SPECIAL NOTES IN COMMERCIAL LAW

I. INSURANCE (P.D. No. 162, as amended by R.A. No. 10607)

A. Basic concepts
1. What may be insured – Anyone or anything with insurable interest except a public enemy,
or nation with which the PH is at war with, against any contingent or unknown event,
past or future.
2. Insurable interest – Relation or connection of a person to the subject matter such that
the person will derive pecuniary benefit or advantage from the preservation of the
subject matter or will suffer pecuniary loss or damage from its destruction, termination,
or injury by the happening of the event insured against it [p. 5]
a) In life/health [no limit]
a. Himself, spouse, or children
b. Supporting person for education and/or support
c. Debtor under threat of death or illness from performance
d. Usufructuary or any person whose life any estate or interest vested in
him depends
e. Bawal beneficiary those listed under Art. 739, NCC. But otherwise
anyone can be a beneficiary.
b) In property [limited to the actual value of the interest]
a. Existing interest
b. Inchoate interest founded on existing interest
c. Expectancy coupled with an existing interest in that out of which the
expectancy arises
3. Double insurance and overinsurance
a) Double insurance – Exists where the same person is insured by several insurers
separately in respect to the same subject and interest. The prohibition on
recovering more than his interest applies only on property interest.
b) Over insurance – When the value of the policies exceeds the value of the
property interest. The insurers here are co-insurers who will provide ratably to
the loss in proportion to the amount for which he is liable under contract.
4. No fault, suicide, and incontestability clauses
a) Incontestability clause – After two years from date of issuance of the policy or
its last reinstatement, the insurer must make good on the policy even though
the policy was obtained by fraud, concealment, or misrepresentation
a. Insurance is life insurance payable on death of the insured
b. The policy is in force for at least 2 years from its date of issue as
appearing in the policy or of its last reinstatement [Tan v. CA] OR
c. The insured died within 2 years from issuance of the policy [Manila
Bankers v. Aban; Sun Life of Canada v. Sibya]
d. Defenses not barred by incontestability clause
i. Lack of insurable interest
ii. Unpaid premium
iii. Death due to excepted risk (like suicide)
iv. The insured employed vicious fraud (as in another person
took the physical exams for the insured)
v. Failure to comply with conditions imposed by the insurer;
and
vi. Time specified in the contract to make claims not complied
with
b) Suicide clause – Insurer liable for suicide of insured only when it is committed
after the policy has been in force for a period of 2 years from the date of its
issue or of its last reinstatement, unless the policy provides a shorter period:
provided however that suicide committed in the state of insanity shall be
compensable regardless of the date of commission [S183, IC].
a. No liability if it is an excepted risk
c) No fault indemnity clause – Any claim for death or injury to a passenger or to a
 third party should be paid without the necessity of proving fault or negligence
of any kind, subject to the following rules
a. Total indemnity in respect of any person shall not be less than P15,000
b. The following proofs of loss, when submitted under oath, shall be
sufficient evidence to substantiate the claim:
i. Police report of accident; and
ii. Death certificate and evidence sufficient to establish the
proper payee; or
iii. Medical report and evidence of medical or hospital
disbursement in respect of which refund is claimed
c. Claim may be made against one motor vehicle only.
i. In case of an occupant of a vehicle, claim shall lie against
the insurer of the vehicle in which the occupant is not
mounting or dismounting from.
ii. In any other case, claim shall lie against the insurer of the
directly offending vehicle
iii. In all cases, the right of the party paying the claim to
recover against the owner of the vehicle responsible for the
accident shall be maintained [S391, IC; BAR 1989]
B. Perfection of the insurance contract
1. Perfected on knowledge of acceptance and approval by the insurer of the applicant’s
application
a) Delay in acceptance
b) Delivery of Policy
a. To an agent by the insurance company gives rise to a presumption
that the agent is authorized to collect premiums
2. Premium Payment
a) Cash and carry rule – Insurance policy not binding unless premium has been
paid [S77, Insurance Code]
a. Except when [p. 47]:
i. The grace period for life or industrial life policy applies
ii. Credit extension not exceeding 90 days, when given by
broker and agency agreements with duly licensed
intermediaries
• This includes acceptance of a check and not yet
encashing the check, unless the check is
dishonored
iii. Acknowledgement, receipt of premium is conclusive
evidence of payment
iv. In a contract of suretyship, where the obligee has accepted
the bond
v. Partial payment of premium in installments if agreed upon,
on loss [Makati Tuscany Condominium Corporation v. CA]
• Note: applicant still has the obligation to fully pay
the premiums
vi. Estoppel [UCPB General Insurance Co. v. Masagana
Telamart]
vii. Cover note issued to temporarily bind the insurance pending
issuance of the policy
• Within 60 days after issue of a cover note, a policy
shall be issued in lieu thereof, including within its
terms the identical insurance bound under the
cover note and the premium
• May be extended or renewed beyond 60 days with
the written approval of the Commissioner on
finding that such extension is not illegal
C. Rights and obligations of parties [WIP]
Party Rights Obligations
Insurer • To cancel or rescind • Assumes the risk of
• Not a natural person the contract on the loss
• Corporation, partnership, or grounds in S64, IC, or • Undertakes for a
association duly authorized to by concealment, consideration to
transact insurance misrepresentation, or indemnify the

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 Party Rights Obligations
breach of warranty insured upon the
except for when the happening of the
policy was issued designated peril
within 2 years
• Cash and carry rule
Insured • No fault indemnity • If applicant, to pay
• Person whose loss is the occasion • Suicide clause unless premiums on the
for the payment of the insurance it is an excepted risk policy
proceeds by the insurer • Incontestability clause
• Anyone except a public enemy, or
a nation at war with the
Philippines, including its citizens or
subjects [S7, IC]
Assured • To receive the • If applicant, to pay
• Insured whose proceeds are proceeds of the policy premiums on the
payable to him • Against rescission policy
• Need for insurable interest in upon the lapse of 2
property, or on the life of a third years, if the ground
person should be on
concealment or
misrepresentation
Beneficiary • Same as assured • Same as assured
• A third person designated by the
insured to receive the proceeds
• Cannot be:
o Persons in illicit relations
(adultery or concubinage;
no need for conviction)
o Persons found guilty of
adultery or concubinage
o Public officer or his wife,
descendants, or
ascendants [Art. 739,
NCC]

D. Rescission of insurance contracts

1. Cancellation of Insurance Policy
a) No policy of insurance other than life shall be cancelled by the insurer except
upon prior notice to the insured
a. Notice must be in writing, mailed, or delivered to the named insured
at the address shown in the policy, or to his authorized broker.
Contains
i. The ground
ii. The facts of the ground on written request by the insured
b) No notice of cancellation shall be effective unless it is based on the following,
after the effective date of the policy [p. 55 citing S64, IC]
a. Non-payment of premium
b. Conviction of a crime arising out of acts increasing the hazard
insured against
c. Discovery of fraud or material misrepresentation
d. Discovery of willful or reckless acts or omissions increasing the
hazard insured against
e. Physical changes in the property insured rendering the property
uninsurable
f. Discovery of other insurance coverage that makes the total
insurance in excess of the value of the property insured
g. A determination by the Commissioner that the continuation of the
policy would be illegal or would become illegal under the Insurance
Code
c) The right to rescind on ground of concealment or misrepresentation should be
exercised prior to commencement of action on the contract
2. Concealment
a) The neglect to communicate that which a party knows and ought to

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 communicate, whether intentional or unintentional. It gives rise to the injured
party to rescind a contract of insurance.
a. Each party must communicate in good faith all facts material to the
contract, within his knowledge and as to which he makes no
warranty, which the other party cannot discern
b. However, if the insured gains knowledge of a material fact after the
effectivity of the insurance policy, he is not obliged to divulge it.
b) The test of materiality is solely determined by the probable and reasonable
influence of the facts upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the contract or making his inquiries.
c) Thus, the principal question is: Was the assurer misled or deceived into entering
a contract obligation or in fixing the premium of insurance by a withholding of
material information or facts within the assured’s knowledge or presumed
knowledge?
d) The right of information of material facts may be waived
a. Either by the terms of insurance or
b. By neglect to make inquiry as to such facts, where they are distinctly
implied in other facts of which information is communicated.
3. Misrepresentations/Omissions
a) A misrepresentation is a statement of fact or condition relating to the risk, which
is false when it does not correspond with its assertions or stipulations but
induced the insurer to enter into a contract.
a. It entitles the injured party to rescission of the contract if the
misrepresentation was made on a material point
b. Theory of imputed knowledge: If the insured furnished the agent
the information and delegated to them the filling up of their
application, then they acted on the insured’s instructions, and not
that of the insurer
i. Even if the agent wrote differently, except when connivance
between agent and insurance company can be proven.
c. Requires proof of intent to defraud, unlike concealment which is
inherently fraudulent [Insular Life v. Alvarez]
4. Breach of Warranties
a) Warranty is a statement or promised made by the insured set forth in the policy
itself or incorporated in it by proper reference, the untruth or non-fulfillment
renders the policy voidable by the insurer, regardless of whether the insurer was
actually prejudiced
a. Can be express (in the contract or another instrument in reference
to the contract) or implied (deemed incorporated in the contract)
b. Affirmative – affirms existence of a fact or condition at the time it is
made
c. Promissory – the insured warrants that certain facts or conditions
exist
b) If loss insured against happens before the time arrives for performance of a
future warranty, or performance becomes legally or physically impossible, the
omission to fulfill the warranty does not avoid the policy
c) The insurer may rescind the policy in case of
a. Breach of warranty whether it is the cause of the loss
b. Violation of a material provision of the policy
c. Violation of a non-material provision of the policy, if so stipulated

II. TRANSPORTATION LAW

A. Common Carriers
a. Concept [Art. 1732, NCC]
i. Person, firm, association
ii. Engaged in the business of carrying/transporting passengers, goods, or both;
iii. Holding itself out to the public, even to a limited clientele
b. Common carrier v. private carrier
i. If the undertaking is a single transaction, not a part of the general business or
occupation engaged in, as advertised and held out to the general public, the
individual or entity rendering such service is a private, not a common, carrier [Sps.
Teodoro v. Sps. Teresita Philippine Nicolas, G.R. No. 157917, August 29, 2012].

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 c. Diligence required [There is a presumption of fault or negligence in case of loss or damage]
i. Extraordinary diligence for goods, unless otherwise stipulated [Art. 1733, NCC].
ii. Utmost diligence of very cautious persons for passengers, cannot be stipulated
against [Art. 1755, NCC].
B. Obligations and liabilities [Recall: only the carrier is liable]
a. Vigilance over goods [Loss, destruction, deterioration of goods = liability of common
carrier, lasts from the time the goods are unconditionally placed in the possession of the
carrier for transportation until delivered to consignee or person who has the right to receive
them, Art. 1736, NCC] except when:
i. Natural calamity
ii. Act of the public enemy in war, whether international or civil
iii. Act or omission of the shipper or owner of the goods
iv. The character of the goods or defects in the packing or in the containers [unless
known; jurisprudence]
v. Order or act of competent public authority [Art. 1734, NCC]
b. Safety of passengers
i. Utmost diligence starts once the passenger places himself to, and is accepted by,
and while he remains under the proper care and charge of the carrier. It lasts until
such time that the passenger safely alights from and is given reasonable
opportunity to leave the premises of the common carrier, including such time that
he looks for and claim his luggage [LRTA v. Navidad, G.R. No. 145804, February
6, 2003].
C. Defenses available to a common carrier
a. Proof of negligence
i. The common carrier is presumed to have been at fault or to have acted negligently
unless they observed extraordinary diligence as required in Art. 1733 [Art. 1735,
NCC]
b. Due diligence in the selection and supervision of employees
i. A common carrier is liable for the death or injuries to passengers through the
negligence or willful acts of the carrier’s employees, although such employees may
have acted beyond the scope of their authority or in violation of the orders of the
common carriers [Art. 1759, NCC]
1. It is the carrier’s strict obligation to select its drivers and similar employees
with due regard not only to their technical competence and physical ability,
but also, no less important, to their total personality, including their
patterns of behavior, moral fibers, and social attitude [Maranan v. Perez,
G.R. No. L-22272, June 26, 1967; BAR 2011]
ii. 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 diligence of a good father of a family
could have prevented or stopped the act or omission [Art. 1763, NCC]
1. However, the carrier is not an insurer of the absolute safety of its
passengers. In one case, a common carrier was not held liable for a
passenger shooting another passenger, as the driver and conductor
observed nothing that would rouse their suspicion that the passenger was
armed [G.V. Florida Transport Inc., v. Heirs of Battung, G.R. No. 208802,
October 14, 2015].
c. Fortuitous event
i. Cause independent of human will
ii. Impossible to foresee or if foreseen, unavoidable
iii. Renders the obligation impossible to fulfill in an ordinary manner
iv. The obligor must be free from participation on the injury [Art. 1740, NCC]
d. Contributory negligence
i. Negligence of common carrier &
ii. Negligence contributed by passenger or shipper or owner [Art. 1741]. If known,
the fact of improper packing holds only the common carrier liable [Jurisprudence;
Art. 1742 NCC].
iii. The contributory negligence of the passenger, shipper, or owner equitably reduces
the damage [Art. 1762, NCC].
e. Doctrine of last clear chance
i. When an accident occurs, and both parties are negligent, the one with the last
clear chance to avoid the accident is primarily liable
D. Extent of liability
a. Recoverable damages
i. Indemnity for death (>P15,000)

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 ii. Loss of earning capacity
1. 2/3*(80 – age of deceased)*[Gross Annual Income – Living Expenses, or
50% of gross annual income] = net earning capacity compensable for
damages
a. 2/3*(80-age of deceased) = Life expectancy [Arts. 1764, 2206,
NCC]
iii. Moral damages
b. Stipulations limiting liability
i. The common carrier is not an absolute insurer of passengers. This especially
applies when it is carrying passengers gratuitously.
ii. For goods, a valid stipulation limiting liability has the following requisites
1. In writing
2. Supported by valuable consideration other than the service provided
3. Reasonable, just, not contrary to public policy [Art. 1744, NCC].
iii. Unreasonable, unjust, and contrary to public policy stipulations
1. Goods transported at the risk of the owner or shipper
2. Common carrier will not be liable for any loss, destruction, or deterioration
of the goods
3. Common carrier need not observe any diligence in the custody of the
goods
4. That the common carrier shall exercise a degree of diligence less than that
of a good father of a family, or of a man of ordinary prudence in the
vigilance over the movables transported
5. That the common carrier shall not be responsible for the acts or omissions
of his or its employees
6. That the common carrier’s liability for acts committed by thieves, or of
robbers who do not act with grave or irresistible threat, violence, or force
is dispensed with or diminished
7. That the common carrier is not responsible for the loss,, destruction, or
deterioration of goods on account of the defective condition of the car,
vehicle, ship, airplane, or other equipment used in the contract of carriage
[Art. 1745, NCC]
c. Limitations under the Montreal Convention
i. For injury/death, 128,821 Special Drawing Rights regardless of cause, on actual
damages only. There can be no claim for exemplary or moral damages.
ii. Anything above the threshold requires that the airline carrier prove it was not
negligent [Montreal Convention as amended].

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III. CORPORATION LAW

A. GENERAL PRINCIPLES

What is a corporation?

A corporation is an artificial being created by operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized by law or incidental to its existence (Section 2,
R.A. No. 11232).

1. Nationality of Corporations

Tests of Nationality

What is the Place of Incorporation Test?

The nationality of the corporation is determined by the State of incorporation, regardless of the
nationality of the stockholders. It is the most commonly used test.

1. Domestic corporations are those organized and governed under and by Philippine laws

2. Foreign corporations are those organized and governed by foreign laws.

a. If their national law allows it, and upon obtaining the requisite license, a foreign
corporation can do business in the PH [S140, RCC]

What is the Domiciliary Test?

Nationality of the corporation is determined by the principal place of business of the corporation;
common for federal states.

a. Control Test

The nationality of the corporation is determined by the controlling stockholders or members.

Control Test is the liberal 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.

Under the control test, the nationality of the private corporation is determined by the citizenship
of the controlling stockholders.

Strictly applied in the following situations:

i. Exploitation of natural resources [60% owned by Filipinos, S2, Art. XII, 1987 CONST.]

ii. Operating public utilities [60% capital owned by Filipinos, S11, Art. XII, 1987 CONST.]

iii. Mass media [Limited to PH citizens or wholly owned and managed PH corporations or
associations, S11(1), Art. XVI, 1987 CONST.]

iv. Advertising industry [70% of capital owned by PH citizens, S11(2), Art. XVI, 1987 CONST.]

Filipino ownership applies both to voting control and beneficial ownership of the corporation,
where the required percentage of Filipino ownership applies to both
• the total number of outstanding shares of stock entitled to vote in the election of directors
and
• the total number of outstanding shares of stock [Roy v. Herbosa, G.R. No. 207246; see
Gamboa v. Teves, G.R. No. 176579 on 60% rule on all shares]

b. Grandfather Rule

The control test must first be complied with before resort to the Grandfather Rule can be resorted
to.

The Grandfather Rule is “the method by which the percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized areas of activities, provided for under the

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 Constitution and other nationalization laws, is computed, in cases where corporate shareholders
are present, by attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder.”

It is a three-level relationship test that gave it the name “grandfather rule”: the target company
is the “grandson”; the holding company would be considered the “father”; and the person or
entity holding shares in the holding company would be considered the “grandfather.”

The Grandfather Rule must be applied to accurately determine the actual participation, both
direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business.
(SEC Opinion re: Silahis Int’l Hotel)

When is the grandfather rule applied? [Divina Vol. 1 (2021), p. 421]

a. Under the Grandfather Rule Proper, if the percentage of Filipino ownership in the corporation
or partnership is less than 60%, only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality

b. Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing
Corporation and the Investee Corporation when traced (i.e., “grandfathered”) to determine
the total percentage of Filipino ownership show less than 60% requirement.

c. If based on records, Filipinos own at least 60% of the investing corporation but there is
doubt as to where control and beneficial ownership in the corporation really reside [ Narra
Nickel Mining and Dev. Corp. vs. Redmont Consolidated Mines, G.R. No. 195580, April 21,
2014].

2. Doctrine of Separate Juridical Personality

The law vests corporations with a separate and distinct personality from those that represent these
corporations (S2, Art. 44, NCC; Pioneer Insurance Surety Corp., vs. Morning Star Travel & Tours,
Inc., G.R. No. 198436, July 8, 2015).

As a general rule, the liability of the corporation is not the liability of (a) corporation’s officers, (b)
Board of Directors/Trustees, (c) stockholders/owners, and (d) subsidiary or parent corporations.

A corporation, being a juridical entity, may act only through its directors, officers and employees.
Obligations incurred by them, acting as such corporate agents, are not theirs but the direct
accountabilities of the corporation they represent (Team Pacific Corporation, et. al. vs. Layla
Parente, G.R. No. 206789, July 15, 2020).

Application of the doctrine as to property

A corporation is a juridical person distinct from the members composing it and its properties
registered in the name of the corporation, are owned by it as an entity separate and distinct from
its members [Stockholders of F. Guanzon and Sons, Inc v. Register of Deeds of Manila (1962)]

Assets of stockholders may not be considered as assets of the corporation, and vice-versa [Situs
Dev. Corp v. Asiatrust Bank 2012]

Liability for tort

A “corporate tort” is a violation of a right given or the omission of a duty imposed by law or a breach
of legal duty [Sergio F. Naguiat v. NLRC 1997]

A corporation is liable whenever a tortious act is committed by an officer or agency under express
direction or authority from the stockholders or members acting as a body, or, generally, from the
directors as the governing body [Philippine National Bank v. CA (1978)]

Not every tortious act by an officer can be ascribed to the corporation. Only when the corporation
has expressly directed the commission of such tortious act, would the damages resulting therefrom
be attributable to the corporation. The corporation can do this either through the adoption of a
resolution or when the board ratifies the tortious act of the person.

Criminal Liability
A penal statute when not expressly made to apply to corporations does not create an offense for
which the corporation may be punished. However, when the penal statute describes a crime that

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 may be committed by the corporation but prescribes individuals who may be punished, such as its
officers or agents, only such individuals may be made criminally liable. Lastly, although the
corporation itself may not be arrested when the crime charged against them is punishable by
imprisonment, the corporation may still be charged and prosecuted when the penalty imposable is
fine. [Ching v. Secretary of Justice (2006)]

Sections 159-170 of the RCC enumerate specific illegal acts done by corporations, which can be
considered as offenses and punishable under the same law.

Corporate Officer

xxx respondent Cando cannot be held personally and solidarily liable with the company for the
monetary claims of Geraldo. As a general rule, a corporate officer cannot be held liable for acts
done in his official capacity because a corporation, by legal fiction, has a personality separate and
distinct from its officers, stockholders, and members (Geraldo vs. The Bill Sender Corp., G.R. No.
222219, October 3, 2018).

Board of Directors

Even if petitioner Roxas-del Castillo, as the time ESHRI defaulted in paying BF’s monthly progress
bill, was still a director, it must be shown that she acted in a manner and under the circumstances
contemplated in Sec. 31 of the Corporation Code (EDSA Shangri-La Hotel and Resort, Inc., vs. BF
Corp., G.R. No. 145842, June 27, 2008).

Stockholders

Stockholders are basically investors in a corporation. They do not have a hand in running the day-
to-day business operations of the corporation. Before a stockholder may be held criminally liable for
acts committed by the corporation, therefore, it must be shown that he had knowledge of the
criminal act committed in the name of the corporation and that he took part in the same or gave
his consent to its commission, whether by action or inaction (Manuel Espiritu, Jr., et. al. vs. Petron
Corp., G.R. No. 170891, November 24, 2009).

Parent Company

xxx mere ownership in a subsidiary does not justify the imposition of liability on the parent company.
It must further appear that to recognize a parent and a subsidiary as separate entities would aid in
the consummation of a wrong. Thus, a holding corporation has a separate corporate existence and
is to be treated as a separate entity (Montilla, Jr. vs. G Holdings, Inc., G.R. No. 194995, November
18, 2021; Maricalum Mining Corp. vs. Florentino, G.R. No. 221813, July 23, 2018).

3. Doctrine of Piercing the Corporate Veil

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where
the separate corporate personality of a corporation is abused or used for wrongful purposes.

Under the doctrine, the corporate existence may be disregarded where the entity is formed or used
for non-legitimate purposes, such as to evade a just and due obligation or to justify a wrong, to
shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable
aims or intentions, in which case, the fiction will be disregarded and the individuals composing it
and the two corporations will be treated as identical (Livesey vs. Binswanger Phils., Inc. G.R. No.
177493, March 19, 2014).

The Supreme Court observed that the doctrine may be applied in at least three basic areas:
1. Fraud Piercing cases - when the corporate entity is used to commit fraud or to justify a wrong
or defend a crime
2. Alter Ego cases - when the corporate entity is used as a mere alter ego, business conduit, or
instrumentality of a person or another entity
3. Equity Piercing cases - when respect for the corporate entity would defeat public convenience
or would result in injustice

The corporate fiction may be pierced if used:

1. To defraud the government taxes due it;
2. To evade payment of civil liability;
3. By a corporation which is merely a conduit or alter ego of another corporation;

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 4. To evade compliance with contractual obligations; or
5. To evade financial obligation to its employees.

Fraud
In fraud piercing cases, the following elements must be present:
1. There must have been fraud or an evil motive in the affected transaction. Mere proof of control
of the corporation would not automatically authorize piercing the corporate veil.
2. The corporate entity has been used in the perpetration of the fraud or in the justification of
wrong or to escape personal liability.
3. The main action should seek for the enforcement of pecuniary claims

Alter-Ego

A three-tiered test was formulated by the Supreme Court in Concept Builders, Inc. v. NLRC (1996):
1. Actual Control - control, not mere majority of complete stock control, but complete
domination, not only of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction had, at the time, no
separate mind, will, or existence of its own;
2. Use of Control [fundamental unfairness] - control must be used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff’s rights
3. Causation/Harm - the control and breach of duty must proximately cause the injury and unjust
loss complained of

Q: In piercing the veil of corporate fiction using the alter ego doctrine, is the existence of fraud
required?

A: No. The existence or non-existence of fraud is immaterial under this theory because “the doctrine
of alter ego is based upon the misuse of a corporation by an individual [or another corporation] for
wrongful or inequitable purposes” (Susan Roquel vs. PNB and PNB Global Remittance and Financial
Co. (HK) Ltd., G.R. No. 246270, June 30, 2021).

B. DE FACTO CORPORATIONS VERSUS CORPORATIONS BY ESTOPPEL

De Facto Corporation

Concept

A de facto corporation is one that is organized with colorable compliance with the requirements of
incorporation and allowed to exist and exercise the powers of a corporation until its existence is assailed
by the State.

Requisites

It is essential to the existence of a de facto corporation that there is:

1. A valid law under which a corporation might be incorporated;

2. A bona fide attempt to organize as a corporation under such law; and
3. Actual use or exercise in good faith of corporate powers conferred upon it by law.

The filing of articles of incorporation and the issuance of the certificate of incorporation are essential
for the existence of a de facto corporation. In fine, it is the act of registration with SEC through the
issuance of a certificate of incorporation that marks the beginning of an entity’s corporate existence
(Missionary Sisters of Our Lady of Fatima vs. Alzona, G.R. No. 224307, August 6, 2018).

Rule

The due incorporation of any corporation claiming in good faith to be a corporation, and its right to
exercise corporate powers, shall not be inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto
proceeding (Sec. 19, R.A. No. 11232).

Corporation by Estoppel

Concept

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 A corporation by estoppel exists when persons assume to act as a corporation knowing it to be without
authority to do so.

Legal Consequence/Effect

All persons who assume to act as a corporation knowing it to be without the authority to do so shall
be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof
(Sec. 20, R.A. No. 11232).

Reverse Application

While the doctrine is generally applied to protect the sanctity of dealings with the public, nothing
prevents its application in the reverse. Such that a person who has assumed an obligation in favor of
a non-existent corporation, having transacted with the latter as if it was duly incorporated, is prevented
from denying the existence of the latter to avoid the enforcement of the contract (Missionary Sisters
of Our Lady of Fatima vs. Alzona, G.R. No. 224307, August 6, 2018).

C. CORPORATE POWERS

A corporation has:
i. Express Powers – such powers as are expressly granted by law and its articles of incorporation;
ii. Implied Powers – those reasonably necessary to accomplish its purposes, as stated in its
articles of incorporation; and
iii. Incidental Powers – those which may be incident to its existence as a juridical entity [Pilipinas
Loan v. SEC, 356 SCRA 193 (2001)]

General Corporate Powers

The Theory of General Capacity states that a corporation is said to hold such powers as are not
prohibited or withheld from it by general law.

Every corporation has the following powers and capacities:

a. To sue and be sued in its corporate name;

b. To have perpetual existence, unless the certificate of incorporation provides otherwise;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation;
e. To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal the same;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with law; and to admit members to the corporation if it be a non-stock corporation;
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;

Note: Pertains to ordinary sale/acquisition of properties in the regular course of business; not
disposition of properties in its entirety.

h. To enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons;
i. To make reasonable donations, including those for the public welfare or for hospital, charitable,
cultural, scientific, civic or similar purposes;
j. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers,
and employees;
k. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation (Sec. 35, R.A. No. 11232).

Specific Corporate Powers

The Theory of Specific Capacity states that the corporation cannot exercise powers except those
expressly/impliedly given. They include:

a. Extend or shorten corporate term

b. Increase or decrease capital stock or incur, create or increase bonded indebtedness

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c. Deny pre-emptive right
d. Sell or dispose all or substantially all of the corporation’s corporate assets
e. Acquire own shares
f. Invest corporate funds in another corporation or business or for any other purpose
g. Declare dividends
h. Enter into management contract

Doctrine of Apparent Authority

The doctrine of apparent authority provides that a corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope
of apparent authority, and it holds him out to the public as possessing the power to do those acts
[AGRO FOOD PROCESSING CORP. v. VITARICH CORPORATION, G.R. No. 217454, January 11, 2021,
J. Caguioa].

Power to Extend or Shorten Corporate Term

A private corporation may extend or shorten its corporate term as stated in the AOI when there is:
[Sec. 36, RCC]
(1) Approval by majority vote of the board of directors or trustees, and

(2) Ratification at a meeting by the stockholders or members representing at least two-thirds

(2/3) of the outstanding capital stock or of its members.

(3) Notice Requirement – Written notice of the proposed action and the time and place of the
meeting shall be:
a. Sent to stockholders or members at their respective place of residence as shown in the books
of the corporation, and
b. Either:
i. Deposited to the addressee in the post office with postage prepaid, served personally,
OR
ii. Sent electronically in accordance with the rules and regulations of the Commission on
the use of electronic data messages when allowed in the by-laws or done with the
consent of the stockholder

Exercise of Appraisal Right

If the corporate term is extended, a dissenting stockholder may exercise the right of appraisal under
the RCC’s conditions [S36, RCC]. This is not the same for shortening of term.

Power to Increase or Decrease Capital Stock or Incur, Create or Increase Bonded Indebtedness

No corporation shall increase or decrease its capital stock or incur, create, or increase any bonded
indebtedness unless approved by a majority vote of the board of directors and by two-thirds (2/3) of
the outstanding capital stock at a stockholders’ meeting duly called for the purpose (Sec. 37, R.A. No.
11232).

Power to increase or decrease capital stock is only for stock corporations; power to incur, create or
increase bonded indebtedness applies for both stock and non-stock corporations.

Power to Increase or Decrease Capital Stock

Procedure to follow:

✓ Approval by a majority vote of the board of directors

✓ Written notice of stockholders’ meeting
✓ Approval by two-thirds (2/3) of the outstanding capital stock at a stockholders’ meeting duly called
for the purpose
✓ Filing of a certificate signed by a majority of the directors of the corporation and countersigned by
the chairperson and secretary of the stockholders’ meeting
✓ Approval of the SEC, and where appropriate, by the PCC

Subscription Requirement

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x x x The SEC shall not accept for filing any certificate of increase of capital stock unless accompanied
by a sworn statement of the treasurer of the corporation x x x showing that at least 25% of the increase
in capital stock has been subscribed and that at least 25% of the amount subscribed has been paid in
actual cash to the corporation or that property, the valuation of which is equal to 25% of the
subscription x x x (Sec. 37, R.A. No. 11232).

After a corporation faithfully complies with the requirements laid down in Section 38, the SEC has
nothing more to do other than approve the same. Pursuant to Sec. 38, the scope of the SEC’s
determination of the legality of the decrease in authorized capital stock is confined only to the
determination of whether the corporation submitted the requisite authentic documents to support the
diminution. Simply, the SEC’s function here is purely administrative in nature (Metroplex Berhad vs.
Sinophil Corp., G.R. No. 208281, June 28, 2021).

Power of Non-Stock Corporation to Incur, Create or Increase Bonded Indebtedness

Non-stock corporations may incur, create or increase bonded indebtedness when approved by a
majority of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.

A bonded indebtedness is a long-term debt of the corporation, secured by mortgage on real or personal
property of the corporation, which are:
• Structured in denominated units of indebtedness and
• Intended to eventually circulate within the investing public as securities, representing units of
investment.

Power to Deny Pre-Emptive Right

GR: All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective shareholdings,

EXC: Unless such right is denied by the articles of incorporation or an amendment thereto (Sec. 38,
R.A. No. 11232).

It shall not extend to:

(1) Shares issued in compliance with laws requiring stock offerings or minimum stock ownership by
the public; or
(2) Shares issued in good faith with the approval of the stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange for property needed for corporate purposes or in
payment of a previously contracted debt. [Sec. 38, RCC]

Power to Sell or Dispose All or Substantially All of the Corporation’s Corporate Assets

Power to sell or dispose corporate assets

A majority vote of the board of directors or trustees in a corporation is required before a corporation
may sell, lease, exchange, mortgage, pledge, or otherwise dispose of its property and assets:
• For such consideration as its board may deem expedient, whether it be money, stocks, bonds,
other monetary instruments, or other property or consideration
• Subject to the provisions of R.A. No. 10667, the Philippine Competition Act, and other related laws
[S39, RCC]

When Authorization by the Stockholders/Members is Unnecessary

Any corporation can sell, lease, exchange, mortgage, pledge, or otherwise dispose of any of its property
and assets without the authorization by the stockholders 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 or other disposition of such property and assets shall be appropriated
for the conduct of its remaining business. [Sec. 39, RCC]

Power to sell or dispose of all or substantially all of the properties of the corporation

A corporation may sell all or substantially all of its properties and assets, including its goodwill [S39,
RCC]

Q: When does a sale or disposal constitute substantially all of its assets?

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1. A computation must be made on the corporation’s net asset value, as shown in its latest financial
statements
2. An assessment must be made on this computation whether the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it was incorporated
[S39, RCC]

Q: What must be complied with prior to the sale of all or substantially all the properties of the
corporation?

(1) Vote of the stockholders representing at least two- thirds (2/3) of the outstanding
capital stock, or at least two-thirds (2/3) of the members, in a stockholders’ or members’
meeting duly called for the purpose; OR Vote of at least a majority of the trustees in office
in nonstock corporations, where there are no members with voting rights
(2) Notice Requirement – Written notice of the proposed action and of the time and place for the
meeting shall be:
i. Addressed to stockholders or members at their places of residence as shown in the books
of the corporation; and
ii. Deposited to the addressee in the post office with postage prepaid, served personally,
OR sent electronically, when allowed by the by-laws or done with the consent of the
stockholder

Failure to comply with the requirements renders the sale invalid.

Power to Acquire Own Shares

A stock corporation shall have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, only when the corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or acquired (Sec. 40, R.A. No. 11232).

Unrestricted Retained Earnings

(1) The accumulated profits and gains realized out of the normal and continuous operations of the
company AFTER deducting therefrom:
a. Distributions to stockholders and
b. Transfers to capital stock or other accounts, and

(2) NOT appropriated by its Board of Directors for corporate expansion projects or programs:

(3) NOT covered by a restriction for dividend declaration under a loan agreement; and

(4) NOT required to be retained under special circumstances obtaining in the corporation such as when
there is a need for a special reserve for probable contingencies. (SEC Memorandum Circular No. 11-
08, [December 5, 2008])

Specific Instances when Power used

a. To eliminate fractional shares arising out of stock dividends;
b. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
and
c. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code [S40, RCC].

Power to Invest Corporate Funds in Another Corporation or Business or for Any Other Purpose

A private corporation may invest its funds in any other corporation, business, or for any purpose other
than the primary purpose for which it was organized, when approved by a majority of the board of
directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two- thirds (2/3) of the members in the case of nonstock
corporations, at a meeting duly called for the purpose (Sec. 41, R.A. No. 11232).

If intra vires or for a secondary purpose allowed under its AOI, it needs stockholder/member approval.
Without approval, it should be construed to be ultra vires.

Funds refer to any corporate property, requiring the 2/3rds vote. But when the investment is reasonably
necessary to accomplish its primary purpose as stated in the AOI, approval is not necessary.

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 Power to Declare Dividends

The board of directors of a stock corporation may declare dividends out of the unrestricted retained
earnings which shall be payable in cash, property, or in stock to all stockholders on the basis of
outstanding stock held by them (Sec. 42, R.A. 11232).

Power to Enter into Management Contract

No corporation shall conclude a management contract with another corporation unless such contract
is approved by the board of directors and by stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the members in the case of a nonstock
corporation, of both the managing and the managed corporation, at a meeting duly called for the
purpose (Sec. 43, R.A. No. 11232).

Exceptions to Requirement of Mere Majority Votes

a. Stockholder or stockholders representing the same interest of both the managing and the
managed corporations own or control more than one-third (1/3) of the total outstanding capital
stock entitled to vote of the managing corporation; or

b. Majority of the members of the board of directors of the managing corporation also constitute
a majority of the members of the board of directors of the managed corporation,

The management contract must be approved by the stockholders of the managed corporation owning
at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a nonstock corporation.

Maximum Term of Management Contract

No management contract shall be entered into for a period longer than five (5) years for any one (1)
term.

SUMMARY OF SPECIFIC POWERS

SPECIFIC POWER
Power to extend or shorten corporate term
[Sec. 36, RCC]
Power to increase or decrease capital stock, or
incur, create, increase bonded indebtedness
[Sec. 37, RCC]
Power to deny pre-emptive rights [Sec. 38,
RCC]
Power to sell or dispose corporate assets [Sec.
39, RCC]
Power to Sell of All or Substantially All of the
Properties of the Corporation [Sec. 39, RCC]
APPROVAL REQUIRED
Majority vote of the BOD/T and
Ratification by the stockholders or members
representing at 2/3 of the outstanding capital stock or
of its members
Majority vote of the BOD/T
Approval by 2/3 of the outstanding capital stock or of
the members
Can be denied by the articles of incorporation or an
amendment thereto
A majority vote of its board of directors or trustees
Vote of the stockholders representing at least 2/3 of the
outstanding capital stock, or of the members;

OR

Vote of at least a majority of the trustees in office in

Power to acquire own shares [Sec. 40, RCC]
Power to invest corporate funds in another
corporation or business, or for any other
purpose [Sec. 41, RCC]
Power to declare dividends [Sec. 42, RCC]
nonstock corporations, where there are no members
with voting rights
Must have unrestricted retained earnings in its books to
cover the shares to be purchased or acquired
Majority vote of the board of directors or trustees and
Ratification by the stockholders representing at least
2/3 of the outstanding capital stock, or of the members
Approval of stockholders representing not less than 2/3
of the outstanding capital stock [only for stock
corporations]

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 SPECIFIC POWER APPROVAL REQUIRED
Power to enter into management contract Approval of:
[Sec. 43, RCC] - BOD of both managing and managed corporation;
and
- Majority of outstanding shares or members of both
managed and managing corporation

But 2/3 vote of outstanding stock/members of

managed corporation is necessary in the ff:
- A stockholder/s representing the same interest of
both the managing and managed corporations own
more than 1/3 of the total outstanding capital
stock; or
- Where majority of directors in both corporations are
the same

1. How Powers are Exercised

The exercise of general corporate powers merely requires approval of the board of
directors/trustees.

In the exercise of certain specific corporate powers, there will be a need for the concurrence of
stockholders/members (i.e., two-thirds vote or majority vote).

a. Ultra Vires Doctrine

Statutory Basis

No corporation shall possess or exercise corporate powers other than those conferred by the
Revised Corporation Code or by its articles of incorporation and except as necessary or incidental
to the exercise of the powers conferred (Sec. 44, R. A. No. 11232).

A corporation has

1. Express powers, which are bestowed upon by law or its articles of incorporation; and

2. Necessary or incidental powers to the exercise of those expressly conferred.

An act which cannot fall under a corporation’s express or necessary or incidental powers is an
ultra vires act.

Guiding Principle if the Act is Incidental

If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose
of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful, sense, it may fairly be considered within charter
powers.

The test to be applied is whether the act in question is in direct and immediate furtherance of
the corporation’s business, fairly incident to the express powers and reasonably necessary to
their exercise. If so, the corporation has the power to do it; otherwise, not (Magallanes
Watercraft Association, Inc. vs. Auguis, G.R. No. 211485, May 30, 2016).

Classification of Ultra Vires Acts

An ultra vires act may be classified as (1) illegal ultra vires or (2) mere ultra vires act.

Illegal ultra vires cannot serve as a basis of a court action, nor acquire validity by performance,
ratification, or estoppel.

A mere ultra vires act is that which is not illegal and void ab initio but is merely outside of the
scope of the articles of incorporation, and is thus, merely voidable and may become binding and
enforceable when ratified by the stockholders (Waterfront Philippines, Inc., vs. Social Security
System, G.R. No. 249337, July 6, 2021).

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 Divina [Pre-week 2022 at p. 84] further divides ultra vires acts into three (3) types, the first two
being “mere ultra vires:”
a. Acts done beyond the powers of the corporation as provided in the law or its articles of
incorporation
b. Acts entered into on behalf of the corporation by persons who have no corporate
authority or exceeded the scope of their authority
c. Acts or contracts, which are per se illegal as being contrary to law.

b. Trust Fund Doctrine

Concept

Under the trust fund doctrine, “the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors, who are preferred in the
distribution of corporate assets” (Salido, Jr. vs. Aramaywan Metals Dev. Corp., G.R. No. 233857,
March 18, 2021).

In short, all assets of the corporation are reserved for the satisfaction of corporate debts.

Legal Implication

The board of directors cannot use the assets of the corporation to purchase its own stock for as
long as the corporation has outstanding debts and liabilities.

Accordingly, there can be no distribution of assets among the stockholders without first paying
corporate debts (Salido, Jr. vs. Aramaywan Metals Dev. Corp., G.R. No. 233857, March 18, 2021).

D. BOARD OF DIRECTORS AND TRUSTEES

1. Basic Principles

Repository of Corporate Powers

The board of directors or trustees shall exercise the corporate powers, conduct all business, and
control all properties of the corporation (Sec. 22, R.A. No. 11232).

a. Doctrine of Centralized Management

Concept

The authority and power to manage the regular business affairs of the corporation is vested on
the board of directors. The concentration in the board of the powers of control of corporate
business and of appointment of corporate officers and managers is necessary for efficiency in
any large organization (Filipinas Port Services, Inc., et. al. vs. Victoriano S. Go, et. al., G.R. No.
161886, March 16, 2007).

Rationale

Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to
conduct its business directly. And so the plan of corporate organization is for the stockholders to
choose the directors who shall control and supervise the conduct of corporate business (Filipinas
Port Services, Inc., et. al. vs. Victoriano S. Go, et. al., G.R. No. 161886, March 16, 2007).

b. Business Judgment Rule

Concept

The board of directors or trustees has the sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the corporation within the scope of its charter.

Consequence of the Doctrine

The corporate and/or business decisions made by the corporation’s Board of Directors, done in
good faith, is not reviewable by the courts.

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 Questions of policy or of management are left solely to the honest decision of the board as the
business manager of the corporation, and the court is without authority to substitute its
judgement for that of the board, and as long as it acts in good faith and in the exercise of honest
judgment in the interest of the corporation, its orders are not reviewable by the courts (PSE vs.
Hon. Court of Appeals, et. al., G.R. No. 125469, October 27, 1997).

Questions of policy and management are left to the honest decision of the officers and directors
of a corporation; and the courts are without authority to substitute their judgment for that of
the BOD, unless said judgment had been attended with bad faith (Ching vs. Quezon City Sports
Club, Inc., G.R. No. 200150).

Exception

MCPI directors in violation of their duty as such directors, acquired an interest adverse to the
corporation when they entered into the ultrasound contract. The petitioners directors/ultrasound
investors failed to inhibit themselves from participating in the meeting and from voting with
respect to the decision to proceed with the signing of the MOA (Balinghasay vs. Castillo, G.R.
No. 185664, April 8, 2015).

Extent of Business Judgement Rule

As long as no arbitrary or malicious action on the part of the employer is shown, the wisdom of
a business judgment to implement a cost saving device is beyond the court’s determination.
After all, the free will of management to conduct its own business affairs to achieve its purpose
cannot be denied (Unera vs. Shin Heung Electro Digital, Inc., G.R. No. 228328, March 11, 2020).

2. Tenure and Qualifications of Directors or Trustees

Term of Office

Directors shall be elected for a term of one (1) year from among the holders of stocks registered
in the corporation’s books, while trustees shall be elected for a term not exceeding three (3) years
from among the members of the corporation. Each director and trustee shall hold office until the
successor is elected and qualified (Sec. 22, R.A. No. 11232).

Qualification

A director who ceases to own at least one (1) share of stock or a trustee who ceases to be a
member of the corporation shall cease to be a director or trustee (Sec. 22 R.A. No. 11232).

The qualifications provided for in the law are only minimum qualifications. Additional qualifications
and disqualifications can be provided for but only by proper provisions in the by-laws of the
corporation (Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]).

Beneficial ownership under VTA no longer qualifies as a director owning at least one share of stock
under his name (Lee v. CA, 205 SCRA 752 [1992]). The law does not require that a Vice-President
be a stockholder (Baguio v. CA, 226 SCRA 366 [1993]).

Grounds for Disqualification

A person shall be disqualified from being a director, trustee, or officer of any corporation if, within
five (5) years prior to the election or appointment as such, the person was:

a. Convicted by final judgment

1. Of an offense punishable by imprisonment for a period exceeding six (6) years;
2. For violating the RCC; and
3. For violating R.A. No. 8799 (The Securities Regulation Code);
b. Found administratively liable for any offense involving fraudulent acts; and
c. By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in pars. (a) and (b) above (Sec. 27, R.A. No.
11232).

Independent Director

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 The board of corporations vested with public interest shall have independent directors constituting
at least twenty percent (20%) of such board (Sec. 22, R.A. No. 11232). Corporations vested with
public interest include:
a) Public companies as described under the Securities Regulation Code (‘SRC”)
b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business,
pre-need, trust and insurance companies, and other financial intermediaries; and
c) Other corporations engaged in businesses vested with public interest similar to the above, as
may be determined by the SEC.

An independent director is a person who, apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other relationship which
could, or could reasonably be perceived to materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a director (Sec. 22, R.A. No. 11232).

Q: X is an independent director of ABC Corporation. X is also a lawyer and the managing partner
of the law firm. The specialization of the law firm is Labor Law. ABC Corporation was sued by the
union of the corporation. ABC Corporation approached X to handle the case, for which he will be
paid the appropriate professional service fees. Assuming he accepts the offer to be ABC
Corporation’s counsel, can X remain as independent director?

A: No, he is disqualified to be an independent director. The independent director must not receive
fees from the corporation other than what is due him as an independent director. When X accepted
the offer to defend the cause of ABC Corporation, his independence can now be reasonably
questioned. He can no longer be considered independent because he is already working with the
management of the corporation.

3. Election and Removal of Directors or Trustees

Stock Corporations

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 at the time fixed in the bylaws or where the
bylaws are silent, at the time of the election (Sec. 23, R.A. No. 11232).

The said stockholder may, except for delinquent stock:

a. vote such number of shares for as many persons as there are directors to be elected;
b. 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
c. distribute them on the same principle among as many candidates as may be seen fit.

Rules on the Election of Directors or Trustees

1. Each stockholder or member shall have the right to nominate any director or trustee who
possesses all of the qualifications and none of the disqualifications.

2. At all elections of directors or trustees, there must be present the owners of majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled
to vote [S23, RCC].

3. When so authorized in the bylaws or by a majority of the board of directors, the stockholders
or members may also vote through remote communication or in absentia.

The right to vote through remote communication may be exercised in corporations vested
with public interest, notwithstanding the absence of a provision in the bylaws.

4. A stockholder or member who participates through remote communication or in absentia,

shall be deemed present for purposes of quorum.

5. The election must be by ballot if requested by any voting stockholder or member.

6. In stock corporations, 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 at the time
fixed in the bylaws or where the bylaws are silent, at the time of the election.

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 7. The directors or trustees elected shall perform their duties as prescribed by law, rules of good
corporate governance, and by-laws of the corporation.

Removal of Directors or Trustees

1. By a vote of stockholders/members

Stock corporations – by vote of the stockholders holding or representing at least two-thirds

(2/3) of the outstanding capital stock, or

Non-stock corporation – by a vote of at least two-thirds (2/3) of the members entitled to

vote.

Note: The law is silent on the requirement of just cause for removal. The assumption is
that a director or trustee may be removed for any cause, for as long as the vote
requirement is satisfied.

Exception – That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled
under the law (Sec. 22, R.A. No. 11232).

2. By order of the SEC

The SEC shall, motu proprio or upon verified complaint, and after due notice and hearing,
order the removal of a director or trustee elected despite the disqualification, or whose
disqualification arose or is discovered subsequent to an election (Sec. 27, R.A. No. 11232).

Filling Up Vacancies

Any vacancy occurring in the board of directors or trustees other than by removal or by expiration
of term may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders or members in
a regular or special meeting called for that purpose (Sec. 28, R.A. No. 11232).

Emergency Board

The requisites are (Sec. 28, R.A. No. 11232):

a. The vacancy prevents the remaining directors from constituting a quorum;
b. Emergency action is required to prevent grave, substantial, and irreparable loss or damage to
the corporation;
c. The vacancy may be temporarily filled from among the officers of the corporation;
d. The appointment must be made by unanimous vote of the remaining directors or trustees.

The limitations on the Emergency Board are:

1. The action by the designated director or trustee shall be limited to the emergency action
necessary.

2. The term shall cease within a reasonable time from the termination of the emergency or
upon election of the replacement director or trustee, whichever comes earlier.

3. The corporation must notify the SEC within three (3) days from the creation of the
emergency board, stating therein the reason for its creation (Sec. 28, R.A. No. 11232).

4. Duties, Responsibilities and Liabilities for Unlawful Acts

Disloyalty of a Director

Rule

Where a director, by virtue of such office, acquires a business opportunity which should belong to
the corporation, thereby obtaining profits to the prejudice of such corporation, the director must
account for and refund to the latter all such profits (Sec. 33, R.A. No. 11232).

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Exception

When the act has been ratified by a vote of the stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock.

This rule shall be applicable, notwithstanding the fact that the director risked one’s own funds in
the venture (Sec. 33. R.A. No. 11232).

Solidary Liability

Directors or trustees who:

1. Willfully and knowingly vote for or assent to patently unlawful acts of the corporation, or
2. Are guilty of gross negligence or bad faith in directing the affairs of the corporation, or
3. Acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees

Shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation,
its stockholders or members and other persons.

A director, trustee or officer shall not attempt to acquire, or acquire any interest adverse to the
corporation in respect of any matter which has been reposed in them in confidence, and upon which,
equity imposes a disability upon themselves to deal in their own behalf; otherwise, the said director,
trustee or officer shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation (Sec. 30, R.A. No. 11232).

Personal liability of a corporate director, trustee or officer along with the corporation may so validly
attach, as a rule, only when:

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;

2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by a specific provision of law, to personally answer for his corporate action
(Atienza vs. Golden Ram Engineering Supplies & Equipment Corp., G.R. No. 205405, June
28, 2021).

When made liable by a specific provision of law

We explained that corporate officers or directors cannot, as a general rule, be personally held liable
for the contracts entered into by the corporation because the corporation has a separate and distinct
legal personality. However, “personal liability of such corporate director, trustee, or officer, along
with the corporation, may validly attach when he is made by a specific provision of law personally
answerable for his corporate action” (Oscares vs. Magsaysay Maritime Corp., G.R. No. 245858,
December 3. 2020).

Dealings of Directors, Trustees or Officers with the Corporation

A contract of the corporation with (1) one or more of its directors, trustees, officers or their spouses
and relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of
such corporation, unless all the following conditions are present:

a. The presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;

b. The vote of such director or trustee was not necessary for the approval of the contract;

c. The contract is fair and reasonable under the circumstances;

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 d. In case of corporations vested with public interest, material contracts are approved by at
least two-thirds (2/3) of the entire membership of the board, with at least a majority of the
independent directors voting to approve the material contract; and

e. In case of an officer, the contract has been previously authorized by the board of directors
(Sec. 31, R.A. No. 11232).

Contracts Between Corporations with Interlocking Directors

Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances,
a contract between two (2) or more corporations having interlocking directors shall not be
invalidated on that ground alone (Sec. 32, R.A. No. 11232).

Offenses and Penalties

Various specific offenses and corresponding penalties were enumerated:

1. Unauthorized Use of Corporate Name (Sec. 159);

2. Violation of Disqualification Provision (Sec. 160);
3. Violation of Duty to Maintain Records, to Allow Inspection or Reproduction (Sec. 161);
4. Willful Certification of Incomplete, Inaccurate, False or Misleading Statements or Reports
(Sec. 162);
5. Independent Auditor Collusion (Sec. 163);
6. Obtaining Corporate Registration through Fraud (Sec. 164);
7. Fraudulent Conduct of Business (Sec. 165);
8. Acting as Intermediaries for Graft and Corrupt Practices (Sec. 166);
9. Engaging Intermediaries for Graft and Corrupt Practices (Sec. 167);
10. Tolerating Graft and Corrupt Practices (Sec. 168);
11. Retaliation Against Whistleblowers (Sec. 169);
12. Other Violations of the Code (Sec. 170).

Liability of Directors, Trustees, Officers

If the offender is a corporation, the penalty may, at the discretion of the court, be imposed upon
such corporation and/or upon its directors, trustees, stockholders, members, officers, or employees
responsible for the violation or indispensable to its commission (Sec. 162, R.A. No. 11232).

E. STOCKHOLDERS AND MEMBERS

1. Rights and Obligations of Stockholders and Members

Rights
a. Direct or indirect participation in management (RCC, Section 6)
b. Right to elect and remove directors (RCC, Section 28)
c. Proprietary rights
i. Right to dividends (RCC, Section 42)
ii. Appraisal right (RCC, Section 80)
iii. Right to inspect books and records (RCC, Section 73)
iv. Pre-emptive right (RCC, Section 38)
v. Voting rights (RCC, Section 6)
d. Right to issuance of stock certificate for fully paid shares (RCC, Section 63)
e. Right to transfer of stocks in corporate books (RCC, Section 62)
f. Right to be furnished with the most recent financial statements/reports (RCC, Section 73)
g. Right to recover stocks unlawfully sold for delinquent payment of subscription (RCC, Section
68)
h. Proportionate participation in the distribution of assets in liquidation (RCC, Section 139)
i. Right to file individual suit, representative suit and derivative suits

a. Doctrine of Equality of Shares

Under the doctrine of equality of shares, all stocks issued by the corporation are presumed
equal with the same privileges and liabilities, provided that the Articles of Incorporation is
silent on such differences (Heirs of Gamboa vs. Teves, G.R. No. 176579 [Resolution], October
9, 2012, citing Comm. Of Internal Revenue vs. Court of Appeals, G.R. No. 108576, January
20, 1999).

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 Statutory Basis

Each share shall be equal in all respects to every other share, except as otherwise provided
in the articles of incorporation and in the certificate of stock (Sec. 6, R.A. No. 11232).

2. Participation in Management

Right to Vote

It is the right of a stockholder to conform or object to a proposed action of the corporation. It

represents the right of a stockholder to participate in the control and management of the
corporation (Castillo vs. Balinghasay, 440 SCRA 442).

Exercise of the Right to Vote

Stockholders and members may vote in person or by proxy in all meetings of stockholders or
members.

When so authorized in the bylaws or by a majority of the board of directors, the stockholders or
members of corporations may also vote through remote communication or in absentia (Sec. 57,
R.A. No. 11232).

a. Proxy

Proxies shall be:

a. in writing;
b. signed and filed, by the stockholder or member, in any form authorized in the bylaws;
and
c. received by the corporate secretary within a reasonable time before the scheduled
meeting.

Unless otherwise provided in the proxy form, it shall be valid only for the meeting for which
it is intended.

No proxy shall be valid and effective for a period longer than five (5) years at any one time
(Sec. 57, R.A. No. 11232).

b. Voting Trust

One or more stockholders of a stock corporation may create a voting trust for the purpose
of conferring upon a trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any time: Provided, That in the case of a
voting trust specifically required as a condition in a loan agreement, said voting trust may be
for a period exceeding five (5) years but shall automatically expire upon full payment of the
loan (Sec. 58, R.A. No. 11232).

Voting Trust Agreement; Rules

The grant of voting trust for the purpose of conferring upon a trustee or trustees the right
to vote shall be governed by the following rules; a voting trust agreement:

1. Must be in writing and notarized and shall specify the terms and conditions thereof;

2. Is limited for a period not exceeding five (5) years at any time;

3. A certified copy shall be filed with the corporation and with the SEC;

4. The voting trust agreement filed with the corporation shall be subject to examination
by any stockholder of the corporation in the same manner as any other corporate
book or record;

5. Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period (Sec. 58, R.A. No. 11232).

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 If not followed, the agreement is ineffective and unenforceable:

• The certificate or certificates of stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of the trustee or trustees, stating
that they are issued pursuant to said agreement.

• The books of the corporation shall state that the transfer in the name of the trustee
or trustees is made pursuant to the voting trust agreement.

Limitation of Voting Trust Agreement

No voting trust agreement shall be entered into for purposes of circumventing the laws
against:

a. anti-competitive agreements;
b. abuse of dominant position;
c. anti-competitive mergers and acquisitions;
d. violation of nationality and capital requirements; or
e. the perpetuation of fraud.
c. Cases when Stockholders’ Action is Required

i. By a Majority Vote

a. Power to Acquire Own Shares (Sec. 40)

b. Power to Declare Dividends (Sec. 42)
c. Power to Enter into Management Contract (Sec. 43)

ii. By a Two-Thirds Vote

a. Power to Extend or Shorten Corporate Term (Sec. 36)

b. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded
Indebtedness (Sec. 37)
c. Power to Deny Preemptive Right (Sec. 38)
d. Sale of All or Substantially All of Corporate Assets (Sec. 39)
e. Power to Invest Corporate Funds in another Corporation or Business or for Any
Other Purpose (Sec. 41)
f. Power to Declare Dividends (Sec. 42)
g. Power to Enter into Management Contract (Sec. 43)

iii. By Cumulative Voting

Election of Directors or Trustees

In stock corporations, 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 at the time fixed. (RCC, Section 27)

A stockholder may either:

1. Vote such number of shares for as many persons as there are directors to be elected
[Straight Voting] or
2. Cumulate said shares and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall equal [Cumulative
Voting for 1 candidate], or
3. Distribute them on the same principle among as many candidates as he shall see fit
[Cumulative Voting by Distribution]

Provided that the total number of votes cast shall not exceed the number of shares
owned as shown in the books of the corporation multiplied by the whole number of
directors to be elected. (RCC, Section 27)

Members of nonstock corporations may cast as many votes as there are trustees to be
elected but may not cast more than one (1) vote for one (1) candidate. (RCC, Section
27)

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 Nominees for directors or trustees receiving the highest number of votes shall be
declared elected. (RCC, Section 27)

3. Proprietary Rights

a. Right to Dividends

The law does not directly and categorically mandate the corporation to declare or pay
dividend. However, a stockholder is entitled to payment once a final dividend is declared on
a shareholder’s share. In case of non-payment, the aggrieved stockholder can sue the
corporation.

Discretion of Board to Declare Dividends

Only the board of directors may declare dividends following the business judgment rule [S42,
RCC].

It is not amiss to stress that the power to declare dividends under Section 43 of the
Corporation Code of the Philippines lies in the hands of the board of directors of a stock
corporation and can be declared only out of its unrestricted retained earnings. Since
dividends can be declared only out of unrestricted retained earnings of a corporation,
payment of dividends in advance is ultra vires since earnings cannot obviously be fixed and
pre-determined five years in advance (Ongkingco vs. Sugiyama, G.R. No. 217787, September
18, 2019; S42, RCC).

However, stock corporations are prohibited from retaining surplus profits in excess of 100%
of their paid-in capital stock, except when:
1. Justified by definite corporate expansion projects or programs approved by the board
2. When the corporation is prohibited under any loan agreement with financial institutions
or creditors, whether local or foreign, from declaring dividends without their consent,
and such consent has not yet been secured; or
3. When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies (RCC, Section 42).

Types of Dividends
a. Cash Dividends
b. Property Dividends
c. Stock Dividends - May be issued only with the approval of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly
called for the purpose (RCC, Section 42).

May be issued out of premium surplus. All other forms may be declared only out of
unrestricted retained earnings (VILLANUEVA at 627).

d. Liquidating Dividends - May declared out of capital (VILLANUEVA at 628).

b. Right to Inspect

Inspection of corporate records, regardless of the form in which they are stored, shall be
open to inspection by any director, trustee, stockholder or member of the corporation in
person or by a representative at reasonable hours on business days, and a demand in writing
may be made by such director, trustee or stockholder at their expense, for copies of such
records or excerpts from said records (Sec. 73, R.A. No. 11232).

Effect of Refusal of the Right to Inspect

Any officer or agent of the corporation who shall refuse to allow the inspection and/or
reproduction of records shall:

1. Be liable for damages, and

2. Be guilty of an offense which shall be punishable under Sec. 161 of the RCC.

Exceptions; Defenses Available to Director, Trustee of Officer Held Liable

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 1. That the person demanding to examine and copy excerpts from the corporation’s
records and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or

2. Was not acting in good faith or for a legitimate purpose in making the demand to
examine or reproduce corporate records, or

3. Is a competitor, director, officer, controlling stockholder or otherwise represents the

interests of a competitor (Sec. 73, R.A. No. 11232).

Non-Stockholder/Non-Member

A requesting party who is not a stockholder or member of record, or is a competitor, director,

officer, controlling stockholder or otherwise represents the interests of a competitor shall
have no right to inspect or demand reproduction of corporate records (Sec. 73, R.A. No.
11232).

Foundation of the Right to Inspect

The stockholder's right of inspection of the corporation's books and records is based upon
their ownership of the assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a quasi-ownership (Gokongwei, Jr. vs. SEC,
178 Phil. 266).

Elements of Refusal to Allow Inspection

1. A director, trustee, stockholder or member has made a prior demand in writing for
a copy of excerpts from the corporation’s records or minutes;

2. Any officer or agent of the concerned corporation shall refuse to allow the said
director, trustee, stockholder or member of the corporation to examine and copy
said excerpts;

3. If such refusal is made pursuant to a resolution or order of the board of directors or

trustees, the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal; and

4. Where the officer or agent of the corporation sets up the defense that the person
demanding to examine and copy excerpts from the corporation’s records and
minutes

a. Has improperly used any information secured through any prior examination
of the records or minutes of such corporation or of any other corporation, or

b. Was not acting in good faith or for a legitimate purpose in making his
demand,

the contrary must be shown or proved (Ang-Abaya vs. Ang, G.R. No. 178511,
December 4, 2011; Keh vs. People, G.R. Nos. 217592-93, July 13, 2020).

Q: Can a petition for injunction be filed by the corporation to prevent inspection?

A: No. The petition for injunction is a pre-emptive action unjustly intended to impede and
restrain the stockholders’ rights. If a stockholder demands the inspection of corporate books,
the corporation could refuse to heed such demand. When the corporation, through its
officers, denies the stockholders of such right, the latter could then go to court to enforce
their rights. Thus, the proper remedy available for the enforcement of the right to inspection
is undoubtedly the writ of mandamus to be filed by the stockholders and not a petition for
injunction filed by the corporation (Philippine Associated Smelting and Refining Corp. vs. Lim,
G.R. No. 172948, October 5, 2016).

Q: Is the right to inspect available to stockholders with minimal shares?

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 A: Yes. The Corporation Code has granted to all stockholders the right to inspect the
corporate books and records, and in so doing has not required any specific amount of interest
for the exercise of the right to inspect (Terelay Investment and Dev. Corp. vs. Cecilia Teresita
Yulo, G.R. No. 160924, August 05, 2015).

Remedies if Inspection Denied

1. Where the corporation has not established the impropriety of the request to inspect,
the right may be enforced by mandamus (VILLANUEVA, supra at 463).
2. Action for damages against the officer or agent of the corporation who refused to
allow the inspection and/or reproduction of records in accordance with the provisions
of this Code.
a. Provided, That if such refusal is made pursuant to a resolution or order of the
board of directors or trustees, liability shall be imposed upon the directors or
trustees who voted for such refusal.
3. Criminal action against the officer or agent of the corporation who refused to allow
the inspection and/or reproduction of records in accordance with the provisions of
this Code.
a. Provided, That if such refusal is made pursuant to a resolution or order of the
board of directors or trustees, liability shall be imposed upon the directors or
trustees who voted for such refusal.
4. The aggrieved party may report the denial to the SEC.
a. Within five days from receipt of such report, the Commission shall conduct a
summary investigation and issue an order directing the inspection or
reproduction of the requested records (RCC, Section 73).

c. Pre-Emptive Right

The right of a stockholder of a stock corporation to subscribe to all issues or disposition of

shares of any class, in proportion to their respective shareholdings [S38, RCC].

This gives the stockholder opportunity to subscribe/buy the shares equivalent to his
proportionate shareholdings in the corporation when there are new shares issued. This is to
make sure that the stockholder is not relegated to minority status after the issuance of new
shares.

The grant of pre-emptive right under the Corporation Code is designed to protect both the
proprietary and voting rights of a stockholder in a corporation. The proportionate interest of
a stockholder in a corporation determines his proportionate power to vote in corporate affairs
where the law gives the stockholders a right to affirm or deny board actions (SEC Opinion,
August 11, 1997).

Exercise of Pre-Emptive Right

The right may be restricted or denied under the articles of incorporation, and subject to
certain exceptions and limitations.

The stockholder must be given a reasonable time within which to exercise their preemptive
rights. Upon expiration of said period, any stockholder who has not exercised such right will
be deemed to have waived it (Lu Ym vs. Lu Ym, Sr., G.R. No. 219902, January 17, 2018).

Coverage of Pre-emptive Right

The pre-emptive right is recognized to exist to “all issues or disposition of shares of any
class.” It includes:
a. Issues from the existing unsubscribed portion of the authorized capital stock when the
board decides to open them for subscription; and
b. Re-issuance or sale of treasury stocks of the corporation (VILLANUEVA, supra at 421).

In determining the proportionate right of the stockholders to subscribe to a proposed

increase of the authorized capital stock, subscription deposits are excluded. They are not
considered part of the capital of the corporation until shares are actually issued in
consideration thereof (VILLANUEVA, supra at 419).

Exceptions to the Pre-emptive Right

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 1. When such right is denied by the articles of incorporation or an amendment thereto;
and
2. Shares to be issued:
a. In compliance with laws requiring stock offerings or minimum stock ownership
by the public; or
b. To shares to be issued in good faith with the approval of the stockholders
representing ⅔ of the outstanding capital stock in exchange for:
i. Property needed for corporate purposes; or
ii. In payment of a previously contracted debt (RCC, Section 38).

d. Right of First Refusal

Right of first refusal is the option granted to the corporation and/or its stockholders to
purchase the shares of a transferring stockholder upon reasonable terms and conditions.

The corporation and its stockholders have no right of first refusal unless such restriction on
transfer is embodied in the articles of incorporation, bylaws of the corporation and stock
certificate of the corporation. This means that a stockholder may freely convey his shares to
any person without having to offer the shares to the corporation and/or the stockholders
first, unless a right of first refusal is granted to the latter.

The right of first refusal, if not provided for by law or by the articles of incorporation, does
not exist at all.

Note: Taken from Divina (2021) as it was not discussed in lecture.

Appraisal Right

Any stockholder of a corporation shall have the right to dissent and demand payment of the
fair value of his shares.

Appraisal right is a right given to stockholders to withdraw from the corporation because they
dissent on a particular corporate action. Mere dissenting a proposed corporate action will not
be enough for one to exercise the right; there must be a corresponding written demand for
the payment of fair value of their shares.

When Appraisal Right Exercised

The right of appraisal may be exercised in the following instances:

a. In case an amendment to the articles of incorporation has the effect of changing or

restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class, or
of extending or shortening the term of corporate existence;

b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of

all or substantially all of the corporate property and assets as provided in this Code;

c. In case of merger or consolidation; and

d. In case of investment of corporate funds for any purpose other than the primary
purpose of the corporation (Sec. 80, R.A. No. 11232).

Procedure in Exercising Appraisal Right

a. The dissenting stockholder must have voted against a proposed corporate action.

b. He makes a written demand on the corporation for the payment of the fair value of
shares held within thirty (30) days from the date on which the vote was taken.

c. He surrenders his certificate or certificates of stock representing his shares, the fair
value thereof as of the day before the vote was taken.

d. There must be valuation or appraisal of the fair value of the shares of the
withdrawing stockholder.

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 e. Payment by the corporation and transfer of the shares to the corporation (Sec. 81,
R.A. No. 11232).

Q: Can a stockholder who exercised his appraisal right be allowed to withdraw his demand
for payment?

A: No more. No demand for payment may be withdrawn, unless the corporation consents
thereto (Sec. 83, R.A. No. 11232).

Costs and Expenses

The costs and expenses of appraisal shall be borne by the corporation.

Exception: When the fair value ascertained by the appraisers is approximately the same as
the price which the corporation may have offered to pay the stockholder, in which case they
shall be borne by the latter (Sec. 84, R.A. No. 11232).

How Appraisal Right Exercised

1. The appraisal right is exercised by any stockholder who has voted against the
proposed corporate action by making a written demand on the corporation, within
30 days after the date on which the vote was taken, for the payment of the fair value
of his shares. The failure to make a demand within the period is deemed a waiver of
the appraisal right.

2. If the withdrawing stockholder and the corporation cannot agree on the fair value of
the shares within a period of 60 days from the date the stockholders approved the
corporate action, the fair value shall be determined and appraised by three (3)
disinterested persons, one of whom shall be named by the stockholder, another by
the corporation, and the third by the two thus chosen.

3. All rights accruing to the withdrawing stockholder’s shares, including voting and
dividend rights, shall be suspended from the time of demand for the payment of the
fair value of the shares until either the abandonment of the corporate action involved
or the purchase of the shares by the corporation, except the right of such stockholder
to receive payment of the fair value of the shares.

4. Within 10 days after demanding payment for his/her shares, a dissenting stockholder
shall submit to the corporation the certificates of stock representing his shares for
notation thereon that such shares are dissenting shares.

5. If the proposed corporate action is implemented or effected, the corporation shall

pay to such stockholder, upon the surrender of the certificates of stock representing
his shares, the fair value thereof as of the day prior to the date on which the vote
was taken, excluding any appreciation or depreciation in anticipation of such
corporate action (Turner vs. Lorenzo Shipping Corp., G.R. No. 157479, November
24, 2010).

4. Remedial Rights

Remedial rights of the stockholder may be the filing of (1) individual suit, (2) representative suit,
or (3) derivative suit.

5. Intra-Corporate Disputes (Individual vs. Representative vs. Derivative Suits)

Intra-Corporate Dispute

Concept

An intra-corporate dispute is understood as a suit arising from intra-corporate relations or between

or among stockholders or between any or all of them and the corporation (Strategic Alliance Dev’t.
Corp. vs. Star Infrastructure Dev’t. Corp., et. al., G.R. No. 187872, November 17, 2010).

Tests to Determine Existence of Intra-Corporate Dispute

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A conflict between two (2) stockholders of a corporation does not automatically render their dispute
as intra-corporate. The nature of the controversy must also be examined (Belo Medical Group, Inc.
vs. Santos, G.R. No. 185894, August 30, 2017).

To determine whether or not a case involves an intra-corporate dispute, two tests are applied —
the relationship test and the nature of the controversy test (San Jose vs. Ozamiz, G.R. No. 190590,
July 12, 2017).

Under the relationship test, there is an intra-corporate controversy when the conflict is

1. Between the corporation, partnership, or association and the public;

2. Between the corporation, partnership, or association and the State insofar as its franchise,
permit or license to operate is concerned;
3. Between the corporation, partnership, or association and its stockholders, partners,
members, or officers; and
4. Among the stockholders, partners, or associates themselves.

On the other hand, in accordance with the nature of the controversy test, an intra-corporate
controversy arises when the controversy is not only rooted in the existence of an intra-corporate
relationship, but also in the enforcement of the parties’ correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the corporation.

Intra-Corporate Dispute Involving Dismissal of Corporate Officer

To be considered an intra-corporate controversy, the dismissal of a corporate officer must have

something to do with the duties and responsibilities attached to his/her corporate office or
performed in his/her official capacity (Real vs. Sangu Phils, Inc., 655 Phil. 68 [2011]).

The Court consistently ruled that a corporate officer’s dismissal is always a corporate act, or an
intra-corporate controversy which arises between a stockholder and a corporation (Cacho vs.
Balagtas, G.R. No. 202974, February 7, 2018).

The mere designation as a high-ranking employee, however, is not enough to consider one as a
corporate officer (Malcaba vs. ProHealth Pharma Phils., Inc., G.R. No. 209085, June 6, 2018).

Note: Corporate officers are those mentioned in the law and bylaws as such (i.e., president,
corporate secretary, treasurer, compliance officer).

While a corporate office is created by an express provision either in the Corporation Code or the
By-laws, what makes one a corporate officer is his election or appointment thereto by the board of
directors (Cacho vs. Balagtas, G.R. No. 202974, February 7, 2018).

Jurisdiction and Venue

All actions involving intra-corporate disputes shall be commenced and tried in the Regional Trial
Court which has jurisdiction over the principal office of the corporation, partnership, or association
concerned (Sec. 5, Interim Rules of Procedure Governing Intra-Corporate Controversies).

Importance of Determining Existence of Intra-Corporate Dispute

An intra-corporate controversy shall be within the jurisdiction of the regular courts, while an
ordinary labor dispute is that which the Labor Arbiter may properly take cognizance of (Cacho vs.
Balagtas, G.R. No. 202974, February 7, 2018).

Individual Suit v. Representative v. Derivative Suits

Individual Suit

A suit brought by the shareholder in his own name against the corporation when a wrong is directly
inflicted against him.

Object is specific to a stockholder and the remedy is specific to him;

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 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.

Representative Suit

A suit brought by the stockholder in behalf of himself and all other stockholders similarly situated
when a wrong is committed against a group of stockholders.

Object is a definite class of stockholder and the remedy is specific to them

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.

Derivative Suit

When the object of the wrong done is the corporation itself or “the whole body of its stock and
property without any severance or distribution among individual holders” (Florete, Jr. vs. Florete,
G.R. No. 174909 & 177275, January 20, 2016).

When the acts complained of constitute a wrong to the corporation itself, the cause of action
belongs to the corporation and not to the individual stockholder or member.

Nature of Derivative Suit

A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce

corporate rights against the corporation’s directors, officers or other insiders. In derivative suits,
the real party-in-interest is the corporation, while the stockholder is a mere nominal party (Juanito
Ang, et. al. vs. Sps. Roberto and Rachel Ang, G.R. No. 201675, June 19, 2013).

The general rule is that the board of directors/trustees must authorize the action to be filed. A
derivative suit is the exception.

Note: A derivative suit is an action directly taken by the stockholder because the board does not
want to take action; inaction of the board affects the interest of the corporation.

Derivative suit as “suit by a shareholder to enforce a corporate cause of action” (Ago Realty &
Development Corp vs. Ago, G.R. Nos. 210906 & 211203, October 16, 2019).

Requisites for Filing Derivative Suit*

1. He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;

2. He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;

3. No appraisal rights are available for the act or acts complained of;

4. The suit is not a nuisance or harassment suit;

5. In case of nuisance or harassment suit, the court shall dismiss the case (Florete, Jr. vs.
Florete, G.R. No. 174909, January 20, 2016, citing Rule 8, Sec. 1 of the Interim Rules of
Procedure for Intra Corporate Controversies).

F. CAPITAL STRUCTURE

1. Shares of Stocks

What are shares of stock?

Shares of stock are forms of securities representing equity ownership in a corporation divided up
into units.

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They serve as a measure of the shareholder’s proportionate interest in the corporation in terms
of the right to vote and to receive dividends, and the right to share in the corporation’s assets
when distributed according to law and equity [DIVINA VOL. 1 (2021) at 442].

Classes of Shares of Stock

What are the classes of shares?

a. Common shares
b. Preferred shares
c. Par value shares
d. No par value shares
e. Voting shares
f. Non-voting shares
g. Founder’s shares
h. Treasury shares
i. Redeemable shares
j. Watered shares
k. Other classifications as may be provided in the AOI not contrary to law [DIVINA VOL. 1
(2021) at 442].

Rules

✓ The classification of shares, their corresponding rights, privileges, restrictions, and their
stated par value, if any, must be indicated in the articles of incorporations.
✓ Each share shall be equal in all respects to every other share, except as otherwise
provided in the articles of incorporation.
✓ Each share shall be equal in all respects to every other share, except as otherwise
provided in the articles of incorporation and in the certificate of stock.
✓ No share may be deprived of voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise provided in this Code (Sec. 6, R.
A. No. 11232).

Holders of Non-Voting Shares

Holders of non-voting shares shall be entitled to vote on the following matters:

a. Amendment of the articles of incorporation;

b. Adoption and amendment of bylaws;
c. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of
the corporate property;
d. Incurring, creating, or increasing bonded indebtedness;
e. Increase or decrease of authorized capital stock;
f. Merger or consolidation of the corporation with another corporation or other
corporations;
g. Investment of corporate funds in another corporation or business; and
h. Dissolution of the corporation.

Preferred Shares

Preferred shares of stock issued by a corporation may be given preference in the distribution of
dividends and in the distribution of corporate assets in case of liquidation, or such other
preferences

✓ The board of directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof
✓ Such terms and conditions shall be effective upon filing of a certificate thereof with the
SEC

Founders’ Shares

Founders' Shares are shares that are given certain rights and privileges not enjoyed by the
owners of other stock.

✓ Where the exclusive right to vote and be voted for in the election of directors is granted,
it must be for a limited period not to exceed five (5) years from the date of incorporation;

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 ✓ Such exclusive right shall not be allowed if its exercise will violate the "Anti-Dummy Law",
the "Foreign Investments Act of 1991" and other pertinent laws (Sec. 7, R. A. No. 11232).

Redeemable Shares

Redeemable shares may be issued by the corporation when expressly provided in the articles of
incorporation. They are shares which may be purchased by the corporation.

✓ They are shares which may be purchased by the corporation from the holders of such
shares upon the expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other terms and
conditions stated in the articles of incorporation and the certificate of stock representing
the shares, subject to rules and regulations issued by the SEC (Sec. 8, R. A. No. 11232).

Treasury Shares

Treasury shares are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation through purchase, redemption, donation, or some other
lawful means.

✓ Such shares may again be disposed of for a reasonable price fixed by the board of
directors (Sec. 9, R. A. No. 11232).

a. Nature of Shares of Stock

Shares of stock are equity ownership in a business.

The shares of stack are ownership in a corporation and are regarded as property and the
owner of such shares may, as a general rule, dispose of them as he sees fit.

Refers to the fractional ownership of the corporation in proportion to the total number of
shares issued by such corporation. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates indorsed by the owner or
his attorney-in-fact or other person legally authorized to make the transfer (Teng vs.
Securities and Exchange Commission, G.R. No. 184332, [February 17, 2016], 781 PHIL
133-148).

b. Consideration for Shares of Stocks

Rule

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, actually received by the corporation and necessary
or convenient for its use and lawful purposes at a fair valuation equal to the par
or issued value of the stock issued;
c. Labor performed for or services actually rendered to the corporation;
d. Previously incurred indebtedness of the corporation;
e. Amounts transferred from unrestricted retained earnings to stated capital;
f. Outstanding shares exchanged for stocks in the event of reclassification or
conversion;
g. Shares of stock in another corporation; and/or
h. Other generally accepted form of consideration.

Note: Where the consideration is other than actual cash, or consists of intangible property
such as patents or copyrights, the valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to the approval of SEC.

Shares of stock shall not be issued in exchange for promissory notes or future service (Sec.
61, R.A. 11232).

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 c. Watered Stock

A watered stock is a stock issued for a consideration less than the par or issued price
thereof or for a consideration in any form other than cash, valued in excess of its fair value
[DIVINA VOL. 1 (2021) at 623, citing S61, RCC; 2015 BAR].

Liability of Directors/Officers for Watered Stocks

A director or officer of a corporation who:

a. Consents to the issuance of stocks for a consideration less than its par or issued
value;

b. Consents to the issuance of stocks for a consideration other than cash, valued in
excess of its fair value; or

c. Having knowledge of the insufficient consideration, does not file a written objection
with the corporate secretary,

Shall be liable to the corporation or its creditors, solidarily with the stockholder concerned
for the difference between the value received at the time of issuance of the stock and the
par or issued value of the same (Sec. 64, R.A. No. 11232).

d. Situs of the Shares of Stocks

Situs of shares of stock is the domicile of the corporation to which they pertain to. (Wells
Fargo Bank and Union v. Collector, 70 Phil. 325, 1940), while the situs of a certificate of
stock is at the situs at the place where it is located or at the domicile of the owner, even if
the corporation is domiciled elsewhere [DIVINA VOL. 1 (2021) at 623]

It is a general rule that for purposes of execution, attachment and garnishment, it is not
the domicile of the owner of a certificate but the domicile of the corporation which is decisive
(Chua Guan v. Samahang Magsasaka, Inc., G.R. No. L-42091, 1935).

2. Certificate of Stock

a. Nature of the Certificate

A certificate of stock is a written instrument signed by the proper officer of a corporation

stating or acknowledging that the person named in the document is the owner of a
designated number of shares of its stock. It is prima facie evidence that the holder is a
shareholder of the corporation (Teng vs. SEC, G.R. No. 184332, February 17, 2016).

Certificate of Stock vs. Shares of Stock

A certificate of stock is merely a tangible evidence of ownership of shares of stock. It is

not a stock in the corporation and merely expresses the contract between the corporation
and the stockholder.

The shares of stock evidenced by said certificates, meanwhile, are regarded as property
and the owner of such shares may, as a general rule, dispose of them as he sees fit, unless
the corporation has been dissolved, or unless the right to do so is properly restricted, or
the owner’s privilege of disposing his shares has been hampered by his own action.

The certificate is not stock in the corporation but is merely evidence of the holder’s interest
and status in the corporation, his ownership of the share represented thereby, but is not
in law the equivalent of such ownership (Insigne vs. Abra Valley Colleges, Inc., G.R. No.
204089, July 29, 2015).

b. Uncertificated Shares

"Uncertificated security" is security evidenced by electronic or similar records. (Sec. 3.14,

Securities Regulation Code)

c. Negotiability; Requirements for Valid Transfer of Stocks

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 Transferability of Stock Ownership

Shares of stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner, his attorney-in-fact, or any other person
legally authorized to make the transfer (Sec. 62, R.A. No. 11232).

Rule on Transfer of Shares

No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates, and the
number of shares transferred (Sec. 62, R.A. No. 11232).

Requisites for Valid Transfer of Stocks

Certain minimum requisites must be complied with for there to be a valid transfer of stocks,
to wit:

a. there must be delivery of the stock certificate;

Note: Nothing in the law requiring the delivery of certificate to the corporate
secretary before sale can be recorded in the books; delivery here should be from
former stockholder to new stockholder.

b. the certificate must be endorsed by the owner or his attorney-in-fact or other

persons legally authorized to make the transfer; and

c. to be valid against third parties, the transfer must be recorded in the books of the
corporation (Teng vs. Securities and Exchange Commission, G.R. No. 184332,
[February 17, 2016], 781 PHIL 133-148).

All transfer of shares of stock must be registered in the corporate books to be binding on
the corporation (F&S Velasco Co., Inc. vs. Madrid, G.R. No. 208844, November 10, 2015).

It is the delivery of the certificate, coupled with the endorsement by the owner or his duly
authorized representative that is the operative act of transfer of shares from the original
owner to the transferee (Teng vs. SEC, G.R. No. 184332, February 17, 2016).

An owner of shares of stock cannot be accorded the rights pertaining to a stockholder —

such as the right to call for a meeting and the right to vote, or be voted for — if his
ownership of such shares is not recorded in the Stock and Transfer Book (F&S Velasco Co.,
Inc. vs. Madrid, G.R. No. 208844, November 10, 2015).

d. Issuance

No certificate of stock shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of delinquent shares), if any is
due, has been paid (Sec. 63, R.A. No. 11232).

e. Lost or Destroyed Certificates

Procedure for Issuance of New Certificates of Stock in Case of Lost, Stolen or Destroyed
Certificates

The following procedure shall be followed by a corporation in issuing new certificates of

stock in lieu of those which have been lost, stolen or destroyed:

a. The registered owner of a certificate of stock in a corporation or such person’s

legal representative shall file with the corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to how the certificate was lost, stolen or
destroyed;

b. The corporation shall publish a notice in a newspaper of general circulation in the

place where the corporation has its principal office, once a week for three (3)

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 consecutive weeks at the expense of the registered owner of the certificate of
stock which has been lost, stolen or destroyed; and

c. The corporation shall issue a new certificate of stock after a period of one (1) year
(Sec. 70, R.A. No. 11232).

The corporation shall issue a new certificate of stock, unless the registered owner files a
bond or other security as may be required, effective for a period of one (1) year, for such
amount and in such form and with such sureties as may be satisfactory to the board of
directors, in which case a new certificate may be issued even before the expiration of the
one (1) year period provided herein. If a contest has been presented to the corporation or
if an action is pending in court regarding the ownership of the certificate of stock which
has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu
thereof shall be suspended until the court renders a final decision regarding the ownership
of the certificate of stock which has been lost, stolen or destroyed.

Except in case of fraud, bad faith, or negligence on the part of the corporation and its
officers, no action may be brought against any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure
above-described (Sec. 72, R. A. No. 11232).

3. Disposition and Encumbrance of Shares

a. Sales of Shares

A sale of shares is perfected upon compliance with the formalities prescribed by the RCC.

SEC. 62. Certificate of Stock and Transfer of Shares. – x x x Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates
indorsed by the owner, his attorney in-fact, or any other person legally authorized to make
the transfer.

No transfer, however, shall be valid, except as between the parties, until the transfer is
a. recorded in the books of the corporation showing
a. the names of the parties to the transaction,
b. the date of the transfer,
c. the number of the certificate or certificates, and
d. the number of shares transferred.
b. The Commission may require corporations whose securities are traded in trading
markets and which can reasonably demonstrate their capability to do so to issue
their securities or shares of stocks in uncertificated or scripless form in accordance
with the rules of the Commission.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation

Shares are not owned or are the assets of the corporation—they are owned by the
stockholders of record. The corporation whose shares of stock are the subject of transfer
transaction (through sale, assignment, donation, or any other mode of conveyance) need
not be a part to transaction to be valid; however, to bind the corporation as well as third
parties, it is necessary that the transfer is recorded in the books of the corporation. [Forest
Hills Golf & Country Club v. Vertex Sales and Trading, Inc., 692 SCRA 706 (2013).]

[Section 62 of Revised Corporation Code] the manner by which a share of stock may be
transferred. Said provision is essentially the same as Section 35 of the old Corporation Law,
which, as held in Fleisher v. Botica Nolasco Co., defines the nature, character and
transferability of shares of stock. Fleisher also stated that the provision on the transfer of
shares of stocks contemplates no restriction as to whom they may be transferred or sold.
As owner of personal property, a shareholder is at liberty to dispose of them in favor of
whomsoever he pleases, without any other limitation in this respect, than the general
provisions of law. [Teng v. SEC, 784 SCRA 216 (2016).]

When the subscriber under a Subscription Agreement assigns the shares to another party,
the same partakes of the nature of a novation through the substitution of the person of
the debtor, which is effective only with the consent of the creditor; but that in the case of

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 the corporation issuing the shares, such assignment would be valid and binding upon notice
by the transferee of the transfer of the shares coupled with a tender of the balance of the
unpaid subscription pursuant to the call made by the corporation. The provisions of
[Section 62 of Revised Corporation Code] to the effect that a transfer of shares does not
bind the corporation unless it is registered in the corporate books cannot apply in this case
since formal notice of the transfer was given to the corporation. [Interport Resources Corp.
v. SSI, 792 SCRA 155 (2016).]

b. Allowable Restrictions on the Sale of Shares

A corporation’s authority to regulate the transfer of its stock does not empower it to restrict
the right of a stockholder to transfer through bylaw provisions, but only authorizes the
adoption of regulations as to the formalities and procedure to be followed to effect the
transfer [Thomson v. CA and the American Chamber of Commerce of the Philippines, Inc.,
G.R. No. 116631, 28 October 1998]

The restrictions must follow the following requisites under S97, RCC as cited in Divina, Vol.
1 (2021) at 634:

1. Restrictions on the right to transfer shares must appear in the articles of

incorporation, in the bylaws, as well as in the certificate of stock, or it is not binding
on any purchaser in good faith

2. Restrictions shall not be more onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring stockholder with
such reasonable terms, conditions, or period stated

3. Upon the expiration of the said period, the existing stockholders or the corporation
fails to exercise the option to purchase, the transferring stockholder may sell their
shares to any third person.

c. Requisites of a Valid Transfer

Under [Section 62 of Revised Corporation Code], certain minimum requisites must be

complied with for there to be a valid transfer of stocks, to wit:

(a) there must be delivery of the stock certificate;

(b) the certificate must have been endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and

(c) to be valid against third parties, the transfer must be recorded in the books of the
corporation. [Rural Bank of Lipa City v. CA, 366 SCRA 188 (2001); codified in S62, RCC]

d. Involuntary Dealings

Only the transfer of shares resulting in a change of ownership is required to be registered

in the books of the corporation.

➢ These include sale, donation, or succession.

Encumbrances, like security interest on shares, are not required to be registered to bind
the corporation and third persons.

➢ They are binding and enforceable against third persons if they are registered with the
appropriate registration registry under R.A. No. 11057, the Personal Property Security
Act [DIVINA VOL. 1 (2021) at 639]

G. DISSOLUTION AND LIQUIDATION

What is dissolution?

Dissolution is the extinguishment or cancellation of the corporate franchise and the termination of its
corporate existence for business purposes [DIVINA VOL. 1 (2021) at 641]

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1. Modes of Dissolution

A corporation may be dissolved (1) voluntarily or initiated by the corporation, or (2) involuntarily
or against the will of the corporation or initiated by an aggrieved party or the SEC (Sec. 133, R.A.
No. 11232).

a. Voluntary Dissolution

What are the voluntary modes of dissolution?

1. Verified request for dissolution which does not prejudice the rights of creditors
2. Petition for dissolution where creditors are affected
3. Shortening of corporate term
4. Merger or consolidation
5. Affidavit of dissolution by a corporation sole [DIVINA at 644]

No Creditors Affected; Procedure

In this situation either the corporation has no creditors or has creditors without conflicting
claims, and the corporate assets are enough to satisfy the claims [DIVINA at 646].

Procedure [DIVINA at 645 -646]

1. There must be approval by majority vote of the board of directors or trustees;

2. There should be a resolution adopted by the affirmative vote of the stockholders

owning at least majority of the outstanding capital stock or majority of the members;

3. At least 20 days prior to the meeting notice shall be given to each shareholder or
member of record personally, by registered mail, or other authorized means under the
by-laws stating that the purpose of the meeting is to vote for corporation dissolution.

4. Notice of the time, place, and object of the meeting shall be published once prior to
the meeting in a newspaper where the principal office of the corporation is located, or
one of general circulation

5. A verified request for dissolution shall be filed with the SEC stating the following,
attached with a.) copy of the resolution, b.) proof of publication, and/or c.) favorable
recommendation from the appropriate regulatory agency when necessary;

a. The reason for the dissolution

b. The form, manner, and time when the notices were given
c. Names of the stockholders, directors, members, and/or trustees who approved
the dissolution
d. The date, place, and time of the meeting where the vote was made, and
e. Details of the publication

6. Within 15 days from receipt of verified request for dissolution, and in the absence of
withdrawal, approval by the SEC and issuance of the certificate of dissolution (Sec.
133, R.A. No. 11232).
7. If withdrawn by majority vote on both the board and the stockholders/members within
the 15 days allotted, the SEC shall withhold action, investigate the matter, and:
a. Pronounce request for dissolution as withdrawn
b. Direct a joint meeting of the board and stockholders/members for the purpose
of determining whether to proceed with dissolution
c. Issue such other orders as deemed appropriate [S137, RCC]

The dissolution shall take effect only upon the issuance by the SEC of the certificate of
dissolution.

No application for dissolution of banks, banking, and quasi-banking institutions, preneed,

insurance and trust companies, NSSLAs, pawnshops, and other financial intermediaries
shall be approved by the SEC, unless accompanied by a favorable recommendation of the
appropriate government agency (Sec. 134, R.A. No. 11232).

Creditors Affected; Procedure

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 1. There must be approval by majority vote of the board of directors or trustees;

2. Such resolution must be approved by the affirmative vote of the stockholders

representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members
at a meeting of its stockholders or members;

3. There must be a verified petition for dissolution filed with the SEC. The petition shall
be signed by a majority of the corporation’s board of directors or trustees, verified by
its president or secretary or one of its directors or trustees, and shall set forth all claims
and demands against it, with the same contents as a verified petition without creditors;

4. The corporation must submit to the SEC the following:

a. A copy of the resolution authorizing the dissolution, certified by a majority of

the board of directors or trustees and countersigned by the secretary of the
corporation;

b. A list of all the creditors;

5. The SEC shall fix a deadline for filing objections to the petition which date shall not be
less than 30 days nor more than 60 days after the entry of the order;

6. There must be a publication of the order at least once a week for three (3) consecutive
weeks in a newspaper of general circulation;

7. The SEC must hear the petition and try any issue raised in the objections filed; and

8. If no such objection is sufficient, and the material allegations of the petition are true,
the SEC shall render judgment dissolving the corporation and directing such disposition
of its assets as justice requires, and may appoint a receiver to collect such assets and
pay the debts of the corporation.

Shortening the Corporate Term

A voluntary dissolution may be effected by amending the articles of incorporation to

shorten the corporate term (Sec. 136, R.A. No. 11232).

A corporation wanting to voluntarily dissolve itself by shortening its corporate term must
submit to SEC a copy of the amended articles of incorporation that indicates a shortened
corporate term (Sec. 136, R.A. No. 11232).

Procedure for Shortening Corporate Term [DIVINA at 649]

i. The articles of incorporation should be amended to shorten the corporate term [S36,
RCC]
ii. The amendment should be approved by at least majority vote of the board AND
ratified at a meeting of stockholders or members representing at least 2/3rds of the
outstanding capital stock or members in a meeting duly called [S36, RCC]
iii. A copy of the amended AOI shall be submitted to the SEC in accordance with the
RCC
iv. Upon expiration of the shortened term in the amended AOI, the corporation shall be
deemed dissolved without further proceedings subject to RCC liquidation [S136, RCC]
v. The dissolution shall take effect on the day after the last day of the corporate term
stated in the AOI, without need for issuance of a certificate of dissolution by the SEC
[S136, RCC]

b. Involuntary Dissolution

SEC may dissolve a corporation (a) motu proprio or (2) upon filing of a verified complaint
by any interested party.

Grounds for Involuntary Dissolution

a. Non-use of corporate charter (for 5 years) [S21, RCC];

b. Continuous inoperation of a corporation (for 5 years) [S21, RCC];

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 c. Upon receipt of a lawful court order dissolving the corporation;
1. Can be a FRIA order of liquidation
d. Upon finding by the final judgment that the corporation procured its incorporation
through fraud;
e. Upon finding by final judgment that the corporation:
1. Was created for the purpose of committing, concealing or aiding the
commission of securities violation, smuggling, tax evasion, money laundering,
or graft and corrupt practices;
2. Committed or aided in the commission of securities violation, smuggling, tax
evasion, money laundering, or graft and corrupt practices, and its stockholders
knew of the same; and
3. Repeatedly and knowingly tolerated the commission of graft and corrupt
practices or other fraudulent or illegal acts by its directors, trustees, officers,
or employees (Sec. 135, R.A. No. 11232).
f. After proper notice and hearing the SEC may also suspend and revoke the certificate
of registration of private corporations on any of the ff. grounds:
1. Fraud in procuring its certificate of incorporation
2. Serious misrepresentation as to what the corporation can do or is doing to the
great prejudice of or damage to the general public
3. Refusal to comply or defiance of any lawful order of the SEC restraining acts
amounting to grave violations of its franchise
4. Failure to file bylaws
5. Failure to file required reports in appropriate forms as determined by the SEC
within the prescribed period [DIVINA at 654-655]

2. Methods of Liquidation

What is liquidation?

Liquidation is the process of settling the affairs of the corporation after dissolution, consisting of:
a. Collection of all that is due the corporation
b. The settlement and adjustment of claims against it
c. The payment of its debts
d. The distribution of the remaining assets among the stockholders in accordance with their
contracts, or if there is no special contract, on the basis of their respective interests [S139,
RCC; Dr. Gil J. Rich v. Guillermo Paloma III, G.R. No. 210538, 7 March 2018]

What are the methods of liquidation?

a. By the corporation itself
b. By the trustee duly appointed by the corporation
c. By the receiver that the SEC may appoint upon judgment dissolving the corporation after
hearing the corporation’s petition for voluntary dissolution
d. By the rehabilitation receiver or liquidator appointed by the court after judgment on a
petition for liquidation involving an insolvent debtor

By the corporation itself (Corporate Liquidation)

All corporations whose existence is terminated shall remain as a body corporate for three (3)
years after the effective date of dissolution (Sec. 139, R.A. No. 11232).

The liquidation period is intended to give the corporation opportunity to prosecute and defend
itself from suits by or against it and enabling it to settle and close its affairs, dispose of and
convey its property, and distribute its assets, but not for the purpose of continuing the business
for which it was established.

By the trustee duly appointed by the corporation

Conveyance to a Trustee

At any time during the three (3) years, the corporation is authorized and empowered to convey
all of its property to trustees for the benefit of stockholders, members, creditors and other
persons-in-interest.

Effect of Conveyance to a Trustee

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 After any such conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others-in-interest, all interest which the corporation had
in the property terminates, the legal interest vests in the trustees, and the beneficial interest in
the stockholders, members, creditors or other persons-in-interest.

The trustee is not bound by the three-year period, as what is important is the completion of
liquidation [DIVINA at 657]

By the receiver that the SEC may appoint upon judgment dissolving the corporation after hearing
the corporation’s petition for voluntary dissolution

Under S135 of the RCC, the SEC shall proceed to hear the petition filed by a corporation where
creditors are affected and try any issue raised in the objections filed.

If there are no objections or no more objections while the material allegations are true, the SEC
will render judgment dissolving the corporation and may appoint a receiver unbound by the
three-year period [Pepsi Cola Philippines v. CA, G.R. No. 145855, 24 November 2004].

A corporate officer has no authority to condone a debt, as the appointed receiver operates to
suspend the authority of a corporation and its board and officers over its property and effects
[Victor Yam & Yek Sun Lent v. CA, G.R. No. 104726, 11 February 1999]

However, jurisdiction over liquidation of the corporation now pertains to the appropriate RTC
[BPI v. Eduardo Hong, G.R. No. 161771, 15 February 2012].

By the rehabilitation receiver or liquidator appointed by the court after judgment on a petition
for liquidation involving an insolvent debtor

If the case falls under S25 of FRIA, the liquidation will be carried out either by the rehabilitation
receiver or the court appointed liquidator [S112, FRIA].

H. OTHER CORPORATIONS

1. Close Corporations

A close corporation is one whose articles of incorporation provides that:

a. all the corporation's issued stock of all classes, exclusive of treasury shares, shall be held
of record by not more than a specified number of persons, not exceeding twenty (20);
a. But a corporation does not become a close corporation just because spouses
own 98.86% of its subscribed capital stock [San Juan Structural and Steel
Fabricators, Inc. v. CA, G.R. No. 129459, 29 September 1998]
b. all the issued stock of all classes shall be subject to one (1) or more specified restrictions
on transfer permitted by law; and
c. the corporation shall not list in any stock exchange or make any public offering of its
stocks of any class (Sec. 95, R.A. No. 11232).

A corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation which is not a close
corporation.

The following cannot incorporate as a close corporation:

a. mining or oil companies

b. stock exchanges
c. banks
d. insurance companies
e. public utilities
f. educational institutions and
g. corporations declared to be vested with public interest (Sec. 95, R.A. No. 11232)

Characteristics of a close corporation [DIVINA at 665-666, citing S96-104, RCC]

a. The business of the corporation may be managed by the stockholders of the corporation
rather than by a board of directors

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 b. If classified as a close corporation, a corporation does not require a board resolution
authorizing the sale or mortgage of corporate property to bind it [Dulay Enterprises Inc., v.
CA, G.R. No. 91889, 27 August 1993]
c. Quorum may be greater than mere majority
d. Transfer of stock to others which would increase the number of stockholders to more than
the maximum (20) are invalid
e. Corporate actions may be binding even without a formal board meeting
i. If the director had knowledge or ratified the informal action of the others
ii. Unless after having knowledge the director promptly files his written objection with
the corporation’s secretary
f. Pre-emptive right extends to all stocks issued, including re-issuance of treasury shares,
whether for money, property, or personal services, or in payment of corporate debts unless
otherwise provided by AOI
g. Deadlocks in the board may be settled by the SEC on written petition by any stockholder
h. A stockholder may withdraw for any reason and avail himself of his right of appraisal when
the corporation has sufficient assets in its books to cover its debts and liabilities exclusive
of capital stock

Restrictions on Transfer of Shares

Restrictions on the right to transfer shares must appear in the articles of incorporation, in the
bylaws, as well as in the certificate of stock; otherwise, the same shall not be binding on any
purchaser in good faith (Sec. 97, R.A. No. 11232).
➢ They shall also not be more onerous than granting the existing stockholders or the
corporation the option to purchase shares of the transferring stockholder with such
reasonable terms, conditions, or period stated
➢ Once the period to exercise the option of shares has expired and the persons above
fail to exercise their option to purchase, the transferring stockholder may sell their
shares to any third person

A provision prohibiting the transfer, conveyance, sale, or assignment of shares to non-blood

relatives is not allowed [Close Holding Corporation; Founder’s Shares, SEC-OGC Opinion No. 02-
10, 15 January 2010]

Legal Effects if Issuance or Transfer of Stock is in Breach of Qualifying Conditions [S98, RCC]

(a) If a stock of a close corporation is issued or transferred to any person who is not eligible to
be a holder thereof under any provision of the articles of incorporation, and if the certificate for
such stock conspicuously shows the qualifications of the persons entitled to be holders of record
thereof, such person is conclusively presumed to have notice of the fact of the ineligibility to be
a stockholder.

(b) If the articles of incorporation of a close corporation states the number of persons, not
exceeding twenty (20), who are entitled to be stockholders of record, and if the certificate for
such stock conspicuously states such number, and the issuance or transfer of stock to any person
would cause the stock to be held by more than such number of persons, the person to whom
such stock is issued of transferred is conclusively presumed to have notice of this fact.

(c) If a stock certificate of a close corporation conspicuously shows a restriction on transfer of

the corporation has been issued or transferred has or is conclusively presumed to have notice of
the fact that the stock in violation of such restriction, the transferee is conclusively presumed to
have notice of the fact that the stock was acquired in violation of the restriction.

(d) Whenever a person to whom stock of a close corporation has been issued or transferred has
or is conclusively presumed under this section to have notice of: (1) the person's ineligibility to
be a stockholder of the corporation; or (2) that the transfer of stock would cause the stock of
the corporation to be held by more than the number of persons permitted under its articles of
incorporation ; or (3) that the transfer violates a restriction on transfer of stock, the corporation
may, at its option, refuse to register the transfer in the name of the transferee.

(e) The provisions of subsection (d) shall not be applicable if the transfer of stock, though
contrary to subsections (a), (b) or (c), has been consented to by all stockholders of the close
corporation, or if the close corporation has amended its articles of incorporation in accordance
with this Title (Sec. 98, R.A. No. 11232).

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 Q: Can a stockholder in a close corporation withdraw?

A: Yes, any stockholder of a close corporation may, for any reason, compel the corporation to
purchase shares held at fair value, which shall not be less than the par or issued value, when
the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of
capital stock (Section 104, RCC)

2. Non-Stock Corporations

A nonstock corporation is one where no part of its income is distributable as dividends to its
members, trustees, or officers.

Characteristics
a. Cannot distribute profits as dividends to its members
b. Cannot lawfully engage in business for profit
c. If incidental to objects and purposes of corporation without the end of making profits for
distribution, it may engage in certain economic activities in its AOI
d. Do not issue stock and distribute dividends to their members as they are created for public
good and welfare
e. Even if it earns profit, it is not a profit-making corporation if the profit is used to carry out
its purposes in its AOI and the profits are not distributed to its members [DIVINA at 675,
citing SEC-OGC Opinion No. 29-06, 7 June 2006]

Treatment of Profits

Any profit which a nonstock corporation may obtain incidental to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose of purposes for which the
corporation was organized (Sec. 86, R.A. No. 11232).

Purpose

Non-stock corporations may be formed or organized for charitable, religious, educational,

professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade,
industry, agricultural and like chambers, or any combination thereof (Sec. 87, R.A. No. 11232).

Plan of Distribution of Assets

A plan for the distribution of assets may be adopted by a non-stock corporation in the process of
dissolution in the following manner:

a. The board of trustees shall, by a majority vote, adopt a resolution recommending a plan of
distribution and directing the submission thereof to a vote at a regular or special meeting
of members having voting rights;

b. Each member entitled to vote shall be given a written notice setting forth the proposed plan
of distribution or a summary thereof and the date, time and place of such meeting; and

c. Such plan of distribution shall be adopted upon arrival of at least two-thirds (2/3) of the
members having voting rights present or represented by proxy at such meeting (Sec. 94,
R.A. No. 11232).

Election and Term of Trustees

✓ The number of trustees shall be fixed in the articles of incorporation or bylaw which may or
may not be more than fifteen (15)

✓ They shall hold office for not more than three (3) years until their successors are elected
and qualified

✓ Trustees elected to fill vacancies occurring before the expiration of a particular term shall
hold office for the unexpired period

✓ Unless otherwise provided in the articles of incorporation or the bylaws, the members may
directly elect officers of a nonstock corporation (Sec. 91, R.A. No. 11232)

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3. Foreign Corporations

A foreign corporation is one formed, organized or existing under laws other than those of the
Philippines' and whose laws allow Filipino citizens and corporations to do business in its own country
or State (Sec. 140, R.A. No. 11232).

a. What Constitutes “Doing Business”

i. Soliciting orders, service contracts;

ii. Opening offices, whether called "liaison" offices or branches;

iii. Appointing representatives or distributors domiciled in the Philippines or who in any

calendar year stay in the country for a period or periods totaling 180 days or more;

iv. Participating in the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines;

v. Other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of
the functions normally incident to, and in progressive prosecution of, commercial gain or
of the purpose and object of the business organization (Sec. 3[d], FIA).

“Doing business” shall NOT include:

a. Mere investment as a shareholder by a foreign entity in domestic corporations duly

registered to do business, and/or the exercise of rights as such investor;

b. Having a nominee director or officer to represent its interests in such corporation;

c. Appointing a representative or distributor domiciled in the Philippines which transacts

business in the representative’s or distributor’s own name and account;

d. Publication of a general advertisement through any print or broadcast media;

e. Performing services auxiliary to an existing isolated contract of sale which are not on a
continuing basis, such as installing in the Philippines machinery it has manufactured or
exported to the Philippines, servicing the same, training domestic workers to operate it,
and similar incidental services;

f. Consignment by a foreign entity of equipment with a local company to be used in the

processing of products for export;

g. Collecting information in the Philippines; and

h. Maintaining a stock of goods in the Philippines solely for the purpose of having the same
processed by another entity in the Philippines (Sec. 1[f], FIA IRR).

Q: What is the principal determinant if the corporation is doing business?

A: Court gives emphasis to the importance of the element of continuity of commercial

activities to constitute doing business in the Philippines (Cargill, Inc. vs. Intra Strata Ass.
Corp., 615 SCRA 304).

Q: Will the appointment of a distributor be deemed “doing business” in the Philippines?

A: No, the appointment of a distributor in the Philippines is not sufficient to constitute doing
business, unless it is under the full control of the foreign corporation (Steelcase, Inc. vs.
Design Int’l Selection, Inc., G.R. No. 171995, April 18, 2012, citing Rule I, Section 1[f], FIA
IRR).

b. Necessity of a License to do Business

Upon issuance of the license, such foreign corporation may commence to transact business
in the Philippines and continue to do so for as long as it retains its authority to act as a

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 corporation under the laws of the country or State of its incorporation, unless such license is
sooner surrendered, revoked, suspended, or annulled in accordance with this Code or other
special laws (Sec. 143, R.A. No. 11232).

Doing Business Without a License

No foreign corporation transacting business in the Philippines without a license, or its

successors or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such corporation may
be sued or proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws (Sec. 150, R.A. No. 11232).

The exception to this rule is the doctrine of estoppel.

Doctrine of Estoppel

A foreign corporation doing business in the Philippines without a license may sue in the
Philippine courts a Filipino citizen or a Philippine entity that had contracted with and benefited
from it.

A party is estopped from challenging the personality of a corporation after having

acknowledged the same by entering into a contract with it. The principle is applied to prevent
a person contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has received the benefits
of the contract (Magna Ready Mix Concrete Corp. vs. Andersen Bjornstad Kane Jacobs, Inc.,
G.R. No. 196158, January 20, 2021).

c. Requisites for issuance of a License

A foreign corporation applying for a license to transact business in the Philippines shall submit
to the Commission a copy of its articles of incorporation and bylaws, certified in accordance
with law, and their translation to an official language of the Philippines, if necessary.

The application shall be under oath and, unless already stated in its articles of incorporation,
shall specifically set forth the following:

a. The date and term of incorporation;

b. The address, including the street number, of the principal office of the corporation in
the country or State of incorporation;

c. The name and address of its resident agent authorized to accept summons and process
in all legal proceedings and all notices affecting the corporation, pending the
establishment of a local office;

d. The place in the Philippines where the corporation intends to operate;

e. The specific purpose or purposes which the corporation intends to pursue in the
transaction of its business in the Philippines: Provided, That said purpose or purposes
are those specifically stated in the certificate of authority issued by the appropriate
government agency;

f. The names and addresses of the present directors and officers of the corporation;

g. A statement of its authorized capital stock and the aggregate number of shares which
the corporation has authority to issue, itemized by class, par value of shares, shares
without par value, and series, if any;

h. A statement of its outstanding capital stock and the aggregate number of shares which
the corporation has issued, itemized by class, par value of shares, shares without par
value, and series, if any;

i. A statement of the amount actually paid in; and

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 j. Such additional information as may be necessary or appropriate in order to enable the
Commission to determine whether such corporation is entitled to a license to transact
business in the Philippines, and to determine and assess the fees payable.

Attached to the application for license shall be a certificate under oath duly executed by the
authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that
the laws of the country or State of the applicant allow Filipino citizens and corporations to do
business therein, and that the applicant is an existing corporation in good standing. If the
certificate is in a foreign language, a translation thereof in English under oath of the translator
shall be attached to the application.

The application for a license to transact business in the Philippines shall likewise be
accompanied by a statement under oath of the president or any other person authorized by
the corporation, showing to the satisfaction of the Commission and when appropriate, other
governmental agencies that the applicant is solvent and in sound financial condition, setting
forth the assets and liabilities of the corporation as of the date not exceeding one (1) year
immediately prior to the filing of the application.

Foreign banking, financial, and insurance corporations shall, in addition to the above
requirements, comply with the provisions of existing laws applicable to them. In the case of
all other foreign corporations, no application for license to transact business in the Philippines
shall be accepted by the Commission without previous authority from the appropriate
government agency, whenever required by law (Sec. 142, R.A. No. 11232).

d. Resident Agent

A resident agent may be either an individual residing in the Philippines or a domestic

corporation lawfully transacting business in the Philippines.

An individual resident agent must be of good moral character and of sound financial standing.

In case of a domestic corporation who will act as a resident agent, it must likewise be of
sound financial standing and must show proof that it is in good standing as certified by the
SEC (Sec. 144, R.A. No. 11232).

e. Personality to Sue and Suability

No foreign corporation transacting business in the Philippines without a license, or its

successors or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such corporation may
be sued or proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws (Sec. 150, R.A. No. 11232).

The following principles govern a foreign corporation’s right to sue in local courts [DIVINA at
701 – 705]:

1. If a foreign corporation does business in the Philippines without a license, it cannot sue
before the Philippine courts

2. If a foreign corporation is not doing business in the Philippines, it needs no license to

sue before Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction on any of the following:
a. On a casual or isolated transaction set apart from the common business of a
foreign enterprise
b. Action to protect the good name, goodwill, and reputation of a foreign corporation
c. Where the contract provides the PH court as the exclusive venue for court action
to the exclusion of other courts
d. A license to engage in business granted subsequent to the transaction enables
the foreign corp. to sue on contracts executed before the license
e. When the unlicensed foreign corporation has domestic corporation as a co-
plaintiff/petitioner
f. Under the doctrine of estoppel when the counterparty is estopped or precluded
from questioning the lack of legal capacity of the foreign corporation

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 3. If a foreign corporation does business in the Philippines with the required license, it can
sue before Philippine court on any transaction

Summary
Transaction Sue Sued
Does business in the Philippines Yes Yes
with a license

Does business in the Philippines No Yes

without a license
Foreign Corporation

Does not do business in the Yes Yes

Philippines, on isolated transaction

4. One Person Corporations

Concept

A One Person Corporation is a corporation with a single stockholder.

Only a natural person of legal age, trust, or an estate may form a One Person Corporation.

Q: Who can form an OPC?

A: Natural person, estate, and trust (NET).

Excepted Corporation

Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and
non-chartered government-owned and -controlled corporations may not incorporate as One
Person Corporations.

A natural person who is licensed to exercise a profession may not organize as a One Person
Corporation for the purpose of exercising such profession except as otherwise provided under
special laws (Sec. 116, R.A. No. 11232).

Capital Requirement

A One Person Corporation shall not be required to have a minimum authorized capital stock,
except as otherwise provided by special law (Sec. 117, R.A. No. 11232).

Articles of Incorporation and By-Laws

A One Person Corporation is required to file articles of incorporation; but it is not required to
submit and file corporate bylaws (Sec. 119, R.A. No. 11232).

Contents of the Articles of Incorporation

a. If the single stockholder is a trust or an estate, the name, nationality, and residence of
the trustee, administrator, executor, guardian, conservator, custodian, or other person
exercising fiduciary duties together with the proof of such authority to act on behalf of
the trust or estate; and

b. Name, nationality, residence of the nominee and alternate nominee, and the extent,
coverage and limitation of the authority (Sec. 118, R.A. No. 11232).

Corporate Name

A One Person Corporation should indicate the letters “OPC” either below or at the end of its
corporate name (Sec. 120, R.A. No. 11232).

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Corporate Structure

The single stockholder shall be the sole director and president of the One Person Corporation
(Sec. 121, R.A. No. 11232).

Within fifteen (15) days from the issuance of its certificate of incorporation, the One Person
Corporation shall appoint a treasurer, corporate secretary, and other officers (Sec. 122, R.A. No.
11232).

The single stockholder may not be appointed as the corporate secretary.

A single stockholder who is likewise the self-appointed treasurer of the corporation shall give a
bond to the SEC in such a sum as may be required (Sec. 122, R.A. No. 11232).

Special Functions of the OPC Corporate Secretary [S123, RCC]

a. Functions designated by OPC
b. Responsible for maintaining a minutes book and/or records of the corporation
c. Notify the nominee/alternate nominee of the death or incapacity of the single stockholder
no later than 5 days from death
d. Notify SEC of death of single stockholder within 5 days from death, staing the names,
residences, and contact details of all known legal heirs
e. Call the nominee/alternate nominee and known legal heirs to a meeting and advise the
legal heirs to the election of a new director, amendment of AOI, and other
ancillary/consequential matters

Nominee/Alternate Nominee

The single stockholder shall designate a nominee and an alternate nominee who shall, in the
event of the single stockholder's death or incapacity, take the place of the single stockholder as
director and shall manage the corporation's affairs (Sec. 124, R.A. No. 11232).

The single stockholder may change the nominee and alternate nominee at any time. The articles
of incorporation need not be amended for this purpose (Sec. 126, R.A. No. 11232).

Minutes Book

A One Person Corporation shall maintain a minutes book which shall contain all actions, decisions,
and resolutions taken by the One Person Corporation (Sec. 127, R.A. No. 11232).

Records in Lieu of Meetings

When action is needed on any matter, it shall be sufficient to prepare a written resolution, signed
and dated by the single stockholder, and recorded in the minutes book of the One Person
Corporation. The date of recording in the minutes book shall be deemed to be the date of the
meeting (Sec. 128, R.A. No. 11232).

Liability of Single Shareholder

Limited to his subscription to the corporation if the following are present:

i. Sole shareholder must show corporation was adequately financed
ii. Prove that the property of the OPC is independent of the stockholder’s personal
property
iii. No ground to pierce the veil of corporate fiction.

If the single stockholder cannot prove that the property of the One Person Corporation is
independent of the stockholder’s personal property, the stockholder shall be jointly and severally
liable for the debts and other liabilities of the One Person Corporation.

The principles of piercing the corporate veil applies to One Person Corporations (Sec. 130, R.A.
No. 11232).

A sole shareholder claiming limited liability has the burden of affirmatively showing that the
corporation was adequately financed (Sec. 130, R.A. No. 11232).

Conversion from an Ordinary Stock Corporation to OPC

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 1. The single stockholder must acquire all the stocks of an ordinary stock corporation.

2. There must be an application for conversion and the filing of amended articles of
incorporation before the SEC (Sec. 116, R.A. No. 11232).

3. The SEC must approve the application for conversion and a corresponding certificate of
filing of amended articles of incorporation reflecting the conversion is issued (Sec. 131,
R.A. No. 11232).

The One Person Corporation converted from an ordinary stock corporation shall succeed the
latter and be legally responsible for all the latter’s outstanding liabilities as of the date of
conversion (Sec. 131, R.A. No. 11232).

Conversion from OPC to Ordinary Stock Corporation

1. There must be an application for conversion and the filing of amended articles of
incorporation before the SEC.

2. The SEC must approve the application for conversion and a corresponding certificate of
filing of amended articles of incorporation reflecting the conversion is issued (Sec. 132,
R.A. No. 11232).

I. MERGERS AND CONSOLIDATIONS

1. Concept

Merger is the absorption of one or more corporations by another existing corporation, which retains
its identity and takes over the rights, privileges, franchises, properties, claims, liabilities and
obligations of the absorbed corporation(s).

The different forms of corporate combinations and acquisitions are:

a. Sale of all or substantially all of the assets (asset sale)

b. Sale of controlling block of stock to new stockholder/s (stock sale)
c. Merger or consolidation

Consequence of a Valid Merger

In case of a valid merger, the absorbing corporation continues its existence while the life or lives of
the other corporation(s) is or are terminated.

Plan of Merger

The board of directors or trustees of each corporation, party to the merger or consolidation, shall
approve a plan of merger or consolidation setting forth the following:

a. The names of the corporations proposing to merge or consolidate, hereinafter referred to as

the constituent corporations;
b. The terms of the merger or consolidation and the mode of carrying the same into effect;
c. A statement of the changes, if any, in the articles of incorporation of the surviving corporation
in case of merger; and, in case of consolidation, all the statements required to be set forth
in the articles of incorporation; and
d. Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable (Sec. 75, R.A. No. 11232).

Articles of Merger and Consolidation

After the approval by the stockholders or members as required by the preceding section, articles of
merger or articles of consolidation shall be executed by each of the constituent corporations, to be
signed by the president or vice president and certified by the secretary or assistant secretary of
each corporation (Sec. 77, R.A. No. 11232).

The Articles of Merger and Consolidation shall set forth the following:

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 a. The plan of the merger or the plan of consolidation;
b. As to stock corporations, the number of shares outstanding, or in the case of nonstock
corporations, the number of members;
c. As to each corporation, the number of shares or members voting for or against such plan,
respectively;
d. The carrying amounts and fair values of the assets and liabilities of the respective companies
as of the agreed cut-off date;
e. The method to be used in the merger or consolidation of accounts of the companies;
f. The provisional or pro forma values, as merged or consolidated, using the accounting
method; and
g. Such other information as may be prescribed by the Commission (Sec. 77, R.A. No. 11232).

Procedure of Merger or Consolidation

1. There must be approval by a majority vote of each of the board of directors or trustees of
the constituent corporations of the plan of merger or consolidation;

2. There must be an affirmative vote of stockholders representing at least two-thirds (2/3) of

the outstanding capital stock of each corporation in the case of stock corporations or at least
two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for
the approval of such plan;

3. Execution of merger or articles of consolidation by each of the constituent corporations, to

be signed by the president or vice president and certified by the secretary or assistant
secretary of each corporation;

4. Submission of the articles of merger or of consolidation to the SEC for its approval;

5. Approval by the SEC of the merger or consolidation and the issuance of a certificate approving
the articles and plan of merger or of consolidation (Secs. 76-78, R.A. No. 11232).

2. Effects and Limitations

Effectivity

If the Commission is satisfied that the merger or consolidation of the corporations concerned is
consistent with the provisions of this Code and existing laws, it shall issue a certificate approving the
articles and plan of merger or of consolidation, at which time the merger or consolidation shall be
effective (Sec. 78, R.A. No. 11232).

By law and jurisprudence, a merger becomes only effective upon approval by the Securities and
Exchange Commission (SEC) of the articles of merger (BPI vs. BPI Employees Union-Davao Chapter-
Federation of Unions in BPI Unibank, 627 SCRA 590).

Limitation

Q: Can a proposed merger be disallowed?

A: Yes. Merger or acquisition agreements that substantially prevent, restrict or lessen competition in
the relevant market or in the market for goods or services as may be determined by the PCC shall be
prohibited (Sec. 20, R.A. No. 10667).

Effects

The merger of consolidation shall have the following effects:

a. The constituent corporations shall become a single corporation which, in case of merger, shall be
the surviving corporation designated in the plan of merger; and in case of consolidation, shall be
the consolidated corporation designated in the plan of consolidation;

b. The separate existence of the constituent corporations shall cease, except that of the surviving
or the consolidated corporation;

c. The surviving or the consolidated corporation shall possess all the right, privileges, immunities
and franchises of each constituent corporation; and all real or personal property, all receivables

Page 50 of 82
 due on whatever account, including subscriptions to shares and other choses in action, and every
other interest of, belonging to, or due to each constituents corporation, shall be deemed
transferred to and vested in such surviving or consolidated corporation as though such surviving
or consolidated corporation had itself incurred such liabilities or obligations; and any pending
claim, action or proceeding brought by or against any constituent corporation may be prosecuted
by or against the surviving or consolidated corporation. The rights of creditors or liens upon the
property of such constituent corporations shall not be impaired by the merger or consolidation
(Sec. 79, R.A. No. 11232).

By operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its
rights and properties, as well as liabilities, shall be taken and deemed transferred and vested in the
surviving corporation (Mindanao Savings and Loan Assoc., Inc., represented by PDIC vs. Edward
Willkom, et. al., G.R. No. 178618, October 11, 2010).

The law provides that the surviving corporation shall possess all the rights, privileges, properties and
receivables due of the absorbed corporation. The surviving corporation likewise acquires all the liabilities
and obligations of the absorbed corporation as if it had itself incurred these liabilities or obligations (Phil.
Geothermal, Inc. Employees Union vs. Unocal Phils., Inc., G.R. No. 190187, September 28, 2016).

The liabilities of the absorbed corporation obtained prior to merger, shall be inherited by the surviving
company (Sumifru (Phils.) Corp. vs. Baya, G.R. No. 188269, April 17, 2017).

All liabilities and obligations of the absorbed corporation shall be transferred to and become the liabilities
and obligations of the surviving corporation in the same manner as if it had itself incurred such liabilities
or obligations (Sps. Ong vs. BPI Family Savings Bank, Inc., G.R. No. 208638, January 24, 2018).

IV. INTELLECTUAL PROPERTY CODE (R.A. No. 8293; exclude implementing rules and
regulations) [D2 pp. 202-356]

1. Patents – Exclusive right granted to an inventor over an invention or a utility model or industrial
design to sell, use, and make the same for commerce and industry [p. 210-211]
a) Patentable vs. non-patentable inventions
a. Any technical solution of a problem in any field of human activity which is
i. New/novel,
• Essentially not prior art, or everything made available to the public
anywhere in the world before the filing date or priority date of the
application claiming the invention, and the whole contents of a
published application for a patent with a filing or priority date that is
earlier than the filing or priority date of the application [S23, IPC]
• The doctrine of prejudicial disclosure is disclosure by the inventor
during the 12 months preceding the filing date or priority date of the
application which does not prejudice the application [S25, IPC]
ii. Involves an inventive step, and
• It is not obvious to a person skilled in the prior art [limited to average
skill] at the time of the filing date or priority date of the application
claiming the invention
iii. Is industrially applicable shall be patentable.
• Produced and used in any industry [S27, IPC]
b. Inventions which are non-patentable, or excluded from patent protection, include
[pp. 217]:
i. Discoveries, scientific theories, and mathematical methods,
• 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
• 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
ii. Schemes, rules, and methods of performing mental acts, playing games or
doing business, and programs for computers
iii. Methods for treatment of the human or animal body by surgery or therapy
and diagnostic methods practiced on the human or animal body
iv. Plant varieties or animal breeds or essentially biological process for the
production of plants or animals

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 v. Aesthetic creations
vi. Anything contrary to public order or morality [S22, IPC]
b) Ownership of a patent
a. The right to a patent belongs to the inventor, his heirs or assigns. When 2 or more
persons have jointly made an invention, the right to a patent shall belong to them
jointly.
i. Copyright protection extends only to the technical drawings of light boxes
and not to the light box itself [Pearl & Dean (Phil.) v. Shoemart, G.R. No.
148222, 15 August 2003]
b. First to file rule: When 2 or more persons have made the invention separately and
independently of each other, the right to the patent shall belong to the person who
filed an application for such invention, or if there are two or more applications, to
the earlier application.
i. The person who was first to file may, within 3 months after the decision
declaring a person other than the applicant as having right to the patent
has become final,
• Prosecute the application as his own application in place of the applicant
• File a new patent application in respect of the same invention
• Request that the application be refused; or
• Seek cancellation of the patent if one has already been issued
ii. The true and actual inventor upon court declaration as such may be
ordered to substitute for the patentee, or upon his option, cancel the
patent and be awarded actual and other damages.
c. Invention created pursuant to a commission: The person who commissions the
work shall own the patent unless otherwise provided in the contract [S30.1, IPC]
d. Invention created by an employee in the course of his employment contract
i. To the employee if the inventive activity is not a part of his regular duties
even if the employee uses the time, facilities, and materials of the
employer
ii. To the employer if the invention is the result of the performance of his
regularly assigned duties, unless there is an agreement, express or implied,
to the contrary.
e. Right of Priority: An application for patent filed by any person who has previously
applied for the same invention in another country which by treaty, convention, or
law affords similar privileges to Filipino citizens, shall be considered as filed as of
the date of the filing of the foreign application, provided:
i. The local application expressly claims priority
ii. It is filed within 12 months from the date of the earliest foreign application
filed
iii. Certified copy of the foreign application together with an English
translation is filed within 6 months from the date of filing in the Philippines
[S31, IPC]
• However, a right of priority is not a patent in itself, as the right only
applies to patent registration [E.I. Dupont De Nemours and Co. v.
Director Emma C. Francisco, et al., G.R. No. 174379, 31 August
2016]
c) Grounds for cancellation of a patent
a. The invention is not new or patentable
b. The patent does not disclose the invention in a manner sufficiently clear and
complete for it to be carried out by any person skilled in the art
c. The patent is contrary to public order or morality [S61.1, IPC] or granted when the
product or the process is non-patentable.
d) Patent infringement
a. A patent (term of 20 years from the filing date of the application) confers the
following exclusive rights
i. Where the subject matter of a patent is a product, to restrain, prohibit and
prevent any unauthorized person or entity from making, using, offering for
sale, selling or importing that product
ii. Where the subject matter of the patent is a process, to restrain, prevent,
or prohibit any unauthorized person or entity from using the process and
from manufacturing, dealing in, using, selling, or offering for sale, or
importing any product obtained directly or indirectly from such process
[S71.1, IPC]

Page 52 of 82
 iii. The right to assign, or transfer by succession the patent, and to conclude
licensing contracts for the same [S71.2, IPC]
b. Patent infringement happens whenever the rights of the owner or holder above
are violated by any act.
i. Any patentee, or anyone possessing any right in and to the patented
invention, whose rights have been infringed, may bring this action before
a court of competent jurisdiction [S76, IPC]. Essentially, only the patent
holder.
• The persons possessing any right, title, or interest in and to the
patented invention, whose rights have been infringed, do not refer
to the inventor not issued the patent, but to the patentee’s
successors-in-interest and assignee [Creser Precision Systems, Inc.
v. CA, G.R. No. 118708, 2 February 1998]
ii. The burden of proof lies with the plaintiff. But presentation of the patent
in evidence in due form gives rise to a prima facie presumption of its
correctness and validity, shifting the burden of evidence to the defendant
[Rosario Maguan v. CA, G.R. No. L-45101, 28 November 1986].
c. There are two tests for patent infringement:
i. Literal infringement
• There is juxtaposition of the claims and specifications to determine
whether there is exact identity of all material elements
ii. Doctrine of equivalents
• Occurs when a device appropriates a prior invention by incorporating
its innovative concept and albeit with some modifications and
change, performs substantially the same function in substantially
the same way to achieve substantially the same result [functions-
means-and-result test] [Pascua Godines v. CA and SV-Agro
Enterprises, Inc., G.R. No. 97343, 13 September 1993]
d. The remedies of the patentee for patent infringement are as follows:
i. Civil action
• the award of damages may not exceed 3x the amount of actual
damages, and if damages cannot be ascertained with reasonable
certainty, it becomes equivalent to the sum of a reasonable royalty.
• The active inducer of patent infringement is solidarily liable with the
infringer
ii. Criminal action
• Cannot be brought on the first act of patent infringement, only when
it is repeated.
iii. Provisional remedies
• Preliminary injunction to restrain acts of infringement during the
pendency of the action for patent infringement
e. A patent infringement suit can only be made for acts of infringement made within
4 years of the institution of the action for infringement [S79, IPC]
f. Defenses that can be raised:
i. The patent or any claim is invalid
ii. Any of the grounds on which petition for cancellation can be brought
iii. The patent is not new or patentable
iv. Specification of the invention does not comply with the law
v. The patent was issued not to the true and actual inventor, or the plaintiff
did not derive his rights from the true and actual inventor; and
vi. Prescription

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2. Trademarks – Any word, name, symbol, emblem, sign, or device or any combination adopted and
used by a manufacturer or merchant to identify his goods and distinguish them from those
manufactured, sold, or dealt in by others; it is any visible sign capable of distinguishing goods
[Pribhdas J. Marpuri v. CA, G.R. No. 114508, 19 November 1999].
a) Marks vs. collective marks vs. trade names
Marks Collective Marks Trade Names
Trademark • Any visible sign • Name or designation
• Any visible sign designated as a identifying or
capable of collective mark and distinguishing an
distinguishing goods of capable of enterprise [S121.3,
an enterprise, distinguishing the origin IPC].
including stamped or or any other common • No trade name shall be
marked containers of characteristic, including contrary to public order
goods [S121.1, IPC] goods quality or or morals, or liable to
• Indicate the origin or services of different deceive trade circles or
ownership of the enterprises which use the public as to the
articles or services in the sign under the nature of the
which they are used control of the registered enterprise [S165.1,
• Guarantee that the owner [S121.2, IPC] IPC].
articles or services • A trade name
come up to a certain previously used in
standard of quality trade or commerce in
• Advertise the articles the Philippines need
and services they not be registered with
symbolize [Zuneca the IPO before an
Pharmaceutical v. infringement suit may
Natrapharm, Inc., G.R. be filed by its owner
No. 211850, 8 against the owner of an
September 2020]. infringing trademark
• Extend to every market [Coffee Partners v. San
where the trader’s Francisco Coffee and
goods have become Roastery, Inc., G.R.
known and identified No. 169504, 3 March
by his use of the mark. 2010].
Service Mark
• Any visible sign
capable of
distinguishing services
of an enterprise

b) Acquisition of ownership
a. Concept of actual use
i. A declaration of actual use of the mark with evidence to that effect, within
3 years from the filing date of the application, shall be filed upon
registration, or else the application shall be refused, or the mark removed
from the Register by the Director [S124.2, IPC].
ii. Lack of funds shall not excuse non-use of a mark [S152.1, IPC] but
circumstances arising independently of the will of the trademark owner
shall be considered in excuses for non-use.
iii. An admission in a pleading that the party has not filed declaration of actual
use within 3 years from application may be construed as an abandonment
or withdrawal of any right or interest in his trademark [Mattel v. Francisco,
G.R. No. 166886, 30 July 2008]
iv. The registrant is also required to file a declaration of actual use and
evidence to that effect within 1 year from the 5 th anniversary of the date
of registration of the mark [S145, IPC]
v. A declaration of actual use of the mark is required for the registered owner
of the mark to maintain his ownership, and not to acquire ownership
[Zuneca v. Natrapharm, id.]
b. Effect of registration
i. The only mode of acquiring ownership of a trademark is through
registration [Zuneca v. Natrapharm, id].
ii. A prior user in good faith may continue to use its mark even after the
registration of the mark by the first to file registrant in good faith [id.]

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 iii. The first to file rule prioritizes the first filer of the trademark application
and operates to prevent any subsequent applicant from registering the
mark [id.]
iv. A certificate of registration of a mark is prima facie evidence of the validity
of the registration, the registrant’s ownership of the mark, and of the
registrant’s exclusive right to use the same in connection with the goods
or services and those that are related, specified in the certificate [S138,
IPC].
• Only recognizes instances where the certificate is not reflective of
ownership, like when registration was done contrary to the IP Code
[Zuneca, id.]
c) Well-known marks
a. A mark which is considered by the competent authority of the Philippines to be
well-known internationally and in the Philippines, whether or not registered here,
as being already the mark of a person other than the applicant for registration.
i. The competent authority to decide on whether a mark is well-known would
be either the registering authority if it has the power to decide this, or the
courts of the country in question if the issues comes before a court
[Sehwani Inc. v. In-N-Out Burger, Inc., G.R. No. 171053, 15 October 2007;
Fredco Manufacturing Corp. v. President and Fellows of Harvard College,
G.R. No. 185917, 1 June 2011]
Registered in the PH Not registered in the PH
• Any mark identical with, • Scope of protection only extends
confusingly similar to, or which to marks used for identical goods
constitutes a translation of such or services [S123.1e, IPC]
well-known mark, cannot be used • Remedies of the owner of a well-
for identical goods or services known mark not registered in the
• OR be registered in the Philippines Philippines
with respect to goods or services o Oppose the application
dissimilar to those with respect to for registration of a mark
which registration is applied for identical with or
o Provided that: Use of the confusingly similar to or
mark in relation to those which constitutes a
dissimilar goods or services translation of such well-
would indicate a known mark
connection between those o Petition for cancellation
goods or services and the of the registration, if one
owner of the registered has been granted; and
mark o Unfair competition if the
o Provided further that the goods are being passed
interests of the owner of off by another as the
the registered mark are goods of the owner of the
likely to be damaged by well-known mark
such use [S123.1e, IPC]
b. Article 6 of the Paris Convention governing the protection of well-known
trademarks and trade names is a self-executing provision, granting any foreign
national or juridical person the legal capacity to sue for the protection of its
trademarks whether they are doing business in the Philippines or not [Sehwani,
id.]
c. Marks which cannot be exclusively appropriated
i. The theory of dilution is the lessening of the capacity of a famous mark to
identify and distinguish goods or services, regardless of the presence or
absence of competition between the owner of the famous mark and other
parties; or likelihood of confusion, mistake, or deception [Levi Strauss &
Co. v. Clinton Apparelle, G.R. No. 138900, 20 September 2005].
ii. Generic marks are not legally protectable and constitute the common
descriptive name of an article or substance [Societe de Produits Nestle v.
CA, 4 April 2001; see De La Salle Montessori International of Malolos v. De
La Salle Brothers, et. Al., G.R. No. 205548, 7 February 2018].
• Generic marks which are identifiable to a good or service are
prohibited from registration [see Kensonic Inc. v. Uni-Line Multi-
Resources, Inc., G.R. Nos. 211820-21 and 211834-35, 6 June 2018].
• The doctrine of secondary meaning refers to a word or phrase
originally incapable of exclusive appropriation with reference to an

Page 55 of 82
 article in the market, because it is geographical or otherwise
descriptive, but has been used for so long and exclusively by the
owner in the trade and to that branch of the purchasing public that
the word or phrase has come to mean that the article was his
produce [Ana Ang v. Toribio Teodoro, as cited in Lyceum of the
Philippines v. CA (1993); S123.2, IPC].
• These kinds of marks CAN be registered.
iii. Descriptive marks are invalid as a trademark when if understood in its
normal and natural sense, the mark clearly denotes what goods or services
are provided in such a way that the consumer does not have to exercise
powers of perception or imagination [Societe de Produits Nestle, id.]
iv. Genericidal marks consist exclusively of signs or of indications that have
become customary or usual to designate the goods or services in everyday
language or in bona fide and established trade practice [S123.1i, IPC]
v. Descriptively misleading marks are marks likely to mislead the public,
particularly as to the nature, quality, characteristics, or geographical origin
of the goods or services [S123.1g, IPC]
d) Rights conferred by registration [except in cases of importation of drugs and medicines
which have been introduced in the PH or anywhere else in the world by the patent owner,
OR by any party authorized to use the invention and of off-patent drugs and medicines]
a. Exclusive right to prevent all third parties not having the mark owner’s consent
from using in the course of trade identical or similar signs or containers for goods
or services which are identical or similar to those in respect of which the trademark
is registered, where such would result in a likelihood of confusion
i. In case of use of an identical sign for identical goods or services, a
likelihood of confusion shall be presumed
b. No infringement of trademarks or trade names of imported or sold patented drugs
and medicines allowed under the IPC, as well as imported or sold off-patent drugs
and medicines
i. Provided that said drugs and medicines bear the registered marks that
have not been tampered, unlawfully modified, or infringed upon [S147 in
re S72.1, IPC]
c. These rights terminate upon cancellation of the certificate of registration by the
IPO in the cases allowed by law
e) Cancellation of registration; grounds for when the IPO may cancel the certificate of
trademark registration
a. Failure to file declaration of actual use (DAU) within 1 year from the fifth
anniversary of the trademark registration
b. Failure to file DAU within 3 years from filing of the application for trademark
registration
i. A petition to cancel a registration of a mark may also be filed with the IPO’s
Bureau of Legal Affairs by any person who believes that he is or will be
damaged by the registration of a mark under the IPC, as follows:
• Within 5 years from the date of registration of the mark
• At any time, if the registered mark becomes the generic name for
the goods or services, or a portion, for which it is registered, or has
been abandoned, or its registration was obtained fraudulently or
contrary to the IPC provisions, or if the registered mark is being
used by, or with the permission of, the registrant so as to
misrepresent the source of the goods or services on or in connection
with which the mark is used.
c. At any time, if the registered owner of the mark without legitimate reason fails to
use the mark within the Philippines, or to cause it to be used in the PH by virtue
of a license during an uninterrupted period of 3 years or longer [S151.1, IPC]
f) Trademark infringement
a. Elements
i. The trademark being infringed is registered in the IPO
ii. The trademark is reproduced, counterfeited, copied, or colorably imitated
by the infringer
iii. The infringing mark is used in connection with the sale, offering for sale,
or advertising of any goods, business or services, or the infringing mark is
applied to labels, signs, prints, packages, wrappers, receptacles, or
advertisements intended to be used upon or in connection with such
goods, businesses, or services

Page 56 of 82
 iv. The use or application of the infringing mark is likely to cause confusion or
mistake or to deceive purchasers or others as to the goods or services
themselves or as to the source or origin of such goods or services or the
identity of such business; and
v. The use or application of the infringing mark is without the consent of the
trademark owner or the assignee [Diaz v. People of the Philippines and
Levi Strauss (Phil.), G.R. No. 180677, 18 February 2013]
b. Remedies
i. Civil action for trademark infringement
• If damages cannot be readily ascertained with reasonable certainty,
the court may award as damages a reasonable percentage based
on the amount of gross sales of the defendant or the value of the
services in connection with the mark or trade name used in
infringement [S156.1, IPC]
• In cases where actual intent to mislead the public or to defraud the
complainant is shown, in the discretion of the court, the damages
may be doubled [S156.3, IPC]
• Can include attorney’s fees, costs of suit, and an application to
impound relevant sales documents and preliminary injunction to
restrain further acts of infringement [S156.4, IPC]
• Disposal outside channels of commerce and destruction of infringing
goods without compensation, to avoid any harm to the rights holder
[S157.1, IPC]
• Court orders immediately executory upon judgment, except
• Order of destruction where MR is filed
• Order of release of seized goods where a search warrant is quashed
ii. Criminal action for trademark infringement
iii. For wrongfully and illegally seized goods and materials, the owner may
recover damages with the same court that issued the writ of search and
seizure
iv. Oppose any other application for registration of the same trademark, or a
dominant feature, for the same goods and services or good and services
related
v. Petition for cancellation of trademark with the IPO, which does not
preclude the first registrant from filing an action for trademark
infringement
g) Unfair competition
a. Defined as the passing off or attempting to pass off upon the public of the goods
or business of one person as the goods or business of another with the end and
probable effect of deceiving the public.
i. Passing off: misleading prospective purchasers into buying his
merchandise under the impression that they are buying that of his
competitor’s [Republic Gas Corp v. Petron Corp, G.R. No. 194062, 17 June
2013].
ii. It is a transitory or continuing offense, where a search warrant may be
applied for in any court where any element of the alleged offense was
committed [Sony Computer Entertainment, Inc. v. Supergreen Inc (2007)].
b. A person is guilty of unfair competition when they employ deception or any other
means contrary to good faith by which they pass off their goods as a competitor’s,
particularly when:
i. Person passes off goods he is selling as another manufacturer’s, in general
appearance of the goods either as to packaging or the goods themselves
to deceive the public and/or prospective purchasers
ii. Person employs means to induce the false belief that he is offering the
services of another who have identified such services in the mind of the
public; or
iii. Person makes any false statement in the course of trade or commits any
other act contrary to good faith of a nature calculated to discredit the
goods, business, or services of another [S168.3, IPC]
c. It is essential to prove the existence of fraud, or intent to deceive, actual or
probable, determined through a judicious scrutiny of the factual circumstances
attendant to a particular case [Shang Properties Realty Corp. v. St. Francis
Development Corp., G.R. No. 190706, 21 July 2014].

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d. Distinguished from trademark infringement
Trademark Infringement Unfair Competition
• Unauthorized use of a trademark • Passing off one’s goods as those of
• Fraudulent intent unnecessary another
• Prior registration of the trademark • Fraudulent intent is essential
is a prerequisite to the action • Registration is not necessary [Del
• No trademark infringement if use Monte Corp. v. CA (1990)]
of the registered trademark is • There can be unfair competition
totally unrelated to the goods even if two products are unrelated
specified in the certificate of if there is passing off of one’s
trademark registration product as that of another
manufacturer

e. An action for cancellation of trademark is not a prejudicial question in a criminal

action for unfair competition [Caterpillar Inc. v. Manolo P. Samson, G.R. No.
205972 and G.R. No. 164352, 9 November 2016]

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3. Copyrights – An intangible, incorporeal right granted by statute to the author or originator of certain
literary or artistic productions [along with scientific and scholarly works], whereby they are
invested, for a specific period, with the sole and exclusive privilege of multiplying copies of the
same and publishing and selling them [Kensonic v. Uni-Line Multi Resources Inc., id; Fernando
Juan v. Roberto Juan, G.R. No. 221372, 23 August 2017], along with any form of public
communication, right of attribution, right to carry out derivative work and other moral rights.
a) Copyrightable works
a. Protected by the sole fact of their creation, irrespective of their mode or form of
expression, as well as of their content, quality, and purpose.
i. A publisher shall have a copyright consisting merely of the right of
reproduction of the typographical arrangement (layout, composition, style,
and general appearance of the page of a published work) of the published
edition of the work [S174, IPC]
b. Classifications
i. Original and literary works
ii. Derivative works
• They are:
• Dramatizations, translations, adaptations, abridgements,
arrangements, and other alterations of literary or artistic works;
and
• Collections of literary, scholarly, or artistic works, and
compilations of data and other materials which are original by
reason of the selection or coordination or arrangement of their
contents [S173.1, IPC]
• They shall be protected as new works, but such new work shall not
affect the force of any subsisting copyright upon the original works
employed or any part, or be construed to imply any right to such
use of the original works, or to secure or extend copyright in such
original works
b) Non-copyrightable works
a. Useful articles or articles with intrinsic utilitarian function that is not merely to
portray the appearance of the article or to convey information are not
copyrightable
i. Except when it incorporates a design element physically or conceptually
separable from the underlying product. It is the design itself which is
subject to copyright protection.
ii. The Denicola Test in intellectual property law states that if design elements
of an article reflect a merger of aesthetic and functional considerations,
the artistic aspects of the work cannot be conceptually separable from the
utilitarian aspects; thus the article cannot be copyrighted.
b. Idea, procedure, system, method or operation, concept, principle, discovery or
mere data as such, even if they are expressed, explained, illustrated, or embodied
in a work
c. News of the day and other miscellaneous facts having the character of mere items
of press information
d. Any official text of a legislative, administrative, or legal nature, as well as any
official translation [S175, IPC]
e. Any work of the Government of the Philippines
i. However, prior approval of the gov’t agency or office where the work is
created shall be necessary for exploitation of such work or profit
ii. Such agency or office may, among other things, impose as a condition
payment of royalties
f. Statutes, rules and regulations, and speeches, lectures, sermons, addresses, and
dissertations, pronounced, read, or rendered in courts of justice, before
administrative agencies, in deliberative assemblies and in meetings of public
character [S176.1, IPC]
i. The author of such things shall have the exclusive right of making a
collection of his works [S176.2, IPC]
c) Rights conferred by copyright
a. Copyright protection is immediate, from the moment of creation.
i. The certificates of registration and deposit issued by the National Library
serve merely as a notice of recording and registration of the work, but do
not confer any right or title upon the registered copyright owner or

Page 59 of 82
 automatically put his work under the protective mantle of copyright law.
ii. However such certificate creates a presumption of the validity and
ownership of the copyright
b. Rights derived from copyright
i. Economic Rights [pp. 317] give a copyright owner the exclusive right to
carry out, authorize, or prevent the following:
• Reproduction
• Copying must have an injurious effect [Pacita v. Felicidad
Robles and Goodwill Trading Co., Inc.], or sensibly diminish the
original
• Must follow rules on fair use, and only for that purpose [pp.
318-319]
• Dramatization (Derivative Right)
• This derivative work is protected by copyright
• First public distribution
• First sale doctrine – An individual who knowingly purchases a
copy of a copyrighted work from the copyright holder receives
the right to sell, display, or otherwise dispose of that particular
copy, notwithstanding the interests of the copyright owner.
• Right of droite de suite – Inalienable right of the author or his
heirs to participate in the gross proceeds of the sale or lease of
the original work to the extent of 5%, during the lifetime of the
author or 50 years after his death
• Rental of the original or of a copy (Rental Right)
• Public display of the original or a copy (Right of Public Display)
• Pwede family but not public display by a person who
commissioned the art [pp. 322-323]
• Public performance of the work (Right of public performance)
• Other communication to the public of the work (Right of communication
to the public)
ii. Moral rights are those which the author of a work shall have, independently
of the economic rights or grant of an assignment or license with respect
to such right
• To require that authorship of the works be attributed to him, in
particular, the right that his name, as far as practicable, be indicated
in a prominent way on the copies, and in connection with the public
use of his work (Right of attribution)
• To make any alterations of his work prior to, or to withhold it from
publication
• To object to any distortion, mutilation, or other modification of, or other
derogatory action in relation to, his work which would be prejudicial
to his honor or reputation (Right of integrity)
• To restrain the use of his name with respect to any work not of his own
creation or in a distorted version of his work (Right against false
attribution) [S34, P.D. No. 49]
c. Moral rights can be waived by written instrument, except when it permits another
i. To use the name of the author, or the title of his work, or otherwise to
make use of his reputation with respect to any version or adaptation of his
work which, because of alterations, would substantially tend to injure the
literary or artistic reputation of another author [S195.1, IPC]
ii. To use the name of the author with respect to a work he did not create
iii. Note that collective work contribution by an author deems his right to
attribution waived unless he expressly reserves it [S196, IPC]
d. Moral rights are coterminous with the economic rights of the author or creator of
the work except the right of attribution, which is in perpetuity [S198.1, IPC]
d) Ownership of a copyright
a. Ownership of copyrighted material is shown by proof of originality and
copyrightability [Sison Olano v. Lim Eng Co., G.R. No. 195835, 14 March 2016]
i. When there is sufficient proof that the copyrighted products are not
original creations but are readily available in the market under various
brands, validity and originally will not be presumed [Manly Sportwear
Manufacturing Inc. v. Dadodette Enterprises and/or Hermes Sports Center,
G.R. No. 165306, 20 September 2005]
b. Rules on Ownership of Copyright

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 i. In the case of original literary and artistic works, copyright shall belong to
the author of the work [S178.1, IPC]
ii. For joint ownership, co-owners shall be original owners, and in the absence
of agreement governed by rules on co-ownership
• If each part can be separately identified, the author of each part shall
be the original owner of the copyright in the part that he has created
[S178.2, IPC]
iii. If during employment by employee as author
• To employee if not part of regular duties
• To employer if part of regular duties [S178.3, IPC]
iv. If commissioned work, commissioner has ownership of the work but
copyright remains with the creator unless there is written stipulation to the
contrary [S178.4, IPC]
v. If audiovisual work, to producer, author of the scenario, composer of the
music, film director, and author of the work so adapted
• Unless there is stipulation to the contrary among the creators, the
producer shall exercise the copyright for exhibition of the work in
any manner except for collection of performing license fees for the
performance of musical compositions (word or no word)
incorporated into the work [S178.5, IPC]
vi. If letter, copyright shall belong to the writer under Art. 723, NCC.
• Publishers deemed to represent the authors of articles and other
writings published without the names of the authors or under
pseudonyms unless the contrary appears, or the pseudonyms or
adopted name leaves no doubt as to the author’s identity, or if the
author of the anonymous work discloses his identity [S179, IPC]
c. The copyright of both original and derivative works shall be protected during the
author’s life and 50 years after his death, applicable also to posthumous works
[S213.1, IPC]
i. For joint authorship, economic rights protected during the life of the last
surviving author and for 50 years after his death [S213.2, IPC]
ii. For pseudonyms, unless the author is identified, copyright lasts 50 years
from first publication
iii. For applied art, 25 years from date of making [S213.4, IPC]
iv. For photographic works, 50 years from publication of the work, and if
unpublished, 50 years from the making [S213.5, IPC]
v. For audio-visual works, 50 years from date of publication or from date of
making if unpublished [S213.6, IPC]
vi. For broadcasts, 20 years from the date the broadcast took place
vii. The term of protection shall run from the date of author’s death or
publication, but such term shall always be deemed to begin on the 1st day
of January of the year following the event which gave rise to them [S214,
IPC]
e) Limitations on copyright
a. The following acts shall not constitute infringement of copyright [S184.1, IPC]
i. Private performance of a work
• Also public performance of a work with no charge except for charitable
purposes
• Public display of the published or sold original or a copy of the work not
on film, slide, TV, image or otherwise on screen
ii. Making of quotations
• Compatible with fair use
• Extent of the use is justifiable for the purpose intended; and
• Source and author of the work are mentioned
iii. Information purposes
• Mass media communication
• Presidential and VP debates fall under this category [Rappler
Inc. v. Andres Bautista, G.R. No. 222702, 5 April 2016]
• Reproduction or communication to the public by mass
media of the debates is for information purposes
• The debates have not been expressly reserved by the
copyright holders
• The source is clearly indicated

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 • Reports of current events
• Teaching purposes
• School recordings
• Ephemeral recordings by broadcast facilities for use in its own broadcast
iv. Under the direction and control of the government
• Must-carry rule – A regulation of the NTC which obligates cable TV
networks to carry the signals of local TV stations and show in full
the local TV programs [GMA Network v. Central CATV, G.R. No.
176694, 18 July 2014]
• National Library
• Educational, scientific, or professional institutions for public interest
compatible with fair use
v. Judicial proceedings or professional advice
• By legal practitioner
vi. Reproduction or distribution of published articles or materials in a
specialized format exclusively for the use of the blind, visually, and reading
impaired persons
• On a nonprofit basis
• Indicating the copyright owner and the date of the original publication
vii. Fair use
f) Doctrine of fair use
a. Fair use is a privilege to use the copyrighted material in a reasonable manner
without the consent of the copyright owner or as copying the theme or ideas rather
than their expressions [ABS-CBN Broadcasting Corporation v. Philippine Multi-
Media System, G.R. Nos. 175769-70, 19 January 2009]. The following uses do not
constitute infringement:
i. For criticism and comment
ii. News reporting
iii. Teaching, including multiple copies for classroom use
iv. Scholarship, research, and similar purposes.
b. Four-Factor Test of Fair Use
i. The purpose and character of the use, including whether such use is of a
commercial nature or is for non-profit educational purposes
ii. The nature of the copyrighted work
iii. The amount and substantiality of the portion used in relation to the
copyrighted work as a whole; and
iv. The effect of the use upon the potential market for or value of the
copyrighted work
g) Copyright infringement
a. When is there copyright infringement (malum prohibitum)? When a person uses
an original literary or artistic work, without the copyright owner’s consent and
infringes an IPC protected right by
i. Directly committing an infringement
ii. Benefits from the infringing activity of another person who commits an
infringement if the person benefitting has been given notice of the
infringing activity and has the right and ability to control the activities of
the other person
iii. With knowledge of infringing activity, induces, causes or materially
contributes to the infringing conduct of another [S216, IPC]
b. Elements of copyright infringement
i. Ownership of a validly copyrighted material by the complainant is proven;
and
ii. Infringement of the copyright by the respondent [Ching v. Salinas (2005)]
c. Corporate officers may also be found individually liable of copyright infringement,
if they are found responsible for its commission [Republic Gas Corporation v. Petron
Corp., id.]
d. Remedies of the copyright owner
i. Civil action for copyright infringement with
• Damages (only up to 4 years from act of infringement)
• Doubled if
• The infringing person circumvents effective
technological measures or
• The infringing person has reasonable grounds to know

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 that it will induce, enable, facilitate, or conceal the
infringement upon removing or altering any electronic
rights management information from a copy of a work
OR
• Communicate to the public works or copies
without authority, knowing that the electronic
rights management information has been
removed or altered without authority [S216.1b,
IPC]
• Statutory damages (<P50k) awarded on the following factors
• The nature and purpose of the infringing act
• The flagrancy of the infringement
• Whether the defendant acted in bad faith
• The need for deterrence
• Any loss that the plaintiff has suffered or is likely to
suffer by reason of infringement; and
• Any benefit shown to have accrued to the defendant
by reason of the infringement
• No knowledge of infringement? Statutory damages at discretion
of court set at <P10k
• Preliminary Injunction
• Search and seizure order
• Order of Destruction
ii. Criminal action for copyright infringement
e. Defenses available against an action for copyright infringement
i. The work is not copyrightable
ii. The term of the copyright has expired
iii. The use of the work falls within the limitations on copyright
iv. The plaintiff/complainant is not the owner of the copyright
v. Non-participation in the commission of the infringing activities
vi. If the basis of the complaint is the benefit derived from the infringing
activity, lack of notice thereof and/or did not have the ability to control the
infringement
vii. Prescription; and
viii. Lack of evidence to support the allegations of the complaint

ANTI-MONEY LAUNDERING ACT (R.A. No. 9160, as amended), from Divina Vol. 2 2021

E. Covered institutions and their obligations

1. Covered Institutions (D2, pp. 163-164):
a) Banks, non-banks, quasi banks, and all other entities supervised or regulated by
BSP
b) Insurance companies and all other institutions supervised or regulated by the
Insurance Commission
c) Securities dealers…mutual funds..ForEX…other entities dealing in currency
d) Jewelry dealers dealing in precious metals for transactions in excess of
P1,000,000
e) Jewelry dealers in precious stones for transactions in excess of P1M
f) Company service providers with a business of:
a. Formation agent of judicial persons
b. Acting as director in relation to other juridical persons
c. Providing a registered office to juridical persons
d. Acting as a nominee shareholder for another person
g) Other persons who provide the ff. svcs [excluding lawyers and accountants
acting as independent legal professionals]:
a. Managing of client money, securities, assets
b. Management of bank, savings, or securities accounts
c. Organization of contributions for creation, operation, or
management of companies
d. Creation, operation, or management of juridical persons or
arrangements, and buying and selling business entities
h) Casinos

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 i) Real estate developers and brokers
j) Offshore gaming operators and their service providers under PAGCOR
2. Obligations
a) Customer identification
b) Record keeping for 5 years from date of transactions
c) Reporting of covered and suspicious transactions within 5 working days from
concurrence, unless the Supervising Authority concerned prescribes a longer
period not exceeding 10 working days
F. Covered and suspicious transactions (pp. 166-168)
1. Covered Transaction – Transaction in cash or its equivalent monetary instrument
involving a total amount in excess of P500k within 1 banking day;
a) For casinos, in excess of P5M or its equivalent in any other currency
b) Real estate developers: a single cash transaction in excess of P7.5M or its
equivalent in any other currency
2. Suspicious transactions – Transactions with covered persons, regardless of amount,
where any of the ff. circumstances exist:
a) There is no underlying legal or trade obligation, purpose, or economic
justification
b) The client is not properly identified
c) The amount involved is not commensurate with the business or financial capacity
of the client
d) Taking into account all known circumstances, it may be perceived that the
client’s transaction is structured in order to avoid being the subject of reporting
requirements under the Act
e) Any circumstance relating to the transaction which is observed to deviate from
the profile of the client and/or the client’s past transactions with the covered
person
f) The transaction is in any way related to an unlawful activity or offense under the
Act that is about to be, is being, or has been committed; or
g) Any transaction that is similar or analogous to any of the foregoing
3. Distinction lies in the amount: while covered transactions require cash transactions in
excess of P500k in a single banking day, suspicious transactions need only be done by
covered persons under any of the circumstances enumerated.
G. Safe harbor provision
1. No administrative, criminal, or civil proceedings shall lie against any person for having
made a covered transaction or suspicious transaction report in the regular performance
of his duties and in good faith, whether such reporting results in any criminal prosecution
under the AMLA or any other Philippine law [S9c, R.A. No. 9160]
H. When is money laundering committed (including predicate crimes)
1. Money laundering is a crime whereby the proceeds of an unlawful activity are
transacted thereby making them appear to have originated from legitimate sources.
2. It is committed by any person who, knowing that any monetary instrument or property
represents, involves, or relates to the proceeds of any unlawful activity
a) Transacts said monetary instrument or property
b) Converts, transfers, disposes of, moves, acquires, possesses, or uses said
monetary instrument or property
c) Conceals or disguises the true nature, source, location, disposition, movement,
or ownership of or rights with respect to said monetary instrument or property
d) Attempts or conspires to commit money laundering offenses referred to in the
preceding sections
e) Aids, abets, assists in or counsels the commission of the money laundering
offenses earlier referred to; and
f) Performs or fails to perform any act as a result of which he facilitates the
offense of money laundering referred to above.
3. Also committed by any covered person who, knowing that a covered or suspicious
transaction is required under this Act to be reported to the AMLC, fails to do so.
4. Predicate crimes under the AMLA are unlawful activity listed under the AMLA, defined
as any act or omission or series or combination involving or having direct relation to
the following [pp. 169-172]:
a) Kidnapping for ransom
b) Comprehensive Dangerous Drugs Act of 2002
c) Anti-Graft and Corrupt Practices Act
d) Plunder
e) Robbery and extortion….etc. [Basically anything that involves money related to
illegal activities]

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I. Authority to inquire into bank deposits
1. AMLC needs to obtain a bank inquiry order from the CA to inquire into funds and deposits
if there is probable cause they relate to unlawful activity under AMLA, except when the
predicate crime is any of hijacking, kidnapping, terrorism, murder, arson, and violation
of the Dangerous Drugs Law [S11, R.A. No. 9160, as amended; cited in D2, p. 177]
J. Freezing and forfeiture
1. The authority to freeze deposits is lodged with and based upon the order of the CA [S10,
R.A. No. 9160 as amended] and not with the AMLC or bank.
a) But a bank may temporarily freeze the bank account of a deceased depositor
under S97, RA No. 8424 or the Tax Reform Act of 1997, preventing withdrawals
from the account upon knowledge of the death of a person.
a. A person is maintaining a bank deposit account
b. The bank has knowledge of the said person’s death.
b) HOWEVER, the TRAIN law has amended S97 to allow any withdrawal from the
deposit account of a deceased depositor subject to a final withholding tax of 6%.
a. All withdrawal slips shall contain a statement to the effect that all of
the joint depositors are still living at the time of withdrawal by any
one of the joint depositors and such statement shall be under oath
by said depositors.
2. A freeze order shall be issued by the CA upon a verified ex parte petition by the AMLC
and after determination that probable cause exists that any monetary instrument or
property is in any way related to an unlawful activity as defined in S3i of the AMLA.
a) This order shall be acted upon within 24 hours of the petition excluding non-
working days, and be effective for a period of 20 days, within which period the
CA will conduct a summary hearing with notice to the parties, to determine
whether to modify or lift the freeze order or extend its effectivity not exceeding
6 months.
a. The freeze order is deemed lifted after 6 months, if no case has
been filed against the person whose account has been frozen, but
not for pending cases in the courts.
b) The RTC, however, has jurisdiction to issue an asset preservation order on the
appropriate money laundering case or civil forfeiture case, where the freeze
order shall not prejudice the APO.
c) It shall be limited only to that amount of cash or monetary instrument or value
of property that the court finds there is probable cause to be considered as
proceeds of a predicate offense.
d) These orders shall not apply to amounts in the same account in excess of the
amount or value of the proceeds of the predicate offense [S10, R.A. No. 9160
as amended by R.A. No. 10927]
3. A verified ex parte petition for forfeiture may be filed by the AMLC through the OSG,
applying the Rules of Court on Civil Forfeiture
a) The forfeiture shall include those other monetary instrument or property having
an equivalent value to that of the monetary instrument or property found to be
related in any way to an unlawful activity or a money laundering offense, when
with due diligence the former cannot be located, it is substantially altered or
diminished to make it worthless, concealed, outside the PH, or commingled with
other property [p. 181]
b) If circumstances warrant, the AMLC may initiate civil forfeiture proceedings to
preserve the assets and to protect it from dissipation.
c) No court shall issue a TRO or WPI against the freeze order except the CA or SC.
d) The AMLC may also apply for the issuance of search and seizure order with any
competent court [S7(13), R.A. No. 9160 as amended by R.A. 11521]
4. [Not in the syllabus] A foreign state and the AMLC may request for mutual assistance in
the investigation or prosecution of a money laundering offense, unless it is
unconstitutional or prejudicial to PH national interest; provided that a treaty between the
states will override the prejudice to national interest. Such a request must
a) Confirm that an investigation or prosecution is being conducted in respect of a
money launderer named or that he has been convicted of any money laundering
offense
b) State the grounds on which any person is being investigated or prosecuted for
money laundering or the details of his conviction
c) Give sufficient particulars as to the identity of
a. Said person
b. Any covered institution believed to have any information, document,

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 material, or object which may be of assistance to the investigation
or prosecution
d) Ask from the covered institution concerned any information, document, material,
or object which may be of assistance to the investigation or prosecution
e) Specify the manner in which and to whom requested information obtained
pursuant to said request is to be produced
f) Give all particulars necessary for the issuance by the court in the requested State
of the writs, orders, or processes needed by the requesting State
g) Contain such other information as may assist in the execution of the request
[S13e, R.A. No. 9160]

ELECTRONIC COMMERCE ACT (R.A. No. 8792)

K. Legal recognition of electronic data messages, documents, and signatures

1. Applies to any kind of electronic data message and electronic document used in the
context of commercial and non-commercial activities, including domestic and
international transactions, contracts and exchanges, and storage of information
a) Lead agency is DTI.
2. An electronic data message refers to information generated, sent, received, or stored
by electronic, optical or similar means [S5c, RA No. 8792]
3. An electronic document refers to information or the representation of information, data,
figures, symbols, or other modes of written expression, described or however
represented, by which a right is established or an obligation extinguished, or by which
a fact may be proved and affirmed, which is received, recorded, transmitted, stored,
processed, retrieved, or produced electronically [S5f, RA No. 8792]
a) Interchangeable with electronic data message [R2, S1h, Rules on Electronic
Evidence]
4. Legal effect of an Electronic Document
a) Same as any other document or legal writing for admissibility in evidence
b) Equivalent to a document in writing when
a. It maintains its integrity and reliability; and
b. It can be authenticated, so as to be usable for subsequent
reference, in that
i. The electronic document has remained complete and
unaltered, apart from the addition of any endorsement
and any authorized change, or any change which arises in
the normal course of communication, storage, and display;
and
ii. The electronic document is reliable in the light of the
purpose for which it was generated and in light of all
relevant circumstances
c) Any legal requirement that a document be presented or retained in its original
form is met by an electronic document if:
a. There exists a reliable assurance as to the integrity of the
document from the time when it was first generated in its final
form; and
b. That document is capable of being displayed to the person to
whom it is to be presented [S7, RA No. 8792]
L. Presumption relating to electronic signatures
1. An electronic signature refers to any distinctive mark, characteristic, and/or sound in
electronic form, representing the identity of a person and attached or logically associated
with the electronic data message or electronic document or any methodology or
procedures employed or adopted by a person and executed or adopted by such person
with the intention of authenticating or approving an electronic data message or electronic
document [S5e, RA No. 8792]
a) Includes digital signatures [R2, S1j, REE]
b) It is 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, exists and conforms with S8 of RA
No. 8792
2. Presumptions relating to an electronic signature in any proceedings
a) The electronic signature is the signature of the person to whom it correlates;
and

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 b) The electronic signature was affixed by that person with the intention of signing
or approving the electronic document, unless the person relying on the
electronically signed document knows or has noticed defects in or unreliability
of the signature or reliance on the electronic signature is not reasonable under
the circumstances [S9, RA No. 8792]
M. Admissibility and evidential weight of electronic data message or electronic document
1. In any legal proceeding, the admissibility of an electronic data message or electronic
document cannot be denied
a) On the sole ground that it is in electronic form; or
b) On the ground that it is not in the standard written form and electronic data
message or electronic document meeting and complying with the requirements
under S6 or 7 hereof shall be the best evidence of the agreement and
transaction contained therein.
2. In assessing the evidential weight of an electronic data message or electronic
document, the reliability of the manner in which it was generated, stored, or
communicated, the reliability of the manner in which its originator was identified, and
other relevant factors shall be given due regard [S12, RA No. 8792]
3. Complies with Original Document Rule when it is a printout or output readable by sight
or other means, shown to reflect the data accurately [R4, S1, REE; See Revised Rules
on Evidence, R131]
4. The Internet is not a valid medium for publishing laws, rules, and regulations [Garcillano
v. HoR, G.R. No. 170338, 23 December 2008]

N. Obligation of confidentiality
1. The obligation of confidentiality provides that unless authorized by law, any person who
obtained access to any electronic key, electronic data message or electronic document,
book, register, correspondence, information, or other material pursuant to any powers
conferred under this Act, shall not convey to or share the same with any other person
[S33, RA No. 8792]

VII. FINANCIAL REHABILITATION, INSOLVENCY, LIQUIDATION and SUSPENSION OF

PAYMENTS (R.A. No. 10142, FR Rules [A.M. No. 12-12-11-SC], and FLSP Rules [A.M.
No.15-04-06-SC])

2. Basic concepts
a) Rehabilitation
a. When a debtor is insolvent, but it can be shown that he can pay off his
creditors if restored to successful operation and solvency through
an economically feasible operation, there can be rehabilitation.
b. The basic issues in rehabilitation concern the viability and desirability of
continuing the business operations of the distressed corporation to
restore it to a state of solvency or to its former healthy financial
condition through the adoption of a Rehabilitation Plan [Philippine
Asset Growth Two, Inc. and Planters Dev’t Bank v. Fastech Synergy
Philippines, Inc., et. al G.R. No. 206528, 28 June 2016]
c. Objectives; how to attain
i. Adoption of an economically feasible Rehabilitation Plan
ii. During the pendency of the rehabilitation, the enforcement
of claims against the debtor are generally suspended – to
give time to the debtor and the Rehabilitation Receiver to
rehabilitate the debtor undistracted by court suits
iii. The Rehabilitation Plan is binding on the debtor and all
creditors affected by the proceedings even to those who did
not take part or opposed the Rehab Plan, under the cram
down effect; and
iv. National and local taxes are likewise waived until approval
of the Rehabilitation Plan or termination of the rehabilitation
proceedings
b) Insolvent
a. Insolvency refers to the financial condition of the debtor as being
unable to pay off debts in the ordinary course of business or having
greater liabilities than assets [S4p, R.A. No. 10142]
b. Two types
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 i. Technical insolvency – Debtor has more assets than
liabilities but is not liquid enough to pay the debts as
they fall due
ii. Actual insolvency – Liabilities greater than debtor’s
assets
c) Liquidation
a. If there are competing claims and property rights of creditors and the
debtor, liquidation or sale of the properties is done to maximize
asset recovery and to equitably distribute the debtor’s properties to
the creditors based on the rules on concurrence and preference of
credits.
d) Suspension of payments
a. A debtor who is technically insolvent may file a verified petition to be
declared in a state of suspension of payments in the court in the
province or city which he has resided in for 6 months prior to the
filing.
b. This is unavailable for a juridically insolvent debtor
3. Modes of rehabilitation
a) Court-supervised rehabilitation
a. Voluntary vs. involuntary

Voluntary
• Who may initiate (insolvent
debtor):
o Owner of a sole
proprietorship
o Majority of the partners in
partnership
o For corporations, majority
vote of the board of
directors or trustees,
authorized by the vote of
the stockholders
representing at least 2/3 of
the outstanding capital
stock; or for non-stock,
2/3 of the members, in a
stockholder’s meeting duly
called for the purpose
o A group of debtors may
jointly file the petition
when one or more of its
members foresee the
impossibility of meeting
debts when they fall due,
and financial distress
would affect financial
condition of the other
members
• What’s in the verified petition:
o Identification of the
debtor, its principal
activities and addresses
o Statement of the fact of
and cause of the debtor’s
insolvency or inability to
pay its obligations as they
become due
o Specific relief sought
under FRIA
o Grounds of petition
o Other information required
under FRIA depending on
relief sought
Involuntary
• The creditor or group of creditors
with a claim or aggregate claim of
at least P1M or at least 25% of the
subscribed capital stock or
partners’ contributions, whichever
is higher, may initiate involuntary
proceedings against the debtor
when:
o There is no genuine issue
of fact or law on the
claim/s of the petitioner/s
and that due and
demandable payments
have not been made for at
least 60 days, or the
debtor has generally
failed to meet his liabilities
as they fall due; or
o A creditor other than the
petitioner/s, has initiated
foreclosure proceedings
against the debtor that
will prevent the debtor
from paying its debts as
they become due or will
render it insolvent [S13,
FRIA]
• Verified petition contains
substantially the same as a
voluntary proceeding, except
o S13 circumstances

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Voluntary Involuntary
o Schedule of the debtor’s
debts and liabilities with a
list of creditors and their
addresses, amounts of
claims, and collaterals or
securities if any
o An inventory of all its
assets including
receivables and claims
against third parties
o Rehabilitation Plan
o At least 3 nominees for
Rehabilitation Receiver
o Other documents to be
filed with the petition
under FRIA and the rules
of procedure as may be
promulgated by the SC

b. Commencement order (including stay order)

i. A commencement order is an order that commences
rehabilitation proceedings, issued by the Rehabilitation
Court after it finds the petition sufficient in form and
substance. The proceedings are deemed commenced from
the date of filing of the petition, or the commencement
date. The order shall:
• Identify the debtor
• Summarize the grounds for proceedings
• State the relief sought under FRIA and any
requirement or procedure with that relief
• State the legal effects of the commencement
order (with S17, FRIA)
• Declare the debtor under rehabilitation
• Direct the publication of the commencement
order [1x a week, 2 consecutive weeks, 7 days
from issuance of order]
• If petitioner is debtor, service by personal delivery
of a copy of the petition on each creditor holding
at least 10% of the total liabilities of the debtor as
determined by the schedule within 5 days. If
creditor, same requirement as to debtor
• Appoint a Rehabilitation Receiver either from the
nominees or from the court’s discretion to
exercise powers and duties under FRIA
• Summarize the requirements and deadlines for
creditors to establish their claims against debtor,
which claims must be filed 5 days before initial
hearing
• Direct BIR to file and serve on debtor its comment
or opposition to the petition, or its claims against
the debtor
• Prohibit the debtor’s suppliers of good or services
from withholding goods or services in the ordinary
course of business if the debtor continues to pay
• Authorize payment of administrative expenses
when due
• Set the case for initial hearing not more than 40
days from date of filing of the petition
• Make available copies of the petition and Rehab
Plan for examination and copying by any
interested party
• Indicate the location or locations at which
documents regarding the debtor and the

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 proceedings under FRIA may be reviewed and
copied
• State that any creditor or debtor not the petitioner
may submit the name or nominate any other
qualified person as Rehab Receiver at least 5 days
before initial hearing
• Include a Stay or Suspension Order
ii. Any attempt to seek legal or other recourse against the debtor
outside these proceedings shall be sufficient to support a
finding of indirect contempt of court [S17, FRIA]
iii. Effectivity and Duration – For the duration of rehab proceedings
for as long as there is a substantial likelihood that the debtor
will be successfully rehabilitated [S21, FRIA]
• Order shall retroact to the date that the petition
was filed, and renders null and void any attempt
to enforce a claim or set-off against the debtor
after the commencement date [Allied Banking
Corp. v. In…Steel Corporation…Placed under
Corporate Rehabilitation].

Stay/suspension order

iv. A stay/suspension order deemed included in the

commencement order shall
• Suspend all actions or proceedings, in court or
otherwise, for the enforcement of claims against
the debtor
• Suspend all actions to enforce any judgment,
attachment, or other provisional remedies against
the debtor
• Prohibit the debtor from disposing in any manner
any of its properties except in the ordinary course
of business
• Prohibit the debtor from making any payment of
its liabilities outstanding as of the commencement
date except as may be provided [S16, FRIA]
v. It does not require a hearing before the issuance of this order.
What it requires is an initial hearing before it can give due
course to or dismiss a petition. A court can still call a hearing
[Pryce Corp v. China Banking Corp., G.R. No. 172302, 18
February 2014]
vi. A “claim” includes all claims or demands of whatever nature or
character against the debtor or its property, whether for
money or otherwise. “Creditor” shall mean any holder of a
claim [BAR 2014; see p. 461 for jurisprudential examples].
• However, pending appeals to the SC are excluded
from suspension [S18a, FRIA]
• Same with specialized courts or QJAs which are
capable of resolving the claim more quickly, fairly,
and efficiently than the court, under its discretion
[S18b, FRIA]
• Sureties and solidary debtors also not covered
• Pp. 464-466, Divina Vol. 2 (2021) provides a list
for the rest.
vii. Administrative expenses not covered by the Stay Order are
those reasonable and necessary expenses:
• Incurred or arising from the filing of a petition
under FRIA
• Arising from, or in connection with, the conduct of
proceedings under FRIA, including those incurred
for rehab or liquidation
• Incurred in the ordinary course of business of the
debtor after the commencement date
• For the payment of new obligations obtained after

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 the commencement date to finance the rehab of
the debtor
• Incurred for the fees of the Rehab Receiver or
liquidator and of the professionals engaged by
them; and
• That are otherwise authorized or mandated under
this Act or such other expenses as may be allowed
by the SC in its rules [S4a, FRIA]
viii. It is an interlocutory order with life until dismissal of the petition
or termination of the rehab proceedings [Pryce Corp, supra]
c. Rehabilitation receiver and management committee
Rehabilitation Receiver
i. A rehabilitation receiver is any qualified natural or juridical
person appointed by the rehabilitation court as a court
officer entrusted with powers and duties under FRIA [S4hh,
FRIA].
• If it is a juridical entity, the entity must designate
a natural person who is completely qualified as
representative. It is solidarily liable with its
representative.
ii. The powers and duties of the rehabilitation receiver are the
following:
• To verify the accuracy of the factual allegations in
the rehab petition and its annexes
• To verify and correct, if necessary, the inventory
of all of the assets of the debtor and their
valuation
• To verify and correct, if necessary, the schedule
of debts and liabilities against the debtor
• To evaluate the validity, genuineness, and true
amount of all the claims against the debtor
• To take possession, custody and control, and to
preserve the value of all the property of the debtor
• To sue and recover, with the court approval, all
amounts owed to and all properties pertaining to
the debtor
• To have access to all necessary, proper, or
relevant information on the debtor’s operations
and business for its rehabilitation
• To sue and recover, with court approval, all
property or money of the debtor paid, transferred,
or disbursed in fraud of the debtor or its creditors,
or those that constitute undue preference of
creditor/s
• To monitor the operations and business of the
debtor to ensure that no payments or transfers of
property are made outside the ordinary course of
business
• With court approval, to engage the services or
employ persons or entities to assist him in the
discharge of his functions
• To determine the manner by which the debtor
may be best rehabilitated, to review, revise,
and/or recommend action on the Rehabilitation
Plan and submit the same or a new one for court
approval
• To implement the Rehabilitation Plan as approved
by the court, if provided under the Rehab Plan
• To assume and exercise the powers of
management of the debtor, if directed by the
court pursuant to S36
• Includes the power to recommend the
appointment of a management
committee over the debtor in cases
provided by law [S31, FRIA]

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 • To exercise such other powers which may from
time to time be conferred upon him by the court;
and
• To submit a status report on the rehabilitation
proceedings every quarter or as may be required
by the court motu proprio, or upon motion of any
creditor, or as may be provided in the Rehab Plan.
iii. The court is not bound by the report of the Rehabilitation
Receiver. Such power to determine the feasibility of
rehabilitation rests with the court [Philippine Asset
Growth Two Inc. and PDB v. Fastech Synergy
Philippines, Inc., et al., G.R. No. 206528, 28 June
2016]

Management Committee

iv. The court may appoint a management committee upon

motion of any interested party to take charge of the
management of the debtor, upon clear and convincing
evidence of any of the following circumstances:
• Actual or imminent danger of dissipation,
loss, wastage, or destruction of the debtor’s
assets or other properties
• Paralyzation of the business operations of
the debtor; or
• Gross mismanagement of the debtor, or
fraud or other wrongful conduct on the part
of, or gross or willful violation of FRIA by,
existing management of the debtor or the
owner, partner, director, officer, or
representative/s in management of the
debtor [S36]
v. The management committee, when appointed, shall
assume the rights and responsibilities of the
management and governing body of the debtor, with
powers prescribed by procedural rules [S37, FRIA].
d. Determination of claims [BOC p. 270]
i. The rules on the determination of claims are as follows:
1. Within 20 days from assuming office, the liquidator shall prepare
a preliminary registry of claims.
2. Secured creditors who have waived their security or have fixed
the value of the property subject of the security shall be
considered unsecured.
3. The registry shall be available for public inspection and
publication notice shall be provided to stakeholders [Sec. 123].
4. The debtor and the creditor have the right to set off their debts
against each other; only the balance, if any, shall be allowed in
the proceedings [Sec. 124].
5. Within 30 days from expiration of the period for filing of
applications for recognition of claims, interested parties may
challenge claims to the court.
6. Upon the expiration of the 30-day period, the liquidator shall
submit the registry of claims containing the claims not subject to
challenge. Such claims shall become final upon filing of the
register.
7. Claims that have become final may be set aside only on grounds
of fraud, accident, mistake or inexcusable neglect [Sec. 125].
8. The liquidator shall submit disputed claims to court for final
approval [Sec.126].
e. Rehabilitation plan
i. Refers to a plan by which the financial well-being and
viability of an insolvent debtor can be restored using
various means, including but not limited to debt
forgiveness, debt rescheduling, reorganization or

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 quasi-reorganization, dacion en pago, debt-equity
conversion and sale of the whole or parts of the
business as a going concern, or setting up of new
business entity as prescribed in S62 of FRIA, or other
similar arrangements as may be approved by the court
or creditors [S4(ii), FRIA]
ii. Contents [pp. 474 – 476, D2; S.62, FRIA]
iii. An economically feasible Rehabilitation Plan is governed
by the following characteristics under Viva Shipping
Lines, Inc. v. Keppel Philippines Mining, Inc. [G.R. No.
177382, 17 February 2016]
• The debtor has assets that can generate
more cash if used in its daily operations than
if sold
• Liquidity issues can be addressed by a
practicable business plan that will generate
enough cash to sustain daily operations
• The debtor has a definite source of financing
for the proper and full implementation of a
Rehabilitation Plan that is anchored on
realistic assumptions and goals.
iv. An infeasible Rehabilitation Plan, on the other hand,
contains the following [Philippine Asset Growth Two v.
Fastech Synergy Philippines, ibid]
• The absence of a sound and workable
business plan
• Baseless and unexplained assumptions,
targets, and goals
• Speculative capital infusion or complete lack
for the execution of the business plan
• Cash flow cannot sustain daily operations;
and
• Negative net worth and the assets are near
full depreciation or fully depreciated
v. Liquidation analysis is that integral part of the
Rehabilitation Plan which shows that given the various
stakeholders of the insolvent debtor-shareholders,
creditors, the state, it is better to rehabilitate the
debtor than to carry out its liquidation and that the
present value recovery is better if the debtor continues
as a going concern than if the debtor is to go under
liquidation within 120 days from the filing of the
petition.
• Present value recovery acknowledges that to
pave the way for recovery, a creditor will not
be paid by the debtor when the credit falls
due. The credit taken into account contains
the interest that the amount of money would
have earned if the creditor was paid on time
[id.]
vi. Material financial commitment gauges the resolve,
determination, earnestness, and good faith of the
distressed corporation in financing the proposed
Rehabilitation Plan.
• This includes voluntary undertakings of the
stockholders or the would-be investors of
the debtor to readily contribute funds or
property for the debtor’s continued
successful operation during rehabilitation.
• Nothing short of legally binding investment
commitment/s from third parties is required
to qualify as a material financial commitment
[BPI Family Savings Bank v. St. Michael
Medical Center, Inc., G.R. No. 205469, 25

Page 73 of 82
 March 2015].
• If it is merely to delay payments or waive
accrued interests and penalties at the
expense of the creditors, the rehabilitation
plan should be denied [Philippine Asset
Growth Two, supra]
• If negotiations with potential investors are
merely pending, the rehabilitation plan
should be denied [BPI Family Savings Bank,
supra]
• A written off insurance claim sourced as
working capital is not a material financial
commitment [PBC v. Basic Polyprinters]
• A proposal for dacion en pago to create a
source of “fresh capital” if the object is an
affiliate corporation also undergoing
rehabilitation [id.]
• If predicated on speculative business
proposals as well as the contingent entry of
the potential foreign investor, the
Rehabilitation Plan should be denied [MBTC
v. Fortuna Paper Mill & Packaging
Corporation, G.R. No. 190800, 7 November
2018].
f. Creditor approval and confirmation
i. Approval of the Rehabilitation Plan
• The receiver shall notify the stakeholders
that the Plan is ready for examination.
Within 20 days from notification, the
receiver shall convene the creditors to vote
on the Plan.
• The Plan must be approved by all classes of
creditors whose rights are adversely
modified or affected. Otherwise, it is
deemed rejected.
• The Plan is approved by a class of creditors
if members of the said class holding more
than 50% of the total claims of the class
vote in favor of the Plan [Sec. 64].
• If the Plan is approved, the receiver shall
submit the same to the court for
confirmation.
ii. Objections to the Rehabilitation Plan
• The creditor may file an objection to the Plan
within 20 days from receipt of notice that it
has been submitted for confirmation.
• Objections are limited to the following:
1. The creditors’ support was induced by fraud;
2. The documents or data relied upon in the Plan are
materially false or misleading;
3. The Plan is in fact not supported by the voting creditors
[Sec. 66].
• If upon hearing, the court finds merit in the
objections, it should order the curing of the
defect.
• If the court determines the debtor acted in
bad faith, or that it is not possible to cure
the defect, the court shall convert the
proceedings into one for liquidation.
iii. Court confirmation of the Rehabilitation Plan results in the
following
• The Rehab Plan and its provisions shall be
binding upon the debtor and all persons who
may be affected by it, including the
creditors, whether such persons have

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 participated in the proceedings or opposed
the Rehab Plan or whether their claims have
been scheduled [cram down effect]
• The debtor shall comply with the provisions
of the Rehab Plan and shall take all actions
necessary to carry out the Plan
• Payments shall be made to the creditors in
accordance with the provisions of the
Rehabilitation Plan
• Contracts and other arrangements between
the debtor and its creditors shall be
interpreted as continuing to apply to the
extent that they do not conflict with the
provisions of the Plan
• Any compromises on amounts or
rescheduling of timing of payments by the
debtor shall be binding on creditors
regardless of whether the Plan is
successfully implemented; and
• Claims arising after approval of the Plan that
are otherwise not treated by the Plan are not
subject to any Suspension Order
iv. The Order confirming the Plan shall comply with R36 of
the Rules of Court, provided that the court may
maintain jurisdiction over the case to resolve claims
against the debtor that remain contested and
allegations that the debtor breached the Plan [S69,
FRIA]
g. Failure of rehabilitation
i. There is failure of rehabilitation when
• Dismissal of the petition by the court
• The debtor fails to submit a Rehabilitation
Plan
• The Rehabilitation Plan submitted by the
debtor provides no substantial likelihood
that the debtor can be rehabilitated within a
reasonable period
• The Rehabilitation Plan or its amendment is
approved by the court but in the
implementation the debtor fails to perform
its obligations, or fails to realize the
objectives, targets, or goals set forth,
including the timelines and conditions for the
settlement of the obligations due to the
creditors and other claimants
• The commission of fraud in securing the
approval of the Plan or its amendment; and
• Other analogous circumstances as may be
defined by the rules of procedure [S74,
FRIA]
ii. Termination of the proceedings results in the following:
• Discharge of the Rehabilitation Receiver
subject to his submission of a final
accounting; and
• The lifting of the Stay Order and any other
court order holding in abeyance any action
for the enforcement of a claim against the
debtor
• If due to failure of rehabilitation or dismissal
of the petition for reasons other than
technical grounds, the proceedings shall be
converted immediately to liquidation [S75,
FRIA]
b) Pre-negotiated rehabilitation
a. How initiated

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 i. Insolvent debtor, by itself or jointly with any of its creditors may
file a verified petition with the court for the approval of this
Plan
ii. It must be endorsed or approved by creditors holding at least
2/3rds of the total liabilities of the debtor, including secured
creditors holding more than 50% of the total secured claims
and unsecured creditors holding more than 50% of the total
unsecured claims of the debtor
iii. Contains as a minimum
• A schedule of the debtor’s debts and liabilities
• An inventory of the debtor’s assets
• The pre-negotiated Rehabilitation Plan, including
the names of at least 3 qualified nominees for
rehabilitation receiver
• A summary of disputed claims against the debtor
and a report on the provisioning of funds to
account for appropriate payments should any
such claims be ruled valid or their amounts
adjusted [S76, FRIA]
b. Period and effect of approval
i. Same as voluntary rehabilitation proceedings [S82, FRIA]
c) Out-of-Court or Informal Restructuring Agreement or Rehabilitation Plan
a. Minimum requirements
i. The debtor must agree to the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan
ii. It must be approved by creditors representing at least 67% of
the secured obligations of the debtor
iii. It must be approved by creditors representing at least 75% of
the unsecured obligations of the debtor
iv. It must be approved by creditors holding at least 85% of the
total liabilities, secured and unsecured, of the debtor [S84,
FRIA] → 85% total liabilities, 75% unsecured obligations,
67% secured obligations
b. Standstill period
i. No suit or court action until out-of-court agreement becomes
effective
ii. Provided by agreement of debtor and creditor pending
negotiation and finalization of the out-of-court agreement
effective and enforceable not only against the contracting
parties but also against other creditors
• Such agreement must be approved by creditors
representing at least 50% of the total liabilities of
the debtor
• It must be published in a newspaper of general
circulation in the PH 1x a week for 2 consecutive
weeks
iii. Period does not exceed 120 days from date of effectivity
iv. Notice must invite creditors to participate in the negotiation for
out-of-court rehabilitation or restructuring agreement and
notify them that said agreement will be binding on all
creditors if the required majority votes are met [S85, FRIA]
v. When the plan is approved, it shall be the same as a court-
supervised Rehabilitation Plan
• It should be published 1x a week for 3 consecutive
weeks in a newspaper of general circulation in the
Philippines
• It shall take effect upon the lapse of 15 days from
the date of the last publication of notice
c. Cram down effect
i. A Rehabilitation Plan may be approved by the Court even over
the opposition of the creditors holding a majority of the
corporation’s total liabilities if there is a showing that
rehabilitation is feasible and their opposition is manifestly

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 unreasonable
ii. It forces the creditors to accept the terms and conditions of the
Rehabilitation Plan, preferring long-term viability over
immediate but incomplete recovery [BPI v. Sarabia Manor
Hotel Corp., G.R. No. 175844, 29 July 2013]
4. Liquidation
a) Voluntary liquidation vs. involuntary liquidation vs. conversion
Type of Liquidation Proceedings Definition
Voluntary Initiated by insolvent debtor. An act of
insolvency.
Involuntary Initiated by creditor/s of insolvent
debtor. Debtor must have committed an
act of insolvency
Conversion When court-supervised or pre-
negotiated rehabilitation proceedings
are converted by the court into
liquidation proceedings.

b) Procedure
a. Voluntary
i. Verified petition with the court of the province or city
in which he has resided for 6 months prior to the
filing of such petition by juridically insolvent
individual debtor whose properties are not sufficient
to cover his liabilities, and owing debts exceeding
P500k, establishing his insolvency and stating the
following [S103]:
• A schedule of the debtor’s debts and liabilities including a
list of creditors with their addresses, amounts of claims and
collaterals, or securities if any
• An inventory of all its assets including receivables and
claims against third parties; and
• The names of at least 3 nominees to the position of
liquidator
ii. If sufficient in form and substance, the court shall
issue a Liquidation Order within 5 working days [S90;
S104, FRIA]
• The court must adjudicate on the
insolvency of the debtor whose assets are
less than his liabilities [BAR 1991]
iii.Debts which are not discharged by insolvency include
• Taxes and assessments due the
government, national or local
• Obligation arising from embezzlement or
fraud
• Obligations of any person liable to the
insolvent debtor for the same debt
• Alimony or claim for support
• In general, debts that are not provable
against the estate of the insolvent or not
listed in the schedule submitted by the
insolvent debtor [BAR 1988]
b. Involuntary
i. For juridically insolvent debtors, 3 or more creditors
the aggregate of whose claims is at least P1M or at
least 25% of the subscribed capital stock or partner’s
contributions of the debtor, whichever is higher, may
apply for and seek the liquidation of an insolvent
debtor by filing a verified petition with the court
where the individual debtor resides, showing:
• There is no genuine issue of fact or law on
the claim/s of the petitioner/s, and that the
due and demandable payments have not
been made for at least 180 days or that the

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 debtor has failed generally to meet its
liabilities as they fall due; and
• There is no substantial likelihood that the
debtor may be rehabilitated.
ii. Any creditor or group of creditors with a claim or
claims aggregating at least P500k, or where the
individual debtor has committed an act of insolvency,
may file a verified petition for liquidation with the
court of the province or city in which the individual
debtor resides. Acts of insolvency include:
• Debtor is about to depart or has departed
from the Philippines with intent to defraud
his creditors
• Being absent from the Philippines with
intent to defraud creditors, he remains
absent
• He conceals himself to avoid the service of
legal process to hinder or delay liquidation
or defraud his creditors
• He conceals or removes any of his property
to avoid it being attached or taken on legal
process
• He has suffered his property to remain
under attachment or legal process for 3
days to hinder or delay liquidation or
defraud his creditors
• He has confessed or offered to allow
judgment in favor of any creditor or
claimant for the purpose of hindering or
delaying the liquidation or defrauding any
creditor or claimant
• He has willfully suffered judgment to be
taken against him by default for the
purpose of hindering or delaying liquidation
or defrauding his creditors
• He has suffered or procured his property to
be taken on legal process with intent to
give preference to one or more of his
creditors, hindering or delaying liquidation
or defrauding his creditors
• He has made any assignment, gift, sale,
conveyance, or transfer of his estate,
property, rights or credits with intent to
hinder or delay liquidation or defraud
creditors
• He has in contemplation of insolvency
made any payment, gift, grant, sale,
conveyance, or transfer of his estate,
property, rights or credits
• Being a merchant or tradesman, he has
generally defaulted in payment of his
current obligations for 30 days
• For 30 days he has failed after demand to
pay any money deposited with him or
received by him in a fiduciary capacity
• An execution having been issued against
him on final judgment for money, he shall
have been found without sufficient
property subject to execution to satisfy the
judgment [S105]
iii. If sufficient in form and substance, the court
shall issue an Order
• Directing the publication of the
petition/motion in a newspaper of
general circulation 1x a week for 2

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 consecutive weeks and
• Directing the debtor and all creditors
who are not the petitioners to file
their comment on the petition or
motion within 15 days from the date
of last publication.
iv. If meritorious despite all comments, the court
shall issue the Liquidation Order [S91, FRIA]

c. Conversion
i. From termination
• Grounds to issue the Liquidation Order
[S92]
• Within 10 days from receipt of
the receiver’s report, a court
finding that the debtor is
insolvent and there is no
substantial likelihood of
substantial rehabilitation [S25c]
• If no Rehabilitation Plan is
confirmed within 1 year from
filing the petition to confirm the
Plan [S72].
• If termination is due to failure or
rehabilitation or dismissal of the
petition for reasons other than
technical grounds [S75]
• Upon motion filed by the
insolvent debtor for conversion
into liquidation proceedings
[S90]
• Any other time upon the
recommendation of the
Rehabilitation Receiver that the
rehabilitation of the debtor is not
feasible.
• The remedy of rehabilitation should be
denied to corporations whose insolvency
appears to be irreversible and whose sole
purpose is to delay the enforcement of any
of the rights of the creditors, rendered
obvious by:
• The absence of a sound and
workable business plan
• Baseless and unexplained
assumptions, targets, and goals
• Speculative capital infusion or
complete lack for the execution
of the business plan [Philippine
Asset Growth Two, supra]
ii. From voluntary
• Conversion may also occur during
rehabilitation proceedings via verified
motion, containing the same statements as
those in a verified petition, and also stating
that the debtor is seeking immediate
dissolution and termination of its corporate
existence
iii. From involuntary
• By verified motion from the 3 creditors
qualified in a verified petition, stating the
same matters as those in a verified petition
and stating that the movants are seeking
the immediate liquidation of the debtor.

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 d. Liquidation order; effects
i. The Liquidation Order shall:
1. Declare the debtor insolvent;
2. Order the liquidation of the debtor and, in the case of a juridical
debtor, declare it as dissolved;
3. Order the sheriff to take possession and control of all the property of
the debtor, except those that may be exempt from execution;
4. Order the publication of the petition or motion in a newspaper of
general circulation once a week for two (2) consecutive weeks;
5. Direct payments of any claims and conveyance of any property due
the debtor to the liquidator;
6. Prohibit payments by the debtor and the transfer of any property by
the debtor;
7. Direct all creditors to file their claims with the liquidator within the
period set by the rules of procedure;
8. Authorize the payment of administrative expenses as they become
due; [they are reasonable and necessary expenses]:
o Incurred or arising from the filing of a petition under the
provisions of this act
o Arising from, or in connection with, the conduct of the
proceedings under this act, including those incurred for the
rehabilitation or liquidation of the debtor
o Incurred in the ordinary course of business after the
commencement date
o For the payment of new obligations obtained after the
commencement date to finance the rehabilitation of the
debtor
o Incurred for the fees of the rehabilitation receiver or
liquidator and of the professionals engaged by them
o That is otherwise authorized or mandated under this act, or
such other expenses as may be allowed by the Supreme
Court in its rules
9. State that the debtor and creditors who are not petitioner/s may
submit the names of other nominees to the position of liquidator; and
10.Set the case for hearing for the election and appointment of the
liquidator, which date shall not be less than thirty (30) days nor more
than forty-five (45) days from the date of the last publication [Sec.
112].
ii. Effects
1. The juridical debtor shall be deemed dissolved and its corporate or
juridical existence terminated;
2. Legal title to and control of all the assets of the debtor, except those
that may be exempt from execution, shall be deemed vested in the
liquidator or, pending his election or appointment, with the court;
3. All contracts of the debtor shall be deemed terminated and/or
breached, unless the liquidator, within ninety (90) days from the date
of his assumption of office, declares otherwise and the contracting
party agrees;
4. No separate action for the collection of an unsecured claim shall be
allowed. Such actions already pending will be transferred to the
Liquidator for him to accept and settle or contest. If the liquidator
contests or disputes the claim, the court shall allow, hear and resolve
such contest except when the case is already on appeal. In such a
case, the suit may proceed to judgment, and any final and executory
judgment therein for a claim against the debtor shall be filed and
allowed in court; and
5. No foreclosure proceeding shall be allowed for a period of one hundred
eighty (180) days.
c) Determination of claims
a. Qualifications
1. Within 20 days from assuming office, the liquidator shall prepare a preliminary
registry of claims.
2. Secured creditors who have waived their security or have fixed the value of
the property subject of the security by agreement with the Liquidator and is
admitted as a creditor for the balance, shall be considered unsecured.

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 3. The registry shall be made available by the Liquidator for public inspection
and publication notice shall be provided to stakeholders. All claims must be
duly proven before being paid [Sec. 123].
4. The debtor and the creditor, if mutually debtor and creditor of each other,
have the right to set off their debts against each other; only the balance, if
any, shall be allowed in the proceedings [Sec. 124].
5. Within 30 days from expiration of the period for filing of applications for
recognition of claims, interested parties may submit a challenge to a claim or
claims to the court, serving a certified copy on the liquidator and the creditor
holding the challenged claim.
6. Upon the expiration of the 30-day period, the liquidator shall submit the
registry of claims containing the claims not subject to challenge. Such claims
shall become final upon filing of the register.
7. Claims that have become final may be set aside only on grounds of fraud,
accident, mistake, or inexcusable neglect [Sec. 125].
8. The liquidator shall resolve disputed claims and submit his findings to the
court for final approval. The liquidator may disallow claims [Sec.126].
b. Treatment of Contracts
1. All contracts are deemed terminated and/or breached
2. Unless the liquidator, within 90 days from assumption of office, declares
otherwise and the contracting party agrees [S113]
5. Suspension of payments; suspension of payment order
a) Verified petition for declaration of state of suspension must contain
a. A schedule of debts and liabilities
b. An inventory of assets
c. A proposed agreement with the creditors [S94, FRIA]
b) The court, within 5 working days from the filing of the petition, shall issue an
order:
a. Calling a meeting of all creditors named in the schedule not less than
15 days but not more than 40 days from the date of the order,
designating the date, time, and place of the meeting
i. 3/5ths of the liabilities represented by the creditors must
be present to hold the meeting
b. Directing the creditors to present written evidence of their claims
before the meeting
c. Directing the publication of this order in a newspaper of general
circulation in the province or city where the petition is filed 1x a
week for 2 consecutive weeks, within 7 days from issuance of the
Order
d. Directing the clerk of court to send copies of the order by registered
mail, postage prepaid, to all named creditors
e. Forbidding the individual debtor from selling, transferring,
encumbering, or disposing in any manner of his property while
proceedings are pending
i. Except for those used in the ordinary operations of
commerce or of industry where debtor is engaged
f. Prohibiting the individual debtor from making any payment
outside of the necessary or legitimate expenses of his
business or industry while proceedings are pending
g. Appointing a commissioner to preside over the creditors’ meeting
[S95, FRIA]
c) The court may suspend any pending execution against the debtor who
filed the petition
a. As long as properties held as security by secured creditors are
not the subject of this suspension order
b. Lapses after 3 months have passed without the proposed
agreement being accepted by the creditors, or as soon as the
agreement is denied [S96, FRIA]
d) Effect of Filing – No creditor shall sue or institute proceedings against the
debtor while the petition is pending except
a. Those creditors having claims for personal labor, maintenance,
expense of last illness and funeral of the wife or children of
the debtor incurred in the 60 days immediately before the

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 filing of the petition; and
b. Secured creditors [S96, FRIA]
e) To approve the petition, the following rules must be followed:
a. The clerk of court shall record the creditors present with the
amount of their respective claims
b. The commissioner presiding shall examine the written evidence
of the claims. If the creditors present hold at least 3/5ths of
the liabilities of the individual debtor, the commissioner shall
declare the meeting open for business
c. The creditors and individual debtor shall discuss the propositions
in the proposed agreement and put them to a vote
d. The Double Majority Rule in a majority vote necessitates:
i. 2/3rds of the creditors voting unite upon the
same proposition; and
ii. The claims represented by said majority vote
amount to at least 3/5ths of the total liabilities
of the debtor mentioned in the petition
e. After the result of the voting has been announced, all
protests made against the majority vote shall be drawn
up, and the commissioner and the individual debtor
together with all creditors taking part in the voting shall
sign the affirmed propositions
f. No creditor who incurred his credit within 90 days prior to
the filing of the petition shall be entitled to vote [S97,
FRIA]
f) When the agreement is approved without opposition, and is upheld
by the court, the agreement shall be carried out and all parties are
bound by its terms
a. The court may also issue all orders necessary or proper to
enforce the agreement on motion of any affected party
b. The order is binding upon all creditors in the schedule
except for those excluded even from filing.
g) The claims not covered by the filing are
a. Claims not in the schedule submitted by the debtor to the
court
b. Creditors with personal claims incurred in the 60 days
immediately before the filing of the petition (see effect
of filing)
c. Secured creditors
h) The proposed agreement is deemed rejected when the double
majority rule is not followed, or if the two majorities are not in favor
a. The proceedings shall be terminated without recourse, and
the parties are now at liberty to enforce the rights
corresponding to them [S99, FRIA]
i) Creditors may enforce their claims against the individual debtor who
filed the petition for suspension of payments when
a. The proposed agreement is rejected for lack of quorum or
failure to obtain approval of the double majorities
required by law
b. If the debtor fails, wholly or in part, to perform the
agreement decided upon at the meeting of the
creditors, the creditors are revested with their rights
before the agreement
i. Debtor may then be subjected to insolvency
proceedings under the FRIA
c. If the claims are those not covered by the rules on
suspension of payments.

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