Regulatory Framework and Legal Issues in Business
Module 1: Law on Sales
Sale as a contract
- There is a meeting of the minds between two parties namely Vendor and Vendee.
Contract of sale may be absolute (if silent) or conditional (needs to be stipulated)
Vendor or seller has the two obligations:
● To deliver a determinate thing
● To transfer ownership
Vendee or buyer also has two obligations:
● To accept the delivery
● To pay the price
Characteristics of a contract - CCBPRNOT
1. Consensual (as a rule)
● Valid in any form whether oral or in writing provided there is meeting of the minds
- Exception to the general rule:
1. It is a formal contract when it is a sale of land through an agent if authority is not
in writing.
● Oral yung authority niya -- contract is void
● All the things that the agent will do pertaining to that sale is also void.
● Ex. May lupa akong ipinabenta sayo kay third person. Ang authority na
ibinigay ko sayo ay salita lamang, hindi written. Kahit notarized pa yung
contract of sale niyo ni third person, void pa rin ang contract dahil ang
authority kay agent ay oral lang, when it should be in writing.
● It will only be valid kapag bumalik si agent kay owner, gagawa ng
contract in writing with signature ni owner and ni agent dahil in-appoint
ka as agent. A new legal relationship will be created between owner and
agent dahil sa written contract na pagbigay ng authority kay agent.
○ Kung ano man yung ginawa ni agent before the written contract
was made, hindi pa rin ito magiging valid. Making a written
contract with the owner and the agent does not make the past
actions of the agent valid.
- But if the owner of the land sold it orally. (Si owner mismo ang nagbenta) It is
considered valid but (a defective contract) unenforceable contract for it violates
the statute of fraud.
● Ex. Bebenta ko yung lupa kay third person for 15 million. After 1 week,
nag-iba yung isip ko at hindi na pala ibebenta ang lupa. Kahit i-demanda
ako ni third person dahil hindi ko na ibebenta yung lupa, kung hindi
naman in writing yung contract namin, hindi ito enforceable sa korte.
● Statute of Frauds: Ang batas ay nagrerekomenda na may mga certain contracts
o transactions na dapat sana ay may masunod na proper form (often in writing)
upang ito ay maging enforceable sa korte.
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2. Sale of securities (ex. Shares of stock)
- VOID + criminal liability if the securities are not SEC registered
- Based on Securities Regulation Code
Note: Void contracts can’t be ratified. Unenforceable contracts can be ratified.
● Art. 1396. Ratification cleanses the contract from all its defects from the moment it was
constituted.
2. Commutative (as a rule)
● It is not determined by risk. The amount of debit is equal to the amount of credit.
- Exception to the rule: Aleatory sale - a sale determined by risk
● Aleatory contract: one of the parties or both reciprocally binds
themselves to give or to do something in consideration of what the other
shall give or do upon the happening of an event which is uncertain, or
which is to occur at an indeterminate time.
● Aleatory contract is a contract that through its nature or by the parties'
will offers at least to one contracting party the chance of advantage,
exposing it at the same time to the risk of losses, that depend upon an
uncertain prospective event.
● Ex. Insurance
● Debit is not equal to credit
● Ex. You bought a lottery ticket. Kahit 1,000 pa ang itaya mo, pwedeng
hindi ka pa rin manalo. There is a risk that you won’t win. Kapag hindi
ka nanalo walang babalik sa itinaya mo. Pero kapag nanalo ka kahit 20
pesos lang itinaya mo, million ang mababalik sayo. (debit ≠ credit)
3. Bilateral
● Both parties have obligations
● Entered into by two or more persons and the rights and obligations arising therefrom are
always reciprocal
4. Principal
● It can stand alone
● it does not depend on its existence or validity upon some other contracts
5. Reciprocal (as a rule)
● Simultaneous performance is required to the parties unless stipulated (there are separate
dates to perform)
● Kung walang napag-usapan, sabay ang performance ng obligation.
6. Nominal
● With name based on Civil Code -- Contract of Sale (special contract)
7. Onerous
● Always have value in return
● On the part of the vendor, the price of the goods. On the part of the vendee, the
determinate thing is received.
● Without the price nor the goods, the contract of sale is void.
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8. Transmission of Ownership
● The ultimate obligation of the seller is to transfer ownership to the buyer.
○ Transfer of ownership at the delivery unless stipulated
● If the contract does not involve the transfer of ownership, it will never be considered a
contract of sale.
Sale and similar contracts - ABCCCD
● Agency to sell
Sale
1. There is a Buyer-Seller relationship.
●
Agency to Sell
1. There is a Principal- Agent
relationship.
2. Effect of sale: Delivery is the transfer
of ownership. (unless stipulated - in
spite of delivery, there should be no
transfer of ownership)
2. There is no transfer of ownership.
3. Sale of land by the owner if orally is
valid but results in an unenforceable
contract (violation of Statute of
Fraud)
3. Sale of land through an agent but authority
of agent is oral --- VOID, sale of the agent is
also void even if it is notarized
Barter
Sale
1. Goods VS Price or Money
2. Purpose of the vendor is to sell,
purpose of the vendee is to buy
Barter
1. Goods VS Goods
2. Purpose is to exchange
Scenario: Goods in exchange of Partly Goods and Partly Money
Ex.: BMW = Nissan + 500,000
Is it sale or barter?
● The intention governs -- look for the words used in the problem.
- Considered a sale: Mr. X sold his BMW to Mr. Y for 500,000 and a Nissan car.
If the problem is silent, check the values.
- BMW is worth 1.2 million = Nissan car + 500,000
- BMV = 700,000 worth Nissan + 500,000
●
●
●
IF GOODS > MONEY --- considered as barter
IF GOODS < MONEY --- considered as sale
IF GOODS = MONEY --- considered as sale
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Note: CHECK FIRST THE INTENTION, BEFORE CHECKING THE VALUES.
●
Contract for a piece of work
Sale
1. Goods is for the general public
(Goods are ready made)
2. After perfection but before delivery,
loss due to fortuitous event shall be
borne by the BUYER
●
1. Goods is a special order (customized)
2. Before delivery, loss due to fortuitous event
shall be borne by the SELLER
Contract to sell
Sale
Contract to sell
1. Absolute contract (no condition)
unless stipulated
1. Conditional contract
Ex. I will sell it to you if you pass the board
exam.
2. Delivery is already the transfer of
ownership unless stipulated
2. Despite delivery, there is no ownership until
there is full payment of price
Ex. If deed of sale ang pipirmahan niyo sa
pagbili ng condo, magbayad ka lang ng
downpayment sayo na yung condo and may
deed of sale ka na kahit hindi ka pa fully paid.
●
Contract for a piece of work
Ngayon ginagamit na ng iba ang contract to
sell, magbibigay lang ng deed of sale kapag
fully paid na yung condo
Cession and Dacion en pago
Sale
1. Purpose of delivery of goods is to
create an obligation to pay
2. Buyer is solvent
Cession / Dacion
1. Delivery is to extinguish an obligation
2. Cession: debtor is insolvent
Dacion en pago: debtor is solvent
Payment by Cession
- cede: to give up all your properties for the payment of your obligation
● It is the abandonment or assignment by the debtor of all his property in favor of his creditors so
that the latter may sell them and recover their claims out of the proceeds.
● Extinguishment is not automatic
○ Ex. upon delivery and acceptance by the creditor
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○
Ex. May utang ako sa inyong tig-100k, may lupa akong worth 10 million. Ibinigay ko na
lang sa inyo ang lupa upang ibenta at kayo na ang mag-hati hati sa kita
● 1 debtor who is insolvent and 2 or more creditors
Dation in Payment
A special form of payment where the ownership of property is transferred to his creditor to pay a debt in
money. It is important that both debtor and creditor consent to such an arrangement.
● Extinguishment is automatic
○ Ex. May utang ako sayong 10,000 and may cellphone akong worth 20,000. Tinignan mo
yung cellphone at nag-agree kayong iyon na ang pambayad sa utang --- payment in kind
● 1 debtor who is solvent and 1 creditor
Special Kinds of Sale
- Not ordinary / deviated from ordinary characteristics of sale
1. Pacto de retro sale
● Sale with right to repurchase
● conditional sale -- needs to be stipulated - may limit kung hanggang kailan pwede
i-repurchase
● Sale with resolutory condition - kapag binalik yung goods ma-extinguish yung sale
2. Aleatory sale
● Determined by risk
● Normal sale is not determined by risk
3. Sale or return
● When the seller delivers to the buyer, there is already a transfer of ownership but the
buyer can return later (within a limited period ex. 10 days from sale) even without defects
● Conditional sale --- sale with resolutory condition
○ Resolutory: kapag ni-return na extinguish yung sale
● Immediately there is sale
● Lost after delivery due to fortuitous event - buyer will bear the loss
○ si buyer na ang owner kasi nagkaroon na ng transfer of ownership
4. Sale on TAS (Trial/ Approval/ Satisfaction)
● When the seller delivers to the buyer, there is no transfer of ownership unless the buyer
informs the seller of his approval or satisfaction
● Conditional sale --- sale with suspensive condition
○ Suspensive: kapag na-approve, may sale na
● No sale yet, because approval or satisfaction of buyer needs to occur first
● Lost after delivery due to fortuitous event - seller will bear the loss
○ Wala pang approval, kaya wala pang transfer of ownership to the buyer
5. Sale by sample
● On normal sale, it is a face to face transaction
● But on sale by sample, the buyer merely relies on the sample of the seller. Hence, upon
delivery goods must conform with the sample. Otherwise, buyer rescind the sale and the
seller may be liable for damages or other remedies.
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●
Ex. Ang binibili kong sample ay cute, little and yellow bird. Pero ang na-deliver ay isang
eagle. Kahit mas mahal ang eagle, hindi ito ang sample na pinakita kay buyer.
6. Sale by description
● Buyer relies on the description of the seller. Hence, upon delivery, goods must conform
with the description. Otherwise, the buyer will rescind the sale and the seller may be
liable to damages or other remedies.
● Ex. Sale in Shopee or Lazada
7. Sale by sample and description
● Buyer relies on both sample and description. Hence, upon delivery, goods must conform
with the sample and description. Otherwise, the buyer will rescind the sale and the seller
may be liable to damages or other remedies.
8. Sale of undivided share of specific mass of fungible goods
● Fungible goods: goods that cannot be used without being consumed.
○ Ex. oil, sugar, rice, salt
● Ex. 1,000 liters of gasoline. Ang owners ay si A, B, and C. Mr. C sold his share to Mr. D
but did not specify the mass or quantity. --- SALE IS VOID
○ Undivided yung gasoline and there is co-ownership kaya void yung sale.
● Ex. I owned 30% of the gasoline and I will sell it all to you for 100,000. --- VALID
● NOTE: If the sale is of divided share, no need to specify the mass.
○ Ex. There are 3 containers owned each by A,B, and C. Mr. C sold his container to
Mr. D for 50,000. --- SALE IS VALID EVEN MASS IS NOT SPECIFIED
Elements of Sale
● Essential - Without the essential elements, there is no sale or the sale is void
1. Consent: Meeting of the minds between parties - vendor and vendee
a. Review the factors affecting consent
● Contractual or Legal incapacity
● With capacity but initiated consent -- VOID
● With capacity but simulated consend (Absolute -- VOID, Relative -VALID but true agreement will prevail)
b. Review the stages in the life of a contract
● Negotiation
● Perfection
● Consummation
c. Review the defective contracts: Sale may be
● Rescissible
○ Sale of property identification without court approval
● Voidable
○ Sale when one party is incapacitated
● Unenforceable
○ Both parties are incapacitated
○ Sale in violation of Statute of Fraud
● Void
○ Sale of illegal objects
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2. Object
Requisities: Must be
1. Licit or lawful
2. Determinate - buyer and seller must specify the object
3. Real / present thing or future thing with potential existence
EMPTIO SPEI
Sale of hope / chance
Ex. Lotto tickets
EMPTIO REI SPERATAE
Sale of future goods. Provided there is potential
existence
Ex. Future harvest in a farm
--- not sale of vain hope -- VOID
Ex. Drawed letter tickets
Absolute sale (no conditions are attached to the
sale)
Conditional sale
- Aalamin pa sa future yung quality or
quantity
Price is fixed
Price varies
3. Cause or consideration
● Price - certain in money or its equivalent
○ Certain meaning you can compute how much will be paid
○ Certain, even with reference to another thing provided it is also certain
■ Ex. Same price for that object/ merchandise in SM Manila
Supermarket -- VALID, this is certain because there is only seller
■ Same price for that object in Divisoria -- VOID, because there
are many sellers with different prices, thus it is not certain
○ Equivalent: can be another object. Provided it is stipulated as part of the
price
■ Ex. 100,000 pesos + Toyota car
● Lesion / Insufficient price
○ Ex. FMV = 100,000 , Selling price = 20,000
○ Sale is still VALID
■ Unless proven that the price is simulated, which results in a
VOID sale.
■ Unless in the case of vitiated consent, VALID but VOIDABLE.
■ Unless the real agreement is a donation, the real contract will
prevail and the contract is not contrary to the law.
● Price to be determined by
a. Third parties -- ALLOWED, provided with proper guidelines and
decision is communicated to the parties
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●
●
●
●
Ex. A is the buyer and B is the seller. C will decide an amount
between 20,000 to 100,000
b. One of the parties (either buyer or seller only) “Bahala ka na or it’s up to
you” -- VOID unless later, one party fixed the price and the other party
accepted it
Price is false / uncertain / cannot be determined / illegal -- Sale is VOID
○ Ex. fake dollar
■ If at the start the seller is already knowledgeable that the money
is fake -- Sale is VOID
■ But if the seller only knew later on that the money is fake -- Sale
is VALID and the seller can sue the buyer
Natural -Without the natural elements, the contract is still valid but may result in remedies (ex.
warranties VS eviction or hidden defects)
Accidental - Present only when stipulated by the parties (ex. Pacto de retro sale - sale with right to
repurchase
When is a sale perfected?
a. Face to face transaction
- Upon acceptance of the offer. Provided that the offer is clear or definite and the
acceptance is complete and unconditional.
b. Sale by correspondence
- ex. Sale through shopee, E-commerce, sale through text messaging
- Apply Cognition Theory: offeror learns of the acceptance by the offeree
c. Sale with suspensive condition
- Upon the happening of the condition
- Ex. I will sell to you my car when you become a CPA
d. Sale by public auction
- Upon the fall of the hammer or other customary modes
- Puffing or by bidding (fake bidders) -- not allowed as a rule (only allowed if announced
publicly and before the public auction starts)
The following sales are void: (prohibited sales) POGEAH
Absolutely void
1. Public officials are prohibited to buy properties under their custody
2. Officers of the court are prohibited to buy properties under their litigation
- Including lawyers if property of their present client
Relatively void (there are instances where it can be valid)
3. Guardians cannot purchase property of their wards
4. Executors or administrators cannot purchase estate under their care
5. Agents cannot purchase property of their principal -- na covered ng kanilang agency
- Yung properties ng kanilang principal na hindi covered ng agency ay pwedeng bilhin ng
agent
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6. Husband and wife cannot enter a contract of sale unless they are already legally separated or they
are governed by Absolute separation of property (property regime)
Obligation of the parties
Vendee
1. Accept delivery
2. Pay the price plus interest if stipulated or there is unreasonable delay on part of the buyer to pay.
3. Other stipulated conditions
Vendor
1.
2.
3.
4.
Deliver the determinate thing
Transfer ownership upon deliver
Warrants VS eviction or hidden defects
Pay the expenses of the sale - can be shifted to the buyer with stipulations from both parties
a. Capital Gains Tax
b. Documentary Stamp Tax
c. Other related expenses
5. Other stipulated conditions
Delivery / Traditio - the only mode to transfer ownership
Kinds of Delivery
1. Actual / Physical/ Real delivery - from one person to another (for movable or personal objects)
2. Constructive delivery
a. Execution of legal instrument or public instrument
● Ex. Deed of sale
b. Traditio Symbolica
● Ex. Delivery of the key for the sale of a car
c. Traditio Longa Manu
● by mere pointing
d. Traditio Brevi Manu
● Lessee possessor becomes the owner of the property that he/she is leasing
● Ex. Nirerentahan mo yung building and biglang binenta sayo. Technically
na-deliver na dahil nandyan ka na sa property. No need for actual delivery
because the person is already in possession
e. Traditio Constitutum Possessorium
● The owner possessor becomes the lessee after selling
● Ex. Binenta ni owner yung property pero nakiusap syang huwag muna syang
paalisin sa property, in return magbabayad pa rin siya ng renta.
3. Quasi Traditio / Delivery - for incorporeal or intangible properties (shares of stock)
● Similar to execution of a public instrument
● A term used to designate that a person is in the use of the property of another,
which the latter suffers and does not oppose.
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Delivery
Very important that the seller
● Need not be the owner at the time of sale (or perfection stage)
● Must be the owner at the time of delivery
○ Because buyer only acquires the title of the seller at the time of delivery
○ Anti-Fencing Law: when you buy stolen goods or properties, good faith or bad
faith is not a defense.
Note: Kahit hindi pa sayo, pwede mo na ibenta basta at the time of delivery ikaw na dapat ang
owner. Otherwise, you will be liable.
Except in the following cases, the buyer acquires a better title than the seller - MEC
● Merchant store sales
- To protect commercial transactions
○ A stole the television of B and sold it to C. Tatamaan ng Anti-Fencing Law si C.
○ A stole the television of B and sold it to XYZ Store na buyer and seller ng second
hand goods. C bought the television from XYZ. C acquires a better title than the
seller.
■ May official receipt si C from XYZ store, yung official receipt is a valid
proof of ownership.
● Estopped (si real owner)
● Court ordered sales
Double sale
- the same object has been sold to two or more buyers
Who has a better title?
● If it is a MOVABLE PROPERTY (ex. Jewelries) - first to possess the object in good faith.
○ Good faith - no knowledge of prior buyer
■ Hindi na good faith kung alam niyang may naunang buyer sa kanya
○ Ex. Today the object was sold to B. The next day it was sold to C. Both for
delivery next week. Pero naunang pumunta si C at nakuha nya.
■ C is the first possessor in good faith.
○ Except in cars dahil ito ay may LTO registration. Kung sino ang nakarehistro has
better title
● If it is an IMMOVABLE PROPERTY (ex. Land)
○ The first to register in Registry of Deeds in good faith OR
○ The first to possess in good faith (ex. unang nakapag bakod sa land) OR
○ The one with the oldest title (in relation to the deed of sale)
Implied Warranties of the Seller
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1. Warranty VS Eviction
○ Eviction: Deprivation of the thing bought either wholly or partly
○ Yung binili ay mawawala sayo dahil may taong mas may karapatan sayo
Requirements on making the seller liable: FDFD
1. Final judgment
○ There is a final court order (wala nang appeal)
2. (As a result of the final judgement) Deprivation of the thing bought either wholly
or partly
3. Fault of the seller
○ Ex. Double sale
4. Due process afforded to the seller
○ Seller is duly notified
If these 4 requirements are present, what can the buyer recover?
1. Value of the thing
■ Present market value, not the historical cost
■ Ex. Nabili ko yung lupa 5 years ago for 1 million. Ngayon nung mawala
sakin, 2 million na ang fair market value. Two million dapat ang kunin
ma-recover kay seller
2. Income
■ Present income
■ Ex. Estimated income ko for the harvest of the farm is 300,000. Nang
nawala yung lupa, kailangan isama ang income for the year ng farm sa
ma-recover ni buyer
3. Cost of the lawsuit
■ Legal expenses
4. Expenses of the sale (if buyer paid the expenses of the sale)
5. Other damages
Is this subject to waiver? NO, unless stipulated in good faith
- Ex. Ibebenta ko yung lupa na worth 10 million. Pero ito ay nakasangla nang 2
million (unpaid mortgage). Nilagay niyo sa contract na the buyer will pay for the
unpaid mortgage and in return the seller will give 3 million discount. The buyer
will only pay 7 million to the buyer and 2 million for the unpaid mortgage. Kapag
hindi nabayaran ni buyer yung unpaid mortgage at na-evict sya sa lupa,
nakalagay sa contract na hindi na ito kasalanan ni seller and the buyer can’t sue
the seller.
- Stipulated in good faith
2. Warranty VS Hidden defects / Warranty for Fitness/ Warranty for Merchantability
○ Seller warrants that the thing sold is FIT for its intended use
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Requirements on making the seller liable for violating this warranty: HEEPU
1. Hidden / Redhibitory defect
2. defect must be Existing at the time of sale
3. defect must be Excluded from the contract
○ Not mentioned
4. Period to complain
○ Unless longer period is stipulated
○ If personal property: 6 months from delivery
○ If animals: 40 days from delivery
Note: Scenario - Animal died within 3 days from delivery because of a known
illness
○ from the time na binili mo may sakit na siya, kaya hindi ito hidden defect
○ Kapag within 3 days from delivery at namatay yung hayop, rule is pwede
mo ito ibalik
○ This is a buyer right according to the Civil Code
5. defect renders the thing Unfit for its intended use of purpose
If these 5 requirements are present, what can the buyer recover?
● Minor Defects (defect is easy to repair or cure)
○ Remedy is ACCIO QUANTI MINORIS: proportionate reduction in the
price or similar remedies
○ Plus damages whether good faith or bad faith
● Major Defects (defect is not easy to repair or cure)
○ Remedy is ACCIO REDHIBITORIA: rescind the sale due to redhibitory
defects
○ Plus damages whether good faith or bad faith
Is this subject to waiver? (waivable)
- whether expressed or implied, YES
There is no Warranty VS Hidden Defects in the following cases: ESPM
1. Expert Buyer in connection to the object bought
● Si buyer ay isang mechanical engineer and ang binili niya ay brake sa
kotse. Ang defense ni seller ay by his trade profession or education ni
buyer, he is expected to easily discover the defect.
2. in terms of Secondhand goods, there is no warranty unless stipulated
3. sale in Public Auction / Fairs / those condemned objects
4. if Mentioned in the contract
Remedies of the Parties
Vendee
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1. No payment if no delivery
2. Reject improper delivery
○ Ex. Wrong venue
3. Suspend payment (if any of the warranties are violated)
○ Ex. issued check, pwedeng magpagawa ng Stop Payment Order
4. If defective goods: Options
○ Accept but reduce the price plus damages as an option
○ Reject plus damages (tuloy pa rin yung sale)
○ Rescind the sale plus damages (extinguished na yung sale)
■ Automatic remedy of sale -- Resolution
Vendor
1. No delivery if no payment
2. Rights of an unpaid seller (including partial payment)
○ Right of possessory lien -- hawak pa ni seller yung goods
■ lender retains physical possession of the underlying collateral during the
term of the loan or agreement
○ Right of stoppage in transitu -- nasa carrier na yung goods
■ the right of a seller of goods to stop them on their way to the buyer and
resume possession of them
○ Right of rescission
■ Automatic remedy -- Resolution
○ Right of resale
■ If perishable goods
■ If there is unreasonable delay on the part of the buyer
■ Other stipulated cases
Note: The first two are also remedies of the seller when buyer is insolvent
In sale of personal properties by installments and the buyer failed to pay:
Remedies of the seller (Alternative remedies - only choose one)
1. Exact fulfillment of the obligation
○ Sue the debtor in court for collection of money
2. Cancel the sale if buyer fails to pay at least two installments
○ Rescission of sale plus repossess of the property
3. Foreclose the chattel mortgage if chattel mortgage is constituted upon the personal
property sold and buyer fails to pay at least two installments
○ Sell of the personal property in public auction
■ If sale results in a deficiency: creditor/ seller can recover
● Except if Recto Law applies, creditor cannot recover
■ If sale results in an excess: return to the debtor
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Recto Law: “Article 1484. In a contract of sale of personal property, the price of which is payable
in installments, the vendor may exercise any of the following remedies:
1. Exact fulfillment of the obligation, should the vendee fail to pay;
2. Cancel the sale, should the vendee’s failure to pay cover two or more installments;
3. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the
vendee’s failure to pay cover two or more installments. In this case, he shall have no
further action against the purchaser to recover any unpaid balance of the price. Any
agreement to the contrary shall be void.”
If there has been no foreclosure of the chattel mortgage or a foreclosure sale, then the
prohibition against further collection of the balance of the price does not apply.
Requirements of Recto Law: (All requirements should be present for Recto Law to apply)
1. Sale of personal property in installments
2. Chattel mortgage is constituted upon the personal property
3. Buyer/ debtor fails to pay at least two installments
4. Seller foreclosed the chattel mortgage above (walang piniling remedy kundi yung
foreclosure)
Maceda Law / Realty Installment Buyers Protection Act
Sale of Real Property in installments --- for residential real properties only (not including
commercial or industrial real properties)
Provisions:
1. Grace Period Rule
○ After two years of complete payments, in case of default, buyer has grace period
of 1 month per year of payment -- as if there is no delay
■ Ex. Nakapagbayad siya ng 5 years of complete payments and na-delay
sya for four months. It is as if the buyer did not experience any delay dahil
mayroon siyang grace period na 5 months (1 month per year of payment)
-- no interest or penalty should be paid for the grace period
■ Can be exercised ONCE EVERY FIVE YEARS ONLY
■ If hindi nakapag complete payments for 2 years, in case of default, may
grace period pa rin pero 60 days lang
2. Cash Surrender Value Rule (refund)
○ After 5 years of (complete) payments, if the seller cancels the sale, seller must
give a cash surrender value or refund to the buyer amounting to the first 5 years
of payment x 50%, plus 5% for every year thereafter.
■ Ex. payment for 6th year x 55%, payment for 7th year x 60%
○ MAXIMUM CASH SURRENDER VALUE IS 90% OF THE TOTAL PAYMENTS
MADE
Extinguishment of Sales
1. By any modes of extinguishing an obligation
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a. Payment / Performance
■ Seller - delivery of the thing
■ Buyer - pay the price
b. Loss of the Thing (due to Fortuitous Event)
■ Before perfection of sale and before delivery
● Res Perit Domino: lost to the person who was the owner of it at
the time.
● Seller bears the loss
■ After perfection of sale but before delivery
● Rule: Res Perit Creditori - In the case where the invalidity of the
underlying right is caused by a cause which is not attributable to
the debtor, the loss or damage to such invalidity falls upon the
creditor.
○ Buyer bears the loss (buyer = creditor)
■ Nakapagbayad ka na at naghihintay ka na lang ng
delivery
● Exception to the rule:
○ Seller has fault (such as fraud, negligence, delay,
contravention of the tenor)
○ Fungible goods - hanggang hindi pa na-deliver ang
fungible goods, it is the seller’s loss
○ Stipulated
■ COD
■ FOB Destination
■ Cost Insurance and Freight
■ After perfection of sale and after delivery
● Res Perit Domino
● Buyer bears the loss
c. Condonation
■ Debt is forgiven by seller or buyer
■ gratuitous abandonment by the creditor of his right to go after the debtor
for the fulfillment of the latter’s obligation to the former.
d. Confusion/ Merger of rights
■ characters of creditor and debtor are merged in the same person.
■ Ex. Nag-issue si D ng promissory note kay C. Dahil hindi na
makapag-intay si C, ni-negotiate niya ang kanyang instrument kay A.
Tapos si A naman ay pinambayad yung instrument kay B. Later on, si B
pinambayad niya yung promissory note kay D. Siya yung dating may
obligation pero ngayon si D na rin ang may karapatan mangolekta.
Nag-merge sa katauhan ni D yung pagiging debtor and creditor.
e. Compensation
■ Buyer and seller became a debtor and creditor of each other
■ each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other
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Regulatory Framework and Legal Issues in Business
f.
Novation
■ Change of the obligation, object or change in the persona of buyer or
seller
■ substituting a new debtor in the place of the original one, may be made
even without the knowledge or against the will of the latter, but not without
the consent of the creditor.
g. Other similar/ analogous modes
■ Annulment
■ Recision
■ Happening of Fortuitous Event
2. By redemption - to buy back
Conventional Redemption (pacto de
retro sale)
Legal Redemption
Basis
Agreement or stipulation between the
parties
Automatic, stated in Civil Code
Period
Either 4 years or 10 years
30 days
Conventional Redemption Rules:
1. If no agreement to redeem at the time of sale, there is no right of redemption
○ Agreement to redeem is only an accidental element
2. With agreement to redeem but no period stated -- Redeem within 4 years from sale
3. With agreement to redeem but within a period -- Redeem within the period agreed or
stipulated but not more than 10 years from sale (including all extensions)
Redemptioner to refund the following:
1. Price of the thing
2. Expenses of the sale (if buyer paid)
3. Necessary expenses in relation to the property (if any)
4. Useful expenses in relation to the property (if any)
○ Ex. Farm lot nilagyan ng irrigation - expenses pertaining to the irrigation is
reimbursable
Note: Hindi refundable ang interest, unless if it is stipulated
Legal Redemption
- Redeem within 30 days from receipt of Notice of Sale
- Kailangan matanggap yung notice of Sale para tumakbo yung 30 day-period
1. Among co-owners if any of them sells his share to third persons or strangers
2. Among co-heirs if any of them sells his share to third persons or strangers
○ Ex. A,B,C,D are co-heirs of 10 hectares of land divided equally. D sold his share
to Mr. X (a third person). A,B,C can redeem proportionately (if all wants to
redeem)
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Regulatory Framework and Legal Issues in Business
○
D sold his share to C. There is no right of redemption because the buyer is not a
third person or a stranger.
For adjoining lots (3&4):
3. BARRIO: Among adjoining owners of rural lots, given that the lot is not more than 1
hectare and buyer is not landless
○ Ex. A and B are adjoining owners of rural lots. B sold his land to C. A can buy the
land from C given that the land of B is not more than 1 hectare and C is not
landless.
4. CITY: Among adjoining owners of urban lots so small in size that it has no better use
alone.
○ 1,000 square meters yung 1st land na owned by A, 20 sq. meters yung katabing
lupa na owned by B. B sold his land to C. The land is so small in size na mas
magandang idikit sya sa land ni A because that small land is no better use alone,
kaya A can redeem kay C. -- Bago bilhin ni C kailangan niya munang bigyan ng
notice yung adjoining lot, and within 30 days pwedeng i-redeem ni A kay C yung
lot ni B. If hindi i-redeem ni A, doon lang pwedeng ilipat ang titulo ng lupa kay C.
○ PRE-EMPTION IS ALLOWED. Bago niya i-offer sa iba, i-offer niya muna sa
ka-adjoining owner niya.
5. Sale/ Assignment of credits (and other intangibles) in litigation
○ Ex. May utang si A na 1 million kay B. A issued a check to B pero NSF pala kaya
nag bounce. B sued A for violation of Batas Pambansa blg 22 (Anti-Bouncing
Check Law). Now B wanted to borrow 300,000 from C. B assigned the 1 million
to C in exchange for 300,000 cash. A has 30 days to redeem from C by paying
300,000 plus legal expenses, if any.
■ Si A and B lang ang mayroong debtor-creditor relationship. B only
assigned to C kaya A has the right to redemption.
○ Ex. A issued a 1 million check to B and C. (Parehas silang creditor). In-assign ni
B kay C yung 500,000 share niya for only 100,000. A cannot redeem dahil
creditor niya rin si C.
Module 2: Law on Credit Transactions
Loans
Mutuum (simple loan)
Commodatum
To spend/ to consume
To use/ to display only without spending
Pautang -- I will pay later
Pahiram -- I will return later
Consumable goods including money
●
Pwede rin pera ang goods dito
pero not for the purpose of
spending, but for the purpose of
displaying
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Regulatory Framework and Legal Issues in Business
○
●
There is transfer of ownership
Ex. Gagamitin mo yung
pera to show it on your
report
Non Consumable goods
There is no transfer of ownership.
Ownership of goods are retained on the
bailor
The two kinds of loans are Commodatum also known as Loan for Use Only and
Mutuum also known as Simple Loan and Loan for Consumption
The subject matter of commodatum is Non-consumable or Non-fungible while mutuum
is Consumable or Fungible goods that cannot be used without consumption (ex.
Rice, sugar, salt)
According to character, commodatum is essentially gratuitous while mutuum maybe
gratuitous (if without interest) or onerous (if with interest)
According to ownership, in commodatum the Bailor/ Lender retains ownership while in
mutuum the Bailee or Borrower becomes the owner.
Note: If later the thing was lost due to fortutious event, under the concept of Res Perit
Domino, who will bear the loss:
•
Commodatum: Bailor / Lender
•
Mutuum: Bailee/ Borrower
According to extinguishment, return of the thing borrowed (return of payment before the
due date) is allowed in Commodatum while in mutuum, it is prohibited (as a rule),
especially if the loan is with interest.
Precarium is a kind of commodatum where the Bailor can demand the return of the
thing anytime / at will which can occur when no due date for the return is stipulated
or use is merely tolerated
The two (2) kinds of mutuum are with interest (onerous) and without interest
(gratuitous)
As to perfection, commodatum and mutuum are real contracts which require delivery
otherwise, contracts are void.
The law on loans is governed by Republic 386, also known as Civil Code of the
Philippines which took effect on August 30, 1950 (with amendments).
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Regulatory Framework and Legal Issues in Business
Consumable may be the object of commodatum if the purpose of the contract is not to
consume (ex. Exhibit or display only)
Movable or immovable may be the object of commodatum.
The liability of two (2) or more bailees to whom a thing is loaned is solidary.
Usurious contracts and interests formerly punishable under Usury Law (ex. Maximum
interest rates controlled by the Central Bank) are now under the determination of
Bangko Sentral ng Pilipinas thru its Monetary Board.
Loans/ Credits may be:
● Secured Credits - with security or guarantee
● Unsecured Credits - without security or guarantee
○ Contracts of personal property where the debtor has no property to secure the
debt but merely depends on the promise of another person to secure his debts.
■ Guarantor - the liability of the person is SECONDARY)
■ Surety / co-maker - the liability of the person is PRIMARY or SOLIDARY
Secured Credits - debtor has property to secure his obligations
Contracts of real security:
Pledge
Relationship to
other contracts
Object used
As to Perfection
Chattel
Mortgage
Real Estate
Mortgage
Antichresis
Accessory contract only to secure a principal obligation which is either a loan or a
debt (monetary obligation)
Personal
property/
Movable property
Personal property/
Movable property
Real property/
Immovable property
Fruits of a Real
Property
Ex. Farm harvest
It is a real
contract, thus
delivery of the
object to the
creditor is
required.
No delivery. Only
registration at the
Registry of Deeds.
It is a formal
contract, thus
documents should
be in legal forms
and in public
instrument. (ex.
Affidavit of Good
Faith)
No delivery. Only
registration at the
Registry of Deeds. It
is a formal contract,
thus documents
should be in legal
forms and in public
instrument.
Void to all parties
if it is not in
writing. (Not
necessarily
needed to be in a
public instrument)
Otherwise, the
contract is void.
Otherwise, the
contract is void to
the third persons
but still valid
Otherwise, the
contract is void to the
third persons but still
valid between the
parties.
It is a purely/
absolutely formal
contract.
Mariel Enriquez
Regulatory Framework and Legal Issues in Business
between the
parties.
Can the creditor
own the
property,
pledged/
mortgaged if the
debtor cant pay?
No, if stipulated. It is called pactum commissorium or also called as appropriate for
himself immediately/ automatic ownership. -- void contract, which is contrary to law
and it is unfair to the debtor.
What is the
creditor’s
remedy if debtor
can’t pay?
Creditor or
Pledgee needs
the help of a
Notary Public to
administer public
auction
Creditor or
Mortgagee will go
to the Sheriff, who
will foreclose the
chattel mortgage
leading to a public
auction sale
Creditor has two
options:
● Judicial
Foreclosure court ang
mag-uutos
ng public
auction sale
● Extra-judicial
foreclosure Sheriff will
foreclose the
Real Estate
Mortgage
leading to
public
auction sale
Not applicable
dahil dahan-dahan
nababawasan ang
utang.
Ex. May utang ako
sayo, in return
kumuha ka lang
ng fruits sa
harvest ko (ito
yung pambayad ni
debtor kay
creditor)
No, absolute.
Dahil
papapirmahin ni
Notary Public si
creditor ng Quit
Claim.
YES, unless
RECTO law applies
● Sale of
personal
property by
installment
● Chattel
mortgage
constitutes
personal
property.
● Debtor/buy
er fails to or
more
installment
● Creditor
foreclose
the chattel
mortgage.
Yes, pwedeng
habulin ni creditor
ang other properties
ni debtor kung kulang
yung binentang
properties ni debtor.
Not applicable
No, absolute.
Creditor will return to
Not applicable
Creditor can
alienate, sell in a
public auction
with notice to the
public.
Effect of public
auction sale
Public auction
proceeds can be
deficient or an
excess
In case of
deficient, can the
creditor recover?
If these 4 are
present in case of
deficiency, the
creditor can’t
recover.
Effect of public
sale
Yes but not
absolute. Unless
No, absolute.
-- kahit may
Mariel Enriquez
Regulatory Framework and Legal Issues in Business
In case of
excess, can the
creditor get all?
stipulated,
creditor will return
to the debtor the
excess
stipulation or wala.
The creditor will
return to the debtor
the excess.
the debtor the excess
Can the debtor
sell the property
pledged or
mortgaged
before the
obligation/ debt
is paid?
Yes, but the
owner/debtor
cannot sell or
deliver to the
buyer without
pledgee’s
consent because
the pledgee has
the possession.
No, without the
creditor’s consent.
Otherwise, the
creditor can sue the
debtor for estafa.
Yes, even without the
creditor's consent
because there is
enough legal
protection for the
creditor due to the
registration in the
Registry of Deeds
(which serves as a
notice to the world na
may utang pang
nakakabit sa real
property)
Possession is with
the debtor,
therefore there is
greater temptation
to abscond or run
away with the
mortgage and the
debt.
It is also not possible
to hide and run away
with a house and a
lot.
Note:
● Judicial Foreclosure
○ through the court, but no right of redemption for the debtor
○ only equity of redemption only -- court will give debtor last chance to pay within
90 – 120 days, otherwise there will be no chance of redemption forever
○ No right of redemption, except if the creditor or mortgagee is a bank with 1 year
right of redemption
● Extrajudicial Foreclosure
○ with 1 year right of redemption from the foreclosure sale/ public auction sale
○ Sometimes ang nakalagay sa ibang books: 1 year of redemption from date of
registration of foreclosure sale
■ If magkaiba yung date of foreclosure sale and the date of registration sa
Registry of Deeds, 1 year of redemption is based sa date of registration
● Minsan ngayon yung date ng foreclosure, then tomorrow yung
date of registration, dahil WHICHEVER IS LATER ang favorable
kay debtor, ang date of registration ang nagiging basis
PLEDGE
Other topics of pledge:
1. Animals
○ Yes but delivery is required.
○ How about the offsprings? Rule: Magiging part ng pledge.
■ Except if it was stipulated that it is not included in the pledge.
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Regulatory Framework and Legal Issues in Business
2. Intangibles (ex. Shares of stock)
○ Yes but delivery of evidence of ownership is required (ex. Stock certificate).
○ How about the fruits or income (ex. Dividend income)? When delivered to the
pledgee/creditor, the creditor will apply the income to the debt or obligation, with
notice to the pledgor or debtor.
■ Kung yung dividend income is enough to cover the debt or obligation, it
will extinguish the obligation. However, if there is excess income, it is the
duty of the creditor to return the excess to the debtor, unless there is a
stipulation.
3. Can the creditor or pledgee use the property?
○ Rule: No, dahil isinanla lang ito at hindi pinapagamit.
■ Except if stipulated na pwedeng gamitin, then the creditor can use.
4. Pledge by operation of law? (or legal pledge)
a. Hotel guests with unpaid bills
- Personal property or effects will be taken by the management as part of
pledge
b. Repair of personal properties with unpaid repair fees/ bills
- The property repaired will be retained by the establishment/store as part
of pledge
Note: In both cases, within 30 days from demand, sell the properties through public auction to
recover the debt.
REAL ESTATE MORTGAGE
1. Conventional Mortgage: by agreement of the parties
2. Legal Mortgage: by operation of law
3. Equitable mortgage: sale in form but mortgage in substance
- Indicators that it is not a sale but an equitable mortgage: UPTSESD
● Price is unusually low
● Possession of the property is retained by the vendor/seller
● Taxes referring to real estate tax is still paid by the vendor
○ Kung sale ito dapat ang nagbabayad ng tax ay si vendee na
● Substantial portion on the purchase price is retained by the vendee
○ Kung sale ito, dapat 50% or more of the price ay hawak na ni vendor
● Expired period to redeem but a new period is granted
○ Right to redeem is expired (pacto de retro sale) pero binigyan ulit ng full
extension -- most likely hindi ito sale kundi sanla lang
● Security to an obligation is the real purpose of the contract
● If in doubt if it is sale or mortgage, then it is a mortgage
Mariel Enriquez
REGULATORY FRAMEWORK
FOR BUSINESS TRANSACTIONS
RFBT: LAW ON SALES
I. Identification: Basic Concept and principles
Resolution
__________________
1. Principle that a party can automatically rescind the sale if the other party` fails to perform.
__________________
Res perit emptoru 2. Principle that the buyer bears the loss.
__________________
Res perit venditoru 3. Principle that the seller bears the loss.
__________________
Politacion
(nego sale only) 4. A unilateral promise to buy or to sell which is not accepted.
Possessory lien
__________________
5. The unpaid seller’s legal power to retain control of possession of goods.
Implied
warranties of the seller6. Sellers responsibility for the title of the thing they sold and for any hidden defects.
__________________
Puffing / By-bidding 7. Where the owner joins the bid without reserving such right.
__________________
__________________
Emptio rei speretae 8. The sale of a thing not yet in existence but may exist in the future. Sale of future goods
Emptio spei
__________________
9. It is also known as sale of hope.
Option contract
__________________10.
An agreement whereby one party concedes to another for a determinate period the power (option) to decide
whether a principal contract will be celebrated.
__________________11.
Also called ARRAS, proof of perfection of contract of sale.
Earnest Money
__________________12.
Unpaid seller’s power to resume possession of the goods.
Stoppage in transit
Negotiable
document of title
__________________13.
A document of title in which it is stated that the goods referred to therein will be delivered to the buyer, or
to the order of any person named in such document. Ex. Warehouse receipt
Future goods
__________________14.
Goods to be manufactured, raised or acquired by the seller often the perfection of the contract of sale.
__________________15.
Goods that cannot be used without being consumed.
Fungible goods
__________________16.
When goods are in such a state that the buyer would be bound to accept the delivery.
Deliverable state
__________________17.
A real estate mortgage in the form of conventional redemption or absolute sale.
Equitable mortgage
__________________18.
The right to be subrogated upon the same term and condition stipulated in the contract in the place of one
Legal redemption
who acquired the thing by onerous tide.
__________________19.
The preferential right of an adjoining owner of an urban land to purchase the adjoining property before it is
Legal pre-emption
sold to a stranger.
Sale / assignment
of credits
__________________20.
A contract by which one transfer to another his right against a third person in consideration of a price certain
in money or its equivalent.
TRUE OR FALSE
False - in writing only
21. Agency to sell land must be notarized to b valid.___________
22. The delivery of movable property may likewise be made by the mere consent or agreement of the
contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter
True
already had it in his possession for any other reason.__________
True
23. A contract to sell, even if accepted by the buyer is not an absolute sale.__________
True
24. In sale by sample, be it understood that the bulk is like the sample.__________
False - primary resolution
25. The right of rescission in sale of movable and immovable property is a subsidiary remedy .__________
26. The expenses for the execution and registration of the sale shall be borne by the vendor, always.__________
False - not always
27. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent or that the parties
True
really intended it donation or some other act or contract._________
True
28. The vendee a retro, is subrogated to the vendor’s rights and actions.__________
False
both
are
incapacitated
(unenforceable), one is incapacitated (voidable)
29. Sale by a minor to another minor is a voidable sale..__________
30. The fixing of the price can never be left to the discretion of one of the contracting parties. However, if the price fixed by one of
True
the parties is accepted by the other, the sale is perfected.________
31. Unless otherwise agreed, where goods are delivered to the buyer and he refuses to accept them, having the right to do so, he is not
bound to return them to the seller, but it is sufficient if he notifies the seller that he refuses to accept them. If he voluntarily
constitutes himself a depository thereof, he shall be liable as such._________
True
32. If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the adjoining land of
smaller area shall be preferred; and should both lands have the same arm the one who first requested the redemption.__________
True
33. The ownership in the thing shall not pass to the purchaser until he has fully paid the price.________
False - upon delivery
34. The vendor need not be the owner at the time the sale is perfected. It is sufficient that he is the owner at the time thing sold is
True
delivered.__________
35. If the consideration of the contract consists partly in money and partly in another thing it shall be considered a barter if the value
of the thing given as a part of the consideration exceeds the amount of the money or its equivalent.__________
False - intention first
36. There may be a contract of sale of goods, whose acquisition by the seller depends upon contingency which may or may not
True - conditional sale
happen.__________
37. Where the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a
title to the goods even if he acquired it in bad faith. False - in good faith
38. Warranty against eviction is ordinarily waivable anytime even impliedly.__________
False - not waivable as a rule (unless stipulated)
39. The parties may stipulate that ownership in the thing shall not pass to the purchaser until he has fully paid the price.__________
True - conditional sale
40. The vendor shall not be bound to deliver the thing sold, if the vendee has not paid him the price, or if no period for the payment
True
has been fixed in the contract._________
False (buyer as a rule) — seller in
contract for a piece of work
41. The loss of the thing after perfection but before delivery shall be borne by the seller as a rule..__________
False - perfection
42. ARRAS is a proof of consummation of the contract of sale.__________
False - Dation in payment
43. In sale, the obligation of the vendor is extinguished; while in dation in payment, obligation is created. __________
extinguishes the sale
44. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first
False - Double Sale
taken possession thereof in good faith, if it should be movable property. __________
RFBT
SALES
45. IN COD (cash on delivery), the carrier is the agent of the seller to deliver the goods to the buyer at the point of destination. In
transit buyer will bear the loss__________
False - in COD seller will bear the loss
46. An assignment of a credit, right or action shall, produce no effect as against third persons, unless it appears in a public instrument,
or the instrument is recorded in the Registry of Property in case the assignment involves real property. __________
True
47. The vendor is bound to deliver the thing sold and its accessories and accession in the condition in which they were upon the
perfection of the contract. All the fruits shall pertain to the vendee from the time the obligation to deliver the thing arises.
False - sale from perfection stage — buyer has the right to the fruits already
__________
48. Sale of a vain hope or expectancy is governed by conditional sale. __________
False - Sale of vain hope is VOID because chance is inexistent
49. Sale or return is a sale with suspensive condition. __________
False - resolutory condition
50. Emptio rei speratae is the sale of thing which is expected to come into existence, the quality and quantity of which are unknown.
True
__________
51. Statement 1: Sale is a consensual contract; therefore delivery or payment is not essential for perfection.
Statement 2: Sale on trial or approval is a sale with resolutory condition. Suspensive condition
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
52. Statement 1: The sale of a mere hope or expectancy is conditioned that the thing will come into existence and the price is always
Price varies in emptio rei speretae
fixed.
Statement 2: The sole owner of a thing can sell an undivided interest therein.
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
53. Statement No. 1: Things subject to a resolutory condition cannot be the object of the contract of sale. Can be
Statement No. 2: If the price is simulated, the contract of sale is voidable. VOID
a. Both are true
c. No. 1 is true; No. 2 is false
b. Both are false
d. No. 1 is false; No. 2 is true
54. Statement No. 1: The ownership in the thing shall not pass to the purchaser until he has fully paid the price in contract to sell.
Statement No. 2: If at the time the contract of the sale is perfected, the thing which is the object of the contract has been partially
lost, the contract shall be without effect in depends of the cause of the loss
a. Both are true
c. No. 1 is true; No. 2 is false
b. Both are false
d. No. 1 is false; No. 2 is true
55.
Statement No. 1: Maceda Law is also applicable to commercial units sold in instalment. Residential only
Statement No. 2: Pacto de retro sale is a sale subject to suspensive condition. Resolutory condition
a. Both are true
c. No. 1 is true; No. 2 is false
b. Both are false
d. No. 1 is false; No. 2 is true
56.
Statement No. 1: Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract,
in the place of one who acquires a thing by purchase or dation in payment or by any other transaction whereby ownership is
transmitted by onerous title.
Statement No. 2: The vendor shall not be bound to deliver the thing sold, if the vendee has not paid him the price, or if no period
for the payment has been fixed in the contract.
a. Both are true
c. No. 1 is true; No. 2 is false
b. Both are false
d. No. 1 is false; No. 2 is true
57.
Statement No. 1: Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder,
unless such part delivery has been made under such circumstances as to show an intent to waive the lien or right of retention.
Statement No. 2: Where the price cannot be determined in a contract of sale, the contract is inefficacious but may be ratified.
Cannot ratify if it is a
a. Both are true
c. No. 1 is true; No. 2 is false
void contract
b. Both are false
d. No. 1 is false; No. 2 is true
58.
S sold to B a specific car for P20,000 payable in four equal instalments. S delivered the car to B but required to mortgage it back
to S to answer for the unpaid installments. B paid the 1st instalment, but the last three he failed to pay. S foreclosed the
mortgaged property and sold it at public auction for P13,000.
a. S can recover from B the balance of P2,000.
b. S can recover from B & balance of P2,000 if there is stipulation to that effect.
c. S cannot recover the deficiency any more even if there is stipulation to that effect. Recto Law applies
d. S can recover the balance under Maceda law
59.
The vendor
a. is liable to the vendee for hidden fault or defect of the thing sold even if he is not aware thereof Warranties VS
Hidden defects
b. is not liable to the vendee for hidden fault or defect of the thing sold if he is not aware
thereof
c. is liable to the vendee for hidden fault or defect of the thing sold if he is not aware
thereof if stipulated
d. Answer not given.
60. When it is stipulated that the repurchase of the property sold could be made at any time, the
repurchase shall be exercised
a. Within four years from the date of the contract
b. Within ten years from the date of the contract Conventional redemption with period
SALES
RFBT
c.
d.
After ten years from the date of the contract
None of them.
61. B imports electric fans from China and specifically asks for 220 volts fans. The fans arrived duly labelled 220 volts and sell them
to the public as such. Later, it turned out that the fan has been mislabelled by the manufacturer and were only good for 110 volts.
Warranties VS a. B is liable to the vendee for any hidden defects in the thing sold even though he was not ware thereof.
Hidden defects b. B is not liable because he was in good faith, and this is shown by specifically asking for 220 volts.
c. B is not liable under the principle of “lot the buyer beware”
d. B is liable because the vendee did not enjoy legal and peaceful possession of the object of sale.
62. S sold to B a parcel of land for a lump sum of P50,000 the contract states that the area is 500
square meters. Subsequently, it was ascertained that the area included within the boundaries is really 550 square meters.
a. S is bound to deliver 500 square meters and B to pay P50,000. 62-63. This is called lump sum sale
b. S is bound to deliver 500 square meters and B to pay P55,000. of land or per boundary sale.
c. S or B can rescind the We because there is no meeting of minds. Whether the area increases or
decreases, the price is the same.
d. None of the above.
(As long as boundary is the same)
63. In the succeeding question, if the land contains 445 square meters, which of the following is correct?
a. S is bound to deliver 500 square meters and B to pay P50,000.
The right to rescind ay kapag
b. S is bound to deliver 445 square meters and B to pay P44,500.
nabawasan yung boundary and the
is unfit for the intended
c. B may rescind the sale because the lack in area is more than 1/10 of the total area.area
purpose. Pero kapag fit pa rin for
d. None of the above.
the intended purpose, reduce the
price plus damages
64. S enter into a contract with B whereby S sold his land orally to B. The land has been delivered and the money has been paid. Is
the oral sale of the land valid?
Statute of Fraud no longer
a. The contract is not valid because it is not in writing as required by the Statue of Frauds.
applies because there is
b. The contract is not valid because the contract is not made in public instrument.
already performance of the
c. The contract is unenforceable.
parties
d. The contract is valid & fully enforceable because the contract is already perfected and executed.
65. G, guardian of W, sold W’s house and lot worth P480,000 for P240,000.
More than 1/4 lesion a. The contract can be rescinded because of inadequacy of price. Rescissible contracts
b. The contract cannot be rescind because of inadequacy of price.
c. The contract cannot be rescind because all essential elements of the contracts are present.
d. The contract cannot be rescinded but can be annulled on the ground of minority of the word. (W)
66. X Shoe Store, Inc. entered into a separate contracts with two movie stars, B1 and B2. With B1, the agreement was that the Shoe
Store shall deliver at a specified date or a price of P1,000 a pair of shoes of a specified brand which the store had been
manufacturing for the general public but which at the time of the contract had already been sold out, and with B2, the agreement
was that the shoe store shall deliver at a specified date for a price of P2,000 a pair of shoes to be made specially for him in
accordance with a design submitted by him. What is the nature of these two contracts?
Two products, a
a. Contract for piece of work
c. Agency to sell
b. Sale
d. Combination of A and B special order and a
product for the public
67. A, B and C are co-owners of an undivided parcel of land. B sold his 1/3 interest to C absolutely. Which is correct?
a. A may exercise his right of redemption on the interest sold by B to C.
b. A cannot exercise the right of redemption because the sale was made in favor of a co-owner. Buyer is a fellow
c. The sale made by B to C is void because it was not made in favor of a stranger.
co-owner
d. A may redeem only ½ of the interest sold by B to C.
68. In No. 67 suppose, instead of selling his interest to C, B sold it to X. Who can exercise the right of redemption?
a. Both A and C.
c. C but not A
Buyer is a third person or a
b. A but not C
d. A, B, and C
stranger
69. Which of the statements is not true?
a. In sale or return ownership is transferred to the buyer upon delivery
b. Warranty against hidden defects is an accidental element of a contract of sale Natural element
c. In sale the obligation of the buyer is not only the payment of the price
d. In dacion en pago, an obligation is extinguished while in contract of sale, obligation arise.
70. A borrowed from B P200,000. To secure payment of the loan, A mortgaged his house and lot to B. The mortgage is duly
recorded. Then, without the consent of B, A sold and delivered the house and lot to C and C took possession of the house and lot.
a. The sale to C is void.
b. A cannot transfer ownership to C because B did not give his consent to the sale
c. A is liable to B for damages
d. Ownership is transferred to C subject to the right of mortgagee B. There is registration of property
71. Delivery of movable may be made by the delivery of the keys of the place or depository where the movables are dept or stored.
This kind of delivery is called:
a. Traditio longa manu
c. Traditio clavium Traditio symbolica
b. Traditio brevi manu
d. Traditio constituturn possessorium
72. If immovable property should have been sold to different vendees, the ownership shall be transferred to the person
a. Who have first taken possession in good faith.
b. Who presents the oldest title in good faith.
c. Who in good faith recorded it in the Registry of Property
SALES
RFBT
d.
Who have paid in good faith the purchase price in full
72-73. Double sale
73. In the preceding question, if movable property, it shall belong to the person
a. Who have paid in good faith the purchase price in full
b. Who in good faith first recorded it in the Registry of Property
c. Who presents the oldest title in good faith.
d. Who have first taken possession in good faith
74. Statement No. 1: If the property is sold for nonpayment of taxes due and not made known to the vendee before the sale, the
vendor is still liable for warranty against eviction.
Statement No. 2: Saleof car worth P500k must be in writing to be valid. To be unenforceable under statute of fraud
a. Both are true
c. No. 1 is true; No. 2 is false
b. Both are false
d. No. 1 is false; No. 2 is true
75. Statement No. 1: Sale of future inheritance is void; while the sale of hereditary right is valid the seller is liable for his character as
an heir.
Statement No. 2: An unpaid seller has right of resale always. - as a rule
a. Both are true
c. No. 1 is true; No. 2 is false
b. Both are false
d. No. 1 is false; No. 2 is true
76. In three of the following there is no warranty against hidden f=defects of animals.
Which is the exception?
a. Animals sold at fairs
b. Livestock sold as condemned, declared known to the buyer
c. Animals sold at public auction
d. None of the above
77. In three of the following the sale is void. Which is the exception?
a. Sale of animals suffering from contagious diseases
b. Sale of animals if the used or service for which they are acquired has been stated in the contract and they are
found to be unfit therefore
c. Sale of a vain hope or expectancy
d. Sale of hereditary right VALID
78. S, 16 years old, sold to B, of legal age, a specific diamond ring for P10,000. Later, B sold it to X, which of the following
statements is incorrect?
B has voidable title because S is
a. S has a voidable title because at the time of sale he is a minor incapacitated
b. X, if in good faith, shall become the owner upon the delivery to him
c. X, if in bad faith, shall also be the owner, except that his title is voidable
d. B has got a valid title even if he acquired the ring from a person who is incapacitated
79. In sale with a right to repurchase, if redemption is to be made, which of the following will not be
paid by the seller to the buyer?
a. Price paid by the buyer
b. Expenses in the execution of the sales contract paid by the buyer
c. All necessary expenses on the thing sold and to be redeemed
d. Interest of the price paid by the buyer Unless stipulated
80. S offers to B 100 radio sets for P50,000 payable in 30days with 10% interest per annum. B cables
S to advise that he accepts provided the interest is reduced to 5%. If S and B are both merchants and there is no further 5
communication between them relating to the terms, them
a. B has made a counter offer - in negotiation stage pa lang, wala pang meeting of the minds
b. The contract is formed incorporating only the terms of S
c. The contract is perfected with B’s reduced interest rate becoming part of the agreement
d. None of the above
81. S offered for sale to B 10 cavans of wigwag rice. B asks S price per cavan. S told B
that the price per sacks is P5.00 over the price in the Divisoria market. The price is
a. Certain, because it has got reference to another thing which is certain
b. Not certain, parties will go to court
c. Not certain because the price at Divisoria Market is not stated
d. None of the above
82. S sell to B his 1988 Toyota car, and leaves to B to determine the price. B refuses to fix the price
But took the car for his use. Which of the following statements is correct?
a. No sale, because the price is not fixed by the parties
b. There is sale, B must pay a reasonable price Pay FMV prevailing in the place
c. No sale until a third person fixes the price
d. S may go to court and ask for damages
83. Not a fundamental right of a buyer under consumer’s Act Law.
a. Right of choice & convenience Not including convenience
b. Right to redress/remedy
SALES
RFBT
c.
d.
Right to information
Right to safety
84. Three of the following are conditional sale. Which is the exception?
a.. Sale expectancy
b. Sale with a right to repurchase
c. Sale of a vain hope Void
d. Sale subject to a contingency
85. S sold a piece of pasture land to B. On the same day S sold it again to X. Both sales were made in private documents, bearing the
same date. Neither of the purchasers succeeded in taking physical possession of the land because if was already in the possession
of another person under a contract of lease for one year, executed by S a month before, also in a private document. Who is the
right owner of the land, on the supposition that both purchasers acted in good faith? Why?
About double sale. B has the better title —- one with the oldest title
86. A bought a truck from B payable in installment secured a chattel mortgage executed by A on the truck, As additional security,
A’s brother, C, executed a real estate mortgage in favor of B
A defaulted in the payment of several installment, consequently, B filed an action for replevin , repossessed the truck, and
foreclosed the chattel mortgage.
Can B proceed against the other properties of A and the real estate mortgage executed by C to recover the deficiency if any, after
the chattel mortgage foreclosure? Explain No because Recto Law applies. Hence, creditor cant recover
87. S sold to B a certain water pump by description. Although the description was completely correct as described by S, the machine
would not work properly for which it has been bought. Can B refuse to pay the price of the sale? Why?
No. Sale by description and the goods delivered conformed with the description
88. S sold car for P300,000 to B. Despite his knowledge of this defect, S obtained a waiver from B of the latter’s right under the
warranty against hidden defects. Subsequently, the car was wrecked due to the recklessness of B who only the discovered the
defects when the FMV of the car was P250, 000. Choose the best answer.Seller is in bad faith but buyer is also partly at fault —
a. S is still liable to reimburse B 50,000 plus damages
parehas may share sa damages. Entitled si seller sa
b. The waiver is void because S knew of the defect
reduction in damages dahil at fault si buyer
c. S is not liable anymore because the car got loss due to the recklessness of B
d. The liability of S remains to be P300,000 because of breach of warranty against hidden
defect.
If buyer is not at fault, answer is letter D.
89. Which is not a characteristic of contract of sale?
a. Onerous
c. Consensual
b. Aleatory
d. Commutative
90. Here, physical delivery is not necessary because seller becomes the lessee.
a. Traditio longe manu
c. Traditio symbolica
b. Traditio brevi manu
d. Traditio constitutum posessorium
Lessee becomes the owner
“Few things are impossible to diligence and skill. Great works are performed not by strength but by perseverance”
-Samuel Johnson
BUSINESS LAW
CREDIT TRANSACTIONS
ATTY. A. S. MACMOD, CPA
I. Identification: Basic Concept and principles
Mutuum
__________________
1. Contract whereby one delivers to another money or other consumable things provided the same
amount or quality shall be returned/paid.
Commudatum
__________________
2. Contract whereby one delivers to another non-consumable things for the latter to use and return
later.
__________________
3. A contract wherein the creditor acquires the right to receive fruits of an immovable of his
Antichresis
debtor, with an obligation to apply them to the principal.
Chattel mortage 4. Contract whereby personal property is recorded in the chattel mortgage registry as security for
__________________
the performance of an obligation.
Pactum
commissorium 5. A stipulation in contract of pledge, mortgage or antichresis whereby creditor is given the power
__________________
to appropriate for himself the thing given as security if the principal obligation is not fulfilled.
Benefit of excussion 6. The right of a guarantor to let the creditor exhaust first the assets of the debtor before he can be
__________________
compelled to pay.
__________________
7. A contract whereby the debtor delivers to the creditor a personal property as a security for a
Pledge
credit.
Guarantor
__________________
8. A person who binds himself to fulfill the obligation of the principal debtor in case he fails to
pay.
Surety
__________________
9. A person who binds himself solidarily with the principal debtor for the payment of an
obligation.
Equitable Mortgage 10. A real estate mortgage in the form of conventional redemption or absolute sale.
__________________
II. TRUE OR FALSE
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
III.
26.
If the thing pledged is returned by the pledgee to the pledgor or owner, the principal obligation is extinguished.
False - only the pledge which is the accessory obligation to be extinguished
__________
A chattel mortgage exists when personal property is recorded in the Chattel Mortgage Register as a security for
True
the performance of the obligation. __________
In chattel mortgage, the mortgagor must execute an affidavit of good faith in order that the mortgage shall be
False - third party only not between the paries
valid against third person and between the parties.. __________
If the thing pledged is sold but the proceeds of the sale is less than the principal obligation, the pledgee can
False - cannot collect
collect the deficiency from the pledgor. __________
Any stipulation in a contract of pledge authorizing the pledgee to sell the thing pledged if the pledgor cannot pay
False - allowed if through public auction. Note: if pledgor and third person are both highest bidders in the public
is void. __________
auction, pledgor/debtor has the right of refusal
Incorporeal rights, evidenced by negotiable instruments, bills of lading shares of stock, bonds, warehouse
receipts and similar documents may also be pledged. The instrument proving the right pledged shall be delivered
True (shares of stocks)
to the creditor, and if negotiable, must be endorsed. __________
If the pledge earns, or produces fruits, income, dividends, or interests, the creditor shall compensate what he
receives with those which are owing him but if none are owing him, or insofar as the amount may exceed that
which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall
True
extend to the interest and earnings of the right pledged. __________
Pledge is a real contract which is perfected from the time the thing pledge is placed in the possession of the
True
creditor, or of a third person by common agreement. __________
If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is
stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the
True
payment of the debt. __________
Chattel mortgage is a solemn contract. __________
True (solemn / formal contract but not absolute)
If the thing pledged is alienated by the pledgor, consented by the pledgee the ownership and possession is
False - upon delivery, consented by the pledged / creditor
transmitted to the vendee after sale is notarized. __________
In mortgage, the mortgagee is entitled to the entire proceeds of the sale of the thing mortgaged. False
__________
- return excess to debtor
In chattel mortgage, and in sale con pacto de retro, the title to the subject matter of the contract is transferred to
the other party. __________
False - no title, registration only
If the immovable mortgaged is sold, and the amount realized is less than the mortgage debt, the buyer of the
mortgaged property is liable to pay the deficiency, if any. __________
False - the debtor / mortgagor’s liability
True - owner has the right
A stipulation forbidding the owner from alienating the immovable property mortgaged is void. __________
Note: if it is in chattel mortgage it is valid.
MULTIPLE CHOICE
to sell because it is
registered in the registry of
deeds
D1, D2 and D3 borrowed from C P300,000 as a security, he mortgaged their undivided agricultural land to C,
Subsequently, D1 paid C P100,000. Is the mortgage on D1’s share of the land extinguished?
a. Yes, because the obligation of D1 on the debt is only P100,000
b. Yes, the obligation of the debtors is joint, D1 is answerable only for P100,000
c. No, because the obligation is solidary, payment in part shall not extinguish the obligation secured by the
mortgage.
2
d.
No, because mortgages are considered indivisible, payment in part shall not extinguish the obligation
secured by the mortgage. Principle of indivisibility of pledge and mortgages
27.
B telephoned S, his sister, to sell his parcel of land. The land was purchased by X, but S did not forward the
money to B. Now wants to recover the parcel of land.
a. B cannot recover because the sale is valid
b. B can recover because the sale between S and X is void, therefore there is no sale Agency to sell land is void if
authority is not in writing
c. B can recover only if B can return the money paid by X to S
d. B can rescind the sale.
28.
If P leads X to believe that A is his (P’s) agent, when as a matter of fact such is not true, and A acts on such
misrepresentation, there is
a. An implied agency
b. An agency by estoppel
c. An agency by necessity
d. An express agency by words spoken
29.
Which of the following statements is correct:
a. Pledge and mortgage are accessory contracts because they can not exist by themselves
b. In both pledge and mortgage the creditor is entitled to deficiency judgment
c. Where an obligation is secured by a pledge or mortgage and it is not paid when due the pledge or
mortgagee may appropriate the thing pledge or mortgaged if there is an agreement to that effect
between the parties.
d. Unless otherwise agreed upon by the parties, the sale of the mortgage property extinguishes in full the
obligation of the C offered to buy the land from A.
30.
D pledged his ring to C for P10,000. D failed to pay his obligation on time. C sold it/at public auction for P7,000.
a. C can recover die deficiency even without stipulation
b. C cannot recover the deficiency even if there is stipulation
c. C cannot recover the deficiency
d. C can recover the deficiency
31.
1st statement:
A guaranty is generally onerous. Generally gratuitious
2nd statement:
A married woman may not guarantee an obligation without the husband’s consent. Unless conjugal
property is involved
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
32.
1st statement:
2nd statement:
a.
b.
The guarantor of a guarantor can enjoy the benefit of excussion.
A compromise between the creditor and the debtor benefits the guarantor but shall not
prejudice him.
Both are true
c. No.1 is true; No.2 is false
Both are false
d. No.1 is false; No.2 is true
33.
1st statement:
The pledgor/mortgagor must be the absolute owner of the object.
2nd statement:
The pledger/mortgagor must have free disposal of the object.
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
34.
1st statement:
All movables and immovables which are within the commerce of men may be pledged.
2nd statement:
A pledge or mortgage is divisible if the debt secured is also divisible. Indivisible contracts
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
35.
1st statement:
Pledgor has the same responsibility as a bailee in commodatum. Bailor / Lender
2nd statement:
Pledgee can deposit the thing pledged to another person. Unless stipulated
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
36.
1st statement:
Movables or immovables may be the object of mortgage.
2nd statement:
Mortgage extends to the natural accessions and fruits of the property involved.
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
37.
1st statement:
The creditor in antichresis is obliged to pay the taxes upon the estate.
2nd statement:
The creditor is also bound to bear the expenses of preservation and repair. - but deductible from the
fruits or income of the
a. Both are true
c. No.1 is true; No.2 is false
property involved in the
b. Both are false
d. No.1 is false; No.2 is true
Movable only can be pledged
antichresis
38.
Correction: preservation
1st statement:
Expenses for the presentation and use of thing loaned are chargeable to the bailee.
2nd statement:
Loss of the thing in commodatum shall be borne by the bailee. Bailor under the principle of
a. Both are true
c. No.1 is true; No.2 is false
Res Perit Domino is still the
owner
b. Both are false
d. No.1 is false; No.2 is true
3
39.
Statement 1: In contracts of pledge, the pledgee is allowed to use the thing pledged. False - unless stipulated
Statement 2: In case of pledge of animals, their offspring shall pertain to the pledgor of the animal pledged and are
no longer subject to the pledge, unless stipulated. - pledgee — unless stipulated na mapupunta kay pledgor
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
40.
Statement 1: In sale of the thing pledged by public auction, pledgee is not allowed to join the bidding in the 1st
auction.
Statement 2: In sale at public auction, the pledgor or owner may be bid and shall have a better right if he should
offer the same terms as the highest bidder.
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
41.
Statement 1: A stipulation in a contract of mortgage stipulating an upset price, at which the property may be sold is
void.
Statement 2: Antichreses is void if not in a public instrument.. In writing only
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
42.
Statement 1: A real mortgage may guarantee future obligation, while a chattel mortgage cannot guarantee future
obligation.
Statement 2: The mortgagee has the right to take possession of the chattel mortgaged upon default of the mortgagor.
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
43.
Statement 1: In chattel mortgage, the mortgagor must execute an affidavit of good faith in order that the mortgage
shall be valid. Valid as to third persons only not to the parties
Statement 2: Delivery of property is also required in chattel mortgage. Registration is required not delivery
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
44.
Statement 1: Pledge can secure a principal or subsidiary obligation.
Statement 2: Creditor can appropriate the thing given by way of pledge or mortgage. Pacto commissorium
a. Both are true
c. No.1 is true; No.2 is false
b. Both are false
d. No.1 is false; No.2 is true
45.
In case of sale of property in public auction, deficiency cannot be recovered in:
a. Real estate mortgage
b. Chattel mortgage
c. Pledge
d. Antichresis
46 to 55
Write:
a. If only the 1st statement is correct
b. If only the 2nd statement is correct
c. If both statements are correct
d. If both statements are incorrect
D
46. 1st Statement
2nd statement
Commodatum is generally gratuitous. Essentially gratuitous
Mutuum is also called secured loan. It depends
C
47. 1st statement
2nd statement
In Commodatum bailor bears the risk of loss.
In Mutuum bailee bears the risk of loss.
A
48. 1st statement
2nd statement
The subject matter of commodatum may be consumable.
The subject matter of Mutuum may be non-consumable. Purpose is to consume always
B
49. 1st statement
2nd statement
The bailee in commodatum acquires the use of the thing loaned including its fruits. False - unless stipulated
Commodatum is purely personal in character. Kapag namatay yung party, kailangan ibalik yung object
C
50. 1st statement
2nd statement
In commodatum, the bailor need not be the owner of the thing.
In mutuum the lender must be the owner of the object.
D
51. 1st statement
2nd statement
Commodatum and Mutuum are consensual contracts. Real contracts
A stipulation in commodatum that the bailee may use the fruits of the thing loaned is void. Valid if stipulated
A
52. 1st statement
2nd statement
Only money or other fungible things may be the object of mutuum.
Movable or immovable and other fungible goods may be the object of commodatum. Not if fungible
4
Correction: surety
C 53. 1st statement
Guaranty and Security are contracts of personal security.
Pledge and Mortgages are contracts of real security.
D 54. 1st statement
Pactum commissorium is valid if clearly stipulated. Always void
Mortgage and antichresis are basically consensual contracts. Formal contracts
D 55. 1st statement
Pledge is accessory, real and unilateral contract. Not unilateral but bilateral because both have obligations
Pledge and mortgages can secure all kinds of obligation but not antichresis. Also antichresis
2nd statement
2nd statement
2nd statement
56. Not a characteristic of mutuum/ commodatum:
a. Bilateral contract
b. Principal contract
c. Gratuitous contract
d. Consensual contract Real contract
57. Not a characteristic of pledge/ mortgages:
a. Nominate contract
b. Onerous contract
c. Principal contract Accessory contract
d. Bilateral contract
58. Not a characteristic of antichresis:
a. Consensual contract Formal contract void if not in writing
b. Onerous contract
c. Nominate contract
d. Formal contract
59. Affidavit of good faith is required in this contract.
a. Real estate mortgage
b. Antichresis
c. Chattel mortgage
d. Pledge
60. In the following contracts, which is directly affected by Recto Law:
a. Real estate mortgage
b. Antichresis
c. Chattel mortgage
d. Pledge
“All accomplishments were achieved by persistent focus on the desired goal”.
-from the book Master Key to Success
Securitie Regulatio Cod
References:
●
Republic Act 8799 or the Securities Regulation code;
●
2015 Implementing Rules and Regulations of the Securities Regulation code (IRR)
Chapter 1 - INTRODUCTION IN SECURITIES
History:
● The first securities passed in the Philippines are Act. No. 2581
○ Enacted by the legislature in 2016.
○ Commonly referred to as the “Blue Sky Law” - as an allusion to the practice of
unscrupulous person selling Securities with no more value than the Blue sky
■ Allusion to Securities being sold back then where sky’s the limit. It has no more
value than the Blue sky.
■ Sky's the limit whatever value you sell, there is no fixed value so it is called the
“Blue sky Law”.
● The Commonwealth Act no. 83 (Securities Act)
○ took effect in 1937 as the new Law regulating securities in the Philippines.
■ Under the time of American commonwealth
● Batas Pambansa Bilang 178 or the Revised Securities Act (RSA)
○ Was enacted by the Batasang Pambansa in 1982 and repealed CA no 83.
● Barely two decades later, BP bilang 178 was repealed by RA No.8799 or the Securities
Regulation code (SRC)
○ Became effective on August 8, 2000.
Securities
Section 3.1 or the Securities Regulation code (hereinafter, “SRC”) defines securities as follows:
3.1. “Securities” are shares, participation or interests in a corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic
in character. It includes:
(a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing agreement,
certificates of deposit for a future subscription;
● Investment contracts - contract, transaction or scheme (collectively 'contract') whereby a
person invests his money in a common enterprise and is led to expect profits primarily
from the efforts of others
○ Contracts to invest or spend in expectation of profit
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments;
(f) Proprietary or non proprietary membership certificates incorporations; and
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(g) Other instruments as may in the future be determined by the Commission.
● SEC retains the jurisdiction to determine in a future time what securities may be
Main feature of a security -- a person purchases or acquires the same in the expectation of obtaining
passive income or asset appreciation, that is income or gain obtained through the effort of another person.
● This feature makes them attractive and desirable and necessitates the protection of the investing
public.
● Investing in a multi-level networking companies: pag nag invest ka, may ibibigay silang product
sayo
○ This differentiates it from a security dahil sa security you only have an expectation of
obtaining passive income or asset appreciation -- without any assurance, unlike in
investing in networking companies na may determinate thing na babalik sayo.
■ That is why securities are heavily regulated -- dahil walang assurance na may
makukuha ka pabalik
Securitization
● process of converting certain types of assets or income into securities form
● In the United States, banks and finance companies aggressively lent to the so called “sub-prime”
borrowers.
● The mortgages issued by the borrowers were packaged into so called collateralized mortgage
obligations (CMO) and sold to investors, including big investment banks like Bear Stearns and
Citibank. When the borrowers could no longer pay the stiff interest rates, their cascading defaults
resulted to the subprime crisis in August 2007
It is a security if it represents a share, participation or interest in a commercial enterprise or any
profit making venture.
● If it is a Security, then it cannot be sold or offered for sale or distribution within the Philippines
without a registration statement duly filed with and approved by the SEC.
○ When there is a security, there must be a registration. Otherwise, the company issuing the
unregistered security will be penalized --- a criminal liability -- estafa.
Time Share Contracts in the United States
● contracts for occupancy of certain bungalows (or beach houses) for a definite time and place are
securities.
○ This involves the property that you will “buy” and you can use that property as if you are
the owner.
○ After using that property, it can be sold subsequently to another buyer.
○ Bibilhin mo lang sya for occupancy for a certain period of time with the expectation na
after mo gamitin ay may bibili na sayo ng property.
● The people buying the same anticipate the increase in value thereof and expect to profit from their
resale.
○ Ex. Preselling ng condominiums -- Naghhoard yung mga tao ng mga units and pag
natapos na yung condo, tyaka nila ibebenta dahil they anticipate an increase in value.
Hence, expecting a profit from the resale.
■ Ex. In Makati, mura lang yung condominiums units dati pero dahil nagging
residential/ commercial area ito, tumaas yung value ng units.
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State policies with regard to Securities
● Security Regulation code is called a “truth in Securities Law”
○ it requires the issuer to make full and fair disclosure of information about securities being
sold or offered to be sold within the Philippines and penalizes manipulative and
fraudulent acts, devices, and schemes.
○ Criminally liable and punishable by Revised Penal Code -- estafa
Thus, The state endeavors to
1. Establish a socially conscious free market that regulates itself.
2. Encourage widest participation of ownership in enterprises.
3. Enhance democratization of wealth
4. Promote development of the capital market
5. Protect investors.
6. Ensure full and fair disclosure about securities.
7. Minimize, if not totally eliminate, insider trading and other fraudulent or manipulative
devices and practices which creates distortion in the free market.
Kinds of Securities:
1. Debt instruments – bonds, debentures, notes, evidence of indebtedness, asset- backed securities.
●
Asset-backed securities (ABS) – These are financial securities the value of which depends on the
assets underlying it.
○ For investors, ABS are alternative to investing in corporate debt.
○ An ABS is essentially the same thing as a mortgage-backed security, except that the
securities backing it are assets such as loans, leases, credit card debt, a company’s
receivables, royalty and so on, and not mortgaged-backed securities, hence, the risk
involved in ABS is greater.
2. Other instruments as may in the future be determined by the SEC
3. Derivatives – options and warrants
●
●
●
Options: contracts that give the buyer the right, but not the obligation, to buy or to sell an
underlying security at a predetermined price called the exercise or strike price, on or before a
predetermined date called the expiry date, which can only be extended in accordance with
Exchange rules.
Warrants: rights to subscribe or purchase new shares or existing shares in a company, on or before
a predetermined date called the expiry date, which can only be extended in accordance with
Exchange rules.
○ Warrants generally have a longer exercise period than options.
Investment Instruments: investment contracts, fractional undivided interests in oil, gas or other
mineral rights.
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4. Equity instruments – shares of stock, certificates of interest or participation in a profit sharing
agreement, certificate of deposit for a future subscription, proprietary or non-proprietary
membership certificates in Corporations.
5. Trust Instruments – Certificates of assignments, certificates of participation, trust certificates,
voting trust certificates or similar instruments.
Kinds of Options:
a) Call option – an option to buy
b) Put option – an option to sell
c) Straddle – a combination of both call and put options
Investment Contract:
● contract, transaction or scheme whereby a person invests his money in a common enterprise and
is led to expect profits primarily from the efforts of others.
○ In United States, “solely” is used instead of primarily
The Howey Test : Test for an Investment Contract
● The Howey test was named as such because of the Landmark case of Securities and Exchange
Commission vs. Howey Co. decided by the Supreme Court of the United States (“SCOTUS”)
which involved a company selling orange groves with accompanying service contracts for the
buyers wherein the produce would be pooled and the profits allocated to the buyers.
○ Profits are allocated proportionately to the orange groves that they both
● Such a scheme was held by the SCOTUS to be selling investment contracts.
However, here in the Philippines we follow a flexible or modified Howey test which replaced the word
“solely” with “primarily”. Thus, for an investment contract to exist, the following elements must concur:
a. Contract, transaction or scheme;
b. An investment of money;
c. Investment is made in a common enterprise;
d. Expectations of profits and
e. Profits arising primarily from the efforts of others
Chapter 2 – SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
● is a collegial body composed of a Chairperson and four (4) Commissioners appointed by the
President for a term of (7) years each and who shall serve as such until their successor shall have
been appointed and qualified.
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Powers and Jurisdiction of the SEC
The SEC possesses the following powers as provided by the SRC:
(a) Have jurisdiction and supervision over all corporations, partnerships or associations who are
the grantees of primary franchises and/or a license or permit issued by the Government;
(b) Formulate policies and recommendations on issues concerning the securities market, advise
Congress and other government agencies on all aspects of the securities market and propose
legislation and amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and
registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and
other SROs;
● SRO: self-regulatory organization
(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant
thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and
provide guidance on and supervise compliance with such rules, regulations and orders;
(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the
Government, civil or military as well as any private institution, corporation, firm, association or
person in the implementation of its powers and functions under this Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of
stockholders or members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the examination, search and seizure of all documents,
papers, files and records, tax returns, and books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the cases before it, subject to the
provisions of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration
of corporations, partnerships or associations, upon any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied
from, or which are necessary or incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws.
As per S.5.2 of the SRC, the SEC’s jurisdiction over cases enumerated by the Presidential Decree No.
902-A have been transferred to the jurisdiction of Special Commercial Courts:
a) Fraudulent devices or schemes employed by the Directors, business associates, officers or
partners against the public and the stockholders, partners, members of associations or
organizations registered with SEC.
b) Intra-corporate and intra-partnership controversies; and controversies between the
corporation, partnership or association on one hand and the state, on the other, insofar as it
concerns their individual franchise or right to exist as such entity.
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c) Controversies in the election or appointment of directors, trustees, officers or managers of
such entities;
d) Petition of such entities to be declared in a state of suspension of payments in cases where it
is illiquid, or where it is insolvent but is under the management of a rehabilitation receiver or
management committee.
Role of the SEC in Regulation of Securities
1. Requiring full disclosure of information to the public regarding the securities that are being offered
and the issuers, including the filing and approval of the registration statement and the approval of the
prospectus;
2. The requirement of regularly submitting material information to the SEC;
3. Close monitoring of the securities and other circumstances that may affect the same as well as the
persons involved including brokers, issuer, the exchange itself etc. in order to ensure compliance with
pertinent Laws and regulations;
4. Prohibiting and penalizing different fraudulent practices and transactions; and
5. Providing the SEC powers and functions.
Chapter 3 – REGISTRATION OF SECURITIES
Statutory Basis
The SRC provides the securities, unless specifically exempted by Law, shall not be sold or offered for sale
or distribution within the Philippines, without a registration statement duly filed with and approved by
the SEC. Prior to such sale, information on the securities in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.
Purpose
They are required to be registered with and approved by the SEC. Registration also includes the
disclosure to SEC all material and relevant information about the issuer of the security. Prior to the sale,
the information on the securities, in such form and with such substance as the SEC may prescribe, shall be
made available to each prospective purchaser.
Registration of securities allows the subsequent release of these securities to the investing public and
serves to protect investors.
●
●
Securities are required to be registered and approved by the SEC. According to the Truth in
Securities Law which requires the investing public to be fully informed of the character and
nature of the securities before they put their money into the investment.
Need lahat ng material and relevant information about the issuer to protect the investing public
General Rule: Securities must be registered
Exception:
1. Exempt Securities and
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2. Securities sold in exempt transactions
-
Transaction is an exempt transaction pero the securities themselves should not be exempt
Even if hindi exempt yung securities mo, pero yung transaction mo ay exempt, then the securities
are exempted from registration in the SEC. However, yung next transaction mo (resale) would
already need to be registered sa SEC, unless yung susunod na transaction mo is also an exempt
transaction.
Exception to the exception: The SRC provides that the resale of Securities previously sold in an exempt
transaction must be registered.
-
Kapag binili mo yung securities mo in an exempt transaction and you will resell it, you have to
register the sale and the securities
Effect of Non Registration:
The issuer would be penalized and the SEC may issue a Cease and Desist order. Issuers of securities not
registered shall be subjected to criminal, civil and administrative charges. A conviction in a criminal case
entails a fine of P50,000 to P5M and or imprisonment of 7-12 years. It carries also civil liabilities in that
the purchaser can recover from the seller:
● Cease and Desist order from issuing securities
● Criminal case under the SRC and possible estafa case (if it applies).
● Civil case for damages
○ Yung mga bumili sayo noong hindi rehistrado yung securities mo can file for damages
● Administrative case under the SEC
(i)
(ii)
The consideration paid with interest thereon, less the amount of any income received on the
purchased securities, upon the tender of such securities or
Damages if the purchaser no longer owns such securities
Securities Exempt from Registration
The following listed securities are exempted because they are either guaranteed by the government or they
are already regulated by another government agency or body other than the SEC
● Exempt ang government dahil sa kanila na nanggaling yung securities and because of the
principle that the government can never be insolvent -- because of the power of taxation
1. Any security issued or guaranteed by the Government of the Philippines or by any political
subdivision or agency thereof or by any person controlled or supervised by and acting as an
instrumentality of said government.
●
The purpose of registration is to protect the investing public.
○ Since the government is the one regulating the securities, they have a corresponding
obligation na yung securities na i-issue niya ay hindi “Blue Sky” securities
2. Any security issued or guaranteed by the Government of any country with which the Philippines
maintains diplomatic relations, or by any state or province or political subdivision thereof on the basis
of reciprocity. Provided that, the SEC may require compliance with the form and content of
disclosures the Commission may prescribe.
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●
Ex. Palestinian state - any securities issued by this state would not be exempt
○ Because we don’t have diplomatic relations with the Palestinian state, since it is
considered an incomplete state (walang ambassador)
3. Certificates issued by the receiver or by a trustee in bankruptcy duly approved by the proper
adjudicatory body.
4. Any security or its derivatives the sale or transfer of which by law is under the supervision and
regulation of the Office of Insurance Commission, Housing and Land use Regulatory board or the
Bureau of Internal Revenue.
● The regulatory function has been assigned to these specific agencies and the SEC would have an
overlap jurisdiction if the SEC still exercises some sort of regulatory control to the securities
under supervision and regulation of the following agencies.
5. Any security issued by a Bank except its own shares of stock (which serves to promote the sale of
securities issued by heavily regulated banks.)
● Any securities issued by the bank (except its own shares of stock) are exempt from registration in
the SEC because there is already a regulatory agency that monitors bank securities -- Bangko
Sentral ng Pilipinas
● Exception: Bank’s issuance to its own shares of stock need to be registered with the SEC because
it does not longer involves the issuance of securities but it concerns its corporate character
6. Other securities as determined by SEC by rule or regulation after public hearing.
Exempt Transactions
Although the securities themselves must still be registered the sale or issue need not be registered because
the investors involved herein are considered as highly sophisticated or specialized investors and as such
have a greater risk tolerance or do not need strict protection from the Commission.
1. Any judicial sale or sale by an executor, administrator, guardian, receiver or trustee in insolvency or
bankruptcy.
● Securities here are not technically exempt but the sale is under regulation or supervision of the
offices of the court
● Securities are under the custody of law. This is an exempt transaction because the protection by
the law is higher compared to the protection of the SEC
2. Those sold by a pledge holder, mortgagee or any similar lien holder to liquidate a bona fide debt a
security pledged in good faith as security Debt.
3. Those sold or offered for sale in an Isolated transaction for the owner’s account and the owner not
being an underwriter.
4. Distribution by the corporation of Securities to its stockholders or other security holders as stock
dividends or distribution out of surplus.
● These involved highly sophisticated or specialized investors that are fully informed. Mas may
alam sila kaya hindi kailangan ng strict regulation from SEC
5. Sale of capital stock of a corporation to its own stockholders exclusively wherein no commission or
remuneration is paid or given directly or indirectly in connection with the sale of such capital stock
● It is an intercorporate matter kaya hindi na kailangan ng strict regulation. The corporation is
selling the stock to its shareholders
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●
○ The shares have already been approved by the SEC -- authorized shares of stock
This sale must not involve any underwriter or financial advisor
6. Bonds or notes secured by a mortgage upon Real estate or tangible personal property, where the entire
mortgage together with all the bonds and notes secured thereby are sold to a single purchaser at a
single sale.
7. Issue and delivery of any security in exchange for any other security of the same Issuer pursuant to
the right of conversion entitling the holder of the security surrendered in exchange to make such
conversion.
8. Broker’s transactions executed upon Customer’s order on any registered exchange or other trading
market.
9. Share subscriptions in capital stock prior to incorporation or in pursuance of an increase in its
authorized capital stock under the corporation code when no expense is incurred or no commission,
compensation or remuneration is paid or given in connection with the sale or disposition of such
securities, and only for the purpose of soliciting
10. The Exchange of securities by the issuer with its existing security holders exclusively
11. The Sale by issuer to fewer than 20 persons in the Philippines during any 12 month period
● Not a public offering -- it is a private transaction
12. The sale of securities to any number of the following qualified buyers:
(a) Bank;
(b) Registered investment house;
(c) Insurance company;
(d) Pension fund or retirement plan maintained by the Government of the Philippines or any political
subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral / to
engage in trust functions:
(e) Investment company; or
(f) Such other persons as the Commission may by rule determine as qualified buyers, on the basis of
such factors as financial sophistication, net worth, knowledge, and experience in financial and
business matters, or amount of assets under management.
Nota Bene: The list of exempt transactions under the SRC is not exclusive.
The SEC may exempt other transactions, if it finds that the requirements of registration under the
SRC is not necessary in the public interest or for the protection of the investors such as by reason of
the small amount involved or the limited character of the public offering.
An exemption fee of 1/10 or one per centum (1%) of the maximum aggregate price or issued value of
the securities should be paid.
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Procedure for Registration:
1. Filing of Sworn Registration Statement containing the information as the SEC may by rule require.
a. Signatories to registration statement: Executive officer, principal, operating officer, principal
financial officer, comptroller, principal accounting officer, corporate secretary.
b. Expert’s written consent: Written consent of the expert named as having certified any part of
the registration statement, whenever necessary.
c. Certification by selling stockholders: Where the registration statement includes shares to be
sold by selling shareholders, a written certification by such selling shareholders as to the
accuracy of any part of the registration statement contributed to by such selling shareholders
shall also be filed.
2. PAYMENT of the filing fees which shall not exceed 1/10 of 1% of the aggregate price at which such
securities are proposed to be offered.
3. PUBLICATION of notice of the filing of the registration statement in two newspapers of general
circulation once for two consecutive weeks.
4. ORDER issued by the SEC within 45 days from date of filing, or at such date as to which the issuer
has consented, declaring the registration statement effective or rejecting it.
5. PROSPECTUS under oath that all requirements are satisfied and all statements in registration
statement and in such prospectus are correct.
6. SALE of the Securities.
7. NOTICE of offering completion/termination.
The SEC may suspend the offer and sale of securities pending any investigation for the purpose of
revoking the registration statement. The suspension order shall be confidential and shall not be published
but shall nonetheless be binding upon the persons notified. Any sale in violation of the suspension order
shall be void.
REPORTORIAL REQUIREMENTS
1. At the end of the fiscal year annual report: Balance Sheet, Profit and Loss Statement, Statement of
Cash Flows certified by a CPA and a management discussion and analysis of results of operation.
2. Other periodical reports for interim fiscal periods and current reports on significant developments of
the issuer as the SEC may prescribe as necessary to keep current information on the operation of the
business and financial condition of the issuer.
3. The reportorial requirements shall apply to an issuer which has sold a class of its registered securities,
with listed shares in an Exchange, with assets of at least P50 million and having 200 or more holders
each holder holding at least 100 shares. Provided, however, that the obligation of such issuer to file
report shall be terminated ninety (90) days after notification to the SEC by the issuer that the number
of its holders holding at least 100 shares reduced to less than 100.
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4. In any case wherein the issuer satisfies the requirements of S17.2 any person who acquires the
beneficial ownership of > 5% of equity shares shall submit a disclosure statement to the issuer, the
commission, and the exchange (ICE). The purpose is to alert the shareholders and the issuer of a
possible take-over or tender offer and to discourage “creeping” take-over.
5. The issuer shall likewise furnish to each holder of such equity security an annual report in such form
and containing such information as the SEC shall prescribe.
CHAPTER 4 – TENDER OFFER
Tender Offer
● publicly announced intention by a person acting alone or in concert with other persons to acquire
equity securities of a public company.
● Stated differently, a tender offer is an offer by the acquiring person or group of persons to
stockholders of a public company for them to tender their shares for purchase by the offeror
therein on the terms specified in the offer.
● The aim of the tender offeror is to get a sizable block of shares in order to get control of a
corporation. It is usually employed as a takeover device where the controlling shareholders refuse
to sell out in a friendly negotiated sale.
○ I want to acquire the majority shares of the corporation so I get to control the corporation.
I’m tendering my offer to sell your shares to me.
■ Nangyayari ito kapag ayaw ng majority ng shareholders of the corporation to sell
their shares to the tender offeror in a friendly negotiated sale.
MANDATORY TENDER OFFER RULE
The Mandatory Tender Offer Rule Tender offer is in place to protect minority shareholders against any
scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to
exit the company under reasonable terms, giving them the opportunity to sell their shares at the same
price as those of the majority shareholders.
In short, the mandatory tender offer rule requires the acquirer-offeror to make a tender offer not just to
those with sizable stockholdings, but to all stockholders including minority stockholders (those who
might get left out if the tender-offeror only deals with the holder of sizable blocks of shares) might be
diluted by the purchase of the acquirer-offeror, the mandatory tender offer rule provides the minority with
a fair price (same price as the majority) for the purchase of their shares.
● That’s why, as much as possible, the acquirer offeror tries to buy the majority of the shares in a
friendly negotiated sale. Kapag ayaw ibenta ng majority, tyaka siya mag-tender offer.
○ Tender offer is the last resort. Because when you attempt to make a tender offer, hindi
lang yung gusto mong bilhin na shares in a friendly negotiated sale ang bibilhin mo. Sa
tender offer, pati yung shares ng minority bibilhin.
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The Mandatory Tender Offer Rule applies in two instances:
1. To any person who intends to acquire at least 35% over a period of 12 months (previously 30%
increased by the SEC by its regulatory power pursuant to S72.1 of the SRC) of any class of any
equity security of a:
a. Listed corporation; or
b. Corporations with assets of at least P50 Million and having at least 200 stockholders with at
least 100 shares each.
2. The rule shall likewise apply even if the acquisition is less than 35% but will result in ownership
of over 51% of the total outstanding equity securities of the public company.
Public Company
- corporation which is listed on an exchange, or a corporation with assets exceeding
P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100
shares of such company.
1. Those listed on an exchange;
2. Those with assets of at least PHP 50M and having 200 shareholders owning at least 100 shares each;
or
3. Those companies that have an effective registration statement under Section 12 of the SRC.
Nota Bene: Thus, under existing SEC Rules, the 15% and 30% threshold acquisition of shares was
increased to 35%. It is further provided that mandatory tender offer is still applicable even if the
acquisition is less than 35% when the purchase would result in ownership of over 51% of the total
outstanding equity securities of the public company. The offeror would be required to accept any and all
securities thus tendered. Note that the percentage requirements likewise applies even in indirect
acquisitions.
TRANSACTIONS EXEMPT FROM THE MANDATORY TENDER OFFER RULE
1. Any purchase of shares from the unissued capital stock provided that the acquisition will not result to
a 50% or more ownership of shares by the purchaser;
2. Any purchase of shares from an increase in authorized capital stock.
3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security
arrangement where the acquisition is made by the debtor or creditor.
4. Purchases in connection with privatization undertaken by the government of the Philippines.
5. Purchases in connection with corporate rehabilitation under court supervision.
6. Purchases through an open market at the prevailing market price.
7. Merger or consolidation.
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PROCEDURE FOR TENDER OFFER
1. The offeror will make an announcement of his intention in a newspaper of general circulation, prior to
the commencement of the offer.
2. At least 2 business days prior to the date of the commencement of the tender offer:
a. File SEC Form 19-1 with the SEC attaching all exhibits thereto, including any and all
amendments thereof, and pay the prescribed filing fees; and
b. Hand deliver a copy of such form including all exhibits thereto, including any and all
amendments thereof, to target company at its principal executive office and to each
Exchange where such class of the target company’s securities are listed for trading.
3. Report the results of the tender offer by filing with the Commission, not later that ten (10) calendar
days after the termination of the tender officer, copies of the final amendments to the form.
CHAPTER 5 – FRAUDULENT TRANSACTIONS, MARKET MANIPULATION OF SECURITY
PRICES, AND INSIDER TRADING
MANIPULATION OF SECURITY PRICES
The prices of securities should be dictated by market forces. It cannot be pegged or stabilized. The
following acts are considered as manipulation of security prices and are therefore prohibited:
1. Transactions intended to create a false or misleading appearance of active trading in any listed
security traded in an Exchange or any other trading market:
a. Wash Sale – any transaction in a security which involves no change in the beneficial
ownership. A series of buy and sale transactions may be placed by one and the same
beneficial owner in the exchange which would not affect any change of ownership of the
shares transacted.
● Yung may ari ng securities na binebenta at yung beneficial owner ay iisa lang.
○ Ex. In-assign niya yung securities sa isang tao and meron siyang kunyaring sure
buyer, para kunyari nag-buy and sale sila.
○ Kahit magbentan ang iba’t ibang tao, ang beneficial owner ay iisa lang. This
creates an illusion of actively trading of shares, when in fact, isa lang yung
may-ari. Yung ahente nya lang ang nagbebentahan at bumibili ng shares para
kunyari the shares are actively traded.
b. Matched Sale – a is a change of ownership in the securities by entering an order for the
purchase or sale of a security with the knowledge that a simultaneous order of substantially
the same size, time, and price, for the sale or purchase of any such security, has or will be
entered by or for the same or different parties; or
● Parang match making -- alam mo na kailangan ng securities of a certain company at this
price therefore maglalabas ka rin ng same shares at the same price.
c. Similar transactions where there is no change of beneficial ownership.
Nota Bene: Wash Sale and Matched Orders are not in themselves illegal. But they are considered
fraudulent whenever they are resorted to in order to create a false or misleading appearance of active
trading.
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2. Effecting a series of transactions that will raise or depress the price of securities to induce the
purchase or sale of securities respectively, or creating active trading to induce transactions through
manipulative devices:
a. Marking the Close – placing of purchase or sale order, at or near the close of the trading
period in the market in an effort to manipulate the closing price of these securities which
would likewise affect the opening price the following day;
● Kapag patapos na yung trading day, bibili ka ng maraming shares. In effect,
sobrang tataas yung end price dahil marami kang binili. The next day na
saturated na yung market, pwedeng tumaas or bumaba yung price, in which case,
you created an abstract of actively trading kaya maaapektuhan yung opening
price the following day.
○ Minamarkahan mo yung pagclose ng trading day para madiktahan mo
yung price the following day. And kapag mataas na yung price, the next
day tyaka mo siya ibebenta
b. Painting the Tape – similar to marking the close but the activity is made during normal
trading hours which involves buying activity among nominee accounts at increasingly
higher or lower prices or causing fictitious reports to appear on the ticker tape. It is
committed by engaging in a series of transactions effected by brokers in securities that are
reported publicly to give the impression or illusion of activity or price movement in a
security, which may trick investors into trading in these securities because of the alleged
trading volume or indications of interest;
● Ma-trick yung public na bumili rin dahil maraming nagaganap na trading during
normal trading hours and the next day kapag mataas na yung price, tyaka mo
ibebenta
c. Squeezing the Float – refers to dealers or persons who intentionally withhold a portion
of outstanding securities in the market, creating an artificial “shortage” which affects the
supply-demand chain, and exploiting the market congestion during such shortages to
increase the price of the withheld securities. This prevents the actual market from
determining the true market price of these securities;
● May pangangailangan yung securities na ito pero hindi ko muna ilalabas para
mas tumaas yung price ng securities.
● A scheme to create an artificial shortage. Dahil sa shortage, tataas yung price ng
securities.
d. Hype and Dump – engaging in buying activity at increasingly higher prices and then
selling securities in the market at the higher prices. This involves the following steps:
i.
Purchase of outstanding capital stock of a dormant public shell company
for a nominal amount;
ii.
Merger of the shell company with the privately held company of the
person or group of persons involved to gain control of the majority of the
stocks of the merged entity;
iii.
iv.
Reverse-split of the shares
Reissuance of the shares certificates in the name of the merged entity to
relatives and associates;
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v.
vi.
vii.
●
Hiring a broker-dealer who would market the stocks of the newly merged
entity;
Hiring a promoter to “hype” the virtues of the company;
When the market reaches the high price, they would “dump” their
shareholding and bail out.
Creating a hype to promote the shares and when the market reaches the ceiling
price, tyaka nila ibebenta.
e. Boiler Room Operations – refers to intensive selling campaign activities through
numerous salesmen that involve the use of high-pressure sale tactics such as direct mail
offers or telephone follow-ups (cold-calling) to investors involving the purchase and sale
of dubious or unsound securities. Investors are induced to purchase through hard-sell
techniques based on unfounded predictions and mailing of misleading market letters. This
is a fraudulent transaction that tricks investors into trading in a false market.
● Spamming the public ng projections that may be unsound or misleading data
f.
Front-Running – refers to the prohibited practice of a broker-dealer executing its
proprietary order before the customer’s order for the same security. This violates the
fiduciary responsibility by the broker-dealer to his customer’s accounts as well as placing
the customer’s order first.
● Before pa magkaroon ng buyer, nagttransact na sila sa same security ne pwedeng
ibenta.
● Violation of fidelity duty that the broker has to his clients because he was
supposed to transact for and on behalf of the client. But before he gets his client,
he is already transacting with the dealer.
g. Churning – involves the excessive trading by a broker-dealer of the securities in his
client’s discretionary account with a view not to benefit the client, but to generate
commissions for him, without regard to the customer’s investment objective.
Nota Bene: These become illegal/unlawful if it is effected to:
1. Raise the price or induce the purchase of a security or of a controlling, controlled or commonly
controlled company by others;
2. Depresses their price to induce the sale of a security, whether of the same or of a different class, of the
same issuer or of a controlling, controlled company, or commonly controlled company by others; and
3. Creates active trading to induce such purchase or sale through said devices or schemes.
h. Circulating or Disseminating Information On Share Price Movement – involves
people providing information that the price of any security listed in an Exchange will or
is likely to rise or fall because of manipulative market operations of any one or more
persons conducted for the purpose of raising or depressing the price of that security and
thus inducing the purchase or sale of such security.
● Information need not be false. Ang mali dito ay you publicly broadcast it para
mag-iba ang price ng securities sa market
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i.
Making False or Misleading Statements – this is with respect to any material fact,
which he knew or had reasonable ground to believe was so false or misleading, for the
purpose of inducing the purchase or sale of any security listed or traded in an Exchange.
● Information need not be broadcasted. It is enough that misleading statements are
utilized to change the prices of the securities to induce buying and selling.
j.
Pegging or Fixing or Stabilizing the Price of Securities – this means to effect, either
alone or with others, any series of transactions for the purchase and/or sale of any
security traded in an exchange for the purpose of pegging, fixing or stabilizing the price
of such security, unless otherwise allowed by the Code or by rules of the Commission.
k. Short Sale – it is the selling of shares which the seller does not actually own or possess
and therefore he cannot, himself, supply the delivery. Short selling leads to speculation of
price and securities. The practice of short-selling is not illegal per se, but only regulated.
The SEC promulgated the Rules on Securities Borrowing and Lending effective 6 July
2006.
● A person will “borrow” the shares of another stockholder and sell it for a higher
price. After selling it, tutubuan nya and buy it back and return the same to the
original stockholder.
SHORT SALE ILLUSTRATION:
Sophia borrows 100 SMC shares from Luna repayable in 30 days. At that time, SMC share are P1 per
share but Sophia expects the share price to fall within 30 days. Sophia sells the 100 shares to Brienne and
gets P100. SMC shares fall to P0.50 per shares after 15 days. Using the sales proceeds, Sophia buys from
the market 100 SMC shares for P50 and repays Luna the 100 SMC shares she had borrowed plus interest
of P5. Sophia profits by P45 (50 gain less P5 interest on the borrowed securities).
l.
Short-swing Transaction – it is a transaction by the director, issuer or any person
controlling the issuer (stockholder owning 10% of the stocks), whereby such person buys
and sells securities within six (6) months.
m. Options – are contracts that give the buyer the right, but not the obligation, to buy or sell
an underlying security at a predetermined price called the exercise or strike price, on or
before a predetermined date, called the expiry date, which can only be extended in
accordance with Exchange rules. Options are also called derivatives since their value
rests on the underlying security, the one subject of the option.
i.
Call Option – an option to buy a security from another person at a predetermined
price within a fixed period. E.g. an option to buy from O 10,000 shares of
SMC at P50 within a period of 30 days. A person may be in the business of
selling call options. He does not want the price to increase. The person
buying the call option wants the price to increase.
ii. Put Option – an option to sell a security to another person at a pre-determined
price within a fixed period. E.g. an option to sell to O 10,000 SMC shares at
P50 within a period of 30 days. A person may purchase put options if he
anticipates SMC shares to depreciate or if he owns SMC shares and he wants
to have a hedge or protection against SMC shares falling in value.
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iii.
Straddle – option to both buy and sell a security to another person at a
predetermined price within a fixed period. E.g., an option to buy or sell SMC
shares at P50 within a period of 30 days. Since the option buyer profits either
way, the price of the straddle is more that the put or call. If the stock does not
move however, he will lose the amount he paid for the straddle.
iv. Warrant – a long-term call option on corporate shares out of unissued or treasury
shares reserves.
Nota Bene: Options are not prohibited or illegal per se. However, trading in them is subject to strict
regulations because these are highly complex instruments (rocket science) and the possibility of the
unsophisticated investor losing money on them is great. PSE members prohibited from directly or
indirectly guaranteeing the performance of any option on a registered security. (S25) Purpose is to prevent
bankruptcy of the PSE members. A registered warrant is however not covered by the prohibition in S25.
INSIDER TRADING
- Refers to a purchase or sale of a security of the issuer made by an insider or such insider’s spouse
or relatives by affinity or consanguinity within the second degree, legitimate or common-law.
Insider trading shall be presumed to have been effected while in possession of material
non-public information if transacted after such information came into existence but prior to
dissemination of such information to the public and the lapse of a reasonable time for the market
to absorb such information.
Insider to the public.
A person who is in possession of corporate material information not generally available
Material non-public information
Material information about the security or the issuer that is not generally available to the public.
Information is material when it will affect the price of the security or would influence a person in
deciding whether to buy, sell, or hold a security. In short:
1. Information about the issuer or the security has not been generally disclosed to the public and would
likely affect the market price of the security after being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information; or
2. Would be considered by a reasonable person important under the circumstance in determining his
course of action whether to buy, sell, or hold a security.
WHO ARE CONSIDERED INSIDERS?
1. The issuer;
2. A director or officer (or person performing similar functions) of, or a person controlling the issuer;
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3. A person whose relationship or former relationship to the issuer gives or gave him access to material
information about the issuer or the security that is not generally available to the public;
4. A government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory
organization who has access to material information about an issuer or a security that is not generally
available to the public; or
5. Constructive Insider – a person who learns such information by a communication from any of the
foregoing insiders. In securities parlance, this person is called a “tippee”. The tippee must know that
the tipper is an insider.
INSIDER’S DUTY TO DISCLOSE WHEN TRADING
General Rule: It shall be unlawful for an Insider to sell or buy a security of the issuer, while in possession
of material non-public information with respect to the issuer or the security that is not generally available
to the public.
Exception:
1. Insider proves that the information was not gained by virtue of being an inside or from an insider. For
instance, he may prove that he obtained the information from security analysts who follow the
company’s stock; or
2. If the other party selling to or buying from the insider (or his agent) is identified, and the insider
proves:
a. That he disclosed the information to the other party, or
b. That he had reason to believe that the other party otherwise is also in possession of the
information.
UNLAWFUL DISCLOSURE TO THIRD PERSONS
It shall be unlawful for any insider to communicate material non-public information about the issuer or
the security to any person who, by virtue of the communication, becomes an insider, where the insider
communicating the information knows or has reason to believe that such person will likely buy or sell a
security of the issuer while in possession of such information. This is regardless of whether the one to
whom the communication was given actually traded on the securities.
●
Ang unlawful dito ay yung disclosure. If you are an insider you cannot disclose the private
information to the public, regardless if the third person will buy or sell the securities
Nota Bene: Under the Securities Regulation Code, the standard is “knowing possession” of material
non-public information, not the use thereof. This is regardless of whether the one to whom the
communication was given actually traded on the securities. For instance, if a corporate officer gets to
possess material non-public information regarding his company’s shares, he cannot buy the shares even if
he already had been following a predetermined plan of purchasing 100 shares of the company every
month. What he should is to refrain from trading or to disclose the material non-public information to the
other party.
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SPECIAL RULES ON TENDER OFFERS
Since tender offers or intended tender offers usually result in an increase of price of shares of a target
corporation, it is unlawful where a tender offer has commenced or about to commerce for:
a. Any person (other than the tender offeror) who is in possession of material nonpublic information
relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought
by such tender offer if such person knows or has reason to believe that the information is nonpublic
and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the
issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and
b. Any tender offeror, those acting on its behalf, the issuer of the securities sought o to be sought by
such tender offer, and any insider of such issuer to communicate material non-public information
relating to the tender offer to any other person where such communication is likely to result in a
violation of Subsection 27.4 (a) (i).
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