of shares subsequently issued by the corporation before the same
can be disposed of in favor of others.
54. Right to Vote
a. GR: No share may be deprived of voting rights

EX: shares classified and issued as “preferred” or “redeemable” may be deprived of

voting rights: Provided, that there shall always be a class or series of shares with
complete voting rights.
55. Remedial Rights
a. Individual Suits
a. A suit brought by the shareholder in his own name against the corporation when
a wrong is directly inflicted against him.
b. Where a stockholder or member is denied the right of inspection, his suit would
be individual because the wrong is done to him personally and not to the other
stockholders or the corporation.
b. Representative Suit
a. 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.
c. Derivative Suit
a. The right of stockholders to bring derivative suits is not based
on any provision of the Corporation Code or the Securities
Regulation Code but is a right that is implied by the fiduciary
duties that directors owe corporations and stockholders.
Derivative suits are, therefore, grounded not on law, but on
equity.
b. A suit brought by a stockholder for and on behalf of the
corporation for its protection from the wrongful acts
committed by the directors/trustees of the corporation, when
 the stockholder finds that he has no redress because the
directors/trustees, are the ones vested by law to decide
whether or not to sue.
c. It is an action brought by minority shareholders in the name of
the corporation to redress wrongs committed against the
corporation, for which the directors refuse to sue.
d. It is a condition sine qua non that the corporation be
impleaded as a party because not only is the corporation an
indispensable party, but it is also the present rule that it must
be served with process.
e. Parties to a derivative suit
1. The suing stockholder – nominal party.
2. Corporation – real party in interest.

Thus, the action must be brought for the benefit and in the name of the
corporation.

NOTE:

a. The corporation should be made a plaintiff or defendant, for res

judicata to apply.
b. Proper forum for derivative suits – jurisdiction is with the
REGIONAL TRIAL COURT (RTC)
c. A derivative suit can only be filed when there has been a
showing of exhaustion of intra-corporate remedies. Unless
where the corporate directors are the ones guilty of a breach of
trust, and intra-corporate remedy is futile or useless.
56. Business Judgement Process.
a. GR: when a wrong is committed against a corporation, whether to
bring the suit or not primarily lies within the discretion and exercise
of business judgment of the BOD.

EX: But where corporate directors are guilty of a breach of trust, not
of mere error of judgment or abuse of discretion, and intra-corporate
remedy is futile or useless, a shareholder may institute a derivative
suit in behalf of himself and other stockholders and for the benefit of
the corporation.
57. Board of Directors and Trustees
a. Repository of Corporate Powers (Doctrine of centralized management
b. Holdover Principle in case of failure of a quorum called for an election. Failure to elect
does not terminate the terms of incumbent officers.
c. Permanent representation not allowed in BOD
d. Requirement of an Independent Director is necessary if the corporation is vested with
public interest.
e. Removal
 a. GR: Any director or trustee of a corporation may be removed from office with or
without cause

EX: if the director was elected by the minority because the minority cannot be
deprived of right of representation.
58. Special Fact Doctrine
a. GR: Directors only owes their duty to the corporation. They owe no fiduciary duty to
stockholders, but they may deal with each other at fair and reasonable terms, as if they
were unrelated. No duty to disclose facts known to the directors or officer.

EX: where special circumstances or facts are present which make it inequitable for the
director to withhold information from the stockholder, such concealment, according to
courts is fraud.

Examples:
1. Concealment of the defendant-purchaser's identity (the corporate
officer had used an agent go-between to avoid detection of his
actions by the seller here)
2. Failure to disclose significant facts that materially affected the
price of the stock.
59. Inside Information
a. The fiduciary position of insiders, directors, and officers prohibits
them from using confidential information relating to the business of
the corporation to benefit themselves or any competitor corporation
in which they may have a mere substantial interest.
b. It is inside information if it is not generally available to others and is
acquired because of the close relationship of the director or officer
to the corporation.
60. Close Corporation
a. One whose AOI provides that:
a. All the corporation’s issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20);
b. All the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title;
and
c. The corporation shall not list in any stock exchange or make
any public offering of its stocks of any class.
b. One where two-thirds (2/3) or more of its voting stock or voting
rights is NOT owned or controlled by another corporation, which is
not a close corporation within the meaning of this Code.
c. The following cannot be incorporated as a close corporation
a. Minong or oil companies
b. Stock exchange
 c. Banks
d. Insurance companies
e. Public utilities
f. Education institutions
g. Corporates declared to be vested with public interest
61. Non-stock corporation
a. one where no part of its income is distributable as dividends to its
members, trustees, or officers.
b. Treatment of Profits
a. Any profit which a non-stock corporation may obtain
incidental to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized.
62. Religious Corporation
a. A corporation sole may be formed by the chief archbishop, bishop,
priest, minister, rabbi, or other presiding elder of such religious
denomination, sect, or church.
b. A corporation sole is not the owner of the properties that he may
acquire, but merely the administrator thereof.
63. One person corporation
a. A corporation with a single stockholder
b. Who may form One Person Corporation (OPC)
a. Natural Person
b. Trust
c. Estate
c. Excepted Corporations
a. Only a natural person, trust or an estate may form OPC.
b. The following may NOT incorporate as OPC:
1. Banks
2. Quasi Banks
3. Pre-need companies
4. Public and publicly-listed companies
5. Non-chartered GOCCs.
d. Capital Stock Requirements
a. OPC shall not be required to have a minimum authorized capital stocks, except
as otherwise provided by special law.
64. Foreign Corporations
a. Foreign Corporations are those formed, organized, or existing under any laws other than
of the Philippines and whose laws allow Filipino citizens and corporations to do business
in its own country.
b. Bases of Authority Over Foreign Corporations
a. Consent Doctrine
1. The legal standing of foreign corporations in the host state is founded on
international law on the basis of consent whether implied or express.
 2. Under the Philippine law, the condition is that it must obtain a license to
do business in the Philippines
b. Doctrine of “Doing Business”
1. When a foreign corporation undertakes business activities within the
territorial jurisdiction of a host state, then it ascribes to the host state
standing to enforce its laws, rules and regulations.
2. What is the concept of “doing business”
a. It implies a continuity of commercial dealings and arrangements
and the performance of some functions normally incident to the
purpose or object of a foreign corporation’s organization.
c. Necessity of a license to do business
a. A foreign corporation transacting business in the Philippines is required to
secure a license to have the personality to sue before Philippine courts.
b. Resident Agent
1. The foreign corporation shall file a written power of attorney:
a. Designating a person on whom summons and other legal
processes may be served
2. A resident agent may be either:
a. An individual residing in the Philippines
b. A domestic corporation
c. Personality to sue and suability

Status Consequence
Doing business in the Philippines with Can sue and be sued
a license
Doing business in the Philippines GR: cannot sue, but may be sued in
without a license the Philippines.

EX: capacity to sue may not be

questioned if the other party is
estopped.
NOT doing business in the May sue and be sued.
Philippines, on ISOLATED
TRANSACTION (Doctrine of Isolated
Transaction – no intent on the part of
the foreign corporation to engage in
a progressive pursuit of the purpose
of a business transaction)

65. Merger and Consolidation

a. Merger – a corporation absorbs the other and remains in existence while the others are
dissolved.
b. Consolidation – a new corporation is created, and consolidating corporations are
extinguished.
c. Merger vs. Consolidation
Merger Consolidation
One or more corporations are absorbed Union of 2 or more corporations to form
by another which survives and continues a new corporation.
the combined business
 Banking Laws

66. Monetary Board

a. Power to close banks (final and executory, subject to judicial scrutiny)
b. The BSP and Banks in Distress
a. Conservatorship
1. Appoint of Conservator – Whenever, on the basis of a report
submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or a quasi-
bank is in a state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate to protect the
interest of depositors and creditors, the Monetary Board may
appoint a conservator
2. The conservatorship shall not exceed 1 year.
3. The power of the conservator cannot extend to post-facto
repudiation of perfected transactions, otherwise they would
infringe against the non-impairment clause of the Constitution.
b. Closure
1. The action of the MB on closure is final and executory. Such
exercise though is subject to judicial scrutiny.
2. RA 7653 no longer requires that an examination be conducted
before the MB can issue a closure order. Under the law, the
sanction of closure could be imposed upon a bank by the BSP
even without notice and hearing. The “close now, hear later”
doctrine has already been justified as a measure for the
protection of the public interest.
c. Receivership
1. Whenever, upon report of the head of supervising or examining
department of the MB, the MB finds that a bank or quasi-bank:
a. Is unable to pay its liabilities as they become due in the
ordinary course of business: Provided, that this shall not
include inability to pay caused by extraordinary demands
induced by financial panic in the banking community.
b. Has insufficient realizable assets, as determined by the
BSP, to meet its liabilities.
c. Cannot continue in business without involving probable
losses to its depositors or creditors.
d. Has willfully violated a cease-and-desist order that has
become final involving fraud.

The MB may summarily and without need for prior hearing forbid the
institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Commission (PDIC) as receiver of the
banking institution.

2. A bank receiver only has the power of “administration” granting or

approving an “exclusive option to purchase” is not an act of
 administration, but an act of strict ownership, involving, as it does the
disposition of property of the bank.
d. Liquidation
1. If the receiver determines that the institution cannot be
rehabilitated or permitted to resume business, the MB shall notify
in writing the BOD of its findings and direct the receiver to
proceed with the liquidation of the institution.
2. the designation of conservator is not a precondition to the
designation of a receiver.
c. General Banking Law
a. Definition of banks
1. Refers to entities engaged in the lending of funds obtained in the
form of deposits.
b. Classification of Banks
1. Universal Banks
2. Commercial banks
3. Thrift banks, composed of: (i) savings and mortgage banks (ii)
stock savings and loan associations, and (iii) private
development banks
4. Rural banks
5. Cooperative banks
6. Islamic banks
7. Other classification of banks as determined by the MB of the BSP
c. Distinction of Banks from Quasi-Banks and Trust Entities

Banks Quasi-Banks Trust Entities

Engaged in lending of Engaged in the A stock corporation or a
funds obtained in the borrowing of funds person duly authorized
form of deposits through the issuance, by the MB to engage in
endorsement or trust business.
assignment with
recourse or acceptance
of deposits substitutes
for purposes or
relending or purchasing
of receivables.

d. Diligence Required of Banks

1. High standards of integrity and performance
2. Higher than that of a good father of a family
3. the business and industry of banks are imbued with public interest.
4. There is a fiduciary relationship between the bank and its depositors.
e. Liability of Banks
 1. Banking institution may be held liable for damages for failure to exercise
the diligence required of it resulting to contractual breach or where the
act or omission complained of constitutes an actionable tort.
f. Stipulation on Interests
1. Higher Interest rate
a. Stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such
stipulation are void for being contrary to law and morals.
b. Since the stipulation on the interest rate is void,
it is as if there was no express contract thereon.
Hence, courts may reduce the interest rate as
reason and equity demand.
67. Secrecy of Bank Deposit
a. Purpose: encouragement to the people to deposit their money in banking institutions
and discourage private hoarding.
b. GR: all peso deposits of whatever with banks in the Philippines including investment in
bonds issued by the government are absolutely confidential.

Trust accounts are covered by the bank secrecy law.

EX:

1.Upon written permission of the depositors

2.Case of impeachment
3.Upon order of the court in cases of bribery or dereliction of duty of public officials
4.Cases where the money deposited or invested is the subject matter of the litigation.
5.The Commissioner of the BIR is authorized to inquire into the bank deposits and
other related information held by financial institutions of:
a. A decedent in order to determine his gross estate
b. any taxpayer who has filed an application to compromise his tax liability on
the ground of financial incapacity
c. a specific taxpayer subject of a request for the supply of tax information
from a foreign tax authority pursuant to an international convention or
agreement to which the Philippine is a signatory or a party.
6. Unexplained wealth under the Anti-Graft and Corrupt Practices Act.
c. Garnishment of Deposits, including Foreign Deposits
a. GR: the prohibition against examination of bank deposit DOES NOT preclude its
being garnished to insure satisfaction of a judgement.

EX: Foreign Currency Deposits shall be exempt from attachment, garnishment or

any other order or process of any court, legislative body, government agency, or
any administrative body.
68. Anti-Money Laundering Act
a. Covered Institutions
 a. Banks, non-banks, quasi-banks, trust entities, foreign exchange dealers,
pawnshops, money changers, remittance and transfer companies and other
similar entities supervised by the BSP.
b. Insurance companies, pre-need companies supervised by the Insurance
Commission
c. Securities dealers, brokers, salesmen, investment houses and other similar
entities managing securities or rendering services as investment agent, advisor
or consultant.
d. Mutual funds
e. Foreign exchange corporations
f. A director or corporate secretary of a company
g. A partner of a partner
h. A similar position in relation to other juridical persons
b. The term covered persons excludes lawyers and accountants acting as independent legal
professionals
c. Obligations of covered institutions
a. Customer Identification
b. Record keeping
c. Reporting of covered and suspicious transactions
d. Anonymous accounts, accounts under fictitious names, and other similar accounts shall
be prohibited.
e. Reporting of Covered and Suspicious Transactions
a. GR: Covered institutions shall report to the AMLC all covered transactions within
5 working days from occurrence.

EX: if the AMLC prescribed a longer period not exceeding 15 working days
f. Covered and Suspicious Transactions
a. GR: A covered transaction is a transaction in cash or other equivalent monetary
instrument involving a total amount in EXCESS of 500K within one banking day.

EX: for casinos or covered persons, a single casino transaction involving an

amount in EXCESS of 5million pesos or its equivalent in any other currency.
b. Suspicious transaction are transactions with covered institutions, REGARDLESS
OF THE AMOUNT INVOLVED, where any of the following circumstances exist:
1. No underlying legal or trade obligation, purpose or economic
justification
2. Client is not properly identified.
3. Amount involved is not commensurate with the business or financial
capacity of the client.
4. Taking into account all known circumstances, it may be perceived that
the client’s transaction is structured to avoid being the subject of
reporting requirements
 5. Any circumstances relating to the transaction which is observed to
deviate from the profile of the client and/or the client’s past
transactions with covered institutions.
6. Transactions in any way related to an unlawful activity or offense that is
about to be, is being or has been committed.
g. Safe harbor provision
a. No administrative, criminal or civil proceedings shall lie against any
person for having made a covered transaction report in the
regular performance of his duties and in good faith, whether
or not such reporting results in any criminal prosecution.
b. Lawyers and accountants acting as independent legal
professionals are not subject to the reporting requirement if
the relevant information was obtained in circumstances
subject to professional secrecy or legal professional privilege
h. When and how Money Laundering is committed (including Predicate
crimes)
a. Money laundering is a crime whereby the proceeds of an
unlawful activity are transacted, thereby making them appear
to have originated from legitimate sources.
b. Money laundering is also committed by any covered person
who, knowing that a covered or suspicious transaction is
required under this Act to be reported to the Anti-Money
Laundering Council (AMLC), fails to do so.
c. Unlawful activity
1. Kidnapping for ransom
2. Comprehensive Dangerous Drugs Act
3. Plunder
4. Robbery and extortion
5. Jueteng and Masiao
6. Piracy on the high sea
7. Qualified theft
8. Swindling
9. Smuggling
10. Violation of Electronic Commerce Act
11. Hijacking
12. Destructive Arson and murder
13. Fraudulent practices under Securities Regulation Code
14. Felonies or offenses of a similar nature
i. Authority to Inquire into bank Deposits
a. GR: The AMLC may inquire into or examine any particular
deposit or investment, including related accounts, with any
banking institution or non-bank financial institution upon order
of the court in cases of violation of Anti-Money Laundering Act
 when it has been established that there is probable cause
that the deposits or investments involved are related: (1) to an
unlawful activity or (2) any money laundering offenses.

EX: No court order shall be required in the following cases:

1. Kidnapping for ransom

2. Hijacking
3. Destructive Arson and murder
4. Terrorism and conspiracy to commit terrorism
b. A bank inquiry order may be availed of without need of a pre-existing case
under the AMLA. Otherwise, the AMLC functions would be rendered futile.

However, unlike a freeze order, it cannot be issued ex parte

j. Freezing and Forfeiture
a. Who may apply: AMLC upon verified ex parte petition and after determination
that probable cause exists that any monetary instrument or property is any way
related to an unlawful activity.
b. Where should the AMLC lodged the application for ex parte petition: Court of
Appeals
c. Effectivity of the Freeze Order
1. Freeze order shall be effective immediately and shall not exceed 6
months.
2. On motion of the AMLC filed before the expiration of the
original period of the freeze order, the court may, for
good cause shown, extend its effectivity.

Insurance Law

69. Definition:
a. Insurance is a contract by which one party (the insurer), for a consideration that is
usually paid in money, either in a lump sum or at different times during the continuance
of the risk, promises to make a certain payment, usually of money, upon the destruction
or injury of something in which the other party (the insured) has an interest.

A contract of suretyship shall be deemed to be an insurance contract within the meaning

of the Insurance code, only if made by a surety who or which, as such, is doing an
insurance business.
b. A contract of insurance is:
a. A contract of indemnity
b. Wherein one undertakes for a consideration
c. To indemnify another against loss, damage or liability
d. Arising from an unknown or contingent event (contingent event: event that is
not certain to take place; unknown event: even which is certain to happen, but
the time of its happening is not known)
 NOTE: a past event cannot be designated event in an insurance contract.

c. There is no particular form required for a contract of insurance.

d. Any person, anyone can be insured, EXCEPT public enemy.
e. Elements of an Insurance Contract:
a. Cause – event or peril insured against
b. Consideration – premium payments paid by the insured
c. Risk of loss or damage being assured by the insurer
d. Risk-distributing scheme – distribution and transfer by the insurer of risk of loss,
damage or liability among persons having similar risks
e. Insurable interest – the insured possesses an interest of some kind, susceptible
of pecuniary estimation, which the event insured against may cause loss or
damage.
f. A meeting of the minds of the parties.
f. Under the Insurance code, the following are void
a. Stipulation in policy for the payment of loss whether the person insured has or
has not any interest in the property insured.
b. Stipulation that the policy shall be received as proof of such interest
c. Policy executed by way of gaming or wagering.

NOTE: insurable interest is not required in industrial life insurance.

NOTE: the insured is not always the person to whom the proceeds are paid. Such
person is the beneficiary.

g. Characteristics/nature of Insurance Contract

a. Consensual (meeting of the minds)
b. Aleatory (obligation of the insurer to pay depends on the happening of an event
which is uncertain, or though certain, is to occur at an indeterminate time)
c. Voluntary (Parties may incorporate appropriate provisions and
conditions they choose, as long as they are not contrary to
law, morals, good customs, public order, or public policy)

Exception: Some insurance contracts, particularly liability

insurance, may be required by law in certain instances:

1. Compulsory motor vehicle liability insurance for motor

vehicle
2. Compulsory coverage in state insurance fund for
employees.
3. As a condition to granting a license to conduct business
or calling affecting the public safety or welfare
4. Social insurance for members of the GSIS and for
employees of the private sector covered by the SSS.
d. Executory and unilateral but synallagmatic
 1. Executory – Once the insured pays the premium, the
contract already takes effect. After the payment of
premiums, the insurance imposes a unilateral obligation
on the insurer who promises to indemnify in case of
loss.
2. Synallagmatic – such that even if the contingent event
or designated peril does not occur, the insurer has still
provided protection against the risk for the period
covered by the insurance contract.
e. Conditional (insurer incurs liability only upon the happening of
the event insured against. However, many other conditions
are usually required (e.g. payment of premium or performance
of other acts) as precedent to the right of the insured to claim
benefits under the insurance)
f. Contract of adhesion – (Insurance contracts are already presented
to the insured in its printed form on a “take it or leave it” basis.
The insured merely must agree to its terms. Such contracts of
adhesion are valid.)
g. Personal Contract
h. Uberrimae Fides contract
h. Classes of Insurance
a. Marine Insurance - covers loss or damage to property and persons in
connection with all risks or peril of navigation. It includes marine protection and
indemnity insurance against liability incidental to ownership, operation,
maintenance or construction of vessels and facilities thereof.
1. Philippine Rule
a. The insured may not abandon (constructive loss) the thing
insured unless the loss or damage is more than ¾ of its value.
Hence, a person insured by a contract of marine insurance may
abandon the thing insured and recover for a total loss when the
cause of the loss is a peril insured against if more than ¾ thereof
in value is actually lost.
b. Fire Insurance – a contract of indemnity by which the insurer, for a stipulated
premium, agrees to indemnify the insured against loss by fire, lightning,
windstorm, tornado or earthquake and other allied risks
1. Alteration in use or condition of a thing insured from that which it is
limited by the policy entitles an insurer to rescind the contract without
the insurer’s consent.
2. A contract of fire insurance is not affected by any act of
the insured after the execution of the policy, which does
not violate its provisions, even though it increases the
risk and is the cause of the loss.
 3. Transferring machinery to another location, despite a
provision in the policy stating that the machine cannot
be transferred without the consent of the insurer, is
considered an alteration in the condition and location of
the thing insured.
c. Casualty Insurance – is an insurance covering loss or liability
arising from accident or mishap.
1. Casualty insurance includes but is not limited to:
a. Employer’s liability insurance
b. Motor vehicle liability insurance
c. Plate glass insurance
d. Burglary and theft insurance
d. Suretyship Insurance – is an agreement whereby a party,
called the surety, guarantees the performance by another
party, called the principal or obligor, of an obligation or
undertaking in favor of a 3rd party called the obligee.
e. Microinsurance
1. Is a financial product or service that meets the risk
protection needs of the poor where the number of
premiums or contributions computed on a daily basis
does not exceed 7.5% of the current daily minimum
wage rate for nonagricultural workers in metro manila.
f. Compulsory motor vehicle liability insurance – a requisite for
registration or renewal of registration of motor vehicle land
transportation operator or owner. It applies both to public and
private vehicles.
g. Compulsory insurance coverage for agency-hired workers – is
an insurance mechanism made available by the law to provide
insurance protection for OFWs.
i. Insurable interest
a. An interest which a person is deemed to have in the subject
matter insured, where he has a relation or connection with or
concern in it, such that the person will:
1. Derive pecuniary benefit from the preservation of the
subject matter
2. Suffer pecuniary loss from its destruction
b. The existence of an insurable interest gives a person the legal
right to insure the subject matter of the policy of insurance. It
may not be waived by stipulation. Absence of insurable
interest renders the insurance contract void.
c. GR: insurable interest must be capable of pecuniary
estimation because the purpose of insurance is to indemnify.
 EX: Life insurance, the purpose of not to indemnify, but to act
as an investment or savings instrument.
j. Double Insurance and Over-Insurance
a. Double Insurance exist where the same person is insured by several insurers
separately in respect to the same subject and interest.
b. Requisites
1. Same person is insured
2. Two or more insurer insuring separately
3. Same subject matter
4. Same interest insured
5. Same risk or peril insured against
c. Double insurance is NOT prohibited under the law, UNLESS, the policy contains a
stipulation to the contrary
d. Over insurance occurs when the value of the insurance exceeds the value of the
insurable interest.
1. Over insurance is not per se void. However, recovery is allowed only to
the extent of the loss or damage incurred by the insured
k. No fault, Suicide and Incontestability Clause
a. No fault clause – connotes that the victim of a tort can recover for his loss from
his insurer without regard to his own contributory fault or the fault of the
tortfeasor. This is to guarantee compensation or indemnity to persons suffering
loss in motor vehicle accidents.
l. Perfection of the Insurance Contract
a. An insurance contract is consensual, it is perfected by mere consent
b. Consent is manifested by the meeting of the offer and the acceptance upon the
object or the cause which are to constitute the contract.
c. There is an offer when the insured submits an application to the insurer. There is
acceptance when the insurer approves the application.
d. So long as the application for insurance has not been accepted or rejected, it is
merely a proposal or an offer to make a contract.
e. The insurance contract becomes effective upon payment of first premium,
provided there has been approval of the application. Payment of premium
without approval cannot be construed as perfection of the insurance contract.
f. The submission of an application, even with premium is mere offer on the part
of the applicant and does not bind the insurer.
g. An insurance contract is also not perfected where the applicant dies before the
approval of his application, or it does not appear that the acceptance of the
application ever came to the knowledge of the applicant.
h. Delay in acting on the application does not constitute acceptance even though
the insured has forwarded his first premium with his application. When there is
delay in acceptance due to the negligence of the insurance company which takes
unreasonably long time before the application is processed and the applicant
dies, the contract is not perfected.
 However, the insurer may be liable for damages in accordance with the tort
theory because an insurance contract is imbued with public interest and thus,
the insurer should act on an application for insurance with a reasonable time.

m. Premium Payment
a. GR: No insurance policy issued or renewal is valid and binding until actual
payment of the premium. Any agreement to the contrary is VOID.

EX:

1. Whenever the grace period provision applies in the case of a life or

industrial life policy.
2. Whenever under the broker and agency agreement with duly licensed
intermediaries, a 90-day credit extension is given.
3. When there is an acknowledgement in the contract that the premium
has been paid.
4. Payment to an agent
5. Credit extension.
6. Agreement to grant payment of premium in installment basis and partial
payment has been made
7. When the parties are barred by estoppel.
b. Excuse for non-payment
1. Fortuitous event – which render payment by the insured wholly
impossible will not prevent forfeiture of the policy when the premium
remains unpaid.
2. Non-payment of premiums occasioned by war causes an insurance to be
not merely suspended, but completely abrogated.
n. Rights and obligations of Parties
a. Obligation of the insurer
1. Obtain a certificate of authority from the office of the Insurance
Commission
2. Honor the insurance policy and promptly settle the claim within 60 days
in case of policy payable upon death or within 30 days in case of NL
policy.
b. Rights of the Insurer
1. On subrogation
a. Insurance company which has paid the insured is subrogated to
the rights of the insured as against the wrongdoer. If the amount
paid by the insurance company does not fully cover the injury or
loss, the aggrieved party can recover the deficiency from the
person who caused the loss or injury.
 b. Insurer steps into the shoes of the insured and becomes entitled
to claim whatever the insured can claim from the 3 rd party
responsible for the loss.
c. If the insured releases the party at fault, insurer can no longer
have the right of subrogation.

c. Rights and obligations of the Insured

Rights Obligations
1. Right to be indemnified by 1. To pay the premiums
the insurer 2. To disclose material facts
2. Right to change beneficiary 3. To comply with
in life insurance when representations and
designation is revocable. warranties.
3. Right to grace period in life
insurance
4. Non-default options in life
insurance
5. Right to reinstate subject to
certain conditions
6. Right to refund of premiums
7. Right to abandon in case of
constructive total loss in
marine insurance
8. Right to assign

o. Recission of Insurance Contracts

a. Concealment - failure to disclose facts which the applicant, at the time of
application, knows or ought to know and are material to the insurance applied
for.
1. A concealment, whether intentional or unintentional, entitles the
injured party to rescind a contract of insurance.
2. RATION: the contract of insurance is one of perfect good faith
(uberrimae fides)
b. Test of Materiality
1. Whether the insurer would have agreed to issue the policy had it known
of the facts concealed or, perhaps, impose additional terms or require
higher premium.
c. Effects
1. GR: Concealment vitiates the contract and entitles the insurer to
rescind, even if the death or loss is due to a cause not related to the
concealed matter.
 EX:

a. concealment after the contract has become effective – because

concealment must take place at the time the contract is entered into in
order that the policy may be avoided.

b. waiver or estoppel.
c. In marine insurance, where concealment of the
following matters does not vitiate the entire contract,
but merely exonerates the insurer from a loss resulting
from the risk concealed:
a. The national character of the insured;
b. The liability of the thing insured to capture and
detention;
c. The liability to seizure from breach of foreign laws of
trade;
d. The want of necessary documents; and
e. The use of false and simulated papers [Sec. 112].

2. Incontestability clause:

GR: stipulates that the policy shall be incontestable

after two years from its date of issue or of its last
reinstatement. The incontestability clause is a
mandatory provision in life and endowment policies.

EX:

a. Non-payment of premium
b. Violation of the conditions of the policy relating to military and
naval service in time of war.

NOTE: though incontestable after the period of 2 years from its date of
issue or of its last reinstatement, the following defenses are still
available to the insurer, such as:

i. Non-payment of premium to make the policy effective

or remain in force
ii. Lack of insurable interest.
iii. Coverage such that the loss/damage did not arise from
the risks covered
iv. Failure to commence action within reglementary period
v. Failure to comply with conditions (proof of loss etc.)
after the loss.
vi. The viciousness of the fraud employed by the insured to
procure the contract, such as:
 1. Where the policy was taken pursuant to a
scheme to murder the insured, or
2. The insured substitutes himself with another
during the medical examination.

Transportation Law

70. Common Carriers

a. Common Carriers are persons, corporations, firms, or associations
a. Engaged in the business of carrying or transporting
b. Passengers or goods or both
c. By land, water or air
d. For compensation
e. Offering their services to the public
71. Test for common carrier
a. Determined by the character of the business carried on by the carrier
b. If the undertaking is a single transaction not part of the general business or occupation
engaged in, as advertised and held out to the general public, the individual or the entity
rendering such service is a private, not common, carrier
72. A travel agency is not a common carrier. Its covenant with its customer is simply to make travel
arrangements on their behalf.
73. A beach resort may be regarded as a common carrier when its ferry services are so intertwined
with its main business as to properly considered ancillary thereto.
74. Operators of a school bus service were: (a) engaged in transporting passengers generally as a
business; (b) undertaking to carry passengers; (c) for a fee.
75. Diligence required of common carrier
a. Extraordinary Diligence
76. There is a presumption of negligence on the part of a common carrier in case of death of or
injuries to passengers, unless they prove that they observed extraordinary diligence.
77. There is a presumption of negligence on the part of a common carrier for carriage of goods
when the delivery of goods in good order to carrier and their arrival at the place of destination in
bad order when no explanation is given as to how the injury occurred.
78. Liabilities of common carrier
 a. The liability of a carrier is contractual and arises upon breach of its
obligation.
a. There is breach if it fails to exert extraordinary diligence
according to all circumstances of each case;
b. A carrier is obliged to carry its passenger with the utmost
diligence of a very cautious person, having due regard for all
the circumstances;
c. A carrier is presumed to be at fault or to have acted
negligently in case of loss of goods and/or death of, or injury
to, passengers, it being its duty to prove that it exercised
extraordinary diligence; and
d. The carrier is not an insurer against all risks of travel.
b. Registered Owner rule
a. The person who is the registered owner of a vehicle is liable for damages caused
by the negligent operation of the vehicle although the same was already sold.
79. Obligations and Liabilities of Common carrier
a. Vigilance over goods
a. GR: common carriers are responsible for the loss, destruction, or deterioration
of the goods

EX: Common carriers are not liable when such loss, destruction,
or deterioration is due to any of the following causes only:

1. Flood, storm, earthquake, lightning, or other natural

disaster or calamity;
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;
5. Order or act of competent public authority
6. Force Majeure

In all other cases of loss, destruction, or deterioration, the

common carrier is presumed to have been at fault or to have
acted negligently, unless they prove that they observed
extraordinary diligence.

b. Exempting Causes
1. Natural Disaster or Calamity
a. NOTE: Fire may not be considered a natural
disaster or calamity because it arises almost
invariably from some act of man or by human
 means. It does not fall within the category of an
act of God unless caused by lightning or by other
natural disaster or calamity.
b. The common carrier must not have negligently
incurred delay.
c. The natural disaster must have been the
proximate and only cause of the loss.
2. Act of Public enemy
a. The act of the public enemy must have been the proximate and
only cause of the loss.
b. NOTE: Thieves, rioters, robbers, and
insurrectionists, though at war with social order,
are not in a legal sense classed as public
enemies, but are merely private depredators for
whose acts a carrier is answerable.
c. NOTE: Pirates on the high seas are considered as public enemy
3. Act or omission of the shipper or owner
a. must have been the proximate and only cause of the
loss, destruction, or deterioration of the goods.
b. If the shipper or owner merely contributed to the
loss, destruction or deterioration of the goods,
the proximate cause being the negligence of the
common carrier, the latter shall be liable for the
damages, which shall, however, be equitably
reduced.
4. Character of the goods
a. If the fact of improper packing is known to the
carrier or its servants or apparent upon ordinary
observation, but it accepts the goods
notwithstanding such condition, it is not relieved
of liability for loss or injury resulting therefrom.
5. Force majeure

b. Contributory negligence
a. The liability of the common carrier shall be equitably reduced
when the loss, destruction, or deterioration of the goods
when:
1. The negligence of the common carrier was the
proximate cause thereof; and
2. The shipper or owner merely contributed to such loss,
destruction, or deterioration
c. Duration of Liability
 a. Instances when carrier has responsibility to exercise
extraordinary diligence
1. From the time the goods are unconditionally placed in
the possession of, and received by the carrier or its
agent 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
2. When the goods are temporarily unloaded or stored in
transit, unless the shipper or owner has made use of
the right of stoppage in transit
3. During storage 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 to remove or dispose them.

NOTE: Delivery of the cargo to the customs authorities is not

delivery to the consignee or “to the person who has the right
to receive them. because in such case the goods are still in
the hands of the government and the owner cannot exercise
dominion over them. However, the parties may agree to limit
the liability of the carrier considering that the goods still have
to go through the inspection of the customs authorities before
they are actually turned over
to the consignee.

NOTE: It is settled in maritime law jurisprudence that cargoes

while being unloaded generally remain under the custody of
the carrier.

NOTE: common carrier remains liable to the consignee when

the goods were lost because the ports authorities released
them to unauthorized persons, absent a stipulation in the bill
of lading.
80. Stipulation for limitation of liability
a. An agreement limiting the common carrier’s liability for delay on
account of strikes or riots is also valid.
b. A stipulation between the common carrier and the shipper or owner
limiting the liability of the former for the loss, destruction, or
deterioration of the goods to a degree less than extraordinary diligence shall
be valid, provided it be:
a. In writing, signed by the shipper or owner;
b. Supported by a valuable consideration other than the service
rendered by the common carrier; and
 c. Reasonable, just and not contrary to public policy.
c. The following are void stipulations for limitation of liability on the
ground of public policy:
a. That the goods are transported at the risk of the owner or
shipper;
b. That the common carrier will not be liable for any loss,
destruction, or deterioration of the goods;
c. That the common carrier need not observe any diligence in
the custody of the goods;
d. 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;
e. That the common carrier shall not be responsible for the acts
or omission of his or its employees;
f. That the common carrier’s liability for acts committed by
thieves, or of robbers who do not act with grave or irresistible
threat, violence or force, is dispensed with or diminished;
g. 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
h. Stipulation which practically leaves the date of arrival of the
subject shipment on the sole determination and the will of the
carrier.
81. Limitation of liability to fixed amount
a. 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:
a. It is reasonable and just under circumstances; and
b. It has been fairly and freely agreed upon
82. Limitation of liability in absence of declaration of greater value
a. Where the liability has been limited due to a stipulation written at
the back of a ticket, to the effect that the liability is limited to a
certain amount unless the passenger declares a higher valuation is
valid and binding
83. Liability for baggage of passenger
a. Checked in baggage vs. hand carried baggage

Checked in baggage Hand carried baggage

Extraordinary diligence Ordinary diligence

84. Safety of Passengers

 a. Void stipulations
a. GR: the responsibility of a common carrier for the safety of passengers cannot
be dispensed with or lessened by stipulations by the posting of notices,
statements on tickets or otherwise

EX: when a passenger is carried gratuitously, a stipulation limiting the common

carrier’s liability for negligence is valid.

EX to EX: even when the a passenger is carried gratuitously, a stipulation limiting

the common carrier’s liability for willful act or gross negligence is INVALID.

NOTE: the reduction of fare does not justify any limitation of the common
carrier’s liability.
b. Liability for Acts of others
a. GR: 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 does not cease:

1. Even upon proof that they exercised all the diligence of

a good father of a family in the selection and
supervision of their employee (because the liability is
not based on quasi-delict, but on culpa contractual)
2. By stipulation, by the posting of notices, nor by
statements on the tickets eliminating or limiting said
liability
85. Other passenger and strangers
a. General Rule: A common carrier is not liable for injuries inflicted by
strangers or copassengers.

Exception: 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.
86. Extent of liability for damages
a. Damages recoverable from common carriers, both in cases of carriage of passengers and
goods are the following:
a. Actual and compensatory damages
b. Moral damages
c. Exemplary damages
 d. Nominal, temperate, and liquidated damages
e. Attorney’s fees.

Public Service Act

87. Critical Infrastructure

a. Refers to any public service which owns, uses or operates systems and assets, whether
physical or virtual, so vital to the Philippines that the incapacity or destruction of such
systems or assets would have a detrimental impact on national security, including
telecommunication
b. Foreign investment made after the effectivity of R.A No. 11659
a. Foreign investment shall be prohibited form owning capital in any public service
classified as public utility or critical infrastructure.
c. Foreign investment made before the effectivity of R.A. No. 11659
a. Foreign investment are prohibited from investing in additional capital upon the
effectivity of R.A No. 11659.
88. Samples of Public service as public utility
a. Distribution of electricity
b. Transmission of electricity
c. Petroleum products
d. Pipeline transmission
e. Waster pipeline transmission
f. Seaports
g. Public utility vehicles (not including electric vehicles, as the definition of R.A No. 11659
refers to internal combustion engine vehicles)
89. No other person shall be deemed a public utility, UNLESS otherwise subsequently provided by
law.
a. No entity shall be considered as a public utility unless provided by law.
 b. So hindi ibig sabihin na if the person is engaged in the distribution of electricity, he is
automatically a listed as a public utility. To be classified as a public utility, there must be
a law classifying the same.
90. In times of national emergency, when the public interest so requires, the state may, during the
emergency and under reasonable terms prescribed, temporarily take over or direct the
operation of any privately-owned public utility or business affected with public interest.
91. A public service which is not classified as a public utility shall be
considered a business affected with public interest.
92. Legal Implications for business affected with public interest
a. The state may, during national emergency, take over the business
affected with public interest.
b. The state, in the interest of national welfare or defense, establish
and operate vital industries, and upon just compensation transfer to
public ownership utilities and other private enterprises to be
operated by the government.
93. Power of the President to Suspend or Prohibit Transaction or Investment
a. Requisite to exercise such power: national security.
b. The president, in the interest of national security, may within 60 days from the receipt of
such recommendation from the relevant government agency suspend or prohibit any
proposed merger or acquisition transaction, or any investment in a public service that
effectively results in the grant of control, whether direct or indirect, to a foreigner or
foreign corporation.
94. Reciprocity Clause
a. Foreign Ownership Limitation for Critical Infrastructure
a. GR: Foreign nationals shall not be allowed to own more than 50% of the capital
of entities engaged in the operation and management of critical infrastructure

EX: the country of such foreign national accords reciprocity to the Philippine
nationals as may provided by foreign law, treaty or international agreement.
 Intellectual Property Law

95. Difference between Copyright, Trademarks, and Patents

Patents Trademarks Copyright

Any technical solution of a
problem in any field of
human activity which is new,
involves an inventive step
and is industrially applicable.
Any visible sign capable of Literary and artistic works
distinguishing the goods which are original intellectual
(trademark) or services creation in the literary and
(service mark) of an artistic domain protected
enterprise from that of from the moment of their
another and shall include a creation.
stamped or marked container
of goods

96. Where Registered

Patents Trademarks Copyright

Intellectual Property Office Intellectual Property Office The national library; Bureau
of Copyright and related
rights of the IPO

97. When Protection Starts

Patents Trademarks Copyright

Upon the issuance of the Upon issuance of the Upon creation
letters of patent by the IPO trademark certificate

98. Term of Protection

Patents Trademarks Copyright

20 years from the date of 10 years from the date of Generally up to 50 years after
filing of the patent registration the death of the author.
application

99. Mode of Acquisition

Patents Trademarks Copyright

Through registration Through registration, Through mere creation.
although well-known marks
are protected even without
registration
100. Jurisdiction of the Intellectual Property Office
a. Threshold: 200K or more in total damages claimed.

101. Important legal notes for Patentable Inventions

a. Novelty
a. An invention shall not be considered new if forms part of a prior art.
b. Prior art shall consist of:
1. 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 [Sec. 24.1, RA 8293];
2. The whole contents of an earlier published Philippine
application or application with an earlier priority date of
a different inventor
c. GR: When a work has already been made available to the
public, it shall be nonpatentable for absence of novelty.

EX: The disclosure of the information contained in the

application during the 12 months preceding the filing date or
the priority date of the application shall not prejudice the
applicant on the ground of novelty if such disclosure was
made by:
1. the inventor;
2. a patent office that should not have disclosed the
information, and the information was found in another
application by the same inventor or a third party; or
3. a third party who obtained the information directly or
indirectly from
the inventor
b. Inventive Steps
a. An invention involves an inventive step if, 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
b. Test of obviousness: If any person possessing ordinary skill in
the art was able to draw the inferences and he constructs
that the supposed inventor drew from prior art, then the latter
did not really invent it.
102. Non-patentable inventions
a. The following shall be excluded from patent protection
a. Discoveries, scientific theories, and mathematical methods,
and in the case of drugs and medicines, the mere discovery of
 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 the mere discovery of any new property or new
use for a known substance, or the mere use of a known
process unless such known process results in a new product
that employs at least one new reactant. Salts, esters, ethers,
polymorphs, metabolites, pure form, particle size, isomers,
mixtures of isomers, complexes, combinations, and other
derivatives of a known substance shall be considered to be
the same substance, unless they differ significantly in
properties with regard to efficacy.
b. Schemes, rules and methods of performing mental acts,
playing games or doing business, and programs for
computers.
c. Methods for treatment of the human or animal body by surgery
or therapy and diagnostic methods practiced on the human or
animal body.
d. Plant varieties or animal breeds or essentially biological
process for the production of plants or animals.
e. Aesthetic creations
f. Anything which is contrary to public order or morality.
103. Ownership of a Patent
a. GR: The right to a patent belongs to the inventor, his heirs, or
assigns. When two or more persons have jointly made an invention,
the right to a patent shall belong to them jointly.
b. First-to-File Rule
a. If two 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.
b. The filing date of a patent application shall be the date of
receipt by the Office.

NOTE: the following are sufficient to consider the application from the Office:

1. An express or implicit indication that Philippine patent is sought

2. Information identifying the applicant
3. Description of the invention and 1 or more claims in Filipino or English

c. Inventions created pursuant to a commission

 a. EXCEPTON: Inventions created pursuant to employment or a
commissioned work:
1. The person who commissions the work shall own the
patent.
2. The employer has the right to the patent if the invention
is the result of the performance of the employee’s
regularly assigned duties.
d. Right of Priority
a. An application for patent filed by any person who has
previously applied for the same invention in another country
which by treaty, convention, or law affords similar privileges
to Filipino citizens, shall be considered as filed as of the date
of filing the foreign application: Provided, That:
1. the local application expressly claims priority;
2. it is filed within twelve (12) months from the date the
earliest foreign application was filed; and
3. a certified copy of the foreign application together with
an English translation is filed within six (6) months from
the date of filing in the Philippines.
104. Test in Patent Infringement
a. Literal Infringement
a. The test is satisfied if the following are met:
1. Exactness Rule – the item being sold, made, or used
conforms exactly to the patent claim of another
2. Addition Rule – one makes, uses, or sells an item that
has all the elements of the patent claim of another plus
other elements.
b. Doctrine of Equivalents
a. Under the doctrine of equivalents, an infringement occurs
when a device:
1. Appropriates a prior invention by incorporating its
innovative concept, albeit with some modification and
change;
2. Performs substantially the same function in
substantially the same way; and
3. Achieves substantially the same result
b. The doctrine of equivalents thus requires satisfaction of the
function-means-and-result test.
105. Defenses in Action for Infringement
a. Invalidity of patent
b. Doctrine of File Wrapper Estoppel
a. The patentee is precluded from claiming as part of a patented
product that which he had to excise or modify in order to
 avoid patent office rejection, and he may omit any additions
he was compelled to add by patent office regulation.
106. Trademarks
a. Trademarks/Service Mark vs. Trade Name

Trademark or Service Mark Trade Name

Basis of Ownership
Registration Prior use in Philippine Commerce
When Protected
Upon registration A trade name may be protected even if
unregistered
Remedies
Administrative, civil and criminal remedies Civil and administrative remedies only

b. Acquisition of Ownership Mark

a. General Rule: To acquire rights in a mark, registration is
required

Exception: Well-known marks are protected even without

registration.

Note: However, when the well-known mark is not registered, its

protection is limited, as it only prevents the registration of
confusingly similar marks that are used for identical or similar
goods or services
c. Acquisition of Ownership of Trade name
a. Through adoption and use
b. Such name shall be protected, even prior to or without registration, against any
unlawful act committed by 3rd parties.
c. Any subsequent use of trade name by a 3 rd party whether trade name or mark
likely to mislead the public shall be unlawful.
107. Non-registrable marks
a. Consists of immoral, deceptive or scandalous matter.
b. Consists of flags, coat of arms or other insignia of the Philippines or
any foreign country
c. Consists of a name, portrait or signature identifying a particular
living individual except by his written consent, or of a deceased
President of the Philippines, during the life of his widow, except by
written consent of the widow;
d. Is identical with a registered mark of another or a mark with an
earlier filing or priority date
108. Test to determine confusing similarity between marks
a. Dominancy Test
 a. The dominancy test considers the dominant features in the
competing marks in determining whether they are confusingly
similar.
b. Greater weight is given to the similarity of the appearance of
the product arising from the adoption of the dominant features
of the registered mark.

Little weight is given to factors like prices, quality, sales

outlets and market segments
109. Copyright
a. Legal protection extended to the owner of the rights in an “original work” which every
literary, scientific and artistic production.
b. Basic Principles
a. Works are protected by the sole fact of their creation. (Principle of Automatic
Protection)
b. Copyrightable works
1. Original works
a. Books, pamphlets, articles and other writings
b. Periodical and newspaper
c. Lectures, sermons, addresses, dissertations
d. Letters
e. Dramatic or dramatico-musical compositions; choreographic
works or entertainment dumb shows.
f. Musical composition
g. Drawing, painting, sculpture etc.
2. Derivative works
a. Dramatizations, translations, adaptations, abridgements and
other alterations of literary or artistic works
b. Collection of literally, scholarly or artistic works.
c. Non-copyrightable works
1. Unprotected subject matter
a. News of the day and other miscellaneous facts having the
character of mere items of press information
b. Official text of a legislative, administrative or legal nature
c. Pleadings
d. Original decisions of the courts and tribunals.

NOTE: news footages are subject to copyright – although news or

the event themselves are not copyrightable, expression of the news
is copyrightable.

c. Limitation on copyright
a. Doctrine of Fair Use
 1. it is a privilege, in persons other than the owner of the copyright, to use
the copyrighted material in a reasonable manner without his consent,
notwithstanding the monopoly granted to the owner by the copyright
d. Copyright infringement
a. Any person who at the time when copyright subsists in a work has in his
possession an article which he known or OUGHT to know to be infringing copy
for the purpose of:
1. Selling, letting for hire, or by way of trade offering or exposing for sale or
hire, the article.
2. Trade exhibit of the article in public.
b. Knowledge not an element of infringement
1. Knowledge of infringement is material only when a person is charged of
aiding and abetting a copyright infringement. The liability for copyright
infringement is in the nature of strict liability. It does not require mens
rea or culpa.
 Electronic Commerce Act

110. Legal Recognition of Electronic Data Messages, Documents and Signatures.

a. Electronic documents shall have the legal effect, validity or enforceability as any other
document or legal writing.
b. An electronic signature on the electronic document shall be equivalent to the signature
of a person on a written document if that signature is proved by showing that a
prescribed procedure, not alterable by the parties interested in the electronic document.
111. The term electronic data message and electronic document do not include a facsimile
transmission. It is not the functional equivalent of an original under the Best Evidence Rule and
is not admissible as electronic evidence.

Since a facsimile transmission is not an electronic data message or an

electronic document and cannot be considered as electronic evidence by
the Court, with greater reason is a photocopy of such a fax transmission
not electronic evidence.
112. Presumption Relating to Electronic Singature
a. GR: In any proceeding involving an electronic signature, it shall be
presumed that:
a. The electronic signature is the signature of the person to
whom it correlates; and
b. The electronic signature was affixed by that person with the
intention of signing or approving the electronic document.

EX: When the person relying on the electronically signed electronic

document knows or has notice of defects in or unreliability of the
signature or reliance on the electronic signature is not reasonable
under the circumstances
113. Admissibility and evidential weight of electronic data message or electronic document
a. In any legal proceeding, nothing in the application of the rules on
evidence shall deny the admissibility of an electronic data message
or electronic document.
 Foreign Investment Act

114. Policy of the law

a. To attract, promote and welcome productive investment from foreign individuals,
partnerships, corporations and governments.
b. To promote accountability and integrity in public office as well as promotion and
administration of efficient public service to entice foreign investments.
115. Definitions
a. Foreign investment – investment made by a non-Philippine national in the form of
foreign exchange and/or other assets actually transferred to the Philippines and duly
registered with the BSP.
b. Doing Business – includes
a. soliciting orders, service contracts, opening offices, whether called liaison offices
or branches.
b. Appointing representatives or distributors domiciled in the Philippines
c. Participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines.

Doing business does not include:

1. Mere investment as a shareholder by a foreign entity in domestic

corporations duly registered to do business
2. Having a nominee director or officer to represent its interest in such
corporation
3. Maintaining stocks of goods in the Philippines
c. Factors used by the Supreme Court to determine whether a foreign
corporation is doing business in the Philippines:
a. Should be active and continuous; isolated business
transactions or occasional, incidental and casual transactions
are not within the context of doing business.
b. Intention of an entity to continue the body of its business in
the country; number and quantity are merely evidence of such
intention.
c. Single act may be considered as doing business if it implies a
continuity of commercial dealings and contemplates the
performance of acts or the exercise of functions normally
incidental to and in the progressive pursuit of its purpose.
d. Export Enterprise
a. a manufacture, processor or service (including tourism)
enterprise exports sixty percent (60%) or more of its output,
or wherein a trader purchases products domestically and
exports sixty per cent (60%) or more of such purchases.
e. Domestic Market Enterprise
a. An enterprise which produces goods for sale, or renders
services to the domestic market entirely or if exporting a
portion of its output fails to consistently export at least sixty
percent (60%) thereof.