Training and Convention Division Atty. Glenda T. Litong Atty. Renee A. Fopalan Atty. Jelorie F. Gallego Ms. Hannah Georgia F. Plopinio Bar Operations Commissioner Joshua Ejeil A. Pascual Academics Committee Heads Ana Regina A. Buban John Alfred H. Mendoza Deputy Heads Mary Clarence Angela T. Protacio Irene Carmella P. Trinidad Layout Committee Head Niegel F. Simon Faculty Advisers Prof. Rafael A. Morales Prof. Marie Cecile R. Quintos Prof. Josephine R. Santiago Overall Heads Kent A. Alonzo Mikaela V. Bernardino Subject Heads Jena Veronica F. Fernandez Janna Jee-Anne G. Abella Vianca Mikaella S. Miguel UP LAW BAR OPERATIONS COMMISSION 2020 UP LAW BAR OPERATIONS COMMISSION EXECUTIVE BOARD COMMISSIONER Joshua Ejeil A. Pascual SECRETARY Karen Faith L. Abrea DEPUTY COMMISSIONER FOR SUPPORT Cristina D. de los Reyes TREASURER Ven Gabriel G. Tan DEPUTY COMMISSIONER FOR OPERATIONS Nicholas William G. Di AUDITOR Julia Gabrielle D.R. Lagman REPRESENTATIVES FOR ACADEMICS Ana Regina A. Buban John Alfred H. Mendoza BGC REPRESENTATIVES Robert Daniel B. Arcadio Felix Gerard D. Leyson Jr. COMMITTEE HEADS ACADEMICS Ana Regina A. Buban John Alfred H. Mendoza ACADEMIC SUPPORT Christine Joy S. Escalante Pristine Bernadette F. Soriano HUMAN RESOURCES Andrea Mae M. Muhlach Prudente Ricardo Paulo C. Soller OEPLfTY HEADS Mary Clarence Angela T. Protacio Irene Carmella P. Trinidad SECRETARIAT & WELFARE Shania Vie T. Bautista Kenneth P. Geolina Erickson C. Mariñas FOOD OPERATIONS Jules Bernard V. Guevarra Alexandra Yvonne A. Orias EVENTS Enrico Miguel D.R. Dizon Stephanie E. Dos Santos Kennedy E. Espina Andrea Jasmine O. Yu LAYOUT Niegel F Simon PUBLIC RELATIONS Jose Alfonso O. Altamira Gianna Chris Gaile E. Bitancor Bernadine Louise C. Tan MERCHANDISE John T. Lansangan John Victor C. Sosito Beatriz M. Zamora COMMERCIAL LAW TEAM FACULTY ADVISERS Prof. Rafael A. Morales Prof. Marie Cecile R. Ouintos Prof. Josephine R. Santiago OVERALL HEADS INTELLECTUAL PROPERTY LAW Vianca Mikaella S. Miguel CONTRIBUTOR Bianca Ortiz Mikaela V. Bernardino sEcURITY REGULATIONS CODE, TRUST RECEIPTS, CORPORATION LAW HEAD AND LETTERS OF CREDIT HEAD Jena Veronica F. Fernandez Kent A. Alonzo CONTRIBUTORS Kent A. Alonzo Anna Nikita R. Bayot Freya Elessandra G. Patron Micah Amethyst M Taguibao Samantha Isabelle Vitriol0 CONTRIBUTOR CONTRIBUTORS Romina Luz B. Medina Anne Renee T. Suarez DAY OPERATIONS Jamela Vidad B. Devanadera John Edrick R. Serrano LINKAGES Jan Fredrick P. Cruz DEPUTY’HEAD Jose Victor A. Dimaculangan ALUMNI RELATIONS HEAD Mikaela D.C. Solmerano LAYOUT TEAM HEAD Niegel F. Simon HEAD Kent A. Alonzo TRANSPORTATION LAW HEAD Janna Jee-Anne G. Abella HOTEL OPERATIONS LOGISTICS Aloysius Francis M. Bresnan Allison Michael Jude T. Maraon Gabriel D. Vera Cruz Simplicio Pio I. Mathay III INSURANCE LAW & BANKING LAW HEAD Mikaela V. Bernardino SPECIAL LAWS HEAD Mikaela V. Bernardino CONTRIBUTORS Kent A. Alonzo Simplicio Pio I. Mathay III MEMBERS Nicolas Japheth D. Mabini Regina Victoria B. Medina Patricia Marie P. Sales Ven Gabriel G. Tan Mae Celriz O. Yano \jy COLLEGE OF 2020 UP LAW BAR OPERATIONS COMMISSION PHILIPPINE COPYRIGHT By THE UNIVERSITY OF THE PHILIPPINES COLLEGE OF LAW THE UP LAW BAR OPERATIONS COMMISSION 2020-2021 ALL RIGHTS RESERVED BY THE AUTHORS This work is the intellectual creation of the UP LAW BAR OPERATIONS COMMISSION 2020-2021 and IS |DUblished and distributed by the UP COLLEGE OF LAW. No part of this work may be copied, reproduced, recorded, or transmltted for sa/e or d/strdofion in any f'orm or by any means (including but not limited to printlng, photocopylng, audio-recordlng, photographing, and other electronic, computerlzed, or mechanlcal means) without prior and wrltten consent from both the UP COLLEGE OF LAW and the UP LAW BAR OPERATIONS COMMISSION. Neither may any portion of this work be stored in any electronic device or information storage and retrleval system of any nature without prior and Written permiSSlOn from both the aforementioned parties. The persons authorized to possess copies of this work are ldentifled by B Unlque code assigned to each copy. Should a copy of the work or its reprodUCtlon fall in the hands of an unauthorized person, both the holder of the original copy—as identified by the code therein — and the unauthorized person shall be crimlnally and ciVllly liable for participating, aiding,or abetting In copyrl@ht infringement. Likewise, a copy of this work without the corresponding code, or a copy whose code Is erased dlgltally, electronically, or manuall'/, Is presumed an unauthorized and illegal reprodUCtlOn of this work. U.P. LAW BOC COMMERCIAL LAW TABLE OF CONTENTS INSURANCE ............................................................. 1 A. B. C. D. 1. 2. 3. 4. 5. 6. 7. 8. E. F. 1. 2. 3. 4. G. 1. 2. 3. 4. 5. H. 1. 2. 3. I. 1. 2. J. K. 1. 2. 3. CONCEPT OF INSURANCE.......................................... 2 ELEMENTS OF AN INSURANCE CONTRACT ............... 3 CHARACTERISTICS AND NATURE OF AN INSURANCE CONTRACT ....................................................................... 5 CLASSES ........................................................................... 6 Marine Insurance....................................... 6 Fire .......................................................... 11 Casualty .................................................. 13 Suretyship ............................................... 14 Life .......................................................... 15 Microinsurance ........................................ 17 Compulsory Motor Vehicle Liability Insurance ................................................... 18 Compulsory Insurance Coverage for Agency-Hired Workers............................... 19 VARIABLE CONTRACTS .............................................. 19 INSURABLE INTEREST ................................................. 20 In Life/Health ........................................... 21 In Property ............................................... 23 Double Insurance and Over Insurance .... 25 Multiple or Several Interests on Same Property ..................................................... 26 PERFECTION OF THE CONTRACT OF INSURANCE 28 Offer and Acceptance/Consensuality ...... 28 Premium Payment ................................... 29 Non-Default Options in Life Insurance ..... 30 Reinstatement of a Lapsed Policy of Life Insurance ................................................... 31 Refund of Premiums................................ 31 RESCISSION OF INSURANCE CONTRACTS ............. 32 Concealment ........................................... 32 Misrepresentation/Omissions .................. 35 Breach of Warranties............................... 36 CLAIMS SETTLEMENT AND SUBROGATION ............ 38 Notice and Proof of Loss ......................... 39 Guidelines on Claims Settlement ............ 40 BUSINESS OF INSURANCE; REQUIREMENTS ......... 43 INSURANCE COMMISSIONER AND ITS POWERS .... 47 Jurisdiction and Adjudicatory Powers ...... 47 Revocation of Certificate of Authority ...... 47 Liquidation of Insurance Company .......... 48 PRE-NEED .............................................................. 49 A. DEFINITION ..................................................................... 50 1. 2. B. C. D. E. Pre-Need Plans ....................................... 50 Pre-Need Company................................. 50 REGISTRATION OF PRE-NEED PLANS .................... 51 LICENSING OF SALES COUNSELORS AND GENERAL AGENTS .......................................................................... 52 DEFAULT AND TERMINATION..................................... 53 CLAIMS SETTLEMENT ................................................. 54 TRANSPORTATION ............................................... 56 A. COMMON CARRIERS ................................ 57 1. Diligence Required of Common Carriers 58 2. Liabilities of Common Carriers ................ 59 3. Classification of transport network vehicle services and transport network companies 60 B. VIGILANCE OVER GOODS ...........................................60 1. Exempting Causes .................................. 61 2. Contributory Negligence .......................... 63 3. Duration of Liability .................................. 63 4. Stipulation for Limitation of Liability ......... 64 5. Liability for Baggage of Passengers ........ 66 C. SAFETY OF PASSENGERS ..........................................67 1. Void Stipulations...................................... 67 2. Duration of Liability .................................. 68 3. Liability for Acts of Others........................ 69 4. Liability for Delay in Commencement of Voyage ...................................................... 71 5. Liability for Defects in Equipment and Facilities..................................................... 72 6. Extent of Liability for Damages ................ 72 D. BILL OF LADING .............................................................74 1. Three-Fold Character .............................. 74 2. Delivery of Goods .................................... 74 3. Period for Filing Claims ........................... 76 4. Period for Filing Actions........................... 77 5. Effects of Stipulations .............................. 77 E. MARITIME COMMERCE ................................................77 1. Charter Parties ........................................ 77 2. Liability of Ship Owners and Shipping Agents ................................................................ 79 3. Accidents and Damages in Maritime Commerce ................................................. 82 4. Carriage of Goods by Sea Act (COGSA) 85 F. PUBLIC SERVICE ACT ..................................................86 1. Definition of Public Utility ......................... 86 2. Necessity for certificate of public convenience .............................................. 86 G. THE W ARSAW CONVENTION .....................................89 BUSINESS ORGANIZATIONS................................ 93 A. PARTNERSHIPS .............................................................94 1. General Provisions .................................. 94 2. Rights and obligations of partnership and partners ................................................... 100 3. Dissolution and Winding Up .................. 111 4. Limited Partnership ............................... 118 B. CORPORATIONS ........................................... 126 1. Definition of Corporation ........................ 126 2. Classes of Corporations ........................ 127 3. Nationality of Corporations .................... 133 4. Corporate Juridical Personality.............. 136 5. Capital Structure.................................... 140 6. Incorporation and Organization ............. 147 U.P. LAW BOC 7. Corporate Powers ................................. 162 8. Stockholders and Members ................... 179 9. Board of Directors and Trustees ............ 205 10. Capital Affairs .................................... 219 11. Dissolution And Liquidation ............... 231 12. Other Corporations............................ 242 13. Merger and Consolidation ................. 264 14. Investigations, offenses, and penalties ... .......................................................... 268 SECURITIES ......................................................... 276 A. B. C. STATE POLICY ............................................. 277 DEFINITION OF SECURITIES ..................................... 277 KINDS OF SECURITIES .............................................. 278 1. Exempt Securities [Sec. 9] .................... 278 2. Exempt Transactions [Sec. 10].............. 279 3. Non-exempt transactions ...................... 281 D. POWERS AND FUNCTIONS OF THE SECURITIES AND EXCHANGE COMMISSION .............................................. 282 E. PROCEDURE FOR REGISTRATION OF SECURITIES ... .................................................................. 282 F. PROHIBITIONS ON FRAUD, MANIPULATION, AND INSIDER TRADING ............................................................. 284 1. Manipulation of security prices [Sec. 24] .... .............................................................. 284 2. Short sales [Rule 24.2-2, 2015 SRC IRR]... .............................................................. 286 3. Option trading [Sec. 25] ......................... 287 4. Fraudulent transactions [Sec. 26] .......... 287 5. Insider trading [Sec. 61]......................... 288 G. PROTECTION OF SHAREHOLDER INTERESTS....... 289 1. Tender offer rule .................................... 289 2. Rules on proxy solicitation ..................... 291 3. Disclosure rule....................................... 292 BANKING .............................................................. 295 A. THE NEW CENTRALBANK ACT ............... 296 State Policies......................................... 296 Creation of the Bangko Sentral ng Pilipinas .............................................................. 296 3. Responsibility and Primary Objective of BSP .............................................................. 296 4. Corporate Powers ................................. 297 5. Operations of the BSP ........................... 297 6. Monetary Board (MB); Powers and Functions ................................................. 300 7. How The BSP Handles Banks In Distress .. .............................................................. 300 8. Administrative sanctions on supervised entities ..................................................... 304 9. Rules on bank deposits and investments by directors, officers, stockholders and their related interests ....................................... 304 10. Supervision and regulation of bank operations ................................................ 305 11. Rate of exchange .............................. 306 1. 2. COMMERCIAL LAW B. LAW ON SECRECY OF BANK DEPOSITS ............... 307 1. Purpose ................................................. 307 2. Prohibited Acts ...................................... 307 3. Deposits and Investments Covered ....... 307 4. Exceptions............................................. 308 5. Garnishment of Deposits, Including Foreign Deposits................................................... 309 6. Penalties for Violation ............................ 310 C. GENERAL BANKING LAW OF 2000 (GBL) ........ 310 1. Definition and classification of banks ..... 310 2. Distinction of banks from Quasi-banks and trust entities ............................................. 311 3. Bank Powers and Liabilities................... 311 4. Diligence required of banks in view of fiduciary nature of banking ....................... 313 5. Nature of Bank Funds and Bank Deposits .. .............................................................. 314 6. Grant of Loans and Security Requirements .............................................................. 314 7. Penalties for violations .......................... 317 D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT. .................................................................. 319 1. Basic Policy ........................................... 319 2. Powers and functions of the PDIC; prohibitions .............................................. 319 3. Concept of insured deposits .................. 321 4. Liability to depositors ............................. 321 5. Concept of bank resolution .................... 325 6. Role of the PDIC in relation to banks in distress .......................................................... 326 INTELLECTUAL PROPERTY LAW ...................... 331 A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL. 332 1. Intellectual Property Rights.................... 332 2. Differences between copyright, trademarks, and patents .............................................. 332 3. Technology Transfer Arrangements ...... 332 B. PATENTS ...................................................................... 333 1. Patentable Invention.............................. 333 2. Non-Patentable Inventions .................... 334 3. Ownership of a Patent ........................... 335 4. Grounds for Cancellation of a Patent..... 336 5. Remedy of the True and Actual inventor..... .............................................................. 336 6. Rights Conferred by a Patent ................ 337 7. Limitations of Patent Rights ................... 337 8. Patent Infringement ............................... 339 9. Licensing ............................................... 340 10. Assignment and Transmission of Rights 344 C. TRADEMARKS ............................................................. 344 1. Definition of Marks, Collective Marks, and Trade Names ................................................. 344 2. Acquisition of Ownership of Mark .......... 346 3. Acquisition of Ownership of Trade Name.... .............................................................. 347 4. Non-Registrable Marks .......................... 347 U.P. LAW BOC 5. Prior use of mark as a Requirement ...... 348 6. Tests to Determine Confusing Similarity between Marks ........................................ 350 7. Well-Known Marks ................................ 351 8. Rights Conferred by Registration........... 352 9. Use by third parties of names, etc. similar to registered mark ........................................ 354 10. Infringement and remedies................ 354 11. Unfair Competition ............................ 356 12. Registration of marks under the Madrid Protocol ................................................... 357 D. COPYRIGHT ................................................................. 360 1. Basic Principles ..................................... 360 2. Copyrightable Works ............................. 360 3. Non-Copyrightable Works ..................... 361 4. Rights of Copyright Owner .................... 363 5. Rules on Ownership of Copyright .......... 367 6. Limitations on Copyright ........................ 369 7. Copyright Infringement .......................... 370 SPECIAL LAWS .................................................... 376 A. 1. 2. 3. 4. 5. B. 1. 2. 3. 4. C. 1. 2. 3. 4. 5. 6. 7. 8. D. 1. 2. 3. 4. 5. 6. E. 1. SECURED TRANSACTIONS .................... 377 Personal Property Security Act.............. 377 Real Estate Mortgage Law..................... 391 Guaranty ............................................... 392 Surety .................................................... 397 Letters of credit...................................... 399 TRUTH IN LENDING ACT ........................................... 402 Purpose ................................................. 402 Obligation of Creditors to Persons to whom Credit is Extended ................................... 402 Covered and Excluded Transactions ..... 402 Consequences of Non-Compliance ....... 403 ANTI-MONEY LAUNDERING ACT ............ 403 Policy of the Law ................................... 403 Covered Institutions and Their Obligations . .............................................................. 404 Covered and Suspicious Transactions . 405 Money Laundering; how committed; unlawful and predicate crimes ............................... 406 Anti-Money Laundering Council; functions . .............................................................. 407 Safe Harbor Provision ........................... 408 Application for Freeze Orders................ 408 Authority to Inquire into Bank Deposits. 409 FOREIGN INVESTMENTS ACT ................ 411 Policy of the law .................................... 412 Definition of terms ................................. 412 Registration of investments of non-Philippine nationals .................................................. 414 Foreign investments in export enterprises .. .............................................................. 414 Foreign investments in domestic market enterprises ............................................... 415 Foreign Investment Negative List .......... 415 INSOLVENCY LAWS ................................ 418 Concurrence and preference of credits. 418 COMMERCIAL LAW 2. Financial Rehabilitation and Insolvency Act of 2010..................................................... 423 F. DATA PRIVACY ACT OF 2012 ........................ 437 1. Definitions and Scope ........................... 437 2. Extraterritorial Application...................... 438 3. Processing of personal information ....... 438 4. Rights of the data subject; exceptions/nonapplicability .............................................. 440 5. Duties and responsibilities of personal information controller ............................... 442 G. PHILIPPINE COMPETITION ACT .............................. 443 1. Definitions and Scope of Application ..... 443 2. Powers and functions of the Philippine Competition Commission ......................... 444 3. Prohibited acts....................................... 445 4. Covered Transactions ........................... 448 5. Determining the Relevant Market .......... 449 6. Determining the control or dominance of....... market...................................................... 449 7. Determining Existence of Anti-Competitive Conduct ................................................... 450 8. Forbearance by the Philippine Competition Commission ............................................. 450 U.P. LAW BOC INSURANCE INSURANCE COMMERCIAL LAW Page 1 of 450 COMMERCIAL LAW U.P. LAW BOC INSURANCE COMMERCIAL LAW parties do not know about it e.g., prior loss of a ship at sea (applicable only to marine insurance) [de Leon, The Insurance Code of the Philippines Annotated (2014)]. A. CONCEPT OF INSURANCE Insurance is essentially a contract by which one party (the insurer), for a consideration that is usually paid in money, either in a lump sum or at different times during the continuance of the risk, promises to make a certain payment, usually of money, upon the destruction or injury of “something” in which the other party (the insured) has an interest [Carale, The Philippine Insurance Law (2014)]. On August 15, 2013, RA 10607 was signed into law. It is a restatement of the Insurance Code (PD 612), with amendments. The section numbers hereinafter generally pertain to RA 10607, unless otherwise indicated. 1. Contract of Insurance A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. [Sec. 2(a)] Definition Thus, a contract of insurance is: 1. A contract of indemnity; 2. Wherein one undertakes for a consideration; 3. To indemnify another against loss, damage, or liability; 4. Arising from an unknown or contingent event. Contingent Event Unknown Event Event that is not Event which is certain to certain to take happen, but the time of place. its happening is not known. General Rule: A past event cannot be a designated event in an insurance contract. The unknown event may be past or future. Even if the proximate cause of the loss is a fortuitous event, the insurer may still be liable if it is the event or peril insured against [de Leon]. Form There is no particular form required for a contract of insurance. The Insurance Code has no provision requiring a particular form for the validity of an insurance contract. In our jurisdiction, the Supreme Court has not made a categorical ruling against the validity of an oral contract of insurance [Carale]. An insurance policy is different from the contract of insurance. The policy is the formal written instrument evidencing the contract of insurance entered into between the insured and the insurer. [Sec. 232] 2. Doing or Transacting Insurance Business The term “doing an insurance business or transacting an insurance business” includes: 1. Making or proposing to make, as insurer, any insurance contract; 2. Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; 3. Doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of the Insurance Code; 4. Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of the Insurance Code. [Sec. 2(b)] Exception: It may be a designated event only in cases where it has happened already but the Page 2 of 450 U.P. LAW BOC INSURANCE General rule: An insurance business consists in undertaking, for a consideration, to indemnify another against loss, damage or liability arising from an unknown or contingent event. Exception: Those not formally designated as insurance businesses but are deemed “doing or transacting an insurance business” as listed in Sec. 2(b). The “principal object and purpose test” Determines: - Whether the assumption of risk and indemnification of loss are the principal object and purpose of the organization; or - Whether they are merely incidental to its business. From such determination, it concludes that: - If these are the principal objectives, the business is that of insurance. - But if they are merely incidental and service is the principal purpose, then the business is not insurance. 4. Parties to an Insurance Contract Two Parties to a Contract of Insurance: a. Insurer or the party who assumes or accepts the risk of loss and undertakes for consideration to indemnify the insured or to pay a certain lump sum on the happening of the event or peril insured against. May be any person, partnership, association, or corporation [Sec. 6]; and b. Insured or the person in whose favor the contract is operative and whose loss is the occasion for the payment of the insurance proceeds by the insurer. [Carale] May be any person except a public enemy [Sec. 7] There is no definition of what a “public enemy” is, but a definition that is generally accepted and in keeping with the nature of an insurance contract is one where a person possesses the nationality of the state which another is at war. [Carale] B. ELEMENTS OF AN INSURANCE CONTRACT 3. Governing Law General Rule: The Insurance Code primarily governs insurance contracts. Exception: When there is a special law which specifically governs (e.g., insurance contract under R.A. 1161 or the Social Security Act), in which case, the Insurance Code governs subsidiarily. Matters not expressly provided for in the Insurance Code and special laws are regulated by the Civil Code. Other special laws: a. National Health Insurance Act of 2013 (RA 10606, amending RA 7875) b. The Revised Government Service Insurance Act of 1997 (RA 8291) c. The Social Security Act (RA 8282) d. The Property Insurance Law (RA 656, as amended by PD 245) e. The Philippine Deposit Insurance Act of 1963 (RA 3591) COMMERCIAL LAW C2 R2 I M a) Cause – event or peril insured against; b) Consideration – premium payments paid by the insured c) Risk of loss or damage being assured by the Insurer d) Risk-Distributing Scheme – distribution and transfer by the insurer of risk of loss, damage or liability among persons having similar risks; e) Insurable interest - the insured possesses an interest of some kind which the event insured against may cause loss or damage f) A Meeting of Minds of the parties upon all the foregoing essentials. Page 3 of 450 U.P. LAW BOC INSURANCE 1. Cause Cause refers to an event or peril insured against. 2. Consideration An insurance premium is the agreed price for assuming and carrying the risk. It is the consideration paid to the insurer for undertaking to indemnify the insured against a designated peril. It is based on probability of loss and extent of liability [43 Am. Jur. 2d 326]. Premium A sum levied and paid to meet anticipated loss, assessments are collected to meet actual loss [Vance, Handbook on the Law of Insurance (1951)]. Assessment A sum specifically levied by mutual insurance companies or associations, upon a fixed and definite plan, to pay losses and expenses. [Sec. 403] 3. Risk of Loss or Damage Peril is the contingent or unknown event which may cause a loss. Its existence creates a risk and its occurrence results in loss. The event or peril insured against must be such that its happening will: a. Damnify or cause loss to a person; or b. Create liability against him [Sec. 3] 4. Risk-Distributing Scheme Insurance contracts serve to distribute the risk of economic loss, damage or liability among as many as possible of those who are subject to the same kind of risk. Scheme: i. The payment of premiums by all will inure to a general fund, out of which payment will be made for anyone who has suffered an economic loss. ii. Hence, each member contributes to a small degree toward compensation for losses suffered by any member of the group. COMMERCIAL LAW 5. Insurable Interest Insurable interest is the interest which the law requires the owner of an insurance policy to have in the person or thing insured [Carale]. In terms of the event insured against, it is the relation between the insurer and the risk insured, such that the occurrence of the risk will cause substantial loss or harm of some kind to the insured [Carale]. Under the Code, the following are void: . Stipulation in a policy for the payment of loss whether the person insured has or has not any interest in the property insured; i. Stipulation that the policy shall be received as proof of such interest; ii. Policy executed by way of gaming or wagering. [Sec. 25] Note: Insurable interest is not required in industrial life insurance [Sec. 235-237]. 6. Meeting of the Minds The two parties to a contract of insurance whose minds need to meet regarding the essential elements are: a. Insurer or the party who assumes or accepts the risk of loss and undertakes foonsideration to indemnify the insured or to pay a certain lump sum on the happening of the event or peril insured against; and b. Insured or the person in whose favor the contract is operative and whose loss is the occasion for the payment of the insurance proceeds by the insurer [de Leon]. The insured is not always the person whom the proceeds are paid. Such person is the beneficiary [Vance]. Page 4 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE c. Voluntary C. CHARACTERISTICS AND NATURE OF AN INSURANCE CONTRACT General rule: Contracts of Insurance are not compulsory and the parties are free to incorporate such terms and conditions they may deem convenient provided they are not contrary to law, morals, good customs, public order, or public policy [de Leon]. 1. In General An insurance contract is: CAVE-CCPU a. Consensual; b. Aleatory; c. Voluntary; d. Executory and unilateral, but synallagmatic; e. Conditional; f. Contract of adhesion; g. Personal contract; h. Uberrimae fides contract (i.e. a contract of the highest degree of good faith). a. Consensual General Rule: An insurance contract is perfected by the meeting of the minds of the parties. There must be concurrence of offer and acceptance. The insurance policy merely evidences the terms and conditions thereof. Exception: It is stipulated that the policy is essential to the existence of the contract. [Campos, Insurance (1983)]. b. Aleatory It is aleatory because it depends upon some contingent event. The obligation of the insurer to pay depends on the happening of an event which is uncertain, or though certain, is to occur at an indeterminate time [Art. 2010, NCC]. Exceptions: Insurance contracts particularly liability insurance, may be required by law in certain instances: 1. For motor vehicles [Compulsory Motor Vehicle Liability Insurance, Secs 386-402, Insurance Code]; 2. For employees [Compulsory Coverage in State Insurance Fund, Articles 168-184, Labor Code]; 3. As a condition to granting a license to conduct business or calling affecting the public safety or welfare [de Leon]; 4. Social Insurance for members of the Government Service Insurance System (GSIS) and for the employees of the private Sector covered by the Social Security System (SSS). d. Executory and Synallagmatic Unilateral but Once the insured pays the premium, the contract already takes effect. After the payment of premiums, the insurance imposes a unilateral obligation on the insurer who promises to indemnify in case of loss. It is also synallagmatic and reciprocal such that even if the contingent event or designated peril does not occur, the insurer has still provided protection against the risk for the period covered by the insurance contract. e. Conditional Being an aleatory contract does not necessarily mean that it is a “contract of chance” because in a contract of insurance, the parties seek to distribute possible loss by reason of mischance, unlike a wagering contract [Carale]. It is conditional because the insurer incurs liability only upon the happening of the event insured against. However, many other conditions are usually required (e.g. payments of premium or performance of other act) as precedent to the right of the insured to claim benefit under the insurance. Page 5 of 450 U.P. LAW BOC f. COMMERCIAL LAW INSURANCE Contract of Adhesion (Fine Print Rule) 2. For Specific Contracts Insurance contracts are already presented to the insured in its printed form on a “take it or leave it” basis. The insured merely has to agree to its terms. Such contracts of adhesion are valid. General Rule: When the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control [Art. 1370, NCC]. Exception: Where the terms of the insurance contract are ambiguous and susceptible to various interpretations, the issue is to be resolved against the insurer, being the party that prepared the contract [Art 1377, NCC]. Thus, ambiguity shall be interpreted liberally in favor of the insured and strictly against the insurer who prepared the same. g. Personal Contract The contract of insurance is basically between the insurer and the insured. The insured cannot assign, before the happening of the loss, his rights under a property policy to others without the consent of the insurer [Sec. 20, 58, and 83]. h. Uberrimae fides Contract Each party is required to: 1. Deal with each other in utmost good faith; 2. Disclose conditions affecting the risk, of which he is aware; 3. Disclose any material fact which the applicant knows and those which he ought to know. Violation of this duty gives the aggrieved party the right to rescind the contract. Where the aggrieved party is the insured, the bad faith of the insurer will preclude it from denying liability on the policy based on breach of warranty. [Campos] Kinds of Insurance a. For Non-Life Insurance Contract of Indemnity The insured who has insurable interest over the property is only entitled to recover the amount of actual loss sustained. The burden is upon him to establish the amount of such loss. Property insurance is personal in the sense that it is the damage to the personal interest not the property that is being reimbursed. General rule: Only non-life insurance or property insurance contracts are contracts of indemnity. Life insurance contracts are not contracts of indemnity because the value of a life is immeasurable. Exception: Where the basis of the insurable interest of the policy owner on the life of the insured is a commercial relationship (e.g., creditor-debtor, mortgagor/guarantormortgagee), then such contract of life insurance is an indemnity contract. b. For Life Insurance Nature of property Life insurance policies, unlike property insurance, are generally assignable or transferrable [Sec. 81] as they are in the nature of property. D. CLASSES 1. Marine Insurance a. Definition Marine insurance is a type of transportation insurance which is concerned with the perils of property in, or incidental to transit, as opposed to property perils at a generally fixed location. Page 6 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE Marine insurance includes: 1. Loss or damage to: a. Vessels, cargo, freightage, profits, and all kinds of property and interests therein, in connection with any and all risks or perils of navigation; b. Person or property appertaining to a marine, inland marine, transit or transportation insurance; c. Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; d. Instrumentalities of transportation and communication, excluding buildings, aids to navigation and transportation, and appurtenant facilities for the control of waterways. 2. Marine protection and indemnity insurance against liability incidental to ownership, operation, maintenance or construction of vessels and facilities therefore. [Sec. 101; Carale] b. Divisions Marine insurance has two major divisions: 1. Ocean marine insurance insures against risk connected with navigation to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time. Its scope includes: a. Ships or hulls; b. Goods or cargoes; c. Earnings such as freight, passage money, commissions, or profits; and d. Liability (protection and indemnity insurance). 2. Inland marine insurance covers the land or over-the-land transportation perils of property shipped by railroads, motor trucks, airplanes, and other means of transportation. It also covers risks of lake, river or other inland waterway transportation and other waterborne perils outside those covered by ocean marine insurance. c. Loan on Bottomry and Respondentia Distinguished Loan on Bottomry Loan on Respondentia Loan that is obtained Loan that is obtained for the value of the as security for the vessel on a voyage. value of the cargo to be transported. In a bottomry loan, the insurable interest of a ship owner on its bottomed boat is the difference between the amount of the loan and the value of the boat. Thus, if the amount of the loan does not cover the total value of the boat, the owner can still insure the boat. Both loans depend on upon conclusion of the voyage. [Carale] the safe d. Risks TWO KINDS OF RISKS i. Perils of the Sea ii. Perils of the Ship i. PERILS OF THE SEA Ocean marine insurance protects ships at sea and the cargo or freight on such ships from standard “perils of the sea” or “perils of navigation”. Includes: i. Losses caused by sea damage, or by the violence of the elements; ii. Losses from extraordinary occurrences or those which cannot be guarded against by the ordinary exertion of human skill or prudence; iii. Barratry or the willful and intentional act on the part of the master or the crew, in pursuance of some unlawful or fraudulent purpose, without the consent of the owner, and to the prejudice of his interest (e.g., burning the ship, unlawfully selling the cargo). Excludes Ordinary wear and tear of the voyage and from injuries suffered by the vessel in consequence Page 7 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE of her not being unseaworthy. [Roque v. IAC, G.R. No. L-66935 (1985)] ii. PERILS OF THE SHIP Perils of the ship are those which cause a loss which in the ordinary course of events, results: 1. From the ordinary, natural and inevitable action of the sea; 2. From ordinary wear and tear of the ship; and 3. From the negligent failure of the ship’s owner to provide the vessel with the proper equipment to convey the cargo under ordinary conditions. [de Leon] Perils of the Sea Perils of the Ship Covers those casualties due to unusual violence or extraordinary causes connected with navigation. Covers losses resulting from ordinary wear and tear, or other damage incident to the voyage. Covers losses which cannot be guarded against by prudence and the ordinary exertion of human skill. Covers losses which result from the negligent failure of the ship’s owner to provide the vessel with proper equipment, and can thus be guarded against by ordinary exertion of human skill. RULE ON ALL RISKS COVERED General Rule: In the absence of stipulation, the risks insured against are only perils of the sea, and does not embrace all losses happening at sea. [Go Tiaco y Hermanos v. Union Ins. Society of Canton, G.R. No. 13983 (1919)] Exception: However, in an all risk policy, all risks are covered unless expressly excepted. The burden rests on the insurer to prove that the loss is caused by a risk that is excluded. [Filipino Merchants Ins. Co. v. CA, G.R. No. 85141(1989)] e. Loss Loss may be total or partial. Total loss may be actual or constructive. TOTAL LOSS 1. Actual loss exists when the subject matter of the insurance is wholly destroyed or lost or when it is so damaged that it no longer exists in its original character. [Vance] It is caused by: a. A total destruction of the thing insured; b. The irretrievable loss of the thing by sinking, or by being broken up; c. Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; d. Any other event which effectively deprives the owner of the possession, at the port of destination of the thing insured. [Sec. 132] An actual loss may be presumed from the continued absence of a ship without being heard of. The length of time which is sufficient to raise this presumption depends on the circumstances of the case. [Sec. 134] 2. Constructive total loss or “technical total loss” is one in which the loss, although not actually total, is of such character that the insured is entitled, if he thinks fit, to treat it as total by abandonment. [45 CJS 1150] A constructive total loss is one which gives to a person insured a right to abandon. [Sec. 133] As to when a constructive total loss exists, three rules exist: 1. English rule: there is constructive total loss when the subject matter of the insurance, while still existent in specie, is so damaged as not to be worth, when repaired, the cost of the repairs; 2. American rule: there is constructive total loss when it is so damaged that the costs of repairs would exceed one-half of the value of the thing as acquired (also known as the “fifty percent rule”); Page 8 of 450 U.P. LAW BOC INSURANCE 3. Philippine rule: the insured may not abandon the thing insured unless the loss or damage is more than ¾ of its value. [de Leon] A person insured by a contract of marine insurance may abandon the thing insured and recover for a total loss thereof when the cause of the loss is a peril insured against – 1. If more than ¾ thereof in value is actually lost, or would have to be expended to recover it from the peril; 2. If it is injured to such an extent as to reduce its value by more than ¾; 3. If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than ¾ the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or 4. If the thing insured is cargo or freightage, and the voyage cannot be performed, nor another ship procured by the master, within a reasonable time and with reasonable diligence, to forward the cargo without incurring either an expense to the insured of more than ¾ the value of the thing abandoned or a risk which a prudent man would not take under the circumstances [Sec. 141]. Note: Freightage cannot in any case be abandoned unless the ship is also abandoned. f. Abandonment Definition Abandonment, is the act of the insured by which, after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured. [Sec. 140] Conditions Aside from the requirement under Sec. 141 already mentioned above: 1. An abandonment must be neither partial nor conditional [Sec. 142]; 2. An abandonment must be made within a reasonable time after receipt of reliable information of the loss, but where the COMMERCIAL LAW information is of a doubtful character, the insured is entitled to a reasonable time to make inquiry [Sec. 143]; 3. Abandonment is made by giving notice thereof to the insurer, which may be done orally, or in writing: Provided, That if the notice be done orally, a written notice of such abandonment shall be submitted within seven days from such oral notice [Sec. 145]; 4. Abandonment must be absolute and total. No notice of abandonment is required for recovery of loss in cases of actual total loss. Where the information upon which an abandonment has been made proves incorrect, or the thing insured was so far restored when the abandonment was made that there was in fact no total loss, the abandonment becomes ineffectual. Characteristics A valid abandonment has the following characteristics: 1. There must be an actual relinquishment by the person insured of his interest in the thing insured; 2. There must be a constructive total loss; 3. It must be factual [Sec. 144]; 4. The notice of abandonment must be explicit and must specify the particular cause of the abandonment. [Sec. 146] Effects 1. An abandonment is equivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and indemnity [Sec. 148]; 2. If a marine insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage, as if there had been a formal abandonment [Sec. 149]; 3. Upon an abandonment, acts done in good faith by those who were agents of the insured in respect to the thing insured, subsequent to the loss, are at the risk of the insurer, and for his benefit [Sec. 150]. Page 9 of 450 U.P. LAW BOC g. Average An Average is the extraordinary or accidental expense incurred during the voyage for the preservation of the vessel, cargo or both and all the damages to the vessel and cargo from the time it is loaded and the voyage commenced until it ends and the cargo is unloaded. [Art. 806, Code of Commerce] There are two kinds of averages: 1. Gross or general averages; and 2. Simple or particular averages. Gross/General Average Includes damages and expenses which are deliberately caused by the master of the vessel or upon his authority, in order to save the vessel, her cargo, or both at the same time from a real and known risk [Art. 811, Code of Commerce]. The loss is borne by all the owners of the interests involved, who are pro tanto obliged to give proportionate contributions to make up for such loss, since the sacrifice was made for the common benefit of all who have an interest in the venture [Art 812, Code of Commerce; Carale]. COMMERCIAL LAW INSURANCE Simple/Particular Average Includes damages and expenses caused to the vessel or her cargo, which have not inured to the common benefit and profit of all the persons interested in the vessel and her cargo [Art. 809, Code of Commerce]. The loss is suffered by and borne alone by the owner of the cargo or of the vessel, as the case must be [de Leon]. Such loss is NOT suffered by all persons contributing ratably [Carale]. To claim general average contributions, the requisites are: 1. There must be a common danger to the vessel or cargo; 2. The sacrifice must be for the common safety or for the benefit of all; 3. It must be successful (i.e., resulted in the saving of the vessel and/or cargo); 4. Expenses or damages should have been incurred or inflicted after taking proper legal steps and authority. [Magsaysay v. Agan, G.R. No. L-6393 (1955)] Vance, however, includes as part of the requisites: 1. Sacrifice was made by the master or upon his authority; and 2. That it was not caused by any fault of the party asking for the contribution. [Carale] An example of particular average loss would be the wages of the crew when the vessel is detained by reason of force majeure. In such a case, the loss is only partial and must be borne by the owner of the vessel alone. [Carale] Rule on averages in marine insurance Where it has been agreed that an insurance upon a particular thing, or class of things, shall be free from particular average: i. A marine insurer is NOT liable for any particular average loss not depriving the insured of the possession of the whole of such thing, or class of things at the port of destination (even though it becomes entirely worthless); ii. HOWEVER, such insurer is liable for his proportion of all general average loss assessed upon the thing insured. [Sec. 138] h. Warranties Marine Insurance is unique in that it has certain implied warranties: 1. Implied Warranty of Seaworthiness 2. Implied Warranty of Against Improper Deviation 3. Implied Warranty of proper Documentation Implied Warranty of Seaworthiness In every marine insurance upon a ship or freight, or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the ship is seaworthy. [Sec. 115] Page 10 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE A vessel is seaworthy if: 1. It is fit to perform the service and to encounter the ordinary perils of the voyage contemplated by the parties to the policy [Sec. 116]; 2. It is properly laden; 3. It is provided with a competent master; 4. It is provided with a sufficient number of competent officers and seamen; 5. It is provided with the requisite appurtenances and equipment; 6. It is provided with other necessary or proper stores and implements for voyage. [Sec.118] A vessel should be seaworthy at the time commencement of the risk or start of the voyage, except: 1. When the insurance is made for a specified length of time, the implied warranty is not complied with unless the ship be seaworthy at the commencement of every voyage it undertakes during that time (Time Policy); 2. When the insurance is upon the cargo which, by the terms of the policy, description of the voyage, or established custom of the trade, is to be transhipped at an intermediate port, the implied warranty is not complied with unless each vessel upon which the cargo is shipped, or transhipped, be seaworthy at the commencement of each particular voyage (Cargo Policy). [Sec. 117] Where different portions of the voyage contemplated by a policy differ in respect to the things requisite to make the ship seaworthy therefor, a warranty of seaworthiness is complied with if, at the commencement of each portion, the ship is seaworthy with reference to that portion. [Sec. 119] The insurer is not liable despite breach of warranty when the ship becomes unseaworthy during the voyage to which an insurance relates, but there is an unreasonable delay in repairing the defect. [Sec. 120] Implied Warranty Against Improper deviation A deviation is a departure from the course of the voyage insured, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage. [Sec.125] Deviation is proper (Insurer remains liable): 1. When caused by circumstances over which neither the master nor the owner of the ship has any control; 2. When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against; 3. When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or 4. When made in good faith, for the purpose of saving human life or relieving another vessel in distress. [Sec. 126] Every deviation not specified in the last section is improper [Sec. 127]. Effect of any loss subsequent to an improper deviation: Insurer is not liable. [Sec. 128] Implied Warranty of Proper documentation Where the nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and that it will not carry any documents which cast reasonable suspicion thereon. [Sec. 122] 2. Fire a. Definition Fire Insurance is a contract of indemnity by which the insurer, for a stipulated premium, agrees to indemnify the insured against loss by: i. Fire, lightning, windstorm, tornado or earthquake; and ii. Other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies. [Sec. 169] Fire is oxidation which is so rapid as to produce either a flame or a glow. Spontaneous Page 11 of 450 U.P. LAW BOC INSURANCE combustion is usually rapid oxidation. Fire is always caused by combustion, but combustion does not always cause fire. [Western Woolen Mills Co. v. Northern Assurance Co., 139 Fed 637 (1905)] Fire cannot be considered a natural disaster or calamity since it almost always arises from some acts of man or by human means. It cannot be an act of God unless caused by lightning or a natural disaster or casualty not attributable to human agency. [Phil. Home Assurance Corp. v. CA, G.R. No. 106999 (1996)] Fire or other so-called “allied risks” enumerated in Sec. 169 must be the proximate cause of the damage or loss. The presence of heat, steam, or even smoke is evidence of fire, but taken by itself will not prove the existence of fire. COMMERCIAL LAW as it burns in the place where it ought to be. [Carale] c. Alterations in Use or Condition An alteration in the use or condition of a thing insured from that to which it is limited by the policy: 1. Entitles an insurer to rescind a contract of fire insurance if such alteration: a. Increases the risks, and b. Was made: (i) Without the consent of the insurer, and (ii) By means within the control of the insured; 2. Does not affect a contract of fire insurance if the alteration does not increase the risk. [Sec. 170-171] Note: A contract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy, which does not violate its provisions, even though it increases the risk and is the cause of the loss. [Sec. 172] b. Risks Rule: The risk assumed by the insurer is the loss and damage caused by hostile fire and not friendly fire. Hostile Fire Friendly Fire Fire that escapes from the place where it was intended to burn and ought to be, or one which remains completely within its proper place but because of the unsuitable materials used to light it, becomes inherently dangerous and uncontrollable. [de Leon] Fire that burns in a place where it is intended to burn and ought to be like fire burning in a stove or a lamp. [de Leon] Friendly fire may become hostile fire by escaping from the place where it ought to be to some place in which it ought not to be [Carale]. The principle underling this distinction is that the policy shall not be construed to protect the insured from injury consequent upon his negligent use or management of fire, so long Transferring machinery to another location, despite a provision in the policy stating that the machine cannot be transferred without the consent of the insurer, is considered an alteration in the condition and location of the thing insured. [Malayan Insurance Co, Ltd v. PAP Co., Ltd., G.R. No. 200784 (2013)] d. Measure of Indemnity 1. In an open policy, only the expense necessary to replace the thing lost or injured in the condition it was at the time of the injury will be paid; 2. In a valued policy, the parties are bound by the valuation, in the absence of fraud or mistake [Sec. 173]; 3. The parties may provide for an option-torebuild clause concerning the repairing, rebuilding, or replacing of buildings or structures wholly or partially damages. [Sec. 174] Valued policy If there is a valuation, the effect shall be similar to a marine insurance policy wherein the Page 12 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE valuation is conclusive between the parties in adjusting the loss. [Sec. 158] Open policy In the absence of express valuation in a fire insurance policy, the insured is only entitled to recover the amount of actual loss sustained and the burden of proof is upon him to establish the amount of such loss by preponderance of evidence. In an open policy, the actual loss, as determined, will represent the total indemnity due the insured except only that the total indemnity shall not exceed the total value of the policy. [Development. Ins. Corp. v. IAC, G.R. No. 71360 (1986)] Open to rebuild clause Whenever the insured desires to have a valuation named in his policy, insuring any building or structure against fire, he may require such building or structure to be examined by an independent appraiser and the value of the insured’s interest therein may then be fixed as between the insurer and the insured. The cost of such examination shall be paid for by the insured. A clause shall be inserted in such policy stating substantially that the value of the insured’s interest in such building or structure has been thus fixed. [Sec. 174] 3. Casualty Excluding: Certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance, such as fire or marine. [Sec. 176] b. Intentional and Accidental Injury Distinguished Intentional Injury Injury involves the exercise of the reasoning faculties, consciousness and volition Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling If the injuries suffered by the insured clearly resulted from the intentional act of the third person, the insurer is relieved from liability as stipulated. Accidental Injury Injury happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen The terms do not, without qualification, exclude events resulting in damage due to fault, recklessness or negligence of third parties. c. Divisions a. Definition Casualty Insurance is insurance covering loss or liability arising from accident or mishap. Including, but not limited to: i. Employer’s liability insurance, ii. Motor vehicle liability insurance, iii. Plate glass insurance, iv. Burglary and theft insurance, v. Personal accident and health insurance, as written by non-life insurance companies, and vi. Other substantially similar kinds of insurance. Casualty insurance has two general divisions: 1. Liability Insurance - against specified perils which may give rise to liability on the part of the insured; 2. Indemnity insurance – against specified perils which may affect the persons. Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no other provisions applicable to casualty insurance or to robbery insurance in particular. These contracts are, therefore, governed by the general provisions applicable Page 13 of 450 U.P. LAW BOC INSURANCE to all types of insurance. Outside of these, the rights and obligations of the parties must be determined by the terms of their contract, taking into consideration its purpose and always in accordance with the general principles of insurance law [Fortune Insurance & Surety Co. v. CA, G.R. No. 115278 (1995)]. Liability Insurance The insurer assumes the obligation to pay the third party in whose favor the liability of the insured arises. The liability of the insurer attaches as soon as the liability of the insured to the third party is established. It covers liability incurred from quasi-delict or criminal negligence but cannot cover deliberate criminal acts [DE LEON]. Indemnity Insurance Under this kind of insurance, no action will lie against the insurer unless brought by the insured for loss actually sustained and paid by him. Liability of the insurer attaches only after the insured has paid his liability to the third party [DE LEON]. COMMERCIAL LAW principal or obligor, of an obligation or undertaking in favor of a third party called the obligee. [Sec. 177] It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue of and under the provisions of Act. No 536, as amended by 2206. [Sec. 177] Nature of Contract It shall be deemed as insurance contract if the surety’s main business is that of suretyship, and not where the contract is merely incidental to any other legitimate business or activity of the surety. It is an accessory contract unlike a contract of insurance which is the principal contract itself. The contract of a surety is evidenced by a document called surety bond which is essentially a promise to guarantee the obligation of the obligor. In turn, the obligor executes an indemnity agreement in favor of the insurer [de Leon]. d. No Action Clause A no action clause is a requirement in a policy of liability insurance which provides that a suit must first be instituted, and a final judgment be first obtained against the insured before the person injured can recover on the policy. However, a no-action clause cannot prevail over the Rules of Court provisions which are aimed at avoiding multiplicity of suits. Parties (i.e. the insured and the insurer) may be joined as defendants in a case commenced by the third party claiming under a liability insurance, as the right to relief in respect to the same transactions is alleged to exist. [Sec. 5, Rule 2 and Sec. 6, Rule 3, 1997 Rules of Civil Procedure; Guingon v. Del Monte, G.R. No. L22042 (1967)] When the obligee accepts the bond, the bond becomes valid and enforceable, whether or not the premium has been paid by the obligor, unlike in an insurance contract where payment of premium is necessary for the contract to be valid. If the obligee has not yet accepted, then payment of premium is still necessary for the contract of suretyship to be valid. Liability of Surety The liability of the surety or sureties under a bond is joint and several, or solidary [Sec. 178]. This means that upon the default of the principal obligor, the surety becomes primarily liable. Unlike a guarantor, a surety is not entitled to the benefit of exhaustion of the principal obligor’s assets and assumes a regular party to the undertaking. Said liability is limited or fixed to the amount of the bond. 4. Suretyship A Contract of Suretyship is an agreement whereby a party, called the surety, guarantees the performance by another party, called the Page 14 of 450 U.P. LAW BOC INSURANCE 5. Life a. Definition Life Insurance is insurance on human lives and insurance appertaining thereto or connected therewith. The ff. shall be considered a life insurance contract for purposes of the Insurance Code: 1. Every contract or undertaking for the payment of annuities; Including contracts for the payment of lump sums under a retirement program where a life insurance company manages or acts as a trustee for such retirement program 2. Every contract or pledge for the payment of endowments or annuities. [Sec. 181-182] An insurance upon life may be made payable: 1. On the death of the person, or 2. On his surviving a specified period, or 3. On the continuance or cessation of life. [Sec. 182] PARTIES [Carale] Owner of With the power to name the beneficiary, assign it, cash it the policy in or use as collateral, with the obligation to pay the premiums Cestui que vie Beneficiary One on whose life insurance is obtained One to whom the proceeds may be paid There are also cases wherein there may be one person only for all three parties. COMMERCIAL LAW may be made payable on the death of the person, or after his surviving a specified period (as an annuity or endowment), or otherwise contingently on the continuation or cessation of life. Group life It is a blanket policy covering a number of individuals who are usually a cohesive group (e.g., employees of a company) and subjected to a common risk. No medical examination is usually required of each person insured (in contrast to individual life insurance). Group insurance is a single insurance contract that provides coverage for many individuals. The employer-policy holder is the agent of the insurer in collecting the premium. [Pineda v. CA, G.R. No. 105562 (1993)] Typically, the policy owner is an employer and the policy covers the employees or members of the group, with one master contract kept by the employer. Where the employee is required to pay a portion of the premium, the arrangement is called a contributory plan, wherein his share is deducted from his wages. [Carale] Industrial life Industrial life insurance refers to an insurance policy under which the premiums are payable either monthly or oftener, if: 1. The face amount of insurance provided in any policy is not more than 500 times that of the current statutory minimum daily wage in the City of Manila; and 2. The words “industrial policy” are printed upon the policy as part of the descriptive matter. [Sec. 235] It provides insurance coverage to industrial workers or people who are unable to afford insurance for bigger amounts. b. Types There are 4 types of Life Insurance 1. Individual Life 2. Group Life 3. Industrial Life 4. Microinsurance Individual life Insurance on human lives and insurance appertaining thereto or connected therewith. It It shall not lapse after non-payment of premiums in 3 months after the expiration of the grace period, if such non-payment is due to the failure of the company to send its representatives to the insured to collect premium. [Sec. 235] Page 15 of 450 U.P. LAW BOC c. Other Classifications Insurance Policies COMMERCIAL LAW INSURANCE of Life provides, need not reimburse any part of the premiums paid. h. Endowment policy – where the insured is paid the face value of the policy if he outlives the designated period. If he dies within said period, the insurer pays the proceeds to the beneficiary. This is a combination of term policy and pure endowment policy. 1. Ordinary or whole life policy, where the insurer agrees to pay the face value of the policy upon the death of the insured; Distinct variations of Whole Life Policy: a. Ordinary Life Insurance – Premiums are paid throughout the lifetime of the person insured or until the person reaches a predetermined specified age at which point the coverage continues without the payment of additional premiums. b. Limited Payment Life Insurance – Premiums are paid only during a specified number of years or until a specified event occurs. c. Single Premium Life Insurance – the coverage is acquired by the payment of a single premium. d. Joint Life Insurance – coverage is payable upon the first death among two or more insured (normally purchased by business partners or spouses) and paid to the survivor. e. Universal Life Insurance – emphasizes the separation of the portion of the premium that is used to cover the insurance protection from the portion of the premium allocated to an investment. f. Variable Life Insurance – some amount of death benefit provided by a variable life insurance policy is guaranteed by the insurer, but the total death benefit and the cash value of the insurance before death depend on the investment performance of that portion of the premium which is allocated to a separate fund. g. Pure endowment policy –where the insurer pays the insured if the insured survives a specified period. If the insured dies within the period, the insurer is released from liability and unless the contract otherwise 2. Term Life Insurance, which provides for the payment of a specified amount if death occurs within the time period designated in the policy, usually for periods of one to five years. 3. Modified Life Insurance, which is a policy that combines term and whole life insurance into a single insurance policy. Premiums paid by the insured are substantially less during the first few years then later on increases during the remaining term of the policy. [Carale] d. Risks Five important risks: 1. Death or Survival 2. Suicide 3. Death at the hands of the law 4. Killing by the beneficiary 5. Accidental Death Death or survival Life insurance may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuation or cessation of life. [Campos] Death of the insured must be proven by the beneficiary before the insurer can be made to pay. Suicide Insurer is liable in any of the following cases: 1. If committed after 2 years from the date of the policy’s issue or its last reinstatement unless the policy provides for a shorter period. Page 16 of 450 U.P. LAW BOC INSURANCE Note: Any stipulation extending the 2-year period is void. 2. If committed in a state of insanity, regardless of the date of the commission, unless suicide is an excepted peril. [Sec. 183] Since suicide is contrary to the laws of nature and the ordinary rules of conduct, it is never presumed. The burden of proving lies with the insurer, who seeks to avoid liability under a life policy, excepting it from coverage. [Campos] Death at the hands of the law Death at the hands of the law (e.g., legal execution) is one of the risks assumed by the insurer under a life insurance policy in the absence of a valid policy exception. [Campos] Killing by the beneficiary General rule: The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice or accessory in willfully bringing about the death of the insured. In such event, the other beneficiaries so named shall receive their share and divide among them the forfeited share of the “guilty” beneficiary. In the absence of other beneficiaries, proceeds shall be paid according to the policy contract, and if silent, it shall be paid to the estate of the insured. [Sec. 12] Exceptions 1. Accidental killing 2. Self-defense 3. Insanity of the beneficiary at the time he killed the insured 4. Negligence Note: Conviction of the beneficiary is necessary before his interest in the insurance policy is forfeited in favor of the others indicated in Sec. 12. Accidental death The terms accident and accidental means have been taken to mean that they happen by chance or fortuitously, without intention and COMMERCIAL LAW design and are unexpected, unusual, and unforeseen. Where the death or injury is not the natural or probable result of the insured’s voluntary act, or if something unforeseen occurs in the doing of the act which produces the injury, the resulting death is within the protection of the policies insuring against death or injury from accident. [Carale] An event is not an accident if it is due to a voluntary and intentional act on the part of anyone, including third parties. In the absence of proof that the incident was intentional, the insurer shall pay the beneficiary the value of the supplemental policy covering death by accident. [Calanoc v. CA, G.R. No. L-8151 (1955)] The fact that there were nine wounds in total is proof that the victim was killed intentionally, as this cannot be considered accidental. Thus, the incident is not covered by the supplemental insurance on death by accident. [Biagtan v. Insular [G.R. No. L-25579 (1972)] 6. Microinsurance Microinsurance is a financial product or service that meets the risk protection needs of the poor, where: 1. The amount of contributions, premiums, fees or charges, computed on a daily basis, does not exceed 7.5% of the current daily minimum wage rate for nonagricultural workers in Metro Manila; and 2. The maximum sum of guaranteed benefits is not more than 1,000 times of the said current daily minimum wage rate. [Sec. 187] No insurance company or mutual benefit association shall engage in the business of Microinsurance UNLESS it possesses all the requirements as may be prescribed by the Commissioner. [Sec. 188] Page 17 of 450 U.P. LAW BOC 7. Compulsory Motor Liability Insurance INSURANCE Vehicle Compulsory motor vehicle liability insurance is a policy of insurance or guaranty in cash or surety bond to indemnify the death, bodily injury, and/or damage to property of a third-party or passenger arising from the use of a motor vehicle. It shall be unlawful for any land transportation operator or owner of a motor vehicle to operate the same in the public highways unless there is in force, a policy of insurance or guaranty in cash or surety bond: 1. Issued in accordance with the provisions of this chapter; 2. To indemnity the death, bodily injury and/or damage to property of a thirdparty or passenger, as the case may be, arising from the use thereof. [Sec. 387] It is a requisite for registration or renewal of registration of a motor vehicle by every land transportation operator or owner. [Sec. 390] It is the only type of compulsory insurance provided for under the Insurance Code. It applies to all vehicles whether public or private vehicles. To the extent that motor vehicle insurance is compulsory, it must be a liability policy, and the provision making it merely an indemnity insurance contract cannot have any effect. [Campos] The insurer’s liability is direct and primary so the insurer need not wait for final judgment in the criminal case to be liable. The purpose is to give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, regardless of the financial capability of motor vehicle owners or operators responsible for the accident sustained. [Shafer v. Judge, RTC Olongapo, G.R. No. 78848 (1988)] COMMERCIAL LAW The claimants/victims may be a passenger or a third party. The insured may be the party at fault as against claims of third parties (i.e. thirdparty liability) or the victim of the contingent event. The following clauses are relevant to compulsory motor vehicle liability insurance: 1. Authorized Driver Clause is a stipulation in a motor vehicle insurance policy which provides that the driver, other than the insured owner, must be duly licensed to drive the motor vehicle, otherwise the insurer is excused from liability; 2. Theft Clause is a stipulation including theft as one of the risks insured against. If there is such a provision and the vehicle was unlawfully taken, the insurer is liable under the theft clause and the authorized driver clause does not apply. The insured can recover even if the thief has no driver’s license. 3. No Fault Clause is a provision required in every compulsory motor vehicle liability insurance regarding claims for death or injury to a passenger or third party on a liability insurance policy covering the vehicle. Any claim for death or injury to any passenger or third party shall be paid without the necessity of proving fault or negligence of any kind, provided the total indemnity in respect of any person shall not exceed P15,000. The claim shall be made against only one motor vehicle. It shall lie against the insurer of the vehicle in which the occupant is riding, and no other. The claimant is not free to choose from which insurer he will claim the no fault indemnity. [Perla Compania de Seguros v. Ancheta, G.R. No. L-49699 (1988)] Page 18 of 450 U.P. LAW BOC INSURANCE 8. Compulsory Insurance Coverage for Agency-Hired Workers a. Definition Compulsory Insurance Coverage for Agency-Hired Workers is an insurance mechanism made available by the law to provide insurance protection for OFWs. Each migrant worker to be deployed by a recruitment/manning agency shall be covered by a compulsory insurance contract which shall be secured at no cost to the said worker. Basis: It is the policy of the State to provide adequate protection to the overseas Filipino workers by ensuring coverage under the compulsory insurance requirement in Section 37-A of the Migrant Workers and Overseas Filipinos Act of 1995, as amended. [Sec. 1(b), Insurance Guidelines on Rule XVI of the Omnibus Rules and Regulations Implementing RA 8042] b. Qualifications To be qualified to provide for the Migrant Workers’ Compulsory Insurance Coverage, the insurance company must: 1. Be a reputable private life, non-life and composite insurance company; 2. Be duly licensed by IC; 3. Be in existence and operational for at least five (5) years; 4. Have a net worth of at least Php 500,000,000 based on the audited financial statements for the immediately preceding year; 5. Have a current year certificate of authority; and 6. Have an IC-approved standard policy. [Sec. 1, Insurance Guidelines on Rule XVI of the Omnibus Rules and Regulations Implementing RA 8042] c. Disqualifications Insurance companies who have directors, partners, officers, employees, or agents with COMMERCIAL LAW relatives within the fourth civil degree of consanguinity or affinity who work or have interest in any of the licensed recruitment/manning agencies or in any of the government agencies involved in the overseas employment program shall be disqualified from providing the migrant worker’s insurance coverage. It shall be the duty of the said directors, partners, officers, employees or agents to disclose any such interest to the IC and POEA. [Sec. 2, Insurance Guidelines on Rule XVI of the Omnibus Rules and Regulations Implementing RA 8042] E. VARIABLE CONTRACTS Variable contract refers to any policy or contract, on either a group or on an individual basis, issued by an insurance company providing: 1. Benefits or other contractual payments or values thereunder to vary, so as to reflect investment results of: a. Any segregated portfolio of investments; or b. A designated separate account in which amounts received, in connection with such contracts shall have been placed and accounted for separately and apart from other investments and accounts; AND/OR 2. Benefits or values incidental thereto payable in fixed or variable amounts, or both. It shall not be deemed to be a security or securities as defined in The Securities Act, as amended, or in the Investment Company Act, as amended, nor subject to regulations under said Acts. [Sec.238(b)] No insurance company authorized to transact business in the Philippines shall issue, deliver, sell or use any variable contract in the Philippines, unless and until such company shall have satisfied the Commissioner that: Page 19 of 450 U.P. LAW BOC INSURANCE a. Its financial and general condition; and b. Its methods of operations, including the issue and sale of variable contracts, are not and will not be hazardous to the public or to its policy and contract owners. [Sec. 238(a)] No foreign insurance company shall be authorized to issue, deliver or sell any variable contract in the Philippines, unless it is likewise authorized to do so by the laws of its domicile. [Sec. 238(a)] In determining the qualifications of a company requesting authority to issue, deliver, sell or use variable contracts, the Commissioner shall always consider the following: 1. The history, financial and general condition of the company: Provided, That such company, if a foreign company, must have deposited with the Commissioner for the benefit and security of its variable contract owners in the Philippines, securities satisfactory to the Commissioner consisting of bonds of the Government of the Philippines or its instrumentalities with an actual market value of Two million pesos (P2,000,000.00); 2. The character, responsibility and fitness of the officers and directors of the company; and 3. The law and regulation under which the company is authorized in the state of domicile to issue such contracts. [Sec. 238(c)] If after notice and hearing, the Commissioner shall find that the company is qualified to issue, deliver, sell or use variable contracts in accordance with this Code and the regulations and rules issued thereunder, the corresponding order of authorization shall be issued. Any decision or order denying authority to issue, deliver, sell or use variable contracts shall clearly and distinctly state the reasons and grounds on which it is based. [Sec.238(d)] COMMERCIAL LAW combination of fixed amount and variable amount of benefits, and for option lump-sum payment of benefits. [Sec. 239] F. INSURABLE INTEREST Insurable interest That interest which a person is deemed to have in the subject matter insured, where he has a relation or connection with or concern in it, such that the person will: Derive pecuniary benefit or advantage from the preservation of the subject matter insured; and Suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against. [Lalican v. Insular Life Ins., G.R. No. 183526 (2009)]. An insurable interest is one of the most basic and essential requirements in an insurance contract. The existence of an insurable interest gives a person the legal right to insure the subject matter of the policy of insurance [Lalican v. Insular Life Ins., G.R. No. 183526 (2009)]. It may NOT be waived by stipulation. Absence of insurable interest renders the insurance contract void. [Sec. 25] General Rule: Insurable interest must be capable of pecuniary estimation because the purpose of insurance is to indemnify. It would be difficult to measure if the benefit derived or the loss incurred is not capable of pecuniary estimation. Exception: The insurable interest need not always be pecuniary in nature (e.g., in insuring the life of a person, the purpose is not to indemnify but to act as an investment or savings instrument). [Lucena v. Crawford, 2Bos & PNR 269 (1806)] Rationale: As a deterrence to the insured Any insurance company issuing variable contracts pursuant to this Code may, in its discretion, issue contracts providing a Page 20 of 450 U.P. LAW BOC INSURANCE A policy issued to a person without insurable interest is a mere wager policy or contract and is void for illegality. [de Leon] Evidence that life insurance is regarded as a wager policy: a) The original proposal to take out insurance was that of the beneficiary; b) The premiums are paid by the beneficiary; c) The beneficiary has no interest, economic or emotional, in the continued life of the insured. [de Leon] As a measure of limit of recovery The insurable interest is the measure of the upper limit of his provable loss under the contract. Insurance should not provide the insured means of making a net profit from the happening of the event insured against. [de Leon] When insurable interest should exist Insurable Interest Required Inceptio Interveni Occurren n ng Period ce of Loss Life/Heal ✓ th Property ✓ ✓ For Life Insurance: Insurable interest over life/health must exist at the time of the inception of the contract, but may be lost after. [Sec. 19] For Property Insurance: Insurable interest must exist at the time of the inception of the contract and at the occurrence of the loss. But it need not exist during the intervening period or from the time between when the policy takes effect and the loss occurs. The alienation of insured property will not defeat a recovery if the insured has subsequently reacquired the property and possesses an insurable interest at the time of loss. [Sec. 19] CHANGE OF INTEREST Change of interest means the absolute transfer of the property insured. COMMERCIAL LAW General rule: A change of interest in the thing insured does not transfer the policy, but suspends the insurance to an equivalent extent until the interest in the thing and the interest in the insurance policy are vested in the same person. Thus, the contract is not rendered void but is merely suspended. [Sec. 20] Exceptions 1. Life, health, and accident insurance. 2. A change of interest in the thing insured after the occurrence of an injury which results in a loss does not affect the policy. [Sec. 21] 3. A change in the interest in one or more of several things, separately insured by one policy, such as a conveyance of one or more things, does not affect the policy with respect to the others not so conveyed. [Sec. 22] 4. A change of interest by will or succession on the death of the insured. His interest passes to his heir or legal representative who may continue the insurance policy on the property by continuing paying premiums. [Sec. 23] 5. A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others. This will avoid the policy only as to the selling partners or co-owners, but not as to others. [Sec. 24] 6. Automatic transfers of interest in cases in which the policy is so framed that it will inure to the benefit of whosoever may become the owner of the interest insured during the circumstance of the risk. [Sec. 57] It is an exception to the general rule that upon maturity, the proceeds of a policy shall be given exclusively to the proper interest if the person in whose name or for whose benefit it is made. In case of an express prohibition against alienation in the policy [Art. 1306, NCC], alienation will not merely suspend the contract but avoid it entirely. Page 21 of 450 U.P. LAW BOC INSURANCE 1. In Life/Health Every person has an insurable interest in the life and health: (a) Of himself, of his spouse and of his children; (b) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (c) Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and (d) Of any person upon whose life any estate or interest vested in him depends. [Sec. 10] A person is not allowed to take out insurance upon the life of a stranger. [Carale] There is no insurable interest in the life of an illegitimate spouse. A creditor may take out insurance on the life of his debtor, but his insurable interest is only up to the amount of the debt, and only when the debt is unsecured. [Carale] General Rule: The measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. Exception: Unless the interest of a person insured is susceptible of exact pecuniary measurement. [Sec. 186] COMMERCIAL LAW Each person has unlimited interest in his own life, whether the insurance is for the benefit of himself or another. [40 CJS 909] The beneficiary designated need not have any interest in the life of the insured when the latter takes out policy on his own life. [de Leon] INTEREST IN LIFE OF ANOTHER The insurable interest in the life of another: (i) Must be a pecuniary interest; (ii) Exists whenever the relation between the assured and the insured is such that the assured has a reasonable expectation of deriving benefit from the continuation of the life insured or of suffering detriment through its termination. [de Leon] General Rule: When the owner of the policy insures the life of another, and designates a third party as beneficiary, both the owner and beneficiary must have an insurable interest in the life of the cestui que vie. Exception: An assignee of the insurance contract is not required to have insurable interest in the life of the insured, since insurable interest over life should exist only during the inception of the contract. Note: An assignment of the insurance contract is different from a change in the designated beneficiary. But if a person obtains a policy on the life of another and names himself as the beneficiary, he must have insurable interest therein [de Leon]. In Life Insurance TYPES OF LIFE INSURANCE Life insurance policies may be divided into two general classes: Insurance upon one’s life Insurance upon the life of another INTEREST IN ONE’S OWN LIFE The cestui que vie is the insured himself. The insured can designate anyone to be the beneficiary of the policy. BENEFICIARY OF LIFE INSURANCE A beneficiary is the person named or designated in a contract of life, health, or accident insurance as the person who is to receive the proceeds or benefits which become payable, if the insured risk occurs. General rule: A person may designate a beneficiary, irrespective of the beneficiary’s lack of insurable interest, provided he acts in good faith and without intent to make the Page 22 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE transaction merely a cover for a forbidden wagering contract, [de Leon] Exceptions: Any person who is forbidden from receiving any donation under Art. 739, Civil Code cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him [Art. 2012, NCC]. Art. 739, NCC. The following donations are void: (1) Those made between persons who were guilty of adultery or concubinage at the time of the donation; (2) Those made between persons found guilty of the same criminal offense, in consideration thereof; (3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office. (…) CHANGING THE BENEFICIARY General Rule: The insured shall have the right to change the beneficiary he designated in the policy. [Sec. 11] Exception: If the insured expressly waived his right to change the beneficiary, this makes the latter an irrevocable beneficiary. But despite the waiver, he can still change the beneficiary, provided he obtained the beneficiary’s consent. [Sec. 11] Under the Slayer Statute, when the beneficiary is the principal, accomplice or accessory in willfully bringing about the death of the insured, the interest of beneficiary in life insurance policy is forfeited. [Sec. 12] TRANSFER OF POLICY The life insurance policy can be transferred whether the transferee has insurable interest or not. Notice of the transfer to the insurer is not required for the validity of the same. [Sec. 184 and 185] There is no right of subrogation in life insurance, because it is not a contract of indemnity. In Health Insurance General rule: Interest in the life or health of a person must exist at the inception of the insurance contract but need not exist thereafter or when the loss occurs. [Sec. 19] Exceptions 1. In the case of a creditor’s insurance taken on the life of the debtor, insurable interest disappears once the debt has been paid; 2. In the case of a company’s insurance taken on the life of an employee, insurable interest disappears once the employee leaves the company. 2. In Property The following are considered as insurable interest, provided that they are of such nature that a contemplated peril might directly damnify the insured: 1. Every interest in real or personal property; or e.g., ownership 2. Any relation thereto; or e.g., interest of a trustee or a commission agent 3. Any liability in respect thereof. [Sec. 13] e.g., interest of a carrier or depository of goods A person has an insurable interest in property when he sustains such relation with respect to it that he has a reasonable expectation of: Benefit to be derived from its continued existence; or Loss or liability from its destruction. [Carale; Gaisano Cagayan Ins. V. Ins. Co. of North America, G.R. No. 147839 (2006)] An insurable interest in property may consist in: a. An existing interest; [Sec. 14] Existing interest in property may be a legal title or equitable title. [DE LEON] Examples of those having existing interest are: (1) Owners as regards their properties, Page 23 of 450 U.P. LAW BOC INSURANCE (2) Trustees in the case of the seller of property not yet delivered, (3) Mortgagors over the property mortgaged, and lessor, lessee and sub-lessee over the property leased. [de Leon] b. An inchoate interest founded on an existing interest; [Sec. 14] or Inchoate interest in property exists but is incomplete or unripe until the happening of an event. [de Leon] Examples of inchoate interests are: (1) The interest of stockholders with respect to dividends in case of profits and shares in the assets, and (2) The interest of a partner in the properties belonging to the partnership. [de Leon] c. An expectancy, coupled with an existing interest in that out of which the expectancy arises. [Sec. 14] For example, a farmer who planted crops has insurable interest over his harvest which can be expected. [de Leon] COMMERCIAL LAW may sell the remains without prejudice to his right to recover; [Sec. 21] 2. A change of interest in one or more several distinct things, separately insured by one policy. This does not avoid the insurance as to the others; [Sec. 22] 3. A change in interest by will or succession upon the death of the insured; [Sec. 23] 4. A transfer of interest by one of several partners, joint owners, or owners in common who are jointly insured. The acquiring co-owner has the same interest; his interest merely increases upon acquiring other co-owners interest. [Sec. 24] Note: This makes a distinction between a transfer in favor of a partner and in favor of a stranger. The latter will avoid the policy while the former will not. [Carale] Mere transfer of the property does not transfer the policy but suspends it until the same person becomes the owner of both the policy and the thing insured. [Sec. 20] Measure of Indemnity A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable. [Sec. 16] A son has no insurable interest over the property of his father because such is just a mere expectancy and has no legal basis before he inherits such property. [Carale] Being a contract of indemnity, the measure of insurable interest in property is the extent to which the insured might be damnified by the loss of injury thereof. [Sec. 17] The insured cannot recover a greater value than that of his actual loss because it would be a wagering policy contrary to public policy and void. Time of Existence General rule: Interest in property insured must exist both at inception and at time of loss, but not in the intervening period [Sec. 19]. A carrier or depository of any kind has an insurable interest in a thing held by him as such, to the extent of his liability but not to exceed the value thereof. [Sec. 15] This means that the insurable interest in the property must exist both at the inception of the contract and at the time of the loss [Carale]. Exceptions 1. A change in interest over the thing insured after the loss contemplated. The insured Page 24 of 450 U.P. LAW BOC Interest in Property Distinguished Property COMMERCIAL LAW INSURANCE and Life Life Extent Limited to actual Unlimited (save in life value of the interest insurance effected thereon by a creditor on the life of the debtor – amount of debt only) Existence Must exist when the Must exist at the time insurance takes the insurance takes effect and when the effect, BUT need not loss occurs, BUT exist thereafter need not exist in the meantime Expectation of benefit to be derived Must have legal Need not have legal basis basis Interest of beneficiary Must have insurable Need not have interest over the insurable interest thing insured over the life of the insured if the insured himself secured the policy. But if the insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured [SUNDIANG and AQUINO] 3. Double Insurance and Over Insurance Double Insurance Double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest. [Sec. 95] Requisites: 1. The same person is insured; 2. Two or more insurers insuring separately; 3. The same subject matter; 4. The same interest insured; and 5. The same risk or peril insured against. [Malayan Insurance v. Philippine First Insurance, G.R. No. 184300 (2012)] Double insurance is NOT prohibited under the law, unless the policy contains a stipulation to the contrary. Usually, insurance policies contain an other insurance clause, which requires disclosure of other existing insurance policy. In such case, non-disclosure will avoid the policy. It is intended to prevent over insurance and thus avert the perpetration of fraud. If there is double insurance and loss occurs: Each of the insurers will be liable only up to the face value of their respective policies; and The insured has the option of choosing the order by which he will claim from the insurers. [Carale] Over Insurance Over insurance occurs when the value of the insurance exceeds the value of the insurable interest. Over insurance It is not per se void, however: Recovery is allowed only to the extent of the loss or damage incurred by the insured. [CARALE] An insurer may cancel an insurance policy, other than life, based on a “discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured”, subject to the requirement of prior notice. [Sec. 64(f)] The insured is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk (in case of an over insurance by several insurers other than life). [Sec. 83] Page 25 of 450 U.P. LAW BOC INSURANCE If there is over-insurance and loss occurs, then the insurers will pay pro-rata or in the order as stated in contract or excess clause. Double Insurance Amount of insurance may or may not exceed the value of the insured’s insurable interest There are always several insurers Over Insurance Amount of insurance exceeds the value of the insured’s insurable interest There may be one or more insurers Rules for Payment Where the insured in a policy other than life is over insured by double insurance: (a) The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts; (b) Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. [Sec. 96] Rules for claiming payment under Valued Policies vs. Unvalued Policies [Sec. 96] Valued Policy Unvalued policy Any sum received by Any sum received by him under any other him under any policy policy shall be shall be deducted deducted from the against the full value of the policy insurable value for without regard to the any sum received by actual value of the him under any policy subject matter insured Where the insured receives any sum in excess of the valuation (for valued policies), or of the insurable value (for unvalued policies), the insured must hold such sum in trust for the insurers, according to their right of contribution among themselves. Sec. 96 enunciates the principle of contribution which requires each insurer to contribute COMMERCIAL LAW ratably to the loss or damage considering that the several insurances cover the same subject matter and interest against the same peril. If the loss is greater than the sum total of all the policies issued, each insurer is liable for the amount of his policy. 4. Multiple or Several Interests on Same Property General Rule: The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made. Exception: Unless otherwise specified in the policy. [Sec. 53] Examples wherein multiple persons may each have insurable interest over the same property: (1) Corporations – the corporation and its stockholders have insurable interest over the corporate assets. (2) Partnerships – the partnership and the partners composing it have insurable interest over its assets. (3) Assignments – the assignor and assignee have insurable interest over the property assigned. (4) Trusts – the trustor and trustee have insurable interest over the property in trust. (5) Lease Agreements - the lessor, lessee and sub-lessees have insurable interest over the property in lease. (6) Mortgages – the mortgagor and mortgagee/s have insurable interest over the property mortgaged. Multiple Interests over Mortgaged Property The Insurance Code recognizes that: Both the mortgagor and mortgagee have each separate and distinct insurable interest in the mortgaged property. They may take out separate policies with the same or different insurance companies. Insurance taken by one on his own name only, does not inure to the benefit of the other. [Sec. 53] Page 26 of 450 U.P. LAW BOC Thus, a mortgagor has an insurable interest equal to the value of the mortgaged property and a mortgagee, only to the extent of the debt Secured by the mortgage. [Geagonia v. CA, G.R. No. 114427(1995)] Mortgagor As owner, the interest is to the extent of the value of the property, regardless of whether it equals to the mortgage debt or not His interest lies in that the loss or destruction of the property will not extinguish his mortgage debt COMMERCIAL LAW INSURANCE Mortgagee Only to the extent of the debt secured What is insured is not the property, but his interest as mortgagee, which subsists until the mortgage debt is extinguished [CARALE] When mortgagee takes out insurance policy When a mortgagee insures his own interest in the mortgaged property without reference to the right of the mortgagor, mortgagee is entitled to the proceeds of the policy in case of loss to the extent of his credit. [de Leon] If the proceeds are more than the total amount of credit, then mortgagee has no right to the excess. If the proceeds are equal to the credit, then insurer is subrogated to the mortgagee’s rights and mortgagee can no longer recover the mortgagor’s indebtedness. If the proceeds are less than the credit, then the mortgagee may recover from the mortgagor the deficiency. Upon payment, the insurer is subrogated to the rights of the mortgagee against the mortgagor to the extent of the amount paid. When a mortgagee insured his own interest and a loss occurs, he is entitled to recover on the insurance. The mortgagee, however, is not allowed to retain his claim against the mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance money paid. [Palileo v. Cosio, G.R. No. L- 7667 (1955)] When mortgagor takes out insurance policy When a mortgagor takes out an insurance for his own benefit, only he can recover from the insurer but the mortgagee has a lien on the proceeds by virtue of the mortgage. A mortgagor can make the proceeds payable to or assigned to the mortgagee [de Leon]. Ways where mortgagee may be the beneficial payee [Geagonia v. CA, G.R. No. 114427 (1995)]: (1) As assignee with the consent of the insurer; (2) A pledge without such consent; (3) The original policy may contain a mortgage clause; (4) A rider making the policy payable to the mortgagee “as his interest may appear” may be attached; (5) A “standard mortgage clause,” containing a collateral independent contract between the mortgagee and the insurer may be attached; (6) The policy, though by its terms payable absolutely to the mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee's benefit. Open Loss Clause Payable Mortgage An open loss payable clause states that the proceeds of the insurance contract is payable to the mortgagee as beneficiary. The contract, however, is procured by the mortgagor for his interest in the property. He is the party to the contract, not the mortgagee. The acts of the mortgagor prior to the loss, which would otherwise avoid the insurance, affects the mortgagee, even if the property is in the hands of said mortgagee. Page 27 of 450 U.P. LAW BOC Union Mortgage Mortgage Clause INSURANCE or Standard A standard or union mortgage clause makes a separate and distinct contract of insurance on the interest of the mortgagee, thus any act of the mortgagor will not affect the mortgagee. [Carale] This clause is similar to an open loss payable clause, except that it is stipulated that the acts of the mortgagor cannot invalidate the insurance, provided that if the mortgagor fails to pay the premiums due, the mortgagee shall, on demand, pay said premiums. [de Leon] G. PERFECTION OF THE CONTRACT OF INSURANCE in the application that contract shall not become binding until the policy is delivered and the first premium is paid. [de Leon] Cognition Theory An acceptance made by letter shall not bind the person making the offer, except from the time it came to his knowledge. In Enriquez v. Sun Life Assurance Co. [G.R. No. L-15895 (1920)] the Court held that: a) The submission of an application, even with premium payment is a mere offer on the part of the applicant, and does not bind the insurer; b) An insurance contract is also not perfected where the applicant dies before the approval of his application or it does not appear that the acceptance of the application ever came to the knowledge of the applicant. 1. Offer and Acceptance/Consensuality An insurance contract is consensual, it is therefore perfected by mere consent. Consent is manifested by the meeting of the offer and the acceptance upon the object or the cause which are to constitute the contract. There is an offer when the insured submits an application to the insurer. There is acceptance when approves the application. the insurer So long as an application for insurance has not been either accepted or rejected, it is merely a proposal or an offer to make a contract. [Perez v. CA, G.R. No. 112329 (2000)] The insurance contract becomes effective upon payment of first premium, provided there has been an approval of the application. COMMERCIAL LAW Delay in Acceptance Delay in acting on the application does not constitute acceptance even though the insured has forwarded his first premium with his application. [Perez v. CA, G.R. No. 112329 (2000)] When there is delay in acceptance due to the negligence of the insurance company which takes unreasonably long time before the application is processed and the applicant dies, the contract is not perfected. The insurer can be liable for damages in accordance with the “tort theory.” The insurance business is imbued with public interest, thus it is the duty of the insurer to act with reasonable promptness in acting on applications submitted to it. [Wallace v. Hartford Fire Insurance Co, 31 Idaho 48r, (1918)] The parties may impose additional conditions precedent to the validity of the policy as a contract as they see fit. Usually, it is stipulated Page 28 of 450 U.P. LAW BOC INSURANCE Delivery of Policy Delivery is the act of placing the insurance policy (i.e. the physical document) into the possession of the insured. The delivery can be proof of the acceptance of the insurer of the offer of the insured. Jurisprudence decided before RA 10607 provides two further exceptions: a) Agreement to grant payment of premium in installment basis and partial payment has been made; [Makati Tuscany v. CA, G.R. No. 95546, (1992)] b) When parties are barred by Estoppel. [UCPB v. Masagana Telemart, G.R. No. 137172 (2001)] It is not, however, a pre-requisite of a valid contract of insurance. Actual manual delivery is not necessary for the validity of the contract; constructive delivery may be sufficient. Delivery to the agent cannot be considered delivery to the insured, as the agent of the insurance company is not the agent of the insured. [Bradley v. New York Life Ins., 275 F. 657 (1921)] COMMERCIAL LAW Authority of Agent to Receive Premium Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said agent to receive the premium in its behalf. The insurer is bound by its agent’s acknowledgement of receipt of payment of premium. [American Home Assurance Co. v. Chua, G.R. No. 130421 (1999)] 2. Premium Payment Payment by Post-Dated Check An insurance premium is the agreed price for assuming and carrying the risk, that is, the consideration paid an insurer for undertaking to indemnify the insured against the specified peril. General rule: No insurance policy issued or renewal is valid and binding until actual payment of the premium. Any agreement to the contrary is void. [Sec. 77] Exceptions 1. Whenever the grace period provision applies in the case of a life or an industrial life policy. [Sec. 77] 2. Whenever under the broker and agency agreements with duly licensed intermediaries, a 90-day credit extension is given. Note: No credit extension to a duly licensed intermediary should exceed 90 days from the date of issuance of the policy. [Sec. 77] 3. When there is an acknowledgment in the contract that the premium has been paid. [Sec. 79] The payment of premium by a postdated check at a stated maturity subsequent to the loss is insufficient to put the insurance into effect. But payment by a check bearing a date prior to the loss, assuming availability of funds, would be sufficient, even if it remains unencashed at the time of the loss. The subsequent effects of encashment would retroact to the date of the instrument and its acceptance by the creditor. [Vitug, Commercial Laws and Jurisprudence (2006)] Non-Payment of Premium Effects of non-payment of first premium: (1) Prevents the contract from becoming binding, unless waived. [Philippine Phoenix Surety and Insurance v. Woodworks, G.R. No. L-25317 (1979)] (2) Does not affect the validity of the contracts unless, by express stipulation, it is provided that the policy shall, in that event, be suspended or shall lapse. Page 29 of 450 U.P. LAW BOC INSURANCE Applicable Grace Periods In case of individual life insurance, the policy holder is entitled a grace period of either 30 days or one month within which payment of any premium after the first may be made. [Sec. 233] In cases of industrial life insurance, the grace period is four weeks, and where premiums are paid monthly, either 30 days or one month. [Sec. 236] Excuses for Non-Payment (1) Fortuitous events which render payment by the insured wholly impossible will not prevent forfeiture of the policy when the premium remains unpaid. In other words, it is not an excuse. (2) Non-payment of premiums occasioned by war causes an insurance to be not merely suspended, but completely abrogated. [Constantino v. Asia Life Ins. Co. G.R. No. L-1669 (1950)]. 3. Non-Default Options in Life Insurance In the case of individual life or endowment insurance, the policy shall contain a provision specifying the options to which the policyholder is entitled to in the event of default in a premium payment after three (3) full annual premiums shall have been paid. [Sec. 233(f)] Such option shall consist of: (1) A cash surrender value payable upon surrender of the policy which shall not be less than the reserve on the policy. - The basis of which shall be indicated, for the then current policy year; and - Any dividend additions thereto, shall be reduced by a surrender charge, which shall not be more than one-fifth (1/5) of the entire reserve or two and one-half percent (2½%) of the amount insured and any dividend additions thereto (2) One or more paid-up benefits on a plan or plans specified in the policy of such value as may be purchased by the cash surrender value. [Sec. 233(f)] COMMERCIAL LAW Cash Surrender Value (CSV) The CSV is the amount that the insured is entitled to receive if he surrenders the policy and releases his claims upon it. The right to CSV accrues only after three full annual premium payments. The insured is given the right to claim the amount less than the reserve, reduced by surrender charge, [Sec. 233(f)(1)] The CSV is an amount which the insurance company holds in trust for the insured to be delivered to him upon demand. When the company’s credit for advances is paid out of the cash value or cash surrender value, that value and the company’s liability is diminished. [Manufacturer’s Life Ins. v. Meer, G.R. No. L2910(1951)] Rationale: The premium is uniform throughout a lifetime, but the risk is varied (i.e. higher risk when older, lower when young). Thus, the cost of protection is more expensive during the early years of the policy. Alternatives to CSV (1) Extended insurance/term insurance where the insured, after having paid three full annual premiums, is given the right to have the policy continued in force from date of default for a time either stated or equal to the amount of the CSV, taken as a single premium. The face value of the policy remains the same but only within the term. If death occurs during this period, the beneficiary can recover the face value of the policy, but if the insured survives, the beneficiary gets nothing. Reinstatement is allowed if made within the term purchased; no reinstatement after the lapse of the term purchased. (2) Paid-up insurance - where, after the insurance is “paid-up,” the insured who has Page 30 of 450 U.P. LAW BOC INSURANCE paid three full annual premiums is given the right, upon default, to have the policy continued from the date of default for the whole period of insurance without further payment of premiums. It is also called reduced paid-up because in effect the policy, terms and conditions are the same but the face value is reduced to the “paid-up” value. The terms and conditions of the original policy remain the same, however, the amount will be less than the original face value. (3) Automatic premium loan (APL) - where, upon default, the insurer lends/advances to the insured without any need of application on his part, the amount necessary to pay overdue premium, but not to exceed the CSV of the policy. It only applies if requested in writing by the insured either in the application or at any time before expiration of the grace period. In effect, the insurance policy continues in force for a period covered by the payment. After the period, if insured still does not resume paying his premiums, the policy lapses, unless CSV still remains. If there is still CSV, APL continues until CSV is exhausted. 4. Reinstatement of a Lapsed Policy of Life Insurance In the case of individual life or endowment insurance, the policy shall contain a provision that the policyholder shall be entitled to have the policy reinstated: At any time within three (3) years from the date of default of premium payment o Unless the cash surrender value has been duly paid o Unless the extension period has expired, COMMERCIAL LAW Upon production of evidence of insurability satisfactory to the company; and Upon payment of all overdue premiums and any indebtedness to the company upon said policy, with interest rate not exceeding that which would have been applicable to said premiums and indebtedness in the policy years prior to reinstatement. [Sec. 233(j)] Reinstatement of a lapsed life insurance policy is NOT a non-default option. It does not create a new contract, but merely revives the original policy so insurer cannot require a higher premium than the amount stipulated in the contract. It does not apply to group/industrial life insurance. Requisites: [Sec. 233(j)] a. It must be exercised within three years from date of default; b. The insured must present evidence of insurability satisfactory to the insurer; c. He must pay all back premiums and all indebtedness to the insurer (with interest); d. The CSV must not have been duly paid to the insured nor the extension period expired; e. The application must be filed during the insured’s lifetime, [Andres v. Crown Life Ins., G.R. No. L-10874 (1958)] 5. Refund of Premiums Return of premiums can be made in the following cases: a. If the thing insured was never exposed to the risks insured against, the whole premium should be refunded. [Sec. 80(a)] b. When the contract is voidable due to the fraud or misrepresentation of insurer or his agent, the whole premium should be refunded. [Sec. 82] c. When by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy and the whole premium should be refunded. [Sec. 82] Page 31 of 450 U.P. LAW BOC INSURANCE d. When the contract is voidable because of the existence of facts of which the insured was ignorant without his fault, the whole premium should be refunded. [Sec. 82] e. Where the insurance is for a definite period and the insured surrenders his policy, the portion of the premium that corresponds to the unexpired time at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy should be return. [Sec. 80(b)] f. When there is over-insurance by several insurers, the return premiums should be proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk. [Sec. 83] g. When rescission is granted due to the insurer’s breach of contract. H. RESCISSION OF INSURANCE CONTRACTS 1. Concealment A concealment, whether intentional or unintentional, entitles the injured party to rescind a contract of insurance. [Sec. 27] Rationale: The contract of insurance is one of perfect good faith (uberrimae fides) not for the insured alone, but equally for the insurer [Qua Chee Gan v. Law Union & Rock Insurance, G.R. No. L-4611(1955)]. Definition Concealment is the failure to disclose facts which the applicant at the time of application, knows or ought to know and are material to the insurance applied for. [Carale] A neglect to communicate that which a party knows and ought to communicate, is called a concealment. [Sec. 26] Duty to Communicate by the Insured Each party to a contract of insurance must communicate to the other, in good faith, all facts within his knowledge: COMMERCIAL LAW i. Which are material to the contract; ii. As to which he makes no warrant; and iii. Which the other has not the means of ascertaining. [Sec. 28] An intentional or fraudulent omission, on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty, entitles the insurer to rescind. [Sec. 29] Note: If the applicant is aware of the existence of some circumstance which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked. [Vance] Matters which Need Not be Disclosed 1. Matters already known to the insurer [Sec. 30(a)]; 2. Matters which each party are bound to know [Sec. 30(b) and Sec. 32]; 3. Matters of which the insurer waives communication [Sec. 30(c) and Sec. 33]; 4. Matters which prove or tend to prove the existence of a risk excluded by a warranty and which are not otherwise material [Sec. 30(d)]; 5. Matters which relate to a risk excepted in the policy, and which are not otherwise material [Sec. 30(e)]; 6. Information of the nature or amount of the interest of one insured unless if inquired upon by the insurer, except if required by Sec. 51 [Sec. 34]; 7. Matters of opinion. [Sec. 35] Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade. [Sec. 32] Requisites of Concealment: a. A party knows a fact which he neglects to communicate or disclose to the other; b. Such party concealing is duty bound to disclose such fact to the other; c. Such party concealing makes no warranty of the fact concealed; Page 32 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE d. The other party has not the means of ascertaining the fact concealed; e. The fact concealed is material. (3) Accepting the application insurance. [Sec. 31] Failure of the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer’s option, the ratio being that a contract of insurance is of good faith. But, Sec. 27, uses the phrase “injured party”, thus the insured may also rescind the contract. Concealment may be committed by either the insurer or the insured. [Qua Chee Gan v. Law Union & Rock Ins. Co. G.R. No. L-4611(1955)] Proof of Fraud in Concealment General rule: Fraud need not be proven in order to prove concealment. Good faith is not a defense. [Saturnino v. Phil. American Life Insurance, G.R. No. L-16163 (1963)] Exception: When the concealment is made by the insured in relation to the falsity of a warranty, the non-disclosure must be intentional and fraudulent in order that the contract may be rescinded. [Sec. 29] Rationale: The insured is under no obligation to reveal things of which he makes a warrant because it would constitute a superfluity of disclosure. [Carale] Test of Materiality The test of materiality is whether the insurer would have agreed to issue the policy had it known of the facts concealed or, perhaps, impose additional terms or require higher premium. [Carale] Materiality relates to the probable and reasonable influence of the facts upon the party to whom the communication should have been made, in: (1) Assessing the risk involved; (2) Making or omitting to make further inquiries; and for The test is the effect which the knowledge of the fact in question would have on the contract. It is sufficient if the knowledge of it would influence the party in making the contract. [de Leon] In several cases, the cause of death may have no relation to the fact or facts concealed. [CARALE] Effects General rule: Concealment vitiates the contract and entitles the insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter. [Sec. 27] Exceptions 1. Concealment after the contract has become effective, because concealment must take place at the time the contract is entered into in order that the policy may be avoided; [Vance] 2. Waiver or estoppel; 3. In marine insurance, where concealment of the following matters does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed: a. The national character of the insured; b. The liability of the thing insured to capture and detention; c. The liability to seizure from breach of foreign laws of trade; d. The want of necessary documents; and e. The use of false and simulated papers. [Sec. 112] 4. Incontestability clause: stipulates that the policy shall be incontestable after two years from its date of issue or of its last reinstatement. The incontestability clause is a mandatory provision in life and endowment policies, [Sec. 233 (b) and Sec. 48] Page 33 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE INCONTESTABILITY CLAUSE In the case of individual life or endowment insurance, the policy shall contain a provision that the policy shall be incontestable. After it shall have been in force during the lifetime of the insured for a period of two (2) years from its date of issue as shown in the policy, or date of approval of last reinstatement. [Sec. 233(b)] Exceptions: o Non-payment of premium o Violation of the conditions of the policy relating to military or naval service in time of war [Sec. 233(b)] The insurer CANNOT prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent: After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two (2) years from the date of its issue or of its last reinstatement [Sec. 48] The insurer’s right to rescind a contract is not exercised previous to the commencement of an action on the contract. [Sec. 48] Effect of the incontestability clause The insurer cannot prove that the policy is: Void ab initio; or Rescissible by reason of – o Fraudulent concealment by the insured or his agent; o Misrepresentation by the insured or his agent. [Sec. 48] Grounds still available: 1. Non-payment of premium to make the policy effective or remain in force 2. Lack of insurable interest 3. Coverage such that the loss/damage did not arise from the risks covered 4. Violation of military or naval service provisions of the policy (also an issue of coverage) 5. Failure to commence action within reglementary period 6. Failure to comply with conditions (proof of loss, etc.) subsequent to the loss; or 7. The particular viciousness of the fraud employed by the insured to procure the contract, such as: Where the policy was taken pursuant to a scheme to murder the insured, or the insured substitutes himself with another during the medical examination. Concealment in Marine and Ordinary Private Insurance Distinguished Required Disclosure Effect of Concealment The incontestability clause is made for the benefit of the insured, and not the insurer, considering that its effect and purpose is to cut off, after a considerable period, any assertion that the policy is invalid. Defenses, other than concealment, misrepresentation and breach of warranty are still available to the insurer, subsequent to the 2-year period. [Carale] Page 34 of 450 Marine Insurance Exact and whole truth Concealment of the matters specified in Sec. 112 will not entirely avoid the contract but will merely exonerate the insurer from losses resulting from the risk concealed. Ordinary Insurance Substantial truth Any kind of concealment will make the insurer not liable. U.P. LAW BOC Concealment Insurance INSURANCE in Non-Medical The cause of death is not important because it is well settled that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimates of the risks of the proposed policy or in making inquiries. [Sunlife v. Sps. Bacani G.R. No. 105135 (1995)] Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue. Reason: The insurer cannot simply rely on those statements. He must make further inquiry. [Philamcare Health Systems v. CA, G.R. No. 125678 (2002)] 2. Misrepresentation/Omissions Representations are factual statements made by the insured at the time of, or prior to, the issuance of the policy, which give information to the insurer and induce him to enter into the insurance contract. It may be about a past, an existing fact, or a future happening. [Carale] A representation: May be oral or written. [Sec. 36] May be made at the time of or before, the issuance of the policy. [Sec. 37] May be altered or withdrawn before the insurance is effected, but not afterwards. [Sec. 41] Must be presumed to refer to the date on which the contract goes into effect. [Sec. 42] COMMERCIAL LAW Just like concealment, misrepresentation is committed before or at the time of the commencement of the insurance contract. Subsequent to this time, an insured may no longer be guilty of misrepresentation as the insurer had already been persuaded to assume the risk. [Carale] There is no false representation if the matter is true at the time the contract takes effect although false at the time it was made/represented. Requisites of misrepresentation: a. The insured stated a fact which is untrue; b. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead; c. Such fact in either case is material to the risk. Like in concealment, fraud or intent is not essential to entitle the insurer to rescind on the ground of misrepresentation. [Sec. 45] Kinds of Representations a. Affirmative – Refers to any allegation as to the existence or non-existence of a fact when the contract begins [de Leon] b. Promissory - Any promise to be fulfilled after the contract has come into existence; or any statement concerning what is to happen during the existence of the insurance. [Sec. 39] A promissory representation is substantially a condition or warranty. [de Leon] Test of Materiality Misrepresentation is a false representation which the insured states with knowledge that is untrue, intended to deceive the insurer into accepting risk. It can be distinguished from concealment in a sense that it is an active form of deception, while concealment is the passive form thereof. [Carale] The materiality of a representation is determined by the same rules as the materiality of a concealment. [Sec. 46] Materiality is a judicial question and not left to the insurance company’s sole discretion. Page 35 of 450 U.P. LAW BOC INSURANCE COMMERCIAL LAW estopped. [Edillon v. Manila Bankers Life, G.R. No. L-34200 (1982)] Effects General Rule: The injured party is entitled to rescind from the time when the representation becomes false. [Sec. 45] Exceptions 1) Incontestability clause; 2) Misrepresentation after contract takes effect; 3) Waiver, made by acceptance of insurer of premium payments despite knowledge of the ground for rescission [Sec. 45]; 4) A representation of the expectation, belief, opinion, or judgment of the insured, although false, and even if material to the risk [Philamcare Health Systems, Inc. v. CA, G.R. No. 125678 (2002)]; 5) Representation by insured based on information obtained from third persons (not his agent), provided the insured: a) Has no personal knowledge of the facts; b) Believes them to be true; and c) Explains to the insurer that he does so on the information of others; 6) A misrepresentation as to age does not constitute a ground for rescission. If the age of the insured was considered in determining the premium and the benefits under the policy and the age is misstated, the amount payable for the policy shall be as if the policy was purchased at the correct age. [Sec. 233(d); Carake] A representation cannot qualify an express provision or an express warranty of insurance [Sec. 40] because a representation is not part of the contract but only a collateral inducement to it. However, it may qualify as an implied warranty. It is sufficient that the representation is substantially or materially true, and in case of promissory representation, it is sufficient that it is substantially complied with. [Carale] The insurer is not entitled to rescission for misrepresentation of age if the birth date on the policy leads to the conclusion that the insured is beyond the age covered. Insurer is deemed Despite not answering the questions and keeping blank certain questions in the application regarding ailments he has suffered, when the insured signed the pension plan application, he adopted the written representations and declarations embodied in as his own. Therefore, it is clear from these representations that he concealed his chronic heart ailment and diabetes. [Florendo v. Philam Plans, G.R. No. 186983 (2012)] Concealment Misrepresentation Who may commit May be committed Committed only by by either insured or insured insurer Act involved Passive form Active form Insured withholds Insured makes information of erroneous material facts from statements of facts the insurer; he with the intent of maintains silence inducing the insurer when he ought to to enter into the speak insurance contract Materiality Determined by the same rules Effects Same effects on the part of the insured; insurer has right to rescind Injured party is entitled to rescind a contract of insurance on ground of concealment or false representation, whether intentional or not. 3. Breach of Warranties A warranty is a statement or promise by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or nonfulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or nonfulfillment, renders the policy voidable by the insurer. [Vance] Page 36 of 450 U.P. LAW BOC Statements or promises agreed upon by both parties to the insurance contract which are contained in the contract or properly incorporated constitute warranties. [Carale] A warranty may: Relate to the past, the present, the future, or to all of these. [Sec. 68] Be made in any form of words. [Sec. 69] Also be made by the insurer. [Carale] Warranties, Endorsements COMMERCIAL LAW INSURANCE Riders, and A rider is a printed or typed stipulation contained in a slip of paper attached to the policy and forming an integral part thereof. Thus, it does not need to be signed by the insured. The signature of the insured is required only if the warranties, or endorsements are in another instrument. For any rider, clause, warranty or endorsement to be binding on the insured: [Sec. 50] Such rider, clause, warranty or endorsement, must be pasted or attached to the policy; The descriptive title or name of the rider, clause, warranty or endorsement must also be mentioned and written on the blank spaces provided in the policy; Such rider, clause, warranty or endorsement issued after the original policy must be countersigned by the insured or owner. o Unless the same is applied for by the insured or owner o Such countersignature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement Kinds of Warranties Express Warranty The Code does not prescribe a particular form for a warranty to be considered as such. [Sec. 69] However, the Code prescribes a requirement for express warranties. It must be an agreement contained in the policy or clearly incorporated therein as part thereof, relating to the person or thing insured or to the risk as a fact. [Sec. 71] Thus, it is not enough, for a stipulation to become a warranty, that the parties intended it as such. It must form part of the contract of insurance. Implied Warranty Deemed included in the contract although not expressly mentioned (e.g., implied warranty of seaworthiness of the vessel in marine insurance and implied warranty not to alter the circumstances of the thing insured). This is only available for marine insurance. Affirmative Warranty Asserts the existence of a fact or condition at the time it is made. Promissory Warranty or Executory Warranty The insured stipulates that certain facts or conditions pertaining to the risk shall exist or that certain things with reference thereto shall be done or omitted. It is in the nature of a condition subsequent. [Sec. 72 and 73] Effect of Breach Notwithstanding the foregoing, the policy may be in electronic form subject to the pertinent provisions of Republic Act No. 8792, otherwise known as the ‘Electronic Commerce Act’ and to such rules and regulations as may be prescribed by the Commissioner. MATERIAL WARRANTY The violation of a material warranty, or other material provision of the policy, on the part of either the insured or insurer, entitles the other to rescind. [Sec. 74] Page 37 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE Breach of a material warranty may either be: 1. Without fraud, in which case, the insurer will be exonerated from the time it occurs. If made during the inception, it will prevent the policy from taking effect. [Sec. 76] 2. With fraud, in which case, the policy is avoided ab initio and the insured is not entitled to the return of the premiums paid. [de Leon] Exceptions 1. Loss occurs before the time of performance of the warranty; [Sec. 73] 2. Performance becomes unlawful; [Sec. 73] 3. Performance becomes impossible; [Sec. 73]; 4. Waiver or estoppel. IMMATERIAL WARRANTY A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy. [Sec. 75] General rule: Breach of an immaterial provision does not avoid the policy. [Sec. 75] Exception: Breach of an immaterial provision avoids the policy when the parties stipulate that violation of a particular provision, though immaterial, shall avoid the policy. In effect, the parties converted the immaterial provision into a material one. [Sundiang and Aquino] A condition in the policy which requires the insured to disclose to the insurer of any insurance that, if violated by the insured, would ipso facto avoid the contract. [Pioneer v. Yap, G.R. No. L-36232 (1974)] Insurer is barred by waiver (or estoppel) to claim violation of the so-called hydrants warranty when, despite knowing fully that only 2 fire hydrants existed (out of the 11 hydrants required), it still issued the insurance policies and received the premiums. [Qua Chee Gan v. Law Union, G.R. No. L-4611 (1955)] Warranty Representation Nature Part of the contract Mere collateral inducement Form Written on the policy, May be written in the actually or by policy or may be oral reference Materiality Presumed material Must be proved to be material Compliance Must be strictly Requires only complied with substantial truth and compliance Applicability of incontestability clause Does not apply Applies I. CLAIMS SETTLEMENT AND SUBROGATION Loss in insurance law embraces injury or damage. Requisites Recovery upon a loss requires that: a. The insured must have insurable interest in the subject matter; b. The interest is covered by the policy; c. There be a loss; and d. The loss must be one for which the insurer is liable; e. Notice and proof of loss must be given if policy is fire insurance or when the same is stipulated in the policy. Causes of loss 1. Remote Cause An event preceding another in a causal chain, but separated from it by other events. 2. Proximate Cause That cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred. [Vda. De Bataclan v. Medina, G.R. No. L-10126 (1957)] 3. Immediate Cause Page 38 of 450 U.P. LAW BOC INSURANCE The cause, not the proximate cause, which immediately precedes the loss. Liability for Loss Loss for which the insurer is liable Loss the proximate cause of which is the peril insured against [Sec. 86] Loss the immediate cause of which is the peril insured against, except where the proximate cause is an excepted peril Loss through negligence of insured except where there was gross negligence amounting to willful acts Loss caused by efforts to rescue the thing from peril insured against if, during the course of the rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession in whole or in part [Sec. 87] Loss for which the insurer is not liable Loss by insured’s willful act COMMERCIAL LAW investigation and take such action as may be necessary to protect its interest. Failure to Give Notice In fire insurance: An insurer is exonerated, if notice of loss be not given to him by an insured, or some person entitled to the benefit of the insurance, without unnecessary delay. [Sec. 90] Loss due to connivance of the insured [Sec. 89] In other types of insurance: General Rule: Failure to give notice will not exonerate the insurer. Exception: Unless there is a stipulation in the policy requiring the insured to do so. Loss where the excepted peril is the proximate cause However, it has been held that formal notice of loss is not necessary if insurer has actual notice of loss [Fidelity Phoenix Insurance v. Friedman, 174 SW 215 (1987)] but there is a ruling to the contrary [Col. Sav. Bank v. American Surety, 87 P 118]. Form In case of loss as regards fire insurance, there must be a written notice thereof [Sec. 90]. But as to other non-life insurance policies, the law does not provide for a necessity of written notice. [de Leon] The notice of loss may be in the form of an informal or provisional claim containing a minimum of information, as distinguished from a formal claim which contains the full details of the loss, computations of the amounts claimed, and supporting evidence, together with a demand or request for payment [de Leon]. Time for Giving Notice Notice of loss must be given within reasonable time. [Bachrach v. Britain American Assurance, G.R. No. L-5715 (1910)] 1. Notice and Proof of Loss Notice of Loss This refers to the formal notice given the insurer by the insured or claimant under a policy of the occurrence of the loss insured against. Purpose Its purpose is to apprise the insurance company so that it may make proper For compulsory motor vehicle insurance, the notice must be given within six months from the date of the accident. [Sec. 397] For other non-life insurance, the Commissioner may specify the period for the submission of the notice of loss. [Sec. 90] Page 39 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE Proof of Loss It is the formal evidence given to the insurance company by the insured or claimant, under a policy, of: The occurrence of the loss, The particulars thereof, and The data necessary to enable the company to determine its liability and the amount. [de Leon] Purpose Its purpose is to give the insurer information by which he may determine the extent of his liability but also to afford him a means of detecting any fraud that may have been practiced upon him, and to operate as a check upon extravagant claims. Like a notice of loss, in the absence of any stipulation in the policy, proof may be given orally or in writing. The insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time. [Sec. 91] RULES FOR RECOVERY General Rule: Timely compliance with the notice and proof of loss is a condition precedent to the right to recover if the policy is fire insurance, or when the same is stipulated in the policy [Sec. 90]. Exceptions 1) For both notice and proof of loss, defects or delay in the presentation of notice may be waived: a) Defects in a notice or proof of loss may be waived when such defects, which the insured might remedy, are not specified without unnecessary delay to him as ground of objection by the insurer. [Sec. 92] b) Delay in presentation to an insurer of notice or proof of loss is waived if caused by any act of his, or if he omits to take objection promptly and specifically upon that ground. [Sec. 93] 2) For notice of loss, a formal notice of loss is not necessary if insurer has actual notice of loss. 2. Guidelines Settlement on Claims Claims settlement is the indemnification of the loss suffered by the insured. The claimant may be the insured or reinsured, the insurer who is entitled to subrogation, or a third party who has a claim against the insured. Where a policy gives the insurer the control of the decision to settle claim or litigate it, the insurer nevertheless is required to observe a certain measure of consideration for the interest of the insured. Life Insurance Non-Life Insurance Maturity Either: 1. Upon happening of event insured 1. Upon death of against; and the person insured; 2. Event must occur 2. Upon his within the period specified in surviving a policy, otherwise specific period; insurer has no or liability 3. Otherwise contingently on the continuance or cessation of life. [Sec. 182] Delivery of Proceeds Page 40 of 450 U.P. LAW BOC INSURANCE General rule: The proceeds should be delivered immediately upon maturity of policy. 1. Within 30 days after: a. Proof of loss is received by insurer; and b. Ascertainment of Exceptions: loss or damage is made either by 1. If payable in installments or agreement between the as an annuity, when such insured and installments or insurer or by annuities arbitration become due; 2. If ascertainment 2. If maturity is is not made upon death, within 60 days within 60 days after such receipt after by insurer of presentation of proof of loss, claim and filing then loss or of proof of death damage shall be of insured. [Sec. paid within 90 248] days after such receipt. [Sec. 249] Effect of refusal or failure to pay claim within time prescribed 1. This entitles the beneficiary to collect interest on the proceeds of policy for the duration of the delay at rate of twice the ceiling prescribed by the monetary board (unless refusal to pay is based on ground that claim is fraudulent) 2. In case damages are awarded, this includes attorney’s fees and other expenses incurred due to delay (plus the interest) [Sec. 248 and 249] In case of litigation, it is the duty of the Commissioner or the Court to determine whether the claim has been unreasonably denied or withheld. Failure to pay any such claim within the time prescribed shall be considered prima facie evidence of unreasonable delay in payment. [Sec. 250] COMMERCIAL LAW Unfair Claims Sanctions Settlement; No insurance company doing business in the Philippines shall: (1) Refuse, without just cause, to pay or settle claims arising under coverages provided by its policies; nor (2) Engage in unfair claim settlement practices. [Sec. 247] Unfair Claim Settlement Practices Any of the following acts by an insurance company, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practices: (1) Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue; (2) Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; (3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies; (4) Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; or (5) Compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them. [Sec. 247] Admissible Evidence The following shall be admissible in evidence in an administrative or judicial proceeding for the purpose of determining whether unfair claim settlement practices have been committed: (a) Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an insurance company; and Page 41 of 450 U.P. LAW BOC COMMERCIAL LAW INSURANCE (b) The Commissioner’s complaint experience with other insurance companies writing similar lines of insurance. [Sec. 247] Penalty Per Violation If it is found, after notice and an opportunity to be heard, that an insurance company has violated this section, each instance of noncompliance: (1) May be treated as a separate violation; and (2) Shall be considered sufficient cause for the suspension or revocation of the company’s certificate of authority. Sec. 247 lists the grounds which are sufficient cause for the suspension or revocation of the insurer’s certificate of authority [Sec. 247(c)]. insurer, NOT from the time when the loss actually occurs. The cause of action in an insurance contract does not accrue until the insured's claim is finally rejected by the insurer. This is because before such final rejection, there is no real necessity for bringing suit. [Eagle Star Insurance vs Chia Yu, G.R. No. L-5915 (1955)] Subrogation Subrogation is a process of legal substitution. The insurer, after paying the amount covered by the insurance policy, steps into the shoes of the insured and avails himself of the latter's rights that exist against the wrongdoer at the time of loss. Prescription of Action Should the insurer reject the claim of the insured, the remedy of the latter would be to file an action against the insurer with the proper tribunal [Carale]. An “action” or “suit” is an act by which one sues another in a court of justice for the enforcement or protection of a right, or the prevention or redress of a wrong. [Lopez v. Filipinas Compania de Seguros, G.R. No. L-19613 (1966)] Prescriptive Period General Rule: It being based on a written contract, the action prescribes in ten years. [Art. 1144, NCC] Exception: The parties may validly agree on a shorter period, provided it is not less than one year from the time the cause of action accrues. [Sec. 63] Note: In compulsory motor vehicle insurance, the action prescribes in one year from the denial of the claim. [Sec. 397] Reckoning Point The period of commencing an action under a policy of insurance under Sec. 63 is to be computed from the time when the insured has a right to bring an action against the The insurer becomes entitled to recover from the wrongdoer the amount of the loss it may have paid to the insured. Note: Subrogation applies only to property insurance and non-life insurance. Right of Subrogation The insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contact if: (1) The plaintiff’s property has been insured, and (2) The plaintiff has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of. [Art. 2207, NCC] Rights Transferred A subrogee-insurer cannot succeed to a right not possessed by the subrogor. A subrogee can recover only if the insured likewise could have recovered. [Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins. Corp., G.R. No. 140349 (2005)] Right to Recover Deficiency Not Subrogated If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the Page 42 of 450 U.P. LAW BOC INSURANCE deficiency from the person causing the loss or injury. [Art. 2207, NCC] The insured can no longer recover from the offended party what was paid to him by the insurer, but he can recover any deficiency if the damages suffered are more than what was paid. The deficiency is not covered by the right of subrogation. The insurer must present the policy as evidence to determine the extent of its coverage. [Wallem Phil. Shipping v. Prudential Guarantee, G.R. No. 152158 (2003)] Where There is No Right of Subrogation 1. Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage; 2. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insured’s claim for loss; 3. Where the insurer pays the insured for a loss or risk not covered by the policy; [Pan Malayan Ins. Co. v. CA, G.R. No. 81026 (1990)] 4. In life insurance; 5. For recovery of loss in excess of insurance coverage. [de Leon] The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer. [Pan Malayan Ins. Co v. CA, G.R. No. 81026 (1990)] Should the insured, after receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid to the latter, unless the release was made with the consent of the insurer. [Manila Mahogany v. CA G.R. No. L- 52756 (1987)] COMMERCIAL LAW J. BUSINESS OF INSURANCE; REQUIREMENTS Business of Insurance The term “doing an insurance business or transacting an insurance business” includes: (1) Making or proposing to make, as insurer, any insurance contract; (2) Making or proposing to make, as surety, any contract of suretyship as a vocation; - Must not be merely incidental to any other legitimate business or activity of the surety (3) Doing any kind of business, specifically recognized as constituting the doing of an insurance business within the meaning of the Insurance Code; - Including a reinsurance business, (4) Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of the Insurance Code. [Sec. 2(b)] The following shall NOT be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business: a. The fact that no profit is derived from the making of insurance contracts, agreements or transactions; or b. The fact that no separate or direct consideration is received therefor. [Sec. 2(b)] For the purpose of determining what "doing an insurance business" means, we have to scrutinize the operations of the business as a whole and not its mere components. [Philippine Health Care Providers, Inc. v. CIR, G.R.167330 (2009)] Requirements to Engage in the Business of Insurance 1. Certificate of Authority 2. Sufficient paid-up capital, Surplus Fund & Solvency Page 43 of 450 U.P. LAW BOC INSURANCE 3. Filing with the Commissioner 4. Reserves 5. For foreign companies: Sufficient capital and securities deposited with the Commissioner 6. For foreign companies: Resident Agent 7. For foreign companies: Surplus Fund, Legal Reserves 1. Certificate of Authority No insurance company shall transact any insurance business in the Philippines until after it shall have obtained a certificate of authority for that purpose from the Commissioner upon application therefor and payment by the company concerned of the fees hereinafter prescribed. [Sec. 193] 2. Sufficient paid-up capital, Surplus Fund & Solvency [Sec. 194, 197, 200] No new domestic life or non-life insurance company shall, in a stock corporation, engage in business in the Philippines unless possessed of a paid-up capital equal to at least One billion pesos (P1,000,000,000.00): Provided, That a domestic insurance company already doing business in the Philippines shall have: (1) By June 30, 2013 – P250,000,000.00 net worth (2) By December 31, 2016 – An additional P300,000,000.00 in net worth; (3) By December 31, 2019 – An additional P350,000,000.00 in net worth; and (4) By December 31, 2022 – An additional P400,000,000.00 in net worth. [Sec. 194] Note: The President of the Philippines may order a periodic review every two (2) years the capital structure set out above to determine the capital adequacy of the local insurance industry from and after the integration and liberalization of the financial services, including insurance, in the ASEAN Region. The Commissioner may also, as a prelicensing requirement of a new insurance company, require: (1) The stockholders to pay in cash to the company in proportion to their subscription COMMERCIAL LAW interests a contributed surplus fund of not less than P100,000,000.00; (2) The company to submit to him a business plan showing the company’s estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three (3) years. [Sec. 194] An insurance company doing business in the Philippines shall at all times maintain the minimum paid-up capital and net worth requirements as prescribed by the Commissioner. Such solvency requirements shall be: (1) Based on internationally accepted solvency frameworks; and (2) Adopted only after due consultation with the insurance industry associations. [Sec. 200] 3. Filing with the Commissioner [Sec. 195] Every company must, before engaging in the business of insurance in the Philippines, file with the Commissioner the following: a) A certified copy of the last annual statement or a verified financial statement exhibiting the condition and affairs of such company; and If incorporated under the laws of the Philippines If incorporated under any laws other than those of the Philippines Page 44 of 450 A copy of the articles of incorporation and bylaws, and any amendments to either, certified by the SEC 1. A certificate from the SEC showing that it is duly registered in the mercantile registry of that Commission in accordance with the Corporation Code 2. If organized or formed under any law requiring such to be filed: A copy of the articles of incorporation and bylaws, and any amendments to either 3. If not so organized: A copy of the law, charter or deed of settlement U.P. LAW BOC INSURANCE under which the deed of organization is made 4. A certificate under the hand and seal of the proper officer of such state or country that such corporation or company is : i. Organized under the laws of such state or country, ii. With the amount of capital stock or assets and legal reserve required by this Code; A certificate setting forth: i. The nature and character of the business, ii. The location of the principal office, iii. The name of the individual or names of If not the persons incorporated composing the and of partnership or association, foreign iv. The amount of actual domicile capital employed or to be employed therein, and v. The names of all officers and persons by whom the business is or may be managed. 4. Reserves Every insurance company, other than life, shall maintain a reserve for unearned premiums on its policies in force, which shall be charged as a liability in any determination of its financial condition. [Sec. 219] 5. For foreign companies: Sufficient capital and securities deposited with the Commissioner [Sec. 197, 198] No insurance company organized or existing under the government or laws other than those of the Philippines shall engage in business in the Philippines unless: COMMERCIAL LAW A. Possessed of unimpaired capital or assets and reserve of not less than One billion pesos (P1,000,000,000.00) B. It has deposited with the Commissioner for the benefit and security of the policyholders and creditors of such company in the Philippines, securities satisfactory to the Commissioner: Provided That – (1) At least fifty percent (50%) of such securities shall consist of bonds or other instruments of debt of the Government of the Philippines, its political subdivisions and instrumentalities, or of GOCCs and entities, including the Bangko Sentral ng Pilipinas; (2) The total investment of a foreign insurance company in any registered enterprise shall not exceed twenty percent (20%) of the net worth of said foreign insurance company nor twenty percent (20%) of the capital of the registered enterprise, unless previously authorized in writing by the Commissioner. [Sec. 197] Securities, for the purposes of this requirement, consist of: - Good securities of the Philippines, - New issues of stock of registered enterprises 6. For foreign companies: Resident Agent The Commissioner must require as a condition precedent to the transaction of insurance business in the Philippines by any foreign insurance company, that such company file in his office: A. A written power of attorney: (1) Designating some person who shall be a resident of the Philippines as its general agent on whom any notice provided by law or by any insurance policy, proof of loss, summons and other legal processes may be served in all actions or other legal proceedings against such company, and (2) Consenting that service upon such general agent shall be admitted Page 45 of 450 U.P. LAW BOC INSURANCE and held as valid as if served upon the foreign company at its home office. B. Agreement or stipulation, executed by the proper authorities of said company, which states that: (1) Service of any notice provided by law, or insurance policy, proof of loss, summons, or other legal process may be made upon the Insurance Commissioner (2) Such service upon the Insurance Commissioner shall have the same force and effect as if made upon the company if at any time said company shall: a. Leave the Philippines, or b. Cease to transact business therein, or c. Be without any agent in the Philippines on whom any notice, proof of loss, summons, or legal process may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines (3) Whenever such service of notice, proof of loss, summons, or other legal process shall be made upon the Commissioner, he must, within ten (10) days thereafter, transmit by mail, postage paid, a copy of such notice, proof of loss, summons, or other legal process to the company at its home or principal office. [Sec. 196] 7. For foreign companies: Surplus Fund, Legal Reserves [Sec. 196, 199] The Commissioner may, as a pre-licensing requirement of a new branch office of a foreign insurance company, require the company to have an additional surplus fund in an amount to be determined by the Insurance Commission. [Sec. 197] COMMERCIAL LAW (1) Set aside an amount corresponding to the legal reserves of the policies written in the Philippines; and (2) Invest and keep the same therein in accordance with the provisions of this section. [Sec. 199] The legal reserve therein required to be set aside shall be invested only in the classes of Philippine securities described in Section 206: Provided, however, That – (1) No investment in stocks or bonds of any single entity shall, in the aggregate exceed 20% of the net worth of the investing company or 20% of the capital of the issuing company, whichever is the lesser, unless otherwise approved in writing by the Commissioner. (2) The securities purchased and kept in the Philippines under this section, shall not be sent out of the territorial jurisdiction of the Philippines without the written consent of the Commissioner. [Sec. 199] Rule as to Partnerships, Persons, or Association of Persons General Rule: No person, partnership, or association of persons shall transact any insurance business in the Philippines except as agent of a person or corporation authorized to do the business of insurance in the Philippines. Exceptions: Such person, partnership, or association of persons may transact insurance business in the Philippines, provided that: (1) It is possessed of the capital and assets required of an insurance corporation doing the same kind of business in the Philippines and invested in the same manner; (2) The Commissioner granted it a certificate to the effect that it has complied with all the provisions of this Code. [Sec. 192] Every foreign company doing business in the Philippines shall: Page 46 of 450 U.P. LAW BOC INSURANCE COMMERCIAL LAW documents or contracts or other records which are relevant or material to the inquiry [Sec. 439]. K. INSURANCE COMMISSIONER AND ITS POWERS 1. Jurisdiction and Adjudicatory Powers The Insurance Commissioner exercises administrative supervision over insurance companies, mutual benefit associations and trusts for charitable uses. He has the duty to see that all laws relating to insurance companies and other insurance matters are faithfully executed. [Carale] In addition to administrative powers, the Commissioner has the power to adjudicate disputes relating to an insurance company’s liability to an insured under a policy. [Sec. 437] A complaint or claim filed with such official is considered an “action” or “suit” the filing of which would have the effect of tolling the suspending the running of the prescriptive period. Concurrent jurisdiction (with regular civil courts) over cases where any single claim does not exceed P5,000,000 involving liability arising from: a. Insurance contract; b. Contract of suretyship; c. Reinsurance contract; d. Membership certificate issued by members of mutual benefit association [Sec. 439] Primary and exclusive jurisdiction over claims for benefits involving pre-need plans where the amount of benefits does not exceed P100,000. [Sec. 55, RA 9829] For the purpose of proceeding under its adjudicatory powers under the Insurance Code, the Commissioner or any officer thereof designated by him, is empowered to administer oaths and affirmation, subpoena witnesses, compel their attendance, take evidence and require the production of any books, papers, Note: However, the Insurance Commission has no jurisdiction to decide the legality of a contract of agency entered into between an insurance company and its agent. The same is not covered by the term “doing or transacting insurance business” under Sec. 2, neither is it covered by Sec. 439, which grants the Commissioner adjudicatory powers. [Sundiang and Aquino] 2. Revocation of Certificate of Authority The Certificate of Authority issued to the domestic or foreign company by the Commission may be revoked or suspended by the Insurance Commissioner for any of the following grounds: . The company is in an unsound condition a. That it has failed to comply with the provisions of law or regulations obligatory upon it b. That its condition or method of business is such as to render its proceedings hazardous to the public or its policyholders c. That its paid-up capital stock, in the case of a domestic stock corporation, or its available cash assets, in the case of a domestic mutual company, or its security deposits, in the case of a foreign company, is impaired or deficient d. That the margin of solvency required of such company is deficient. [Sec. 254] The Commissioner is authorized to suspend or revoke all certificates of authority granted to such insurance company, its officers and agents, and no new business shall thereafter be done by such company or for such company by its agents in the Philippines while such suspension, revocation, or disability continues or until its authority to do business is restored by the Commissioner. [Sec. 254] Before restoring such authority, Commissioner shall require the company Page 47 of 450 the U.P. LAW BOC INSURANCE concerned to submit to him a business plan showing the company’s estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three years. [Sec. 254. 3. Liquidation Company of Insurance If the company is determined by the Commissioner to be insolvent or cannot resume business, he shall, if public interest requires, order its liquidation. [Sec. 256] This should be distinguished from a situation where a conservator is appointed when the Commissioner finds that a company is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity adequate to protect the policyholders and creditors. The conservator will take charge of the management of the insurance company. [Sec. 255] Page 48 of 450 COMMERCIAL LAW U.P. LAW BOC INSURANCE PRE-NEED COMMERCIAL LAW Page 49 of 450 COMMERCIAL LAW U.P. LAW BOC 1. Pre-Need Plans A. DEFINITION The section numbers hereinafter generally pertain to RA 9829 (Pre-Need Code), unless otherwise indicated. Pre-need plans are contracts, agreements, deeds or plans for the benefit of the planholders which provide for the performance of future services, payment of monetary considerations or delivery of other benefits at >the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or insurance coverage and includes life, pension, education, interment and other plans, instruments, contracts or deeds. [Sec. 4(B)] Form Beneficiary Purpose When benefits may be availed Consideration Types COMMERCIAL LAW PRE-NEED Contracts Agreements Deeds Plans Planholder/s To provide for the: - Performance of future services - Payment of monetary considerations; or - Delivery of other benefits At the time of actual need OR On agreed maturity date specified therein Cash or installment amounts with or without interest, OR Insurance Coverage Life Pension Education Interment Other plans, instruments, contracts, or deeds Pre-need plans are contracts which provide for the rendering of services or payment of money to plan holders or their beneficiaries when the actual need for such payment or rendition of services accrues. [Carale] They are governed by the Pre-Need Code (RA 9829). They are not considered as insurance contracts because: a. Pre-need plans can have insurance coverage, implying that they are separate contracts; and b. Pre-need plans do not involve unknown or contingent events but events certain to happen at a certain time. However, all Pre-need plans are under the primary and exclusive power supervision and regulation of the Insurance Commission. [Sec. 5, RA 9829. In addition, the Insurance Commissioner shall have the primary and exclusive power to adjudicate any and all claims involving pre-need plans. If the amount of benefits does not exceed P100,000, which decision shall be final and executory. [Sec. 55] 2. Pre-Need Company A Pre-need Company refers to: a. Any corporation Registered with the Commission and authorized/licensed to sell or offer to sell pre-need plans b. Schools, memorial chapels, banks, nonbank financial institutions and other entities Authorized/licensed to sell or offer to sell pre-need plans insofar as their pre-need activities or business are concerned. [Sec. 4(c)] Page 50 of 450 U.P. LAW BOC TRANSPORTATION LAW B. REGISTRATION OF PRE-NEED PLANS Powers of the Commission i. Promulgate rules governing the registration of pre-need plans and the required documents. Said rules shall further set forth the: a. Conditions under which such registration may be denied revoked, suspended or withdrawn; b. Remedies of pre-need companies in such instances; ii. Approve all forms, including amendments, relating to the pre-need plans. [Sec. 14 & 17] Required Documents for Registration a. The viability study b. Certification, under oath, of a pre-need actuary accredited by the Commission c. A copy of the pre-need plan d. Any information brochure e. Information and documents necessary to ensure the protection of planholders and the general public [Sec. 14] 1. Necessity of Registration a. To be granted a license to do business as a pre-need company b. To file a registration statement with the Commission for the sale of pre-need plans - This is required for every pre-need plan which the company intends to offer for sale to the public [Sec. 14] 2. When Registered Within a period of forty-five (45) days after the grant of a license to do business as a pre-need company. [Sec. 14] 3. Registration Requirements The Commission shall require the following documents, among others: (a) Duly accomplished Registration Statements; (b) Board resolution authorizing the registration of applicant’s pre-need plans; COMMERCIAL LAW (c) Opinion of independent counsel on the legality of the issue; (d) Audited financial statements; (e) Viability study with certification, under oath, of pre-need actuary accredited by the Commission; (f) Copy of the proposed pre-need plan; and (g) Sample of sales materials. Such registration statements and sales materials required under this section shall contain the appropriate risk factors as may be determined by the Commission. [Sec. 15] 4. Accreditation of Actuary An actuary prepares and certifies, under oath, the viability study required for registration. [Sec. 15] Requirements to be a Pre-Need Actuary: i. Must be accredited by the Commission. [Sec. 15] ii. Must NOT be engaged by the pre-need company as actuary, and at the same time: Be a stockholder; or Serve as: a. Director of the board b. Chief executive officer or c. Chief financial officer of the company, or d. Any such position that the Commission may determine to have an inherent conflict of interest to the position of an actuary. [Sec. 16] The Commission shall have the power to: 1. Set standards for the accreditation of actuaries directly responsible for the preparation and certification of the viability study of the pre-need plan submitted by the pre-need company for registration or amendment with the Commission; 2. Define the obligations and liabilities of actuaries accredited by it. 5. Pre-Need Advertising Rules Pre-need plans shall be advertised and sold in an appropriate non-misleading manner in accordance with the rules to be prescribed by the Code. Page 51 of 450 U.P. LAW BOC TRANSPORTATION LAW It shall be unlawful for any pre-need company to adverti>se itself or its pre-need plans unless the Commission has approved such advertising material. The Commission shall have a period of ten (10) working days to approve or deny the advertising material and failure to act within the said period shall cause the advertising material to be approved. For purposes hereof, the Commission shall have the power to define the scope of its advertising rules to appropriately cover advertising or other communications to the public. COMMERCIAL LAW d. Such other information that the Commission shall require by rule. [Sec. 19] The making of any untrue statement of a material fact in an information brochure is a ground for administrative sanctions and criminal penalties. [Sec. 56(a)(i), IRR of RA 9829] C. LICENSING OF SALES COUNSELORS AND GENERAL AGENTS Any person who sells or offers to sell any preneed plan or contract by any means or instruments of communication in violation of this section shall be liable to the person purchasing such pre-need contract who may sue to recover the consideration paid for such pre-need contract with interest thereon. In addition hereto, the Commission shall have the power to pursue the erring pre-need company in an administrative or criminal proceeding. 1. Qualifications for Issuance No sales counselor shall be allowed to solicit, sell or offer to sell pre-need plans under this Code without being licensed as such by the Commission. A fine of P100, 000,000.00 shall be imposed on any pre-need company found to have violated this section: Provided, That a second violation of this section shall, in addition to the fine imposed, result in the suspension of the license of the pre-need company. [Sec. 18] Qualifications for the issuance of a license: a. The applicant must be of good moral character and must not have been convicted of any crime involving moral turpitude; b. The applicant has undergone a training program approved by the Commission and such fact has been certified under oath by a duly authorized representative of a preneed company; and c. The applicant has passed a written examination administered by the Commission: Provided, that the administration of the examination may be delegated to an independent organization under the supervision of the Commission. [Sec. 20] 6. Disclosures to Prospective Planholders No registered pre-need plan shall be sold to prospective planholders unless an information brochure, which has been filed with the Commission, has been provided to the purchaser. The information brochure shall contain: a. An explanation of the principal features of the pre-need plan; b. A statement that the planholder may avail of a default or reinstatement period within which to reinstate his lapsed plan; c. The conditions of the same and the rates of return for scheduled benefit plans and illustrative yields for contingent benefit plans; Such license shall automatically expire every 30th day of June or such date of every year as may be fixed by the Commission and may be accordingly renewed. 2. Denial, Suspension, or Revocation of License An application for the issuance or renewal of a license to act as sales counselor may be denied, or such license, if already issued, shall be suspended or revoked based on the following grounds: Page 52 of 450 U.P. LAW BOC TRANSPORTATION LAW (a) Materially misrepresented statements in the application requirements; (b) Obtained or attempted to obtain a license by fraud or misrepresentation; (c) Materially misrepresented the terms and conditions of pre-need plans; (d) Sold, solicited or attempted to solicit or sell a pre-need plan by means of false or misleading representation and other fraudulent means; (e) Terminated for cause from another preneed company; (f) Similar grounds found in Section 11 of RA 9829; (g) Wilfully allowing the use of one’s license by a non-licensed or barred individual; (h) Analogous circumstances. [Sec. 21] 3. Licensing of General Agents If the issuer should contract the services of a general agent to undertake the sales of its plans, such general agent shall be required to be licensed as such with the Commission, in accordance with the requirements imposed by the Commission. [Sec. 22] D. DEFAULT AND TERMINATION 1. Default; Reinstatement Period Grace Period The pre-need company must provide in all contracts issued to planholders a grace period of at least sixty (60) days within which to pay accrued installments, counted from the due date of the first unpaid installment. Nonpayment of a plan within the grace period shall render the plan a lapsed plan. Any payment by the planholder after the grace period shall be reimbursed forthwith, unless the planholder duly reinstates the plan. COMMERCIAL LAW grace period or a longer period, as provided in the contract within which to reinstate his plan. No cancellation of plans shall be made by the issuer during such period when reinstatement may be effected. Notice Requirement The pre-need company shall give written notice to the planholder that his plan will be cancelled if not reinstated within two (2) years. Two notices shall be given: Within thirty (30) days from the expiration of the grace period; and Within thirty (30) days from the expiration of the reinstatement period, which is two (2) years from the lapse of the grace period. Failure to give either of the required notices shall preclude the pre-need company from treating the plans as cancelled. [Sec. 23] 2. Termination of Pre-Need Plans A planholder may terminate his pre-need plan at any time by giving written notice to the issuer. [Sec. 24] Termination Value The termination value of the pre-need plan shall be predetermined by the actuary of the pre-need company upon application for registration of the pre-need plans with the Commission and shall be disclosed in the contract. A pre-need plan shall contain a schedule of termination values to which the planholder is entitled to upon termination. Such schedule of termination value shall be required for all in-force pre-need plans and shall be fair, equitable and in compliance with the Commission issuances. [Sec. 24] Reinstatement The planholder shall be allowed a period of not less than two (2) years from the lapse of the Page 53 of 450 U.P. LAW BOC TRANSPORTATION LAW E. CLAIMS SETTLEMENT 1. Unfair Claims Settlement Practices No pre-need company shall refuse, without just cause, to pay or settle claims arising under coverages provided by its plans nor shall any such company engage in unfair claim settlement practices. The following acts constitute unfair claims settlement practices: 1. Knowingly misrepresenting to claimants pertinent facts or plan provisions relating to coverages at issue; 2. Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its plan; 3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its plan; 4. Failing to provide prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; or 5. Compelling planholders to institute suits or recover amounts due under its plan by offering, without justifiable reason, substantially less than the amounts ultimately recovered in suits brought by them. Any violation of this section shall be considered sufficient cause for the suspension or revocation of the company's certificate of authority. [Sec. 25] 2. Payment of Plan Proceeds Scheduled Benefit Plans General Rule: In the case of scheduled benefit plans, the proceeds of the plan shall be paid immediately upon maturity of the contract. Exception: Unless such proceeds are made payable in installments or as an annuity, in which case the installments or annuities shall be paid as they become due. COMMERCIAL LAW Contingent Benefit Plans In the case of contingent benefit plans, the benefits shall be paid by the pre-need company thirty (30) days upon submission of all necessary documents. [Sec. 26] Refusal or Failure to Pay General Rule: Refusal or failure to pay the claim within fifteen (15) days from maturity or due date will entitle the beneficiary to collect interest on the proceeds of the plan for the duration of the delay at the rate twice the legal interest. Provided, That the planholder has duly complied with the documentary requirements of the pre-need company. Exception: Unless such failure or refusal to pay is based on the ground that the claim is fraudulent. 3. Recovery of Investment The planholder may institute the necessary legal action in court to recover his/her investment in the pre-need company thirty (30) days upon submission of all necessary documents. However, in case the insolvency or bankruptcy is a mere cover-up for fraud or illegality, the planholder may institute the legal action directly against the officers and/or controlling owners of the said pre-need company. [Sec. 27] 4. Consequences of Delay or Default In case of any litigation for the enforcement of any pre-need plan, it shall be the duty of the Commission to determine whether the payment of the claim of the planholder has been unreasonably denied or withheld. The failure to pay any such claim within the time prescribed in Section 26 hereof shall be considered prima facie evidence of unreasonable delay in payment. [Sec. 27] If found to have unreasonably denied or withheld the claim, the pre-need company shall be liable to pay damages, consisting of actual Page 54 of 450 U.P. LAW BOC TRANSPORTATION LAW damages, attorney’s fees and legal interest, to be computed from the date the claim is made until it is fully satisfied. 5. Distribution of Profits A pre-need company may declare divided: Provided, That the following shall remain unimpaired, as certified under oath by the president and the treasurer with respect to items (a) and (b); and in the case of item (c), by the trust officer: (a) One hundred percent (100%) of the capital stock; (b) An amount sufficient to pay all net losses reported, or in the course of settlement, and all liabilities for expenses and taxes; and (c) Trust fund. Any dividend declared under the preceding paragraph shall be reported to the Commission within thirty (30) days after such declaration. [Sec. 29] Page 55 of 450 COMMERCIAL LAW U.P. LAW BOC TRANSPORTATION LAW COMMERCIAL LAW TRANSPORTATION COMMERCIAL LAW Page 56 of 450 U.P. LAW BOC TRANSPORTATION LAW A. COMMON CARRIERS Contract of Transportation A contract of transportation is one whereby a certain person or association of persons obligate themselves to transport persons, things, or news from one to another for a fixed price. [Crisostomo v CA, G.R. No. 138334 (2003)] Parties to the contract: a. Shipper - one who gives rise to the contract of transportation by agreeing to deliver the things or news to be transported, or to present his own person or those of other or others in the case of transportation of passengers b. Carrier (may sometimes be referred to as conductor) - one who binds himself to transport persons, things, or news, as the case may be, or one employed in or engaged in the business of carrying goods for others for hire c. Consignee - the party to whom the carrier is to deliver the things being transported, or to whom the carrier may lawfully make delivery in accordance with its contract of carriage; the shipper and the consignee may be the same person Carriers are persons or corporations who undertake to transport or convey goods, property, or persons, from one place to another, gratuitously or for hire, and are classified as: a. Private or special carriers, who transport or undertake to transport in a particular instance for hire or reward [AGBAYANI, Commercial Laws of the Philippines (1987)]; and b. Common or public carriers [Art. 1732, NCC] COMMERCIAL LAW Common carriers are: a. Persons, corporations, firms or associations, b. Engaged in the business of carrying or transporting, c. Passengers or goods or both, d. By land, water, or air, e. For compensation, f. Offering their services to the public. [Art. 1732, NCC] Art. 1732 makes no distinction: a. Between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity [Fabre v. CA, G.R. No. 111127 (1996)]; b. Between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic, or unscheduled basis [Loadstar Shipping Co., Inc. v. CA, G.R. No. 131621 (1999)]; c. Between a carrier offering its services to the general public and one who offers services or solicits business only from a narrow segment of the general population [De Guzman v. CA, G.R. No. L-47822 (1988)]; d. Between a carrier that maintains terminals or issues tickets with fixed and publicly known routes and one that does not. [Asia Lighterage and Shipping v. CA, G.R. No. 147246 (2003)] Test for a Common Carrier Whether the undertaking is a part of the activity engaged in by the carrier, which it has held out to the general public as its business or occupation. - Determined by the character of the business actually carried on by the carrier - If the undertaking is a single transaction, not a part of the general business or occupation engaged in, as advertised and held out to the general public, the individual or the entity rendering such service is a private, not a common, carrier. [Perena v. Nicolas, G.R. No. 157917 (2012)] Page 57 of 450 U.P. LAW BOC COMMERCIAL LAW TRANSPORTATION LAW One engaged in the business of transporting petroleum products from refineries via pipeline is a common carrier. It is engaged in the business of transporting or carrying goods, i.e., petroleum products, for hire as a public employment. It undertakes to carry for all persons indifferently, that is, to all persons who choose to employ its services, and transports the goods by land and for compensation. The fact that it has a limited clientele does not exclude it from the definition of a common carrier. [First Phil. Industrial v. CA, G.R. No. 125948 (1998)] A customs broker may be regarded as a common carrier. As long as a person holds itself to the public for the purpose of transporting goods as a business, it is already considered a common carrier regardless if it owns the vehicle used or has to hire one. [Schmitz Transport v. CA, G.R. No. 150255 (2005)] A travel agency is not a common carrier. It is not an entity engaged in the business of transporting either passengers or goods and is therefore neither a private nor a common carrier. Its covenant with its customers is simply to make travel arrangements on their behalf. [Crisostomo v. CA, G.R. No. 138334 (2003)] DIFFERENCE BETWEEN COMMON CARRIER AND PRIVATE CARRIER Common Carrier special agreement to do so Diligence Required Extraordinary diligence Ordinary diligence Governing Law Civil Code; Code of Commerce and special laws, if not regulated by the Civil Code (Art. 1766); law of the country to which Law on obligations the goods are to be and contracts transported, if regarding liability for loss, destruction, or deterioration of goods (Art. 1753) Regulation A public service, therefore subject to Not subject provisions governing regulation as common carriers and common carrier public utilities to a It is not necessary that the carrier be issued a certificate of public convenience. [Loadstar Shipping Co., Inc. v. CA, G.R. No. 131621 (1999)] 1. Private Carrier Diligence Required Common Carriers of Availability Holds himself out in common, that is, to all persons who choose to employ him, as ready to carry for hire Agrees in some special case with some private individual to carry for hire Binding Effect Bound to carry all who offer and tender reasonable compensation for carrying them Not bound to carry for any reason, such goods as it is accustomed to carry, unless it enters into a a. Standard of Diligence Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence, according to all the circumstances of each case: 1. In the vigilance over the goods, [Arts. 1734, 1735, and 1745, Nos. 5, 6, and 7, NCC] and 2. For the safety of the passengers transported by them [Art. 1733, NCC]. Extraordinary diligence Requires carrying passengers safely: Page 58 of 450 U.P. LAW BOC TRANSPORTATION LAW As far as human care and foresight can provide, Using the utmost diligence of very cautious persons, With a due regard for all the circumstances [Art. 1755, NCC]. Note: A common carrier is not an insurer of the safety of its passengers and is not bound absolutely and at all events to carry them safely and without injury [Yobido v. CA, G.R. No. 113003 (1997)]. b. Presumption of Negligence The following gives rise to a presumption of negligence against the carrier: For carriage of goods i. Proof of delivery of goods in good order to a carrier, and ii. Proof their arrival at the place of destination in bad order Note: While delay in the delivery of goods is a breach of contract of carriage, it does not raise the presumption of negligence because the goods are not lost, deteriorated, or destroyed. [Art. 1735, NCC]. For carriage of passengers i. Death of passenger/s, or ii. Injury to passenger/s Note: Mere failure to reach one’s destination, without injury or death, does not raise the presumption of negligence because it does not involve safety of the passengers. Effects of Presumption Makes out a prima facie case against the carrier Makes it incumbent upon the carrier to prove that the loss/death/injury was due to some other circumstance inconsistent with its liability, or that it observed extraordinary diligence [Art. 1756, NCC; Ynchausti Steamship v. Dexter and Unson, G.R. No. L-15652 (1920)]. 2. Liabilities Carriers COMMERCIAL LAW of Common The obligation of the common carrier consists in the transportation of passengers or goods or both [Art. 1732, NCC]. Principles governing the liability of common carriers: a. The liability of a carrier is contractual and arises upon breach of its obligation. There is breach if it fails to exert extraordinary diligence according to all circumstances of each case; b. A carrier is obliged to carry its passenger with the utmost diligence of a very cautious person, having due regard for all the circumstances; c. A carrier is presumed to be at fault or to have acted negligently in case of death of, or injury to, passengers, it being its duty to prove that it exercised extraordinary diligence; and d. The carrier is not an insurer against all risks of travel [Isaac v. A.L. Ammen, G.R. No. L-9671 (1957)]. Registered owner rule The person who is the registered owner of a vehicle is liable for any damage caused by the negligent operation of the vehicle although the same was already sold [Filcar Transport v. Espinas, G.R. No. 174156 (2012)]. Kabit system It is an arrangement whereby a person who has been granted a certificate of convenience allows another person who owns motor vehicles to operate under such franchise for a fee [Lita Enterprises, Inc. v. IAC, G.R. No. L64693 (1984)]. It is invariably recognized as being contrary to public policy and therefore void and inexistent under Art. 1409. Thus, for the safety of passengers and the public, the registered owner of the vehicle is not allowed to prove that another person has become the owner so that he may be thereby relieved of responsibility [Lim v. CA, G.R. No. 125817 (2002)]. Page 59 of 450 U.P. LAW BOC TRANSPORTATION LAW One of the primary factors considered in the granting of a certificate of public convenience for the business of public transportation is the financial capacity of the holder of the license, so that liabilities arising from accidents may be duly compensated. The kabit system renders illusory such purpose and, worse, may still be availed of by the grantee to escape civil liability caused by a negligent use of a vehicle owned by another and operated under his license [Dizon v. Octavio (1955)]. However, one who has availed of the kabit system is not precluded from filing for damages against another who caused the injury, as the policy against the kabit system will not be defeated by giving such person standing to sue [Lim v. CA, G.R. No. 125817 (2002)]. 3. Classification of transport network vehicle services and transport network companies Transport Network Company or TNC is defined as an organization whether a corporation, partnership, or sole proprietor, that provides pre-arranged transportation services for compensation using an internet-based technology application or a digital platform technology to connect passengers with drivers using their personal vehicles [DOTC D.O. No. 2015-011]. Transport Network Vehicle Service or TNVS refers to a TNC-accredited private vehicle owner, which is a common carrier, using the internet-based technology application or digital platform technology transporting passengers from one point to another, for compensation. The TNVS cannot operate as a common carrier outside of or independent from the use of the internet-based technology of the TNC or TNCs to which they are accredited. [DOTr D.O. No. 2018-012] TNVs and TNCs are expressly considered common carriers and are classified as public utilities. They are subject to full regulation and supervision by the LTFRB, including but not limited to: COMMERCIAL LAW 1. application and approval/ denial of franchise, 2. setting of fares, routes, operating conditions, and 3. imposition of fines, suspension and cancellation of franchise. The LTFRB shall grant the TNCs and their accredited TNVS a Certificate of Public Convenience (CPC) upon full compliance of jurisdictional requirements, as may be determined by LTFRB. The LTFRB shall also set the fare for the TNVS after public hearing or in consultation with the TNCs and TNVS. [DOTr D.O. No. 2018-012] Previously, the TNC may or may not have been granted a Certificate of Public Convenience (CPC). If it is a holder of a valid and current CPC, it is known as a common carrier. Otherwise, it is classified as a land transportation service contractor. The Partners (owners of the vehicles used in transporting passengers) forming part of the network of a TNC, may or may not be a common carrier, depending on whether the Partner(s) itself/themselves are holders of a CPC. A mere Accreditation given by Land Transportation Franchising and Regulatory Board (LTFRB) is not an equivalent to a CPC and will not make said holder a common carrier. If the Partner is a holder of a CPC, said Partner is a common carrier. However, if the Partner is not a holder of a CPC, said Partner is merely a land transportation service contractor [BIR RMC 70-2015] B. VIGILANCE OVER GOODS The liability of the common carrier with respect to vigilance over goods, in general, are as follows: a. Common carriers are responsible for the loss, destruction, or deterioration of the goods [Art. 1734, NCC]. In fact, they are Page 60 of 450 U.P. LAW BOC TRANSPORTATION LAW liable even in those cases where the cause of the loss or damage is unknown [AGBAYANI]. b. If the goods are lost, destroyed, or deteriorated, common carriers are presumed to have been at fault or to have acted negligently [Art. 1735, NCC]. Note: Two-pronged analysis in determining liability: a. Whether or not the cause of the loss, destruction, or deterioration is included under Art. 1734; b. If not, whether or not the common carrier exercised extraordinary diligence. Presumption of Negligence General rule: Common carriers are responsible for the loss, destruction, or deterioration of the goods. Exception: Common carriers are not liable when such loss, destruction, or deterioration is due to any of the following causes only: 1. Flood, storm, earthquake, lightning, or other natural disaster or calamity; 2. Act of the public enemy in war, whether international or civil; 3. Act of omission of the shipper or owner of the goods; 4. The character of the goods or defects in the packing or in the containers; 5. Order or act of competent public authority [Art. 1734, NCC]. In all other cases of loss, destruction, or deterioration, the common carrier is presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence [Art. 1735, NCC]. COMMERCIAL LAW 2. The common carrier must exercise due diligence to prevent or minimize the loss before, during and after the occurrence of the flood, storm, or natural disaster [Art. 1739, NCC]; and 3. The common carrier must not have negligently incurred delay [Art. 1740, NCC]. Fire may not be considered a natural disaster or calamity because it arises almost invariably from some act of man or by human means. It does not fall within the category of an act of God unless caused by lightning or by other natural disaster or calamity [Eastern Shipping Lines v. IAC, G.R. No. L-69044 (1987)]. Act of public enemy Requisites a. The act of the public enemy was committed either in an international or civil war [Art. 1734 (2), NCC]; b. The act of the public enemy must have been the proximate and only cause; and c. The common carrier must exercise due diligence to prevent or minimize the loss before, during and after the act of the public enemy causing the loss, destruction or deterioration of the goods [Art. 1739, NCC]. Thieves, rioters, robbers, and insurrectionists, though at war with social order, are not in a legal sense classed as public enemies, but are merely private depredators for whose acts a carrier is answerable. Pirates on the high seas, however, stand as an exception to this rule. They are considered the enemies of all civilized nations, and indeed of the human race, and consequently their depredations on a common carrier will excuse him from liability [Aquino]. Act or omission of shipper or owner 1. Exempting Causes The act or omission of the shipper must have been the proximate and only cause of the loss, destruction, or deterioration of the goods. Natural disaster or calamity Requisites 1. The natural disaster must have been the proximate and only cause of the loss; If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause being the Page 61 of 450 U.P. LAW BOC TRANSPORTATION LAW negligence of the common carrier, the latter shall be liable for the damages, which shall, however, be equitably reduced [Art. 1741, NCC]. Character of the goods Requisites a. The loss, destruction, or deterioration of the goods is due to the character of the goods or defects in the packing or in the containers [Art. 1734 (4), NCC]; and b. The common carrier must exercise due diligence to forestall or lessen the loss [Art. 1742, NCC]. If the fact of improper packing is known to the carrier or its servants or apparent upon ordinary observation, but it accepts the goods notwithstanding such condition, it is not relieved of liability for loss or injury resulting therefrom [Southern Lines v. CA, G.R. No. L16629 (1962)]. Order of competent authority Requisites a. There must be an order or act of competent public authority through which the goods are seized or destroyed [Art. 1734 (5), NCC]; and b. The said public authority must have had the power to issue the order [Art. 1743, NCC]. To be exempted from liability, the intervention of the competent public authority must be of a character that would render impossible the fulfillment by the carrier of the obligation [Ganzon v. CA, G.R. No. L-48757 (1988)]. Force majeure Force majeure – in general, has also been invoked as an exempting cause based on Art. 1174, which states that no person shall be responsible for a fortuitous event which could not be foreseen, or which, though foreseen, was inevitable. COMMERCIAL LAW A fortuitous event has the following characteristics: a. The cause of the unforeseen and unexpected occurrence, or the failure of the debtor to comply with his obligations, must be independent of human will; b. It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid; c. The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and d. The obligor must be free from any participation in the aggravation of the injury resulting to the creditor. A common carrier may not be absolved from liability in case of force majeure or fortuitous event alone. The common carrier must still prove: (i) That it was not negligent in causing the death or injury resulting from an accident; [Yobido v. CA, G.R. No. 113003 (1997)] (ii) That the loss or destruction of the merchandise was due to accident and force majeure and not fraud, fault, or negligence on the part of the captain or owner of the ship [Tan Chiong Sian v. Inchausti, G.R. No. L-6092 (1912)]. a. Requirement Negligence of Absence of If the common carrier is found to have acted negligently, it is precluded from invoking the exempting causes under Art. 1734, and will be liable for damages suffered by the goods it carried if such damages arise from its negligence [Agbayani]. The exempting circumstance should be the proximate and only cause of the loss, destruction, or deterioration of the goods for the common carrier to be exempted from liability on any of the ff. grounds: 1. Natural Disaster/Calamity 2. Act of Public Enemy 3. Character of the Goods [Art. 1739, 1742, NCC] Page 62 of 450 U.P. LAW BOC TRANSPORTATION LAW When the common carrier’s negligence is the proximate cause of the loss, destruction, or deterioration of the goods, the act or omission of the shipper will only mitigate the carrier’s liability [Art. 1741, NCC]. b. Absence of Delay In order to be free from responsibility on the ground of natural disaster/calamity, the common carrier should not have negligently incurred in delay [Art. 1740, NCC]. c. Due Diligence to prevent or lessen the loss The common carrier should have exercised due diligence to prevent, forestall or lessen the loss, destruction, or deterioration of the goods, in order to be exempted from liability on any of the ff. grounds: a. Natural Disaster/Calamity b. Act of Public Enemy c. Character of the Goods [Art. 1739, 1742, NCC] Meeting a typhoon head-on falls short of due diligence required from a common carrier [Asia Lighterage and Shipping Inc. v CA, G.R. No. 147246 (2000)]. 2. Contributory Negligence The liability of the common carrier shall be equitably reduced when the loss, destruction, or deterioration of the goods when: a. The negligence of the common carrier was the proximate cause thereof; and b. The shipper or owner merely contributed to such loss, destruction, or deterioration [Art. 1741, NCC]. COMMERCIAL LAW Maritima v. Insurance Co., G.R. No. L18965 (1964)], until the same are delivered actually and constructively by the carrier to the consignee or to the person who has a right to receive them; b. When goods are temporarily unloaded or stored in transit, unless the shipper or owner has made use of the right of stoppage in transitu [Art 1737, NCC]; c. During storage in a warehouse of the carrier at the place of destination, until consignee has been advised of the arrival of the goods and has had reasonable opportunity to remove or dispose them [Art 1738, NCC]. In dealing with the contract of common carriage of passengers, for purpose of accuracy, there are two (2) aspects of the same, namely: (a) Contract ‘to carry (at some future time),’ which contract is consensual and is necessarily perfected by mere consent; and (b) Contract ‘of carriage’ or ‘of common carriage,’ which should be considered as a real contract for not until the carrier is actually used can the carrier be said to have already assumed the obligation of a carrier [Paras, Civil Code Annotated, 11th Ed]. Note: The distinction is important in determining when the common carrier is required to exercise extraordinary responsibility. The birth of the contract is not necessarily the birth of the duty to exercise extraordinary responsibility. Delivery of Goods to Common Carriers 3. Duration of Liability Delivery means unconditionally placing the goods in the possession of the carrier and the carrier receiving them for transportation [Art. 1736]. Instances when carrier has responsibility to exercise extraordinary diligence: a. From the time the goods are unconditionally placed in the possession of, and received by the carrier [Art 1736, NCC] or its authorized agent [Compania Unconditionally placing the goods in the possession of the carrier means the shipper cannot get them back from the common carrier at will. Page 63 of 450 U.P. LAW BOC TRANSPORTATION LAW Thus, the liability of the carrier as common carrier and its duty of extraordinary diligence begins with the actual delivery of the goods, NOT: When the common carrier received the goods not for transportation but only for safekeeping; or When a receipt or bill of lading is executed, since the issuance of a bill of lading is not necessary to complete delivery and acceptance [Compania Maritima v Insurance Co., G.R. No. L-18965 (1964)]. Actual or Constructive Delivery The extraordinary responsibility of the common carrier ends when, subject to Art. 1738, the goods are delivered actually or constructively by the carrier to: a. The consignee; or b. The person who has a right to receive them, such as agents, brokers, and the like. Art. 1738 provides that the extraordinary liability of the common carrier continues to be operative even during the time the goods are stored in a warehouse of the carrier at the place of destination, until the consignee has: 1. Been advised of the arrival of the goods; and 2. Had reasonable opportunity thereafter to remove them or otherwise dispose of them. Delivery of the cargo to the customs authorities is not delivery to the consignee or “to the person who has a right to receive them” as contemplated in Art. 1736 because in such case the goods are still in the hands of the government and the owner cannot exercise dominion over them. However, the parties may agree to limit the liability of the carrier considering that the goods still have to go through the inspection of the customs authorities before they are actually turned over to the consignee. It is unfair that the carrier be made responsible for what may happen during the interregnum [Lu Do v. Binamira, G.R. No. L-9840 (1957)]. COMMERCIAL LAW It is settled in maritime law jurisprudence that cargoes while being unloaded generally remain under the custody of the carrier [Asian Terminals, Inc. v. Philam Insurance Co., G.R. No. 181163 (2013)]. Temporary Unloading or Storage General rule: Extraordinary diligence over the goods remains even when the goods are temporarily unloaded or stored in transit. Exception: The duty to observe such diligence ceases when shipper or owner makes use of the right of stoppage in transitu [Art 1737, NCC]. Stoppage in transitu is the act by which the unpaid vendor of goods stops their progress and resumes possession of them constructively, while they are in the course of transit from him to the purchaser and not yet actually delivered to the latter [Agbayani]. Basis: Under Art. 1530, when the buyer of the goods becomes insolvent, the unpaid seller who has parted with the possession of the goods, at any time while they are in transit, may resume the possession of the goods as he would have had if he had never parted with the possession. When the right of stoppage in transitu is exercised, the common carrier holds the goods in the capacity of an ordinary bailee or warehouseman upon the theory that the exercise of the right of stoppage in transitu terminates the contract of carriage. Hence, only ordinary diligence is required [Agbayani]. 4. Stipulation for Limitation of Liability There are two possible stipulations limiting the liability of the common carrier: a. Stipulation limiting the common carrier’s liability as to the diligence required; b. Stipulation limiting the common carrier’s liability as to the amount of liability. Page 64 of 450 U.P. LAW BOC TRANSPORTATION LAW An agreement limiting the common carrier’s liability for delay on account of strikes or riots is also valid [Art. 1748, NCC]. As to Diligence Required A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: 1. In writing, signed by the shipper or owner; 2. Supported by a valuable consideration other than the service rendered by the common carrier; and 3. Reasonable, just and not contrary to public policy [Art. 1744, NCC]. a. Void Stipulations Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy: 1. That the goods are transported at the risk of the owner or shipper; 2. That the common carrier will not be liable for any loss, destruction, or deterioration of the goods; 3. That the common carrier need not observe any diligence in the custody of the goods; 4. That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported; 5. That the common carrier shall not be responsible for the acts or omission of his or its employees; 6. That the common carrier’s liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; 7. That the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage [Art. 1745, NCC]; COMMERCIAL LAW 8. That the common carrier is exempt from any and all liability for loss or damage occasioned by its own negligence; 9. Stipulation providing for an unqualified limitation of such liability to an agreed stipulation [Heacock v. Macondray, G.R. No. L-16598 (1921)]. b. Limitation of Liability to Fixed Amount A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction or deterioration of the goods is valid if: 1. It is reasonable and just under the circumstances; and 2. It has been fairly and freely agreed upon [Art. 1750, NCC]. While a passenger may not have signed the plane ticket, he is nevertheless bound by the provision thereof, regardless of the latter’s lack of knowledge or assent to the regulation. It is what is known as a contract of adhesion wherein one party imposes a ready-made form of contract on the other. The one who adheres to the contract is in reality free to reject it entirely. A contract limiting liability upon an agreed valuation does not offend against the policy of the law forbidding one from contracting against his own negligence [Ong Yiu v. CA, G.R. No. l-40597 (1979)]. [However], the fact that the conditions are printed at the back of the ticket stub in letters so small that they are hard to read would not warrant the presumption that the [shipper] was aware of those conditions such that he had “fairly and freely agreed” to those conditions [Shewaram v. PAL, G.R. No. L-20099 (1966)]. Factors Affecting Agreement The effect of these stipulations is subject to the following provisions: 1. An agreement limiting the common carrier’s liability may be annulled by the shipper or owner if the common carrier refused to carry the goods unless the former agreed to such stipulation [Art. 1746, NCC]; Page 65 of 450 U.P. LAW BOC TRANSPORTATION LAW 2. If the common carrier, without just cause, delays the transportation of the goods or changes the stipulated or usual route, the contract limiting the common carrier’s liability cannot be availed of in case of the loss, destruction, or deterioration of the goods [Art. 1747, NCC]; 3. The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common carrier’s liability is reasonable, just and in consonance with public policy [Art. 1751, NCC]; 4. Even when there is an agreement limiting the liability of the common carrier in the vigilance over the goods, the common carrier is disputably presumed to have been negligent in case of their loss, destruction or deterioration [Art. 1752, NCC]. c. Limitation of Liability in Absence of Declaration of Greater Value Where the liability has been limited due to a stipulation written at the back of a ticket, to the effect that the liability is limited to a certain amount unless the passenger declares a higher valuation, a passenger who did not declare a higher valuation, or did not pay additional charges, cannot increase the liability of the carrier [Ong Yiu v. CA, G.R. No. l-40597 (1979)]. Baggage must have a direct relationship with the passenger who is traveling. For instance, a balikbayan box or suitcase is passenger’s baggage. However, 10,000 cans of corned beef is not considered as passenger baggage. They are considered as goods, and are not part of the contract of carriage [of passenger]. A separate contract of carriage [or bill of lading] must be entered into in order to transport them [Agbayani]. There are two kinds of passenger’s baggage, which are governed differently: a. Passenger baggage in the custody of the passenger (or carry-on luggage); and b. Passenger baggage NOT in the custody of the passenger (or checked-in luggage). The liability is greater for baggage that is in the custody of the carrier, or checked-in baggage, as compared to those in the possession of the passenger. a. Checked-In baggage A stipulation that the common carrier’s liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding [Art. 1749, NCC]. 5. Liability for Passengers COMMERCIAL LAW of Baggage are things that a passenger will bring with him consistent with a temporary absence from where he lives. Passenger’s baggage The provisions of Arts. 1733-1753 shall apply to passenger’s baggage which is not in his personal custody or in that of his employee [Art. 1754, NCC]. In other words, the rules governing the responsibility of a common carrier in the transportation of goods apply. Thus, extraordinary diligence is required. b. Baggage in Passengers Possession of As to baggage other than checked-in baggage, they are governed by Arts. 1998, and 20002003, concerning the responsibility of hotelkeepers [Art. 1754, NCC]. Art. 1998, as applied by analogy, the baggage of passengers in their personal custody or in that of their employees, while being transported, are regarded as necessary deposits. The common carriers are responsible as depositaries, provided that: Page 66 of 450 U.P. LAW BOC TRANSPORTATION LAW 1. Notice was given to them, or to their employees, of the effects brought by the passengers; and 2. The passengers take the precautions which the common carrier advised relative to the care and vigilance of their baggage. In case of loss or injury to the baggage of passengers in their personal custody, or in that of their employees, while being transported, the carrier is liable if the loss or injury is caused by: 1. His servants; 2. His employees; 3. Strangers [Art. 2000, NCC]; or 4. A thief or robber done without the use of arms or irresistible force [Art. 2001, NCC]. The carrier is not liable if loss or injury is caused by: 1. Force majeure [Art 2000, NCC]; 2. Theft or robbery with the use of arms or irresistible force [Art 2001, NCC]; 3. The acts of the passenger, his family, servants, or visitors; 4. The character of the baggage [Art 2002, NCC]. The following provisions also figure in determining the liability of the common carrier: 1. The fact that passengers are constrained to rely on the vigilance of the common carrier shall be considered in determining the degree of care required of him [Art 2000, NCC]; 2. The common carrier cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the passenger; 3. Any stipulation whereby the responsibility of the common carrier as set forth in Arts. 1998-2001 is suppressed or diminished shall be void [Art. 2003, NCC]. COMMERCIAL LAW C. SAFETY OF PASSENGERS The liability of the common carrier with respect to the safety of passengers, in general, are as follows: (1) A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances [Art. 1755, NCC]; (2) In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence [Art. 1756, NCC]. Note: It is not enough that the accident was caused by force majeure, the common carrier must still prove that it was not negligent in causing the injuries resulting from such accident [Bachelor Express v. CA, G.R. No. 85691 (1990)]. Bachelor Express illustrates that force majeure is not itself a defense; the exercise of the diligence required by law is the defense. 1. Void Stipulations General rule: The responsibility of a common carrier for the safety of passengers cannot be dispensed with or lessened by stipulation by the posting of notices, by statements on tickets, or otherwise [Art. 1757, NCC]. Exception: When a passenger is carried gratuitously, a stipulation limiting the common carrier’s liability for negligence is valid [Art 1758, NCC]. Exception to the exception: Even when a passenger is carried gratuitously, a stipulation limiting the common carrier’s liability for willful acts or gross negligence is invalid [Art 1758, NCC]. Page 67 of 450 U.P. LAW BOC TRANSPORTATION LAW The reduction of fare does not justify any limitation of the common carrier’s liability [Art. 1758, NCC]. 2. Duration of Liability As in the contract of carriage of goods, the perfection of the contract of carriage of passengers does not necessarily coincide with the commencement of the duty of extraordinary diligence. It may occur at the same time or later. Based on jurisprudence, the duty that the carrier of passengers owes to its patrons extends to persons boarding the cars as well as those alighting therefrom [Del Prado v. Manila Electric Company, G.R. No. L-29462 (1929)]. This is also reflected in Art. 17, Warsaw Convention, which applies to international air carriage. It provides that the liability of a common carrier for injury to the passenger lasts from embarkation to disembarkation, including the period when the passenger is on board the aircraft. In maritime commerce, Art. 698, Code of Commerce relates to the period of the voyage: 1. In case a voyage already begun should be interrupted: a. The passengers shall be obliged to pay the fare in proportion to the distance covered; and b. Have the following reliefs: Cause of interruption An accidental cause Without right to or force majeure recover for losses and damages right (1) Caused by the (a) He may not be disability of the required to pay vessel and any increased price of passage; (2) A passenger but should agree to living await the repairs (b) His expenses during the stay shall be for his own account. 2. In case of delay in the departure of the vessel, the passengers have: a) The right to remain on board; b) If the delay is not due to a fortuitous event or force majeure, the right to be furnished with food for the account of the vessel; c) If the delay should exceed ten days: i) Passengers requesting the same shall be entitled to the return of the fare; and ii) If it is due exclusively to the fault of the captain or ship agent, they may also demand indemnity for losses and damages. A vessel exclusively devoted to the transportation of passengers must take them directly to the port or ports of destination, no matter what the number of passengers may be, making all the stops indicated in its itinerary. a. Waiting for Carrier or Boarding of Carrier The duty that the carrier of passengers owes to its patrons extends to persons boarding the cars as well as to those alighting therefrom. Relief By the captain With a exclusively indemnity COMMERCIAL LAW to It is the duty of common carriers of passengers to stop their conveyances at a reasonable length of time in order to afford passengers an opportunity to board and enter: 1. Carriers are liable for injuries suffered by boarding passengers resulting from the sudden starting up or jerking of their conveyances while they are doing so [Dangwa Transportation v. CA, G.R. No. 95582 (1991)]. Page 68 of 450 U.P. LAW BOC TRANSPORTATION LAW 2. However, a person boarding a moving car must be taken to assume the risk of injury from boarding the car under the conditions open to his view. Nonetheless, he cannot fairly be held to assume the risk that the motorman, having the situation in view, will increase the peril by accelerating the speed of the car before he is planted safely on the platform [Del Prado v. Manila Electric Company, G.R. No. L-29462 (1929)]. The extraordinary responsibility of common carriers commences: (i) With respect to carriage of passengers by trains: The moment the person who purchases the ticket from the carrier presents himself at the proper place and in a proper manner to be transported with a bona fide intent to ride the coach [Aquino citing Vda. de Nueca, et al. vs. Manila Railroad Company]. (ii) With respect to carriage of passengers by sea: As soon as the person with bona fide intention of taking passage places himself in the care of the carrier or its employees and is accepted as passenger [Aquino]. b. Arrival at Destination The relation of carrier and passenger does not cease at the moment the passenger alights from the carrier’s vehicle at a place selected by the carrier at the point of destination, but continues until the passenger has had a reasonable time or a reasonable opportunity to leave the carrier’s premises. What is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances such as the kind of common carrier, the nature of its business, the customs of the place, and so forth, and therefore precludes a consideration of the time element per se without taking into account such other factors. The primary factor to be considered is the existence of a reasonable cause as will COMMERCIAL LAW justify the presence of the victim on or near the petitioner’s vessel: 1. A person who, after alighting from a train, walks along the station platform is considered still a passenger; 2. A passenger, who has alighted at his destination and is proceeding by the usual way to leave the company’s premises, but before actually doing so is halted by the report that his brother, a fellow passenger, has been shot, and he in good faith, returns to relieve his brother, is deemed reasonably and necessarily delayed and thus continues to be a passenger entitled as such to the protection of the railroad and company and its agents [La Mallorca v. CA, G.R. No. L-20761 (1966)]; 3. In the case of a shipper, the passengers of vessels are allotted a longer period of time to disembark from the ship than other common carriers such as a passenger bus, since such vessels are capable of accommodating a bigger volume of both passenger and baggage as compared to the capacity of a regular commuter bus. Consequently, a ship passenger will need at least an hour as is the usual practice, to disembark from the vessel and claim his baggage [Aboitiz Shipping v. CA, G.R. No. 84458 (1989)]; 4. The carrier necessarily would still have to exercise extraordinary diligence in safeguarding the comfort, convenience and safety of its stranded passengers until they have reached their final destination [PAL v. CA, G.R. No. L-82619 (1993)]. Note: Despite the Court’s pronouncement in PAL v. CA, note that common carriers are bound to observe extraordinary diligence in the ‘safety’ of its passengers. The law does not mention the words ‘comfort’ and ‘convenience.’ 3. Liability for Acts of Others Employees General rule: Common carriers are liable for the death of or injuries to passengers through Page 69 of 450 U.P. LAW BOC TRANSPORTATION LAW COMMERCIAL LAW the negligence or willful acts of the former’s employees, although such employees may >have acted beyond the scope of their authority or in violation of the orders of the common carriers. as there are human factors involved in the situation [Yobido v. CA, G.R. No. 113003 (1997)]. This liability does not cease: (i) Even upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees [Art. 1759, NCC]; (ii) By stipulation, by the posting of notices, nor by statements on the tickets eliminating or limiting said liability [Art. 1760, NCC]. General Rule: A common carrier is not liable for injuries inflicted by strangers or copassengers. Ratio: The servant is clothed with delegated authority and charged with the duty to execute the carrier’s undertaking to carry the passenger safely [Agbayani]. Also, the defense of diligence in the selection and supervision of employees does not obtain because the liability is not based on quasi-delict, but on culpa contractual. However, there must be a reasonable connection between the act and the contract of carriage. Other Passengers and Strangers Exception: A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the common carrier's employees, through the exercise of the diligence of a good father of a family, could have prevented or stopped the act or omission [Art. 1763, NCC]. Note: The law speaks of injuries suffered by the passenger but not death. However, there appears to be no reason why the common carrier should not be held liable under such circumstances. The word “injuries” should be interpreted to include death [Agbayani]. Note: The employee must be on duty at the time of the act. It is enough that the assault happens within the course of the employee’s duty. It is no defense for the carrier that the act was done in excess of authority or in disobedience of the carrier’s orders. [Maranan v. Perez, G.R. No. L-22272 (1967)]. Under Art. 1763, a tort committed by a stranger which causes injury to a passenger does not accord the latter a cause of action against the carrier. The negligence for which a common carrier is held responsible is the negligent omission by the carrier’s employees to prevent the tort from being committed when the same could have been foreseen and prevented by them through the exercise of the diligence of a good father of a family [Pilapil v. CA, G.R. No. 52159 (1989)]. Exception: A common carrier is not responsible for acts falling under force majeure. When a party is unable to fulfill his obligation because of force majeure, he cannot be held liable for damages for nonperformance [Japan Airlines vs. CA, G.R. No. 118664 (1998)]. Contributory Negligence The passenger must observe the diligence of a good father of a family to avoid injury to himself [Art. 1761, NCC]. Note: In order to be exempted from liability due to a fortuitous event, a common carrier must still prove a complete exclusion of human agency from the cause of injury or death. Hence, it was held that the explosion of the new tire may not be considered a fortuitous event The contributory negligence of the passenger does not bar recovery of damages for his death or injuries, if the proximate cause thereof is the negligence of the common carrier, but the amount of damages shall be equitably reduced [Art. 1762, NCC]. Page 70 of 450 U.P. LAW BOC TRANSPORTATION LAW However, when the negligence of the passenger was the proximate cause of the injury, the passenger is barred from recovery, and the common carrier is exempted from liability. It is negligence per se to voluntarily or inadvertently protrude one’s arm, hand, elbow, or any other part of his body through the window of a moving car beyond the outer edge of the window or outer surface of the car, so as to come in contact with objects or obstacles near the track [Isaac v. A.L. Ammen, G.R. No. L-9671 (1957)]. 4. Liability for Delay in Commencement of Voyage A “delayed voyage” refers to a voyage involving: i. Late departure of the ship from its port of origin; or ii. Late arrival thereof to its port of destination for a period of time not exceeding twenty-four (24) hours from the CPC-authorized time of departure or arrival of the ship [Maritime Industry Authority Circular No. 2018-27]. In case of delayed voyages, passengers shall have the following rights: a. Right to information Within thirty (30) minutes of knowledge that the voyage shall be delayed but not later than one (1) hour before the CPC-authorized departure schedule, the operator shall inform the passengers of: i. The delay; ii. The cause of delay; iii. The new departure or expected arrival time [Maritime Industry Authority Circular No. 2018-27]. b. Right to refund or revalidation Should the delay be for more than three (3) hours, the passenger shall be offered the option to request a refund of the ticket price, or for the revalidation of the ticket [Maritime Industry Authority Circular No. 2018-27]. COMMERCIAL LAW c. Right to amenities The operator shall provide, free of charge, the passengers with the following: i. Snacks or refreshment, or meals during mealtime; ii. Free access to first aid/ relief medicine, if necessary; iii. Free access to communication facilities or services, if necessary; iv. Free, decent, and clean accommodation located near or accessible from the port; v. Free transportation to and from the port and the place of accommodation, should the delay require a waiting time of more than eight (8) but not exceeding twenty-four (24) hours [Maritime Industry Authority Circular No. 2018-27]. d. Right to compensation As an alternative to providing accommodation or whenever the same is not practicable, the operator may offer the passengers corresponding compensation: i. In an amount equivalent to the prevailing market price of a decent and clean accommodation in the immediate or adjacent locality of the ship’s point of departure; ii. Subject to the limitation of a maximum of three (3) nights per passenger [Maritime Industry Authority Circular No. 2018-27]. e. Right to remain on board In case the departure of the vessel is delayed the passengers have a right to remain on board and to be furnished with food for the account of the vessel, unless the delay is due to an accidental cause or to force majeure [Art. 698, COC]. f. Right to return If the delay should exceed ten days, the passengers who request it shall be entitled to the return of the passage [Art. 698, COC]. Page 71 of 450 U.P. LAW BOC TRANSPORTATION LAW g. Right to damages If the delay were due exclusively to the captain or agent, the passengers may furthermore demand indemnity for losses and damages [Art. 698, COC]. 5. Liability for Defects Equipment and Facilities in While a carrier is not an insurer of the safety of the passengers, it should nevertheless be held to answer for the flaws of its equipment and mechanical defects, if such flaws were at all discoverable. The manufacturer of the defective appliance is considered in law, as the agent of the carrier, and the good repute of the manufacturer will NOT relieve the carrier from liability. Rationale: The passenger has no privity with the manufacturer of the defective equipment. Hence, he has no remedy against him, while the carrier usually has [Necesito vs. Paras, G.R. No. L-10605 (1958)]. 6. Extent of Damages Liability for Damages recoverable from common carriers, both in cases of carriage of passengers and goods, shall be awarded in accordance with Title XVIII concerning Damages. Art. 2206, on liability, in case of death, for loss of earning capacity, support, and moral damages for mental anguish, shall also apply to the death of a passenger caused by the breach of contract by a common carrier [Art. 1764, NCC]. Thus, the damages recoverable are: a. Actual or compensatory damages; b. Moral damages; c. Exemplary damages; d. Nominal, temperate, and liquidated damages; e. Attorney’s fees. COMMERCIAL LAW a. Actual or Compensatory Damages Actual or compensatory damages refer to adequate compensation for such pecuniary loss suffered as duly proved [Art. 2199, NCC]. Under Art. 2201, the liability for damages include: a. In case the common carrier acted in good faith: a. The natural and probable consequence of the breach of the obligation; and b. Those which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted; b. In case of fraud, bad faith, malice or wanton attitude, all damages which may be reasonably attributed to the nonperformance of the obligation. In case of death, actual damages also include: a. Loss of earning capacity, unless the deceased had no earning capacity at the time of death; and b. Support for a period not exceeding five years [Art. 2206, NCC]. In the absence of a showing that common carrier’s attention was called to the special circumstances requiring prompt delivery of a passenger’s luggage, the common carrier cannot be held liable for the cancellation of passenger’s contracts [for exhibition of films] as it could not have foreseen such an eventuality when it accepted the luggage for transit [Pan-Am World Airways v. IAC, G.R. No. 70462 (1988)]. b. Moral Damages Moral damages, though incapable of pecuniary computation, if they are the proximate result of the common carrier’s wrongful act or omission, may be recovered [Art. 2217, NCC]. In cases of breach of contract of carriage, moral damages may be recovered where: 1. The common carrier acted fraudulently; 2. The common carrier acted in bad faith [Art. 2220, NCC]; Page 72 of 450 U.P. LAW BOC TRANSPORTATION LAW COMMERCIAL LAW 3. Death of a passenger resulted even in the absence of bad faith or fraud [Art. 2206, NCC]. breach of contract of carriage and in every case where any property right has been invaded [Art. 2222, NCC]. Bad faith contemplates a state of mind affirmatively operating with furtive design or with some motive of self-interest or will or for ulterior purpose [Air France v. Carrascoso, G.R. No. L-21438 (1966)]. A violation of the passenger’s right to be treated with courtesy in accordance with the degree of diligence required by law to be exercised by every common carrier entitles the passenger to nominal damages [Saludo v. CA, G.R. No. 95536 (1922)]. Inattention and lack of care on the part of the carrier, resulting in the failure of the passenger to be accommodated in the class contracted for, amounts to bad faith or fraud which entitles the passenger to the award of moral damages in accordance with Art. 2220 [Ortigas v. Lufthansa, G.R. No. L-28773 (1975)]. Willful and deliberate overbooking on the part of the airline carrier constitutes bad faith. Under Section 3, Economic Regulations No. 7 of the Civil Aeronautics Board, overbooking, which does not exceed ten percent, is not considered as deliberate and therefore does not amount to bad faith [United Airlines v. CA, G.R. No. 124110 (2001)]. c. Exemplary Damages In a contract of carriage, exemplary damages may be awarded if the common carrier acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner [Art. 2232, NCC]. Exemplary damages serves as an instrument to serve the ends of law and public policy by reshaping socially deleterious behaviors, specifically, in the case, to compel the common carrier to control their employees, to tame their reckless instincts, and to force them to take adequate care of human beings and their property [Mecenas v. CA, G.R. No. 88052 (1989)]. d. Nominal, Temperate, and Liquidated Damages Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated by the defendant, may be vindicated or recognized, not for the purpose of indemnifying the plaintiff for any loss suffered by him [Art. 2221, NCC]. It may be awarded in case of Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be recovered when some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty [Art. 2224, NCC]. In the case of Philtranco v Paras [G.R. No. 161909(2012)], the Supreme Court upheld the award of temperate damages by the CA. Paras failed to show receipts of at least two surgeries as well as rehabilitative therapy. Nonetheless, the CA was convinced that Paras should not suffer from the lack of definite proof of his actual expenses for the surgeries and rehabilitative therapy. Thus, the CA awarded to him temperate damages of P50,000.00 in the absence of definite proof of his actual expenses towards that end. Liquidated damages are those damages agreed upon by the parties to a contract, to be paid in case of breach thereof [Art. 2226, NCC]. e. Attorney’s Fees Under Art. 2208, as applicable to a contract of carriage, attorney’s fees and expenses of litigation may be recovered in the following cases: 1. When exemplary damages are awarded; 2. When the common carrier’s act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; 3. Where the common carrier acted in gross and evident bad faith in refusing to satisfy the plaintiff’s valid, just and demandable claim; Page 73 of 450 U.P. LAW BOC TRANSPORTATION LAW 4. In any other case where the court deems it just and equitable that attorney’s fees and expenses of litigation should be recovered. D. BILL OF LADING Definition A Bill of Lading is a written acknowledgement, signed by the master of a vessel or other authorized agent of the carrier, that he has received the described goods from the shipper: a. To be transported on the expressed terms to the described place of destination; and b. To be delivered there to the designated consignee or parties [70 Am. Jur. 2d 924]. Effectivity The bill of lading becomes effective usually upon its delivery to and acceptance by the shipper [Aquino]. In the absence of fraud, concealment, or improper conduct, it is presumed that the stipulations of the bill are known to the shipper, and he is generally bound by his acceptance whether he reads the bill or not [Magellan Mfg. Marketing Corp. v. CA, G.R. No. 95529 (1991)]. 1. Three-Fold Character A Bill of Lading operates as a: 1. Receipt as to the quantity and description of the goods shipped; 2. Contract to transport and deliver the goods to the consignee or other person therein designated, on the terms specified in such instrument; and 3. Document of title, which makes it a symbol of the goods. General Rule: The bill of lading constitutes the legal evidence of the contract of transportation, and all disputes between the parties regarding the execution and performance of the contract shall be decided by the contents of the bill of lading issued by the carrier. COMMERCIAL LAW It is covered by the Parol Evidence Rule in which the terms of the contract are rendered conclusive upon the parties. Evidence aliunde is not admissible to vary or contradict a complete and enforceable agreement embodied therein [Magellan Mfg. Marketing Corp. v. CA, G.R. No. 95529 (1991)]. The value of the goods stated in the bill of lading is conclusive between the parties, and the shipper is not allowed to prove a higher value [Art. 372, COC]. It is only when the carrier’s fault is so gross as to amount to actual fraud that the actual amount of the losses and damages suffered may be proved by the shipper against the carrier. Exception: The contents of the bill of lading are not controlling when there is falsity and material error in its drafting [Art. 353, COC]. A bill of lading is not, however, indispensable for the creation of a contract of carriage [Compania Maritima v Insurance Co., G.R. No. L-18965 (1964)]. In the absence of a bill of lading, disputes shall be determined by the legal proofs which the parties may present in support of their respective claims, according to the Code of Commerce [Art. 354, COC]. 2. Delivery of Goods The goods should be delivered to the consignee or any other person to whom the bill of lading was validly transferred or negotiated. The carrier is duty bound to deliver the goods in the same condition in which, according to the bill of lading, they were at the time of their receipt, without damage or impairment [Art. 363, COC]. Page 74 of 450 U.P. LAW BOC TRANSPORTATION LAW Period of Delivery Period for the delivery of goods Period of Delivery must be made delivery is within period fixed [Art. 370, stipulated COC]. in the Bill of Lading Period of Delivery must be made delivery is through the first shipment of NOT the same or similar merchandise to the point of stipulated delivery. If not made on such first shipment, delay arises. [Art. 358, COC]. Liability in case of delay in delivering the goods Indemnity Liability is limited to the for delay is stipulation [Art. 358, COC]. fixed in the Bill of Lading Indemnity Liable for all damages which for delay may have been caused by NOT fixed the delay [Art. 370, COC]. Delivery Without Surrender of Bill of Lading After the contract has been complied with: a. The bill of lading which the carrier has issued shall be returned to him; and b. The respective obligations and actions shall be considered cancelled by virtue of the exchange of this title with the thing transported. Unless in the same act, the claim which the parties may wish to reserve be reduced to writing. Exception being made of the provisions of Art. 366, on period for filing claims [Art. 353, par. 2, COC]. If the consignee CANNOT return the bill of lading subscribed by the carrier, upon receiving the merchandise, in case of loss or for any other reason whatsoever: The consignee shall give said carrier a receipt for the goods delivered. COMMERCIAL LAW This receipt produces the same effects as the return of the bill of lading [Art. 353, par. 3, COC]. If surrender of the original bill of lading is not possible, acknowledgment of the delivery by signing the delivery receipt suffices for a common carrier to be discharged of its contractual obligation [National Trucking and Forwarding Corp v Lorenzo Shipping Corp, G.R. No. 153563 (2005)]. Refusal of Consignee to Take Delivery The consignee may refuse to take delivery in the following cases: 1. If only part of the goods transported should be delivered, when he proves that he cannot make use thereof without the others [Art. 363, COC]; 2. When the goods are rendered useless for purposes of sale or consumption in the use for which they are properly destined, in which case the consignee may demand payment of the goods at current market prices [Art. 365, COC]; 3. In case part of the goods is in good condition and separation is possible, the consignee may refuse to receive only the damaged goods [Art. 365, COC]; 4. Where the delay is through the fault of the carrier [Art. 371, COC]. In case of dispute as to the condition of the goods, the same shall be examined by experts appointed by the parties, and in case of disagreement, appointed by the judicial authority. If the persons interested should not agree with the report, said judicial authority shall order the deposits of the merchandise in a safe warehouse, and the parties interested shall make use of their rights in the proper manner [Art. 367, COC]. Horses, vehicles, vessels and equipment used by the carrier serve as liens for the payment of the value of the goods, which the carrier must Page 75 of 450 U.P. LAW BOC TRANSPORTATION LAW pay in case of loss or misplacement [Art. 372, COC]. 3. Period for Filing Claims A claim, on account of damage found upon opening the packages, must be made against the carrier: a. Within 24 hours, if the indications of the damage cannot be ascertained from the exterior of the packages (i.e., latent damage); or b. At the time of receipt, if the indications damage can be so ascertained (i.e., patent damage) [Art. 366, COC]. No claim whatsoever shall be admitted against the carrier with regard to the condition in which the goods transported were delivered: a. After the periods mentioned have elapsed; or b. After the transportation charges have been paid. The periods mentioned commence upon delivery of cargo to the consignee at the place of destination. Thus, Art. 366 is limited to cases of claims for damage to goods actually turned over by the carrier and received by the consignee. It does not apply to misdelivery of goods. Failure to file a claim bars recovery [Aquino]. Ratio: The rule protects the carrier by affording it an opportunity to make an investigation of a claim while the matter is still fresh and easily investigated so as to safeguard itself from false and fraudulent claims [UCPB General Ins. Co., Inc. v. Aboitiz Shipping, G.R. No. 168433 (2009)]. However, provisions specifying a time to give notice of damage to common carriers are ordinarily to be given a reasonable and practical, rather than a strict construction. Thus, in light of the peculiar circumstances in this case, the Court made a pro hac vice ruling, in that even if the notice was given more than 24 hrs after the receipt of the goods, the notice COMMERCIAL LAW requirement was held nevertheless to have been complied with [Aboitiz v Insurance Company of North America, GR No. 168402 (2008)]. Code of Commerce COGSA Primarily governs Applicable law for domestic transport, all contracts for but nothing stops carriage of goods parties from by sea to Philippine stipulating that ports in foreign COGSA applies in trade their contract File claim for apparent loss: upon receipt File claim within 24 hours from delivery if damage or loss is not apparent File claim within 3 days from delivery if damage or loss is not apparent Filing of the claim is Filing of the claim is mandatory; condition not mandatory precedent for filing of action for damages Prescriptive period to file an action: 10 years from breach if bill of lading/written receipt/contract is issued. 6 years from breach if only through oral contract Prescriptive period to file an action: 1 year from discharge of goods, or date when they should have been delivered. The 1year period may be extended by stipulation. The parties to a contract of carriage may fix, by agreement, a shorter time for the bringing of suit on a claim for the loss of or damage to the shipment than that provided by the statute of limitations. i. In the absence of any statutory limitation; and ii. Subject to the requirement on the reasonableness of the stipulated period. Ratio: Such stipulation merely affects the shipper’s remedy and does not affect the liability of the carrier [PHILAMGEN v. Sweet Lines, Inc., G.R. No. 87434 (1992)]. Page 76 of 450 U.P. LAW BOC TRANSPORTATION LAW COMMERCIAL LAW Suit must be brought within one year: 1. After delivery of the goods; or 2. From the date when the goods should have been delivered. occasioned by its own negligence Limited Unqualified INVALID liability limitation of such liability to an agreed valuation Qualified Limits the VALID and liability liability of the enforceable carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of freight [H.E. Heacock Company v. Macondray & Company, Inc., G.R. No. L-16598, Oct. 3, 1921]. Otherwise, the carrier and the ship shall be discharged from all liability in respect of loss or damage. E. MARITIME COMMERCE 4. Period for Filing Actions Overland Transportation Coastwise Shipping and The general rules under the Civil Code on extinctive prescription apply. Thus, action for damages must be filed in court: 1. Within 6 years, if a bill of lading was not issued [Art. 1145, NCC]; 2. Within 10 years, if a bill of lading was issued [Art. 1146, NCC]. International Carriage of Goods by Sea The absence of notice shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered [Section 3(6), COGSA]. The COGSA, as adopted and embodied in CA No. 65, applies because it is a special law, and, as such, prevails over the general provisions of the Civil Code on prescription of actions [Maritime Agencies & Services, Inc. v. CA, G.R. No. 77638 (1990) ]. 5. Effects of Stipulations Three kinds of limiting stipulations often made in bill of lading: Effect Valid/Invalid No Exempts the INVALID liability carrier from any and all liability for loss or damage Vessel Vessels are those engaged in navigation, whether coastwise or on the high seas destined for the services of the industry or maritime commerce. The word ‘vessel’ used in the Code of Commerce was not intended to include all ships, craft, or floating structures of every kind without limitation [Lopez v. Duruelo, G.R. No. L-29166 (1928)]. Vessels are considered personal or movable property [Art. 585, COC]; but they partake to a certain extent, of the nature and conditions of real property, on account of their value and importance in the world of commerce. 1. Charter Parties Charter party – a contract by virtue of which the owner or agent of a vessel binds himself to Page 77 of 450 U.P. LAW BOC TRANSPORTATION LAW transport merchandise or persons for a fixed price. Liabilities arising from breach of a charter party is identical to overland transport. Towage is not a charter party. It is a contract for the hire of services by which a vessel is engaged to tow another vessel from one port to another for consideration. Bill of lading distinguished from a charter party Bill of Lading Charter Party A private receipt A complete contract, which the captain whereby the whole or gives to accredit part of the ship is let that such goods by the owner to a belong to such merchant or other person for a specified persons. time or use for the conveyance of goods, in consideration of the payment of freight [Caltex v. Sulpicio Lines, G.R. No. 131166 (1999)]. A real contract A consensual contract can be which exists only which after delivery of the dissolved by means of goods to be indemnity for losses transported is and damages. made. Persons who make a charter: a. Owner or owners of the vessel, either in whole or in part, who have legal control and possession of the vessel; b. Charterer may subcharter entire vessel to 3rd person only if not prohibited in original charter [Art 679, COC]; c. Ship agent if authorized by the owner/s or given such power in the certificate of appointment [Art 598, COC]; or d. Captain in the absence of the ship agent or consignee and only if he acts in accordance with the instructions of the agent or owner and protects the latter’s interest [Art 609, COC]. COMMERCIAL LAW b. Existing vessel which should be placed at the disposition of the shipper; c. Freight; and d. Compliance with the formal requisites under Article 652 of the Code of Commerce which include the requirement that the charter party must be in (a) writing, (b) drawn in duplicate, and (c) signed by the parties [Aquino]. In modern maritime law and usage, there are three distinguishable types of charter parties: a. Bareboat or demise charter; b. Time charter; and c. Voyage or trip charter [Litonjua Shipping, Inc. v. National Seamen Board, G.R. No. L51910 (1989)]. Note: Both time and voyage charters are said to be contracts of affreightment, where a common or public carrier is not converted into a private carrier. Contract of affreightment – one in which the owner of the vessel leases part or all of its space to haul goods for others. It is a contract for special service, wherein the general owner retains the possession, command and navigation of the ship The charterer or freighter merely has use of the space in the vessel in return for his payment of the charter hire. The rights, responsibilities of ownership rest on the owner, and the charterer is usually free from liability to third persons in respect of the ship [Puromines Inc. v. CA, G.R. No. 91228 (1993)]. Bareboat or Demise Charter In a bareboat or demise charter, the ship owner leases to the charterer the whole vessel. The owner relinquishes, completely and exclusively, the possession, command and navigation of the vessel Requisites for a valid charter party: a. Consent of the contracting parties; Page 78 of 450 U.P. LAW BOC TRANSPORTATION LAW Anything short of such a complete transfer is a contract of affreightment or not a charter party at all. Common carrier is converted to private carrier The master and crew of the vessel thereby become the charterer’s “servants” [AQUINO (2011)]. Time Charter Thus, the charterer, by virtue of a demise charter, is considered the owner pro hac vice. He mans and equips the vessel and assumes all responsibility for navigation, management and operation. He thus acts as the owner of the vessel in all important aspects during the duration of the charter [Puromines Inc. v. CA, G.R. No. 91228 (1993)]. Bareboat distinguished from contract of affreightment In a bareboat or demise charter, the common carrier is converted to private carrier. Although a charter party may transform a common carrier into a private one, the same, however, is not true in a contract of affreightment on account of the distinctions between a contract of affreightment and a demise or bareboat charter [Puromines Inc. v. CA, G.R. No. 91228 (1993)]. Demise or Bareboat Charterer becomes liable to others for any breach caused by its negligence Charterer regarded as owner pro hac vice for the voyage Contract of Affreightment Owner remains liable as carrier and must answer for any breach of duty Charterer is not regarded as owner Owner of relinquishes possession, command, navigation charterer The vessel owner retains possession, command, and navigation of the ship vessel and to COMMERCIAL LAW Common carrier is not converted to private carrier Time charter – a contract for the use of a vessel for a specified period of time or for the duration of one or more specified voyages. The owner of a time-chartered vessel retains possession and control through the master and crew, who remain his employees. The time charterer acquires the right to: Utilize the carrying capacity and facilities of the vessel; and Designate her destinations during the term of the charter [Litonjua Shipping Co., Inc. v. National Seamen Board, G.R. No. L51910(1989)]. Voyage or Trip Charter In a voyage charter, the vessel is leased for a single or particular voyage. The vessel is chartered for a carriage of goods from one or more ports of loading to one or more ports of unloading. The master and crew remain the employ of the owner of the vessel [Litonjua Shipping Co., Inc. v. National Seamen Board, G.R. No. L-51910 (1989)]. The owner who retains possession of the ship remains liable as carrier and must answer for loss or non-delivery of the goods received for transportation [Cebu Salvage Corp. vs. Philippine Home Assurance Corp., G.R. No. 150403 (2007)]. 2. Liability of Ship Owners and Shipping Agents The persons participating in commerce are the following: a. Ship owners or ship agents; b. Captains and masters; c. Other officers and crew; Page 79 of 450 maritime U.P. LAW BOC TRANSPORTATION LAW d. Supercargoes. Ship Owner - has possession, control and management of the vessel. >He has the consequent right to direct her navigation and receive freight earned and paid, while his possession continues; He is the person who is PRIMARILY liable for damages sustained in the operation of the vessel, based on the provisions of the Code of Commerce. Ship Agent - the person entrusted with the provisioning of a vessel, or who represents her in the port in which she happens to be [Art. 586, COC]. The ship agent is SOLIDARILY liable with the owner; The joint and several liability applies both for breach of contract and extra-contractual obligation such as tort; The ship agent, even though he is not the owner, is liable in every way to the creditor for losses and damages, without prejudice to the right of the owner, the vessel and its equipment and freight [Aquino]. Captains - those who govern vessels that navigate the high seas or ships of large dimensions and importance, although they may be engaged in coastwise trade. Masters - those who command smaller ships engaged exclusively in coastwise trade. In maritime commerce, masters and captains are the same. Crew - a person on board who is involved in highly technical tasks and in the manning of the vessel (e.g. master, mate). Complement - a person, not a crew, who is not directly involved in the manning of the vessel (e.g. cook). Supercargo - a person on board the vessel, who: Functions as an agent of the owner of the goods shipped as cargo on a vessel; Has charge of the cargo on board; Sells the cargo to the best advantage in the foreign markets; COMMERCIAL LAW Buys cargo to be brought back on the return voyage of the ship, and comes home with it. The ship owner or ship agent is liable: a. For the acts of the captain, unless the latter exceeds his authority [Art. 586, COC]; b. For contracts entered into by the captain to repair, equip and provision the vessel, provided that the amount claimed was invested for the benefit of the vessel [Art. 586, COC]; c. For the indemnities in favor of third persons which may arise from the conduct of the captain in the care of the goods transported, as well as for the safety of passengers transported [Art. 587, COC]; d. For damages to third persons for tort or quasi-delict committed by the captain, except collision with another vessel [Art. 1759, NCC]; e. For damages in case of collision due to the fault, negligence, or want of skill of the captain, sailing mate, or any other member of the complement [Art. 826, COC]. Liability for Acts of Captain Three (3) distinct roles of a captain: 1. General agent of the ship owner; 2. Commander and technical director of the vessel; 3. Representative of the country under whose flag he navigates [Inter-Orient Marine Enterprises v. NLRC, G.R. No. 115286 (1994)]. The captain shall be liable to the agent, and the latter to third persons [Art. 618, COC]: 1. For all the damages suffered by the vessel and his cargo by reason of want of skill or negligence on his part; 2. For all the thefts committed by the crew, reserving his right of action against the guilty parties; 3. For the losses, fines, and confiscations imposed on account of violation of the laws and regulations of customs, police, health, and navigation; 4. For the losses and damages caused by mutinies on board the vessel, or by reason Page 80 of 450 U.P. LAW BOC 5. 6. 7. 8. TRANSPORTATION LAW of faults committed by the crew in the service and defense of the same, if he does not prove that he made full use of his authority to prevent or avoid them; For those arising by reason of an undue use of powers and non-fulfillment of the obligations which are his; For those arising by reason of his going out of his course or taking a course which he should not have taken without sufficient cause, in the opinion of the officers of the vessel at a meeting with the shippers or supercargoes who may be on board; For those arising by reason of his voluntarily entering a port other than that of his destination; For those arising by reason of nonobservance of the provisions contained in the regulations on situation of lights and maneuvers for the purpose of preventing collisions. Exceptions to Limited Liability The Doctrine of Limited Liability (Hypothecary Rule) The real and hypothecary nature of maritime law simply means that the liability of the carrier in connection with losses related to maritime contracts is confined to the vessel, which is hypothecated for such obligations or which stands as the guaranty for their settlement. The liability of the vessel owner and agent arising from the operation of such vessel is confined to the vessel itself, its equipment, freight, and insurance, if any Originated by reason of the conditions and risks attending maritime trade in its earliest years, when such trade was replete with innumerable and unknown hazards since vessels had to go through largely uncharted waters to ply their trade. Ratio: Such limitation of liability was designed to – Offset adverse conditions; Encourage people and entities to venture into maritime commerce despite the risks and the prohibitive cost of shipbuilding; and COMMERCIAL LAW Induce capitalists into effectively wagering their resources against the consideration of the large profits attainable in the trade [Aboitiz Shipping Corp. v. General Accident Fire and Life Assurance Corp., G.R. No. 100446 (1993)]. Thus, under the doctrine of abandonment: 1. The agent shall be civilly liable for the indemnities in favor of third persons which arise from the conduct of the captain in the care of the goods which the vessel carried, but he may exempt himself therefrom by abandoning the vessel with all her equipment and the freight he may have earned during the voyage [Art. 587, COC]; 2. The owners of a vessel shall be civilly liable in the proportion of their contribution to the common fund, for the results of the acts of the captain, referred to in Art. 587. Each part owner may exempt himself from this liability by the abandonment before a notary of the part of the vessel belonging to him [Art. 590, COC]; 3. In case of collision, the liability of the ship owner shall be understood as limited to the value of the vessel with all her appurtenances and all the freight earned during the voyage [Art. 837, COC]; 4. If the vessel and her freight should be totally lost, by reason of capture or wreck, all rights of the crew to demand any wages whatsoever shall be extinguished, as well as the agent for the recovery of the advances made [Art. 643, COC]. If the ship owner or agent may in any way be held civilly liable at all for injury to or death of passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction [Yangco v. Laserna, G.R. No. L-47447 (1941)]. Exceptions to the Limited Liability Rule (1) Claims under the Workmen’s Compensation Act [Abueg v. San Diego, G.R. No. L-773 (1946)]; (2) Expenses for repairing, provisioning and equipping the vessel [Government v Page 81 of 450 U.P. LAW BOC (3) (4) (5) (6) TRANSPORTATION LAW Insular Maritime, G.R. No. L-21495 (1924)]; There is an actual finding of negligence on the part of the vessel owner or agent [Aboitiz Shipping v. General Accident Fire and Life Assurance Corp., G.R. No. 100446 (1993)]; Vessel is insured, to the extent of the insurance proceeds [Vasquez v. CA, G.R. No. L-42926 (1985)]; There was no total loss and the vessel is not abandoned [Yangco v. Laserna, G.R. No. L-47447 (1941)]; Collision between two negligent vessels. 3. Accidents and Damages in Maritime Commerce General Average Averages pertain to expenses and damages: a. Expense – to constitute an average, an expense must be: a. Extraordinary or accidental; b. Incurred during the voyage; and c. Incurred in order to preserve the vessel, the cargo, or both. b. Damages or Deterioration – to constitute an average, it must: a. Have been suffered by the vessel from the time the vessel put to sea from the port of departure until it casts anchor in the port of destination; and b. Have been suffered by the merchandise from the time they are loaded in the port of shipment until they are unloaded in the port of consignment [Art. 806, COC]. There are two kinds of averages: 1. Particular or simple average; and 2. Gross or general average. PARTICULAR AVERAGE Particular or simple averages shall include all damages and expenses caused to the vessel or cargo that did not inure to the common benefit and profit of all persons interested in the vessel and her cargo [Art. 809, COC]. COMMERCIAL LAW The owner of the goods which gave rise to the expense or suffered the damage shall bear this average [Art. 810, COC]. GENERAL AVERAGE General or gross averages shall include all the damages and expenses which are deliberately caused in order to save the vessel, her cargo, or both at the same time, from a real and known risk [Art. 811, COC]. The gross or general average shall be borne by those who benefited from the sacrifice. These include the ship owner and the owners of the cargoes that were saved. Contribution may also be imposed on the insurers of the vessel or cargoes that were saved, as well as lenders on bottomry or respondentia. Requisites 1. There must be a common danger; 2. That for the common safety, part of the vessel or of the cargo or both is sacrificed deliberately; 3. That from the expenses or damages caused follows the successful saving of the vessel and cargo; and 4. That the expenses or damages should have been incurred or inflicted after taking proper legal steps and authority [Magsaysay, Inc. v. Agan, G.R. No. L-6393 (1955)]. Common danger means both the ship and the cargo, after it has been loaded, are subject to the same danger. Whether during the voyage, or in the port of loading or unloading; Whether the danger arises from the accidents of the sea, dispositions of the authority, or faults of men; Provided that the circumstances producing the peril may rationally be said to be certain and imminent; Excludes measures undertaken against a distant peril [Magsaysay, Inc. v. Agan, G.R. No. L-6393 (1955)]. Page 82 of 450 U.P. LAW BOC TRANSPORTATION LAW Note: When a vessel is stranded unintentionally, the damages incurred cannot constitute general averages. Cases of general average 1. The goods or cash invested in the redemption of the vessel or cargo captured by enemies, privateers, or pirates, and the provisions, wages, and expenses of the vessel detained during the time the arrangement or redemption is taking place; 2. The goods jettisoned to lighten the vessel, whether they belong to the vessel, to the cargo, or to the crew, and the damage suffered through said act by the goods kept; 3. The cables and masts which are cut or rendered useless, the anchors and the chains which are abandoned in order to save the cargo, the vessel, or both; 4. The expenses of removing or transferring a portion of the cargo in order to lighten the vessel and place her in condition to enter a port or roadstead, and the damage resulting therefrom to the goods removed or transferred; 5. The damage suffered by the goods of the cargo through the opening made in the vessel in order to drain her and prevent her sinking; 6. The expenses caused through floating a vessel intentionally stranded for the purpose of saving her; 7. The damage caused to the vessel which is necessary to break open, scuttle, or smash in order to save the cargo; 8. The expenses of curing and maintaining the members of the crew who may have been wounded or crippled in defending or saving the vessel; 9. The wages of any member of the crew detained as hostage by enemies, privateers, or pirates, and the necessary expenses which he may incur in his imprisonment, until he is returned to the vessel or to his domicile, should he prefer it; 10. The wages and victuals of the crew of a vessel chartered by the month during the time it should be embargoed or detained by force majeure or by order of the 11. 12. 13. 14. COMMERCIAL LAW Government, or in order to repair the damage caused for the common good; The loss suffered in the value of the goods sold at arrivals under stress in order to repair the vessel because of gross average; The expenses of the liquidation of the average [Art. 811, COC]; If in lightening a vessel on account of a storm, in order to facilitate her entry into a port or roadstead, part of her cargo should be transferred to lighters or barges and be lost, the owner of said part shall be entitled to indemnity, as if the loss has originated from a gross average [Art. 817, COC]; If, as a necessary measure to extinguish a fire in a port; roadstead; creek, or bay, it should be decided to sink any vessel, this loss shall be considered gross average, to which the vessels saved shall contribute. Jettison – The act of throwing overboard part of a vessel’s cargo or hull in hopes of saving a ship from sinking. The captain shall direct the jettison, and shall order the goods cast overboard in the following order: 1. Goods on deck - beginning with those which embarrass the maneuver or damage the vessel, preferring if possible, the heaviest ones with the least utility and value; 2. Goods below the upper deck - always beginning with those of the greatest weight and smallest value to the amount and number absolutely indispensable [Art. 815, COC]. To include the goods jettisoned in the general or gross average, the existence of the cargo or goods must be proved: 1. For cargo – by means of bill of lading; 2. For good belonging to the vessel – by means of the inventory prepared prior to departure [Art. 816, COC]. Jason clause Jason clause is a provision in the contract of carriage that requires the cargo owners to contribute in the general average, though the Page 83 of 450 U.P. LAW BOC TRANSPORTATION LAW event which gave rise to the sacrifice or expenditure may have been due to the fault of one of the parties to the adventure [Rule D, York Antwerp Rules]. Note: This shall not prejudice any remedies or defenses which may be open against or to that party in respect of such fault. Procedure for recovery 1. Assembly and deliberation with the sailing mate and other officers; 2. Resolution of the captain adopted; 3. Hearing of the persons interested. In case an interested person should not be heard, he shall not contribute to the gross average [Art. 813, COC]; 4. Resolution to be entered in the log book, stating the motives and reasons therefore as well as the votes and reason for disagreement [Art. 814, COC]; 5. Minutes to be signed by all the persons present or in urgent cases, the captain; 6. Captain shall deliver one copy of the minutes to the maritime judicial authority of the first port he may make within 24 hours [Art. 814, COC]; 7. Captain shall ratify the minutes under oath [Art. 814, COC]. Collisions and Allisions Collision is an impact or sudden contact between two moving vessels [Aquino]. Allision is the striking of a moving vessel against one that is stationary. Collision between a Steam and a Sail Vessel General Rule: When meeting a sailing vessel, whether close hauled or with the wind free, the sail vessel has a right to keep her course, and it is the duty of the steamer to adopt precautions as will avoid the sail vessel. In a collision between a steam vessel and a sail vessel, the presumption is against the steam vessel. COMMERCIAL LAW Ratio: The steamer’s greater facility of maneuvering over a sail vessel means it has the greater ability to avoid collisions [A. Urrutia & Co. v. Baco River Plantation Co, G.R. No. L7675. [1913)]. Collision between Two Power-Driven Vessels General Rule: When two power-driven vessels are meeting head on, or nearly head on, so as to involve risk of collision, each shall alter her course to starboard (right side). Ratio: So that each may pass on the port (left) side of the other [Smith Bell and Co. v. CA, G.R. No. L-56294 (1991)]. Liability in Collision Cases Liability in collision cases is negligence-based. Courts are called upon to determine the negligence of the persons involved in order to impose liability. The person who caused the injury is both civilly and criminally liable [Aquino]. Nevertheless, the rules that apply to quasidelict cannot be applied to collision cases. The doctrine of last clear chance and the rules on contributory negligence cannot be applied in collision cases. This is in accordance with Art. 827 of the Code of Commerce. Thus, if both vessels were negligently operated, each must suffer its own damage even if the other has the last clear chance of avoiding the injury [C.B. Williams v. Yangco, G.R. No. L-8325 (1914)]. Similarly, proof that the plaintiff was negligent will bar recovery from the defendant in collision cases even if the plaintiff’s negligence can be classified as merely contributory [Gorgonio De Sarasola v. Yu Biao Sontua, G.R. No. L-22630 (1925)]. The steam vessel must show that she took the proper measures to avoid a collision. Page 84 of 450 U.P. LAW BOC TRANSPORTATION LAW Classes of Collision a. Fortuitous - none was at fault; b. Culpable - one or more vessels were at fault; c. Inscrutable Fault - it cannot be determined which of the vessels was at fault. Fortuitous When collision is due to a fortuitous event or force majeure, each vessel and its cargo shall bear its own damages [Art. 830, COC]. When, by reason of force majeure, a vessel properly anchored and moored collides with another, the injury occasioned shall be looked upon as particular average to the vessel run into [Art. 832, COC]. Culpable When only one vessel is at fault, the owner of the vessel at fault shall indemnify the losses and damages suffered, after an expert appraisal. When both vessels are at fault, each shall suffer its own damages, and both shall be solidarily responsible for the losses and damages occasioned to their cargoes [Art. 826, COC]. Note: The ship owners cannot successfully maintain an action against the other for the loss or injury to his vessel. When a third vessel is at fault, the owner of the third vessel shall indemnify the losses and damages caused, the captain thereof being civilly liable to said owner [Art. 831, COC]. Inscrutable Fault In case of inscrutable fault, that is, if it cannot be decided which of the two vessels was the cause of the collision, each shall bear his own damage and both shall be jointly responsible for the losses and damages suffered by their cargoes [Art. 828, COC]. 4. Carriage of Goods by Sea Act (COGSA) COMMERCIAL LAW Application COGSA (Commonwealth Act No. 65) is a special law that governs all contracts of carriage of goods by sea between or to and from the Philippine ports. Its application is according to the following scheme: Common Carrier Private carrier Coming to the Philippines from foreign trade* New Civil Code COGSA (Common Carriers) Code of Commerce COGSA New Civil Code Code of Commerce (Provisions NOT on common carriers, i.e. torts, contracts) From Philippines to foreign country Apply laws of such foreign country [1753, NCC] *Nothing stops parties from stipulating that COGSA shall primarily apply; even domestic carriers can stipulate such. With respect to vessels destined for foreign ports, the COGSA does not apply unless parties make it applicable. Under Art. 1766, in all matters not regulated by the Civil Code, the rights and obligations of common carriers shall be governed by the Code of Commerce and special laws. Thus, although a special law, COGSA only applies when the Civil Code has no provision dealing with the matter. Notice of Loss or Damage Notice of claim and the general nature of the loss or damage must be given in writing to the carrier or his agent at the port of discharge before or at the time of the removal of the goods [Section 3(6), COGSA]. If damage is not patent or cannot be ascertained from the package, the shipper should file the claim with the carrier within three days from delivery. Under Section 3(6), COGSA, a failure to file a notice of claim within three (3) days will not bar Page 85 of 450 U.P. LAW BOC TRANSPORTATION LAW COMMERCIAL LAW recovery if it is nonetheless filed within one year. but only if the amount so declared is the real value of goods [Aquino]. This one-year prescriptive period also applies to the shipper, the consignee, the insurer of the goods or any legal holder of the bill of lading. Inasmuch as the neither the Civil Code nor the Code of Commerce states a specific prescriptive period on the matter, the COGSA may be applied [Belgian Overseas Chartering and Shipping v. Philippine First Ins. Co, G.R. No. 143133 (2002)]. The Civil Code does not limit the liability of the common carrier to a fixed amount per package. Thus, the COGSA, supplements the Civil Code by establishing a statutory provision limiting the carrier’s liability in the absence of a shipper’s declaration of a higher value in the bill of lading [Belgian Overseas Chartering and Shipping v. Philippine First Ins. Co, G.R. No. 143133 (2002)]. Note: In the Warsaw Convention, as well as the Code of Commerce, the notice requirement is a condition precedent for the right of action against the shipowner to accrue. F. PUBLIC SERVICE ACT 1. Definition of Public Utility Period of Prescription The carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered. The absence of a notice shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered [Section 3 (6), COGSA]. COGSA, as a special law, prevails over the general provisions of the Civil Code on prescription of actions [Maritime Agencies & Services, Inc. v. CA, G.R. No. 77638 (1990)]. A public utility is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone, or telegraph service [National Power Corporation v. Court of Appeals, G.R. No. 112702 (1997)]. Elements of a public utility: 1. There must be public interest or consequence; 2. Private property devoted to public use; 3. Offers to the public indiscriminately ; 4. For hire/ compensation. 2. Necessity for certificate of public convenience Limitation of Liability Under Section 4(5), COGSA, the limit is set at a maximum of $500 per package or customary freight unit. This is deemed incorporated in the bill of lading even if not mentioned therein [Eastern Shipping Lines v. IAC, G.R. No. L-69044 (1987)]. The declaration made by the shipper stating an amount bigger than $500 per package will make the carrier liable for such bigger amount, No public service as herein defined shall operate in the Philippines without having first secured from the Commission a certificate, which shall be known as Certificate of Public Convenience (CPC) or as Certificate of Public Convenience and Necessity (CPCN) [Section 15, Public Service Act]. Requisites The ff. are the requisites before a Certificate of Public Convenience (CPC) may be granted: Page 86 of 450 U.P. LAW BOC COMMERCIAL LAW TRANSPORTATION LAW 1. The applicant must be a citizen of the Philippines, or a corporation or copartnership, association or joint stock company constituted and organized under the laws of the Philippines, 60 per centum at least of the stock or paid-up capital of which belong entirely to citizens of the Philippines; 2. The applicant must prove that the operation of the public service proposed and the authorization to do business will promote the public interest in a proper and suitable manner; 3. The applicant must be financially capable of undertaking the proposed service and meeting the responsibilities incident to its operations [Vda. De Lat v. Public Service Commission, G.R. No. L-34978 (1988)]. Citizenship financial capacity of the holder of the license, so that liabilities arising from accidents may be duly compensated [Dizon v Octavio, 51 O.G. 4059 (1955)]. Prior operator rule Meaning The first licensee should have more or less of a vested and preferential right over a person who seeks to acquire another and a later license over the same route, so long as the first licensee: Keeps and performs the terms and conditions of its license; and Complies with the reasonable rules and regulations of the Commission and meets the reasonable demands of the public. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to: (1) Citizens of the Philippines; or (2) Corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens [Section 11, Article XII, 1987 Constitution]. Rationale: Without such preferential right, the first licensee would not have protection on his investment, and would be subject to ruinous competition and thus defeat the very purpose and intent for which the Public Service Commission was created [Batangas Transportation Co., G.R. No. L-28865 (1928)]. Promotion of public interests 1. Where public interest and convenience would be better served by the new operator; 2. Where the old operator failed to make an offer to meet the increase in traffic; 3. Where the CPC granted to the new operator is a maiden franchise; 4. When the application of the rule would be conducive to monopoly [Mandbusco Inc. v. Francisco, G.R. No. L-23688 (1970)]. Property becomes clothed with a public interest when used in a manner to make it of public consequence and affect the community at large. When one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good, to the extent of the interest he has thus created [North Negros Sugar Co. vs. Hidalgo, G.R. No. L-42334 (1936)]. Financial capability One of the primary factors considered in the granting of a certificate of public convenience for the business of public transportation is the Exceptions iii. Ruinous competition There is ruinous competition if: a. The operator would be deprived of their profits on the capital invested in its business; b. The business would not have sufficient gains to pay a fair rate of interest on its capital investments. Page 87 of 450 U.P. LAW BOC COMMERCIAL LAW TRANSPORTATION LAW In order that the opposition based on ruinous competition may prosper, it must be shown that the opponent would be deprived of their profits on the capital invested in its business. The mere possibility of reduction in the earnings of a business is not sufficient to prove ruinous competition. It must be shown that the business would not have sufficient gains to pay a fair rate of interest on its capital investments [Vda. De Lat v. Public Service Commission, G.R. No. L-34978 (1988)]. 3. Fixing of rate Rationale for control by the government The investor agrees, by embarking capital in a utility, that its charges to the public shall be reasonable. His company is the substitute for the State in the performance of the public service, thus becoming a public servant. The compensation which the Constitution guarantees an opportunity to earn is the reasonable cost of conducting the business [Republic of the Philippines v. Manila Electric Company, G.R. No. 141314 (2002)]. Standard for fixing of rates In the fixing of rates, the only standard which the legislature is required to prescribe for the guidance of the administrative authority is that the rate be reasonable and just. What is a just and reasonable rate is a question of fact calling for the exercise of discretion, good sense, and a fair, enlightened and independent judgment. The requirement of reasonableness comprehends such rates which must not be so low as to be confiscatory, or too high as to be oppressive [Republic of the Philippines v. Manila Electric Company, G.R. No. 141314 (2002)]. b. rate base; and c. the return itself or the computed revenue to be earned by the public utility based on the rate of return and rate base. The rate of return is a judgment percentage which, if multiplied with the rate base, provides a fair return on the public utility for the use of its property for service to the public. The rate of return of a public utility is not prescribed by statute but by administrative and judicial pronouncements. This Court has consistently adopted a 12% rate of return for public utilities [Republic of the Philippines v. Manila Electric Company, G.R. No. 141314 (2002)]. Exclusion expense of income tax as Income derived from any public utility or from the exercise of any essential government function accruing to the Philippine government or to any political subdivision is excluded from gross income [Sec. 32(B)(7)(b), NIRC]. 4. Unlawful arrangements Boundary system Under the boundary system, the driver: (1) Rents the vehicle, typically a jeepney, from the owner or operator by paying a fee called the “boundary” fee; (2) Pays for fuel and maintenance of the vehicle. Whatever the driver earns from passenger fares in excess of the boundary fee is his income [Paguio Transport Corp. v. National Labor Relations Commission, G.R. No. 11950 (1998)]. Rate of return Kabit system In determining the just and reasonable rates to be charged by a public utility, three major factors are considered by the regulating agency: a. rate of return; Definition The kabit system is an arrangement “whereby a person, who has been granted a CPC allows another person, who owns motor vehicles. to operate under such franchise for a fee” [Teja Page 88 of 450 U.P. LAW BOC Marketing v. Intermediate Appellate Court, G.R. No. L-65510 (1987)]. Rationale against the kabit system 1. it is an abuse of the certificate of public convenience, a special privilege conferred by the government; 2. it is one of the root causes of the prevalence of graft and corruption in the government transportation offices; 3. it is contrary to public policy, and is therefore void and inexistent [Teja Marketing v. Intermediate Appellate Court, G.R. No. L-65510 (1987)]. Effect of the kabit system Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as being contrary to public policy and, therefore, void and in existent [Art. 1409, NCC]. o It is a fundamental principle that the court will not aid either party to enforce an illegal contract, but will leave both where it finds them [Art. 1412, NCC]; o Courts will not grant affirmative relief to parties in cases where they set up a Kabit system. They are in pari delicto and the Court will simply leave them where it found them [Lita Enterprises, Inc. v. IAC, G.R. No. 64693 (1984)]. The operator of record is considered the operator of the vehicle in contemplation of law as regards the public and third persons, even if the vehicle involved in the accident had been sold to another [Santos v Sibug, G.R. No. L-26815 (1981)]. o Where such sale had not been approved by the then Public Service Commission (PSC). See also Registered Owner Rule under A. 2. Liabilities of Common Carriers 5. Approval encumbrance property COMMERCIAL LAW TRANSPORTATION LAW of or sale, lease of Before the sale, encumbrance, or lease of public utility property or assets, the Public Service Act requires the approval of the PSC. There should be a public hearing, with notice to all interested parties before the approval is granted; The PSC must first determine if there are good and reasonable grounds justifying the transfer or lease of the property covered by the franchise, or if the sale or lease is detrimental to public interest. Rationale: A franchise is personal in nature. Any transfer or lease thereof should be notified to the PSC so that the latter may take proper safeguards to protect the interest of the public. If the property covered by the franchise is transferred or leased to another without obtaining the requisite approval: (1) The transfer is not binding against the Public Service Commission; and (2) The grantee continues to be responsible under the franchise in relation to the Commission and to the public [Montoya v. Ignacio, G.R. No. L-5868 (1953)]. G. THE WARSAW CONVENTION 1. Applicability The Warsaw Convention applies to: All international carriage of persons, baggage, or cargo performed by aircraft for reward; Gratuitous carriage by aircraft performed by an air transport undertaking [Art. 1(1), Warsaw Convention]. International air carriage or international air transport means transportation by air between points of contact of two high contracting parties, or those countries that have acceded to the Warsaw Convention, wherein the place of departure and the place of destination are situated: a. Within the territories of two high contracting parties, regardless of whether or not there Page 89 of 450 U.P. LAW BOC TRANSPORTATION LAW be a break in the transportation or a transshipment; or b. Within the territory of a single >high contracting party, if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of another power, even though the power is not a party to the Convention [Art. 1(2), WC]. A carriage to be performed by several successive air carriers is deemed, for the purposes of the Convention, to be one undivided carriage, if it has been regarded by the parties as a single operation, whether it had been agreed upon under the form of a single contract or of a series of contracts [Art. 1(3), WC]. The carrier is liable for damages for: a. Death or injury of a passenger if the accident causing it took place: 1. On board the aircraft; 2. In the course of the operations of embarking or disembarking; or 3. When there was delay [Art. 17 and 19, WC]. b. Destruction, loss, or damage to any baggage or goods that are checked in, if damage occurred: 1. During the transportation by air; or 2. When there was delay [Art. 18 and 19, WC]. c. Delay in the transport by air of passengers, baggage or goods [Art. 19, WC]. The carriage by air contemplated comprises the period in which the baggage or goods are in charge of the carrier, whether in an airport or on board an aircraft, or, in the case of a landing outside an airport, in any place whatsoever. It does not cover any transportation by land, by sea, or by river performed outside an airport. If transportation takes place in the performance of a contract by air, for the purpose of loading, delivery, or transshipment, any damage is presumed, subject to proof to the contrary, to have been the result of an event which took COMMERCIAL LAW place during the transportation by air [Art. 18, WC]. The Warsaw Convention does not provide for an exclusive enumeration of instances when the carrier is liable. It does not provide an absolute limit of liability and it does not preclude the application of the Civil Code and other pertinent local laws in the determination of the extent of liability of the common carrier [Philippine Airlines v. CA, G.R. No. (1996)]. Hence, a complaint for quasi-delict can still be filed even if the filing is beyond the prescriptive period provided for under the Convention so long as it is within the prescriptive period of four years under the Civil Code [Villanueva]. Notice of claim with the international carrier is a mandatory or condition precedent under the Warsaw Convention. a. Baggage: within 3 days from receipt. In case of delay, within 14 days from the time the baggage was placed at the disposal of the passenger; b. Goods: within 7 days from delivery. In case of an action for damage to passenger baggage, the case must be filed in court within two years. 2. Limitation of Liability Any provision tending to relieve the carrier of liability or to fix a lower limit than that which is laid down shall be null and void, but the nullity of any such provision does not involve the nullity of the whole contract [Art. 23, WC]. Availing of Provisions Excluding/Limiting Liability The carrier shall not be entitled to avail himself of the provisions which exclude or limit his liability, if: (1) The damage is caused by his willful misconduct or by such default on his part, as is considered to be equivalent to willful misconduct; or Page 90 of 450 U.P. LAW BOC TRANSPORTATION LAW (2) The damage is caused as aforesaid by any agent of the carrier acting within the scope of his employment [Art. 25, WC]. Sec. 22(2), WC does not operate as an exclusive enumeration of the instances of an airline’s liability, or as an absolute limit of the extent of that liability. The Convention’s provisions do not regulate or exclude the following areas: (1) Liability for other breaches of the contract by the carrier; (2) Misconduct of its officers and employees; and (3) For some particular or exceptional type of damage (i.e. moral, nominal, temperate or exemplary damages) [Alitalia v. IAC, G.R. No. 71929 (1990)]. Right to Damages The right to damages under the WC is extinguished after two years from the date of arrival at the destination or from the date on which the aircraft ought to have arrived, or from the date on which the carriage stopped. The method of calculating the period of limitation shall be determined by the law of the Court seized of the case [Art. 29, WC]. Liability to Passengers General rule: In the carriage of passengers, the liability of the carrier for each passenger is limited to “100,000 Special Drawing Rights for the aggregate of the claims” in respect of damage suffered as a result of death or personal injury to each passenger [Art. 22(1), WC as amended by Additional Protocol No. 3 (1975)]. Exception: By special contract, the carrier and the passenger may agree to a higher limit [Art. 22(1), WC]. Note: Special drawing rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund. Liability for Checked Baggage COMMERCIAL LAW General rule: “In the carriage of cargo, the liability of the carrier is limited to a sum of 17 Special Drawing Rights per kilogramme” [Art. 22(1), WC as amended by Additional Protocol No. 3 (1975)]. Exception: The limit does not apply when the consignor has made, at the time when the package was handed over to the carrier, a special declaration of the value at delivery and has paid a supplementary sum if the case so requires. In that case, the carrier will be liable to pay a sum not exceeding the declared sum, unless he proves that that sum is greater than the actual value to the consignor at delivery [Art. 22(2), WC]. Liability for Hand-Carried Baggage As regards hand-carried baggage, the liability of the carrier is limited to “332 Special Drawing Rights per passenger” [Art. 22(3) WC, as amended by Additional Protocol No. 2 (1975)]. The Guatemala Protocol of 1971 increased the limit for passengers to $100,000 and for baggage to $1,000. However, the Supreme Court noted in Santos III v. Northwest Orient Airlines [G.R. No. 101538(1992)], that the Guatemala Protocol is still ineffective [Sundiang and Aquino]. The Warsaw Convention should be deemed a limit of liability only in those cases where: (1) The cause of death or injury to person, or destruction, loss or damage to property or delay in its transport is not attributable to or attended by: a. Any willful misconduct, bad faith, recklessness; or b. Otherwise improper conduct on the part of any official or employee for which the carrier is responsible; and (2) There is otherwise no special or extraordinary form of resulting injury [Alitalia v. IAC, G.R. No. 71929 (1990)]. Page 91 of 450 U.P. LAW BOC TRANSPORTATION LAW Note: The Montreal Convention 1999 changed the limits of liability in relation to delay, baggage and cargo as follows: 1. In the case of damage caused by delay as specified in Article 19 in the carriage of persons, the liability of the carrier for each passenger is limited to 4,150 Special Drawing Rights; 2. In the carriage of baggage, the liability of the carrier in the case of destruction, loss, damage or delay is limited to 1,000 Special Drawing Rights for each passenger x x x; 3. In the carriage of cargo, the liability of the carrier in the case of destruction, loss, damage or delay is limited to a sum of 17 Special Drawing Rights per kilogramme x x x [Art. 22, Montreal Convention]. 3. Willful Misconduct A common carrier may not avail of the limitation in the following cases: a. Willful misconduct; b. Default amounting to willful misconduct [Art. 25, WC]; c. Accepting passengers without ticket [Art. 3(2), WC]; d. Accepting goods without airway bill or baggage without baggage check. Receipt by the person entitled to the delivery of baggage or cargo without complaint is prima facie evidence that the same has been delivered in good condition and in accordance with the document of carriage [Art. 26, WC]. Page 92 of 450 COMMERCIAL LAW U.P. LAW BOC BUSINESS ORGANIZATIONS BUSINESS ORGANIZATIONS COMMERCIAL LAW Page 93 of 450 COMMERCIAL LAW U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW persons. The form of the common fund may not even be cash or property; it can be in the form of credit or industry. [Lim Tong Lim v. Philippine Fishing Gear, G.R. No. 136448 (1999)] A. PARTNERSHIPS 1. General Provisions 2. With the intention of dividing the profits among themselves Definition By the contract of partnership: 1. Two or more persons bind themselves to contribute to a common fund: a. money; b. property; or c. industry 2. With the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. [Art. 1767, NCC] Intention to Divide Profits If the common fund’s work is “indispensable, beneficial and economically useful to the business” of the partners and the profit motive is the primordial reason to establish the partnership, even if there are no actual profits, then there is partnership. [AFISCO v. CA, G.R. No. 112675 (1999)] Note: There must be a valid contract. Additionally, a partnership contract must comply with the necessary elements of a contract under the Civil Code (cause, object, and consideration). Elements Parties According to Article 1767, the elements are as follows: 1. Two or more persons bind themselves to contribute money, property, or industry to a common fund Money – must be in legal tender. Checks, drafts, promissory notes, and other mercantile documents are not money. There is no contribution of money until they have been cashed. [Art. 1249, NCC] Property – may be real, personal, corporeal, or incorporeal property. Industry – means the active cooperation, the work of the party associated, which may be either personal manual efforts or intellectual, and for which he receives a share in the profits (not salary) of the business. Common Fund The NCC requires the parties “bind themselves to contribute” to a common fund. The partnership may therefore exist even before the common fund is created. The common fund may not even come from the partners themselves but may be borrowed from third General Rule: Any person capacitated to contract may enter into a contract of partnership. The following persons CANNOT enter into a contract of partnership: a. Those suffering from civil interdiction; b. Minors; c. Insane or demented persons; d. Deaf-mutes who do not know how to write; e. Incompetents who are under guardianship. Exceptions: The capacity of the following persons to enter into a contract of partnership, though capacitated to contract generally, are limited: a. Those who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership [Article 1782]; Page 94 of 450 Void donations: 1. Those made between persons who were guilty of adultery or concubinage at the time of the donation [Article 739, NCC] U.P. LAW BOC BUSINESS ORGANIZATIONS 2. Those made between persons found guilty of the same criminal offense, in consideration thereof [Article 739, NCC] 3. Those made to a public officer or his wife, descendants and ascendants, by reason of his office [Article 739, NCC] 4. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts, which the spouses may give to each other on the occasion of any family rejoicing. The prohibition shall also apply to persons living together as husband and wife without a valid marriage. [Article 87, Family Code] b. A corporation cannot enter into a partnership in the absence of express authorization by statute or charter. [Mendiola v. CA, G.R. No. 159333 (2006)] Under Sec. 35 of the Revised Corporation Code (RCC), every corporation incorporated under the RCC has the power and capacity to enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with natural and juridical persons. There is no prohibition against a partnership being a partner in another partnership. [de Leon] Object IN A UNIVERSAL PARTNERSHIP A universal partnership may refer to: 1. All present property – a. The partners contribute all the property which belongs to them to a common fund, with the intention of dividing the same among themselves, as well as the profits they may acquire therewith. [Art. 1778, NCC] b. The property contributed includes all those belonging to the partners at the time of the constitution of the partnership. c. A stipulation for the common enjoyment of any other profits may also be made. However, the property which COMMERCIAL LAW the partners may acquire subsequently by inheritance, legacy or donation cannot be included in such stipulation, except the fruits thereof. [Art. 1779, NCC] 2. All the profits – a. It comprises all that the partners may acquire by their industry or work during the existence of the partnership. b. Only the usufruct over the property of the partners passes to the partnership. [Art. 1780, NCC] When the articles of universal partnership do not specify its nature (all present property or all the profits), the partnership will be considered as one only of all the profits. [Art. 1781, NCC] Rule on After-Acquired Properties Aside from the contributed properties, only the profits of the contributed common property (no other profits) are included. Thus, should a partner subsequently acquire a property as remuneration for his work, such property and its fruits are not to be enjoyed by the universal partnership of all present property. [Paras] Properties subsequently acquired by inheritance, legacy, or donation, cannot be included in the stipulation but the fruits thereof can be included in the stipulation. IN A PARTICULAR PARTNERSHIP A particular partnership has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation. [Art. 1783, NCC] EFFECT WHEN THE OBJECT IS UNLAWFUL If the partnership has an unlawful object or purpose: 1. The contract is void ab initio [Art. 1409(1), NCC]; 2. Once dissolved by judicial decree: a. The profits shall be confiscated by favor of the State; b. The instruments or tools and proceeds of the crime shall also be forfeited in favor of the State [Art. 1770, NCC]; Page 95 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS 3. The contributions of partners shall not be confiscated unless they are instruments or tools of the crime. [de Leon] Form No required form is necessary, but the contract is subject to the provisions of Arts. 1771, 1772 and 1773, NCC and to the Statute of Frauds. • • Where immovable property or real rights are contributed to the partnership, a public instrument shall be necessary. [Art. 1771, NCC] - An inventory of said property, signed by the parties, must be attached to the public instrument; - Otherwise, the contract of partnership is void. [Art. 1773, NCC] Every contract of partnership having a capital of P3,000 or more, in money or property, shall appear in a public instrument - The instrument must be recorded in the Office of the Securities and Exchange Commission. - Failure to comply with these requirements shall not affect the liability of the partnership and the members thereof to third persons. [Art. 1772, NCC] Characteristics COMMERCIAL LAW Essential Attributes [Villanueva] 1. Informal/Consensual and Weak Juridical Personality [Arts. 1771, 1785, 1830, NCC] a. Generally, a partnership may be constituted in any form; b. The juridical personality of a partnership is deemed weak since a partnership may be dissolved without need of going through a formal dissolution process. 2. Mutual Agency [Arts. 1803, 1818, NCC] a. All partners shall be considered agents and whatever any one of them may do alone shall bind the partnership; b. Every partner is an agent of the partnership for the purpose of its business, and the act of every partner binds the partnership. 3. Delectus Personae (Selection of Persons) One selects his partners on the basis of their personal qualifications and qualities. It is for this reason that there is mutual representation among the partners so that the act of one is considered the act and responsibility of the others as well. [Bautista] 4. Partners Burdened with Unlimited Liability [Arts. 1816, 1817, NCC] Rules to determine existence Generally 1. Principal – does not depend on other contracts; 2. Preparatory – entered as a means to an end; 3. Commutative – undertaking of each one is considered equal with others; 4. Consensual – perfected by mere consent; 5. Bilateral – entered by two or more persons; 6. Onerous – contributions have to be made, and 7. Nominate – has a special designation in law. [de Leon] When the intent of the parties is clear, such intent shall govern. When it does not clearly appear, the following rules apply: 1. Persons who are not partners to each other are not partners as to third persons, subject to the provisions on partnership by estoppel. 2. Co-ownership or co-possession does not of itself establish a partnership, even when there is sharing of profits in the use of the property. Page 96 of 450 Exception: The co-ownership of inherited properties is automatically converted into an unregistered partnership the moment said common properties and/or the income U.P. LAW BOC BUSINESS ORGANIZATIONS derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition. [Ona v. CIR, G.R. L19342 (1972)] 3. Sharing of gross returns does not of itself establish a partnership, even when the parties have joint or common interest in any property from which the returns are derived. 4. The receipt by a person of a share in the profits of a business is prima facie evidence that he is a partner. No such inference is drawn if the profits are received in payment: a. As a debt by installments or otherwise; b. As wages of an employee or rent to a landlord; c. As an annuity to a widow or representative of a deceased partner; d. As interest on a loan, though the amount of payment vary with the profits of the business; e. As the consideration for the sale of a goodwill of a business or other property by installments or otherwise. [Art. 1769, NCC] Partnership Term A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. [Art. 1784] As to period, a partnership may either be: 1. For a fixed term or particular undertaking; or 2. At will, the formation and dissolution of which depend on the mutual desire and consent of the parties. Any one of the partners may, at his sole pleasure, dictate the dissolution of the partnership, even in bad faith, subject to liability for damages. [Ortega v. CA, G,R, No. 109248 (1995)] A partnership term may be extended by: 1. Express renewal; or 2. Implied renewal, when these requisites concur: COMMERCIAL LAW a. The partnership is for a fixed term or particular undertaking; b. It is continued after the termination of the fixed term or particular undertaking without any express agreement. [Art. 1785, NCC] Partnership by Estoppel Estoppel – a bar which precludes a person from denying or asserting anything contrary to that which has been established as the truth by his own deed or representation, either express or implied. [de Leon] A partner by estoppel is a person who, by words spoken or written or by conduct: (1) represents himself as a partner or (2) consents to another representing him to anyone as a partner – a. In an existing partnership; or b. With one or more persons not actual partners [par. 1, Art. 1825, NCC]. LIABILITY OF A PARTNER BY ESTOPPEL Personal Representation a. A partner by estoppel is liable to any such persons: 1. To whom such representation has been made; and 2. Who has, on the faith of such representation, given credit to the actual or apparent partnership. [par. 1, Art. 1825] Public Representation If he has made such representation or consented to its being made in a public manner, whether the representation has or has not been (personally) made or communicated to such persons so giving credit by or with his knowledge: 1. When partnership liability results, he is liable as though he were an actual member of the partnership. 2. When no partnership liability results, he is liable pro rata with the other persons, Page 97 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS if any, so consenting to the contract or representation. 3. When there are no such other persons, he is separately liable. [par. 1, Art. 1825, NCC] Effect on Existing Partnership or Other Persons not Actual Partners [par. 2, Art. 1825, NCC] Representation Effect When a person has been represented to be a partner (1) in an existing partnership, or (2) with one or more persons not actual partners He is an agent of the persons consenting to such representation: • • When all the members of the existing partnership consent to the representation In all other cases To bind them to the same extent and in the same manner as though he were a partner in fact With respect to persons who rely upon the representation. A partnership act or obligation results. The representation is the joint obligation of the person acting and the persons consenting to the representation Nature of Liability Summarizing Article 1825, a partner by estoppel is liable in the following manner: (a) He is liable as though he were a partner when – 1. There is an existing partnership; 2. All the partners consented to the representation; and 3. A partnership liability results. (b) He is liable jointly and pro rata (as though he were a partner in fact) with those who consented to the representation when: 1. There is an existing partnership but not all the partners consented; or COMMERCIAL LAW 2. There is no existing partnership and all those represented as partners consented to the representation. (c) He is liable separately when: 1. There is an existing partnership but none of the partners consented; or 2. There is no existing partnership and not all of those represented as partners consented to the representation. Note: Art 1825 does not create a partnership as between the alleged partners. The law only considers them as partners and the association as a partnership insofar as it is favorable to third persons. However, partnership liability is created only in favor of persons who on the faith of such representation given credit to the partnership. [de Leon] Partnership as distinguished from joint venture Partnership Joint venture Operates with firm Operates without name and legal firm name and legal personality personality Generally relates to a continuing business of Usually limited to a various transactions of single transaction a certain kind A joint venture is an agreement between two parties to enter into a commercial undertaking. It may fall under a partnership with a limited purpose. Under Philippine law, a joint venture is a form of partnership and should thus be governed by the laws of partnership. [Aurbach v. Sanitary Wares Manufacturing Corp, G.R. No. 75875] Professional Partnership Definition General professional partnerships — those formed by persons for the sole purpose of exercising their common profession, no part of Page 98 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW the income of which is derived from engaging in any trade or business. [Sec. 22(B), NIRC] Exception: He cannot do so when he acts in bad faith. [Art. 1800, NCC] Distinction from an Ordinary Partnership The distinction between a Partnership and a General Professional Partnership (GPP) is material in taxation. • A GPP is NOT TAXABLE as an entity. • The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits.” [Tan v. Del Rosario, G.R. No. 109289 (1994)] Revocation of Power by Managing Partner General Rule: Power is irrevocable without just or lawful cause. Requirement to File Income Tax Returns GPPs are still required to file income tax returns for the purposes of furnishing information as to the share in the gains or profits which each partner shall include in his individual return. [RR 2-1998] Management In General The property rights of a partner are: (1) His rights in specific partnership property; (2) His interest in the partnership; and (3) His right to participate in the management [Art. 1810, NCC] Management of the partnership is primarily governed by the agreement of the partners in the articles of partnership. It may be stipulated that the partnership will be managed by: 1. All the partners; or 2. A number of partners appointed as managers which may be appointed – In the articles of partnership; or After constitution of the partnership. Scope of Powers of a Managing Partner General rule: The partner designated as manager in the articles may execute all acts of administration, despite opposition by the other partners. The powers of the managing partner may be revoked: If appointed in the articles of partnership, when — a. There is just or lawful cause for revocation; and b. The partners representing the controlling interest revoke such power. If appointed after the constitution of the partnership, at any time and for any cause. [Art. 1800, NCC] Rationale: Such appointment is a mere delegation of power, not founded on a change of will on the part of the partners, the appointment not being a condition of the contract. It is merely a simple contract of agency, which may be revoked at any time. Removal, however, should also be done by the partners having the controlling interest. [de Leon] Managing by Two or More Partners When there are two or more managing partners appointed — 1. Each one may separately execute all acts of administration. 2. If any of them opposes the acts of the others, the decision of the majority prevails. 3. In case of a tie, the partners owning the controlling interest will decide. [Art. 1801, NCC] Requisites for Applicability of Art. 1801: a. Two or more partners have been appointed as managers; b. There is no specification of their respective duties or no stipulation on how each one will act; and c. There is no stipulation that one of them shall not act without the consent of all the others. The right to oppose is not given to Page 99 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS non-managers because in appointing their other partners as managers, they have stripped themselves of all participation in the administration. [Paras] COMMERCIAL LAW alteration without interposing any objection. [de Leon] Stipulation of Unanimity General Rule: In case there is a stipulation that none of the managing partners shall act without the consent of others — a. The concurrence of all is necessary for the validity of the acts, and b. The absence or disability of one cannot be alleged. Mutual Agency In addition to the Art. 1801, NCC there is effectively a mutual agency in the following cases: 1. Partners can dispose of partnership property even when in partnership name. [Art. 1819, NCC] 2. An admission or representation made by any partner concerning partnership affairs is evidence against the partnership. [Art. 1820, NCC] 3. Notice to any partner of any matter relating to partnership affairs is notice to the partnership. [Art. 1821, NCC] 4. Wrongful act or omission of any partner acting for partnership affairs makes the partnership liable. [Art. 1822, NCC] 5. Partnership is bound to make good losses for wrongful acts or misapplications of partners. [Art. 1823, NCC] Exception: Unless there is imminent danger of grave or irreparable injury to the partnership. [Art. 1802, NCC] 2. Rights and obligations of partnership and partners Management When Manner Not Agreed Upon When there is no agreement as to the manner of management, the following rules apply: 1. All the partners are considered agents (mutual agency). Whatever any one does alone binds the partnership, unless there is a timely opposition to the act, under Art. 1801, NCC. 2. Any important alteration in the immovable property of the partnership, even if useful to the partnership, requires unanimity. If the alteration is necessary for the preservation of the property, however, consent of the others is not required. [Art. 1803, NCC; de Leon] Rights and obligations of the partnership The other managers, however, should make the opposition before the acts produce legal effects insofar as third persons are concerned. IRRECONCILABLE DEADLOCK Those who vote against the contract shall prevail, the same having been entered into without authority. [de Leon] If the refusal is manifestly prejudicial to the partnership, court intervention may be sought. [Art. 1803, NCC] The consent need not be express. It may be presumed from the fact of knowledge of the a. Right to Contribution, Right to Warranty As a general rule, every partner is a debtor of the partnership for whatever he may have promised to contribute. [Art. 1786, NCC] Contribution of Money or Property With respect to contribution of money or property, a partner is obliged to: 1. To contribute, at the beginning of the partnership or at the stipulated time, the money, property or industry which he undertook to contribute; Effect of failure to contribute: Makes the partner ipso jure a debtor of the partnership even in the absence of demand. The remedy is not rescission but an action for specific performance with damages and Page 100 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS interest. [Sancho v. Lizarraga, G.R. L33580 (1931)] Note: When contribution is in goods, the amount thereof must be determined by proper appraisal of the value thereof at the time of contribution. [Art. 1787, NCC] 2. In case a specific and determinate thing is to be contributed: a. To warrant against eviction in the same manner as a vendor; and b. To deliver to the partnership the fruits of the property promised to be contributed, from the time they should have been delivered, without need of demand [Art. 1786, NCC]; 3. In case a sum of money is to be contributed, or in case he took any amount from the partnership coffers, to indemnify the partnership for: a. Interest; and b. Damages from the time he should have complied with his obligation, or from the time he converted the amount to his own use, respectively. [Art. 1788, NCC] 4. To preserve the property with diligence of a good father of a family pending delivery to the partnership. [Art. 1163, NCC] 5. To indemnify for any interest and damages caused by the retention of the property or by delay in its obligation to contribute a sum of money. [Art. 1788 and 1170, NCC] Amount of Contribution General rule: Partners are to contribute equal shares to the capital of the partnership. Exception: When there is an agreement to the contrary, the contribution shall follow such agreement [Art. 1790, NCC]. Industrial partners, unless he has contributed capital pursuant to an agreement to that effect. COMMERCIAL LAW ADDITIONAL CAPITAL CONTRIBUTION Requisites: 1. There is an imminent loss of the business of the partnership; 2. The majority of the capitalist partners are of the opinion that an additional contribution to the common fund would save the business; 3. The capitalist partner refuses deliberately (not because of financial inability) to contribute an additional share to the capital; and 4. There is no agreement that even in case of imminent loss of the business, the partners are not obliged to contribute. Any partner who refuses to contribute an additional share to the capital, except an industrial partner, to save the venture shall be obliged to sell his interest to the other partners, unless there is an agreement to the contrary. [Art. 1791, NCC] Contribution of Industry An industrial partner is obliged to contribute his industry at the stipulated time. Right to Have Sums Applied Pro Rata General rule: A partner — 1. Authorized to manage; 2. Who collects a demandable sum owed to him a. In his own name; b. From a person who also owes the partnership a demandable sum, is obliged to apply the sum collected to both credits pro rata, even if he issued a receipt for his own credit only. [Art. 1792, NCC] Exceptions: 1. In case the receipt was issued for the account of the partnership credit only, however, the sum shall be applied to the partnership credit alone. 2. When the debtor declares, pursuant to Art. 1252, NCC at the time of making the payment, to which debt the sum must be Page 101 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW applied, and if the personal credit of the partner is more onerous to him, it shall be so applied. [Art. 1792, NCC] Right to Accounting of Profits Received without the Consent of the Other Partners Requisites for Applicability of Art. 1792: There exist at least two debts, one where the collecting partner is creditor, and the other, where the partnership is the creditor; Both debts are demandable; and The partner who collects is authorized to manage and actually manages the partnership. Every partner must: (1) Account to the partnership for any benefit; and (2) Hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. [Art. 1807, NCC] Right to be Compensated Every partner is responsible to the partnership for damages suffered by it through his fault. • • He cannot compensate the damages with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably lessen this responsibility if through the partner's extraordinary efforts in other activities of the partnership, unusual profits have been realized. [Art. 1794, NCC] Set-Off of Liability General rule: The liability for damages cannot be set-off or compensated by profits or benefits which the partner may have earned for the partnership by his industry. Rationale: The partner has the obligation to secure the benefits for the partnership. As such, the requirement for compensation that the partner be both a creditor and a debtor of the partnership at the same time, is not complied with [Art. 1278, NCC; de Leon]. Exception: The court may equitably lessen the liability if, through his extraordinary efforts in other activities of the partnership, unusual profits were realized [Art. 1794, NCC]. Note, however, that there is still no compensation in this case. Obligation to Reimburse Partners The partnership shall be responsible to every partner for: 1. The amounts he may have disbursed on behalf of the partnership; and 2. The corresponding interest, from the time the expenses are made; 3. The obligations the partner may have contracted in good faith in the interest of the partnership business; and 4. Risks in consequence of the partnership’s management. [Art. 1796, NCC] Obligations of the partners among themselves Right to Associate Another in Share Every partner may associate another person with him in his share, but the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager. [Art. 1804, NCC] This arrangement refers to a contract of subpartnership, which is a partnership within a partnership, distinct and separate from the main partnership. It is considered a modification of the original contract. [de Leon] Page 102 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Right to Inspect Partnership Books The partnership books shall be kept: 1. At a place agreed upon by the partners; 2. When there is no such agreement, at the principal place of business of the partnership. Every partner shall, at any reasonable hour, have access to and may inspect and copy any of them. [Art. 1805, NCC] Any reasonable hour means reasonable hours on business days throughout the year. [Pardo v. Lumber Co., G.R. No. L-22442 (1925)] Right to Formal Account General rule: The right to a formal account of partnership affairs accrues only when the partnership is dissolved. Exceptions: In the special and unusual cases mentioned in Article 1809, formal accounting may be demanded by any partner even before dissolution: a. If he is wrongfully excluded from the partnership business or possession of its property by his co-partners; b. If the right exists under the terms of any agreement; c. If, without his consent, a partner has derived profits from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use of partnership property; d. Whenever other circumstances render it just and reasonable. [Art. 1809, NCC] As long as the partnership exists, any of the partners may demand an accounting of the partnership business. Prescription of the said right starts to run only upon the dissolution of the partnership when the final accounting is done. [Emnace v. CA, G.R. 126334 (2001)] COMMERCIAL LAW Property Rights of Partners In General The property rights of a partner are: (a) His rights in specific partnership property; (b) His interest in the partnership; and (c) His right to participate in the management. [Art. 1810, NCC] Property And Capital Distinguished Partnership capital Partnership property With constant value Value varies with market conditions Includes only actually contributed and promised capital Includes the contributions and property acquired by the partnership Ownership of Certain Properties The ownership of property used by the partnership depends on the intention of the parties, which may be drawn from an express agreement or their conduct. A partner may allow the property to be used by the partnership without transfer of ownership, contributing only the use or enjoyment thereof. He may also hold title to partnership property, without acquiring ownership thereof. [Art. 1819, NCC] Property acquired by a partner with partnership funds is presumed to be partnership property. The same presumption also arises when the property is indicated in the partnership books as partnership asset. Other factors may be considered to determine ownership of the property. Rights in Specific Property a. The partners have equal rights to possess partnership property for partnership purposes. b. For other purposes, the consent of his partners is necessary. Page 103 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS c. If the partner is excluded, he may ask for: 1. Formal accounting [Art.1809, NCC]; or 2. Dissolution by judicial decree [Art.1831, NCC]. d. A partner’s right in such property is not assignable, except when all the partners assign their rights in the same property. e. The right is not subject to attachment or execution, except on claim against the partnership. In case of such attachment, the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws. f. The right is not subject to legal support under Article 291. [Art. 1811, NCC] g. Contemplates tangible property. Interest In Partnership A partner’s interest in the partnership is his share of the profits and surplus. [Art. 1812, NCC] Assignment of Interest [Art. 1813, NCC] Assignment by a partner of his whole interest in the partnership, of itself: a. Does not dissolve the partnership; or b. Does not entitle the assignee to: 1. Interfere in the management or administration of the partnership business or affairs; 2. Require information or account of partnership; or 3. Inspect the partnership books. It merely entitles the assignee to: a. Receive the profits to which the assigning partner was entitled; b. In case of fraud in management, avail himself of the usual remedies provided by law, such as dissolution [Art. 1831, NCC]; c. In case of dissolution: 1. Receive his assignor’s interest; and 2. Require an accounting from the date only of the last account agreed to by all the partners. [Art. 1813, NCC]. Rationale: It would effectively allow a third party to participate in the affairs of the partnership and would basically have a stranger become a COMMERCIAL LAW partner without the consent of all other partners. RISK OF LOSS OF THINGS CONTRIBUTED Who Bears the Thing Contributed Risk Specific and determinate things Borne by the partner which are not because he remains fungible; only the the owner of the usufruct is things contributed Specific and determinate things the ownership of Borne by the which is partnership as owner transferred to the partnership Partnership, because use is impossible without Fungible things the things being consumed or impaired Partnership, for there cannot be any that the Things contributed doubt partnership was to be sold intended to be the owner Partnership, because the intention of the parties was to Things brought contribute to the and appraised in partnership the price of the things the inventory contributed with an appraisal in the inventory. There is thus an implied sale. Note: The list presupposes delivery. Without delivery, the loss is borne by the partner. Right to be Reimbursed by the Partnership The partnership shall be responsible to every partner for: Page 104 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS (a) The amounts he may have disbursed on behalf of the partnership; and (b) The corresponding interest, from the time the expenses are made; (c) The obligations the partner may have contracted in good faith in the interest of the partnership business; and (d) Risks in consequence of the partnership’s management. [Art. 1796, NCC] The provision is meant to grant to every partner the right to demand from the partnership reimbursement of advances made on behalf of the partnership business. [Villanueva] Article 1796 is not applicable when there is no other money than that contributed as capital is involved. [de Leon; Martinez v. Ong Pong Co, G.R. No. 5236 (1910)] Right to Ask for Dissolution [Arts. 1830(2) and 1831, NCC] COMMERCIAL LAW Every partner must: (a) Account to the partnership for any benefit; and (b) Hold as trustee for it any profits derived by him without the consent of the other partners: 1. From any transaction connected with the formation, conduct, or liquidation of the partnership; or 2. From any use by him of its property. [Art. 1807, NCC]. General Rule: The partner cannot use or apply exclusively to his own benefit partnership assets or results of the knowledge or information gained by him as a partner to the detriment of the partnership. [de Leon] Exception: If the taking by the partner is with the consent of all other partners. [Lim Tanhu v. Ramolete, G.R. L-40098 (1975)] The duty to account continues until the partnership relation is terminated. [de Leon] See Dissolution and Winding Up, infra. Obligation to Render True and Full Information Partners shall render on demand true and full information of all things affecting the partnership to: a. Any partner; b. The legal representative of any deceased partner; or c. The legal representative of any partner under legal disability [Art. 1806, NCC]. Even without demand, honesty demands the giving of vital information, the refraining from all kinds of concealment. [Paras] By “information”, it is meant that which can be used for partnership purposes, it is in the sense of a property which the partnership has a valuable right. [de Leon] Obligation to Account and Act as Trustee This obligation exists even when he issued a receipt for his share only [Art. 1793, NCC]. Rationale: In this case, the debt becomes a bad debt. It would be unfair for the partner who already collected not to share in the loss of the other partners. Credit collected after dissolution: The collecting partner need not bring the same to the partnership capital. Art. 1793 presupposes that there exists partnership capital. Upon dissolution of the partnership and the return to each principal of what he contributed, the community of interest between them disappears altogether. [de Leon] Obligation not to Engage in Another Business FOR INDUSTRIAL PARTNERS General rule: An industrial partner cannot engage in business for himself. Should he do so, the capitalist partners, as well as industrial partners may either: Exclude him from the firm; or Page 105 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Avail themselves of the benefit which he may have obtained with a right to damages. [de Leon] Exception: He may engage in business for himself when the partnership expressly permits him to do so. [Art. 1789, NCC] Remedy of the other partners The other partners have the remedy of either excluding the erring partner from the firm or of availing themselves of the benefits which he may have obtained. An action for specific performance to compel the partner to perform the promised work is not available as a remedy because this will amount to involuntary servitude. Reasons: 1. To prevent the industrial partner from exploiting his services for his own personal benefit without the permission of the firm. 2. To prevent conflict of interest and to ensure compliance by said partner with his prestation. FOR CAPITALIST PARTNERS General Rule: For a capitalist partner, the prohibition on engaging in another business extends only to any operation which is of the same or similar kind of business in which the partnership is engaged Exception: Unless there is a stipulation to the contrary. If the capitalist partner violates this prohibition, he shall: (1) Bring to the common funds any profits accruing to him from his transactions; and (2) Personally bear all the losses. [Art. 1808, NCC] The test is the competition. possibility of unfair A partner occupies a fiduciary position with respect to his co-partners imposing duties of utmost good faith and he may not carry on any other business in rivalry with the business of COMMERCIAL LAW the partnership, whether in his own name or for the account of another at the expense of the partnership. [de Leon] Obligation to Profits/Losses Share in the Rules for Distribution of Profits and Losses The distribution of profits and losses shall be in accordance with the following rules: 1. They shall be distributed in conformity with the agreement. 2. If only the share in profits has been stipulated, the share in the losses shall be in the same proportion. 3. In the absence of any stipulation: (a) The share in the profits of the capitalist partners shall be in proportion to their contributions. (b) The losses shall be borne by the capitalist partners, also in proportion to the contributions. (c) The share of the industrial partners in the profits is that share as may be just and equitable. If he also contributed capital, he will receive a share of the profits in proportion to his contribution; and (d) The industrial partner, who did not contribute capital, is not liable for losses. [Art. 1797, NCC] Exclusion Of Partner From Share General rule: A stipulation excluding one or more partners from any share in the profits or losses is void. [Art. 1799, NCC] Exception: A stipulation exempting an industrial partner from losses is valid, since, if the partnership fails to realize profits, he can no longer withdraw his work or labor. [de Leon] But this does not exempt the industrial partner from liability insofar as third persons are concerned. He may however, recover what he has given to third persons from the other partners, for he is exempted by law from losses. Page 106 of 450 U.P. LAW BOC Obligations partnership/partners persons BUSINESS ORGANIZATIONS to of third Operate Under a Firm Name General rule: The partners may adopt any firm name desired, which may or may not include the name of one or more of the partners. [Art. 1815, NCC] Note: Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner. [Art. 1815, NCC] The partnership name shall contain the word “Company” or “Co.”, except for professional partnerships. [SEC Memo Circ No. 14-00] Exceptions: 1. They cannot use a name which is “identical or deceptively or confusingly similar one already protected by the Commission or a sole proprietorship registered with the Department of Trade and Industry. [SEC Memo Circ No. 14-00] 2. The use of names of a deceased partner in law firms is “permissible provided that the firm indicates in all its communications that said partner is deceased”. [Rule 3.02, Code of Professional Responsibility] Liability for Partnership Debts Liability of Partners for Partnership Contracts The partnership is primarily liable for contracts entered into: 1. In its name and for its account; 2. Under its signature; and 3. By a person authorized to act for it. Upon exhaustion of its assets, all partners are liable pro rata with all their property. Any partner may enter into a separate obligation to perform a partnership contract [Art. 1816, NCC]. COMMERCIAL LAW Nature of Individual Liability Subsidiary General rule: The partners are liable subsidiarily. It only arises upon exhaustion of partnership assets. [Cia. Maritima v. Muñoz, G.R. No. L-24796 (1907)] Exceptions: 1. A third person who transacted with the partnership can hold the partners solidarily (rather than subsidiarily) liable for the whole obligation if the case falls under Articles 1822 or 1823. [Muñasque v. CA, G.R. L-39780 (1985)] The provisions refer to wrongful acts or omission and misapplication of money or property by a partner in the ordinary course of business. 2. A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission, except that his liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary. [Art. 1826, NCC] In other words, he is not personally liable. Pro Rata The partners are liable pro rata. This liability is not increased even when a partner: Has left the country and the payment of his share of the liability cannot be enforced; [CoPitco v. Yulo, G.R. No. L-3146 (1907)] or His liability is condoned by the creditor. [Island Sales v. United Pioneers, G.R. No. L-22493 (1975)] Basis for Pro-rating Pro rata must be understood to mean equally or jointly and not its literal meaning. After all partnership assets have been exhausted, pro-rating is based on the number of partners and not on the amount of their contributions to the common fund, subject to adjustment among the partners. [de Leon] Liability of an Industrial Partner An industrial partner, who is not liable for losses, is not exempt from this liability (for partnership debts). However, he can recover the amount he has paid from the capitalist partners, unless there is a stipulation to the Page 107 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS contrary. [Cia. Maritima v. Muñoz, G.R. No. L24796 (1907)] Stipulation against Individual Liability Any stipulation against pro rata liability is: Void against third persons; but Valid among the partners. [Art.1817, NCC] A stipulation which excludes one or more partners from any share in the profits or loses is void. [Art. 1799, NCC] Reconciling Art. 1816 and Art. 1797 The exemption of the industrial partner to pay losses relates exclusively to the settlement of the partnership affairs among the partners themselves, and has nothing to do with the liabilities of the parties to third persons. Art. 1816 refers to “liabilities” while Art. 1797 speaks of “losses”. There is therefore no conflict between the two articles. [Nachura] Liability of Partners for Partnership Contracts 1. Acts apparently for the carrying on of usual business General rule: The partnership is liable for any act of a partner which is apparently for the carrying on of the usual business of the partnership binds the latter, including the execution of any instrument in the partnership name. Exception: The partnership is not bound when the following concur: (a) The partner has in fact no authority to act; and (b) The person with whom he deals has knowledge of such fact [par. 1, Art. 1818, NCC]. 2. Acts not apparently for carrying on of the usual business General rule: Acts of a partner which is not apparently for carrying on of the usual business does not bind the partnership. COMMERCIAL LAW Exception: The partnership is bound if the other partners authorized him to do the act. [par. 2, Art. 1818, NCC] 3. Acts of Strict Dominion General Rule: One or some of the partners have no authority to do the following acts of strict dominion: a. Assign the partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership; b. Dispose of the goodwill of the business; c. Do any other act which makes it impossible to carry on the ordinary business of the partnership; d. Confess a judgment; e. Enter into a compromise concerning a partnership claim or liability; f. Submit a partnership claim or liability to arbitration; g. Renounce a claim of the partnership. Exceptions: They may do so if: 1. Authorized by all the partners; or 2. The other partners have abandoned the business. [par. 3, Art. 1818, NCC] 4. Acts In Contravention of a Restriction Any act of a partner in contravention of a restriction on authority does not bind the partnership to persons having knowledge of the restriction. [par. 4, Art. 1818, NCC]. The partnership is not liable to third persons having actual or presumptive knowledge of the restrictions, whether or not the acts are for apparently carrying on in the usual business of the partnership. [de Leon] Conveyance of Partnership Real Property (a) Title In Partnership Name Any partner may convey the real property in the name of the partnership. The partnership can recover it, except when: 1) The act of the partner binds the partnership, when he has authority to Page 108 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW carry out the usual business of the partnership, under par. 1, Art. 1818, NCC; or 2) If not so authorized, the property has been conveyed by the grantee, or a person claiming under him, to a holder for value and without knowledge that the partner exceeded his authority. [par. 1, Art. 1819, NCC] A partner authorized to carry out the usual business may convey, in his own name, the equitable interest of the partnership. [par. 2, Art. 1819, NCC] Instances Where Knowledge of a Partner is Considered Knowledge of the Partnership a. Knowledge of the partner acting in the particular matter – a. Acquired while a partner; or b. Then present to his mind; b. Knowledge of any other partner who reasonably could and should have communicated it to the acting partner. [Art. 1821, NCC] (b) Title in the Name Of Other Persons Where the title is in the name of one or more but not all the partners, and the record does not disclose the right of the partnership: 1) The partners having title may convey title. 2) The partnership may recover it when the partners conveying title have no authority to carry on the usual business of the partnership, unless the purchaser or his assignee is: i. A holder for value; and ii. Without knowledge that the act exceeded authority. [par. 4, Art. 1819, NCC]. The partnership is solidarily liable with the partner who causes loss or injury to any person not a partner, or incurs any penalty through any wrongful act or omission: a. In the ordinary course of the business of the partnership; or b. Not in such ordinary course of business, but with the authority of his co-partners. [Art. 1822, NCC] Where the title is in the name of one or more or all the partners, or in a third person in trust for the partnership, a partner authorized to carry on the usual business may convey equitable title in the partnership name or in his own name. [par. 4, Art. 1819, NCC] Where the title is in the names of all the partners, a conveyance executed by all of them passes all the rights to the property. [par. 5, Art. 1819, NCC] Liability for Admission by a Partner An admission or representation by any partner may be used as evidence against the partnership when: a. It concerns partnership affairs; and b. Such affairs are within the scope of his authority. [Art. 1820, NCC] Liability for Wrongful Acts of a Partner Liability for Misapplication of Money or Property The partnership is liable for losses suffered by a third person whose money or property was: a. Received by a partner – Acting within the scope of his apparent authority; and Misapplied it; b. Received by the partnership – In the course of its business; and Misapplied by any partner while it is in the custody of the partnership. [Art. 1823, NCC] LIABILITY OF THE OTHER PARTNERS UNDER ARTS. 1822 AND 1823, NCC All partners are solidarily liable with the partnership for its liabilities under Arts. 1822 and 1823. [Art. 1824, NCC] This is without prejudice to the guilty partner being liable to the other partners. However, as far as third persons are concerned, the partnership is answerable. [de Leon] Page 109 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Applicability of the Rule of Respondeat Superior The rule of respondeat superior (also called the rule of vicarious liability) applies to the law of partnership in the same manner as other rules governing the agency relationship. [de Leon] It is not only the partners who are liable in solidum; it is also the partnership. [Art 1824, NCC] The injured party may proceed against the partnership or any partner. [Paras] The reason for the law’s imposition of wider liability on the partnership with respect to torts and breach of trust is based on public policy. [de Leon] Criminal Liability for Criminal Acts A non-acting partner in a partnership engaged in a lawful business is not criminally liable for the criminal acts of another partner but he is criminally liable if the partnership is involved in an unlawful enterprise with his knowledge or consent. Partnership Liability Does Not Extend to criminal liability where the wrongdoing is regarded as individual in character, i.e. embezzlement. Extends to criminal liability where the crime is statutory, especially where it involves fine or imprisonment. [de Leon] Liability in Case of Partnership by Estoppel See Partnership by Estoppel, supra. Liability of an Incoming Partner A person admitted as a partner is liable for obligations incurred subsequent to his admission as the other partners are liable. This is because he is already part of the partnership. As per Article 1826, the partner is liable for obligations incurred before his admission, but will be satisfied only out of the partnership COMMERCIAL LAW property, unless otherwise stipulated that he fully assumes such obligations. Rationale a. The new partner partakes of the benefits of the partnership property and an already established business. b. He has every means of obtaining full knowledge of the debts of the partnership and remedies that amply protect his interest. [de Leon] Notice To Or Knowledge Of The Partnership The following operate as notice to or knowledge of the partnership: a. Notice to any partner of any matter relating to partnership affairs; b. Knowledge of the partner acting in the particular matter acquired while a partner; c. Knowledge of the partner acting in the particular matter then present to his mind; or d. Knowledge of any other partner who reasonably could and should have communicated it to the acting partner. These do not apply in case of fraud on the partnership committed by or with the consent of the partner. [Art. 1821, NCC] Preference of Partnership Creditors in Partnership Property With respect to partnership assets the partnership creditors are entitled to priority of payment. However, the private creditors of each partner may ask the attachment and public sale of the share of the latter in the partnership assets as provided in Art. 1814, NCC. [Art. 1827, NCC] Property Preference: a. Partnership Property – Partnership creditors are preferred; b. Partner’s Individual Property – Partner’s individual creditors are preferred. [de Leon] Remedy in Case of Insufficiency of Assets: a. Partnership Creditor – After exhaustion of partnership assets, the creditor may come after the private property of the partners. Page 110 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS b. Partner’s Individual Creditor – Ask for attachment and public sale of the share of the partner in the partnership assets. [de Leon]. Liability with Regard to Personal Creditors of Partners Interest by Personal Creditors General rule: Partnership creditors are preferred over the personal creditors of the partners as regards partnership property. Exception: On due application by any judgment creditor of a partner, a competent court may: a. Charge the interest of the partner for the satisfaction of the judgment debt; b. Appoint a receiver of the share of the profits and of any other money due or to fall due to the partner; and c. Make all other orders, directions, accounts and inquiries, which the debtor partner might have made, or which the circumstances may require. [par. 1, Art. 1814, NCC] The interest charged may be redeemed before foreclosure or, in case of sale directed by the court, may be purchased without causing dissolution: a. With separate property, by one or more of the partners; or b. With partnership property, by one or more of the partners, with consent of all, except the debtor partner. [par. 2, Art. 1814, NCC] 3. Dissolution and Winding Up Concepts Dissolution – the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. It is different from the winding-up of the business. [Art. 1828, NCC] It does not terminate the partnership, which continues until the winding up of partnership affairs is completed. [Art. 1829, NCC] COMMERCIAL LAW Note: The dissolution of a partnership must not be understood in the absolute and strict sense so that at the termination of the object for which it was created, the partnership is extinguished. [Testate Estate of Mota v. Serra, G.R. No. L22825 (1925)] Partnership Still Exists The partnership, although dissolved, continues to exist until its termination, at which time the winding up of its affairs should have been completed and the net partnership assets are partitioned and distributed to the partners. [Emnace v. CA, G.R. No. 126334 (2001)] Winding up – the actual process of settling the partnership business or affairs after dissolution. It involves collection and distribution of partnership assets, payment of debts, and determination of the value of the interest of the partners in the partnership. Termination – the point in time when all partnership affairs are completely wound up and finally settled. It signifies the end of the partnership life. [de Leon] Causes of Dissolution Without Violation of the Agreement Between the Partners 1. By the termination of the definite term or particular undertaking specified in the agreement; 2. By the express will of any partner, who must act in good faith, when no definite term or particular is specified; 3. By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking; 4. By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners. [Art. 1830(1), NCC] If, after the expiration of the definite term or particular undertaking, the partners continue Page 111 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS the partnership without making a new agreement, the firm becomes a partnership at will. [Art. 1785, NCC] Any one of the partners may, at his sole pleasure, dictate the dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership, but that it can result in a liability for damages. [Ortega v. CA, G.R. No. 109248 (1995)] In Contravention of the Agreement Between the Partners Where circumstances do not permit dissolution under any other provision of Art. 1830, NCC it may also be dissolved by the express will of any partner at any time. Thus, even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable cause. If the cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm [Rojas v. Maglana, G.R. No. 30616 (1990)]. By operation of Law 1. By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership; Note: If the business or object had been unlawful from the very beginning, the firm never had juridical personality. [Paras] 2. When a specific thing which a partner had promised to contribute, perishes before delivery, or by the loss of the thing, only the use or enjoyment of which has been contributed; the loss of a specific thing, however, does not dissolve the corporation after its ownership has already been transferred to the partnership; 3. By the death of any partner; COMMERCIAL LAW 4. By the insolvency of any partner or of the partnership; 5. Note: The insolvency of the partner or of the partnership must be adjudged by the court. [de Leon] 6. By the civil interdiction of any partner; Civil interdiction deprives the offender during the time of his sentence of the right to manage his property and dispose such property by any act or any conveyance inter vivos. [Art. 34, RPC] Ratio: One who is without capacity to manage his own property should not be allowed to manage partnership property. [de Leon] By Decree of Court A partner may apply for dissolution in court when: 1. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind; Note: The partner may have been previously declared insane in a judicial proceeding; otherwise, his insanity must be duly proved. It must materially affect the capacity of the partner to perform his contractual duties as such. [de Leon] 2. A partner becomes in any other way incapable of performing his part of the partnership contract; Note: The incapacity must be lasting, from which the prospect of recovery is remote. [de Leon] 3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business; 4. A partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters Page 112 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him; Ratio: They defeat and materially affect and obstruct the purpose of the partnership. [de Leon] 5. The business of the partnership can only be carried on at a loss; Note: A court is authorized to decree dissolution notwithstanding the partnership has been making profits where it appears at the time of the application that the business can only be carried on at a loss. [de Leon] 6. Other circumstances render a dissolution equitable. Reason for necessity of court decree: In the instances mentioned in Art. 1831, the facts may be so far open to dispute as to make necessary judicial determination as to dissolution, rather than allow them to be the occasion for automatic dissolution by operation of law. [de Leon] A person who acquires the interest of a partner may likewise apply: 1. After the termination of the specified term or particular undertaking; 2. At any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued. Other Causes 1. When a new partner is admitted into an existing partnership; 2. When any partner retires; 3. When the other partners assign their rights to the sole remaining partner; 4. When all the partners assign their rights in the partnership property to third persons. [Art. 1840, NCC] COMMERCIAL LAW Effects of Dissolution On Authority of the Partners In general, upon dissolution, the authority of the partners to represent the partnership is confined only to acts necessary to: 1. Wind up partnership affairs; or 2. Complete transactions begun but not then finished. [par. 1, Art. 1832, NCC] With respect to partners The authority of partners to act for the partnership is terminated, with respect to partners: 1. When the dissolution is not by the act, insolvency or death of a partner; or 2. When the dissolution is by such act, insolvency or death, when the partner acting for the partnership has knowledge or notice of the cause. [Art. 1832 and 1833, NCC] In other cases, each partner is still liable for his share in the liability created by the partner acting for the partnership. [Art. 1833, NCC] With respect to third persons With respect to persons not partners: 1. After dissolution, a partner can bind the partnership by any act appropriate for – a. Winding up partnership affairs; or b. Completing transactions unfinished at dissolution. 2. He can also bind it by any transaction which would bind the partnership as if dissolution had not taken place, provided the other party to the transaction – a. Had extended credit to the partnership prior to dissolution and had no knowledge or notice thereof; or b. Had not so extended credit but had known of the partnership prior to dissolution, and having no knowledge or notice of dissolution, the fact had not been advertised in a newspaper of general circulation in the place (or in each place if more than one) at which the Page 113 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS his want of authority, the fact of his want of authority has not been advertised. [Art. 1834, NCC] partnership business was regularly carried on. [par. 1, Art. 1834, NCC] Note the character of the notice required: 1. As to persons who extended credit to the partnership prior to dissolution, notice must be actual. 2. As to persons who merely knew of the existence of the partnership, publication in a newspaper of general circulation in the place of business of the partnership is sufficient. On Liability for Transactions after Dissolution The liability of a partner, in general, is the same as in ordinary contracts (pro rata and subsidiary). In the following cases, however, the liability shall be satisfied out of the partnership assets alone (i.e., there is no subsidiary liability): 1. When the partner had been, prior to the dissolution, unknown as a partner to the person with whom the contract is made; 2. When the partner had been, prior to the dissolution, so far unknown or inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it. [Art. 1834, NCC] COMMERCIAL LAW Art. 1834, NCC does not affect the liability under Art. 1825, NCC of any person who, after dissolution, represents himself or consents to another representing him as a partner in a partnership engaged in carrying on business. [Art. 1834, NCC] On Liability for Contracts after Dissolution by Specific Causes General rule: A contract: 1. Entered into by a partner acting for the partnership; 2. After dissolution by – a. act, b. death, or c. insolvency of a partner, Binds the other partners. Exceptions: 1. The dissolution being by act of any partner, the partner acting for the partnership had knowledge of the dissolution; or 2. The dissolution being by death or insolvency of a partner, the partner acting for the partnership had knowledge or notice of the death or insolvency. [Art. 1833, NCC] On Existing Liability of Partners Any act of a partner after dissolution in no case binds the partnership in the following cases: 1. Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs; 2. Where the partner has become insolvent; or 3. Where the partner has no authority to wind up partnership affairs, except by a transaction with one who – a. Had extended credit to the partnership prior to dissolution and had no knowledge or notice of his want of authority; or b. Had not extended credit to the partnership prior to dissolution and, having no knowledge or notice of General rule: Dissolution does not of itself discharge the existing liability of any partner. Exception: A partner may be relieved when there is an agreement to that effect between: 1. Himself; 2. The partnership creditor; and 3. The person or partnership continuing the business. Page 114 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Such agreement may be inferred from the course of dealing between: 1. The creditor having knowledge of the dissolution; and 2. The person or partnership continuing the business. In case of dissolution by death, the individual property of a deceased partner is liable for obligations of the partnership incurred while he was a partner, after payment of his separate debts. [Art.1835, NCC] COMMERCIAL LAW Rights of Partners in Case of Dissolution a. Dissolution Without Violation of the Agreement Each partner may have: 1. The partnership property applied to discharge the partnership liabilities; and 2. The surplus applied in cash to the net amount owing to the respective partners. This is a right as against his co-partners and all partners claiming through them in respect of their interests in the partnership. It cannot be availed if there is an agreement to the contrary. [Art. 1837 (1), NCC] Winding Up Partners Who May Wind Up The following partners have the right to wind up the partnership affairs: 1. Those designated in an agreement; 2. Those who have not wrongfully dissolved the partnership; or 3. The legal representative of the last surviving partner, who was not insolvent. Note: When dissolution is caused by expulsion, the expelled partner may be discharged from all partnership liability in the same manner as above but he shall receive in cash only the net amount due him from the partnership. [de Leon] Any partner or his legal representative or assignee may obtain winding up by the court, upon cause shown [Art. 1836, NCC]. Manner of Winding Up 1. Extrajudicial, by the partners themselves; or 2. Judicial, under the control and direction of the proper court. The action for liquidation of the partnership is personal. The fact that sale of assets, including real property, is involved does not change its character, such sale being merely a necessary incident of the liquidation of the partnership, which should precede and/or is part of its process of dissolution. [Claridades v. Mercader, G.R. No. L-20341 (1966)] Dissolution in Contravention of the Agreement PARTNER WHO DID NOT CAUSE THE DISSOLUTION The partners who did not cause the dissolution wrongfully has the following rights: 1. To demand the right under par. 1, Art. 1837, NCC; 2. To be indemnified for damages for breach of the agreement against the partner who caused the dissolution wrongfully [Art. 1837(1), NCC]; 3. To continue the business: a. In the same name; b. By themselves or jointly with others; c. During the agreed term for the partnership. For the purpose of continuing the business, the said partners may possess the partnership property provided: 1. They secure the payment by bond approved by the court; or 2. They pay any partner, who has caused the dissolution wrongfully, the value of his Page 115 of 450 U.P. LAW BOC COMMERCIAL LAW BUSINESS ORGANIZATIONS interest in the partnership, less any damages recoverable, and indemnity against all present or future partnership liabilities. [Art. 1837(2), NCC] PARTNER WHO CAUSED THE DISSOLUTION The partner who caused the dissolution wrongfully has the following rights: 1. If the business is not continued, all the rights par. 1, Art. 1837, NCC, subject to liability for damages; 2. If the business is continued, the right, as against his co-partners and all claiming through them, to: a. Ascertainment, without considering the value of the goodwill of the business, and payment to him in cash the value of his partnership interest, less any damage, or have the payment secured by a bond approved by the court; and b. Be released from all existing liabilities of the partnership. [Art. 1837(3), NCC] The goodwill of a business may be defined to be the advantage which it has from its establishment or from the patronage of its customers, over and above the mere value of its property and capital. The goodwill (which includes the firm name) is part of the partnership assets and may be subject of sale. [de Leon] creditors of the partnership for any payments made by him in respect of the partnership liabilities; and c. To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership [Art. 1838, NCC]. Nature of Fraud or Deceit The fraud or deceit must be material or substantial. Mere exaggerations of one partner of the prospects of enterprises or of value of the property which he has put into the firm as capital is not ground for dissolution. [Pineda] Settling of Partners between Subject to any agreement to the contrary, the following rules shall be observed in settling accounts between partners after dissolution. Composition of Partnership Assets 1. The partnership property; and 2. The contributions of the partners necessary for the payment of all the liabilities. [Art. 1839(1), NCC] In accordance with the subsidiary liability of the partners, the partnership property shall be applied first to satisfy any liability of the partnership. [Art. 1839(3), NCC] Amount of Liabilities Rights of Partners in Case of Rescission A partner, who is induced by fraud or misrepresentation to become such partner, may rescind the contract. Without prejudice to any other right, he is entitled: a. To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him; b. To stand, after all liabilities to third persons have been satisfied, in the place of the Accounts Contribution for The rules for distribution of losses shall determine the contributions of the partners. [Art. 1839(4), NCC] As such: 1. The contribution shall be in conformity with the agreement. 2. If only the share in profits has been stipulated, the contribution shall be in the same proportion. 3. In the absence of any stipulation, the contribution shall be in proportion to the capital contribution. [Art. 1797, NCC] Page 116 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW c. Those owing to partners by way of contribution. [Art. 1839(9), NCC]. Enforcement of Contribution The following persons have the right to enforce the contributions: 1. An assignee for the benefit of creditors; 2. Any person appointed by the court; or 3. To the extent of the amount which he has paid in excess of his share of the partnership liability, any partner or his legal representative. [Art. 1839(5) and (6), NCC] The individual property of a deceased partner shall be liable for the contributions. [Art. 1839(7), NCC] Order of Application of Assets The partnership liabilities shall rank, in order of payment, as follows: 1. Those owing to creditors other than partners; 2. Those owing to partners other than for capital and profits; 3. Those owing to partners in respect of capital; 4. Those owing to partners in respect of profits. [Art. 1839(2), NCC] Doctrine of Marshaling of Assets When partnership property and the individual properties of the partners are in possession of a court for distribution: 1. Partnership creditors have priority on partnership property; 2. Separate creditors have priority on individual property, saving the rights of lien of secured creditors; 3. Anything left from either shall be applied to satisfy the other. [Art. 1839(8), NCC] Distribution of Property of Insolvent Partner Where: 1. A partner has become insolvent; or 2. His estate is insolvent, The claims against his separate property shall rank in the following order: a. Those owing to separate creditors; b. Those owing to partnership creditors; Rights of Creditors of Dissolved Partnership As Creditors of the New Partnership In the following cases, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business: 1. When the business is continued without liquidation, and the cause of dissolution is – a. Admission of a new partner into the existing partnership; b. Retirement or death of any partner, and his rights to partnership property are assigned to [1] two or more of the partners, or [2] one or more of the partners and one or more third persons; c. Retirement of all but one partner, and their rights to partnership property are assigned to the remaining partner, who continues the business, either alone or with others; d. Wrongful dissolution by any partner, and the remaining partners continue the business, either alone or with others; or e. Expulsion of a partner, and the remaining partners continue the business, either alone or with others. 2. When the cause of dissolution is the retirement or death of any partner, and business is continued with the consent of the retired partner or the representative of the deceased partner, without assignment of their rights to partnership property. 3. When the cause of dissolution is the assignment by all the partners or their representatives of their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the partnership. [par. 1, Art. 1840, NCC] Page 117 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW in the property of the dissolved partnership. [Art. 1841, NCC] Liability of A New Partner The liability to the creditors of the dissolved partnership of a new partner in the partnership continuing the business shall be satisfied out of the partnership property alone. However, he may, through agreement, assume individual liability. [par. 2, Art. 1840, NCC] Priority of Creditors of Dissolved Partnership Creditors of the dissolved partnership have prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business. [par. 3, Art. 1840, NCC] This is without prejudice to the right of creditors to set aside any assignment on the ground of fraud. [par. 4, Art. 1840, NCC] Ratio: Business will be hampered if outside creditors are not given superior right. It will be risky for them to deal with partnerships. Moreover, if partners enjoy priority right, in the natural order of things, they will prefer their own interests to that of the outside creditors. Such state will make it easy to defraud non-partner creditors. [Pineda] Rights of a Retired Partner or a Representative of Deceased Partner Unless otherwise agreed upon, when any partner retires or dies, and the business is continued without any settlement of accounts as between him or his estate and the person or partnership continuing the business, he or his legal representative, as against such person or partnership, subject to the prior rights of creditors of the dissolved partnership: a. May have the value of his interest at the date of dissolution ascertained; and b. Shall receive as an ordinary creditor – 1. An amount equal to the value of his interest in the dissolved partnership with interest; or 2. At his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right Right to an account In the absence of any agreement to the contrary, the right to an account of his interest shall accrue to any partner, or his legal representative at the date of dissolution, as against: a. The winding up partners; b. The surviving partners; or c. The person or partnership continuing the business [Art. 1842, NCC]. 4. Limited Partnership Definition (1) (2) (3) A partnership; Formed by two or more persons; Having as members: i. One or more general partners; and ii.One or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership [Art. 1843, NCC], except to the extent of their capital contributions. Characteristics 1. A limited partnership is formed by compliance with the statutory requirements. [Art. 1844, NCC] 2. The business is controlled or managed by one or more general partners, who are personally liable to creditors. [Arts. 1848 and 1850, NCC] 3. One or more limited partners contribute to the capital and share in the profits but do not manage the business and are not personally liable for partnership obligations beyond their capital contributions. [Arts. 1845, 1848 and 1856, NCC] 4. Obligations or debts are paid out of the partnership assets and the individual property of the general partners. [Art. 1843, NCC] 5. The limited partners may have their contributions back subject to conditions Page 118 of 450 U.P. LAW BOC prescribed by law. [Arts. 1844 and 1957, NCC] A limited partnership has the following advantages: 1. For general partners, to secure capital from others while retaining control and supervision for the business; 2. For limited partners, to have a share in the profits without risk of personal liability. General and Distinguished COMMERCIAL LAW BUSINESS ORGANIZATIONS Limited Prohibited (subject Not prohibited to qualifications) Effect of retirement, death, insanity or insolvency Dissolves Does not dissolve partnership partnership; rights transferred to executor or administrator for selling his estate Assignability of interest Not assignable Assignable Partners General partner Limited partner Extent of liability Personally, but Liable only to the subsidiarily liable extent of his capital for obligations of contributions (subject the partnership to exceptions) Right to participate in management Unless otherwise No right to participate agreed upon, all in management general partners have an equal right to manage the partnership Nature of contribution Cash, property or Cash or property only, industry not industry Proper party in proceedings by or against partnership Proper party Not proper party, unless (1) he is also a general partner; or (2) where the object of the proceedings is to enforce his right against or liability to the partnership. The limited partner is a necessary but not an indispensable party. Firm name Name may appear Name must not in the firm name appear in the firm name (subject to exceptions) Prohibition to engage in other business General and Limited Partnership Distinguished General partnership Limited partnership Creation May be constituted in any form, subject to exceptions Partners must: [1] sign and swear to a certificate in compliance with Art. 1844, NCC; and [2] file the certificate for record in the SEC Composition One or more general, Only general partners and one or more limited partners Firm name Must include the word “Limited” [SEC Memo. Circ. No. 14-00] Must contain the word “Company” [SEC Must not include Memo Circ No. 14name of limited 00], except for partners, unless: [1] it professional is also the surname of partnerships. a general partner, or [2] prior to the time May or may not when the limited include the name of partner became such, one or more of the the business has partners. been carried on under a name in which his surname appeared Rules governing dissolution Arts. 1828-1842, NCC Arts. 1860-1863, NCC Page 119 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Formation General Requirements Two or more persons desiring to form a limited partnership shall: 1. Sign and swear to a certificate stating the items in Art. 1844, NCC; and 2. File for record the certificate in the SEC. [Art. 1844, NCC] A limited partnership is formed if there is substantial compliance in good faith with the requirements. [Art. 1844, NCC] When there is failure to substantially comply with the requirements: 1. In relation to third persons, the partnership is general, unless they recognized that the firm is a limited partnership; and 2. As between the partners, the partnership remains limited, since they are bound by their agreement. [de Leon] Purpose of Filing 1. To give actual or constructive notice to potential creditors or persons dealing with the partnership; and 2. To acquaint them with its essential features, including the limited liability of limited partners. [de Leon] Firm Name General rule: The surname of a limited partner shall not appear in the partnership name. COMMERCIAL LAW Exceptions: 1. It is also the surname of a general partner; or 2. Prior to the time when the limited partner became such, the business had been carried on under a name in which his surname appeared. A limited partner whose surname appears in a partnership name contrary to this prohibition is liable as a general partner to partnership creditors who extend credit without actual knowledge that he is not a general partner. [Art. 1846, NCC] False Statement in the Certificate If the certificate contains a false statement, one who suffers loss by reliance thereon may hold liable any party to the certificate who knew the statement to be false: 1. At the time he signed the certificate; or 2. Subsequently, but within a sufficient time before the statement was relied upon to enable him to cancel or amend the certificate, or to file a petition for its cancellation or amendment [Art. 1847, NCC]. Requisites: 1. The partner knew the statement to be false: a. At the time he signed the certificate; or b. Subsequently, but having sufficient time to cancel or amend it, or file a petition for its cancellation or amendment, and he failed to do so; 2. The person seeking to enforce liability has relied upon the false statement in transacting business with the partnership; and 3. The person suffered loss as a result of reliance upon such false statement. Page 120 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS General and Limited Partner at the Same Time A person may be: 1. A general; and 2. A limited partner, in the same partnership at the same time. This fact must be stated in the certificate. Such person shall have: 1. All the rights and powers of a general partner; and 2. Be subject to all the restrictions of a general partner. f. COMMERCIAL LAW Admit a person as a limited partner, unless the right to do so is given in the certificate; 1. Continue the business with partnership property on the: 2. Death; 3. Retirement; 4. Insanity; 5. Civil interdiction; or 6. Insolvency of a general partner, unless the right so to do is given in the certificate [Art. 1850, NCC] Obligations of a Limited Partner Obligations Related to Contribution Except that, in respect to his contribution as a limited partner, he shall have the rights against the other members which he would have had if he were not also a general partner. [Art. 1853, NCC] Management General Rule: Only general partners have the right to manage the partnership. A general partner shall have the rights and powers and be subject to all restrictions and liabilities of a partner in a partnership without limited partners. Thus, he has general authority over the business. Thus, if a limited partner takes part in the control of the business, he becomes liable as a general partner. [Art. 1848, NCC] However, written consent or ratification by all limited partners is necessary to authorize the general partners to: a. Do any act in contravention of the certificate; b. Do any act which would make it impossible to carry on the ordinary business of the partnership; c. Confess a judgment against the partnership; d. Possess partnership property, or assign their rights in specific property, for other than a partnership purpose; e. Admit a person as a general partner; The contributions of a limited partner may be cash or other property, but not services. [Art. 1845, NCC] A limited partner is liable for partnership obligations when he contributes services instead of only money or property to the partnership. [de Leon] A limited partner is liable to the partnership: 1. For the difference between his actual contribution and that stated in the certificate as having been made; and 2. For any unpaid contribution which he agreed in the certificate to make in the future, at the time and on the conditions stated in the certificate. [par. 1, Art. 1858, NCC] He holds as trustee for the partnership: 1. Specific property stated in the certificate as contributed by him, but which was not contributed or which has been wrongfully returned; and 2. Money or other property wrongfully paid or conveyed to him on account of his contribution. [par. 2, Art. 1858, NCC] Page 121 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS These liabilities can be waived or compromised only by the consent of all members. Such waiver or compromise, however, shall not affect the right to enforce said liabilities of a creditor: 1. Who extended credit; or 2. Whose claim arose, after the filing or before a cancellation or amendment of the certificate, to enforce such liabilities. [par. 3, Art. 1858, NCC] Even after a limited partner has rightfully received the return in whole or in part of his capital contribution, he is still liable to the partnership for any sum, not in excess of such return with interest, necessary to discharge its liabilities to all creditors: 1. Who extended credit; or 2. Whose claims arose before such return. [par. 4, Art. 1858, CC] A person: 1. Who has contributed capital to a partnership; 2. Who erroneously believed that he has become a limited partner; and 3. Whose name appears in the certificate as a general partner, or who is not designated as a limited partner, is not personally liable as a general partner by reason of his exercise of the rights of a limited partner, provided: a. On ascertaining the mistake, he promptly renounces his interest in the profits of the business or other compensation by way of income [Art. 1852, NCC]; b. He does not participate in the management of the business [Art. 1848, NCC]; and c. His surname does not appear in the partnership name. [Art. 1846, NCC] Liability to Partnership Creditors General rule: A limited partner is not liable as a general partner. His liability is limited to the extent of his contributions. [Art. 1843, NCC] Exceptions: The limited partner is liable as a general partner when: COMMERCIAL LAW 1. His surname appears in the partnership name, with certain exceptions. [par. 2, Art. 1846, NCC] 2. He takes part in the control of the business. [Art. 1848, CC] 3. The certificate contains a false statement of which he knows and which was relied upon, resulting in loss. [Art. 1847, CC] In cases (1) and (2), the limited partner is entitled to reimbursement by the general partner/s. Ratio: The general partner/s may not have been aware of such false statement. Liability to Separate Creditors On due application to a court of competent jurisdiction by any separate creditor of a limited partner, the court may: 1. Charge his interest with payment of the unsatisfied amount of such claim; 2. Appoint a receiver; and 3. Make all other orders, directions and inquiries which the circumstances of the case may require. The interest so charged may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property. [Art. 1862, NCC] Note: In a general partnership, the interest may be redeemed with partnership property with the consent of all the partners whose interests are not charged. [Art. 1814, NCC] Rights of a Limited Partner In General A limited partner shall have the same rights as a general partner to: 1. Require that the partnership books be kept at the principal place of business of the partnership; 2. To inspect and copy any of them at a reasonable hour; 3. To demand true and full information of all things affecting the partnership; Page 122 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS 4. To demand a formal account of partnership affairs whenever circumstances render it just and reasonable; 5. To ask for dissolution and winding up by decree of court; 6. To receive a share of the profits or other compensation by way of income; and 7. To receive the return of his contribution provided the partnership assets are in excess of all its liabilities. [Art. 1851, NCC] Right to Transact Business with the Partnership A limited partner may: 1. Loan money to the partnership; 2. Transact other business with the partnership; and 3. Receive a pro rata share of the partnership assets with general creditors if he is not also a general partner. [par. 1, Art. 1854, NCC] Limitations: A limited partner, with respect to his transactions with the partnership, cannot: 1. Receive or hold as collateral security any partnership property; or 2. Receive any payment, conveyance, or release from liability if it will prejudice the right of third persons. [par.1, Art. 1854, NCC] Violation of the prohibition is considered a fraud on the creditors of the partnership. [par. 2, Art. 1854, NCC] COMMERCIAL LAW Rationale: Otherwise, he will receive a share to the prejudice of third-party creditors. Right to Return of Contribution A limited partner may have his contributions withdrawn or reduced when: 1. All the liabilities of the partnership, except liabilities to general partners and to limited partners on account of their contributions, have been paid or there remains property of the partnership sufficient to pay them; 2. The consent of all members is had, unless the return may be demanded as a matter of right; and 3. The certificate is cancelled or so amended as to set forth the withdrawal or reduction. [par. 1, Art. 1857, NCC] Note: Once withdrawal has been approved by the SEC and registered, the partnership may no longer recover the limited partner’s contributions. The return of his contributions may be demanded, as a matter of right [i.e., even when not all the other partners consent]: 1. On the dissolution of the partnership; 2. Upon the arrival of the date specified in the certificate for the return; or 3. After the expiration of a 6-month notice in writing given by him to the other partners, if no time is fixed in the certificate for: a. The return of the contribution; or b. The dissolution of the partnership [par. 2, Art. 1857, CC]. Right to Share in Profits A limited partner may receive from the partnership the share of the profits or the compensation by way of income stipulated for in the certificate. This right is subject to the condition that partnership assets will still be in excess of partnership liabilities after such payment. [Art. 1856, NCC] The partnership liabilities being referred to exclude the liabilities to the limited and general partners. General rule: A limited partner, irrespective of the nature of his contribution has only the right to demand and receive cash in return for his contribution. Exceptions: He may receive his contribution in a form other than cash when: 1. There is a statement in the certificate to the contrary; or 2. All the members of the partnership consent. [par. 3, Art. 1857, NCC] Page 123 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Preference of Limited Partners General rule: The limited partners stand on equal footing. COMMERCIAL LAW An assignee becomes a substituted limited partner when the certificate is appropriately amended. [par. 5, Art. 1859, NCC] Right to Ask for Dissolution Exception: By an agreement of all the partners (general and limited) stated in the certificate, priority or preference may be given to some limited partners over others with respect to: 1. The return of contributions; 2. Their compensation by way of income; or 3. Any other matter. [Art. 1855, NCC]. Note: Such an agreement shall be stated in the certificate. A limited partner may have the partnership dissolved and its affairs wound up when: 1. He rightfully but unsuccessfully demands the return of his contribution; or 2. He has a right to contribution but his contribution is not paid because the partnership property is insufficient to pay its liabilities. [par. 4, Art. 1857, NCC] Dissolution Right to Assign Interest The interest of a limited partner is assignable. The assignee may become: 1. A substituted limited partner; or 2. A mere assignee. A substituted limited partner is a person admitted to all the rights of a limited partner who has died or has assigned his interest in a partnership. He has all the rights and powers, and is subject to all the restrictions and liabilities of his assignor, except those liabilities which: 1. The assignee was ignorant of; and 2. Cannot be ascertained from the certificate. [pars. 2 and 6, Art. 1859, NCC] An assignee is only entitled to receive the share of the profits or other compensation by way of income, or the return of contribution, to which the assignor would otherwise be entitled. He has no right: 1. To require any information or account of the partnership transactions; 2. To inspect the partnership books. [par. 3, Art. 1859, NCC] A limited partnership is dissolved in much the same way and causes as an ordinary partnership. [de Leon] General rule: The retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves the partnership. Exception: It is not so dissolved when the business is continued by the remaining general partners: a. Under a right to do so stated in the certificate; or b. With the consent of all members. [Art. 1860, NCC] Upon the death of a limited partner, his executor or administrator shall have: a. All the rights of a limited partner for the purpose of settling his estate; and b. The power to constitute an assignee as a substituted limited partner, if the deceased was so empowered in the certificate. The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner. [Art. 1861, NCC] An assignee has the right to become a substituted limited partner if: 1. All the partners consent thereto; or 2. The assignor, being empowered to do so by the certificate, gives him that right, [par. 4, Art. 1859, NCC]. Page 124 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW Amendment of Certificate Settlement of Accounts Order of Payment In settling accounts after dissolution, the liabilities of the partnership shall be entitled to payment in the following order: 1. Those to creditors, including limited partners except those on account of their contributions, in the order of priority as provided by law; 2. Those to limited partners in respect to their share of the profits and other compensation by way of income in their contributions; 3. Those to limited partners in respect to the capital of their contributions; 4. Those to general partners other than for capital and profits; 5. Those to general partners in respect to profits; 6. Those to general partners in respect to capital. [par. 1, Art. 1863, NCC] Note: In settling accounts of a general partnership, those owing to partners in respect to capital enjoy preference over those in respect to profits. A certificate shall be amended when: 1. There is a change in the name of the partnership or in the amount or character of the contribution of any limited partner; 2. A person is substituted as a limited partner; 3. An additional limited partner is admitted; 4. A person is admitted as a general partner; 5. A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction and the business is continued; 6. There is a change in the character of the business of the partnership; 7. There is a false or erroneous statement in the certificate; 8. There is a change in the time as stated in the certificate for the dissolution of the partnership or for the return of a contribution; 9. A time is fixed for the dissolution of the partnership, or the return of a contribution, no time having been specified in the certificate; or 10. The members desire to make a change in any other statement in the certificate in order that it shall accurately represent the agreement among them. [Art. 1864, NCC]. Share in the Partnership Assets The share of limited partners in respect to their claims for capital, profits, or for compensation by way of income, is in proportion of their contribution, unless: 1. There is a statement in the certificate as to their share in the profits; or 2. There is a subsequent agreement fixing their share. [Art. 1863, NCC] Amendment or Cancellation of Certificate a. Cancellation of Certificate The certificate shall be cancelled when: The partnership is dissolved; or 1. All limited partners cease to be such limited partners. Requirements for Amendment or Cancellation To amend or cancel a certificate: The amendment or cancellation must be in writing; 1. It must be signed and sworn to by all the members including the new members, and the assigning limited partner in case of substitution or addition of a limited or general partner; and The writing to amend (with the certificate, as amended) or to cancel must be filed for recorded in the SEC. When a person required to sign the writing, a person desiring the cancellation or amendment may petition the court to order cancellation or amendment. The court shall order the SEC to record the cancellation or amendment if it finds that the petitioner has a right to have the writing executed. Page 125 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS From the moment the amended certificate/writing or a certified copy of a court order granting the petition for amendment has been filed, such amended certificate shall thereafter be the certificate of partnership. [Art. 1865, NCC] Limited Partnerships Formed Prior to the NCC Limited partnerships formed under the law prior to the NCC may a. Continue to be governed by the provisions of the old law b. Become a limited partnership under the NCC by compliance with Art. 1844, provided that the certificate states: 1. The amount of the original contribution of each limited partner and the time it was made; and 2. That the partnership assets exceeds its liabilities to third persons by an amount greater than the sum of all limited partners’ contributions. [Art. 1867, NCC] B. CORPORATIONS 1. Definition of Corporation A Corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. [Sec. 2, unless otherwise indicated, all sections cited herein are from RA 11232, or the Revised Corporation Code] COMMERCIAL LAW Being only a juridical entity, the physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for such purpose by corporate bylaws or by a special act of the Board of Directors (BOD). [Swedish Match Philippines, Inc. v. Treasurer of the City of Manila, G.R. No. 181277 (2013)] A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may be related. [Yutivo Sons Hardware v. CTA, G.R. No. L-13203 (1961)] b. Created by Operation of Law Mere consent of the parties to form a corporation is not sufficient. The State must give its consent either through a special law (in case of government corporations) or a general law (i.e., Revised Corporation Code in case of private corporations). A corporation comes into existence upon the issuance of the certificate of incorporation. Then, and only then, will it acquire juridical personality to sue and be sued, enter into contracts, hold or convey property or perform any legal act in its own name. c. Has the Right of Succession Since one of the attributes of a corporation is that it is an artificial being with a distinct personality, the corporation’s existence is unaffected by a change in the composition of stockholders. Its existence is limited only by the Articles of Incorporation (AOI), may be subject to Quo Warranto proceedings (Rule 66 of the Rules of Court), and may be shortened by dissolution (Title XIV). ATTRIBUTES OF A CORPORATION a. An Artificial Being A corporation is a juridical entity that exists apart from its stockholders. It has its own set of rights and obligations as provided for by law. Technically, it has no physical existence although it occupies a principal place of business. d. Has the Powers, Attributes and Properties Expressly Authorized by Law or Incident to its Existence A corporation has no power except those expressly conferred on it by the Revised Corporation Code and by its articles of incorporation, those which may be incidental to such conferred powers, those that are implied from its existence, and those reasonably Page 126 of 450 U.P. LAW BOC necessary to accomplish its purposes. In turn, a corporation exercises said powers through its BOD and/or its duly authorized officers and agents. [Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, G.R. No. 152542 (2004)] Being a creature of the law, its powers are limited by: The law (see Sec. 35 for general powers and Secs. 36 to 43 for specific powers); By the express terms of its AOI as well those essential or necessary to carry out its purpose or purposes under such Articles (see Sec. 35, last par.); and By those necessary or incidental to its powers so conferred (see Sec. 44) 2. Classes of Corporations a. Stock Corporation Stock corporations – corporations which have capital stock divided into shares AND are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of shares held. [Sec. 3] It is organized for profit. The governing body of a stock corporation is usually the BOD (except in certain instances, e.g. one person corporations, close corporations). Note: A corporation is deemed to have the power to declare dividends. So long as the corporation has capital stock and there is no prohibition in its Articles of Incorporation or in its by-laws for it to declare dividends, such corporation is a stock corporation. [Sec. 42] b. Non-Stock Corporation All other corporations are corporations. [Sec. 3] COMMERCIAL LAW BUSINESS ORGANIZATIONS non-stock Non-stock corporations – One where no part of the income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Code on dissolution. [Sec. 86] It is not organized for profit. Its governing body is usually the Board of Trustees (BoT). However, non-stock corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees. [Sec. 174] Stock Non-Stock No part of income is as Have capital stock distributable to its divided into shares dividends members or trustees [Sec. 3,] [Sec. 86] Are authorized to distribute to the holders of such shares, dividends or allotments of surplus profits on the basis of the shares held [Sec. 3] Composed stockholders Any profit may obtain as an incident to its operations shall, when necessary or proper, be used for the furtherance of its purpose or purposes [Sec. 86,] of Composed members It is for profit of It is not for profit [Sec. 87] Other distinctions Stock Non-Stock Cumulative voting in election of directors is provided by law [Sec. 23] Cumulative voting in election of trustees is only available if provided in AOI or BL [Sec. 23] Maximum of 15 directors except in merger or consolidation of banks [Sec. 13] May be more than 15 [Sec. 91] Term of director is 1 year [Sec. 22] Maximum term of a trustee is 3 years [Sec. 91] Page 127 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Stockholders’ meetings must be in the principal office as set forth in the AOI or, if not practicable, in the city or municipality where the principal office is located [Sec. 50] May be anywhere within Philippine territory as provided by BL. [Sec. 92] One class of shares must always have complete voting rights [Sec. 6,] Right to vote of members of any class may be denied in the AOI or BL [Sec. 88] There is free transfer of shares. Membership is not personal to the stockholder. Note: Subject to provisions on close corporations. Transfer of membership cannot be made without consent of the corporation. [Sec. 89] Membership is personal. May always vote by proxy [Sec. 57] Vote by proxy can be denied in the AOI or BL [Sec. 88] Upon transfer of share, seller is no longer part of corporation. Transfer may only be subject to restrictions noted down in AOI, BL, and stock certificate, and must not be more onerous than the right of first refusal. [Sec. 97] Membership may be terminated according to causes provided in the BL. [Sec. 90] Note: Transfer restrictions imposed i n a Shareholders Agr eement may be bindi ng upon the stockhol ders who are parties thereto, since they ar e chargeable with not ice, unless palpably COMMERCIAL LAW unreasonable under t he circumstances (SEC Opinion, [June 8, 1995]) Residual assets are to be distributed to the stockholders upon dissolution, after payment of creditors. Dissolution is effected through the methods provided in the Code. [Sec. 133] Generally, members are not allowed to participate in distribution of assets. Assets are to be distributed to such persons, societies, organizations or corporations as may be specified in a plan of distribution. [Sec. 93] c. One Person Corporations One Person Corporations - A corporation with a single stockholder. Only a natural person, trust, or an estate may form a One Person Corporation. Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-chartered governmentowned and controlled corporations may not incorporate as One Person Corporations. A natural person who is licensed to exercise a profession may not organize as a One Person Corporation for the purpose of exercising such profession except as otherwise provided under special laws. [Sec. 116,] d. Other Corporations 1. Public Corporation Public corporation – one formed or organized for the government of a portion of the state. Its purpose is for the general good and welfare. [Sec. 3, Act 1456] Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of the government, and the intervention in a transaction of the Office of the President through the Executive Secretary does not Page 128 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS change the independent existence of a government entity as it deals with another government entity. [Polytechnic University of the Phils. v. CA, G.R. No. 143513 (2001)] Not all corporations which are not GOCCs are ipso facto to be considered private corporations as there exists another distinct class of corporations or chartered institutions which are otherwise known as “public corporations.” These corporations are treated by law as agencies or instrumentalities of the government which are not subject to the tests of ownership or control and economic viability but to different criteria relating to their public purposes/interests or constitutional policies and objectives and their administrative relationship to the government or any of its Departments or Offices. [Boy Scouts of the Philippines v. COA, G.R. No. 177131 (2011)] 2. Private Corporation Private corporation – One formed for some private purpose, benefit, aim or end [Sec. 3, Act 1456]; it may be either stock or non-stock, government-owned or controlled or quasipublic. at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. [Sec. 95] Any corporation may be incorporated as a close incorporation, except: 1. Mining or oil companies; 2. Stock exchanges; 3. Banks; 4. Insurance companies; 5. Public utilities; 6. Educational institutions; and 7. Corporations declared to be vested with public interest. [Sec. 95] Ordinary Stock Corporation Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when Close Corporation AOI must provide: a. Not to be held by more than a certain number of Stockholders, not to exceed 20 b. Transfer restrictions allowed Has an AOI with a c. Shall not be listed, general template and shall not [Sec. 14] publicly offer The test to determine whether GOCC or private corporation: if a corporation is created by its own charter for the exercise of a public function, then GOCC; if by incorporation under the general corporation law, then private corporation. [Baluyot v. Holganza, G.R. No. 136374 (2000)] 3. Close Corporation Close corporation – One whose articles of incorporation provide that: 1. All issued stock, exclusive of treasury shares, shall be held by persons not exceeding 20; 2. All issued stock shall be subject to one or more specified restrictions on transfer; and 3. The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. COMMERCIAL LAW Further, a corporation which is not a close corp. cannot own more than 75% of the outstanding capital stock No limit to number of corporators Not more than allowed by according to AOI authorized shares 20, May list in Philippine Stock May not list on PSE Exchange (PSE) Mining, Oil, Stock In general, all Exchange, Banks businesses may be Insurance, Public carried out by Utility, Educational, corporation Public Interest cannot Page 129 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS be organized as close corporation Stockholders may Powers exercised manage affairs directly, by board, elected subject to the same rights and liabilities of by stockholders directors No limit to pre-emptive Pre-emptive right rights. Thus, includes subject to Sec. 38 sale of treasury shares limitations and for acquisition of properties Appraisal right can be for any cause, and no need for unrestricted Appraisal right must retained earnings be for reasons (URE), so long as the listed in the Code corporation would not thereby become insolvent Dissolution must Any stockholder may comply with all the petition for dissolution requirements for stated grounds SEC may not SEC may intervene in regulate if purpose management of corp. in not illegal case of deadlocks No classification of directors May classify directors Shareholders, as directors, directly elect BOD elects officers officers, if provided by AOI Must have URE to buy own shares No need for URE to acquire shares if ordered by SEC in intra-corporate deadlock An arbitration agreement may be provided in the Arbitration allowed AOI/BL of unlisted corporations [Sec. 181] COMMERCIAL LAW 4. Educational Corporation Educational corporation – One organized for educational purposes. [Sec. 105] If organized as a non-stock corporation Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15). Provided, however, that the number of trustees shall be in multiples of five (5). They shall classify themselves in such a way that the term of 1/5 of them expires every year. [Sec. 106] If organized as a stock corporation For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. [Sec. 106] 5. Religious Corporation Classes of Religious Organization (i) Corporation Sole – incorporated by one person; and (ii) Religious Societies – incorporated by more than one person. [Sec. 107] Corporation sole – is one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect or church. [Sec. 108] A corporation sole has no nationality but for the purpose of applying nationalization laws, nationality is determined not by the nationality of its presiding elder but by the nationality of its members constituting the sect in the Philippines. Thus, the Roman Catholic Church can acquire lands in the Philippines even if it is headed by the Pope. [Roman Catholic Apostolic, etc v. Register of Deeds of Davao City, G.R. No. L-8451 (1957)] Religious Society (Corporation Aggregate) Corporation aggregate – A religious corporation incorporated by more than one person. Page 130 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS 6. Eleemosynary Corporation Eleemosynary corporation– One organized for a charitable purpose. 7. Domestic Corporation Domestic corporation – One formed, organized, or existing under the laws of the Philippines. 8. Foreign Corporation Foreign corporation – One formed, organized or existing under any laws other than those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and state. [Sec. 140] 9. Corporation Created By Special Laws Or Charter Corporation created by special laws or charter - Corporations which are governed primarily by the provisions of the special law or charter creating them. Corporation Code has suppletory application. [Sec. 4] 10. Subsidiary Corporation Subsidiary corporation – One in which control, in the form of ownership of majority of its shares, is in another corporation (the parent corporation). 11. Parent Corporation Parent corporation – Its control lies in its power, directly or indirectly, to elect the subsidiary’s directors thus controlling its management policies. Holding company – a parent company which has no other business aside from the holding of the shares of its subsidiaries, which it controls. Investment company – a company which holds shares in other corporations not for the purpose of controlling them but merely to invest therein. COMMERCIAL LAW complaint with the regulations of the RCC, other laws, rules and regulations, the Commission shall issue the certificate of incorporation. [Sec. 18] 13. De facto Corporation De facto corporation – A corporation where there exists a flaw in its incorporation. Rule on De Facto Corporations The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. [Sec. 19] General Rule: The defect in the juridical personality of a corporation cannot be inquired into by private individuals, much less used as a defense to avoid claims. Exception: In quo warranto proceedings brought on behalf of the State where the main action is to question the validity or existence of such juridical personality. [Villanueva] Requisites 1. There is an apparently valid statute under which the corporation may be formed; 2. There has been colorable compliance with the legal requirements in good faith; and 3. There has been user of corporate powers, i.e. the transaction of business as if it were a corporation. [Campos] An association of persons cannot claim to be a corporation if it has not been issued a certificate of incorporation since that fact belies the claim of good faith compliance with the requirements of the law. [Hall v. Piccio, G.R. No. L-2598 (1950)] 12. Corporation De Jure Corporation de jure – A corporation organized in accordance with the requirements of the law. [CAMPOS] If the Commission finds that the submitted documents and information are fully Page 131 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS 14. Corporation By Estoppel Corporation by estoppel – Where a group of persons misrepresent themselves as a corporation, they are subsequently estopped from claiming lack of corporate life in order to avoid liability. Also, a third party who had dealt with an unincorporated association as a corporation is precluded from denying its corporate existence on a suit brought by the alleged corporation on the contract. EFFECTS ESTOPPEL OF CORPORATION BY As to liability All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof. [Sec. 20] As to the defense of lack of corporate personality When such ostensible corporation is sued, it shall not be allowed to use its lack of corporate personality as a defense. [Sec. 20] As to third party Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation. [Sec. 20] The doctrine of estoppel applies to a third party only when he tries to escape liability on a contract from which he has benefited on the ground of defective incorporation. It does not apply to a third party who is not trying to escape liability from the contract, but rather is the one claiming from the contract. [International Express Travel v. CA, G.R. No. 119002 (2000)] COMMERCIAL LAW Comparison with Sec. 15, Rule 3 of the ROC Corporation by Estoppel Sec.15, Rule 3 Clothes a non-entity with personality to sue a third person who seeks to evade liability in favor of the former The unincorporated entity may only be sued but has no personality to sue Merely creates a fiction whereby an association of persons is treated as a corporation only for purposes of exacting/enforcing liability For purposes of both protecting, as well as imposing liability against, third parties Does not concede to the association of persons the cover of a corporate entity even for such purposes of litigation Procedural remedy for drawing out the persons who will truly answer for the liability De facto Corporation vs. Corporation By Estoppel De facto Estoppel Where all the requisites of a de facto corporation are present, then the defectively formed corporation will have the status of a de jure corporation in all cases brought by or against it, except only as to the State in a direct proceeding If any of the requisites are absent, then the estoppel doctrine may be applied only if any of the parties is estopped from defending: a. The defendant association is estopped from defending on the ground of its lack of capacity to be sued, or b. The defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence. Page 132 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS 3. Nationality of Corporations The nationality of a corporation serves as a legal basis for subjecting an enterprise or its activities to the laws, the economic and fiscal powers, and the various social and financial policies of the State to which it is supposed to belong. [SEC OGC Opinion No. 22-07] Place of Incorporation Test Under the incorporation theory, a corporation is a national of the country under whose laws it is organized or incorporated. Domestic corporations – organized and governed under and by Philippine laws. Foreign corporations – one formed, organized or existing under laws other than those of the Philippines’ and whose laws allow Filipino citizens and corporations to do business in its own country or State. It shall have the right to transact business in the Philippines after obtaining a license for that purpose. [Sec. 140] While the incorporation test serves as the primary test under Philippine jurisdiction, other tests such as the Control Test and the Grandfather Rule must also be applied in determining compliance with the provisions of the Constitution and of other laws on nationality requirements. [SEC OGC Opinion No. 11-42] Control Test The nationality of the private corporation is determined by the citizenship of the controlling stockholders. Under the “liberal” Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino. [Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, April 21, 2014] Absent any doubt, the Control Test shall be used in determining the nationality of a COMMERCIAL LAW corporation specially in cases where foreign ownership restrictions apply. [SEC OGC Opinion No. 16-19] Control Test is applied in the following: Exploitation of natural resources - Only Filipino citizens or corporations whose capital stock is at least 60% owned by Filipinos can qualify to exploit natural resources. [Sec. 2, Art. XII, Const.] Public Utilities - No franchise, certificate or any other form of authorization for the operation of a public utility shall be granted, except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens. [Sec. 11, Art. XII, Const.] Mass Media (100%) - “The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens.” [Sec. 11, Art. XVI, Const.] Advertising industry (70%) – “Only Filipino citizens or corporations or associations at least seventy per centum of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry.” [Sec. 11, Art. XVI, Const.] Any industry or activity where foreign ownership is prohibited or restricted under the Foreign Investment Negative List. The "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in the mind of the Court, there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino equity ownership in the corporation, then it may apply the "grandfather rule." [Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, April 21, 2014] Page 133 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS THE GAMBOA RULINGS 2011 Gamboa Ruling The term "capital" in Sec. 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock [common and non-voting preferred shares]. For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens, cannot be considered held by Philippine citizens or Philippine nationals. [Gamboa v. Teves, G.R. No. 176579 (2011)] 2012 Gamboa Ruling In 2012, the Supreme Court reversed its ruling, stating now that: The term “capital” is not limited to voting shares since the constitutional requirement of at least 60% Filipino ownership applies not only to voting control of the corporation, but also to the beneficial ownership of the corporation. It is therefore imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Preferred shares, denied the right to vote in the election of directors, are still entitled to vote on the eight specific corporate matters under Sec. 6. of the Corporation Code. [Note: Still Sec. 6 under the RCC] Thus, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. [Gamboa v. Teves, G.R. No. 176579 (2012)] COMMERCIAL LAW 2017 Gamboa Ruling (Roy III v Herbosa) However, in 2017, the Supreme Court explained its ruling in the 2012 Gamboa decision. It stated that the resolution of the 2012 Gamboa resolution, specifically its dispositive portion, did not modify the 2011 Gamboa decision. The Supreme Court clarified that the Gamboa Decision already held, in no uncertain terms, that what the Constitution requires is full and legal beneficial ownership of 60% of the outstanding capital stock, coupled with 60% of the voting rights must rest in the hands of Filipino nationals. Thus, for purposes of determining compliance with the constitutional or statutory ownership, the required percentage of Filipino ownership shall be applied to both the (a) total number of outstanding shares of stock entitled to vote in the election of directors; and (b) the total number of outstanding shares of stock, whether or not entitled to vote. [Jose M. Roy III v. Chairperson Teresita Herbosa, G.R. No. 207246 (2017)] SEC Memorandum Circular No. 8 dated 20 May 2013 All corporations engaged in identified areas of activities or enterprises specifically reserved, wholly or partly, to Philippine Nationals by the Constitution, the FIA and other existing laws, shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to both: 1. the total number of outstanding shares of stock entitled to vote in the election of directors; AND 2. the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. [Sec. 1-2, SEC MC No. 8] Note: This was the SEC Memorandum that was put in question in the Roy III v. Herbosa case, and subsequently upheld by the Court as constitutional. Page 134 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW Corp v. Redmont Consolidated Mines Corp., G.R. No. 195580 (2014)]. Grandfather Rule The Grandfather Rule is a method of determining the nationality of a corporation, which is owned in part by another corporation, by breaking down the equity structure of the shareholder corporation. [de Leon] The Grandfather Rule is applied if doubt exists as to the locus of the “beneficial ownership” and “control” of a corporation, even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation. [Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, April 21, 2014] It involves the computation of Filipino ownership of a corporation in which another corporation, of partly-Filipino and partly-foreign equity, owns capital stock. The percentage of shares held by the second corporation in the first is multiplied by the latter’s own Filipino equity, and the product of these percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation. The Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business. [SEC Opinion re: Silahis Int’l Hotel (1987)] “Doubt” "Doubt" refers to various indicia that the "beneficial ownership" and "control" of the corporation do not in fact reside in Filipino shareholders, but in foreign stakeholders. The following are indicators of doubt: a. That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino businessmen and their foreign partner; b. That the foreign investors undertake to provide practically all the technological support for the joint venture; c. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies. [Narra Nickel Mining and Dev. The Grandfather Rule applies only when the 60-40 Filipino foreign equity ownership is in doubt (i.e. in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in another joint venture corporation, which is either 60-40% Filipino-alien or the 59% less Filipino). [Narra Nickel Mining and Dev. Corp v. Redmont Consolidated Mines Corp., G.R. No. 195580 (2014)] Successive Application of the Tests The Control Test can be applied jointly with the Grandfather Rule to determine the observance of foreign ownership restriction in nationalized economic activities. They are not incompatible ownership-determinant methods that can only be applied alternative to each other. The Grandfather Rule, standing alone, should NOT be used to determine the Filipino ownership and control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only when there is doubt, based on the Control Test, that the Grandfather Rule is applied. i. If the subject corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the need to resort to the Grandfather Rule disappears. ii. If a corporation that complies with the 60-40 Filipino to foreign equity requirement, it can be considered a Filipino corporation, and if there is no doubt as to who has the “beneficial ownership” and “control” of the corporation, there is no need for the application of the Grandfather Rule. iii. However, if there is doubt as to who has the “beneficial ownership” and “control” of the corporation (e.g. the Filipino-Owned corporation subscribed Page 135 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS to 60% of the capital and the foreign corporation subscribed to 40%, but the subscription of the former is only nominally paid-up and such corporation entered into a financial assistance agreement with the foreignowned corporation), the application of the grandfather rule is necessary. [Narra Nickel Mining and Dev. Corp v. Redmont Consolidated Mines Corp., G.R. No. 195580 (2015)] 4. Corporate Personality Juridical Corporate existence and juridical personality commences from the date the SEC issues a certificate of incorporation under its official seal. [Sec. 18] Persons desiring to incorporate must submit to the SEC: 1. The intended corporate name for verification, and 2. The articles of incorporation and bylaws. [Sec. 18] Note: One person corporations are not required to submit and file bylaws. [Sec. 119] Doctrine of Personality Separate Juridical Concept A corporation has a personality separate and distinct from that of its stockholders and members and is not affected by the personal rights, obligations, and transactions of the latter. General Rule: Due the corporation’s seaparate juridical personality, a stockholder may not be made to answer for acts or liabilities of said corporation, and vice-versa. [Land Bank of the Philippines v. CA, G.R. No. 127181 (2001)] Exceptions: The corporation’s seaparate juridical personality cannot be invoked to escape liability when: COMMERCIAL LAW 1. This legal fiction is used for ends subversive to the policy and purpose behind its creation or which could not have been intended by law to which it owes its being (i.e. to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues, used as a vehicle for the evasion of an existing obligation, perpetrate deception or otherwise circumvent the law). 2. The corporate entity is a mere alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. [Land Bank of the Philippines v. CA, G.R. No. 127181 (2001)] The corporation is merely a farce, as it so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. [Lanuza et al v. BF Corporation, et al, G.R. No. 174938 (2014)] Property Corporate property is owned by the corporation as a juridical person, and the stockholders have no claim on corporate property as owners. The latter only have a mere expectancy or inchoate right to the same upon dissolution of the corporation and after all corporate creditors have been paid. Such right is limited only to their equity interest (doctrine of limited liability). Although a stockholder’s interest in the corporation may be attached by his personal creditor, corporate property cannot be used to satisfy his claim. [Wise and Co. v. Man Sun Lung, G.R. No. 46997 (1940)] A stockholder cannot bring an action for replevin to recover property of the corporation. The corporation, as an artifical person, must purchase, hold, grant, sell, and convey the corporate property, and do business, sue and be sued, plead and be impleaded, for corporate purposes, in its corporate name. [Button v. Hoffman, 61 Wis. 20 (1884)] Corporations are entitled to due process and equal protection, but subject to the police power of the state. insofar as their properties Page 136 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS are concerned. [Smith, Bell & Co. v. Natividad, 40 Phil. 144 (1920)] They are also entitled to protection against unreasonable searches and seizures. [Bache & Co. v. Ruiz, 37 SCRA 823 (1971)] They are not, however, entitled to the privilege against self-incrimination. [Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987)] Liability for Tort and Crime Being an entity with a separate juridical personality, a corporation can be held liable for torts committed by its officers under express direction from the stockholders or directors, acting as a body. [PNB v. CA G.R. No. L-27155 (1978)] The corporation itself cannot be arrested and imprisoned; thus, it cannot be penalized for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a crime if the imposable penalty is a fine. [Ching v. Secretary of Justice,¸G.R. No. 164317 (2006)] Note: Sec. 170 of the RCC provides that for violations of the Code, if it is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Commission. Since a corporation as a person is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself. [Time Inc. v. Reyes, G.R. No. L-28882 (1971)] Recovery of Damages A corporation, being an artificial person, has no feelings, emotions nor senses; therefore, it cannot experience physical suffering and mental anguish, which are bases for moral damages under Art. 2217 of Civil Code. [Manila Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018)]. COMMERCIAL LAW Nevertheless, a corporation can recover moral damages under Art 2219(7), if it was the victim of defamation. [Filipinas Broadcasting Network v. Ago Medical and Educational Center, G.R. No. 141994 (2005)] Note: Filipinas Broadcasting pointed out that the doctrine in Mambulao Lumber v. PNB (1968), to the effect that a corporation may recover moral damages for besmirched reputation, is obiter dictum. Doctrine of Piercing the Corporate Veil A corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons. Piercing the veil of corporate entity is an equitable remedy developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. [PNB v. Ritratto Group, G.R. No. 142616 (2001)] Effect of Piercing the Corporate Veil The corporation will be considered as a mere association of persons. Thus, the liability will directly attach to the stockholders or to the other corporation. [China Banking v. DyneSem, G.R. No. 149237 (2006)] For the juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established, and cannot be presumed. [Del Rosario v. NLRC, G.R. No. 85416 (1990)] Procedural Considerations One cannot pierce the veil in order to acquire jurisdiction over a party. [Pacific Rehouse Corp. v. CA, G.R. No. 199687 (2014)] Page 137 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS General Rule 1. Both the individual sought to be held liable and the corporation must be impleaded at the first instance; 2. The court must first acquire jurisdiction over the corporation or corporations involved before its or their separate personalities are disregarded; and 3. The doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a cause of action duly commenced involving parties duly brought under the authority of the court by way of service of summons or what passes as such service. [Kukan v. Reyes, G.R. No. 182729 (2010)]. Exception: When an aggrieved laborer is unable to attach the properties of the corporation, the Labor Arbiter may thereafter “amend” its decision by ordering that the individuals responsible be impleaded and their properties levied. [Guillermo v. Uson, G.R. No. 198967 (2016)] A sheriff may not pierce the corporate veil, because such power only belongs to the court. [Cruz v. Dalisay, A.M. No. R-181-P (1987)] COMMERCIAL LAW Banking v. Dyne-Sem, G.R. No. 149237 (2006)] Note: Aside from this general guideline, no hard and fast rule can be laid down to cover all cases where the corporate entity theory cannot be availed of, and each case will have to be considered on its merits. [CAMPOS] The Court has pierced the veil of corporate fiction when it was used: 1. To defraud the government of taxes due it; 2. To evade payment of civil liability; 3. By a corporation which is merely a conduit or alter ego of another corporation; 4. To evade compliance with contractual obligations; 5. To evade financial obligation to its employees; 6. To ward off a judgment credit; 7. To avoid inclusion of corporate assets as part of the estate of the decedent; and 8. To cover up an otherwise blatant violation of the prohibition against forum shopping. Only in these and similar instances may the veil be pierced and disregarded. [PNB v. Andrada Electric and Engineering Co., G.R. No. 142936 (2002)] Grounds for Application of the Doctrine Test in Determining Applicability The veil of separate corporate personality may be lifted/pierced: 1. When such personality is used to defeat public convenience, to justify wrong, to protect fraud or defend crime, or as a shield to confuse the legitimate issues; 2. When the corporation is merely an adjunct, a business conduit or an alter ego of another corporation; or 3. Where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation; or 4. When the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or 5. Where necessary to achieve equity or for the protection of the creditors. [China The doctrine has been applied in the following contexts: 1. When the liability belongs to the corporations but the plaintiff seeks to hold the individual liable. Mere controlling interest is not enough. There must be a clear showing that the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. [Koppel Phil v. Yatco, G.R. No. L-47673 (1946)] Note the following badges of fraud: (1) used as a shield to further an end subversive of justice; or (2) for purposes that could not have been intended by the law that created it; or (3) to defeat public convenience; (4) justify wrong; (5) protect Page 138 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS fraud; or (6) defend crime; or (7) to perpetuate fraud or confuse legitimate issues; or (8) to circumvent the law or perpetuate deception. 2. Where the liability is personal to the individual and he seeks to evade it by hiding behind a corporate vehicle. The veil of corporate fiction must be pierced where the main purpose in forming the corporation was to evade the incorporator’s subsidiary civil liability resulting from the conviction of one of his employees. [Palacio v. Fely Transportation, G.R. No. L-15121 (1962)] 3. The instrumentality or alter ego rule. The elements of this modality are: a. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; b. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs’ legal rights; and c. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. Circumstances rendering a subsidiary an instrumentality a. the parent corporation owns all or most of the subsidiary’s capital stock; b. the parent and subsidiary corporations have common directors or officers; c. the parent corporation finances the subsidiary; d. the parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation; COMMERCIAL LAW e. the subsidiary has grossly inadequate capital; f. the parent corporation pays the salaries and other expenses or losses of the subsidiary; g. the subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation; h. in the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation or its business or financial responsibility is referred to as the parent corporation’s own; i. the parent corporation uses the property of the subsidiary as its own; j. the directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latter’s interest; and k. the formal ledger requirements of the subsidiary are not observed. [PNB v. Ritratto Group, G.R. No. 142616 (2001)] 4. Successor corporation rule - where a corporation feigns dissolution or cessation but really continues in existence organized under another name. The application of the rule figures prominently in labor cases where the prior entity seeks to evade its obligations to its laborers. Some telltale signs exhibited in Claparols v. CIR [G.R. No. L-30822 (1975)] include: (1) consecutive date of cessation and commencement of subsequent entity; (2) ownership and control by former controlling stockholder; and (3) turnover of assets. On the other hand, in Livesey v. Binswanger [G.R. No. 177493 (2014)], the court pointed to the following: (1) same officers; (2) same office; and (3) continuation of the business. Note: SME v. De Guzman, G.R. No. 184517 (2013) allows for the defense of Page 139 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS good faith in case of assets sales between a predecessor and successor corporation: In asset sales or when the assets of the selling corporation are transferred to another entity, the rule is that – a. The seller in good faith is authorized to dismiss the affected employees, but is liable for the payment of separation pay under the law b. The buyer in good faith is not obliged to absorb the employees affected by the sale, nor is it liable for the payment of their claims. The most that it may do, for reasons of public policy and social justice, is to give preference to the qualified separated personnel of the selling firm. In stock sales, which takes place at the shareholder level, the rule is that – a. A shift in the composition of its shareholders will not affect its existence and continuity because the corporation possesses a personality separate and distinct from that of its shareholders b. The corporation continues to be the employer of its people and continues to be liable for the payment of their just claims. c. The corporation or its new majority shareholders are not entitled to lawfully dismiss corporate employees absent a just or authorized cause Note: This overturns the ruling in Manlimos v. NLRC (1995) allowing for the defense of good faith in stock sales. 5. Capital Structure Number and Incorporators Qualification of Number: Not more than fifteen [Sec. 10] The Revised Corporation Code removed the prescribed minimum COMMERCIAL LAW number of incorporators. Previously, the incorporators must be no less than five except for special corporations. [Herbosa, 2019] A corporation with a single stockholder is considered a One Person Corporation Qualifications 1. Any person, natural or juridical, may organize a corporation [Sec. 10] Juridical entities (partnership, association or corporation, singly or jointly with others) are now permitted to be incorporators, and not merely initial subscribers under the Old Code. The following are NOT allowed to organize as a corporation, except as provided under special laws: a. Natural persons who are licensed to practice a profession b. Partnerships or associations organized for the purpose of practicing a profession 2. Natural persons must be of legal age 3. Each incorporator must subscribe to at least one share of the capital stock Note: The RCC removed the Philippine residency requirement for the majority of the incorporators. Subscription Requirements No minimum capital requirement Under the Old Corporation Code (CC), at least 25% of the authorized capital stock as stated in the AOI must be subscribed at the time of incorporation, and at least 25% of the total subscription must be paid upon subscription [Sec 13, CC]. Section 13 has been removed in the Revised Corporation Code, thus removing such minimum capital requirements [Sec 12]. However, the increase in capital remains subject to the 25% subscription and 25% payment of subscription rule [Sec. 37]. Page 140 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW Subscription Agreements Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription contract. This is notwithstanding the fact that the parties may refer to it as a purchase or some other contract. [Sec. 59] becomes a stockholder upon acceptance of the corporation of his offer to subscribe whether the consideration is fully paid or not 2. By acquisition of already issued shares from an existing stockholder purchase of TREASURY SHARES from the corporation Nature of Subscription Contracts A subscription contract is indivisible. Consequently, where stocks were subscribed and part of the subscription contract price was not paid, the whole subscription shall be considered delinquent, and not only the shares which correspond to the amount not paid. Types of Subscription Contracts 1. Pre-incorporation subscription - It is a subscription for shares of stock of a corporation still to be formed. 2. Post-incorporation subscription - Entered into after incorporation. [Sundiang Sr. & Aquino, 2009] Nevertheless, holders of subscribed shares not fully paid, which are not delinquent, shall have all the rights of a stockholder. [Sec. 71] SEC has opined that the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer must assume the unpaid balance. [SEC Opinion, 9 Oct. 1995] It is necessary, however, to secure the consent of the corporation because such transfer contemplates a novation which under Art. 1293 (NCC) cannot be made without consent of the creditor. Characteristics There can be a subscription only with reference to unissued shares of the Authorized Capital Stock (ACS), in the following cases: 1. The original issuance of the ACS at the time of incorporation. 2. The opening, during the life of the corporation, of the portion of the original ACS previously unissued; or 3. The increase in ACS achieved through a formal amendment of the Articles and registration thereof with the SEC [Villanueva] Rules on Pre-Incorporation Subscription General Rule: A pre-incorporation subscription is IRREVOCABLE: For a period of at least 6 months from the date of subscription; Exceptions (1) All of the other subscribers consent to the revocation, or (2) The incorporation fails to materialize within 6 months or within a longer period as may be stipulated in the contract of subscription After the submission of the Articles of Incorporation to the SEC. [Sec. 60] Interest on Unpaid Subscription General Rule: A stockholder is NOT liable to pay interest on his unpaid subscription. He is not considered a corporate debtor for the unpaid amount of his subscription. [Herbosa, 2019] Exception: If expressly stipulated in the subscription contract. [Sec 65] Corporate Term Status as Shareholder One may become a stockholder in a corporation in either of two ways: 1. By SUBSCRIPTION to shares before or after incorporation Perpetual existence General Rule: The Revised Corporation Code provides that a corporation shall have perpetual existence. The AOIs of existing Page 141 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS corporations shall be deemed amended to reflect their perpetual term. Exception: The AOIs of corporations created under the effectivity of this Code provide for a specific period. [Sec 11] A corporation already existing upon effectivity of the RCC may opt out of the rule on perpetual existence by: i. Obtaining the vote of its stockholders representing majority of the Outstanding Capital Stock, without prejudice to the appraisal right of dissenting stockholders ii. Notifying the Commission that it elects to retain its specific corporate term, as provided in its AOI. [Herbosa, 2019] It is presumed that shareholders, when they incorporated, assented to the perpetual character of their contract. Their corporate relations will only end upon agreement between or among the prescribed number of shareholders or involuntarily upon the court’s or the SEC’s determination. Extending or shortening the corporate term General Rule: If a corporation wishes to extend its corporate term, it may amend its AOI at least 3 years prior to the expiration of its term. Previously, such change should be made at least 5 years prior to the expiration. [Sec. 11] Revival of Corporate Existence Corporations with an expired term upon the effectivity of the RCC, may apply with the SEC for revival of its corporate existence. Upon approval by the SEC, it will then issue a certificate of revival giving it perpetual existence, with all its rights and privileges, and subject to all its duties, debts and liabilities prior to revival, unless it requests for a limited term. [Sec. 11] This benefit does not extend to corporations whose dissolution was decreed by the SEC or the courts. Should the controlling stockholders or members wish to file the application, they must represent the prescribed number of stockholders or members the application for voluntary dissolution (i.e. at least 2/3 of OCS/membership). Dissenting stockholders may not exercise their appraisal right. [Herbosa, 2019] Summary of changes [Herbosa, 2019] For newly established corporations For existing corporations Exception: When there exists justifiable reasons for an earlier extension, to be determined by the SEC. Requisites: A private corporation may extend or shorten its term as stated in the articles of incorporation when – 1. Approved by a majority vote of the board of directors or trustees, and 2. Ratified at a meeting by the stockholders or members representing at least two-thirds (2/3) of the outstanding capital stock or of its members COMMERCIAL LAW For corporations with expired terms For corporations with a limited term Note: In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal [Sec. 36] Page 142 of 450 GR: Automatic perpetual term XPN: AOI provides a specific corporate term GR: AOI shall be deemed amended to reflect a perpetual term XPN: The corporation opts out and elects to retain their existing term; Requires majority vote of shareholders/members GR: May apply with the SEC for the revival of the corporation. Upon approval, they will have a perpetual term XPN: Their application indicates a fixed term GR: May file an application for extension of such term 3 years prior to the expiration of the term XPN: There are justifiable reasons for an earlier extension U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW i. Preferred Shares vs. Common Shares Classification of shares Nature of Shares of Stock Shares of stock are units into which the capital stock is divided. A share of stock represents interest of the holder thereof to participate in the management of the corporation, to share proportionally in the profits of the business and, upon liquidation, to obtain an aliquot part of corporate assets after all corporate debts have been paid. [Campos] Classes of Shares of Stock The shares in stock corporations may be divided into classes or series of shares, or both. The rights, privileges, or restrictions, and the stated par value of the class or series of shares must be indicated in the Articles of Incorporation. [Sec. 6] General Rule: No share may be deprived of voting rights [Sec. 6] Exceptions Preferred non-voting shares Redeemable shares, Provided by the Code (e.g. Treasury shares) There shall always be a class/series of shares which have COMPLETE VOTING RIGHTS. [Sec. 6] DOCTRINE OF EQUALITY OF SHARES Each share shall be EQUAL in ALL respects to every other share, except as otherwise provided in the Articles of Incorporation and stated in the certificate of stock. [Sec. 6] Classification of shares: (i) Preferred Shares vs. Common Shares (ii) Scope of Voting Rights Subject to Classification (iii) Founders’ Shares (iv) Redeemable Shares (v) Treasury Shares (vi) Par value shares vs. No-par value shares PREFERRED SHARES Stocks which are given, by the issuing corporation: 1. Preference in dividends 2. Preference in the distribution of assets of the corporation in case of liquidation, or 3. Preference in both dividends and distribution, or 4. Such other preferences as may be stated in the Articles of Incorporation which do not violate the Corporation Code. Note: Preferred shares may be issued only with a stated par value. [Sec. 6] Unless the right to vote is clearly withheld, a preferred stockholder would have such right as it is an incident to stock ownership. The Board of Directors may fix the terms and conditions only when so authorized by the Articles of Incorporation and such terms and conditions shall be effective upon filing a certificate thereof with the SEC. [Sec. 6] Kinds of Preferred Shares 1. Preferred Shares as to Assets Preferred Shares as to Dividends 2. Cumulative vs. Non-Cumulative 3. Participating vs. Non-participating vs. Preferred Shares as to Assets vs. Preferred Shares as to Dividends a. Preferred shares as to assets –gives the holder preference in the distribution of the assets of the corporation in case of liquidation. b. Preferred shares as to dividends - entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. Page 143 of 450 U.P. LAW BOC COMMERCIAL LAW BUSINESS ORGANIZATIONS Cumulative vs. Non-cumulative In the absence of any express stipulation, preferred stocks are deemed cumulative. and entitles the shareholder to a pro rata division of profits.” [CIR v. CA, 301 SCRA 152 (1999)] a. Cumulative - regardless of lack of profits in any given year, and lack of declaration of dividends, the arrears for such year have to be paid to the preferred stocks in a subsequent year (once profits are made) before any dividends can be paid to the common stocks. b. Non-Cumulative – entitlement to receipt of dividends essentially depends on declaration of such; types: (i) Discretionary – right to dividends in a particular year depends on the discretion of the board, even if the corporation has profits. (ii) Mandatory – a positive duty is imposed to declare preferred dividends every year that profits are earned. (iii) Earned cumulative or dividend credit – board has discretion not to declare dividends, even if there were profits in a certain year; however, once the board decides that dividends will be declared, the preferred stockholders have a right to arrears in dividends for the years when there were profits but no dividend was declared. The owners thereof are entitled to management (via exclusive right to vote) of the corporation and to equal pro-rata division of profits. Participating and Non-participating COMPARISON Definition Value Voting Rights Preference upon Liquidatio n Unless otherwise provided, preferred stocks are non-participating. a. Participating - those which, after getting their fixed dividend preference, share with common stocks the rest of the dividends. b. Non-participating - those which, after getting their fixed dividend preference, have no more right to share in the remaining dividends with the common stocks. Common shares A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges Common Stock which entitles the owner to an equal pro rata division of profits Preferred Stock which entitles the holder to some preference, either in the dividends, or in the distribution of assets, or both Depends if it Stated par is a par or no- value [Sec. 6] par value share Usually May be vested with deprived of voting rights the exclusive [Sec. 6] right to vote No Has the first advantage, crack at priority or dividends/prof preference its/ over any other distribution of stockholder in assets the same class ii. Scope of Voting Rights Subject to Classification Only preferred and redeemable shares may be deprived of the right to vote [Sec. 6], except as otherwise provided in the Revised Corporation Code. General Rule: Non-Voting Shares are not entitled to vote. The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, Page 144 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS provided that there shall always be a class or series of shares which have complete voting rights. [Sec. 6] Exception: These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be entitled to vote on the following fundamental matters: 1. Amendment of the Articles of Incorporation 2. Adoption and amendment of by-laws 3. Sale, lease, exchange, other disposition of all or substantially all of the corporate property 4. Incurring, creating or increasing bonded indebtedness 5. Increase or decrease of capital stock 6. Merger and consolidation 7. Investment of corporate funds in another corporation or business 8. Dissolution of the corporation iii. Founders’ Shares Founders’ Shares are shares classified as such in the AOI, which are given certain rights and privileges not enjoyed by the owners of other stocks. These may be given special preference in voting rights and dividend payments. Where exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not to exceed 5 years, subject to approval by SEC The 5-year period shall commence from date of approval by SEC. Founder’s shares given the exclusive right to vote and be voted for are not allowed to exercise that right in violation of the AntiDummy Law and the Foreign Investment Act. [Sec. 7] COMMERCIAL LAW The RCC made the redemption subject to the rules and regulations that may be issued by SEC, in addition to what may be stipulated in the AOI and Certificate of Stock. [Sec. 8] Limitations 1. Redeemable shares may be issued only when expressly provided for in the AOI [Sec. 8]. 2. The terms and conditions affecting said shares must be stated both in the AOI and in the certificate of stock [Sec. 8]. 3. Redeemable shares may be deprived of voting rights in the AOI. [Sec. 6] 4. The corporation is required to maintain a sinking fund to answer for redemption price if the corporation is required to redeem. [SEC-OGC Opinion No. 07-03] 5. The redeemable shares are deemed retired upon redemption, unless otherwise provided in the AOI (i.e., if the AOI allows for reissuance of such shares). [SEC Rules Governing Redeemable and Treasury Shares, 26 April 1982] 6. Unrestricted retained earnings are NOT necessary before shares can be redeemed, but there must be sufficient assets to pay the creditors and to answer for operations. [Republic Planters Banks v. Agana, G.R. No. 51765 (1997)] 7. Redemption cannot be made if such redemption will result in insolvency or inability of the corporation to meet its obligations. [SEC Opinion, 24 Aug 1987] Kinds of redeemable shares 1. Compulsory - the corporation is required to redeem the shares. 2. Optional - the corporation is not mandated to redeem the shares. v. Treasury Shares iv. Redeemable Shares Redeemable Shares are shares which may be purchased by the corporation from the holders of such shares upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation. Treasury Shares are shares which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the BOD. [Sec. 9] Page 145 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Shares may be reacquired without impairing the corporate trust fund. Reacquisition of shares is allowed, provided the corporation will use assets up to the extent of its unrestricted retained earnings. [SEC Rules Governing Redeemable and Treasury Shares, Sec 3, par (1)(a)] It should be recalled that corporate earnings are not part of the corporate trust fund. [Herbosa, 2019] They are excluded from the definition of outstanding capital stock. Pre-emptive right of stockholders in close corporations shall extend to reissuance of treasury shares, unless otherwise provided in the AOI. [Sec. 101] Delinquent stocks, which are stocks that have not been fully paid, may become treasury stocks upon bid of the corporation in absence of other bidders. [Sec.67] Limitations on treasury shares 1. They may be re-issued or sold again as long as it is for a reasonable price fixed by the BOD. 2. Cannot participate in dividends. 3. It has no voting right as long as such shares remain in the Treasury. [Sec. 56] 4. It cannot be represented during stockholder’s meetings. 5. The amount of URE equivalent to the cost of treasury shares being held shall be restricted from being declared and issued as dividends. Note: When treasury shares are sold below its par or issued value, there can be no watering of stock because such watering of stock contemplates an original issuance of shares. For both stock corporations and close corporations, the pre-emptive right of stockholders extends to the re-issuance or sale treasury shares, unless the articles of incorporation provide otherwise. [Sec. 38 and 101; SEC Opinion, 14 January 1993] COMMERCIAL LAW Treasury Shares are not Retired Shares Treasury shares do not revert to the unissued shares of the corporation, but are regarded as property acquired by the corporation, which may be reissued or resold at a price to be fixed by the Board of Directors. [SEC Rules Governing Redeemable and Treasury Shares, CCP No. 1-1982] Note: Under the SEC Rules, the redemption of redeemable shares does not necessarily make them as treasury shares. Instead, it leads to their automatic retirement or cancellation, unless the contrary is specifically stipulated. The articles thus provide advance notice to ordinary shareholders that the board may, at its own discretion, reissue redeemable shares with the same features. Treasury shares distributed by way of dividends Treasury shares may also be distributed as property dividends. In order for treasury shares to be distributed as property dividends, the amount of the retained earnings previously used to support their acquisition must not have been impaired by losses. Further, such retained earnings must not be used to justify the distribution of treasury shares as property dividends. They may only be distributed out of the other earnings of the corporation. [SECOGC Opinion No. 12-06, dated April 20, 2012] Note: Treasury shares are treated as assets of the corporation. [Herbosa, 2019] Since a treasury share is a fully paid share re-acquired by the corporation, it is not outstanding and may be re-issued and resold. It cannot receive dividends before the resale, because the corporation cannot grant dividends to itself. [CIR vs Manning] vi. Par Value Shares vs. No-Par Value Shares Par value shares These are shares with a stated or fixed value set out in the Articles of Incorporation, which remains the same regardless of the profitability of the corporation. This gives rise to financial stability, and is the reason why banks, trust Page 146 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS corporations, insurance companies and building and loan associations must always be organized with par value shares. Par value is minimum issue price of such share in the Articles of Incorporation which must be stated in the certificate. [Sec 61] No par value shares These are shares without a stated value in the AOI. They are without nominal value. They may be issued for the amount stipulated in the AOI, or fixed by the Board. [Sec 61] Limitations on no par value shares [Sec. 6] 1. Cannot have an issue price of less than P5.00 per share 2. Once issued, they shall be deemed fully paid and non-assessable, and the holders of such shares shall not be liable to the corporation or to its creditors in respect thereto 3. Entire consideration received by the corporation shall be treated as capital and shall not be available for distribution as dividends 4. The AOI must state the fact that the corporation issues no-par shares and the number of shares 5. Cannot be issued as preferred stock 6. Cannot be issued by banks, insurance companies, public utilities and building and loan associations 7. Cannot be issued by all corporations authorized to obtain or access funds from the “public” Note: A new addition in the Revised Corporation Code is the prohibition on the issuance of no-par shares being imposed on all corporations authorized to obtain or access funds from the “public.” This prohibition is not anymore limited to banks, insurance companies, public utilities and building and loan associations. COMMERCIAL LAW 6. Incorporation and Organization Promoter Promoters – persons who, acting alone or with others, take initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. [Sec. 3.10, RA 8799, The Securities Regulation Code] Promoter’s Contracts Promoter’s contracts are those types of contracts entered into in behalf of a corporation which is in the process of organization and incorporation, and such fact is acknowledged as an essential ingredient in the process of perfection. [Villanueva] Liability of Promoter General rule: the promoter binds himself personally and assumes the responsibility of looking to the proposed corporation for reimbursement. The promoter binds himself to ensure that the corporation, once formed, will ratify the contract entered into in its name. Otherwise, he becomes personally liable for such contract in the event that corporation does not ratify. Exceptions: 1. Express or implied agreement to the contrary 2. Novation, not merely adoption ratification, of the contract Liability of Corporation Promoter’s Acts or for General rule: A corporation is NOT bound by the contract. A corporation, until organized, has no life and no legal existence. It could not have had an agent [the promoter] who could legally bind it. [Cagayan Fishing Development Co., Inc. v. Sandiko, G.R. No. L-43350 (1937)] Page 147 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Exceptions: A corporation may be bound by the contract if it makes the contract its own by: Adoption or ratification of the ENTIRE contract after incorporation. a. Novation or the intent to novate the original contract is required to adopt or ratify the pre-incorporation contract. [Campos] b. The Court’s ruling in Cagayan Fishing v. Teodoro Sandiko, that “a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business”, is not absolute. One of the exceptions recognized by American courts is that “a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized”. [Rizal Light v. PSC and Morong Electric (1968)] Acceptance of benefits under the contract with knowledge of the terms thereof. Performance of its obligation under the contract. The contract must of course be one which is within the powers of the corporation to enter. [Builders’ Duntile Co. v. Dunn Mfg. Co. (1929)] The corporation adopts the entire contract, not only parts which are beneficial. [Campos] Subscription Contract A subscription contract is any contract for the acquisition of unissued stock in an existing corporation, or corporation still to be formed. Notwithstanding the fact that the parties refer to the contract as a purchase or some other contract, it shall be deemed a subscription as long as it involves the acquisition of unissued stock in an existing corporation or a corporation still to be formed. [Sec. 59] Pre-incorporation Agreements Subscription A pre-incorporation subscription agreement is a type of promoter’s contract for COMMERCIAL LAW the acquisition of unissued stock in a corporation still to be formed. Subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, UNLESS: (1) All of the other subscribers consent to the revocation; or (2) The corporation fails to incorporate within the same period or within a longer period stipulated in the contract of subscription. No pre-incorporation subscription may be revoked after the articles of incorporation is submitted to the Commission. [Sec. 60] The rule on irrevocability of a pre-incorporation subscription agreement embodied in the RCC is a combination of the features of two theories: Contract Theory: Subscription agreement among several persons to take shares in a proposed corporation becomes a binding contract and is irrevocable from the time of subscription unless cancelled by all parties before acceptance of corporation. Offer Theory: Subscription agreement is only a continuing offer to a proposed corporation, offer does not ripen into a contract until accepted by the corporation when organized. [Villanueva] Consideration for Stocks Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be: (a) Actual cash paid to the corporation; (b) Property, tangible or intangible, which must be: i. Actually received by the corporation; and ii. Necessary or convenient for its use and lawful purposes iii. At a fair valuation equal to the par or issued value of the stock issued; (c) Labor performed for or services actually rendered to the corporation; (d) Previously incurred indebtedness of the corporation; Page 148 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS (e) Amounts transferred from unrestricted retained earnings to stated capital; (f) Outstanding shares exchanged for stocks in the event of reclassification or conversion; (g) Shares of stock in another corporation; and/or (h) Other generally accepted form of consideration. [Sec. 61] Invalid Consideration The following cannot be exchanged for the issuance of shares of stock: [Sec. 61] (1) Promissory notes (2) Future service In case a subscription contract contemplates unlawful consideration exchanged for shares of stock: The subscription contract would be valid and binding on both the corporation and subscriber But the provision on such unlawful consideration is deemed void, such that the subscription agreement would be construed to be for cash, and the unpaid amount treated as part of subscription receivables It would not be in consonance with the trust fund doctrine to consider the subscription contract void. [Villanueva] Valuation of Consideration Where the consideration is other than actual cash, or consists of intangible property, the valuation thereof shall initially be determined by the stockholders or the board of directors, subject to the approval of the Commission. [Sec. 61] COMMERCIAL LAW (b) between the stockholders and the State; (c) between the corporation and its stockholders. [Villanueva] (d) among the stockholders [Campos] The AOI must be filed with the SEC for the issuance of the Certificate of Incorporation. The AOI and its amendments can be filed electronically. [Sec. 13] Contents The Articles of Incorporation must contain: (a) Corporate Name; (b) Purpose Clause; (c) Principal Office; (d) Corporate Term if the corporation has not elected perpetual existence; (e) Incorporators; (f) Trustees/Directors; (g) For stock corporations: 1. The authorized capital stock, 2. Number of shares into which it is divided, 3. The par value of each share, 4. Names, nationalities, and residence addresses of the original subscribers, 5. Amount subscribed and paid by each on the subscription, and 6. A statement that some or all of the shares are without par value, if applicable (h) For nonstock corporations: 1. Amount of its capital, 2. The names, nationalities, and 3. Residence addresses of the contributors, and 4. Amount contributed by each (i) Other matters (including arbitration agreement pursuant to Sec. 181). [Sec. 13] (a) Corporate Name Articles of Incorporation (AOI) The AOI is a basic contract document, defining the charter of the corporation, and serves as the basis by which to judge whether it exists for legal purposes. See f. Corporate Name; Limitations on Use of Corporate Name The charter of the corporation is a contract between 3 parties: (a) between the State and the corporation; A corporation only has such powers as are expressly granted by law and the AOI. The (b) Purpose Clause Page 149 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS purpose clause confers and limits the powers that a corporation may exercise. Must indicate the specific PRIMARY and SECONDARY purposes if there are more than one purpose; a non-stock corporation may not include a purpose which would contradict or change its nature as such. [Sec. 13 (b)] Must not be patently unconstitutional, illegal, immoral, and contrary to government rules and regulations. [Sec. 16 (b)] Must not be for the purpose of practicing a profession. [Sec. 10] Prohibited Purposes and Activities A corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy. [Sec. 10] Under the present state of our law and jurisprudence, a corporation cannot be organized for or engage in the practice of law in this country. This cannot be subverted by employing some so-called paralegals supposedly rendering the alleged support services. The remedy for the apparent breach of this prohibition is the concern and province of the Solicitor General who can institute the corresponding quo warranto action. [Ulep v. The Legal Clinic, B.M. No. 553 (1993)] The RCC prohibits to foreign corporations from giving donations in aid of any political party or candidate or for purposes of partisan political activity”. [Sec. 35(i)] Reasons for requiring purpose clause: (a) investor will know what line of business he will be risking his money on; (b) Ultra vires doctrine; (c) third persons dealing with corporation can determine if the corporation can enter into a transaction. [Campos] COMMERCIAL LAW chattel mortgage of shares should be registered. [Chua Guan vs. Samahang Magsasaka, G.R. No. L-42091 (1935)] 1. Must be within the Philippines [Sec. 13 (c)]; 2. Articles of Incorporation must specify both province or city or town where it is located; 3. All corporations and partnerships applying for registration with the SEC should state in their Articles of Incorporation or Articles of Partnership the following: a. Specific address of their principal office, which shall include, if feasible, the street number, street name, barangay, city or municipality, and if applicable, the name of the building, number of the building, and name or number of the room or unit; and b. Specific residence address of each incorporator, stockholder, director, trustee or partner. [SEC Memorandum Circular No. 6, s. 2016, Sec. 1] 4. For foreign corporations, the principal office address in the country of incorporation, the specific address of the resident agent, the present directors and officers, and the specific location where it will hold office in the Philippines, shall be indicated. [SEC Memorandum Circular No. 6, s. 2016, Sec. 2] The residence of a corporation is the place where its principal office is located, as stated in its Articles of Incorporation. Thus, the proper venue is not the actual principal office but that stated in its Articles of Incorporation. A corporation has no residence in the same sense in which the term is applied to a natural person. [Hyatt Elevators v. Goldstar Elevators, G.R. No. 161026 (2005)]. (d) Corporate Term (c) Principal Office The principal office establishes the residence of a corporation, which is important in determining the venue in an action by or against the corporation or the province where a See c. Corporate Term under 5. Capital Structure (e) Number, Names, Citizenship and Residences of the Incorporators Page 150 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS See a. Number and Qualification of Incorporators under 5. Capital Structure (f) Number, Names, Citizenship and Residences of the Directors/Trustees The minimum number of directors/trustees has been repealed. [Sec. 13] Note: Ordinary corporations can have a minimum of two (2) directors, since only OPCs can have one (1) director. Stock corporations: directors, not more than 15 Non-stock corporations: trustees a. Non-stock corporations whose articles or by-laws may provide for more than 15 trustees. [Sec. 91] b. Banks may have up to 21 directors for cases of mergers and consolidation. [Sec. 17, General Banking Act] c. For educational non-stock corporations: i. Trustees may not be less than 5 nor exceed 15; ii. Number of trustees shall be in multiples of 5. [Sec. 106] Nationalized or Partially-Nationalized Industries: Aliens may be directors but only in such number as may be proportional to their allowable ownership of shares. (g) Capital/Capital Stock “Outstanding capital stock” is the total shares of stock issued under binding subscription contracts to subscribers or stockholders, whether fully or partially paid, except treasury shares. [Sec. 173] COMMERCIAL LAW If STOCK corporation: Authorized capital stock (ACS) in lawful money of the Philippines a. The number of shares into which the ACS is divided b. If with par value shares, the par value of each share [Sec. 13[h], Sec. 14[7]] c. Names, citizenship, residences of original subscribers d. Amount subscribed and paid on each subscription e. Fact that some or all shares are without par value If NON-STOCK: a. Amount of capital b. Names, nationalities and residences of contributors c. Amount contributed by each (h) Other Matters Included in the AOI Classes of shares, as well as preferences or restrictions on any such class [Sec. 6]. Denial or restriction of pre-emptive right [Sec. 38] Prohibition against transfer of stock which would reduce stock ownership to less than the required minimum in the case of a nationalized business or activity [Sec. 14(11)] Arbitration agreement [Sec. 13; 181] No transfer clause If the foreign shareholdings of a landholding corporation exceed 40%, it is not the foreign stockholders’ ownership of the shares which is adversely affected but the capacity of the corporation to own land – that is, the corporation becomes disqualified to own land. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land [J.G. Summit Holdings, Inc. v. CA, G.R. No. 124293 (2005) Page 151 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Contents of AOI Corporate name COMMERCIAL LAW Comments Under the RCC, incorporators undertake to change the name of the corporation immediately upon receipt of notice from SEC that another corporation, partnership or person has acquired a prior right to its use, that the name has been declared not distinguishable from a name already registered or reserved for the use of another corporation, or that it is contrary to law, public morals, good customs or public policy. [Sec. 14(11)] See also SEC Memorandum Circular No. 13, s. 2019 A corporation can only have one (1) primary purpose. However, it can have several secondary purposes. Purpose clause A corporation has only such powers as are expressly granted to it by law & by its articles of incorporation, those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purposes & those which may be incident to its existence. Corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy. ● ● Principal office ● Term of existence Incorporators and Directors/Trustees Must be within the Philippines Must contain specific address of their principal office, which shall include, if feasible, the street number, street name, barangay, city or municipality, and if applicable, the name of the building, number of the building, and name or number of the room or unit Important in determining venue in an action by or against the corp., or on determining the province where a chattel mortgage of shares should be registered ● A corporation shall now have perpetual existence unless its AOI provides otherwise. [Sec. 11] ● ● Names, nationalities & residences of the incorporators; Names, nationalities & residences of the directors or trustees who will act as such until the first regular directors or trustees are elected; Treasurer who has been chosen by the pre-incorporation subscribers/members to receive on behalf of the corporation, all subscriptions /contributions paid by them See SEC Memorandum Circular No. 26, s. 2019 ● ● ● ● ● Capital stock ● ● Amount of its authorized capital stock in lawful money of the Philippines Number of shares into which it is divided In case the shares are par value shares, the par value of each, Names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated For a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each The provision on minimum subscribed and paid up capital has been repealed. Page 152 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS ● Other matters ● ● ● COMMERCIAL LAW Classes of shares into which the shares of stock have been divided; preferences of & restrictions on any such class; and any denial or restriction of the pre-emptive right of stockholders should also be expressly stated in said articles. If the corporation is engaged in a wholly or partially nationalized business or activity, the AOI must contain a prohibition against a transfer of stock which would reduce the Filipino ownership of its stock to less than the required minimum. Transfer restrictions Arbitration agreement ii. Non-amendable Items The following items are amendable under Sec. 15: 1. Change of name of the Corporation; adding business name 2. Adding to or changing the purpose/s 3. Change of principal office 4. Change in the number of directors or trustees 5. Increase or decrease in authorized capital stock [subject to Sec. 37]; re-classifying shares in the authorized capital stock; 6. Adding or revising transfer restrictions Requirements for Making Amendments to AOI a. By a majority vote of the BOD or trustees; and b. The vote or written assent of a. 2/3 of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, b. 2/3 of the members if it be a nonstock corporation. [Sec. 15] unless the AOI provides for higher voting requirements Limitations (a) Requirements imposed by the Code or by special laws (b) Must be for a legitimate purpose (c) Must be approved by the directors/trustees and the stockholders/members through the vote requirement (d) Appraisal Right (in specified cases) (e) Both the original and the amended articles together must contain all the provisions required by law to be set out in the articles (f) If the corporation is governed by a special law, the amended articles must be accompanied by a favorable recommendation of the appropriate government agency to the effect that such amendment is in accordance with law. [Lopez] (g) Will take effect only: a. Upon their approval by the SEC by the issuance of a certificate of filing of amended articles; OR b. From the date of filing with the SEC if not acted upon within 6 months from the date of filing for a cause not attributable to the corporation Procedure a. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation b. The articles, as amended shall be indicated by underscoring the change or changes made c. A copy shall be submitted to the SEC a. Duly certified under oath by the corporate secretary and a majority of the directors or trustees b. Stating the fact that the amendment or amendments have been duly approved by the required vote of the directors or trustees and stockholders or members Page 153 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Non-Amendable Items The following items state accomplished facts (fait accompli), therefore, cannot be amended: 1. The names, nationalities and residences of the incorporators. To allow an amendment would mean going against the definition of “incorporators” in Sec. 5 2. Treasurer-in-trust 3. First set of directors or trustees 4. Original stock subscriptions and paid-in capital 5. Place and date of execution 6. Witnesses [De Leon] Corporate Name; Limitations on Use of Corporate Name The name of a corporation is essential not only for its existence as a juridical person, but also in the manner of dealing with it, and it cannot be changed except in the manner provided for by law. [Villanueva] SEC Memorandum Circular No. 13 s. 2019 a) The corporate name shall contain the word "Corporation" or "Incorporated," or the abbreviations "Corp." or "Inc." respectively; b) In the case of a One Person Corporation, the corporate name shall contain the word "OPC" either below or at the end of its corporate name; c) The partnership name shall bear the word "Company" or "Co." and if it is a limited partnership, the word "Limited" or "Ltd.". d) A professional partnership name may bear the word "Company," "Associates," or "Partners," or other similar descriptions; e) The corporate name of a foundation shall use the word "Foundation"; f) The corporate name of all non-stock, nonprofit corporations, including nongovernmental organizations and foundations, engaging in micro finance activities shall use the word "Microfinance" or "Microfinancing" - Provided that said corporations shall state in the purpose clause of their AOI that they shall conduct COMMERCIAL LAW microfinance operations pursuant to Republic Act No. 8425 or the Social Reform and Poverty Alleviation Act. Criteria for Allowable Corporate Names Under present law, no corporate name shall be allowed by the Commission if it is: a. Not distinguishable from that already reserved or registered for the use of another corporation, or b. Already protected by law, or c. Used contrary to existing law, rules and regulations. [Sec. 17] A name is not distinguishable even if it contains one or more of the following: i. The word “corporation”, “company”, “incorporated”, “limited”, “limited liability”, or an abbreviation of one of such words; and ii. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different tenses, spacing, or number of the same word or phrase. [Sec. 17] Note: Instead of being distinguishable, the old criteria under the Sec. 18 of the OLD Corporation Code to determine whether or not a corporate name should be allowed is whether it is “identical or deceptively or confusingly similar” to that of any existing corporation or which is “patently deceptive or patently confusing”. If the SEC determines that a corporation’s name is not allowed, it may: (1) Summarily order the corporation to immediately cease and desist from using a non-distinguishable name and require it to register a new one, (2) Cause the removal of all visible signages, marks, advertisements, labels, prints and other effects bearing such corporate name. [Sec. 17] Business or trade name which is different from the corporate or partnership name shall be indicated in the articles of incorporation or partnership. A company may have more than Page 154 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS one business or trade name. Memorandum Circular No. 13 s. 2019] [SEC Change of Corporate Name A change of corporate name requires the amendment of the Articles of Incorporation which must be approved by: (1) Majority vote of the board; and (2) The vote or written assent of stockholders holding 2/3 of the outstanding capital stock. [Sec. 16] Unless the Articles of Incorporation provides for a higher voting requirement. Amendment of a corporation’s Articles of Incorporation to change its corporate name does not extinguish the personality of the original corporation. It is the same corporation with a different name, and its character is not changed. Consequently, the “new” corporation is still liable for the debts and obligations of the “old” corporation. [Republic Planters Bank v. CA, G.R. No. 93073 (1992)] Use of Corporate Names of Dissolved Corporations The name of a corporation or partnership that has been dissolved or whose registration has been revoked shall not be used by another corporation or partnership: a. Within five years from the approval of the dissolution; or b. Within five (5) years from the date of revocation, unless its use has been allowed at the time of the dissolution or revocation by the stockholders, members or partners who represent a majority of the outstanding capital stock or membership of the dissolved corporation or partnership, as the case may be. [SEC Memo Circ. No. 13, s. 2019] Registration, Incorporation, and Commencement of Corporate Existence A private corporation organized under the RCC commences its corporate existence and juridical personality from the date the SEC COMMERCIAL LAW issues the certificate of incorporation under its official seal. [Sec. 18] Thereupon, the incorporators, stockholders or members, and their successors constitute a body politic and corporate under the name stated in the AOI, for the period of time mentioned therein. [Sec. 18] AOIs do not become binding as the charter of the corporation unless they have been filed and registered with, and certified by the SEC. DOCUMENTS TO BE FILED WITH SEC: a. Articles of Incorporation, and By-Laws (if crafted prior to incorporation) b. Certification concerning the amount of capital stock subscribed and/or paid Note: Sec. 15 of the OLD Corporation Code requiring that at least 25% of amount subscribed be paid, and a minimum paidup capital upon incorporation, was removed under the RCC. Note: SEC Resolution No. 0331 dated July 20, 2012 no longer requires a bank certificate of deposit covering the paid-up capital if payment for shares is made in cash; where the capital stock is paid by a combination of cash and property, only the portion paid by way of property will require the submission of supporting documents. c. Undertaking to change the corporate name in case there is another person or entity with same or similar name that was previously registered (unless already incorporated in the Articles of Incorporation) d. Favorable recommendation from the appropriate government agency that the AOI or amendments thereto of banks, banking and quasi-banking institutions, preneed, insurance and trust companies, NSSLAS, pawnshops, and other financial intermediaries, is in accordance with law. [Sundiang and Aquino; Sec. 16] Page 155 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS ISSUANCE OF CERTIFICATE OF INCORPORATION BY SEC Effect: Commencement of corporate existence and juridical personality. [Sec. 18] Ground for revocation of certificate of incorporation: If, after due notice and hearing, the Commission finds that any provision of this Code, rules or regulations, or any of the Commission’s orders has been violated - Depending on the extent of participation, nature, effects, frequency and seriousness of the violation. [Sec. 158] GROUNDS FOR DISAPPROVING ARTICLES OF INCORPORATION: THE a. Does not substantially comply with form prescribed b. Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations c. The certification concerning the amount of capital stock subscribed and/or paid is false d. Required percentage of ownership of Filipino citizens has not been complied with when required by existing laws or the Constitution. [Sec. 16] SEC shall give the incorporators reasonable time to correct or modify objectionable portions of the articles or amendment. [Sec. 16] Page 156 of 450 COMMERCIAL LAW U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW Steps in Incorporation Steps Promotional Stage Comments Promoter: ● Brings together persons who become interested in the enterprise ● Aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself ● Formulates the necessary initial business and financial plan and, if necessary, buys the rights and property which the business may need, with the understanding that the corporation, when formed, shall take over the same [See e. Articles of Incorporation under 6. Incorporation and Organization] Drafting Articles of ● Arbitration agreements may now be provided in the AOI Incorporation (see Sec. 13) (see Sec. 181). ● The AOI and applications for amendments may be filed in an electronic document ● ● Filing of Articles; Payment of Fees AOI must be filed w/ the SEC & the corresponding fees paid Failure to file the AOI will prevent due incorporation of the proposed corporation and will not give rise to its juridical personality. It will not even be a de facto corporation. ● Under present SEC rules, the AOI once filed, will be published in the SEC Weekly Bulletin at the expense of the corporation [SEC Circular # 4, 1982]. For corporations governed by special laws (banks, insurance companies, public utilities and educational institutions) the AOI must be accompanied by a favorable recommendation from the appropriate government agency. Process: a. SEC shall examine them in order to determine whether they are in conformity with law b. If it is not, the SEC must give the incorporators a reasonable time within which to correct or modify the objectionable portions. Examination of Articles; Approval or Rejection by SEC Grounds for rejection or disapproval of AOI: [Sec. 16] a. AOI/amendment not substantially in accordance with the form prescribed b. Purpose/s are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations c. The certification concerning the amount of capital stock subscribed and/or paid is false d. Required percentage of ownership has not been complied with Favorable recommendation from the appropriate government agency did not accompany the AOI or amendments thereto of banks, banking and quasi-banking institutions, preneed, insurance Page 157 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW and trust companies, NSSLAS, pawnshops, and other financial intermediaries, is in accordance with law. Certificate of Incorporation will be issued if: a. SEC is satisfied that all legal requirements have been complied with; AND b. There are no reasons for rejecting or disapproving the AOI. Issuance of Incorporation Certificate of It is only upon such issuance that the corporation acquires juridical personality. [Sec. 18] Should it be subsequently found that the incorporators were guilty of fraud in procuring the certificate of incorporation, the same may be revoked by the SEC, after proper notice and hearing. Election of Directors or Trustees When Elections are Held The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof are provided in the bylaws. [Sec. 49] By a resolution of the majority of the board of directors; Provided, That the resolution shall only be applicable for a particular meeting. Notwithstanding the absence of a provision in the bylaws of the corporation [SEC Memorandum Circular No. 6, s. 20] Nomination General Rule: Each stockholder or member shall have the right to nominate any director or trustee who possesses all of the qualifications and none of the disqualifications set forth in this Code. The right to vote through such modes may be exercised in corporations vested with public interest, notwithstanding the absence of a provision in the bylaws of such corporations. [Sec. 23] Exception: When the exclusive right to nominate directors or trustees is reserved for holders of founders’ shares under Section 7 of the RCC. [Sec. 23] A stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum. Required Participation At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy: (1) Stock Corporations: The owners of majority of the outstanding capital stock (2) Non-Stock Corporations: A majority of the members entitled to vote. [Sec. 23] The election must be by ballot if requested by any voting stockholder or member. Voting in Stock Corporations Stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own names in the stock books of the corporation at the time fixed in the bylaws, or where the bylaws are silent, at the time of the election. Voting via Remote Communication/In Absentia The stockholders or members may also vote through remote communication or in absentia: Page 158 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS The said stockholder may: (a) vote such number of shares for as many persons as there are directors to be elected; (b) cumulate said shares and give one (1) candidate as many votes as the number of directors to be elected multiplied by the number of the shares owned; or (c) distribute them on the same principle among as many candidates as may be seen fit: Provided, That – i. The total number of votes cast shall not exceed the number of shares owned by the stockholders as shown in the books of the corporation multiplied by the whole number of directors to be elected ii. No delinquent stock shall be voted. [Sec. 23] Nominees for directors receiving the highest number of votes shall be declared elected. They shall perform their duties as prescribed by law, rules of good corporate governance, and bylaws of the corporation. [Sec. 23] Voting in Non-Stock Corporations General Rule: Members of nonstock corporations may cast as many votes as there are trustees to be elected but may not cast more than one (1) vote for one (1) candidate. Exception: Unless otherwise provided in the articles of incorporation or in the bylaws. [Sec. 23] Nominees for trustees receiving the highest number of votes shall be declared elected. They shall perform their duties as prescribed by law, rules of good corporate governance, and bylaws of the corporation. [Sec. 23] Report to SEC Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Commission, the elected trustees’ and officers’: i. Names ii. Nationalities iii. Shareholdings, and COMMERCIAL LAW iv. Residence addresses [Sec. 25] When No Election is Held The meeting may be adjourned if: (1) If no election is held; or (2) The owners of majority of the outstanding capital stock or majority of the members entitled to vote are not present in person, by proxy, or through remote communication or not voting in absentia at the meeting. Report to SEC After such adjournment, the non-holding of elections and the reasons therefor shall be reported to the Commission within thirty (30) days from the date of the scheduled election. [Sec. 25] The report shall specify a new date for the election, which shall not be later than sixty (60) days from the scheduled date. SEC Order to Hold Election If no new date has been designated, or if the rescheduled election is likewise not held: (1) The Commission may summarily order that an election be held. a. Upon the application of a stockholder, member, director or trustee; and b. After verification of the unjustified non-holding of the election (2) The Commission shall have the power to issue such orders as may be appropriate, including orders directing the issuance of a notice stating the: a. Time and place of the election, b. Designated presiding officer, and c. The record date or dates for the determination of stockholders or members entitled to vote. [Sec. 25] (3) The shares of stock or membership represented at such meeting and entitled to vote shall constitute a quorum for purposes of conducting an election under this section. Notwithstanding any provision of the articles of incorporation or bylaws to the contrary. Page 159 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Election of Officers Immediately after the election of directors, the directors must formally organize by electing the corporate officers. They are tasked to carry out the policies laid down by the Board, the AOI and the by- laws. [Sec. 24] Who are the Corporate Officers . President – must be a director; a. Treasurer – may or may not be a director; must be a resident b. Secretary – need not be a director unless required by the by-laws; must be a citizen and resident of the Philippines; and c. Other officers as may be provided in the bylaws. d. Compliance officer – only for corporations vested with public interest. [Sec. 24] Note: Any 2 or more positions may be held concurrently by the same person, EXCEPT that no one shall act as president and secretary or as president and treasurer at the same time, unless otherwise allowed in the Code. [Sec 24] The number of officers is not limited to those three enumerated in Sec. 24. A corporation may have such other officers as may be provided for by its by-laws. [Garcia v. Eastern Telecommunications Philippines, Inc., G.R. No. 173115 (2009)]. COMMERCIAL LAW Adoption of By-Laws By-laws are regulations, ordinances, rules or laws adopted by an association or corporation for its internal governance, including rules for routine matters such as calling meetings. [SMC v. Mandaue, G.R. No. 152356 (2005)] May be done either: 1. Prior to incorporation - approved and signed by all the incorporators and submitted to SEC together with Articles of Incorporation; or 2. After incorporation - The requirement of adoption of by-laws one (1) month after receipt of the notice of issuance of certificate of incorporation has been deleted in the RCC. [Sec. 45] Nature: It is a product of agreement of the stockholders or members. [Campos] Function: It establishes the rules for internal government of the corporation [Campos]. It also regulates the affairs and relationship between and among stockholders, BOD and corporation. [Lopez] Note: OPCs are not required to have by-laws. EFFECT OF FAILURE TO FILE THE BYLAWS Qualifications of Corporate Officers President Secretary Treasurer Director YES NO NO Filipino Citizen* NO YES NO Residency NO YES YES Prohibited Secretary concurrent or positions President President Treasurer * subject to rule if corporation is engaged in a nationalized or partially-nationalized industry Additional qualifications of officers may be provided for in the by-laws. [Sec. 46(f)] Does not imply the "demise" of the corporation. By-laws may be required by law for an orderly governance and management of corporations but they are not essential to corporate birth. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. [Loyola Grand Villas Homeowners Association v. CA G.R. No. 117188 (1997)] Note: Sec. 21 on the effect of failure to formally organize within 5 years from incorporation, the corporation’s corporate powers cease and the corporation is deemed dissolved. Organization includes: the filing and approval of by-laws with the SEC and the election of directors and officers. [Campos] Page 160 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS REQUISITES OF VALID BY-LAWS Approval requirement: Must be approved by the affirmative vote of the stockholders representing at least a MAJORITY of the outstanding capital stock, or majority of members. [Sec. 45] If filed pre-incorporation: Must be approved and signed by all incorporators. Record-Keeping: Must be kept in the principal office of the corporation, subject to inspection by any director, trustee, stockholder or member of the corporation in person or by a representative at reasonable hours on business days. [Sec. 45] Filing with SEC: A copy of the by-laws duly certified by a majority of the directors or trustees and countersigned by the secretary of the corporation, shall be filed with the Commission and attached to the original articles of incorporation. [Sec. 45] No provision of the by-laws can be adopted if it is contrary to law. Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. [Grace Christian High School v. CA, G.R. No. 108905 (1997)] Contents of By-laws Matters Usually Found in By-Laws a. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; b. The time and manner of calling and conducting regular or special meetings and mode of notifying the stockholders or members thereof; c. The required quorum in meetings of stockholders or members and the manner of voting therein; COMMERCIAL LAW d. The modes by which a stockholder, member, director, or trustee may attend meetings and cast their votes; e. The form for proxies of stockholders and members and the manner of voting them; f. The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the compensation of directors or trustees and officers, and the maximum number of other board representations that an independent director or trustee may have which shall, in no case, be more than the number prescribed by the Commission; g. The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; h. The manner of election or appointment and the term of office of all officers other than directors or trustees; i. The penalties for violation of the bylaws; j. In the case of stock corporations, the manner of issuing stock certificates; and k. Such other matters as may be necessary for the proper or convenient transaction of its corporate affairs for the promotion of good governance and anti-graft and corruption measures. l. An arbitration agreement may be provided in the bylaws pursuant to Section 181 of RCC. [Sec. 46] Note: In close corporations - restrictions on the right to transfer shares must appear in both the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, restriction shall not be binding on any purchases of good faith. [Sec. 97] Matters That Cannot Be Provided for in the By-laws (must be in the AOI) ● Classification of shares of stock and preferences granted to preferred shares ● Provisions on founder’s shares ● Providing for redeemable shares ● Provisions on the purposes of the corporation ● Providing for the corporate term of existence ● Capitalization of stock corporations ● Corporate Name ● Denial of pre-emptive rights [Villanueva] Page 161 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS ii. Binding Effects When Binding: ONLY from date of issuance of SEC of a certification that the by-laws are not inconsistent with the Code [Sec. 45] Pending such approval, they cannot bind stockholders or corporation. Effect on third parties: Mere internal rules among stockholders cannot affect or prejudice 3rd persons who deal with the corporation unless they have knowledge of the same [China Banking Corp v CA G.R. No. 117604 (1997)]. iii. Amendments Effected by: majority vote of the members of the board and majority vote of owners of the Outstanding Capital Stock or members, in a meeting duly called for the purpose. [Sec. 47] Unless a higher requirement is provided in the by-laws Delegation to BOD of power to amend By vote of stockholders representing 2/3 of the Outstanding Capital Stock or 2/3 of the members. [Sec. 47] Delegation to BOD may be revoked Any power delegated to the BOD or trustees to amend or repeal any by-laws or adopt new bylaws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. [Sec. 47] Filing with SEC Whenever the bylaws are amended or new bylaws are adopted, the corporation shall file with the Commission: (1) Such amended or new bylaws; and, (2) If applicable, the stockholders’ or members’ resolution authorizing the delegation of the power to amend and/or adopt new bylaws, duly certified under oath by the corporate secretary and a majority of the directors or trustees. [Sec. 47] COMMERCIAL LAW Effectivity of Amended By-Laws The amended or new bylaws shall only be effective upon the issuance by the Commission of a certification that the same is in accordance with this Code and other relevant laws. [Sec. 47] Effects of Non-Use of Corporate Charter Failure to Organize If a corporation does not formally organize and commence its business within five (5) years from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five (5) year period. [Sec. 21] Continuous Inoperation If a corporation has commenced its business but subsequently becomes inoperative for a period of at least five (5) consecutive years, the Commission may, after due notice and hearing, place the corporation under delinquent status. [Sec. 21] ● A delinquent corporation shall have a period of two (2) years to resume operations and comply with all requirements that the Commission shall prescribe. ● Upon compliance by the corporation, the Commission shall issue an order lifting the delinquent status. ● Failure to comply with the requirements and resume operations within the period given by the Commission shall cause the revocation of the corporation’s certificate of incorporation. [Sec. 21] 7. Corporate Powers General Powers; Theory of General Capacity [Sec. 35] General Powers Every corporation has the power and capacity: (a) To sue and be sued in its corporate name; (b) To have perpetual existence; Page 162 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS - (c) (d) (e) (f) (g) (h) (i) Unless the certificate of incorporation provides otherwise To adopt and use a corporate seal; To amend its articles of incorporation in accordance with the provisions of this Code; To adopt bylaws, and to amend or repeal the same in accordance with this Code; - Must not contrary to law, morals or public policy In case of stock corporations: To issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and In case of non-stock corporations: To admit members to the corporation; To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal with such real and personal property, including securities and bonds of other corporations; - As the transaction of the lawful business of the corporation may reasonably and necessarily require - Subject to the limitations prescribed by law and the Constitution To enter, with natural and juridical persons, into a: i. Partnership, (Note: New in the RCC) ii. Joint venture, (Note: New in the RCC) iii. Merger, iv. Consolidation, or v. Any other commercial agreement To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: - Provided, That no foreign corporation shall give donations in aid of any political party or candidate or for purposes of partisan political activity; - Note: Under OLD Corporation Code, both domestic and foreign corporations were prohibited from (j) (k) COMMERCIAL LAW giving donations in aid of any political party or candidate or for purposes of partisan political activity. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and employees; and To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. [Sec. 35] A corporation has: i. Express Powers – such powers as are expressly granted by law and its articles of incorporation; Implied Powers – those reasonably necessary to accomplish its purposes, as stated in its articles of incorporation; and Note: Such implied powers are deemed to exist because of the following provisions – “Except such as are necessary or incidental to the exercise of the powers so conferred” [Sec. 44] “Such powers as are essential or necessary to carry out its purpose or purposes as stated in the Articles of Incorporation” – catch-all phrase. [Sec. 35(k)] ii. iii. Incidental Powers – those which may be incident to its existence as a juridical entity [Pilipinas Loan v. SEC, 356 SCRA 193 (2001)] The Theory of General Capacity states that a corporation is said to hold such powers as are not prohibited or withheld from it by general law. Page 163 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Specific Powers; Theory of Specific Capacity [Secs. 36-43, 15] The Theory of Specific Capacity states that the corporation cannot exercise powers except those expressly/impliedly given. Under the Theory of Specific Capacity, the specific powers of a corporation are as follows: (a) Power to extend or shorten corporate term [Sec. 36] (b) Power to increase or decrease capital stock, or incur, create, increase bonded indebtedness [Sec. 37] (c) Power to deny pre-emptive rights [Sec. 38] (d) Power to sell or dispose corporate assets [Sec. 39] (e) Power to acquire own shares [Sec. 40] (f) Power to invest corporate funds in another corporation or business, or for any other purpose [Sec. 41] (g) Power to declare dividends [Sec. 42] (h) Power to enter into management contract [Sec. 43] (i) Power to amend AOI [Sec. 15] Power to Extend or Shorten the Corporate Term [Sec. 36] A private corporation may extend or shorten its term as stated in the articles of incorporation. [Sec. 36] Perpetual existence under the RCC applies to existing corporations. AOIs shall be deemed amended to reflect its perpetual term, unless the corporation elects to retain its limited term [Herbosa, 2019]. When Exercised Period to extend the corporate term has been reduced by the RCC to three years before expiration. When the term expires, it is not ipso facto dissolved but may apply for a revival of its corporate existence. [Divina, 2020] COMMERCIAL LAW Requirements (1) Approval by majority vote of the board of directors or trustees, and (2) Ratification at a meeting by the stockholders or members representing at least two-thirds (2/3) of the outstanding capital stock or of its members. (3) Notice Requirement – Written notice of the proposed action and the time and place of the meeting shall be: i. Sent to stockholders or members at their respective place of residence as shown in the books of the corporation, and ii. Either: a. Deposited to the addressee in the post office with postage prepaid, served personally, OR b. Sent electronically in accordance with the rules and regulations of the Commission on the use of electronic data messages, when allowed in the by-laws or done with the consent of the stockholder. [Sec. 36] Exercise of Appraisal Right In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal under the conditions provided in this Code. [Sec. 36] An extension of corporate term actually novates the corporate contract with each shareholder by extending the corporate relationship beyond the original term. Shortening the corporate term DOES NOT trigger the right of appraisal because there would be no violation of the original contractual intent, since shortening would mean the early realization of the value of the shares of a dissenting stockholder with the dissolution of the corporation. [Villanueva] Page 164 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness [Sec. 37] A corporation may increase or decrease its capital stock or incur, create or increase any bonded indebtedness. [Sec. 37] Power to Increase or Decrease Capital Stock An increase or decrease of the capital stock amends the underlying contractual relationships between and among members of the corporation. Aside from the requisites in Sec. 37, when the capital stock is increased or decreased, the provisions of Sec. 15 on the amendment of the articles of incorporation must also be complied with. [Villanueva] Power to Incur, Create, or Increase Bonded Indebtedness “Bonded indebtedness” are long term debts of the corporation, secured by mortgage on real or personal property of the corporation, which are: Structured in denominated units of indebtedness Intended to eventually circulate within the investing public as securities, representing units of investment Thus, the power to incur, create, or increase bonded indebtedness is a form of distributing liability securities to the public, and constitutes an aspect of the inherent power of every corporation to borrow or to incur loan obligations. [Villanueva] Requirements [Sec. 37] (1) Approval by a majority vote of the board of directors or trustees (2) Approval by two-thirds (2/3) of the outstanding capital stock or at least two-thirds (2/3) of the members at a stockholders’ meeting duly called for the purpose (3) Notice Requirement – Written notice of the time and place of the stockholders’ COMMERCIAL LAW meeting and the purpose for said meeting must be: i. Sent to the stockholders at their places of residence as shown in the books of the corporation and ii. Served on the stockholders personally, OR through electronic means recognized in the corporation’s bylaws and/or the Commission’s rules as a valid mode for service of notices. (4) Certification Requirement – A certificate must be signed by a majority of the directors of the corporation and countersigned by the chairperson and secretary of the stockholders’ meeting, setting forth: (a) That the requirements of this section have been complied with; (b) The amount of the increase or decrease of the capital stock; (c) In case of an increase of the capital stock: i. The amount of capital stock or number of shares of no-par stock thereof actually subscribed, ii. The names, nationalities and addresses of the persons subscribing, iii. The amount of capital stock or number of no-par stock subscribed by each, and iv. The amount paid by each on the subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder, if such increase is for the purpose of making effective stock dividend therefor authorized; (d) Any bonded indebtedness to be incurred, created or increased; (e) The amount of stock represented at the meeting; and (f) The vote authorizing the increase or decrease of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. (5) Sworn Statement of the Treasurer – A sworn statement of the corporation’s Page 165 of 450 U.P. LAW BOC (a) (b) (6) (7) (8) BUSINESS ORGANIZATIONS treasurer must accompany the filing of the certificate, and it must show that: At least twenty-five percent (25%) of the increase in capital stock has been subscribed; and At least twenty-five percent (25%) of the amount subscribed has been paid in actual cash to the corporation or that property, the valuation of which is equal to twenty-five percent (25%) of the subscription, has been transferred to the corporation Note: A treasurer’s affidavit is required in an increase of capital stock, not in a decrease in capital stock. Prior SEC Approval – The application with the Commission shall be made within six (6) months from the date of approval of the board of directors and stockholders, which period may be extended for justifiable reasons. Prior PCC Approval – Where appropriate, prior approval of the Philippine Competition Commission is required for any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness SEC Registration – Applicable only to bonds issued by a corporation. After approval and the issuance by the Commission of its certificate of filing: (1) The capital stock shall be deemed increased or decreased; and (2) The incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare Provided, That: (a) The Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by a sworn statement of the treasurer (with the abovementioned contents) (b) No decrease in capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. [Sec. 37] COMMERCIAL LAW Copies of the certificate of the increase/decrease in capital shall: (1) Be kept on file in the office of the corporation and (2) Filed with the Commission and (3) Attached to the original articles of incorporation. [Sec. 37] Exercise of Appraisal Right In Cases of Increase or Decrease of Capital Sock The right of appraisal can be exercised in cases of increase of capital stock because it has the potential effect of diluting the proportionate interest of a stockholder in the corporation. Even with the existence of the pre-emptive right, there is no guaranty that the stockholder can preserve his proportional interest, since he might not have the financial resources to exercise his pre-emptive right on the increase. The right of appraisal CANNOT be exercised in cases of decrease in capital stock since the decrease would result in returning part of the investments of the stockholders, including dissenting stockholders. [Villanueva] In Cases of Incurring, Creating or Increasing Bonded Indebtedness The appraisal right CANNOT be exercised by dissenting stockholders when the corporation validly incurs, creates, or increases bonded indebtedness. To allow them to do so would drain the financial resources of the corporation, which is contrary to the purpose for which the power is exercised, which is to raise funds for corporate affairs. [Villanueva] Power to Deny Pre-Emptive Rights [Sec. 38] Preemptive right The preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings. [Sec 38] The purpose of preemptive right is to enable the shareholder to Page 166 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS retain his proportionate control in the corporation and to retain his equity in the surplus. General Rule: All shareholders of a stock corporation have the preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. Exception: If such right is denied by the AOI or an amendment thereto. [Sec. 38] “All issues” of shares extends to BOTH issuances of: New shares resulting in an increase in capital stock, and Previously unsubscribed shares which formed part of the existing capital stock. [Herbosa, 2019; SEC Opinion No. 5-03] For close corporations, the pre-emptive rights extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the AOI provides otherwise. [Sec. 101] Pre-emptive right can only be exercised to the same class of shares issued or disposed with that owned by the stockholder (Share-a-like basis). Requirements (1) Approval by majority vote of the board of directors, and (2) Ratification at a meeting by the stockholders or members representing at least two-thirds (2/3) of the outstanding capital stock. (3) Notice Requirement – Written notice of the proposed action and the time and place of the meeting shall be: i. Sent to stockholders at their respective place of residence as shown in the books of the corporation, and ii. Either: a. Deposited to the addressee in the post office with postage prepaid, served personally, OR COMMERCIAL LAW b. Sent electronically in accordance with the rules and regulations of the Commission on the use of electronic data messages, when allowed in the by-laws or done with the consent of the stockholder. Denial of preemptive right The AOI may deny pre-emptive right. It may also be denied when circumstances call for its denial, specifically when: Shares to be issued are to comply with laws requiring stock offerings or minimum stock ownership by the public; [Sec. 38] Shares to be issued are in good faith with the approval of the stockholders representing 2/3 of the OCS in exchange for property needed for corporate purposes; [Sec. 38] Shares to be issued are issued in payment of previously contracted debts; [Sec. 38] In case the right is denied in the AOI; Waiver of the right by the stockholder. Note: The validity of issuance of additional shares may be questioned if done in breach of trust by the controlling stockholders notwithstanding the non-existence of the preemptive right, (i.e. when controlling stockholders’ primary purpose is to perpetuate or shift control of the corporation or to “freeze out” the minority interest). Amendment of the Articles of Incorporation to deny pre-emptive right Such amendment to the AOI to deny preemptive right may trigger the exercise of a dissenting stockholder of his appraisal right. This is because such amendment prevents the dissenting stockholder from maintaining his equity interest in the corporation. The test is whether the company controllers initiated the questioned amendment. [Herbosa, 2019] Power to Sell or Dispose Corporate Assets [Sec. 39] A corporation may sell, lease, exchange, mortgage, pledge, or otherwise dispose of its property and assets: Page 167 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS For such consideration as its board of directors or trustees may deem expedient, which may be: - Money - Stocks - Bonds, or - Other instruments for the payment of money or - Other property or consideration Subject to the provisions of Republic Act No. 10667, otherwise known as “Philippine Competition Act”, and other related laws. Requisite: A majority vote of its board of directors or trustees [Sec. 39] Sale of all or substantially all of corporate assets A corporation may sell all or substantially all of the its properties and assets, including its goodwill. [Sec. 39] To determine whether a sale or other disposition shall be deemed to cover all or substantially all the corporate property and assets: i. Make a computation based on the corporation’s net asset value, as shown in its latest financial statements. ii. Assess whether the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. [Sec. 39] The exercise of this power does not render the corporation empty, since it is still left with assets received in exchange. It always receives something of equal value to what has been disposed. [Villanueva] Requirements (1) Vote of the stockholders representing at least two- thirds (2/3) of the outstanding capital stock, or at least two-thirds (2/3) of the members, in a stockholders’ or members’ meeting duly called for the purpose; OR Vote of at least a majority of the trustees in office in nonstock corporations, where there are no members with voting rights COMMERCIAL LAW (2) Notice Requirement – Written notice of the proposed action and of the time and place for the meeting shall be: i. Addressed to stockholders or members at their places of residence as shown in the books of the corporation; and ii. Deposited to the addressee in the post office with postage prepaid, served personally, OR sent electronically, when allowed by the by-laws or done with the consent of the stockholder. [Sec. 39] Abandonment of Sale/Lease/Mortgage After obtaining the authorization or approval by the stockholders or members, the board of directors or trustees may abandon such sale, lease, exchange, mortgage, pledge, or other disposition of property and assets. However, this is subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. [Sec. 39] Where only the approval of a quorum of the BOD/T is required Corporation is not restricted in its power to sell or dispose of its assets without the authorization of shareholders or members: a. If the same is necessary in the usual and regular course of business of the corporation or b. If the proceeds of the sale will be appropriated for the conduct of its remaining business c. If the transaction does not cover all or substantially all of the assets. [Sec. 39] Exercise of Appraisal Right Any stockholder who disagrees from the sale, lease, exchange, mortgage, pledge and any other disposition may exercise his appraisal right. [Sec. 39] The transfer should not prejudice the creditors of the assignor The only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the Page 168 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignor’s liabilities, unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud. [Caltex (Phils.) Inc. v. PNOC Shipping and Transport Corp, G.R. No. 150711 (2006)] De facto Merger – Continuity-of-business enterprise requirement There is a de facto merger when a corporation (transferring corporation) exchanges all or substantially all of its assets for the shares of another (transferee corporation). The transferring corporation may later on be dissolved, where the shares of the transferee corporation will be distributed by way of liquidating dividends to the shareholders of the transferring corporation. The continuity-of-business enterprise requirement is what differentiates a de facto merger from a voluntary dissolution of a corporation. [Herbosa, 2019] Power to Acquire Its Own Shares [Sec. 40] The power of a corporation to acquire its own shares A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes. This corporate power does not need shareholder’s approval. Discretion solely rests on the board, subject to the existence of unrestricted retained earnings (“URE”) and for a legitimate corporate purpose/s. [Sec. 40] Unrestricted Retained Earnings This is defined as the amount which is: (1) The accumulated profits and gains realized out of the normal and continuous operations of the company AFTER deducting therefrom: a. Distributions to stockholders and COMMERCIAL LAW b. Transfers to capital stock or other accounts, and (2) NOT appropriated by its Board of Directors for corporate expansion projects or programs: (3) NOT covered by a restriction for dividend declaration under a loan agreement; and (4) NOT required to be retained under special circumstances obtaining in the corporation such as when there is a need for a special reserve for probable contingencies. [SEC Memorandum Circular No. 11-08, (December 5, 2008)] General Rule: The corporation may only acquire its own stocks in the presence of URE. [Sec. 40] Rationale: Existence of URE is required before a corporation acquires its own shares because: i. The repurchase of shares is a method of distribution or withdrawal of assets, and is subject to abuse, as creditors have a right to assume that so long as there are debts and liabilities, the Board will not use corporate assets to purchase its own stock; and ii. Treasury shares may be availed of to perpetrate control of the enterprise without the expensive requisite of a majority voting stock. [Villanueva] Exceptions: a. Redeemable shares may be acquired even without surplus profit for as long as it will not result to the insolvency of the Corporation; b. In cases that the corporation conveys its stocks in payment of a Debt; c. In a Close corporation, a stockholder may demand the payment of the fair value of shares regardless of existence of retained earnings for as long as it will not result to the insolvency of the corporation. Legitimate Corporate Purposes [Sec. 40] Legitimate corporate purposes include, but is not limited to the following: 1. To eliminate fractional shares arising out of stock dividends 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid Page 169 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders. regulations of the Commission on the use of electronic data messages, when allowed in the by-laws or done with the consent of the stockholder Power to Invest Corporate Funds in Another Corporation or Business [Sec. 41] Exercise of Appraisal Right Any stockholder who disagrees from the investment of corporate funds in another corporation or business may exercise his appraisal right. General Rule: The corporation is not allowed to engage in a business different from those enumerated in its AOI. Exception: The purpose will be amended to include the desired business activity among its secondary purpose. Rules in case a corporation wants to invest in an undertaking ● Investment of a corporation in a business which is in line with its primary purpose requires only the approval of the board. ● Investment of assets for any of its secondary purposes requires the prior approval of its shareholders/members ● If the investment is outside the purpose/s for which the corporation was organized, Articles of Incorporation must be amended first, otherwise it will be an Ultra Vires act. Requirements (1) Approval by majority vote of the board of directors or trustees, and (2) Ratification at a meeting by the stockholders or members representing at least two-thirds (2/3) of the outstanding capital stock or of its members. (3) Notice Requirement – Written notice of the proposed action and the time and place of the meeting shall be: i. Sent to stockholders or members at their respective place of residence as shown in the books of the corporation, and ii. Either: a. Deposited to the addressee in the post office with postage prepaid, served personally, OR b. Sent electronically in accordance with the rules and Power to Declare Dividends [Sec. 42] Requirements (1) Must be distributed out of URE (2) Payable in cash, in property, or in stock to all shareholders on the basis of outstanding stock held by them (3) Resolution by the Board Additional requirement for stock dividend Approved by 2/3 of shareholders representing the outstanding capital stock at a regular/special meeting called for that purpose - Note: The approval requirement for the declaration of stock dividends underscores that the payment of dividends to a stockholder is not a matter of right but a matter of consensus. [Republic Planters Bank v. Agana, 269 SCRA 1 (1997)] A corporation must have also a sufficient number of authorized unissued shares for distribution to stockholders (if ACS is insufficient, corporation must apply for increase in capital stock). Source of dividends Dividends may only be declared out of actual and bona fide unrestricted retained earnings. Prohibition imposed by law on UREs of a stock corporation Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: a. When justified by definite corporate expansion projects or programs approved by the BOD; Page 170 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS b. When the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring dividends without its consent, and such consent has not yet been secured; c. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation. Note: In case a corporation unjustifiably retains surplus profits in excess of one hundred (100%) percent of the paid-in accumulated capital, it will be liable for Improperly Accumulated Earnings Tax (IAET) equal to 10% of the improperly accumulated taxable income. [Sec. 29 (A), NIRC] Moreover, it will also be liable to pay a penalty imposed by the SEC. [SEC Memo. Circ. No. 6, s. 2005] Forms of dividends 1. Cash - Any cash dividend due on delinquent stock shall first be applied to the unpaid balance on the subscription plus cost and expenses. [Sec. 42] 2. Stock - Stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid; Stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered. 3. Property - Stockholders are entitled to dividends pro-rata based on the total number of shares and not on the amount paid on shares. Cash Dividends vs. Stock Dividends Cash Dividends Voting Board requirements Directors for issuance Stock Dividends of Shall be applied to the Effect on unpaid delinquent balance on stock the subscription Board of Directors + 2/3 of stockholders Shall be withheld from the delinquent stockholder until his unpaid subscription is paid COMMERCIAL LAW plus cost and expenses Can this be issued by No [Sec. 34] Executive Committee? No, since this requires stockholders’ approval [Sec. 34] Rule on shares of stock issued to pay for services A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. But a share of stock thus issued should be part of: i. The original capital stock of the corporation upon its organization; or ii. The stocks issued when the increase of the capitalization of a corporation is properly authorized. In other words, it is the shares of stock that are ORIGINALLY ISSUED by the corporation and FORMING PART OF THE CAPITAL that can be exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalization. STOCK DIVIDENDS are issued only to stockholders because only stockholders are entitled to dividends. [Nielson and Co. v. Lepanto Consolidated Mining, G.R. No. L21601., (1968)]. Rule on the receipt of dividends in case of mortgaged or pledged shares General Rule: The mortgagor or the pledgor has the right to receive the dividends. Exception: When the mortgagor or pledgor defaults and the mortgagee or pledgee acquires the pledged stocks and the transfer is recorded in the books of the corporation, the Page 171 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS mortgagee or pledgee is entitled to receive the dividends. Power to Enter into Management Contracts [Sec. 43] Management Contract Any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise. This refers only to a management contract with another corporation and does not apply to management contracts entered into by a corporation with natural persons. Corollary to this, management contract with a natural person need not comply with the requisites of Sec. 43. Period of every management contract General Rule: No management contract shall be entered into for a period longer than 5 years for any one term. Exception: Service contracts or operating agreements which relate to exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided in the pertinent laws and regulations. Requirements (1) Approval by majority vote of the BOD of both the managing and the managed corporation (2) Approval by shareholders owning at least the majority of the outstanding capital stock or at least a majority of the members of both the managing and the managed corporation However, the contract must be approved by 2/3 of stockholders owning outstanding capital stock/members of the managed corporation when: i. Stockholders representing the same interest of both the managing and managed corporations own more than COMMERCIAL LAW 1/3 of the total outstanding capital stock entitled to vote of the managing corporation (Interlocking stockholders); or ii. A majority of the members of the BOD of the managing corporation also constitute a majority of the BOD of the managed corporation (Interlocking directors). For the managed corporation: There is a need for such ratification as such contract is a deviation from the principle that corporate affairs shall be managed by the BOD. For the managing corporation: There is a need for such ratification as such contract is a deviation from the principle that the BOD would devote their time and resources for the affairs of the corporation. [Villanueva] Limitations a. Ultra Vires Acts Ultra Vires Acts Those acts which a corporation is not empowered to do or perform because they are outside or beyond the express and implied powers conferred by its Articles of Incorporation or by the Revised Corporation Code, or not necessary or incidental to the exercise of the powers so conferred. [Sec. 44] Types of Ultra Vires Acts a. Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation; b. Ultra Vires acts of officers and not of the corporation c. Acts or contracts, which are per se illegal as being contrary to law. [Villanueva] Kinds of Ultra Vires acts by reason a. By reason of Lack of Authority (ultra vires acts) b. By reason of Illegality (illegal acts) Page 172 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Basis Ultra Vires Acts Illegal Acts Lawfulness Lack of authority; Not necessarily unlawful, but outside the powers of the corporation Illegality; Unlawful; against law, morals, public policy, and public order Ratification Can be ratified Cannot ratified Binding power Can bind the Cannot bind the parties if wholly parties or partly executed be Enforceabil ity Voidable, and Void and cannot may be be validated enforced by performance, ratification or estoppel Examples 1. Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation; 2. Ultra Vires acts of officers and not of the corporation Acts or contracts, which are per se illegal as being contrary to law. (a) Applicability of the Ultra Vires Doctrine The application of the Ultra Vires Doctrine is a question, in each case, of the logical relation of the act to the corporate purpose expressed in the charter. It may fairly be considered within the charter powers if: 1. The act is one which is lawful in itself, and not otherwise prohibited; 2. The act is done for the purpose of serving corporate ends; AND COMMERCIAL LAW 3. The act reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful sense. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not. [Montelibano v. Bacolod-Murcia Milling Co., Inc., G.R. No. L15092 (1962)] (b) Consequences of Ultra Vires Acts Ultra vires acts, which are per se illegal are generally void. While ultra vires acts which are not illegal but are within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by stockholders. [Montelibano v. BacolodMurcia Milling Co., Inc., G.R. No. L-15092 (1962)] Consequences of Ultra Vires Acts with respect to contracts: a. Executed contract – courts will not set aside or interfere with such contracts; b. Executory contracts – no enforcement even at the suit of either party (void and unenforceable); c. Partly executed and partly executory – principle of “no unjust enrichment at expense of another” shall apply; d. Executory contracts apparently authorized but Ultra Vires – the principle of estoppel shall apply. Remedies in case of Ultra Vires Acts a. State i. Dissolution of the corporation thru a quo warranto proceeding ii. Injunction iii. Suspension or revocation of the certificate of registration by the SEC b. Stockholders Injunction Derivative suit Page 173 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Ratification (except when a 3rd party is prejudiced or the act is illegal) c. Creditors - Nullification of contract in fraud of creditors Doctrine of Subscription Individuality COMMERCIAL LAW presumption should exist to distinguish one share from another. Sec. 6 of the RCC now requires that the distinguishing features be stated also in the Certificate of Stock. of Trust Fund Doctrine The Doctrine of Individuality of Subscription states that a subscription is one entire and indivisible whole contract. It cannot be divided into portions. Consequently, where stocks were subscribed and part of the subscription contract price was not paid, the whole subscription shall be considered delinquent, and not only the shares which correspond to the amount not paid. Nevertheless, holders of subscribed shares not fully paid, which are not delinquent, shall have all the rights of a stockholder. [Sec. 71] SEC has opined that the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer must assume the unpaid balance. [SEC Opinion, 9 Oct. 1995] It is necessary, however, to secure the consent of the corporation because such transfer contemplates a novation which under Art. 1293 (NCC) cannot be made without consent of the creditor. Doctrine of Equality of Shares The doctrine of equality of shares states that all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences. [Sec. 6] There is a presumption of equality of the rights and features of shares when nothing is expressly provided to the contrary. Although a corporation has the power to classify its shares of stock, provide for preferences and other conditions, no The Trust Fund Doctrine states that the capital stock, properties and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. All funds received by the corporation in payment of the shares of stock shall be held in trust for the corporate creditors and other stockholders of the corporation. No fund shall be used to buy back the issued shares of stock except only in instances specifically allowed by the Corporation Code. [Boman Environmental Development Corporation v. CA, G.R. No. 77860 (1988)] Effects of the trust fund doctrine 1. Dividends must never impair the subscribed capital stock and must only be declared out of unrestricted retained earnings (URE). [Philippine Trust Co. v. Rivera, G.R. No. L-19761 (1923)] 2. Subscription commitments cannot be condoned or remitted. 3. General Rule: The corporation cannot buy its own shares using the subscribed capital as the consideration therefore. [NTC v. CA. G.R. No. 127937 (1999)] Exceptions: 1. Redeemable shares may be acquired even without surplus profit for as long as it will not result to the insolvency of the Corporation; 2. In cases that the corporation conveys its stocks in payment of a Debt; or 3. In a Close corporation, a stockholder may demand the payment of the fair value of shares regardless of existence of retained earnings for as long as it will not result to the insolvency of the corporation 4. Rescission of a subscription agreement is not allowed since it will effectively result in the unauthorized distribution of the capital Page 174 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW assets and property of the corporation. [Ong Yong v. Tiu, G.R. No. 144476 (2003)] and assets generally regarded in equity as a trust fund for the payment of corporate debts. NOTE: Rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed (Ibid). All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim. Exceptions to the Trust Fund Doctrine --When Distribution of Corporate Capital is Allowed The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. v. Rivera is the underlying principle in the procedure for the distribution of capital assets, embodied in Corporation Code, which allows the distribution of corporate capital only in three instances: 1. Amendment of the AOI to reduce the authorized capital stock, 2. Purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, and 3. Dissolution and eventual liquidation of the corporation. The creditors of a corporation have the right to assume that so long as there are debts and liabilities, the BOD will not use corporate assets to purchase its own shares of stock or to declare dividends to its stockholders when the corporation is insolvent. [Steinberg v. Velasco, G.R. No. L-30460 (1929)] Scope of the Trust Fund Doctrine The trust fund doctrine is NOT limited to reaching the stockholder’s unpaid subscriptions. A corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shares, in whole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors. The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the satisfaction of its debt. The scope of the doctrine when the corporation is insolvent also encompasses other property To make out a prima facie case in a suit against stockholders of an insolvent corporation to compel them to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is only necessary to establish that the stockholders have not in good faith paid the par value of the stocks of the corporation. [Donnina Halley v. Printwell, Inc., G.R. No. 157549 (2011)] How Corporate Exercised Powers Are By the Shareholders Corporate Acts Requiring All (Voting and Non-Voting) Shareholders’ Approval General Rule: Vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights [Sec. 6] Exceptions [Sec. 6]: Voting and non-voting shares shall be entitled to vote in the following cases: a. Amendment of Articles of Incorporation [Sec. 15] b. Adoption, Amendment and Repeal of ByLaws [Sec. 47] c. Sale, Lease, Mortgage or Other Disposition of Substantially all corporate assets [Sec. 39] d. Incurring, Creating or Increasing Bonded Indebtedness [Sec. 37] e. Increase or Decrease of Capital Stock [Sec. 37] f. Merger and Consolidation [Sec. 76-79] g. Investment of funds in another corporation or business or for any purpose other than Page 175 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW the primary purpose for which it was organized [Sec. 41] h. Dissolution of the Corporation [Secs. 133138] authority, but an innocent person cannot be prejudiced if he had the right to presume under the circumstances the authority of the acting officers. Corporate Acts Requiring Voting Shareholders’ Approval 1. Declaration of Stock Dividends [Sec. 42] 2. Management Contracts [Sec. 43] 3. Fixing the Consideration of No-Par shares [Sec. 61] 4. Fixing the Compensation of Directors [Sec. 29] Doctrine of Apparent Authority Corporate officers have apparent authority to bind the corporation on matters that are generally within the domain of corporate business, and the scope of their usual duties. [Herbosa, 2019] By the Board of Directors Unless otherwise provided in this Code, the board of directors or trustees shall exercise the corporate powers, conduct all business, and control all properties of the corporation. [Sec. 22] If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. [Associated Bank v. Pronstroller, G.R. No. 148444 (2008)] Majority vote of the Board is needed in the exercise of the ff. powers: (1) Filling of vacancies in the board, except when it is due to removal by the stockholders/members or by expiration of term (2) Extension or shortening of the corporate term (3) Increase or decrease of capital stock or the creation of bonded indebtedness (4) Sale or other disposition of all or substantially all assets (5) Acquisition of its own shares (6) Investment of corporate funds in any corporation or business or for any purpose other than its primary purpose (7) Declaration of cash, property, and stock dividends (8) Entering into management contracts (9) Amendment of AOI (10) Amendment of the by-laws (11) Approval of the plan of merger or consolidation (12) Dissolution of the corporation By the Officers Authority of Corporate Officers A person dealing with a corporate officer is put on inquiry as to the scope of the latter’s Page 176 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW SUMMARY OF SPECIFIC POWERS Specific Power Power to extend or shorten corporate term [Sec. 36] Approval Required Majority vote of the BOD/T and Ratification by the stockholders or members representing at 2/3 of the outstanding capital stock or of its members Appraisal Right Can be exercised only in case of extension of the corporate term [Sec. 36] [Note: Section 80(a) however provides that appraisal right may be exercised in both extension and shortening of corporate term, which is an error carried over from the old Corporation Code. It does not make sense to grant appraisal right in case of shortening the term/dissolution, since the same would already result in liquidation of the corporation.] Power to increase or decrease capital stock, or incur, create, increase bonded indebtedness [Sec. 37] Majority vote of the BOD Power to incur, create, increase bonded indebtedness [Sec. 37] Majority vote of the BOD/T Power to deny preemptive rights [Sec. 38] Can be denied by the AOI or an amendment thereto Can be exercised in case it is denied through an amendment of AOI [Sec. 80(a)] Power to Sell of All or Substantially All of the Properties of the Corporation [Sec. 39] A majority vote of its board of directors or trustees Can be exercised [Sec. 39/ 80(b)] Approval by 2/3 of the outstanding capital stock Can be exercised only if the increase of capital stock results in or has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class [Sec. 80(a)]; x Approval by 2/3 of the outstanding capital stock or of the members Ratification by the stockholders or members representing at 2/3 of the outstanding capital stock or of its members (Note: Vote of at least a majority of the trustees in office in nonstock corporations, where there are no members with voting rights) [Note: power to sell assets in the ordinary course of business only requires board approval] Page 177 of 450 U.P. LAW BOC Specific Power BUSINESS ORGANIZATIONS Approval Required Power to acquire own shares [Sec. 40] Majority vote of the BOD Power to invest corporate funds in another corporation or business, or for any other purpose [Sec. 41] Majority vote of the board of directors or trustees and Power to declare dividends [Sec. 42] For cash and property dividends: Resolution by the Board only COMMERCIAL LAW Appraisal Right x Can be exercised [Sec. 41/80(d)] Ratification by the stockholders representing at least 2/3 of the outstanding capital stock, or of the members x Additional requirement for stock dividends: Approval of stockholders representing not less than 2/3 of the outstanding capital stock Power to enter into management contract [Sec. 43] Approval of: x BOD of both managing and managed corporation; and Majority of outstanding shares or Note: A management contract is a members of both managed and deviation from the centralized managing corporation management doctrine, and this departure would require the But 2/3 vote of outstanding stock/members approval of the stockholders under of managed corporation is necessary in the the principle that it would vary the ff: contractual corporate arrangements A stockholder/s representing the same [Villanueva] interest of both the managing and managed corporations own more than 1/3 of the total outstanding capital stock; or Where majority of directors in both corporations are the same OTHERS Approval Required Merger or consolidation [Sec. 76] Majority vote of the board of directors or trustees and Appraisal Right Can be exercised [Sec. 76/80(c)] Ratification by the stockholders representing at least 2/3 of the outstanding capital stock, or of the members Voluntary Dissolution (by Petition or by shortening corporate term) [Sections 134-136] Majority vote of the board of directors or trustees and Ratification by the stockholders representing at least 2/3 of the outstanding capital stock, or of the members Page 178 of 450 x [See Note on Sec. 36] U.P. LAW BOC BUSINESS ORGANIZATIONS Participation in Management 8. Stockholders and Members Fundamental Stockholder Rights of COMMERCIAL LAW Proxy a 1. Direct or indirect participation in management [Sec. 6] 2. Voting rights [Sec. 6] 3. Right to remove directors [Sec. 27] 4. Proprietary rights (a) Right to dividends [Sec. 42 and 70] (b) Appraisal rights [Sec. 80] (c) Right to issuance of stock certificate for fully paid shares [Sec. 63] (d) Proportionate participation in the distribution of assets in liquidation [Sec. 139] (e) Right to transfer of stocks in corporate books [Sec. 62] (f) Pre-emptive right [Sec. 38] 5. Right to inspect books and records [Sec. 73] 6. Right to be furnished with the most recent financial statements/reports [Sec. 73] 7. Right to recover stocks unlawfully sold for delinquent payment of subscription [Sec. 68] 8. Right to file individual suit, representative suit and derivative suits Nature of the Rights of Members The eleemosynary nature (i.e. charitable) of every non-stock corporation defines the characteristic of membership therein as being essentially personal in character and therefore essentially non-transferable in nature. [Villanueva] Sec. 88 of the Revised Corporation Code specifically provides that in a non-stock corporation, the right of members of any class or classes to vote “may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws.” Stockholders and members may vote in person or by proxy in all meetings. [Sec. 57] The word “proxy” may be understood in two ways: (1) First, it may refer to the person duly authorized by a stockholder to vote in his behalf in a stockholder’s meeting. (2) Secondly, it may refer to the document which evidences this authority. [CAMPOS] Right to Issue a Proxy The right to issue a proxy is vested with public interest when it comes to stock corporations. • Although it may be regulated under the bylaws, it cannot be denied, since it is an aspect of ownership interest of stockholders. • However, the right of members to vote by proxy may be denied under the articles of incorporation or bylaws of a non-stock corporation. [Sec. 88; CAMPOS] Requisites for a Valid and Enforceable Proxy: 1. It must be in writing; 2. Signed by the stockholder or member of record; and 3. Filed with the corporation before the scheduled meeting with the Corporate Secretary. [Sec. 57] Period of Effectivity Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. [Sec. 57] Procedural Matters Relating to Proxies: 1. “Proxy solicitation” involves the securing and submission of proxies, while “proxy validation” concerns the validation of such secured and submitted proxies; Page 179 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS 2. The SEC’s power to pass upon the validity of proxies in relation to election controversies has effectively been withdrawn, tied as it is to its abrogated quasi-judicial powers, and has been transferred to the RTC Special Commercial Courts pursuant to the terms of Sec. 5.2 of the Securities Regulation Code; Note: The SEC has the power to mpose or recommend new modes by which a stockholder, member, director, or trustee may attend meetings or cast their votes, as technology may allow, taking into account the company’s scale, number of shareholders or members, structure, and other factors consistent with the basic right of corporate suffrage. [Sec. 179] 3. Nevertheless, although an intra-corporate controversy may animate a disgruntled shareholder to complain to the SEC a corporation’s violations of SEC rules and regulations, that motive alone should not be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are exercisable on a motu proprio basis. The fact that the jurisdiction of the RTC Special Commercial Courts is confined to the voting on election of officers, and not all matters which may be voted upon by stockholders, elucidates that the power of the SEC to regulate proxies remains extant and could very well be exercised when stockholders vote on matters other than the election of directors. [GSIS v. C.A., G.R. No. 183905 (2009)] Voting Trust Under a voting trust agreement, a stockholder of a stock corporation parts with the naked or legal title, including the power to vote, of the shares and only retains the beneficial ownership of the stock. Voting trustee — A share owner vested with colorable and naked title of the shares covered for the primary purpose of voting upon stocks that he does not own. A voting trust agreement shall be ineffective and unenforceable unless: 1. It is in writing and notarized; 2. It specifies the terms and conditions thereof; and 3. A certified copy of such agreement is filed with the corporation and with the SEC. [Sec. 58] Period of Effectivity General Rule: Voting trust agreements shall not exceed five (5) years at any one time. Exception: Voting trust agreements may be for a period exceeding five (5) years if it is specifically required as a condition in a loan agreement. • • Voting Trust — An arrangement created by one or more stockholders: (a) For the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares; (b) For a period not exceeding 5 years at any time [Sec. 58]. COMMERCIAL LAW This envisions a situation where a corporation obtains a loan from a bank, but as a condition of the loan, the majority stockholders would be required to execute voting trust agreements to ensure that the lending institution would have a controlling interest in the corporate votes to be taken that may affect the ability of the borrowing corporation to pay. The voting trust agreement therefore constitutes further security to the lending institution. (VILLANUEVA, supra at 432) Such voting trust agreement conditioned upon a loan agreement, however, shall automatically expire upon full payment of the loan. [Sec. 58] Unless the agreement is expressly renewed, all rights granted in the agreement shall automatically expire at the end of the agreed period. [Sec. 58] Page 180 of 450 U.P. LAW BOC Right to Inspect The voting trust agreement filed with the corporation shall be subject to examination by any stockholder in the same manner as any other corporate record. [Sec. 58] Both the trustor and trustee may exercise the right of inspection of all corporate books and records in accordance with the provisions of the RCC. [Sec. 58] Limitation of a Voting Trust Agreement No voting trust agreement shall be entered into for the purposes of circumventing the laws against: Anti-competitive agreements; Abuse of dominant position; Anti-competitive mergers and acquisitions; Violations of nationality and capital requirements; or Fraud. [Sec. 58] Proxy vs. Trustee Proxy Principal-agent COMMERCIAL LAW BUSINESS ORGANIZATIONS Trustee Trustee-beneficiary Proxy cannot exceed The only limit to authority is that the delegated authority act must be for the benefit of the trustor (fiduciary obligation) Must be in writing Must be in writing and notarized Copy must be filed with the corporation Copy must be filed with SEC and the corporation No transfer Transfer of legal title to trustee Proxy exercises voting rights only for a specific meeting (unless otherwise provided) Trustee exercises absolute voting rights continuously, subject only to fiduciary duty Proxy cannot be director Trustee can be director because he holds legal title over the shares Revocable at will in any manner, EXCEPT if coupled with an interest Irrevocable, as long as no misconduct or fraud Max of 5 years at a time Max of 5 years at a time (unless the voting trust is specifically required as a condition in a loan agreement) SEC can pass on validity Cases When Stockholders’ Action is Required Right to Vote in Stock Corporations General Rule: Each share of stock is entitled to vote. [Sec. 6] 1. The stockholder of record has the right to participate and to vote [Villanueva] 2. Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend or vote in behalf of stockholders without need of any written proxy. [Sec. 54] Exception: Unless otherwise provided in the articles of incorporation or declared delinquent under Sec. 66. [Sec. 6] Note: “Outstanding capital stock” means stocks entitled to VOTE. Nevertheless, ALL stockholders, regardless of classification as voting or non-voting, are entitled to vote in the following matters: a. Amendment of the articles of incorporation; b. Adoption and amendment of by-laws; c. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property; d. Incurring, creating, or increasing bonded indebtedness; Page 181 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS e. Increase or decrease of capital stock; f. Merger or consolidation; g. Investment of corporate funds in another corporation or business; and h. Dissolution of the corporation. [Sec. 6] Right to Vote in Non-Stock Corporations In non-stock corporations, the voting rights attach to membership. Members vote as persons, in accordance with the law and the bylaws of the corporation. Pledged or Pledgor or mortgagor mortgaged shares shall have the right to attend and vote, unless the pledgee or mortgagee is expressly given such right in writing which is recorded on the appropriate corporate books. [Sec. 54] Treasury shares General Rule: Each member shall be entitled to one vote. [Sec. 88] Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend or vote in behalf of stockholders without need of any written proxy. [Sec. 54] Exception: Unless the right to vote is limited, broadened, or denied in the articles of incorporation or by-laws. When the principle for determining the quorum for stock corporations is applied by analogy to non-stock corporations, only those who are actual members with voting rights should be counted. [Sec. 88] Limitations on the Right to Vote Type of Shares Shares of stock owned jointly by two (2) or more persons Shares owned in an and/or capacity Manner of Voting The consent of all the co-owners shall be necessary, unless there is a written proxy signed by all the co-owners authorizing the person to vote such share or shares. [Sec. 55] Any of the joint owners can vote said shares or appoint a proxy therefor. [Sec. 55] COMMERCIAL LAW No voting rights as long as such stock remains in the treasury. (a) By a majority vote (1) Power to enter into management contracts [Sec. 43] General Rule: Requires approval by — a. Majority of the BOD/BOT; and b. Stockholders owning at least the majority of the outstanding capital stock/majority of members of both the managing and the managed corporation. Exceptions: In the ff. cases, at least 2/3 votes of the outstanding capital stock/membership of the managed corporation is required. BUT only majority vote is required for the managing corporation: a. Where a stockholder/s representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or b. Where a majority of the members of the managing corporation’s BOD also constitute a majority of the managed corporation’s BOD. (2) Amendments to by-laws [Sec. 47] Requires approval by: a. Majority of the BOD/BOT; and Page 182 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW b. Stockholders owning at least the majority of the outstanding capital stock/majority of members. Includes all stockholders with or without voting rights. to adopt new by-laws shall be considered revoked when stockholders representing a majority of the outstanding capital stock or a majority of the members shall so vote at a regular or special meeting. (3) Revocation of delegation to the BOD of the power to amend or repeal or adopt by-laws [Sec. 47] (8) Requires approval by stockholders owning at least the majority of the outstanding capital stock/majority of members. (4) Granting compensation other than per diems to directors [Sec. 29] Compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock. (5) Fixing the consideration for no-par shares [Sec. 61] When the Articles of Incorporation or the BOD does not provide for the value of no-par shares, the value of such shares shall be determined by the stockholders representing at least majority of the outstanding capital stock. (6) Voluntary dissolution of a corporation where no creditors are affected [Sec. 134] If dissolution of a corporation DOES NOT prejudice the rights of any creditor having a claim against it, the dissolution may be effected by: a. Majority vote of the BOD/BOT; and b. A resolution adopted by the affirmative vote of the stockholders owning at least majority of the outstanding capital stock/membership. (7) Revocation of Delegation to the Board of the Power to Amend/Repeal/Adopt By-laws [Sec. 47] Calling a Meeting to Remove Directors or Trustees [Sec. 27] A special meeting for the purpose of removing any director or trustee must be called: 1. By the secretary on order of the president; or 2. Upon written demand of stockholders representing or holding at least a majority of the outstanding capital stock, or a majority of the members entitled to vote. [Sec. 27] (b) By a two-thirds vote (1) Removal of directors or trustees [Sec. 27] Any director or trustee of a corporation may be removed from office by a vote of — • The stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock; or • At least two-thirds (2/3) of the members entitled to vote in a non-stock corporation. Note: Such removal shall take place — a. Either at a regular meeting of the corporation or at a special meeting called for the purpose; and b. In either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. (2) Amendment of AOI [Sec. 15] Amendment of the AOI may be made by: a. A majority vote of the BOD/BOT; and b. The vote or written assent of the stockholders representing at least twothirds (2/3) of the outstanding capital stock, or by the vote or written assent of at least two-thirds (2/3) of the members. Any power delegated to the board of directors or trustees to amend or repeal the by-laws or Page 183 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Note: Includes all stockholders with or without voting rights. Amendment of Articles of Incorporation of close corporations [Sec. 102] An affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, at a meeting duly called for the purpose is required to make any amendment to the AOI which seeks to: a. Delete or remove any provision; or b. Reduce a quorum of the voting requirement stated in the articles shall require. (3) Delegating the power to amend or repeal by-laws or adopt new by-laws [Sec. 47] Delegation to the BOD/BOT of the power to amend or repeal by-laws or adopt new by-laws requires approval by at least 2/3 of the outstanding capital stock/membership. Note: Revocation of the delegation requires only majority vote of the outstanding capital stock/membership. (4) Extending/shortening corporate term [Sec. 36] Requires approval by a majority vote of the BOD/BOT and approval by at least 2/3 of the outstanding capital stock/membership. Includes all stockholders with or without voting rights. (5) Increasing/decreasing capital stock [Sec. 37] Requires approval by: a. A majority vote of the BOD; and b. At least 2/3 of the outstanding capital stock. Includes all stockholders with or without voting rights. COMMERCIAL LAW Incurring, creating, increasing bonded indebtedness [Sec. 37] Requires approval by a majority vote of the BOD and approval by at least 2/3 of the outstanding capital stock. Includes all stockholders with or without voting rights. (6) Issuance of shares not subject to preemptive right [Sec. 38] Shares in good faith in exchange for property or previously incurred indebtedness with the approval of the stockholders representing 2/3 of the outstanding capital stock are not subject to pre-emptive rights. (7) Sale/disposition of all or substantially all of corporate assets [Sec. 39] A sale of all or substantially all of the corporation’s properties and assets, including its goodwill must be authorized by the vote of: • The stockholders representing at least 2/3 of the outstanding capital stock; or • At least 2/3 of the members, in a stockholders’ or members’ meeting duly called for the purpose. - Note: In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization. (8) Investment of funds in another business [Sec. 41] Requires approval by: a. A majority vote of the BOD/BOT; and b. At least 2/3 of the outstanding capital stock/membership. Includes all stockholders with or without voting rights. • However, where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of Page 184 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS the stockholders or members shall not be necessary. (10) Stock Dividend declaration [Sec. 42] b. The vote of such director or trustee was not necessary for the approval of the contract; c. The contract is fair and reasonable under the circumstances; Requires approval by: a. A majority vote of the BOD; and b. At least 2/3 of the outstanding capital stock. Note: Declaration of cash and property dividends only requires BOD/BOT approval. (11) Power to enter into management contracts [Sec. 43] General Rule: Requires approval by — a. Majority of the BOD/BOT; and b. Stockholders owning at least the majority of the outstanding capital stock/majority of members of both the managing and the managed corporation. Exceptions: In the ff. cases, at least 2/3 votes of the outstanding capital stock/membership of the managed corporation is required. BUT only majority vote is required for the managing corporation: a. Where a stockholder/s representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or b. Where a majority of the members of the managing corporation’s BOD also constitute a majority of the managed corporation’s BOD. (12) Ratifying contracts with respect to dealings with directors/trustees [Sec. 31] A contract of the corporation with one or more of its directors is voidable, at the option of such corporation, unless ALL of the following conditions are present: a. The presence of such director/trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; COMMERCIAL LAW In case of corporations vested with public interest, material contracts are approved by at least two-thirds (2/3) of the entire membership of the board, with at least majority of the independent directors voting to approve the material contract; and In case of an officer, the contract has been previously authorized by the BOD. Note: Where any of the first 3 conditions in the preceding paragraph is absent, in the case of a contract with a director/trustee, the contract may be ratified by the vote of the stockholders representing 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for that purpose. Full disclosure of the adverse interest of the directors/trustees involved is made at such meeting and the contract is fair and reasonable under the circumstances. [Sec 31] (13) Ratifying acts of disloyalty of a director [Sec. 33] General Rule: Where a director, by virtue of such office, acquires a business opportunity, which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, the director must account for and refund to the latter all such profits. Exception: His act may be ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. (14) Plan of merger or consolidation [Sec. 76] Requires approval by: a. Majority of each of the BOD/BOT of the constituent corporations of the plan of merger or consolidation; and Page 185 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW b. At least 2/3 of the outstanding capital stock/membership of each corporation at separate corporate meetings duly called. (17) Voluntary dissolution of a corporation where creditors are affected [Sec. 135] Amendments to the plan of the merger or consolidation also requires approval by majority vote of each of the BOD and 2/3 vote of the outstanding capital stock/membership of each corporation voting separately. If dissolution of a corporation may prejudice the rights of any creditor having a claim against it, the dissolution may be effected by: Includes all stockholders with or without voting rights. a. Majority vote of the BOD/BOT; and b. A resolution adopted by the affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock/membership. (c) By cumulative voting (15) Plan of distribution of assets in non-stock corporations [Sec. 94] Election of Directors or Trustees [Sec. 23] The BOT shall, by majority vote, adopt a resolution recommending a plan of distribution which shall be approved by at least 2/3 of the members with voting rights. (16) Incorporation of a religious society [Sec. 114] General Rule: Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, may incorporate — a. Upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least 2/3 of its membership; b. For the administration of its temporalities or for the management of its affairs, properties and estate Exception: Unless forbidden by the Constitution, rules, regulations or discipline of the religious denomination, sect or church of which it is a part, or by competent authority. Stockholders entitled to vote may: a. Vote such number of shares for as many persons as there are directors to be elected [Straight Voting]; b. Cumulate said shares and give 1 candidate as many votes as the number of directors to be elected multiplied by the number of the shares owned [Cumulative Voting for 1 Candidate]; or c. Distribute them on the same principle among as many candidates as may be seen fit [Cumulative Voting by Distribution]. Note: No delinquent stock shall be voted [Sec. 23]. Members of a non-stock corporation may cast as many votes as there are trustees to be elected, but may not cast more than 1 vote for 1 candidate. Nominees for directors or trustees receiving the highest number of votes shall be declared elected. Page 186 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW VOTE REQUIREMENTS FOR ACTS REQUIRING APPROVAL OF STOCKHOLDER/MEMBERS Corporate Act Amendment of AOI [Sec. 15] Election of directors [Sec. 23] Removal of director/trustee [Sec. 27] Filling of vacancy other than removal by stockholders, expiration of term and increase of seats [Sec. 28] Board of Directors/Trustees Stockholders/Members Majority vote of the BOD/BOT 2/3 outstanding capital stock/members - Plurality vote of the outstanding capital stock/members - 2/3 outstanding capital stock Majority of the remaining BOD/BOT, if there is still quorum. If vacancy prevents the quorum and emergency action is required, may be filled by unanimous vote of the remaining BOD/BOT. Granting of compensation to directors other than reasonable per diems [Sec. 29] - Majority vote of outstanding capital stock Ratification of contract with director [Sec. 31] - 2/3 outstanding capital stock Ratification of contracts between interlocking directors [Sec. 32] - 2/3 outstanding capital stock Ratification of act of director acquiring interest [Sec. 33] - 2/3 outstanding capital stock Extend or shorten corporate term [Sec. 36] Majority vote of the BOD/BOT 2/3 outstanding capital stock/members Majority vote of the BOD 2/3 outstanding capital stock Sale or disposition of other asserts [Sec. 39] Majority vote of BOD/BOT 2/3 outstanding capital stock/members Invest coroporate funds in another corporation or business not in line with primary purpose [Sec. 41] Majority vote of BOD/BOT 2/3 outstanding capital stock/members Increase or decrease capital stock, create or increase bonded indebtedness [Sec. 37] Page 187 of 450 U.P. LAW BOC Declaration of dividends [Sec. 42] BUSINESS ORGANIZATIONS Majority vote of BOD Enter into a management contract [Sec. 43] COMMERCIAL LAW 2/3 outstanding capital stock (required only in the case of issuance of stock dividend) General Rule: Majority of the outstanding capital stock/members of both managing and maanged corporation Majority of the quorum of the BOD/BOT Exception: 2/3 of outstanding capital stock/members required for the managed corporation: a. Where a stockholder representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation; or b. Where a majority of the members of the BOD of the maging corporation also constitute a majority of the members of the BOD of the managed corporation - Majority of the outstanding capital stock/members Majority vote of BOD/BOT Majority of the oustanding capital stock/members Delegation to the BOD the power to amend, repeal or adopt by-laws [Sec. 47] - 2/3 of the oustanding capital stock/members Revocation of the power delegated to the BOD to amend, repeal or adopt bylaws [Sec. 47] - Majority of the oustanding capital stock/members General Rule: Fixed in the AOI or by majority of the quroum of the BOD pursuant to authority under the AOI Exception: Majority of the outstanding capital stock in the absence of provisions in the AOI Approval of by-laws [Sec. 45] Amendment or repeal of bylaws [Sec. 47] Fix the issued price of no-par value shares [Sec. 62] Page 188 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW Merger or consolidation [Sec. 77] Majority of each BOD/BOT 2/3 outstanding capital stock of each corporation Amendment to the plan of merger or consolidation [Sec. 77] Majority of each BOD/BOT 2/3 outstanding capital of each corporation Plan of distibution of assets of non-stock corporations [Sec. 95] Majority vote of BOT 2/3 of the membership Amendment of AOI of close corporations to delete any required provision or to reduce a quoru or voting requirement as stated in the AOI [Sec. 103] - 2/3 outstanding capital stock, with or without voting rights, or greater if provided by the AOI Voluntary dissolution where creditors are affected [Sec. 134] Majority vote of the BOD/BOT 2/3 outstanding capital stock or members Voluntary dissolution where no creditors are affected [Sec. 135] Majority of the BOD/BOT Majority of the outstanding capital stock./members Manner of Voting A stockholder may vote either: 1. Directly (in person); or 2. Indirectly, through a representative, in any of the following manner: a. By means of a proxy b. By a trustee under a voting trust agreement; or c. By executors, administrators, receivers, or other legal representatives duly appointed by the court 3. Remote communication 4. In absentia [Sec. 57] Remote communication or in absentia The Revised Corporation Code introduced voting through remote communication or in absentia for stockholders [Sec. 57] and members. [Sec. 88] Procedural Matters Relating to Voting Via Remote Communication or In Absentia: [Sec. 57] Must be authorized in the by-laws or by a majority of the board of directors; o EXCEPT: The right to vote through these modes may be exercised in corporations vested with public interest, notwithstanding absence of provision in the by-laws of such corporations [Sec 23]. Votes must be received before the corporation finishes the tally of votes; If a stockholder or member intends to participate in a meeting through remote communication, he/she shall notify in advance the Presiding Oicer and the Corporate Secretary of his/her intention. The Corporate Secretary shall note such fact in the Minutes of the meeting. [SEC MC 6 s. 2020, Sec. 10] A stockholder or member who participates through remote communication or in absentia, shall be deemed present for purposes of quorum; Page 189 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS The corporation shall establish the appropriate requirements and procedures for voting, taking into account: o The company’s scale; o Number of shareholders or members; o Structure; o Other factors consistent with the basic right of corporate suffrage. [Sec. 57] For the convenience of their stockholders and members, corporations shall issue their own internal procedures embodying the mechanisms for participation in meetings and voting through remote communication or in absentia. [SEC MC 6 s. 2020, Sec. 13] If no election is held, or the owners of majority of the outstanding capital stock or majority of the members entitled to vote are not present even through these modes, the meeting may be adjourned and the corporation shall proceed. [Sec. 23] When attendance, participation and voting are allowed by these modes, each notice of meeting shall be accompanied by the requirements and procedures to be followed when a stockholder or member elects either option. [Sec. 50] Proprietary Rights Right to Dividends Concept of Dividends A dividend is — That portion of the profits of the corporation set aside, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time. Payment to the stockholders as a return upon their investment. [Villanueva] Discretion of Board to Declare Dividends General Rule: The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings to all stockholders on the basis of outstanding stock held by them. [Sec. 42] Upon lawful declaration of dividends by the BOD, dividends become a debt owing to COMMERCIAL LAW the shareholders. No revocation can be made. Exceptions: - Dividends are revocable if NOT yet announced or communicated to the stockholders. - Stock dividends, even if already declared, may be revoked prior to actual issuance since these are not distributions but merely representations of changes in the capital structure. Such declaration is essentially within the business judgment of the board of directors. • The fact that profits have accrued in the prosecution of the corporate business does not necessarily impose upon the directors the duty to declare them as dividends. [Villanueva] Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock. Exception to the exception: Stock corporations may retain surplus profits in excess of 100% of their paid-in capital stock: 1. When justified by definite corporate expansion projects or programs approved by the board of directors; or 2. When the corporation is prohibited under any loan agreement with financial institutions or creditors, whether local or foreign, from declaring dividends without their consent, and such consent has not yet been secured; or 3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. [Sec. 42] Note: Right to dividends vests upon declaration so whoever owns the stock at such time also owns the dividends. Subsequent transfer of stock would not carry with it right to dividends UNLESS agreed upon by the parties. Page 190 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Unrestricted Retained Earnings The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings. [Sec. 42] Retained Earnings Represents the accumulation of net profits of the corporation over the years and likewise losses sustained, as well as deductions made upon previous dividends declared. Restricted Unrestricted Retained Earnings Retained Earnings That portion of the That portion which is retained earnings free and can be specifically declared as earmarked or setdividends to aside for specific stockholders. purposes. [Villanueva] In case of no-par value shares, the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. [Sec. 6] Appraisal Right Appraisal Right — The right to withdraw from the corporation and demand payment of the fair value of the shares after dissenting from certain corporate acts involving fundamental changes in corporate structure. [Sec. 80] Who is Entitled to Exercise A prejudiced stockholder who dissented in the meeting where the proposal was approved. Mere silence or abstention does not suffice. The stockholder must have voted against the corporate action. [Villanueva] COMMERCIAL LAW (a) When Available [Sec. 80] a. If amendment of AOI results in: a. Changing or restricting the rights of any stockholder or class of shares; or b. Authorizing preferences in any respect superior to those of outstanding share of any class; [Sec. 80] b. Extension of the term of corporate existence [Sec. 80], including Voluntary Dissolution (by Petition or by shortening corporate term); [Secs. 134-136] c. Note: Section 80(a) however provides that appraisal right may be exercised in both extension and shortening of corporate term, which is an error carried over from the old Corporation Code. d. Sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets; [Sec. 80] e. Merger or consolidation; [Sec. 80] f. Investment of corporate funds for any purpose other than the primary purpose of the corporation; [Sec. 80] g. Increasing or decreasing capital stock, or incurrring, creating, increasing bonded indebtedness; [Sec. 37] h. Note: Can be exercised only if the increase of capital stock results in or has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class. [Sec. 80(a)] i. Denial of pre-emptive rights through an amendment of AOI; [Sec. 80(a)] See “SUMMARY OF SPECIFIC POWERS“ table under “7. Corporate Powers“. (b) Manner of Exercise of Right Amount Paid to Dissenting Stockholder The amount paid to the stockholder is the fair value of his shares as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of the corporate action. [Sec. 81] Requirements for Exercise of Appraisal Right [Sec. 81 & 85] a. Stockholder must have voted against the corporate act. b. Stockholder must make a written demand on the corporation within 30 Page 191 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS days after the vote was taken for payment of the fair value of his shares. o Failure to make demand within such period shall be deemed waiver of the appraisal right. c. Stockholder must submit his certificate of stock to the corporation for notation within 10 days after demand for payment. o Otherwise, right to appraisal may be terminated at the option of corporation. Effect of Demand for Payment [Sec. 82] a. ALL rights accruing to such shares, including voting and dividend rights, shall be suspended, EXCEPT the right of such stockholder to receive payment of the fair value thereof. b. There is RESTORATION of voting and dividend rights if the dissenting stockholder is not paid the value of his shares within 30 days after the award. Note: The award shall be — (a) Agreed upon by the dissenting stockholder and corporation; or (b) Determined and appraised by 3 disinterested persons, if they fail to agree within 60 days from the date when the corporate action was approved, these 3 persons shall be — 1. One named by the shareholder; 2. One named by the corporation; 3. One chosen by 1 & 2. The findings of the majority of the appraisers shall be final. [Sec. 81] c. If shares represented by the certificates bearing a notation that such shares are dissenting shares are transferred, and the certificates consequently cancelled: (1) The rights of the transferor as a dissenting stockholder under this Title [Appraisal Right] shall cease; and (2) The transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. [Sec. 85] COMMERCIAL LAW When Right to Payment Ceases [Sec. 83, generally] General Rule: No demand for payment may be withdrawn. Exceptions: The right may be extinguished in the following instances — 1. Withdrawal of demand by the stockholders WITH CONSENT of the corporation 2. Abandonment of the proposed corporate action 3. Disapproval by SEC of the proposed corporate action where such approval is necessary 4. Where SEC determines that such stockholder is not entitled to appraisal right 5. Failure to submit the certificates of stock representing his shares to the corporation for notation as dissenting shares within 10 days after demand for payment, at the option of the corporation. [Sec. 85] Effect of Extinguishment of Right a. Right of dissenting stockholder to be paid for the fair value of his shares shall cease; b. His status as a stockholder shall thereupon by restores; and c. All dividend distributions which would have accrued on his shares shall be paid to him. [Sec. 83] Right to Inspect Basis of Right As the beneficial owners of the business, the stockholders have the right to know the financial condition and management of corporate affairs. A stockholder’s right of inspection is based on his ownership of the assets and property of the corporation. Therefore, it is an incident of ownership of the corporate property, whether this ownership or interest is termed an equitable ownership, a beneficial ownership, or quasi-ownership. Such right is predicated upon the necessity of self-protection. [Gokongwei Jr. v. SEC, G.R. No. L-45911 (1979)] Page 192 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Records Subject to Inspection [Sec. 73] Every corporation shall keep and carefully preserve at its principal office all information relating to the corporation including, but not limited to: a. The AOI and by-laws of the corporation and all their amendments; b. The current ownership structure and voting rights of the corporation, including lists of stockholders or members, group structures, intra-group relations, ownership data, and beneficial ownership; c. The names and addresses of all the members of the BOD or BOT and the executive officers; d. A record of all business transactions; e. A record of the resolutions of the BOD or BOT and of the stockholders or members; f. Copies of the latest repertorial requirements submitted to the Commission; and g. The minutes of all meetings of stockholders or members, or of the BOD/BOT, which shall set forth – i. Time and place of the meeting held; ii. How meeting was authorized; iii. Notice given; iv. Agenda; v. Whether meeting was regular or special (its object, if special) vi. Those present and absent vii. Every act done or ordered done at the meeting h. Upon demand of the BOD/BOT/stockholder or member – i. Time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; ii. The yeas and nays must be taken on any motion or proposition, and a record thereof carefully made; iii. The protest of a director, trustee, stockholder or member on any action or proposed action COMMERCIAL LAW Requirements for the exercise of the right of inspection [Sec. 73] a. The records are open to inspection only by any director, trustee, stockholder or member of the corporation in person or by a representative. b. Must be done at reasonable hours on business days. c. A demand in writing may be made by the director, trustee or stockholder at their expense, for such records or excerpts from the records. d. The inspecting or reproducing party shall remain bound by confidentiality rules under prevailing laws such as: a. Intellectual Property Code b. Data Privacy Act c. Securities Regulation Code d. Rules of Court Test to Determine Whether the Purpose of Inspection is Legitimate A legitimate purpose is one which is genuine to the interests of the stockholders as such and not contrary to the interests of the corporation [Gokongwei Jr. v. SEC, G.R. No. L-45911 (1979)]. Valid defenses of the officer or agent of the corporation who refuses to allow inspection and/or reproduction of records: a. The person demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation; b. The person was not acting in good faith; c. The person was not acting for a legitimate purpose in making the demand to examine or reproduce corporate records; d. The person is a competitor, director, officer, controlling stockholder or otherwise represents the interests of a competitor. [Sec. 73] Remedies when inspection is refused a. Mandamus Under the Rules of Court, the writ of mandamus should be granted only if the Page 193 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS court is satisfied that justice so requires. [Sec. 8, Rule 65] Injunction Action for damages [Sec. 73] File an action under Sec. 161 to impose a penal offense by fine The unjustified failure or refusal by the corporation, or by those responsible for keeping and maintaining corporate records, to comply with the pertinent rules and provisions of the RCC on inspection and reproduction of records shall be punished with a fine ranging from P10,000.00 to P200,000.00, at the discretion of the Court When the violation of this provision is injurious or detrimental to the public, the penalty is a fine ranging from P20,000.00 to P400,000.00 [Sec. 161] Summary investigation by SEC [Sec. 73] b. c. d. e. Preemptive Right Definition Pre-emptive right — An option or privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation before the same can be disposed of in favor of others. • • This right includes all issues and disposition of such shares any class. It is a common law right and may be exercised by stockholders even without legal provision. Basis of Preemptive Right: Preservation of the existing proportional rights of the stockholders. [Campos] COMMERCIAL LAW Distinguished from Right of First Refusal Right of First Pre-emptive Right Refusal Grants stockholders the option to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. [Sec. 38] All stockholders of a stock corporation shall enjoy the preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. [Sec. 38] A right claimed against the corporation on unissued shares of its capital stock, and likewise on treasury shares held by the corporation. [Villanueva] Grants the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder. [Sec. 97] Arises only by virtue of contract stipulations, by which the right is strictly construed against the right of person to dispose or deal with their property. A right exercisable against another stockholder on his shares of stock. [Villanueva] Purpose of Pre-emptive Right The purpose is to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus. Scope of Pre-emptive Right The broad phrase “all issues or disposition of shares of any class” is construed to include: a. New shares issued in pursuance of increase in capital stock or from the unissued shares which form part of the ACS; and also b. Treasury shares • Treasury shares would come under the term “disposition”. • Likewise considering that it is not included among the exceptions enumerated therein, where pre-emptive right shall not extend, the intention is to Page 194 of 450 U.P. LAW BOC COMMERCIAL LAW BUSINESS ORGANIZATIONS include it in its application. [SEC Opinion, 14 January 1993] iv. Limitations to Exercise of Pre-emptive right [Sec. 38] a. Such pre-emptive right shall NOT extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; b. It shall also NOT extend to shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt; c. It shall not take effect if denied in the AOI or an amendment thereto; d. If one shareholder does not want to exercise his pre-emptive right, the other shareholders are not entitled to purchase the corresponding shares of the shareholder who declined. But if nobody purchased the same and later on the board re-issued the shares, the pre-emptive right applies. [Sundiang and Aquino] Exceptions to the Pre-emptive Right 1. When such right is denied by the articles of incorporation or an amendment thereto; and 2. Shares to be issued: a. In compliance with laws requiring stock offerings or minimum stock ownership by the public; or b. To shares to be issued in good faith with the approval of the stockholders representing ⅔ of the outstanding capital stock in exchange for: i. Property needed for corporate purposes; or ii. In payment of a previously contracted debt. [Sec. 38] Remedies in case of unwarranted denial i. Injunction ii. Mandamus iii. The suit should be individual and not derivative because the wrong done is to the stockholders individually SEC can cancel shares if the 3rd party is not innocent Waiver/Denial of Preemptive Right Allowed by the Code provided that it is made in the AOI a. Waiver made through AOI would bind present and subsequent shareholders; b. 2/3 vote of the outstanding capital stock is necessary before waiver is binding; c. Result of non-placement of waiver clause in AOI: Waiver shall not bind future stockholders but only those who agreed to it. The shareholders must be given reasonable time within which to exercise their preemptive rights. • • Upon expiration of such period, any shareholders who did not exercise such will be deemed to have waived it. This is necessary so as to not hinder future financing plans of the corporation. Some new investors may be willing to invest only if all the new shares will be issued to them. [Campos] Right to Vote Nature of the Right to Vote The right to vote is inherent and incidental to the ownership of corporate stocks. [Tan v. Sycip, 499 SCRA 216 (2016)] It represents the right of a stockholder to participate in the control and management of the corporation. However, it is subject to the rule of the majority. [Villanueva] General Rule: No share may be deprived of voting rights. Exception: Shares classified and issued as “preferred” or “redeemable” may be deprived of voting rights: Provided, that there shall always be a class or series of shares with complete voting rights. [Sec. 6] Page 195 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Non-Voting Shares Non-voting shares are not entitled to vote, except as provided for in par. 3 of Sec. 6. Holders of nonvoting shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of bylaws; 3. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property; 4. Incurring, creating, or increasing bonded indebtedness; 5. Increase or decrease of authorized capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except in the above cases, the vote necessary to approve a particular corporate act shall be deemed to refer only to stocks with right to vote. [Sec. 6] Rules Applicable to Certain Kinds of Shares i. Preferred or redeemable shares may be deprived of the right to vote. [Sec. 6] ii. Fractional shares of stock cannot be voted. iii. Treasury shares have no voting rights as long as they remain in the treasury. iv. No delinquent stock shall be voted. [Sec. 70] v. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation. vi. In case a stockholder grants security interest in his or her shares in stock corporations, the stockholder-grantor shall have the right to attend and vote at meetings of stockholders. • Exception: The secured creditor is expressly given by the stockholdergrantor such right in writing which is recorded in the appropriate corporate books. [Sec. 54] vii. The sequestration of shares does not entitle the government to exercise acts of COMMERCIAL LAW ownership over the shares. Even sequestered shares may be voted upon by the registered stockholder of record. [Cojuangco, Jr. v. Roxas, 195 SCRA 797 (1991)] Exception: The PCGG may exercise the voting right on sequestered shares whenever it is able to comply with the “twotiered” or “public character” tests: a. The two-tiered test is satisfied when: a. Prima facie evidence show that the wealth and/or the shares are indeed ill-gotten; and b. There is demonstrated imminent danger of dissipation of the assets. b. The two-tiered test does not apply when the funds are prima facie public in character or, at least, affected with public interest. [Republic v. COCOFED, 372 SCRA 462 (2001)] viii. When shares are jointly owned by two or more persons, the consent of all the coowners shall be necessary. • Exception: There is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an “and/or” capacity, any one of the joint owners can vote said shares or appoint a proxy therefor. [Sec. 55] Right of First Refusal Right of First Refusal — Obligates a stockholder who may wish to sell or assign his shares to first offer the shares to the corporation or to the other existing stockholders under terms and conditions which are reasonable. • Grants the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder. [Sec. 97] • Only when the corporation or the other stockholders do not or fail to exercise their option, is the offering stockholder Page 196 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS at liberty to dispose of his shares to third parties. An agreement entered into between the two majority stockholders of a corporation, whereby they mutually agreed not to sell, transfer, or otherwise dispose of any part of their shareholdings till after one year from the date of the agreement is valid. [Lambert v. Fox G.R. No. L-7991 (1914)] Nature of the Right of First Refusal The right of first refusal is primarily an attribute of ownership, and consequently can be effected only through a contractual commitment by the owner of the shares. Consequently, the waiver of a right of first refusal when duly constituted can be effected only by the registered owner. [PCGG v. SEC, G.R. No. 82188 (1988)] Remedial Rights Individual Suit A suit brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him. Representative Suit A suit brought by the stockholder in behalf of himself and all other stockholders similarly situated when a suit brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him or a wrong is committed against a group of stockholders. Derivative Suit • It is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue. • It is a remedy designed by equity and has been the defense of minority shareholders against abuses by the majority. [Villanueva] Derivative Suit as Defined in Jurisprudence It is a suit by a shareholder to enforce a corporate cause of action. • It is a condition sine qua non that the corporation be impleaded as a party because not only is the corporation an indispensable party, but it is also the present rule that it must be served with process. • The judgment must be made binding upon the corporation in order that the corporation may get the benefit of the suit and may not bring subsequent suit against the same defendants for the same cause of action. [Chua v. C.A., G.R. No. 150793 (2004)] It is a suit brought by one or more stockholders/members in the name and on behalf of the corporation to redress wrongs committed against it, or protect/vindicate corporate rights whenever the officials of the corporation refuse to sue, or the ones to be sued, or has control of the corporation. [Sundiang and Aquino] Business Judgment Rule As a general rule, when a wrong is committed against a corporation, whether to bring the suit or not primarily lies within the discretion and exercise of business judgment of the BOD. • Definition A suit brought by a stockholder for and on behalf of the corporation for its protection from the wrongful acts committed by the directors/trustees of the corporation, when the stockholder finds that he has no redress because the directors/trustees, are the ones vested by law to decide whether or not to sue. COMMERCIAL LAW • But where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intacorporate remedy is futile or useless, a shareholder may institute a derivative suit in behalf of himself and other stockholders and for the benefit of the corporation, The purpose of the suit is to bring about a redress of the wrong inflicted directly upon Page 197 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS the corporation and indirectly upon the stockholders. [Bitong v. C.A., G.R. No. 123553 (1998)] Parties to a Derivative Suit In a derivative suit, the suing stockholder is merely a nominal party, while the corporation is the real party in interest. Thus, the action must be brought for the benefit and in the name of the corporation. [Villanueva] The corporation is an unwilling co-plaintiff. [Rule 3 Section 10, Rules of Court] • The corporation should be made a party to the suit, either as plaintiff or defendant, for res judicata to apply. • BUT the personal injury suffered by the stockholder cannot disqualify him from filing a derivative suit in behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring corporate officers. [Gochan v. Young, G.R. No. 131889 (2001)]. Proper Forum for Derivative Suits The Regional Trial Courts exercise jurisdiction over derivative suits. [Sec. 5.2., Securities Regulation Code] Requisites of Derivative Actions a. That the person instituting the action be a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; b. That the stockholder or member exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the AOI, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; c. That there is no appraisal right available for the act(s) complained of; d. That the suit is not a nuisance or harassment suit; [Rule 8, Interim Rules of Procedure for Intra-Corporate Controversies] e. The action brought by the stockholder/member must be “in the name COMMERCIAL LAW of the corporation or association”. [implied from 1st par. of Rule 8, Sec. 1 of the Interim Rules; see also Florete v. Florete, G.R. No. 174909 (2016)] The action brought by the shareholder or member must be in the name of the corporation or association. [Villamor v. Umale, G.R. No. 172843 (2014)] Requisites of a Derivative Suit according to Jurisprudence [SMC v. Kahn, G.R. No. 85339 (1989)] 1. The party bringing the suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; 2. He has tried to exhaust intra-corporate remedies, i.e., has made a demand on the BOD for the appropriate relief but the latter has failed or refused to heed his plea; and 3. The cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. [Lisam Enterprises, Inc., represented by Lolita A. Soriano and Lolita A. Soriano v. Banco de Oro Unibank, Inc. et al., G.R. No. 143264 (2012)]. Note: The “wrong” contemplated in a derivative suit is one in which the injury alleged be indirect as far as the stockholders are concerned and direct only insofar as the corporation is concerned. [de Leon] The reliefs sought pertain to the corporation. [Symaco Trading Corp. v Santos, G.R. No. 142474 (2005)] Stockholder may commence a derivative suit “for mismanagement, waste or dissipation of corporate asset because of a special injury to him for which he is otherwise without redress. [Yu v. Yukayguan, G.R. No. 177549 (2009)] Exhaustion of Administrative Remedies General Rule: A derivative suit can only be filed when there has been a showing of exhaustion of intra-corporate remedies. Page 198 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Exception: But where corporate directors are the ones guilty of a breach of trust, and intracorporate remedy is futile or useless, shareholders may institute a derivative suit for the benefit of the corporation without having to exhaust intra-corporate remedies in order to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. [Villanueva] Obligations of a Stockholder (1) Liability to the Corporation for Unpaid Subscription [Sec. 66] Payment of unpaid subscription or any percentage thereof, together with any interest accrued shall be made: On the date specified in the subscription contract; or On the date stated in the call made by the board. Failure to pay on such date shall: 1. Render the entire balance due and payable; and 2. Make the stockholder liable for interest at the legal rate on such balance, unless a different interest rate is provided in the subscription contract. A subscription contract is unconditional (i.e., obligation to pay is not subject to any contingency) and indivisible (as to the amount and transferability). [Fua Cun v. Summers (1923)] Hence, if the subscriber paid 20% of his subscription, he is not entitled to the issuance of certificates corresponding to 20% of the shares. Unpaid claim refers to any unpaid subscription, and not to any indebtedness which a subscriber may owe the corporation rising from any other transaction. [China Banking Corp. v. C.A., G.R. No. 117604 (1997)] (2) Liability to the Corporation for Interest on Unpaid Subscription if so Required by the By-Laws [Sec. 65] COMMERCIAL LAW General Rule: Subscribers for stock are NOT liable to pay interest on his unpaid subscription. Exception: If so required in the by-laws at the rate fixed in the by-laws. If no rate is fixed in the subscription contract, the prevailing legal rate shall apply. [Sec. 65] Notes: Transfer for consideration of treasury shares is a sale (or disposition) by the corporation (not subscription). A transfer of previously issued shares by a stockholder to a third person in a sale (or disposition). Transfer of unissued shares is subscription. Shareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application. Subscription contract is NOT required to be in writing. (3) Liability for Watered Stocks [Sec. 64] Definition Watered Stocks — Shares issued as fully paid when in truth no consideration is paid, or the consideration received is known to be less than the par value or issued value of the shares. [Sec. 64] See b. Watered stocks under 10. Capital Affairs Liability of directors or officers [Sec. 64] Any director or officer of a corporation who: 1. Consents to the issuance of stocks for a consideration less than its par or issued value; 2. Consents to the issuance of stocks for a consideration other than cash, valued in excess of its fair value; or 3. Having knowledge of the insufficient consideration, does not file a written objection with the corporate secretary. The director or officer shall be liable to the corporation or its creditors, SOLIDARILY with the stockholder concerned to the corporation Page 199 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS and its creditors for the difference in value. [Sec. 64] Value received at time issuance of the stock Par or issued value Liability for watered stock of Php XXX (XXX) Php XXX Personal liability of corporate directors, trustees or officers attaches when they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not file with the corporate secretary their written objection. [SPI Technologies Inc. V. Mapua, G.R. No. 191154 (2014)] COMMERCIAL LAW All persons who assume to act as a corporation, knowing it to be without authority to do so, shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof. When any such ostensible corporation is sued on any transaction entered or on any tort committed by it as a corporation, it shall not be allowed to use as a defense its lack of corporate personality. Anyone who assumes an obligation to an ostensible corporation cannot resist performance thereof on the ground that there was in fact no corporation. [Sec. 20] Meetings (4) Liability for Dividends Unlawfully Paid The director, trustee or officer shall be liable as a trustee for the corporation and must account for the profits, which would otherwise have accrued to the corporation when: • A director, trustee willfully attempts to acquire, or acquires any interest adverse to the corporation • In respect of any matter which has been reposed in them in confidence, and upon which, equity imposes a disability upon themselves to deal in their own behalf. [Sec. 30] The sanction can be found in Sec. 158 which can be: (a) A fine from P5,000 and not more than P1,000 for each day of continuing violation but in no case to exceed P2,000,000; (b) An issuance of a permanent cease-anddesist order, suspension or revocation of the certificate of incorporation, or dissolution and forfeiture of corporate assets. (5) Liability for Assuming to Act as a Corporation Knowing it to be Without Authority General Rule: Stockholders’ or members’ approval is expressed in a meeting duly called and held for the purpose. Exception: In case of amendment of AOI, approval may be expressed by referendum or written assent of the stockholders or members. [Sec. 15] Who May Attend and Vote a. Stockholders [Sec. 23] a. In person b. By proxy c. Via remote communication (only if allowed by by-laws or by majority of BOD/BOT, except if vested with public interest) d. In absentia (only if allowed by bylaws or by majority of BOD/BOT, except if vested with public interest) e. Note: The SEC shall issue the rules and regulations governing participation and voting through remote communication or in absentia. b. Stockholder-grantor [Sec. 54] c. Secured creditor, if expressly empowered by the stockholder-grantor [Sec. 54] d. Executors, administrators, receivers and other legal representatives duly appointed by the court, without need of any written proxy [Sec. 54] Page 200 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS e. ALL joint owners of stocks, or any of them with the consent of ALL the co-owners, unless there is a written proxy, signed by all the co-owners [Sec. 55] f. Any one of the joint owners of shares owned in an “and/or” capacity or a proxy thereof [Sec. 55] Who Calls the Meeting Any petitioning stockholder or member upon order of the SEC when there is no person authorized to call a meeting. The petitioning stockholder or member shall preside until at least a majority of the stockholders/members present have chosen from among themselves, a presiding officer. [Sec. 49] Who Presides at the Meeting General Rule: The chairman or, in his absence, the president shall preside at all meetings of the directors or201 trustees as well as of the stockholders or members. Exception: The bylaws provide otherwise. [Sec. 53] Page 201 of 450 COMMERCIAL LAW U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW Regular or Special Regular Annually on a date fixed by the by-laws. When Written notice Agenda If not fixed, on any date AFTER April 15 of every year as determined by the BOD/BOT [Sec. 49] General Rule : Sent at least 21 days prior to the meeting Special Any time deemed necessary or as provided in the by-laws [Sec. 49] General Rule : At least 1 Exception : A different period is required by the by- week written notice Exception : A different period laws, law or regulation. is provided in the by-laws, law or regulation [Sec. 49] Written notice may be sent to all stockholders or members of record through electronic mail or such other manner as the SEC shall allow [Sec. 49] Notice of meetings shall be sent through means of communication provided in the by-laws and must contain : 1. Time ; 2. Place ; 3. Purpose; 4. Agenda ; 5. Proxy form which shall be submitted to the corporate secretary within a reasonable time before the meeting ; 6. When attendance, participation and voting are allowed by remote communication or in absentia, the requirements and procedures to be followed when a stockholder/members elects either option ; 7. When the meeting is for election of directors/trustees, the requirements and procedure for nomination and election [Sec. 50] 1. Minutes of the most recent regular meeting which shall include : a) Description of the voting and vote tabulation procedures used in the previous meeting ; b) Description of opportunity given to stockholders/members to ask questions and a record of the questions asked and asnwers given ; A stockholder or c) Matters discussed and resolutions member may propose the reached ; items to be included in the d) Record of the voting results for each agenda [Sec. 49]. agenda item ; e) List of directors/trustees, officers and stockholders/members who attended the meeting ; f) Other items that the SEC may require in the interest of good corporate governance and protection of minority stockholders Page 202 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Regular 2. Members’ list for non-stock corporations. For stock corporations, material information on the current stokcholders, and their voting rights ; 3. Detailed, descriptive, balanced and comprehensible assessment of the corporation’s performance, which shall include information on any material change in the corporation’s business, strategy and other affairs ; 4. Financial report for the preceding year, which shall include financial statements duly signed and certified, a statement on the adequacy of the corporation’s internal controls or risk management systems, and a statement of all external audit and non-audit fees ; 5. Explanation of the dividend policy and the fact of payment of dividends or the reasons for nonpayment ; 6. Director/trustee profiles which shall include their qualifications and relevant experience, length of service in the corporation, trainings and continuing education attended, and their board representations in other corporations 7. Director/trustee attendance report, indicating the attendance of each director or trustee at each of the meetings of the board and its committees and in regular or special meetings ; 8. Appraisals and performance reports for the board and the criteria and procedure for assessment ; 9. Director/trustee compensation report 10. Director disclosures on self-dealings and related party transactions ; and/or Postponemen t 11. The profiles of directors nominated or seeking election/re-election [Sec. 49] Written notice and reason therefor shall be sent to all stockholders/members at least 2 weeks before the meeting, unless a different period is required under the bylaws, law or regulation [Sec. 49] Page 203 of 450 COMMERCIAL LAW Special U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW Regular Special Stock Corporations General Rule : Principal office of the corporation as set forth in the AOI Exception : If not practicable, in the city or municipality where the principal office of the corporation is located. Where Quorum Note : Any city or municipality in Metro Manila, Metro Cebu, Metro Davao and other Metropolitan areas shall be considered a city or municipality [Sec. 50]. Non-stock Corporations Any place even outside the place where the principal office of the corporation is located, as long as within Philippine territory and proper notice is sent to all members. [Sec. 92] General Rule: Stokcholders representing majority of the outstanding capital stock or majority of the members. Exception: The Code or the by-laws provide otherwise. [Sec. 51] Notice of Meetings Content of Notice Notice of meetings shall be sent through the means of communication provided in the bylaws, which notice shall state the time, place and purpose of the meetings. Each notice of meeting shall be accompanied by the following: 1. The agenda for the meeting; 2. A proxy form which shall be submitted to the corporate secretary within a reasonable time prior to the meeting; 3. When attendance, participation, and voting are allowed by remote communication or in absentia, the requirements and procedures to be followed when a stockholder or member elects either option; and 4. When the meeting is for the election of directors or trustees, the requirements and procedure for nomination and election. [Sec. 50] Subject to Waiver General Rule: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Exception: General waivers of notice in the articles of incorporation or the bylaws shall not be allowed. [Sec. 49] Attendance as Waiver General Rule: Attendance at a meeting shall constitute a waiver of notice of such meeting. Exception: When the person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. [Sec. 49] Postponement of Regular Meetings General Rule: In case of postponement of stockholders’ or members’ regular meetings, written notice thereof and the reason therefor shall be sent to all stockholders or members of record at least 2 weeks prior to the date of the meeting. Exception: If a different period is required under the bylaws, law or regulation. [Sec. 49] Place and Time of Meetings See table under i. Regular or special Quorum General Rule: Stockholders representing majority of the outstanding capital stock or majority of the members. Exception: The Code or the by-laws provide otherwise. [Sec. 51] Page 204 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Where quorum is present at the start of a lawful meeting, stockholders present cannot, without justifiable cause, break the quorum by walking out from said meeting so as to defeat the validity of any act proposed and approved by the majority. However, stockholders can break the quorum for justifiable causes. [Johnston v. Johnston (1965), CA decision] Minutes and Agenda of Meetings COMMERCIAL LAW 2. The yeas and nays on any motion or proposition; 3. The protest of a director, trustee, stockholder or member on any action or proposed action. [Sec. 73] 9. Board of Trustees Directors and Repository of Corporate Powers Agenda in Regular Meetings See enumeration in the table under i. Regular or special. Doctrine of Centralized Management BOARD IS SEAT OF CORPORATE POWERS A director, trustee, stockholder, or member may propose any other matter for inclusion in the agenda at any regular meeting of stockholders or members. [Sec. 49] General Rule: Unless otherwise provided in this Code, the board of directors or trustees shall exercise the corporate powers, conduct all business, and control all properties of the corporation. [Sec. 22] Agenda in Special Meetings See enumeration in the table under i. Regular or special. A stockholder or member may propose the items to be included in the agenda during a special meeting. [Sec. 49] Minutes of Meetings The minutes of all meetings of stockholders or members shall be kept and carefully preserved at its principal office. Such minutes shall set forth in detail, among others: a. The time and place of the meeting held; b. How it was authorized; c. The notice given; d. The agenda therefor; e. Whether the meeting was regular or special, its object if special; f. Those present and absent; and g. Every act done or ordered done at the meeting. Upon the demand of a director, trustee, stockholder or member, the following must be noted in the minutes: 1. The time when any director, trustee, stockholder or member entered or left the meeting; Governing Body of the Corporation It is well established in corporation law that the corporation can act only through its board of directors in the case of stock corporations, or board of trustees in the case of non-stock corporations. [de Leon] Exceptions: 1. In case of an Executive Committee duly authorized in the by-laws; [Sec. 34] Exception to Exception: The following may not be delegated to the executive committee: (1) Approval of any action for which shareholders' approval is also required; (2) The filing of vacancies in the board; (3) The amendment or repeal of by-laws or the adoption of new by-laws; (4) The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) A distribution of cash dividends to the shareholders. [Sec. 34] 2. In case of a contracted manager which may be an individual, a partnership, or another corporation Page 205 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Note: In case the contracted manager is another corporation, the special rule in Sec. 43 applies. 3. In case of close corporations, the stockholders may manage the business of the corporation rather than by a BOD, if the Articles of Incorporation so provide [Sec. 96] The power to purchase real property is vested in the BOD or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. [Spouses Constantine Firme v. Bukal Enterprises and Development Corporation, G.R. No. 146608 (2003)] Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation. This is exercised through his vote in the election of directors because it is the BOD that controls or manages the corporation. [Gamboa v. Teves, G.R. No. 176579 (2011)] Limitations on powers of BOD/BOT (1) Limitations imposed by the Constitution, statutes, articles of incorporation or bylaws; (2) Certain acts of the corporation that require joint action of the stockholders and BOD: a. Removal of director [Sec. 27] b. Amendments of Articles of Incorporation [Sec. 15] c. Fundamental changes [Sec. 37] d. Declaration of stock dividends [Sec. 42] e. Entering into management contracts [Sec. 43] f. Fixing of consideration of no-par shares [Sec. 61] g. Fixing of compensation of directors [Sec. 29] (3) Cannot exercise powers not possessed by the corporation. COMMERCIAL LAW Principle on Delegation of Board Power Under Sec. 23 (now Sec. 22, RCC), the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, by-laws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the BOD may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. [People’s Aircargo v. CA, G.R. No. 117847 (1998)] Corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of incorporation, the by-laws, or by resolution or other act of the board of directors. [Citibank, N.A. vs. Chua, 220 SCRA 75 (1993)] Tenure, Qualifications, and Disqualifications of Directors or Trustees Tenure Directors – Term of 1 year from among the holders of stocks registered in the corporation’s books. [Sec. 22] Trustees – Term not exceeding 3 years from among the members of the corporation. [Sec. 22] Holdover Principle Upon failure of a quorum at any meeting of the stockholders or members called for an election, the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Each director and trustee shall hold office until the successor is elected and qualified. [Sec. 22] Page 206 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS The failure to elect does not terminate the terms of incumbent officers nor dissolve the corporation. COMMERCIAL LAW Qualifications a. Director: Must own at least one (1) share of stock. Term v. Tenure Term Tenure Time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another. The period within which the director actually holds office, including the holdover period after the end of his term Not affected by the holdover Includes holdover Fixed by statute, and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify. May be shorter or longer (in case of a holdover) than the term for reasons within or beyond the power of the incumbent [Valle Verde Country Club v. Africa, G.R. No. 151969 (2009)] Permanent representation not allowed in BOD The board of directors of corporations must be elected from among the stockholders or members directors every year. Estoppel does not set in to legitimize what is wrongful. (Grace Christian High School v. CA, G.R. No. 108905, October 23, 1997) Trustee: Must be a member of the corporation. A director who ceases to own at least one (1) share of stock or a trustee who ceases to be a member of the corporation shall cease to be such. [Sec. 22] In order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation. [Lee v. CA, G.R. No. 93695 (1992)] b. Must be a natural person, of legal age, possess full legal capacity c. Must not be convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years [Sec. 26] d. Other qualifications as may be prescribed in the by-laws of the corporation. [Sec. 46] While additional qualifications may be prescribed, this cannot be in conflict with the requirements as set by the RCC. Note: The RCC removed the requirement that majority of the directors or trustees must be residents of the Philippines. Disqualifications A person shall be disqualified from being a director, trustee, or officer of any corporation if, within five (5) years prior to the election or appointment as such, the person was: (a) Convicted by final judgment: (1) Of an offense punishable by imprisonment for a period exceeding six (6) years; (2) For violating this Code; and (3) For violating Republic Act No. 8799, otherwise known as “The Securities Regulation Code”; (b) Found administratively liable for any offense involving fraud acts; and Page 207 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS (c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above. [Sec. 26] Note: The foregoing is without prejudice to qualifications or other disqualifications, which the Commission, the primary regulatory agency, or the Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings. An amendment to the corporation’s by-laws which renders a stockholder ineligible to be a director, if he be also a director in a corporation whose business is in competition with that of the other corporation, has been sustained as valid. This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." [Gokongwei, Jr. v. SEC, G.R. No. L-45911 (1979)] Note: See Sec. 160 Requirement Directors of Independent Independent Directors An independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director. [Sec. 22] Requirement for Independent Directors Corporations vested with public interest are now required to have independent directors constituting at least twenty percent (20%) of the board. [Sec. 22] This is in order to promote good governance. These corporations include: (1) Corporations covered by the Securities Regulation Code, namely: i. ose whose securities are registered with the COMMERCIAL LAW Commission; ii. Corporations listed with an exchange or with assets of at least Fifty million pesos (P50,000,000.00); and iii. Having two hundred (200) or more holders of shares, each holding at least one hundred (100) shares of a class of its equity shares; (2) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, pre-need, trust and insurance companies, and other financial intermediaries; (3) Other corporations engaged in business vested with public interest similar to the above, as may be determined by the Commission. [Sec. 22] Manner of Election Independent directors must be elected by the shareholders present or entitled to vote in absentia during the election of directors. [Sec. 22] Independent directors shall be subject to rules and regulations governing their: Qualifications, disqualifications, voting requirements, duration of term and term limit, maximum number of board memberships; and Other requirements that the Commission will prescribe to strengthen their independence and align with international best practices. [Sec. 22] Elections [Sec. 23] Number of Directors and Trustees Directors: Not more than fifteen (15) Trustees: May be more than fifteen (15) [Sec. 13 and 91] The RCC removed the minimum number of directors which stood at five (5) under the old code. [Sec. 14, Old Corporation Code] Page 208 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Election of Directors or Trustees See h. Election of Directors or Trustees under 6. Incorporation and Organization COMMERCIAL LAW 150 votes to candidate 4, and 50 votes to candidate 5. Quorum Cumulative Voting Methods of Voting (1) Straight voting (2) Cumulative voting for one candidate (3) Cumulative voting by distribution Rules Governing all Methods of Voting a. The total number of votes cast shall not exceed the number of shares owned by the stockholders as shown in the books of the corporation multiplied by the whole number of directors to be elected b. No delinquent stock shall be voted. [Sec. 23] Straight Voting Every stockholder may vote such number of shares for as many persons as there are directors to be elected. [Sec. 23] Cumulative Voting Cumulative Voting For One Candidate A stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. [Sec. 23] Illustration: If there are 5 directors to be elected and Pedro, as shareholder, has 100 shares, Pedro can give 500 (5 x 100 shares) votes to just one candidate. At all elections of directors or trustees, there must be present, either in person or through a representative authorized to act by written proxy: (1) Stock Corporations: The owners of majority of the outstanding capital stock (2) Non-Stock Corporations: A majority of the members entitled to vote. [Sec. 23] It is necessary that there be a quorum. An election without quorum is invalid. If the owners of majority of the outstanding capital stock or majority of the members entitled to vote are not present in person, by proxy, or through remote communication, or not voting in absentia at the meeting, such meeting may be adjourned. [Sec. 23] See subheading “When No Election is Held” under h. Election of Directors or Trustees under 6. Incorporation and Organization Election Contests All matters affecting the manner and conduct of the election of directors are properly cognizable by the regular courts. Otherwise, these matters may be brought before the SEC for resolution based on the regulatory powers it exercises over corporations, partnerships, and associations. [SEC v. CA, 739 SCRA 99 (2014)] Removal Cumulative Voting By Distribution A stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. [Sec. 23] Illustration: In the illustration above, Pedro instead may choose to give 100 votes to candidate 1, 100 votes to candidate 2, 100 votes to candidate 3, General Rule: Any Director or Trustee of a corporation may be removed from office, with or without cause. [Sec. 27] Exception: If the director was elected by the minority, there must be cause for removal because the minority may not be deprived of the right to representation to which they may be entitled to under Sec. 23 of the Code. [Sec. 27] Page 209 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Note: The right to representation refers to the right to cumulative voting for one candidate. Requisites for Removal: 1) It must take place either at a regular meeting or special meeting of the stockholders or members called for the purpose; 2) A special meeting for the purpose of removing directors or trustees must be called by: a. The secretary, on order of the president; or b. The secretary, upon written demand of the stockholders representing or holding at least a MAJORITY of the capital stock or a MAJORITY of the members entitled to vote; 3) There must be previous notice to the stockholders or members of the intention to remove a director; and 4) There must be a vote of the stockholders representing 2/3 of outstanding capital stock or in case of a nonstock corporation, 2/3 of members entitled to vote. New Power of the SEC under the Revised Corporation Code [Sec. 27] The Commission shall, motu proprio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election. The removal of a disqualified director shall be without prejudice to other sanctions that the Commission may impose on the board of directors or trustees who, with knowledge of the disqualification, failed to remove such director or trustee. [Sec. 27] Filling of Vacancies [Sec. 28] Ways which the filling of a vacancy may occur: (1) Expiration of term; (2) Removal; COMMERCIAL LAW (3) Grounds other than the above, but the remaining directors can constitute a quorum. (4) Grounds other than the above, but the remaining directors cannot constitute a quorum for the purpose of filling the vacancy; (5) By reason of an increase in the number of directors or trustees. Cause of Vacancy Procedure Expiration of term The election by stockholders shall be held no later than the day of such expiration at a meeting called for that purpose. Removal The election may be held on the same day of the meeting authorizing the removal and this fact must be so stated in the agenda and notice of said meeting. Other grounds, but the remaining directors can constitute a quorum The election must be held no later than forty-five (45) days from the time the vacancy arose. a. The vacancy must be filled by the stockholders or Other members in a regular or special grounds, meeting for that purpose; or but the b. In case of the necessity of remaining emergency action, the vacancy directors may be temporarily filled from CANNOT among the officers of the constitute corporation by unanimous a quorum: vote of the remaining directors or trustees. By reason of an increase in the Page 210 of 450 Shall be filled only by an election at a regular or at a special meeting of stockholders duly called for the U.P. LAW BOC Cause of Vacancy BUSINESS ORGANIZATIONS Procedure number of purpose, or in the same directors meeting authorizing the or trustees increase of directors or trustees if so stated in the notice of the meeting. Note: In all elections to fill vacancies under this section, the procedure set forth in Sections 23 and 25 of the Revised Corporation Code shall apply. [Sec. 28] Designation of director or trustee A vacancy may be temporarily filled from among the officers of the corporation by unanimous vote of the remaining directors or trustees when: (1) The vacancy prevents the remaining directors from constituting a quorum; and (2) Emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation. The action by the designated director or trustee shall be limited to the emergency action necessary. [Sec. 28] Term of designated director or trustee The term of the designated director or trustee shall cease: (1) Within a reasonable time from the termination of the emergency; or (2) Upon election of the replacement director or trustee, whichever comes earlier. [Sec. 28] Compensation General Rule: Directors or trustees are only entitled to reasonable per diems. They are not entitled to compensation as directors or trustees. [Sec. 29] Exceptions: a. When Articles of Incorporation, by-laws, or an advance contract provides for compensation. b. Compensation other than per diems may also be granted to directors by the vote of COMMERCIAL LAW the stockholders representing at least a majority of the Outstanding Capital Stock or a majority of the members at a regular or special stockholders’ meeting. Note: The total yearly compensation of directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year. [Sec. 29] Added in the RCC The directors or trustees shall NOT participate in the determination of their own per diems or compensation. Corporations vested with public interest shall submit to their shareholders and the Commission, an annual report of the total compensation of each of their directors or trustees. Compensation of Directors as Corporate Officers The position of being Chairman and ViceChairman, like that of treasurer and secretary, are not considered directorship positions, but officership positions that would entitle the occupants to compensation. Likewise, the limitation placed under Sec. 30 (now Sec. 29, RCC) of the Corporation Code that directors cannot receive compensation exceeding 10% of the net income of the corporation would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members. [Western Institute of Technology v. Salas, G.R. No. 113032 (1997)] Disloyalty Duties of Directors and Trustees THREE-FOLD DUTY In this jurisdiction, the members of the BOD have a three-fold duty: duty of obedience, duty of diligence, and duty of loyalty. 1) Duty of Obedience - shall direct the affairs of the corporation only in accordance with the purposes for which it was organized; Page 211 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW 2) Duty of Diligence - shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing the affairs of the corporation; and 3) Duty of Loyalty - shall not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees. [Strategic Alliance Development Corp v. Radstock Securities Ltd., G.R. No. 178158 (2009)] DOCTRINE OF CORPORATE OPPORTUNITY Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business opportunity which: a. Corporation is financially able to undertake b. From its nature, is in line with corporation’s business and is of practical advantage to it; and c. One in which the corporation has an interest or a reasonable expectancy. Duty of Obedience The Directors or Trustees and Officers should direct the affairs of the corporations only in accordance with the purposes for which it was organized. The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture. [Sec. 33] Duty of Diligence The directors should not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing the affairs of the corporation. [Sec. 30] Note: The conditions for the application of Sec. 31 (now Sec. 30, RCC) of the Corporation Code require factual foundations to be first laid out in appropriate judicial proceedings. Hence, concluding that a person breached fiduciary duties as an officer and member of the BOD of a corporation without competent evidence thereon would be unwarranted and unreasonable. [Republic of the Philippines v. Sandiganbayan (First Division) et al., G.R. No. 166859 (2011)] Duty of Loyalty General Rule: Where a director, by virtue of such office, acquires a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, the director must account for and refund to the latter all such profits. Exception: Unless the act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. [Sec. 33] By embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation. Hence, the law does not permit him to seize the opportunity even if he will use his own funds in the venture. [Sundiang & Aquino] A director, trustee, or officer shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation if: (1) He attempts to acquire, or acquire any interest adverse to the corporation in respect of any matter which has been reposed in them in confidence; and (2) Upon which, equity imposes a disability upon themselves to deal in their own behalf. [Sec. 30] Note: Differences between Sec. 30 and Sec. 33: a) First, while both involve the same subject matter (business opportunity) they concern different personalities; Sec. 33 is applicable only to directors and not to officers, whereas Sec. 30 applies to directors, trustees and officers. b) Second, Sec. 33 allows a ratification of a transaction by a self-dealing director by vote of stockholders representing at least 2/3 of the outstanding capital stock. [Villanueva] Page 212 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Business Judgment Rule General Rule: Questions of policy or management are left solely to the honest decision of officers and directors of a corporation and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation and so long as it acts in good faith, its orders are not reviewable by the courts or the SEC. [Montelibano v. Bacolod-Murica Milling Co., G.R. No. L-15092 (1962); Phil. Stock Exchange, Inc. v. CA, G.R. No. 125469, (1997)] Exceptions: a. If the contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority [Ingersoll v. Malabon Sugar, G.R. No. L27770 (1927)]; b. If they violate their duties under Sec. 30 (director willfully and knowingly assents to patently unlawful acts of the corporation, or are guilty of gross negligence or bad faith); and c. If they violate Sec. 33 (disloyalty of a director who acquires for himself a business opportunity that should have belonged to the corporation, unless his act is ratified by a 2/3 vote of stockholders). CONSEQUENCES OF THE BUSINESS JUDGMENT RULE The resolution, contracts and transactions of the board cannot be reversed or set aside by the Courts even on the behest of stockholders or members, under the principle that the business of the corporation has been left to the hands of the board. Directors and duly authorized officers cannot be held personally liable for acts or contracts done with the exercise of their business judgment. COMMERCIAL LAW REQUIREMENTS FOR THE BUSINESS JUDGMENT RULE TO APPLY a. Presence of a business decision including decisions on policy management and administration; b. The decision must be intra vires and must comply with the procedural and substantive requirements of law; c. Good faith; d. Due care in making the decision; e. The director must not have personal interest or nor self-dealing or otherwise on breach of the duty of loyalty. [Villanueva] REMEDIES IN CASE OF MISMANAGEMENT (1) Removal of directors pursuant to Sec. 27 (2) Derivative suit or complaint filed with the RTC [Sec. 5.2, R.A. 8799, Securities Regulation Code; A.M. No. 01-2-04 SC, Interim Rules of Procedure Governing Intracorporate Controversies] (3) Receivership (4) Injunction if the act has not yet been done (5) Dissolution if abuse amounts to a ground for quo warranto but Solicitor General refuses to act Note: Dean Villanueva opined that a derivative suit may be an exception to the Business Judgment Rule – This occurs when it is apparent that the Board is not in a position to validly exercise its business judgment for the protection of the corporation e.g., when the Board itself has committed an act causing damage to the corporation or when the Board is placed in a conflict of interest scenario, whereby it is unlikely that it would use such business discretion to file such suit for the best interest of the corporation. Solidary Liabilities for Damages Solidary Liability For Damages a. The directors and trustees are solidarily liable for damages arising from the ff.: b. Willfully and knowingly voting for and assenting to patently unlawful acts of the corporation; [Sec. 30] Page 213 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS c. Gross negligence or bad faith in directing the affairs of the corporation; [Sec. 30] d. Acquiring any personal or pecuniary interest in conflict of duty; [Sec. 30] e. Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to file objections with secretary; [Sec. 64] f. Agreeing or stipulating in a contract to hold himself liable with the corporation; or g. By virtue of a specific provision of law. LIABILITY FOR WATERED STOCKS Watered Stocks – stocks issued for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value. Any director or officer of a corporation shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference in value for: (1) Consenting to the issuance of watered stocks or; (2) Failing express his objection in writing and file the same with the corporate secretary despite having knowledge thereof of such issuance [Sec. 64]. Personal Liabilities General rule: Members of the Board, who purport to act in good faith for and on behalf of the corporation within the lawful scope of their authority, are not liable for the consequences of their acts. When the acts are of such nature and done under those circumstances, they are attributed to the corporation alone and no personal liability is incurred. [Price v. Innodata Phils., Inc., G.R. No. 178505 (2008)]. Exception: When sufficient proof exists on record that the officers acted fraudulently, beyond his authority or when the officer agrees to be personally liable on behalf of the corporation. Note: Members of the BOD who are also officers are held to a more stringent liability COMMERCIAL LAW because they are in-charge of day-to-day activities. [Campos] The provisions on seizing corporate opportunity and disloyalty [Secs. 30 and 33] shall also apply to corporate officers. [Price v. Innodata Phils., Inc., G.R. No. 178505 (2008)] Doctrine of Limited Liability Doctrine of Immunity Shields the incorporators from corporate liability beyond their agreed contribution to the capital or shareholding in the corporation Protects a person acting for and in behalf of the corporation from being himself personally liable for his authorized actions Strains in Labor Law The Supreme Court appears to have different views regarding the personal liability of officers when it comes to labor law violations: ● Absent proof that the manager exceeded his authority in dealing as regards the employee, he cannot be held personally liable for the said employee’s monetary compensation. (Nicario v. NLRC, GR No. 125340 [1998]) ● Officers can be held personally liable for 13th month pay of employees after the corporation has ceased to exist. This is because the officers are deemed to have acted on behalf of the corporation. (Restaurante Las Conchas v. Llego, 372 Phil 697 [1999]) Responsibility for Crimes Since a corporation is a person by mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Note: However, violations of the Code, if it is committed by a corporation, the same may, after notice and hearing, be dissolved in Page 214 of 450 U.P. LAW BOC appropriate proceedings Commission. [Sec. 170] BUSINESS ORGANIZATIONS before the If the offender is a corporation, the penalty may, at the discretion of the court, be imposed upon: (1) Such corporation and/or upon its directors, trustees, stockholders, members, officers, or employees responsible for the violation or indispensable to its commission; or (2) Anyone who shall aid, abet, counsel, command, induce, or procure any violation of this Code, or any rule, regulation, or order of the Commission. [Sec. 171-172] Criminal Liability of Corporate Agents Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself. Since the BOD is the repository of corporate powers and acts as the agent of the corporation, the directors may be held criminally liable. [Time Inc. v. Reyes, G.R. No. L-28882 (1971)] Corporations, partnerships, associations and other juridical entities cannot be put to jail. Hence, the criminal liability falls on the human agent responsible for the violation of the Trust Receipts Law. [Ong v. CA, G.R. No. 119858 (2003); see also Sec. 13, P.D. 115] COMMERCIAL LAW Exception: Special Facts Doctrine Conceding the absence of a fiduciary relationship in the ordinary case, where special circumstances or facts are present which make it inequitable for the director to withhold information from the stockholder – Courts nevertheless hold that the duty to disclose arises and concealment is fraud Examples: o Concealment of the defendantpurchaser's identity (the corporate officer had used an agent gobetween to avoid detection of his actions by the seller here) o Failure to disclose significant facts that materially affected the price of the stock. [Strong v. Repide, 213 U.S. 419 (1909)] Inside Information The fiduciary position of insiders, directors, and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest. Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action as long as there is unfair use of inside information. Special Fact Doctrine General Rule: Majority view: Directors only owe their duty to the corporation. They owe no fiduciary duty to stockholders, but they may deal with each other at fair and reasonable terms, as if they were unrelated. No duty to disclose facts known to the director or officer. [Taylor v. Wright, 53 N.Y.S. 423 (1945)] Note: Minority View (Realistic View) recognizes the directors’ obligation to the stockholders individually as well as collectively, and refuses to permit him to profit at the latter’s expense by the use of information obtained as a result of official position and duties. It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer to the corporation. An INSIDER means: (a) The issuer; (b) A director or officer (or any person performing similar functions) of, or a person controlling the issuer; gives or gave him access to material information about the issuer or the security that is not generally available to the public; (c) A government employee, director, or officer of an exchange, clearing agency and/or self-regulatory organization who has Page 215 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS access to material information about an issuer or a security that is not generally available to the public; or (d) A person who learns such information by a communication from any foregoing insiders. [Sec. 3.8, Securities Regulation Code] c. The contract is fair and reasonable under the circumstances. [Sec. 31] *Amended from two to three in the Revised Corporation Code. Between Corporations Interlocking Directors Contracts By Self-Dealing Directors with the Corporation General Rule: A contract of the corporation with (1) one or more of its directors, trustees, officers or their spouses and relatives within the fourth civil degree of consanguinity or affinity is voidable, at the option of such corporation. [Sec. 31] Exception: Such contract is VALID if all of the following conditions are present: . The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; a. The vote of such director or trustee was not necessary for the approval of the contract; b. The contract is fair and reasonable under the circumstances; and c. In case of corporations vested with public interest: Material contracts are approved by at least two-thirds (2/3) of the entire membership of the board, with at least a majority of the independent directors voting to approve the material contract; and d. In case of an officer: The contract has been previously authorized by the BOD. [Sec. 31] Ratification In case of absence of the first three* conditions above, contract may be ratified if: a. Stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract; b. There is full disclosure of the adverse interest of the directors or trustees involved is made at such meeting; AND COMMERCIAL LAW with General Rule: A contract between two or more corporations having interlocking directors shall NOT be invalidated on that ground alone. [Sec. 32] Exception: If contract is fraudulent or not fair and reasonable under the circumstances, such contract is invalid. [Sec. 32] Interlocking, characterized Interlocking directors are persons who serve as member of the board of directors of two or more competing corporations or corporations engaged in practically the same kind of business. Interlocking director with nominal and substantial interest Nominal Interest – His stockholdings are 20% or less of the OCS Substantial Interest – His stockholdings exceed 20% of the OCS If the interest of the interlocking director in one of the corporations is substantial, while nominal in the other, the contract shall be VALID, if the following conditions are met, insofar as the latter corporation is concerned: 1. The presence of such director or trustee in the board meeting in which the contract was approved was NOT necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; and 3. That the contract is fair and reasonable under the circumstances. Where (a) and (b) are absent, the contract can be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in Page 216 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS a meeting called for the purpose voted to ratify the contract, provided that: 1. Full disclosure of the adverse interest of the directors/trustees involved is made on such meeting; 2. The contract is fair and reasonable under the circumstances. [Sec. 31-32] Executive Committee and Other Special Committees [Sec. 34] Creation Executive Committee The by-laws may provide for the creation an executive committee, composed of not less than 3 members of the board, to be appointed by the Board. [Sec. 34] Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board. [Sec. 34] Special Committees The board of directors may create special committees of temporary or permanent nature and to determine the members’ term, composition, compensation, powers, and responsibilities. COMMERCIAL LAW Where by-laws are silent as to creation of executive committee Under Sec. 34 of the RCC, the creation of an executive committee must be provided for in the bylaws of the corporation. Unfortunately, the by-laws of the corporation in this case are silent as to the creation by its BOD of an executive committee. Notwithstanding the silence of the by-laws on the matter, the SC did not rule that the BOD’s creation of the executive committee is illegal or unlawful. No showing that the "executive committee," referred to in Sec. 35 (now 34) of the Corporation Code, which is as powerful as the BOD, and in effect acting for the board itself, should be distinguished from other committees which are within the competency of the board to create at any time and whose actions require ratification and confirmation by the board. The BOD has the power to create positions not provided for in the by-laws since the board is the corporation’s governing body. [Filipinas Port Services Inc. v. Go, G.R. No. 161886 (2007)] Meetings Regular or Special Limitations on Its Power The following CANNOT be delegated to the Executive Committee: a. Matters needing stockholder approval [Sec. 34]; b. Filling up of board vacancies [Sec. 34]; c. Amendment, repeal or adoption of new bylaws [Sec. 34]; d. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable [Sec. 34]; e. Cash dividend distribution [Sec. 34]; and f. Acts which would render the BOD powerless and free from all responsibilities imposed on it by law. [Campos] Kinds of Meetings Meetings of directors, trustees, stockholders, or members may be regular or special. [Sec. 48] (a) When and Where When [Sec. 52] Regular meetings of directors or trustees shall be held monthly, unless the by-laws provide otherwise. Special meetings of the BOD or trustees may be held at any time upon the call of the president or as provided in the by-laws. Where [Sec. 53] Meetings of directors or trustees of corporations may be held anywhere in or Page 217 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS outside of the Philippines, unless the by-laws provide otherwise. (b) Notice Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least two (2) days* prior to the scheduled meeting, unless a longer time is provided by the by-laws. Note: This was previously just one day, under the old corporation code. A director or trustee may waive this requirement, either expressly or impliedly. [Sec. 52] COMMERCIAL LAW In the Philippines, teleconferencing and videoconferencing of members of BOD of private corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange Commission issued SEC Memorandum Circular No. 15, series of 2001, on November 30, 2001, providing the guidelines to be complied with in relation to such conferences. [Expertravel and Tours, Inc. v. CA, G.R. No. 152392 (2005)] Mandatory Recusal A director or trustee who has a potential interest in any related party transaction must recuse from voting on the approval of the related party transaction without prejudice to compliance with the requirements of Section 31 of this Code. [Sec. 52] (c) Attendance in Meetings Who Presides In the old corporation code, directors or trustees cannot be represented or voted by proxies at board meetings. [Sec. 25, CC] Allowable Alternative Modes of Attendance Directors or trustees who cannot physically attend or vote at board meetings can participate and vote through: (1) Remote communication such as videoconferencing, teleconferencing; or (2) Other alternative modes of communication that allow them reasonable opportunities to participate. [Sec. 52] If a director or trustee intends to participate in a meeting through remote communication, he/she shall notify in advance the Presiding Officer and the Corporate Secretary of his/her intention. The Corporate Secretary shall note such fact in the Minutes of the meeting. Corporations may issue their own internal procedures for the conduct of board meetings through remote communication or other alternative modes of communication to address administrative, technical and logistical issues. [SEC Memo. Circ. No. 6, s. 2020] The chairman, or in his absence, the president shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the bylaws provide otherwise. [Sec. 53] Quorum Quorum to Transact Corporate Business General Rule: Majority of the directors or trustees. as stated in the articles of incorporation, shall constitute a quorum to transact corporate business. [Sec. 52] Exception: Unless the articles of incorporation or the by-laws provide for a GREATER majority. Decisions Reached by Majority of Quorum General Rule: Every decision reached by at least a majority of the directors or trustees constituting a quorum shall be valid as a corporate act. Exception: A vote of a majority of all the members of the board is required in case of election of officers. [Sec. 52] Attendance and Voting by Proxy Directors or trustees cannot attend or vote by proxy at board meetings. [Sec. 52] Page 218 of 450 U.P. LAW BOC COMMERCIAL LAW BUSINESS ORGANIZATIONS In Case of Death of Board Members In stock corporations: Shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor. In non-stock corporations: Membership in and all rights arising from a non-stock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. In other words, the determination of whether or not “dead members” are entitled to exercise their voting rights (through their executor or administrator), depends on the Articles of Incorporation or bylaws. [Tan v. Sycip, G.R. No. 153468 (2006)] Rule on Abstention No inference can be drawn in a vote of abstention. When a director or trustee abstains, it cannot be said that he intended to acquiesce in the action taken by those who voted affirmatively. Neither, for that matter, can such inference be drawn from the abstention that he was abstaining because he was not then ready to make a decision. [Lopez v. Ercita, G.R. No. L-32991 (1972)] Philippines, unless otherwise provided by by-laws ● Notice ● Date, time, and place of the meeting must be sent to every member at least two (2) days prior to the scheduled meeting, unless a longer time is provided in the by-laws This requirement may be waived Attendance ● ● Proxy not allowed Voting through remote communication is allowed (videoconferencing, teleconferencing, etc.) Who Presides ● ● The chairman In his absence, the president Quorum GR: Majority of the directors or trustees, as stated in the AOI EX: Unless the AOI or the bylaws provide for a GREATER majority. 10. Capital Affairs SUMMARY OF MEETINGS Regular Meeting Special Meeting Description Meetings that are fixed by law or as provided by the by-laws Meetings that are called for a special purpose Date time Held monthly, unless otherwise provided by the by-laws Held anytime upon call Venue and Anywhere in and outside the Certificate of stock Nature of the certificate Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner, his attorney-in-fact, or any other person legally authorized to make the transfer. [Sec. 62, RCC] A certificate of stock is — An instrument formally issued by the corporation with the intention that the same constitute the best evidence of the rights and status of a shareholder Page 219 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS An instrument signed by the proper corporate officer acknowledging that the person named in the document is the owner of a designated number of shares of stock. It is prima facie evidence that the holder is a shareholder of a corporation. (Lao v. Lao, 567 SCRA 558, 2008) The paper representative or tangible evidence of the stock itself and of the various interests therein. It is merely evidence of the holder’s interest and status in the corporation, his ownership of the share represented thereby. It expresses the contract between the corporation and the stockholder [Makati Sports Club v. Cheng, G.R. No. 178523 (2010)]. A certificate of stock is NOT — A condition precedent to the acquisition of of the rights and status of a shareholder A stock in the corporation The equivalent of ownership of the share it represents Essential to the existence of a share of stock or the nature of the relation of shareholder to the corporation [Makati Sports Club v. Cheng, G.R. No. 178523 (2010)]. Uncertificated shares An uncertificated share is a subscription duly recorded in the corporate books, but has no corresponding certificate of stock yet issued. Uncertificated shares or securities are those evidenced by electronic or similar records [Sec. 3.14, Securities Regulation Code] Added provision in Sec. 62 of the Revised Corporation Code: The Commission may require corporations whose securities are traded in trading markets and, which can reasonably demonstrate their capability to do so, to issue their securities or shares of stocks in uncertificated or scripless form in accordance with the rules of the Commission. COMMERCIAL LAW Notwithstanding Sec. 62, RCC (Certificate of Stock and Transfer of Shares), a corporation whose securities are registered pursuant to the SRC or listed on securities exchange may: If so resolved by the BOD and agreed by a shareholder, investor or securities intermediary, issue shares to, or record the transfer of some or all its shares into the name of such shareholders, investors or, securities intermediary in the form of uncertified securities. The use of uncertified securities in these circumstances shall be without prejudice to the rights of the securities intermediary subsequently to require the corporation to issue a certificate in respect of any shares recorded in its name; and If so provided in its articles of incorporation and by-laws, issue all of the shares of a particular class in the form of uncertificated securities and subject to a condition that investors may not require the corporation to issue a certificate in respect of any shares recorded in their name. [Sec. 43, Securities Regulation Code] TRANSFERS OF UNCERTIFICATED SECURITIES, HOW MADE Valid as between parties - validly made and consummated by appropriate book-entries in the securities intermediaries, or in the stock and transfer book held by the corporation or the stock transfer agent. A transfer made pursuant to the foregoing has the effect of delivery of a security in bearer form or duly indorsed in blank representing the amount of security or right transferred, including the unrestricted negotiability of that security by reason of such delivery. Valid as to corporation – when the transfer is recorded in the books of the corporation so as to show the names of the parties to the transfer and the number of shares transferred [Sec. 43.3, Securities Regulation Code]. Page 220 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Negotiability; requirements for valid transfer of stocks Theory of Quasi-Negotiability Although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by delivery, it is wellsettled that the instrument is NONNEGOTIABLE, because — The holder thereof takes it without prejudice to such rights or defenses as the registered owner or creditor may have under the law Except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppels. [Republic v. Sandiganbayan, G.R. Nos. 107789 & 147214, April 30, 2003]. Certificates of stock are not negotiable instruments. Consequently — A transferee under a forged assignment acquires no title which can be asserted against the true owner, unless the latter’s negligence has been such as to create an estoppel against him. If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is acquired by on innocent purchaser for value [De los Santos v. Republic, G.R. No. L-4818 (1955)]. Street Certificate When a stock certificate is endorsed in blank by the owner thereof, it constitutes what is termed as street certificate. Upon its face, the holder is entitled to demand its transfer into his name from the issuing corporation. Such certificate is deemed quasi-negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor. [Santamaria v. Hongkong and Shanghai Banking Corporation, 89 Phil. 780, 788-789 (1951)]. COMMERCIAL LAW REQUIREMENTS FOR VALID TRANSFER OF STOCKS For a valid transfer of stocks, the requirements are as follows: (1) There must be delivery of the stock certificate; (2) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (3) To be valid against third parties, the transfer must be recorded in the books of the corporation (i.e., showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred) [Sec. 62, RCC] [Bitong v. CA, G.R. No. 123553 (1998)]. No shares of stock against which the corporation holds an unpaid claim shall be transferable in the books of the corporation [Sec. 62, RCC]. The Corporation Code acknowledges that the delivery of a duly indorsed stock certificate is sufficient to transfer ownership of shares of stock in stock corporations. Such mode of transfer is valid between the parties. In order to bind third persons, however, the transfer must be recorded in the books of the corporation. [Sec. 43.3, Securities Regulation Code] Clearly then, the absence of a deed of assignment is not a fatal flaw which renders the transfer invalid. Requisites for a valid transfer per Sec. 62, RCC: 1. Between the parties: 2. Delivery 3. Indorsement 4. To be valid as to third persons: Recorded in the books of the corporation [Republic v. Estate of Hans Menzi, G.R. No. 152578 (2005)] The execution of a deed of sale does not necessarily make the transfer effective. The delivery of the stock certificate duly indorsed by the owner is the operative act that transfers the Page 221 of 450 U.P. LAW BOC COMMERCIAL LAW BUSINESS ORGANIZATIONS shares. The absence of delivery is a fatal defect which is not cured by mere execution of a deed of assignment [Rural Bank of Lipa City v. CA, G.R. No. 124535 (2001)]. The stock and transfer book is the basis for ascertaining the persons entitled to the rights and subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a stockholder, the corporation is under no specific legal duty to issue stock certificates in the transferee’s name [Ponce v. Alsons Cement Corp., G.R. NO. 139802 (2002)]. Citing Hager v. Bryan (1911): A mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do, upon the demand either: - Of the person in whose name the stock is registered, or - Of some person holding a power of attorney for that purpose from the registered owner of the stock. A transfer of shares is not valid unless recorded in the books of the corporation. [Sec. 43.4, RCC] The purpose of registration is two-fold: (a)To enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and (b) To inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder [Batangas Laguna Tayabas Bus Co. v. Bitangas, G.R. No. 137934 (2001)]. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting. His vote can be properly counted to determine whether a stockholders’ resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded in the corporate books. Until the transfer is registered, the transferee is not a stockholder, but an outsider. Issuance (a) Full payment General Rule: No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid [Sec. 63, RCC]. Exception: Where it was the practice of the corporation since its inception to issue certificates of stock to its individual stockholders for unpaid shares of stock and to give full voting power to shares fully paid [Baltazar v. Lingayen Gulf Electric Power Company, G.R. No. L-16236 (1965)]. (b) Payment pro-rata The entire subscription must be paid first before the certificates of stock can be issued. Partial payments are to be applied pro rata to each share of stock subscribed [Nava v Peers Mktg. Corp., G.R. No. L-28120 (1976)]. Stock and transfer book (a) Contents Stock corporations must also keep a stock and transfer book, which shall contain: a. A record of all stocks in the names of the stockholders alphabetically arranged b. The installments paid and unpaid on all stocks for which subscription has been made c. The date of payment of any installment d. A statement of every alienation, sale or transfer of stock made, the date thereof, by and to whom made e. Such other entries as the by-laws may prescribe. [Sec. 73, RCC] Page 222 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Note: The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. [Sec. 73, RCC] (b) Who may make valid entries The obligation and duty to make proper entries in stock and transfer books falls on the corporate secretary. If the corporate secretary refuses to comply, the stockholder may rightfully bring suit to compel performance. [Torres, Jr. v. CA, G.R. No. 120138, Sept. 5, 1997]. (c) Stock transfer agent A stock transfer agent is one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation. The stock transfer agent shall be allowed to operate in the Philippines upon securing a license from the Commission. Provided, That — (1) A stock corporation is not precluded from performing or making transfers of its own stocks In which case, all the rules and regulations imposed on stock transfer agents shall be applicable Except the payment of a license fee herein provided (2) The Commission may require stock corporations which transfer and/or trade stocks in secondary markets to have an independent transfer agent. [Sec. 73, RCC] COMMERCIAL LAW Lost or destroyed certificates Procedure for re-issuance in case of loss, stolen or destroyed certificates: 1) Filing of an affidavit of loss with the corporation by the registered owner. 2) Verifying the affidavit and other information and evidence with the books of the corporation by the corporation. 3) Publishing by the corporation of a notice of loss in a newspaper of general circulation published — 4) In the place, where the corporation has its principal office; 5) Once a week for 3 consecutive weeks; 6) At the expense of the owner of the certificate of stock. 7) Cancellation of the certificate in the books of the corporation and issuance of new certificates, after the expiration of 1 year from the date of the last publication and there is no contest. The right to make such contest shall be barred after the expiration of the one-year period. 8) Issuance by the corporation of new certificates before 1 year period if the registered owner files a bond and there is no pending contest regarding the ownership of said certificates. [Sec. 72, RCC] Note: Except in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against the corporation which shall have issued certificates of stock in lieu of those lost, stolen or destroyed pursuant to the above procedure. Situs of the shares of stock General rule: The situs of shares of stock is the country where the corporation is domiciled [Wells Fargo Bank v. CIR, G.R. No. L-46720, June 28, 1940]. It is not the domicile of the owner of a certificate but the domicile of the corporation which is decisive [Chua Guan v. Samahang Magsasaka, Inc., 1935]. Page 223 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS The residence of the corporation is the place where the principal office of the corporation is located as stated in its AOI, even though the corporation has closed its office therein and relocated to another place [Hyatt Elevators and Escalators Corp. v. Goldstar Elevator Phils., Inc., G.R. No. 161026, 2005] Exception: In property taxation – the situs of intangible property, such as shares of stocks, is at the domicile or residence of the owner. Exception to the Exception: 1. When a nonresident alien has shares of stock in a domestic corporation, then the situs will be in the Philippines; and 2. For purposes of the estate tax, the gross estate of a resident decedent, whether citizen or alien, or a citizen decedent, whether resident or nonresident, includes his intangible personal property wherever situated [De Leon]. Watered stocks Definition Watered stock are shares issued as fully paid when in truth — (1) No consideration is paid in any form; or (2) The consideration received is known to be less than the par value or issued value of the shares [Sec. 64, RCC]. Watered stocks can either be par or no par value shares. A watered stock is a stock issued in exchange for: (a) A consideration less than its par value or issued price; and (b) A non-cash consideration valued in excess of its fair value. [Herbosa, 2019] Scope Watered stocks include the following: Issued without consideration (bonus share) Issued as fully paid when the corporation has received less sum of money than its par or issued value (discounted share) COMMERCIAL LAW Issued for consideration other than actual cash (i.e., property or services), the fair valuation of which is less than its par or issued value Issue stock dividend when there are no sufficient retained earnings or surplus profit to justify it. Note: Subsequent increase in the value of the property used in paying the stock does not do away with the watered stocks, nor cure the defect in issuance. The existence of watered stocks is determined at the time of issuance of the stock. Rationale Behind Prohibition Stock watering is prohibited because: • Corporation is deprived of needed capital and the opportunity to market its securities to its own advantage • Existing and future stockholders who are also injured by the dilution of their proportionate interests in the corporation • Present and future creditors who are injured as the corporation is deprived of the assets or capital and reduces the value of the corporate assets, which stand as a substitute for the stockholders’ personal liability to them • Persons who deal with it or purchase its securities who are deceived because stock watering is invariable accompanied with misleading corporate accounts and financial statements Liability of directors for watered stocks A director or officer of a corporation who: 1) consents to the issuance of stocks for a consideration less than its par or issued value; 2) consents to the issuance of stocks for a consideration other than cash, valued in excess of its fair value 3) having knowledge of the insufficient consideration, does not file a written objection with the corporate secretary Page 224 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference in value [Sec. 64, RCC]. Trust fund doctrine for liability for watered stocks Trust Fund Doctrine It is established doctrine that subscription to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims, and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts [Philippine Trust Corp. v. Rivera, G.R. No. L19761 (1923), citing Velasco v. Poizat, (1918)] A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release • As against creditors. a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. • Moreover, strict compliance with the statutory regulations is necessary [Philippine Trust Corp. v. Rivera, G.R. No. L-19761 (1923)]. Trust Fund Doctrine for Liability for Watered Stocks Where the corporation issues watered stock and thereby assumes an ostensible capitalization in excess of its real assets, the transaction necessarily involves — • The misleading of subsequent creditors; and • A constructive fraud upon creditors, whether done with that purpose actually in mind or not Hence, it is held that recovery may be had by a creditor in such case, even though the corporation itself has no cause of action against the stockholders. COMMERCIAL LAW • Some of the earlier decisions put the right of recovery in such a case upon the so-called “trust fund doctrine.” • The creditors’ right of action to compel the making good of the representation as to the corporation’s capital is based on fraud, and the trust fund doctrine is only another way of expressing the same underlying idea [DE LEON]. Despite the view of foreign authors that the fraud theory is the prevailing view, it would seem that in the Philippine jurisdiction, the trust fund doctrine on watered stock prevails. Payment of balance subscription [Sec. 66] of Time when the balance of the subscription should be paid: 1) On the date specified in the subscription contract, without need of demand or call. 2) If no date of payment has been specified, on the date specified on the call made by the BOD 3) If no date of payment has been specified on the call made, within 30 days from the date of call; and 4) When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up, all unpaid subscriptions become payable on demand, and are at once recoverable, without necessity of any prior call. Call by board of directors The BOD of any stock corporation may, at any time: (1) Declare due and payable to the corporation unpaid subscriptions to the capital stock; and (2) Collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. When Payment Should be Made Payment shall be made: (a) On the date specified in the contract of subscription; or Page 225 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS (b) On the date stated in the call. COMMERCIAL LAW action for the call [Lingayen Gulf Electric Power Co., Inc. v. Baltazar, G.R. No. L-4824 (1965)]. Failure to pay on such date shall — • Render the entire balance due and payable; and • Make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided for in the by-laws. If within 30 days from said date no payment is made, all stocks covered by said subscription shall — (1) Become delinquent; and (2) Subject to sale under Sec. 67 of RCC, unless the BOD orders otherwise. Requisites for a valid call SEC opined on July 21, 1976 that the following are the requisites for a valid call: 1. It must be made in the manner prescribed by law; 2. It must be made by the BOD; and 3. It must operate uniformly upon all the shareholders. There are two instances when call is not necessary to make the subscriber liable for payment of the unpaid subscription: When, under the terms of the subscription contract, subscription is payable, not upon call, but immediately, or on a specified day, or when it is payable in installments at specified times; [Sec. 66, RCC] and If the corporation becomes insolvent, which makes the liability on the unpaid subscription due and demandable, regardless of any stipulation to the contrary in the subscription agreement [Villanueva]. Notice requirement Where call is necessary, notice must be given to the stockholder concerned. A call without notice to the subscriber is practically no call at all. The notice is regarded as a condition precedent to the right of recovery. It must, therefore, be alleged and proved to maintain an The right to notice of call, however, may be waived by the subscriber [De Leon]. Sale of delinquent shares [Sec. 67] Delinquent Shares - shares in which the corresponding subscription or balance remains unpaid after a grace period of 30 days from — (a) The date specified in the contract of subscription; or (b) The date stated in the call made by the BOD. All stocks covered by said subscription shall thereupon become delinquent and shall be subject to delinquency sale, unless the BOD orders otherwise [Sec. 67]. Effect of delinquency [Sec. 70] Effects of Delinquency Generally, delinquency suspends the rights of a subscriber, except the right to receive dividends (1) No delinquent stock shall be voted for (2) No delinquent stock shall be entitled to vote or to representation at any stockholders’ meeting. (3) Delinquent stock shall be subject to delinquency sale. A subscriber acquires all the rights of a shareholder at the point of subscription. His political and economic rights are not impaired by the fact that he has unpaid subscription. • Delinquency suspends the rights of a subscriber, except the right to receive dividends. • The dividends corresponding to such shares, if any, shall be applied against the unpaid amount. [Herbosa, 2019]. Note: The holder thereof shall NOT be entitled to any of the rights of a stockholder except the right to dividends. But the dividends it will receive will be subject to Sec. 42, RCC, that is — Page 226 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW • Cash dividends shall first be applied to the unpaid balance on the subscription plus costs and expenses; and the stockholder may question the sale as provided under Sec. 67, RCC. • Stock dividends shall be withheld until the unpaid subscription is fully paid. Public Auction • The highest bidder is one who is willing to pay the balance of the subscription for the least number of shares. - The stock so purchased shall be transferred to such purchases in the books of the corporation and a certificate of such stock shall be issued in his favor. - The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. • If there are no bidders, the corporation must bid for the whole number of shares regardless of how much the shareholders has paid. Such stocks will pertain to the corporation as fully paid treasury stocks. Call by resolution of the board of directors [Sec. 67] The BOD may, by resolution, order the sale of delinquent stock and shall specifically state — (1) The amount due on each subscription plus all accrued interest, and (2) The date, time and place of the sale, which shall not be less than 30 days nor more than 60 days from the date the stocks became delinquent, which is 30 days after the date specified in the contract of subscription or on the date stated in the call. Notice of sale [Sec. 67] If the BOD resolves to proceed with the sale: Notice of sale and a copy of the resolution shall be sent to every delinquent stockholder either personally or by registered mail. Notice of sale shall furthermore be published once a week for 2 consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Auction sale Procedure for delinquency sale [Sec. 67, RCC] 1. Call for payment made by the BOD. 2. Notice of call served on each stockholder. 3. Notice of delinquency issued by the BOD upon failure of the stockholder to pay within 30 days from date specified. 4. Service of notice of delinquency on the non-paying subscriber, PLUS publication in a newspaper of general circulation in the province or city where the principal office of the corporation is located, once a week for 2 consecutive weeks. Payment by Delinquent Stockholder The delinquent stockholder may stop the auction by paying to the corporation on or before the date specified for the sale the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of the sale. Otherwise, the public auction shall proceed and the delinquent shares shall be sold to the bidder that will pay the full amount of the balance of subscription with accrued interest, costs and expenses of the sale, for the smallest number of shares or fraction of a share. Irregularities in the delinquency sale [Sec. 68] Action to recover delinquent stock must be on the ground of irregularity or defect in: o the notice of sale or o in the sale itself of delinquent stock Unless, party seeking to recover first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate. Note: Requirements on notice and publication are mandatory. Lacking such requirements, Page 227 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS The action must be commenced within 6 months from the date of sale. Alienation of shares Allowable restrictions on the sale of shares General Rule: Free Transferability of Shares Shares of stock so issued are personal property and may be transferred [Sec. 62]. Exception: In CLOSE corporations, restrictions on the right to transfer shares may be provided in the Articles of Incorporation, bylaws and certificates [Sec. 97]. Sale of partially paid shares No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. [Sec. 62] A corporation may refuse to acknowledge and register a sale or assignment of shares which are not fully paid, and may continue to hold the original subscriber liable on the payment of the subscription. • However, the above principle in Section 62 cannot be utilized by the corporation to refuse to recognize ownership over pledged shares purchased at public auction. • The term “unpaid claims” refers to “any unpaid claims arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transactions. [China Banking Corp. v. CA, G.R. No. 117604 (1997)] Sale of a portion of shares not fully paid The SEC has opined on several occasions that a stockholder who has not paid the full amount of his subscription cannot transfer part of his subscription in view of the indivisible nature of a subscription contract. COMMERCIAL LAW Rationale Behind Prohibition The reason behind the principle of disallowing transfer of not fully paid subscription to several transferee is that it would be difficult to determine: (1) Whether or not the partial payments made should be applied as — • Full payment for the corresponding number of shares which can only be covered by such payment; or • Proportional payment to each and all of the entire number of subscribed shares (2) The unpaid balance to be assumed by each transferee [Villanueva]. Sale of all of shares not fully paid The SEC has opined that the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer must assume the unpaid balance. It is necessary, however, to secure the consent of the corporation, since the transfer of subscription rights and obligations contemplates a novation of contract which under Article 1293 of the Civil Code cannot be made without the consent if the creditor [Villanueva]. Sale of fully paid shares Shares of stock so issued are personal property and may be transferred by the delivery of the stock certificate or certificates, indorsed by — (1) The owner; or (2) The owner’s attorney-in-fact; or (3) Other person legally authorized to make the transfer. [Sec. 62] Requisites of a valid transfer Same as requirements for valid transfer of stocks. No transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing: i. The names of the parties to the transaction Page 228 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS ii. The date of the transfer, iii. The number of the certificate or certificates and iv. The number of shares transferred [Sec. 62]. The failure to register a sale or disposition of shares of stock in the books of the corporation would render the same invalid to all persons, including the attaching creditors of the seller. [Uson v. Diosomito, 61 Phil. 535 (1935).] See iii. Negotiability; requirements for valid transfer of stocks under a. Certificate of stock Involuntary dealings Right to Encumber Shares Shares of stock are personal property and the owner has an inherent right, as incident of ownership to transfer the same at will, which would include the power to encumber the shares. The right of a stockholder to pledge, mortgage or otherwise encumber his shares is recognized under Sec. 54 of the RCC which regulates the manner of voting on pledged or mortgaged shares. Restrictions on the Right to Encumber Shares Restriction Absolutely prohibits the stockholders from pledging or mortgaging their shares without the consent of the BOD Merely allows the corporation or existing stockholders to accept the offer within the option period, and thereafter, if no one accepts the offer, the stockholder is free to pledge or mortgage COMMERCIAL LAW his shares in favor of any 3rd party Right to Vote of Secured Creditors and Administrators General Rule: In case a stockholder grants security interest in his or her shares in stock corporations, the stockholder-grantor shall have the right to attend and vote at meetings of stockholders Exception: Unless the secured creditor is expressly given by the stockholder-grantor such right in writing which is recorded in the appropriate corporate books. [Sec. 54] Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. [Sec. 54] Attachment, Execution and Other Involuntary Dealings on Shares Attachments of shares of stock are not included in the term “transfer” as provided in [Section 62, RCC]. Both the Revised Rules of Court and [Revised Corporation Code] do not require annotation in the corporation’s STB for the attachment of shares to be valid and binding on the corporation and third parties. [Chemphil Export & Import Corp. v. CA, 251 SCRA 257 (1995).] Valid/Invalid INVALID It would be violative of the statutory right of the stockholders to encumber shares of stock as allowed in Sec. 54. VALID and binding A bona fide transfer of shares, not registered in the corporate books, is not valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not. All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute. [Garcia v. Jomouad, 323 SCRA 424 (2000).] Bias Against Voluntary Sales By the strict application of Sec. 63 of the Corporation Code [now Sec. 62, RCC] to cover only the sale, assignment or absolute disposition of shares of stock, the SC has placed a bias against voluntary sales, Page 229 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS assignments or dispositions of shares of stock vis-à-vis pledges, mortgages, attachment or levy thereof. • • To be valid and binding on third parties, the voluntary sale, assignment or disposition of shares requires the essential element of registration in the stock and transfer book; Otherwise the sale, assignment or disposition is considered void as to third parties, even when they have actual notice. In contrast, when it comes to pledge, mortgage, encumbrance, attachment or levy of shares, registration thereof in the stock and transfer book is not essential either for validity or as a species of notifying third parties. [Villanueva]. Corporate books and records Records to be kept at principal office Every corporation shall keep and carefully preserve at its principal office all information including but not limited to: ■ Articles of incorporation and by-laws and all their amendments; ■ Current ownership structure and voting rights of corporation ■ Names and addresses of all members of BOD/trustees and the executive officers ■ Record of all business transactions ■ Record of resolutions of BOD/Trustees and of stockholders/members ■ Copies of latest reportorial requirements submitted to the Commission; and • A record of all stocks in the names of the stockholders alphabetically arranged; • The installments paid and unpaid on all stocks for which subscription has been made, and the date of payment of any installment; • A statement of every alienation, sale or transfer of stock made, the date thereof, by and to whom made; and • Such other entries as the by-laws may prescribe NOTE: The duty to keep these books is imperative and mandatory. The stockholder can likewise inspect the financial statements of the corporation [Sec. 73]. Financial Statements [Sec. 74] A corporation shall furnish a stockholder or member its most recent financial statement within 10 days from receipt of written request. At a regular meeting, the Board shall present a financial report of the operations of the corporation for the preceding year, which shall include financial statements duly signed and certified in accordance with the Code. Exception: However, if the total assets or total liabilities of the corporation is less than Six hundred thousand pesos (P600,000.00), or such other amount as may be determined appropriate by the Department of Finance, the financial statements may be certified under oath by the treasurer and the president. ■ Minutes of all meetings of stockholders/members or of BOD/trustees. Stock Corporations [Sec. 73] Stock corporations must also keep: Books that record all business transactions of the corporation which shall include contract, memoranda, journals, ledgers, etc; Minute book for meetings of the stockholders/members; Minute book for meetings of the board/trustees; Stock and transfer book, which shall contain: COMMERCIAL LAW Right to inspect corporate records Requirements for the exercise of the right of inspection [Sec. 74] It must be exercised at reasonable hours on business days The inspecting or reproducing party shall remain bound by confidentiality rules under prevailing laws, such as the rules on trade secrets or processes under the Intellectual Property Code, Data Privacy Act, and the Securities Regulation Code. Page 230 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable times. • The right of inspection is not to be denied on the ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. • A director or stockholder can make copies, abstracts, and memoranda of documents, books, and papers as an incident to the right of inspection, but cannot, without an order of a court, be permitted to take books from the office of the corporation. However, a director or stockholder does not have any absolute right to secure certified copies of the minutes of the corporation until these minutes have been written up and approved by the directors [Veraguth v. Isabela Sugar, G.R. No. L-37064 (1932)]. • A stockholder of a sequestered company has the right to inspect and/or examine the records of the corporation pursuant to Sec. 74 of the Corporation Code (now Sec. 73, RCC) [Africa v. PCGG, G.R. No. 83831 (1992)]. Effect of refusal to inspect corporate records Refusal to allow inspection is a criminal offense. Such refusal, when done in violation of Sec. 74(4) of the Corporation Code (now Sec. 73, RCC), properly falls within the purview of Sec. 144 of the same code and thus may be penalized as an offense [Yujuico and Sumbilla v. Quiambao and Pilapil, G.R. No. 180416 (2014)]. (please note that the Code’s provisions have been changed under the RCC) Because the obligations provided for in Sec. 73, RCC fall on the corporation, violation of the same is done by the corporation; thus, criminal action based on such violation can only be maintained against corporate officers or other such persons acting on behalf of the corporations. COMMERCIAL LAW Officer or agent of corporation who refused to allow the inspection and/or reproduction of records shall be liable to the requesting officer for damages and shall be punishable under Section 161 If refusal is made pursuant to a resolution or order of the BOD/trustees, liability for such action shall be imposed upon the directors/trustees who voted on such refusal Defenses for refusal • Person demanding to examine and copy excerpts has improperly used any information secured through any prior examination of the records of such corp of any other corp • • Person demanding to inspect was not acting in good faith or for a legitimate purpose Person demanding to inspect is a competitor, director, officer, controlling stockholder, or otherwise represents interests of a competitor [Sec. 73] Remedies when inspection is refused Mandamus Injunction Action for damages File an action under Sec. 161 to impose a penal offense by fine and/or imprisonment. Under the Rules of Court, the writ of mandamus should be granted only if the court is satisfied that justice so requires [Sec. 8, Rule 65]. 11. Dissolution Liquidation And Dissolution of a corporation is the extinguishment of its franchise and the termination of its corporate existence or business purpose. However, for the purpose only of winding up its affairs and liquidating its assets, its corporate existence continues for a period of 3 years from such dissolution [Sec. 139]. Page 231 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Upon dissolution, the corporation ceases to be a juridical person and consequently can no longer continue transacting its business [Campos]. Note: If no dissolution papers are filed with the SEC by a corporation claiming dissolution voluntarily, such corporation is still deemed legally existing, notwithstanding the fact that it has ceased to operate [De Leon]. dissolution for approval 5. By merger consolidation Based on jurisprudence, the methods of effecting dissolution as prescribed by law are exclusive, and a corporation cannot be dissolved except in the manner prescribed by law [De Leon]. Dissolution may be voluntary or involuntary: INVOLUNTARY 1. Voluntary surrender of its charter by the vote of the BOD/T and the stockholders/members where no creditors are affected [Sec 134] 1. Expiration of the shortened corporate term [Sec 36] 2. By the judgment of the SEC after hearing of petition for voluntary dissolution, where creditors are affected 2. By legislative enactment 3. Amending the AOI 3. Failure to to shorten its term [Sec organize and 136] commence business within 2 years from incorporation [Sec 21] 4. In case of a corporation sole, by submitting to the SEC a verified declaration of the 4. Cessation of business for 5 years [Sec 21] or 5. By order of the SEC on grounds under existing laws [Sec 138] 5. By order of the Courts following a quo warranto proceeding, a proceeding involving a financially distressed corporation, or for grounds under existing laws. Modes Of Dissolution VOLUNTARY COMMERCIAL LAW Note: Where the veil of corporate fiction is pierced, it does not operate as a cause for the dissolution of the corporation. Voluntary Dissolution (a) Where no creditors are affected [Sec. 134] This type of dissolution is initiated by the corporation. It does not prejudice, or is not consented by creditors. Procedure 1. Notice of the meeting should be given to the stockholders or members by personal delivery, registered mail, or by any means authorized under its by- laws at least 20 days prior to the meeting. 2. The notice of meeting should also be published once prior to the meeting a. Notice shall contain the time, place and object of the meeting b. in a newspaper published in the place where the principal office of said corporation is located, or if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines. Page 232 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS 3. The resolution to dissolve must be approved by the majority of the BOD/T and approved by at least majority of the Outstanding Capital Stock or majority of the members. a. In the old Corporation Code, only a vote of majority of the BOD/T and 2/3 of the OCS/members was required. 4. The corporation must submit the following to the SEC: a) A verified request for dissolution stating the following: the reason for the dissolution, the form, manner, and time when the notices were given names of the stockholders and directors or members and trustees who approved of the dissolution the date, place and time of the meeting in which the vote was made, date of publication b) A copy of the resolution certified by the majority of the BOD/T and countersigned by the secretary. c) Proof of publication d) Favorable recommendation from the appropriate regulatory agency, when necessary e) The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution. Withdrawal of the request The corporation may withdraw its verified request for dissolution within 15 days from receipt by the SEC. Otherwise, the SEC shall approve the request and issue the certificate of dissolution. Effectivity of the dissolution Dissolution shall take effect upon the issuance of the certificate of dissolution by the SEC Favorable recommendation by the appropriate agency required No application of dissolution will be approved without the favorable recommendation of the appropriate government agency for: 1. banks, COMMERCIAL LAW 2. banking and quasi-banking institutions, 3. pre-need, insurance and trust companies, 4. non-stock savings and loans associations (NSSLA), 5. pawnshops, and 6. other financial intermediaries (b) Where creditors are affected [Sec. 135] This covers a case where the corporation petitions for its dissolution which may prejudice the rights of creditors, or are not consented by all of them. Here, the corporation is not under financial distress or in a state of insolvency. In those cases, the corporation must file a petition for rehabilitation or liquidation in court. [Herbosa, 2019] 1. A petition shall be filed with the SEC containing the following: (1) signature by a majority of its BOD/T or other officers having management of its affairs; (2) verified by its president, or secretary or one of its director or trustees; (3) all claims and demands against the corporation; and (4) resolved upon by affirmative vote of the stockholders representing at least 2/3 of the Outstanding Capital Stock or 2/3 of members; 2. The corporation must submit the following to the SEC: (1) The petition for dissolution stating the following: a. the reason for the dissolution; b. the form, manner, and time when the notices were given; c. the date, place and time of the meeting in which the vote was made (2) A copy of the resolution authorizing the dissolution, certified by the majority of the BOD/T and countersigned by the secretary. (3) A list of all its creditors 3. If the petition is sufficient in form and substance, the SEC shall issue an order Page 233 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS fixing the date on or before which objections to the petition may be filed. Such date shall not be less than 30 days nor more than 60 days after the entry of the order. 4. A copy of the order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation published in the municipality or city of the corporation’s principal office. If none, in a news paper of general circulation in the Philippines. A similar copy shall be posted for 3 consecutive weeks in 3 public places in such municipality or city. 5. A hearing of any issue or objections raised shall be conducted 5 days after the lapse of the expiration of the time to file objections. 6. If the objections are insufficient or the material facts in the petition are true, judgment shall be rendered dissolving the corporation and directing the disposition of assets. The judgment may include appointment of a receiver. a. As long as 2/3 vote is obtained, no member/ stockholder can prevent such dissolution unless the majority stockholders acted in bad faith. The latter may be held liable for damages [Campos]. b. Even where there are creditors of the corporation who may be prejudiced by the dissolution, it is still possible for the corporation to terminate its existence prior to the expiration of its term, provided said creditors are given the opportunity to present their claims and objections so that their interests may be protected [Campos]. (c) By shortening of corporate term [Sec. 136] COMMERCIAL LAW Ipso Facto Dissolution Upon approval of the expired shortened term, the corporation shall be deemed dissolved without any further proceedings. The corporation shall be deemed dissolved without any further proceedings, taking effect on the day following the last day of the corporate term. Shortening vs. Expiration Shortening of the Expiration of the Corporate Term Original Term Has the effect of Where a corporation dissolving the elects to retain its corporation, ipso corporate term, and term has facto, once the such the shortened term has expired, corporation may file arrived a petition for revival of corporate existence. [Divina] (d) Withdrawal 137] of dissolution [Sec. A withdrawal of the request for dissolution shall be: (1) Made in writing; (2) Duly verified by any incorporator, director, trustee, shareholder, or member; (3) Signed by the same number of incorporators, directors, trustees, shareholders, or members necessary to request for dissolution as set forth in Sec. 133-136; (4) Submitted no later than fifteen (15) days from receipt by the Commission of the request for dissolution. A withdrawal of the petition for dissolution shall be in the form of a motion and similar in substance to a withdrawal of request for dissolution but shall be verified and filed prior to publication of the order setting the deadline for filing objections to the petition. A voluntary dissolution may be effected by amending the AOI to shorten the corporate term under Sec 16. Page 234 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS SEC Action Upon receipt of a withdrawal of request for dissolution, the Commission shall withhold action on the request for dissolution and shall, after investigation: (a) Make a pronouncement that the request for dissolution is deemed withdrawn; (b) Direct a joint meeting of the board of directors or trustees and the stockholders or members for the purpose of ascertaining whether to proceed with dissolution; or (c) Issue such other orders as it may deem appropriate. Involuntary Dissolution BY EXPIRATION OF CORPORATE TERM The RCC provides that a corporation shall have perpetual existence. The AOIs of existing corporations shall be deemed amended to reflect their perpetual term. The exception is when the AOIs of corporations created under the effectivity of this Code provide for a specific period [Sec 11]. An existing corporation may opt out of the rule on perpetual existence by notifying the Commission, provided it was approved by shareholders, and without prejudice to the appraisal right of dissenting stockholders. [Herbosa, 2019] When such term has expired, a petition for revival of corporate existence may be filed. [Divina] COMMERCIAL LAW franchise of a public utility shall be made only “when the common good so requires”; 2. Under Sec. 84 of the Code, it is provided that: “No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof”; 3. While Congress may provide for the dissolution of a corporation, it cannot impair the obligation of existing contracts between the corporation and third persons, or take away the vested rights of its creditors. [De Leon] Note: Thus, except for the expiration of its term, no dissolution can be effective without some act of the State [Daguhoy Enterprises v. Ponce, G.R. No. L-6515 (1954)]. NON-USE OF CORPORATE CHARTER [Sec 21; Sec 138(a)] If a corporation fails to formally organize and commence the transaction of its business or construction of its works within 5 years, its certificate of incorporation shall be deemed revoked, its corporate powers shall cease and the corporation shall be deemed dissolved [Sec. 21]. LEGISLATIVE DISSOLUTION The inherent power of Congress to make laws carries with it the power to amend or repeal them. Involuntary corporate dissolution may be effected through the amendment or repeal of the Revised Corporation Code [implied from Sec. 184, DE LEON]. Dissolution in this case is automatic [Campos]. Contrary view: Since there is a defense available to the corporation, that is, if its failure to organize and commence its business is due to causes beyond the control of the corporation as may be determined by the SEC, therefore, the dissolution is not automatic. The limitations on the power to dissolve corporations by legislative enactment are as follows: 1. Under the Constitution, the amendment, alteration, or repeal of the corporate Formal organization includes not only the adoption of the by-laws but also the establishment of the body which will administer the affairs of the corporation and exercise its powers Page 235 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS By-laws should be adopted within one month of receipt of official notice of the issuance of the certificate of incorporation, otherwise the certificate may be suspended or revoked [PD 902-A, Sec. 6 (i)(5)]. CONTINUOUS INOPERATION OF CORPORATION [Sec 21; 138(b)] If a corporation commenced its business but fails to continue operations after least 5 consecutive years, the corporation is first placed on delinquent status, after due notice and hearing. • The delinquent corporation is given 2 years to resume operations and comply with all the requirements that the SEC shall prescribe. • Otherwise, the SEC will prescribe its dissolution. The corporation may have the revocation reconsidered. Otherwise, the SEC may proceed to involuntary dissolution with notice and hearing. Dissolution in this case is not automatic [Campos]. DISSOLUTION BY THE SEC ON GROUNDS UNDER THE CODE AND OTHER EXISTING LAWS The Revised Corporation Code also introduced a number of changes on involuntary dissolution. Sec. 138 codified the grounds that may lead to involuntary dissolution by the Commission motu proprio or upon filing of a verified complaint by any interested party. Grounds for dissolution [Sec 138] (a) Non-use of corporate charter; (b) Continuous inoperation of a corporation; (c) Upon receipt of a lawful court order dissolving the corporation; (d) Upon finding by final judgment that the corporation procured its incorporation through fraud; (e) Upon finding by final judgment that the corporation: (1) Was created for the purpose of committing, concealing or aiding the commission of securities violations, COMMERCIAL LAW smuggling, tax evasion, money laundering, or graft and corrupt practices; (2) Committed or aided in the commission of securities violations, smuggling, tax evasion, money laundering, or graft and corrupt practices, and its stockholders knew; and (3) Repeatedly and knowingly tolerated the commission of graft and corrupt practices or other fraudulent or illegal acts by its directors, trustees, officers, or employees. Non-use of corporate charter and continuous inoperation The grounds for dissolution under (a) and (b) as discussed above, will lead to the dissolution of the corporation unless the corporation files a petition to set aside its delinquency status, and the SEC grants it. Upon receipt of a lawful court order dissolving the corporation The ground under (c) may involve or arise from a quo warranto proceeding involving a de facto corporation (Sec 19, RCC) or a liquidation proceeding involving an insolvent debtor under FRIA (infra). Upon finding by final judgment that the corporation procured its incorporation through fraud The ground under (d) constitutes cases where a corporation misrepresented its purpose of incorporation, or when the incorporators used fictitious names, there was then fraud in the procurement of the certificate. Upon finding by final judgment that the corporation was created for an unlawful purpose The ground under (e) is a new provision. Here, a corporation found by final judgment to have been created for the purpose of committing, concealing, or aiding the commission of securities violations, smuggling, tax evasion, money laundering or graft and corrupt practices, may be subjected to involuntary dissolution by the SEC, motu proprio or upon filing of a verified complaint by any interested Page 236 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS party. In addition, the corporate assets after payment of its liabilities shall be forfeited in favor of the government upon petition of the Commission with the appropriate court. Grounds under other existing laws The grounds enumerated above are not exclusive. There are other grounds to dissolve the corporation upon order of the SEC which may be found in other laws. For example, the SEC may also suspend or revoke, after proper notice and hearing, the certificate of registration of private corporations under any of the following grounds: Fraud in procuring its certificate of incorporation; Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public; Refusal to comply or defiance of any lawful order of the SEC restraining commission of acts which amount to a grave violation of its franchise; Failure to file bylaws Failure to file required reports in appropriate forms as determined by the SEC within the prescribed period (PD No. 902-A, Sec 6(i)). Methods of Liquidation Liquidation is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. • Among corporate creditors, the rules on concurrence and preference of credits apply. • It is a proceeding in rem. The end of corporate relations does not result in the immediate termination of corporate existence. A corporation shall have the extended term of 3 years to wind up its corporate affairs and liquidate its assets. [Herbosa] COMMERCIAL LAW The RCC provides that any distributable asset to an unknown creditor or corporator shall be escheated in favor of the national government. This was previously in favor of the LGU where such assets are located, under the old Code. Difference between Rehabilitation Liquidation Liquidation and Rehabilitation The winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss Contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. Both cannot be undertaken at the same time [Phil. Veterans Bank v. Employees Union, G.R. No. 105364 (2001)]. Winding up of corporate affairs Under Sec. 139 of the RCC, a corporation loses its juridical personality and can no longer enter into transactions that have the effect of continuing its business. The only exception to this is the “winding-up” period which takes place for 3 years after the loss of the corporation’s juridical personality. • • It continues to be a body corporate for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the 3-year term, appoint a trustee or a receiver who may act beyond that period. A corporation in the process of liquidation has no legal authority to engage in any new business, even if the same is in accordance with the primary purpose stated in its article of incorporation. Page 237 of 450 U.P. LAW BOC • • BUSINESS ORGANIZATIONS It may not acquire new rights or incur new obligations. It may only have rights as may be required by the process of liquidation. [Herbosa] Pending actions against the corporation are not extinguished Pending actions against the corporation may still be prosecuted against the corporation even beyond the 3-year period. General Rule: The creditors of the corporation who were not paid within the 3-year period may follow the property of the corporation that may have passed to its stockholders Exceptions: • Unless the action is barred by prescription or laches; or • Unless there was a disposition of said property in favor of a purchaser in good faith.. Suits not brought against the corporation within the 3-year period may still be prosecuted against the corporation, since there is nothing in Sec. 122, par. 1 which bars action for the recovery of the debts of the corporation against the liquidator thereof after the lapse of the winding up period of 3 years [Republic of the Philippines vs. Marsman Dev. Co., G.R. No. L-175109, April 27, 1972]. Right of the corporation to appeal a judgment is not extinguished by the expiration of the 3-year period. Corporations whose certificate of registration was revoked by the SEC may still maintain actions in court for the protection of its rights which includes the right to appeal [Paramount Insurance Corp. v. A.C. Ordonez Corp., G.R. No. 175109, August 6, 2008]. Methods of liquidation: 1. By the corporation itself or its board of directors or trustees (Sec. 139[1], RCC) 2. By conveyance to a trustee within a threeyear period (Sec. 139[2], RCC; Board of Liquidators v. Kalaw, G.R. No. L-18805, Aug. 14, 1967) COMMERCIAL LAW 3. By a management committee or rehabilitation receiver appointed by SEC (Sec. 119, RCC) 4. By liquidation after three years By the Corporation Itself The liquidation and distribution of the assets of a dissolved corporation is a matter of internal concern of the corporation and falls within the power of the directors and stockholders or duly appointed liquidation trustee [SEC Opinion, July 23, 1996]. The corporation through its board and/or executive officers are in charge for this method of liquidation. The Legislature intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. The normal method of procedure is for the directors and executive officers to have charge of the winding up operations, though there is the alternative method of assigning the property of the corporation to trustees for the benefit of its creditors and shareholders. China Banking Corp. V. M. Michelin & Cie, 58 Phil. 261 (1933). The termination of the life of a corporate entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity. If the 3-year extended life has expired without a trustee or receiver having been expressly designated by the corporation, within that period, the BOD (or trustees) itself, may be permitted to so continue as "trustees" by legal implication Such designation as “trustees” is for the purpose of completing the corporate liquidation [Pepsi-Cola Products Philippines, Inc. v. CA, G.R. No. 145855 (2004)]. A corporation under liquidation may not amend its articles of incorporation to extend its lifespan. When a corporation is liquidating pursuant to the statutory period of 3 years to Page 238 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS liquidate, it is only allowed to continue for the purpose of final closure of its business and no other purposes. In fact, within that period, the corporation is enjoined from “continuing the business for which it was established.” [Alhambra Cigar and Cigarette Mfg. v. SEC, G.R. No. L23606 (1968)] Conveyance To A Trustee Within A 3-Year Period Liquidation may also be placed in the hands of a trustee or assignee. All the corporate assets are conveyed to such trustee or assignee by a resolution of stockholders at any time during the 3-year period. [Sec. 139] In this method, the 3-year limitation DOES NOT apply, provided that the designation of the trustees is made within the period. General rule: There is no time limit within which the trustee must finish the liquidation, and he may sue and be sued as such even beyond the 3-year period. Exception: The trusteeship is limited in its duration by the deed of trust. Trustees to whom the corporate assets have been conveyed pursuant to liquidation may sue and be sued as such in all matters connected with the liquidation [National Abaca v. Pore, G.R. No. L-16779 (1961)]. The trustee of a dissolved corporation may commence a suit which can proceed to final judgment even beyond the 3-year period of liquidation. [Reburiano v. CA, G.R. No. 102965 (1999)]. Unless the trusteeship is limited in its duration by the deed of trust, there is no time limit within which the trustee must finish liquidation [Board of Liquidators v Kalaw, G.R. No. L-18805 (1967)]. Any corporate creditor, shareholder, member or other person-in-interest may petition the courts for the appointment of a different COMMERCIAL LAW trustee//s in liquidation. [Clemente et.al. v. CA, G.R. No. 82407 (1995), citing Gelano v. CA, 103 SCRA 90]. By Management Committee Rehabilitation Receiver or In SEC’s judgment dissolving the corporation and directing disposition of its assets as justice requires, it may appoint a receiver to collect such assets and pay the debts of the corporation [Sec. 135]. In the exercise of its jurisdiction, the Commission possesses the following powers: (1) To appoint one or more receivers of the property, real and personal, which is the subject of the action pending before the Commission in such other cases whenever necessary in order to preserve the rights of the parties-litigants and/or protect the interest of the investing public and creditors; (2) To create and appoint a management committee, board, or body upon petition or motu propio to undertake the management of corporations, partnerships or other associations not supervised or regulated by other government agencies in appropriate cases. [PD 902-A, as amended by PD 1799, Sec. 6] While the SEC has the authority to dissolve a corporation, it does not have the authority to settle disputes arising from its liquidation. A commercial court is in the best position to convene all stakeholders, including creditors, to ascertain their claims and determine their preferences [Consuelo Metals Corporation v. Planters Development Bank G.R. No. 152580 (2008)]. WHO IS A REHABILITATION RECEIVER • A rehabilitation receiver is a natural or juridical person appointed by the court pursuant to RA 10142 or the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, whenever necessary in order to preserve the rights of the parties-litigants and/or protect the interest of the investing public and creditors. Page 239 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS • The receiver’s principal duty is to - Preserve and maximize the value of the assets of the debtor during the rehabilitation proceedings; - Assess the viability of rehabilitation, and implement a Rehabilitation Plan • Unless appointed by the court, the rehabilitation receiver shall not take over the management and control of the debtor, but may recommend the appointment of a management committee over the debtor in the cases provided by the FRIA [Sec. 31, FRIA]. WHAT IS A MANAGEMENT COMMITTEE The management committee is the body appointed by the court who shall take the place of the management and the governing body of the debtor corporation and assume their rights and responsibilities. A rehabilitation receiver may also be appointed to assume the management of the corporation [Sec. 36, FRIA]. A management committee may be appointed in the following cases: 1. Actual or imminent danger of dissipation, loss, wastage or destruction of the debtor’s assets or other properties; 2. Paralyzation of the business operations of the debtor; or 3. Gross mismanagement of the debtor, or fraud or other wrongful conduct on the part of, or gross or willful violation of the FRIA by existing management of the debtor or the owner, partner, director, officer or representative/s in management of the debtor [Sec. 36, FRIA] EFFECTS OF APPOINTING A RECEIVER The appointment of a receiver suspends the authority of the corporation, as well as its directors and officers, over the properties of the corporation. • • The receiver shall act as the representative of the corporation. The receivership shall exist indefinitely until the complete settlement and liquidation of the corporation, unless otherwise limited. [Herbosa] COMMERCIAL LAW The mere appointment of a receiver, without anything more, does not result in the dissolution of the corporation, nor bar it from the exercise of its corporate rights [Leyte Asphalt and Mineral Oil Co. Ltd., v. Block Johnston and Breenbrawn, G.R. No. 9755 (1928)]. While the appointment of a receiver rests within the sound judicial discretion of the court, such discretion must, however, always be exercised with caution and governed by legal and equitable principles, the violation of which will amount to its abuse, and in making such appointment the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate business. China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261 (1933). RECEIVERSHIP VS. TRUSTEESHIP (1) Trusteeship is a contractual relationship that can be created by a corporation through its Board of Directors. Receivership is created by judicial appointment of a rehabilitation receiver and/or management committee. (2) Both involve transfers of legal/naked title from the corporation to the trustee/receiver/management committee. From the time the assets of the corporation are transferred to a trustee or receiver pursuant to liquidation, all such assets are then held by and in the name of the trustee or receiver who can lawfully proceed with liquidation even if the corporation no longer exists, because he has title to the assets. (3) The trustee in liquidation is accountable under the terms of the trust agreement. The receiver and management committee members are deemed officers of the court and must therefore be accountable to the court by provision of law. (4) Both are not subject to the 3-year period because the corporation is substituted in either case by the trustee or the receiver who may sue or be sued even after the expiration of the 3-year period. However, in the case of trusteeship, the trustee must Page 240 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS have been designated within the 3-year period. 3-YEAR PERIOD DOES NOT APPLY When the liquidation of a dissolved corporation has been placed in the hands of a receiver or assignee: The 3-year period prescribed by law for • liquidation cannot be made to apply, and The receiver or trustee may institute all actions leading to the liquidation of the assets of the corporation even after the expiration of said period. Sumera v. Valencia, 67 Phil. 721 (1939). Liquidation after three years Under Sec. 139, after the expiration of the 3year winding-up period, pending actions by or against the corporation are abated. It should not, however, be construed as to prevent a corporation from pursuing activities which would complete the final liquidation of a dissolved corporation. In this case, Northern Luzon Corporation Inc. which term has long expired, was unable to dispose of its remaining assets even during the 3-year period granted it by Sec. 122 [now Sec. 139, RCC]. - Accordingly, it should be allowed to continue liquidating its remaining assets in order to complete the process of dissolving the corporation. - Likewise, it should be allowed to distribute the proceeds from said disposition to its stockholders or creditors if any. A contrary interpretation would have unjust and absurd results. SEC-OGC Opinion No. 15-07 (2015) citing SECAC No. 347 (1991). COMMERCIAL LAW Directors as Trustees If full liquidation can only be effected after the 3-year period and there is no trustee, the directors may be permitted to complete the liquidation by continuing as trustees by legal implication [Reburiano v. CA, G.R. No. 102965 (1999)]. A corporation’s BOD is not rendered functus officio by its dissolution. • Sec. 122 [now Sec 139] allows a corporation to continue its existence for a limited purpose, necessarily there must be a board that will continue acting for and on behalf of the dissolved corporation for that purpose [Aguirre vs. FQB+, Inc., G.R. No. 170770 (2013)]. Continuation of Pending Suits The trustee of a corporation may continue to prosecute a case commenced by the corporation within 3 years from its dissolution until rendition of the final judgment, even if such judgment is rendered beyond the 3-year period allowed by Sec 139, RCC • However, an already defunct corporation is barred from initiating a suit after the lapse of the said 3-year period. • If a petition is filed after the corporate existence, the effect is that petitioner lacks the capacity to sue as a corporation. To allow such petition to prosper, on the ground that it is for the sole purpose of liquidating the corporation’s assets, would be to circumvent the provisions of Sec. 122 of the Corporation Code (now Sec. 139, RCC) [Alabang Development Corporation v. Alabang Hills Village Association and Rafael Tinio, G.R. No. 187456 (2014)]. • Page 241 of 450 U.P. LAW BOC 12. BUSINESS ORGANIZATIONS COMMERCIAL LAW Incorporating a Close Corporation General Rule: Any corporation may be incorporated as a close corporation. Other Corporations Close corporations Statutory Definition A close corporation is – 1. One whose AOI provides that: (a) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (b) All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (c) The corporation shall not list in any stock exchange or make any public offering of its stocks of any class. 2. One where two-thirds (2/3) or more of its voting stock or voting rights is NOT owned or controlled by another corporation, which is not a close corporation within the meaning of this Code. [Sec. 95, RCC] A narrow distribution of ownership does not, by itself, make a close corporation. When a corporation’s AOI does not contain the provisions enumerated under Sec. 96 of the Code [now Sec. 95, RCC], such corporation is not a “close corporation”. It does not become one either, just because only a few individuals owned 99.866% of its subscribed capital stock [San Juan Structural and Steel Fabricators v CA, G.R. No. 129459 (1998)]. “Incorporated Partnership” A close corporation embodies what businessmen perceive to be the best features of a partnership and a corporation, such as – Corporation: separate personality, limited liability, and the right of succession Partnership: delectus personae (the selection of a person satisfactory to oneself for a position), and general management by all partners of business affairs [Villanueva] Exceptions: The ff. cannot be incorporated as a close corporation – i. Mining or oil companies ii. Stock exchanges iii. Banks iv. Insurance companies v. Public utilities vi. Educational institutions; and vii. Corporations declared to be vested with public interest in accordance with the provisions of this Code. [Sec. 95, RCC] Applicability of RCC Provisions The provisions of Title XII (Close Corporations) primarily govern close corporations, while other Titles of the RCC apply suppletorily, except as otherwise provided under Title XII. [Sec. 95, RCC] Characteristics corporation of a close DIRECT MANAGEMENT BY STOCKHOLDERS The AOI of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. [Sec. 96, RCC] The feature of a close corporation, whereby there is a merger of stock ownership and active management is what significantly distinguishes it from other corporations. [Villanueva] Identity of Stock Ownership and Active Management All or most of the stockholders of a close corporation are active in the corporate business either as directors, officers or other key men in management [Campos]. Page 242 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Stockholders’ Meeting Unnecessary So long as the abovementioned AOI provision continues in effect, no meeting of stockholders need be called to elect directors. Provided, that the stockholders of the corporation shall be: (1) Deemed to be directors for the purpose of applying the provisions of this Code; and - Unless the context clearly requires otherwise (2) Subject to all liabilities of directors. [Sec.96,RCC] IDENTITY AND NUMBER STOCKHOLDERS (1) Stockholders of record not more than 20 (2) Stocks not publicly listed (3) Restricted transfer of ownership of stocks [Sec. 95, RCC] VOTING STOCK OR VOTING RIGHTS NOT HELD BY ANOTHER CORPORATION A corporation cannot be deemed as a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation, which is not a close corporation within the meaning of this Code. [Sec. 95, RCC] Validity of restrictions on transfer of shares In order to be binding on any purchaser in good faith, restrictions on the right to transfer shares must appear in the: (1) AOI; (2) By-laws; and (3) Certificate of stock. [Sec. 97, RCC] Right of First Refusal Restrictions on transfer shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder. Said option is subject to such reasonable terms, conditions or period stated in the AOI, by-laws, and certificate of stock. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the COMMERCIAL LAW transferring stockholder may sell their shares to any third person. [Sec. 97, RCC] The right of first refusal as discussed above, is the most onerous transfer restriction allowed. Such right is a control scheme essential to a close corporation. It allows the existing stockholders the power to maintain the character of delectus personae by preventing an outsider from coming into and interfering with the affairs of the close corporation. [Villanueva] A transfer restriction should NOT amount to a deprivation of a stockholder’s right to ultimately dispose of his shareholdings. [Rural Bank of Salinas v. CA, 210 SCRA 510 (1992)] Issuance or transfer of stock in breach of qualifying conditions Subject to certain requirements, the person to whom stock is issued or transferred shall be conclusively presumed to have notice of the fact of the breach of the ff. qualifying conditions: (a) Eligibility of Stockholder (b) Number of Stockholders of Record (c) Stock Transfer Restrictions [Sec. 98 (a)(c), RCC] Note: The term “transfer”, as used in Sec. 98, is not limited to a transfer for value. [Sec. 98(f), RCC] Breach: Ineligibility of Stockholder The transferee is conclusively presumed to have notice of the fact of the ineligibility to be a stockholder: (1) If a stock of a close corporation is issued or transferred to any person who is not eligible thereof under any provision of the AOI; and (2) If the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof. [Sec. 98(a), RCC] Page 243 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW Breach: Exceeding the Number of Stockholders of Record The transferee is conclusively presumed to have notice of the fact that the issuance or transfer of stock to any person would cause the stock to be held by more than the number stated in the AOI: (1) If the AOI of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be stockholders of record; and (2) If the certificate for such stock conspicuously states such number; and (3) The issuance or transfer of stock to any person would cause the stock to be held by more than such number of person [Sec. 98(b), RCC] Option to Rescind or Recover The provisions of Sec. 98 shall not impair any right which the transferee may have to either: (a) Rescind the transfer; or (b) Recover the stock under any express or implied warranty. [Sec. 98(g), RC Breach: Violation of Stock Transfer Restriction The transferee is conclusively presumed to have notice of the fact that the stock was acquired in violation of the transfer restriction: (1) If a stock certificate of a close corporation conspicuously shows a restriction on transfer of the corporation’s stock; and (2) The transferee acquires the stock in violation of such restriction [Sec. 98(c), RCC] When Board Meeting is Unnecessary However, in a close corporation, unless the bylaws provide otherwise, any action taken by the directors without a meeting called properly and with due notice shall nevertheless be deemed VALID if: (a) Before or after such action is taken, written consent thereto is signed by all the directors; or (b) All the stockholders have actual or implied knowledge of the action and make no prompt objection in writing; or (c) The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or (d) All the directors have express or implied knowledge of the action in question and none of them makes a prompt objection in writing. [Sec. 100, RCC] Effect of Conclusive Presumption General Rule: Whenever a person to whom stock of a close corporation has been issued or transferred is conclusively presumed to have notice of the breach of qualifying conditions, the corporation may, at its option, refuse to register the transfer in the name of the transferee. [Sec. 98(d), RCC] Exceptions: (1) If the transfer of stock, though in breach of the qualifying conditions, has been consented to by ALL the stockholders of the close corporation; or (2) If the close corporation has amended its articles of incorporation in accordance with Title XII. [Sec. 98(e), RCC] When board meeting is unnecessary or improperly held Board Must Act as a Body to Bind the Corporation Generally, under the doctrine of centralized management, the exercise of powers by the BOD is done through the adoption of a board resolution in a board meeting called for the purpose. [Villanueva] In a close corporation, a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. [Manuel R. Dulay Enterprises v. CA [G.R. No. 91889 (1993)] When Board Meeting is Improperly Held General Rule: An action within the corporate powers taken at a meeting held without proper call or notice, is deemed ratified by a director who failed to attend. Page 244 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Exception: Unless after having knowledge thereof, the director promptly files his written objection with the secretary of the corporation. [Sec. 100, RCC] Preemptive right Definition The preemptive right is a right granted to stockholders to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. [Sec. 38, RCC] Scope of Pre-emptive Right in Ordinary Corporations In ordinary corporations, the pre-emptive right shall not extend to – (1) Shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or (2) Shares issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. [Sec. 38, RCC] However, because of the desire to preserve the characteristic of delectus personae in close corporations, the aforesaid limitations are NOT APPLICABLE to close corporations. Scope of Pre-emptive Right in Close Corporations General Rule: The preemptive right of stockholders in close corporations shall extend to ALL stock to be issued, including reissuance of treasury shares, whether: (1) For money, property or personal services; or (2) In payment of corporate debts Exception: Unless the AOI provide otherwise. [Sec. 101, RCC] Amendment incorporation COMMERCIAL LAW of articles of Contents of the AOI of Close Corporations Mandatory Provisions The AOI of a close corporation must provide that: (a) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (b) All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and z (c) The corporation shall not list in any stock exchange or make any public offering of its stocks of any class. [Sec. 95, RCC] Optional Provisions The AOI of a close corporation may provide for: (1) A classification of shares or rights, The qualifications for owning or holding the same, and Restrictions on their transfers, subject to the provisions of the following section; (2) A classification of directors into one (1) or more classes, Each of whom may be voted for and elected solely by a particular class of stock (3) Greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code, (4) The management by the stockholders of the business of the corporation, rather than by a board of directors; and (5) The election or appointment by the stockholders of all officers or employees, or specified officers or employees, instead of by the board of directors. [Sec. 96, RCC] Amendments Any amendment to the AOI, which seeks: (1) To delete or remove any provision required by this Title; or Page 245 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS (2) To reduce a quorum or voting requirement stated in said articles of incorporation shall require, at a meeting duly called for the purpose, the affirmative vote – a. Of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights; or b. Of such greater proportion of shares as may be specifically provided in the AOI for amending, deleting or removing any of the aforesaid provisions. [Sec. 102, RCC] Deadlocks Definition A deadlock is a situation when the directors or stockholders are so divided on the management of the corporation’s business and affairs that: (1) The votes required for a corporate action cannot be obtained; (2) With the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally. [Sec. 103, RCC] Effect of the Existence of a Deadlock General Rule: The SEC, upon written petition by any stockholder, shall have the power to arbitrate the dispute. Exception: Contrary provision in the close corporation’s articles of incorporation, bylaws, or stockholders’ agreement. [Sec. 103, RCC] Exercise of Power to Arbitrate by the SEC In the exercise of such power, the Commission shall have authority to make appropriate orders, such as: (a) Cancelling or altering any provision contained in the articles of incorporation, bylaws, or any stockholder’s agreement; (b) Cancelling, altering or enjoining a resolution or act of the corporation or its board of directors, stockholders, or officers; (c) Directing or prohibiting any act of the corporation or its board of directors, (d) (e) (f) (g) COMMERCIAL LAW stockholders, officers, or other persons party to the action; Requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; Appointing a provisional director; Dissolving the corporation; or Granting such other relief as the circumstances may warrant. [Sec. 103, RCC] Appointment of a Provisional Director Qualifications A provisional director shall be an impartial person: 1. Who is neither a stockholder, nor a creditor of the corporation or any of its subsidiaries or affiliates; and 2. Whose further qualifications, if any, may be determined by the Commission. [Sec. 103, RCC] Powers, Rights, Compensation A provisional director shall have all the rights and powers of a duly elected director. This includes the right to be notified of, and to vote at meetings of directors until removed by order of the Commission or by all the stockholders. However, the provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. [Sec. 103, RCC] The compensation of the provisional director shall be determined by agreement between such director and the corporation, subject to approval of the Commission. The SEC may fix the compensation, absent an agreement or in the event of disagreement between the provisional director and the corporation. [Sec. 103, RCC] Buy-Back Order & Right to Withdraw In the exercise of its power to arbitrate a deadlock situation, the SEC can require the purchase, at their fair value, of shares of any stockholder, either by: Page 246 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS The corporation regardless of the availability of unrestricted retained earnings in its books; or The other stockholders. [Sec. 103(d), RCC] The stockholder of a close corporation has a counterpart right to compel the corporation, for any reason, to purchase shares held at fair value. Such purchase shall not be less than the par or issued value Such purchase shall take place only when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock. [Sec. 104, RCC] Dissolution Order & Right to Dissolve In the exercise of its power to arbitrate a deadlock situation, the SEC can order the dissolution of a corporation. [Sec. 103(f), RCC] The stockholder of a close corporation has a counterpart right to compel the dissolution of such corporation by written petition to the Commission: (1) Whenever any of acts of the directors, officers, or those in control of the corporation is illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to the corporation or any stockholder; or (2) Whenever corporate assets are being misapplied or wasted. [Sec. 104, RCC] Rationale Behind Deadlock Provisions The deadlock provisions, through the threat of dissolution or repurchase of shares, provide a strong incentive for the controlling group to manage equitably, or otherwise face the likelihood that the enterprises would be folded up by the SEC. A close corporation setting does not allow a stockholder to “cash-in” on his equity because there is no market for his shares (i.e. right of first refusal) Deadlocks arise often because some members feel that the managing group has been able to corner profits through schemes that are inequitable to the other parties. [Villanueva] COMMERCIAL LAW Non-stock corporations Definition A non- stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers. [Sec. 86, RCC] Essence of a Non-Stock Corporation It is legally possible for a corporation having capital stock to still be considered a non-stock corporation. For this reason, the essence of a non-stock corporation is NOT the non-existence of shares of stock, but that: a. Its primary purpose should be eleemosynary in nature; and b. There is a prohibition in its AOI and by-laws that no part of the income or any form of dividend is distributable to the members, trustees, or officers of the corporation. [Villanueva] Purposes Non-stock corporations may be formed or organized for the ff. purposes: (1) Charitable, (2) Religious, (3) Educational, (4) Professional, (5) Cultural, (6) Fraternal, (7) Literary, (8) Scientific, (9) Social, (10) Civic service, (11) Similar purposes, like trade, industry, agricultural and like chambers; or (12) Any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. [Sec. 87, RCC] A non-stock corporation may not include in its AOI a purpose which would change or contradict its nature as such. [Sec. 13(b), RCC] A nonstock corporation may not engage in investment business, where profit is the main Page 247 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS or underlying purpose. [People v. Menil, 340 SCRA 125 (2000)] Treatment of Profits Any profit which a non-stock corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. [Sec. 86, RCC] A non-stock corporation holds its funds in trust for the carrying out of the objectives and purposes expressed in its AOI. Thus, if it were to be converted to a stock corporation, it must be dissolved first, otherwise, such transformation would be tantamount to an unauthorized distribution of its assets or income to its members. [Villanueva] Earning of Profits Merely Incidental It is not inconsistent with the nature of a nonstock corporation to incidentally earn profits in pursuing its eleemosynary purpose. [CIR v. University of Visayas, 1 SCRA 669 (1961)] The incurring of profit or losses does not determine whether an activity is for profit or non-profit, what the courts will consider is: 1. Whether dividends have been declared; or 2. Whether its profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise. [Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963)] COMMERCIAL LAW Note: Reasons for Dissolution under Sec. 139 Charter expires pursuant to its AOI, Charter is annulled by forfeiture, or Corporate existence is terminated in any other manner [Sec. 139, RCC] Rules of Distribution of Assets Upon Dissolution The assets of a nonstock corporation undergoing the process of dissolution for reasons other than those set forth in Section 139, shall be applied and distributed as follows: (a) All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefor; (b) For the assets of the corporation – Type of Asset How Distributed Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution Returned, transferred or conveyed in accordance with such requirements; Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but NOT held upon a condition requiring return, transfer or conveyance by reason of the dissolution Transferred or conveyed to one or more corporations, societies or organizations: (1) Engaged in activities in the Philippines substantially similar to those of the dissolving corporation (2) According to a plan of distribution adopted pursuant to this Chapter; Plan and distribution of assets upon dissolution Applicability The subsequent rules of distribution of assets are applicable only when the nonstock corporation undergoing dissolution was dissolved for reasons other than those set forth in Section 139. [Sec. 93, RCC] Page 248 of 450 U.P. LAW BOC Assets other than those mentioned in the preceding paragraphs, if any BUSINESS ORGANIZATIONS Distributed in accordance with the provisions of the AOI or the bylaws to the extent that the AOI or the bylaws: • Determine the distributive rights of members or any class or classes of members; or • Provide for distribution Assets, in any other case Distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter [Sec. 93, RCC] Plan of Distribution of Assets Upon Dissolution A plan providing for the distribution of assets may be adopted by a non-stock corporation in the process of dissolution in the following manner: (1 ) (2 ) (3 ) The board of trus tees shall, by majority vote, adopt a resol ution: a. Recommendi ng a pl an of distributi on and b. Directing the s ubmis sion thereof to a vote at a reg ular or s peci al meeting of members having voti ng rights; Eac h member entitl ed to vote s hall be gi ven, i n the manner provi ded in this Code for the givi ng of notic e of meeti ngs, a written notic e s etti ng forth: a. The propos ed pl an of distri bution or a s ummar y thereof b. The date, ti me and pl ace of s uch meeti ng within the time; and Suc h plan of dis tribution s hall be adopted upon approval of at l east two-thirds (2/3) of the members having voti ng rights pr esent or r epr es ented by proxy at s uc h meeting. [Sec. 94, RCC] Page 249 of 450 COMMERCIAL LAW U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW SUMMARY: Stock vs. Non-Stock Corporations Stock Non-stock Definition Stock corporations are those which have capital stock divided into shares and are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held. [Sec. 3, RCC] All other corporations . [Sec. 3, RCC] One where no part of its income is distributable as dividends to its members, trustees or officers. [Sec. 87, RCC] Purpose Primarily to make profits for its shareholders. Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. [Sec. 87, RCC] Distribution of profits A nonstock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers: Provided, That any profit which a non-stock corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. [Sec. 86, RCC] Profit is distributed to shareholders. Scope of Voting Rights Each stockholder votes according to the proportion of his shares in the corporation. No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, That there shall always be a class or series of shares with complete voting rights [Sec. 6, RCC]. Each member, regardless of class, is entitled to one (1) vote UNLESS such right to vote has been limited, broadened, or denied in the AOI or by-laws [Sec. 88, RCC]. Voting by proxy Page 250 of 450 U.P. LAW BOC COMMERCIAL LAW BUSINESS ORGANIZATIONS Stock Non-stock Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. When so authorized in the by-laws or by a May be denied by the AOI or the by-laws [Sec. 88, majority of the board of directors, the RCC] stockholders or members of corporations may also vote through remote communication or in absentia: Provided, That the votes are received before the corporation finishes the tally of votes. [Sec. 57, RCC] Who Exercises Corporate Power Board of Directors or Trustees. [Sec. 22, 92, RCC] Board of Trustees, which may or may not be more than 15 trustees, as provided by the AOI or by-laws [Sec. 23, 91, RCC] Term of Directors of Trustees Board classified in such a way that the term of office Directors / trustees shall hold office for 1 year of 1/3 of their number shall expire every year. and until their successors are elected and Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and trustees so qualified [Sec. 23]. elected shall have a term of 3 years [Sec. 92]. Election of Officers Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation’s books, while trustees shall be elected for a term not exceeding three (3) years from among the members of the corporation. Each director and trustee shall hold office until the successor is elected and qualified. [Sec. 22, RCC] The articles of incorporation may provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. Except with respect to independent trustees of nonstock corporations vested with public interest, only a member of the corporation shall be elected as trustee. [Sec. 91, RCC] Officers may directly elected by the members UNLESS the AOI or by-laws provide otherwise [Sec. 91, RCC]. [Sec. 97]. Transferability of interest or membership Page 251 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Stock COMMERCIAL LAW Non-stock Generally non-transferable since membership and all rights arising therefrom are personal. However, the AOI or by-laws can provide otherwise [Sec. 89, RCC]. Transferable. Educational corporations Educational corporation – A stock or nonstock corporation organized for educational purposes. [De Leon, Corporation Code] Educational corporations shall be governed by special laws and by the general provisions of this Code. [Sec. 105, RCC] Composition of Board: If organized as a non-stock corporation Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15). Provided, however, that – The number of trustees shall be in multiples of five They shall classify themselves in such a way that the term of 1/5 of them expires every year. [Sec. 106, RCC] If organized as a stock corporation For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. [Sec. 106, RCC] The powers and authority of trustees shall be defined in the bylaws. Quorum A majority of the trustees shall constitute a quorum for the transaction of business. [Sec. 106, RCC] Constitutional Provisions Related to Educational Corporations: Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity participation in all educational institutions. The control and administration of educational institutions shall be vested in citizens of the Philippines. [CONST, Art. XIV, Sec. 4(2), par. 1] No educational institution shall be established exclusively for aliens and no group of aliens shall comprise more than one-third of the enrollment in any school. The provisions of this subsection shall not apply to schools established for foreign diplomatic personnel and their dependents and, unless otherwise provided by law, for other foreign temporary residents. [CONST, Art. XIV, Sec. 4(2), par. 1] Religious corporations Rules as to Vacancies Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. [Sec. 106, RCC] Religious corporations may be incorporated by one or more persons. Such corporations may be classified into: 1. Corporations sole; and 2. Religious societies. [Sec. 107, RCC] Religious corporations shall be governed by Title XIII, and by the general provisions on nonstock corporations insofar as applicable. [Sec. 107, RCC] Page 252 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Corporation sole; nationality A corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of such religious denomination, sect, or church. [Sec. 108, RCC] A corporation sole consists of only one person and his successors (who will always be one at a time), in some particular station. [Roman Catholic Apostolic Adm. of Davao v. LRC, 102 Phil. 596 (1957)] Purpose A corporation sole is incorporated for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church. [Sec. 108, RCC] A corporation sole is not the owner of the properties that he may acquire, but merely the administrator thereof. [Roman Catholic Apostolic Adm. of Davao v. LRC, 102 Phil. 596 (1957)] Nationality A corporation sole has no nationality, but for the purpose of applying nationalization laws, nationality is determined not by the nationality of its presiding elder but by the nationality of its members constituting the sect in the Philippines. Thus, the Roman Catholic Church can acquire lands in the Philippines even if it is headed by the Pope [Roman Catholic Apostolic, etc v. Register of Deeds of Davao City, G.R. No. L-8451 (1957)]. Incorporation Contents of the AOI The AOI of the corporation sole must set forth the following: 1. That the applicant chief archbishop, bishop, priest, minister, rabbi, or presiding elder represents the religious denomination, sect, or church who desires to become a corporation sole; 2. That the rules, regulations and discipline of the religious denomination, sect or church are consistent with becoming a corporation sole and do not forbid it; COMMERCIAL LAW 3. That such chief archbishop, bishop, priest, minister, rabbi, or presiding elder is charged with: 4. The administration of the temporalities and 5. The management of the affairs, estate and properties of the religious denomination, sect, or church within the territorial jurisdiction, so described succinctly in the AOI; 6. The manner by which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi, or presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect, or church; and 7. The place where the principal office of the corporation sole is to be established and located, which place must be within the territory of the Philippines. [Sec. 109, RCC] Submission of the AOI The chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file the AOI with the Commission. [Sec. 109, RCC] The articles of incorporation must be: (1) Verified, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi, or presiding elder, as the case may be; and (2) Accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi, or presiding elder, duly certified to be correct by any notary public. [Sec. 110, RCC] From and after filing with the Commission of the said AOI: (1) Such chief archbishop, bishop, priest, minister, rabbi, or presiding elder shall become a corporation sole; and (2) All temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed as such chief archbishop, bishop, priest, minister, rabbi, or presiding elder shall be personally held in trust as a corporation sole Page 253 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS For the use, purpose, exclusive benefit and on behalf of the religious denomination, sect, or church. This includes hospitals, schools, colleges, orphan asylums, parsonages, and cemeteries thereof. [Sec. 110, RCC] Power to Amend AOI Note that Sec. 107 allows the application to religious corporations of the general provisions governing non-stock corporations, insofar as applicable. For non-stock corporations, the power amend its Articles of Incorporation lies in members. The code requires two-thirds their votes for the approval of such amendment. to its of an So how will this requirement apply to a corporation sole that has technically but one member (the head of the religious organization) who holds in his hands its broad corporate powers over the properties, rights, and interests of his religious organization? • Although a non-stock corporation has a personality that is distinct from those of its members who established it, its AOI cannot be amended solely through the action of its BOT. The amendment needs the concurrence of at least 2/3 of its membership. • If such approval mechanism is made to operate in a corporation sole, its one member in whom all the powers of the corporation technically belongs, needs to get the concurrence of 2/3 of its membership. The one member is but a trustee of its membership. • There is no point to dissolving the corporation sole of one member to enable the corporation aggregate to emerge from it. The one member, with the concurrence of two-thirds of the membership of the organization for whom he acts as trustee, can self-will the amendment. He can, with membership concurrence, increase the technical number of the members of the corporation from “sole” or one to the greater number authorized by its amended COMMERCIAL LAW articles. [Iglesia Evangelica Metodista En Las Filipinas (Corporation Sole) Inc., et al v. Bishop Nathanael Lazaro, et al, G.R. No. 184088 (2010)] Filling of Vacancies The successors in office of any chief archbishop, bishop, priest, minister, rabbi, or presiding elder in a corporation sole: (1) Shall become the corporation sole on their accession to office; and (2) Shall be permitted to transact business as such upon filing a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public with the Commission. [Sec. 112, RCC] During any vacancy in the office, all the powers and authority of the corporation sole during such vacancy shall be exercised by the person or persons authorized by the rules, regulations or discipline of the religious denomination, sect, or church represented by the corporation sole to: i. Administer the temporalities and ii. Manage the affairs, estate, and properties of the corporation sole. [Sec. 112, RCC] Acquisition of Property A corporation sole may: (1) Purchase and hold real estate and personal property for its church, charitable, benevolent, or educational purposes; and (2) Receive bequests or gifts for such purposes. [Sec. 111, RCC] Alienation of Property A corporation sole may sell or mortgage real property held by it by: (1) Obtaining an order for that purpose from the Regional Trial Court of the province where the property is situated (2) Adducing proof that: The notice of the application for leave to sell or mortgage has been made through publication or as directed by the Court; and Page 254 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS It is in the interest of the corporation that leave to sell or mortgage be granted. The application for leave to sell or mortgage: (1) Must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi, or presiding elder acting as corporation sole, and; (2) May be opposed by any member of the religious denomination, sect, or church represented by the corporation sole. Provided, that in cases where the rules, regulations, and discipline of the religious denomination, sect, or church, religious society, or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling, and mortgaging real estate and personal property: a. Such rules, regulations and discipline shall control; and b. The intervention of the courts shall not be necessary. [Sec. 111, RCC] Voluntary Dissolution A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Commission a verified declaration of dissolution, setting forth: (a) The name of the corporation; (b) The reason for dissolution and winding up; (c) The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; (d) The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. [Sec. 113, RCC] Upon approval of such declaration of dissolution by the Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. [Sec. 113, RCC] COMMERCIAL LAW Religious societies Religious society – A religious corporation incorporated by more than one person. Also called “corporation aggregate.” Incorporation General Rule: Any religious society, religious order, diocese, synod, or district organization of any religious denomination, sect, or church, may incorporate for the administration of its temporalities or for the management of its affairs, properties, and estate – (1) Upon written consent of at least two-thirds (2/3) of its membership; and/or (2) By an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership Exception: Unless forbidden by competent authority, the Constitution, pertinent rules, regulations, or discipline of the religious denomination, sect, or church of which it is a part. [Sec. 114, RCC] Filing and Contents of the AOI The AOI must be: (1) Verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect, or church; and (2) Filed with the Commission. [Sec. 114, RCC] The AOI must set forth the following: (a) That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church; (b) That at least two-thirds (2/3) of its membership has given written consent or has voted to incorporate, at a duly convened meeting of the body; (c) That the incorporation of the religious society or religious order, diocese, synod, or district organization is not forbidden by competent authority or by the Constitution, rules, regulations or discipline of the Page 255 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS religious denomination, sect, or church of which it forms part; (d) That the religious society or religious order, diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; (e) The place within the Philippines where the principal office of the corporation is to be established and located; and (f) The names, nationalities, and residence addresses of the trustees, not less than five (5) nor more than fifteen (15) Elected by the religious society or religious order, or the diocese, synod, or district organization To serve for the first year, or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization. [Sec. 114, RCC] COMMERCIAL LAW The assets of the OPC are not owned by its sole stockholder unless the OPC is not adequatelyfinanced and/or the assets. The obligations of The obligations that the corporation the sole cannot be enforced proprietorship against its sole incurred in stockholder unless conducting the the situation business may be warrants piercing enforced against the the veil of corporate proprietor. fiction. Registered with the Registered with the DTI. SEC. [Divina, “Highlights of the Revised Corporation Code”] The assets of the sole proprietorship are similarly owned by the proprietor conducting the business. One person corporations Excepted corporations One Person Corporation (OPC) – A corporation with a single stockholder. [Sec. 116, RCC] Who May Form OPCs Only the ff. may form OPCs: (1) A natural person; (2) A trust; or (3) An estate. The ff. may NOT incorporate as OPCs: a. Banks and quasi-banks b. Pre-need, trust, insurance, public and publicly-listed companies; and c. Non-chartered GOCCs. [Sec. 116, RCC] Capital stock requirement Note: A natural person who is licensed to exercise a profession may not organize as a OPC for the purpose of exercising such profession, except as otherwise provided under special laws. [Sec. 116, RCC] Sole Proprietorship vs. OPC Sole Proprietorship OPC Has no separate Has a legal legal personality from personality separate the proprietor and distinct from the conducting the sole stockholder of business. the corporation. A One Person Corporation shall not be required to have a minimum authorized capital stock, except as otherwise provided by special law. [Sec. 117, RCC] Articles of incorporation and bylaws Articles of Incorporation A One Person Corporation shall file articles of incorporation in accordance with the requirements under Section 14 of this Code. It shall likewise substantially contain the following: (a) If the single stockholder is a trust or an estate – a. The name, nationality, and residence of the trustee, Page 256 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS administrator, executor, guardian, conservator, custodian, or other person exercising fiduciary duties b. Proof of such authority to act on behalf of the trust or estate; and (b) Name, nationality, residence of the nominee and alternate nominee, and the extent, coverage and limitation of the authority. [Sec. 118, RCC] By-Laws The OPC is not required to submit and file corporate by-laws. [Sec. 119, RCC] Corporate name A One Person Corporation shall indicate the letters “OPC” either below or at the end of its corporate name. [Sec. 120, RCC] Corporate structure and officers Single Stockholder as Director, President The single stockholder shall be the sole director and president of the One Person Corporation. [Sec. 121, RCC] Treasurer, Corporate Secretary, and Other Officers Within fifteen (15) days from the issuance of its certificate of incorporation, the OPC shall appoint: (1) A treasurer; (2) A corporate secretary; and (3) Other officers as it may deem necessary Note: The single stockholder may NOT be appointed as the corporate secretary. Within five (5) days from appointment, the OPC shall notify the Commission thereof. [Sec. 122, RCC] Treasurer’s Bond A single stockholder who is likewise the selfappointed treasurer of the corporation, shall give a bond to the Commission in such a sum as may be required: Provided, That – (1) The said stockholder/treasurer shall undertake in writing: a. To faithfully administer the OPC’s funds to be received as treasurer, and COMMERCIAL LAW b. To disburse and invest the same according to the articles of incorporation as approved by the Commission. (2) The bond shall be renewed every two (2) years or as often as may be required. [Sec. 122, RCC] Corporate Secretary’s Special Functions In addition to the functions designated by the OPC, the corporate secretary shall: (a) Be responsible for maintaining the minutes book and/or records of the corporation; (b) Notify the nominee or alternate nominee of the death or incapacity of the single stockholder Such notice shall be given no later than five (5) days from such occurrence; (c) Notify the Commission of the death of the single stockholder within five (5) days from such occurrence and stating in such notice – The names, residence addresses, and contact details of all known legal heirs; and (d) Call the nominee or alternate nominee and the known legal heirs to a meeting and advise the legal heirs with regard to, among others: The election of a new director; Amendment of the AOI; and Other ancillary and/or consequential matters. [Sec. 123, RCC] Nominee The single stockholder shall designate in the AOI a nominee and an alternate nominee who shall, in the event of the single stockholder’s death or incapacity: (1) Take the place of the single stockholder as director; and (2) Manage the corporation’s affairs. [Sec. 124, RCC] Consent of Nominee and Alternate Nominee The written consent of the nominee and alternate nominee shall be attached to the AOI. Such consent may be withdrawn in writing any time before the death or incapacity of the single stockholder. [Sec. 124, RCC] Page 257 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Term of Nominee When the single stockholder is temporarily incapacitated: (1) The nominee shall sit as director and manage the affairs of the OPC (2) The nominee shall serve only until the stockholder, by self-determination, regains the capacity to assume such duties. [Sec. 125, RCC] In case of death or permanent incapacity of the single stockholder: (1) The nominee shall sit as director and manage the affairs of the OPC (2) The nominee shall serve until: a. The legal heirs of the single stockholder have been lawfully determined; and b. The heirs have designated one of them or have agreed that the estate shall be the single stockholder of the OPC. [Sec. 125, RCC] Term of Alternate Nominee In case of the nominee’s inability, incapacity, death, or refusal to discharge the functions as director and manager of the corporation: (1) The alternate nominee shall sit as director and manage the One Person Corporation; and (2) The alternate nominee shall serve only for the same term, and under the same conditions applicable to the nominee. [Sec. 125, RCC] Change of Nominee or Alternate Nominee The single stockholder may, at any time, change its nominee and alternate nominee by submitting to the Commission: (1) The names of the new nominees; and (2) The new nominees’ corresponding written consent. Note: For this purpose, the AOI need not be amended. [Sec. 126, RCC] Minutes and records Minutes Book A One Person Corporation shall maintain a minutes book which shall contain all its actions, decisions, and resolutions. [Sec. 127, RCC] COMMERCIAL LAW The corporate secretary shall be responsible for maintaining the minutes book and/or records of the corporation. [Sec. 123(a), RCC] Records in Lieu of Meetings When action is needed on any matter, it shall be sufficient to prepare a written resolution: (a) Signed and dated by the single stockholder; and (b) Recorded in the minutes book of the One Person Corporation. [Sec. 128, RCC] The date of recording in the minutes book shall be deemed to be the date of the meeting for all purposes under this Code. [Sec. 128, RCC] Liability Limited Liability An important advantage of the corporation is the limitation of an investor’s liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. [San Juan Structural and Steel, Inc. v. CA, 296 SCRA 631 (1998).] Liability of Single Shareholder A sole shareholder claiming limited liability has the burden of affirmatively showing that the corporation was adequately financed. Where the single stockholder cannot prove that the property of the OPC is independent of the stockholder’s personal property, the stockholder shall be jointly and severally liable for the debts and other liabilities of the OPC. Applicability of the Doctrine of Piercing the Corporate Veil The principles of piercing the corporate veil applies with equal force to OPCs, as with other corporations. [Sec. 130, RCC] When the veil of corporate fiction is pierced: The corporation will be considered as a mere association of persons; and The liability will directly attach to the stockholders or to the other corporation Page 258 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS [China Banking v. Dyne-Sem, G.R. No. 149237 (2006)]. Conversion of corporation to one person corporations and vice-versa Conversion from an Ordinary Corporation to a OPC When a single stockholder acquires ALL the stocks of an ordinary stock corporation, the latter may apply for conversion into a One Person Corporation, subject to the submission of such documents as the Commission may require. If the application for conversion is approved: (1) The Commission shall issue certificate of filing of amended articles of incorporation reflecting the conversion (2) The OPC converted from an ordinary stock corporation shall succeed the latter, and be legally responsible for all the latter’s outstanding liabilities as of the date of conversion. [Sec. 131, RCC] Conversion from a OPC to an Ordinary Stock Corporation A One Person Corporation may be converted into an ordinary stock corporation after: (1) Due notice to the Commission of such fact and of the circumstances leading to the conversion; and Such notice shall be filed with the Commission within sixty (60) days from the occurrence of the circumstances leading to the conversion into an ordinary stock corporation (2) Compliance with all other requirements for stock corporations under this Code and applicable rules. If all requirements have been complied with, the Commission shall issue an amended certificate of incorporation reflecting the conversion. [Sec. 132, RCC] In case of death of the single stockholder: 1. Within seven (7) days from receipt of either an affidavit of heirship or self- adjudication executed by a sole heir, or any other legal document declaring the legal heirs of the COMMERCIAL LAW single stockholder, the nominee or alternate nominee shall: a. Transfer the shares to the duly designated legal heir or estate; and b. Notify the Commission of the transfer. 2. Within sixty (60) days from the transfer of the shares, the legal heirs shall notify the Commission of their decision to either: a. Wind up and dissolve the One Person Corporation; or b. Convert it into an ordinary stock corporation. The ordinary stock corporation converted from a One Person Corporation shall succeed the latter and be legally responsible for all the latter’s outstanding liabilities as of the date of conversion. [Sec. 132, RCC] Foreign corporations Foreign Corporation — Those formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state [Sec. 140]. Bases of authority over foreign corporations (a) Consent As a rule, a foreign corporation can have no legal existence or status beyond the bounds of the State or sovereignty by which it is created or incorporated and organized. It exists only in contemplation of law and by force of the law Where that law ceases to operate, the corporation can have no existence. However, this principle does not prevent a corporation from acting in another State or country with the latter’s express or implied consent. Page 259 of 450 U.P. LAW BOC COMMERCIAL LAW BUSINESS ORGANIZATIONS Consent Doctrine The legal standing of foreign corporations in the host state is founded on international law on the basis of consent, whether implied or express. A corporation can exercise none of the functions and privileges conferred by its charter in another State or country except by the comity and consent of such State or country. [DE LEON] Under Philippine law, the condition is that it must obtain a license to do business in the Philippines [CAMPOS]. Consent as Basis for Exercise of Jurisdiction To obtain jurisdiction over foreign corporations, the considerations of due process and fair play require that consent be obtained. [Villanueva] The jurisdiction of courts to render judgment in personam is grounded on their de facto power over the defendant's person. His presence within the territorial jurisdiction of a court is prerequisite to its rendition of judgment personally binding him. [Pennoyer v, Neff, 95 U.S. 714 (1877)] Thus, a foreign corporation may be subjected to jurisdiction by reason of consent, ownership of property within the State, or by reason of activities within or having an effect within the state. [Villanueva citing Salonga] (b) Doctrine of “doing business” When a foreign corporation undertakes business activities within the territorial jurisdiction of a host state, then it ascribes to the host state standing to enforce its laws, rules and regulations. [Villanueva] Said business activities serves as the basis by which a host state is deemed to have authority over a foreign corporation within its territorial jurisdiction. [Villanueva] Concept of“Doing Business” The concept of "doing business" implies a continuity of commercial dealings and arrangements and the performance of acts/works/exercise of some of the functions normally incident to the purpose or object of a foreign corporation’s organization. [Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 525 (1941)] It is the crucial point to determine: • Whether foreign corporations and multinational enterprises have come within the territorial jurisdictions of the host countries; and • To what extent they are bound to obtain licenses within various host countries before they can sue with local courts and administrative bodies. [Villanueva] Jurisprudential Tests of “Doing Business In The Philippines” 1. Twin Characterization Test Continuity Test: Doing business implies a continuity of commercial dealings and arrangements, or performance of acts normally incidental to the purpose and object of the organization. Substance Test: Doing business implies that a foreign corporation is continuing the body or substance of the enterprise of business for which it was organized [Agilent Technologies v Integrated Silicon Technology, G.R. No. 154618 (2004)] 2. Contract Test: A foreign corporation is doing business in the Philippines if the contracts entered into by the foreign corporation or by an agent acting under the control and direction of the foreign corporation are consummated in the Philippines [Pacific Vegetable Oil v. Singson, G.R. No. L-7917 (1955)]. Necessity business of a license to do Every foreign corporation, which on the date of the effectivity of this Code, is authorized to do business in the Philippines under a license issued to it, shall continue to have such authority under the terms and conditions of its Page 260 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS license, subject to the provisions of this Code and other special laws [Sec 141, RCC]. (a) Requisites license for issuance of a A foreign corporation shall submit: 1. A copy of its articles of incorporation and bylaws, certified in accordance with law, and 2. Their translation to an official language of the Philippines, if necessary. [Sec 142, RCC] The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: The date and term of incorporation; The address, including the street number, of the principal office of the corporation in the country or State of incorporation; The name and address of its resident agent authorized to accept summons and process in all legal proceedings and all notices affecting the corporation, pending the establishment of a local office; The place in the Philippines where the corporation intends to operate; The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency; The names and addresses of the present directors and officers of the corporation; A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by class, par value of shares, shares without par value, and series, if any; A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by class, par value of shares, shares without par value, and series, if any; A statement of the amount actually paid in; and Such additional information as may be necessary or appropriate in order to enable COMMERCIAL LAW the Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable [Sec. 142, RCC] Documents Attached to Application Attached to the application shall be: (1) A certificate under oath duly executed by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that: a. The laws of the country or State of the applicant allow Filipino citizens and corporations to do business therein; b. The applicant is an existing corporation in good standing. (Sec 142, RCC) (2) A statement under oath of the president or any other person authorized by the corporation: a. Showing to the satisfaction of the Commission and when appropriate, other governmental agencies that the applicant is solvent and in sound financial condition; and b. Setting forth the assets and liabilities of the corporation as of the date not exceeding one year immediately prior to the filing of the application [Sec. 142, RCC] Issuance of a License Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or State of its incorporation, unless such license is: surrendered, revoked, suspended, or annulled in accordance with this Code or other special laws. [Sec. 143, RCC] Deposit of Securities Within 60 days, the licensee, except foreign banking or insurance corporations, shall Page 261 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS deposit with the Commission for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the Commission, consisting of: bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or - controlled corporations and entities, shares of stock or debt securities that are registered under Republic Act No. 8799, otherwise known as “The Securities Regulation Code”, shares of stock in domestic corporations listed in the stock exchange, shares of stock in domestic insurance companies and banks, any financial instrument determined suitable by the Commission, or any combination thereof with an actual market value of at least Five hundred thousand (P500,000.00) pesos or such other amount that may be set by the Commission. [Sec. 143, RCC] Within 6 months after each fiscal year of the licensee, the Commission shall require: ● the licensee to deposit additional securities or financial instruments equivalent in actual market value to 2% of the amount by which the licensee’s gross income for that fiscal year exceeds P10,000,000.00. ● the deposit of additional securities or financial instruments if the actual market value of the deposited securities or financial instruments has decreased by at least 10% of their actual market value at the time they were deposited. [Sec. 143, RCC] The Commission may: at its discretion, release part of the additional deposit if the gross income of the licensee has decreased, or if the actual market value of the total deposit has increased, by more than ten (10%) percent of their actual market value at the time they were deposited. allow the licensee to make substitute deposits for those already on deposit as COMMERCIAL LAW long as the licensee is solvent. (Sec 143, RCC) In the event the licensee ceases to do business in the Philippines, its deposits shall be returned: Upon the licensee’s application therefore; and Upon proof to the satisfaction of the Commission that the licensee has no liability to Philippine residents, including the Government of the Republic of the Philippines. [Sec. 143, RCC] (b) Resident agent A resident agent may be either: an individual residing in the Philippines (must be of good moral character and sound financial standing) or a domestic corporation (must likewise be of sound financial standing and must show proof of good standing) lawfully transacting business in the Philippines. [Sec. 144, RCC] The foreign corporation shall file a written power of attorney: (1) Designating a person (Philippine resident), on whom summons and other legal processes may be served in all actions or other legal proceedings against such corporation; and (2) Consenting that service upon such resident agent shall be admitted and held as valid, as if served upon the duly authorized officers of the foreign corporation at its home office. [Sec. 144, RCC] It shall be the duty of the resident agent to immediately notify the Commission in writing of any change in the resident agent’s address. [Sec. 144, RCC] (c) Amendment of license A foreign corporation shall obtain an amended license in the event it changes its corporate name, or desires to pursue other or additional purposes in the Philippines. Page 262 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Said amendment may be made by submitting an application with the Commission, endorsed by the appropriate government agency. [Sec. 148, RCC] Personality to sue Foreign corporations which conduct regular business should be denied any access to courts until they secure a license so as to ensure that they will abide by the decisions of the local courts. [Eriks Ltd. v. CA, 267 SCRA 567 (1997)] A foreign corporation transacting business in the Philippines is required to secure a license to have the personality to sue before, or intervene in, any court or administrative proceeding. [Sec. 150, RCC; CAMPOS] By filing an action before Philippine courts, a foreign corporation puts itself under their jurisdiction. [Communication Materials v. CA, 260 SCRA 673 (1996)] Suability of foreign corporations No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines. Nevertheless, such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws [Sec. 150, RCC]. A foreign corporation cannot claim exemption from being sued in Philippine courts for acts done against a person or persons in the Philippines [Facilities Management Corporation v. De La Osa, G.R. No. L-38649 (1979)]. Instances when unlicensed foreign corporations may be allowed to sue (isolated transactions) COMMERCIAL LAW Doctrine on Isolated Transactions Foreign corporations are not required to obtain a license in order to obtain relief from local courts or agencies. [Villanueva] In an isolated transaction, there is no intent on the part of the foreign corporation to engage in a progressive pursuit of the purpose of a business transaction. [Eriks Ltd. v. CA, 267 SCRA 567 (1997)] General Rule: No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; Exception: but such may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. [Sec. 150, RCC] Summary of Rules on Capacity to Sue [Agilent Technologies v Integrated Silicon Technology, G.R. No. 154618 (2004)] STATUS CONSEQUENCE Doing Business in the PH, WITH a license Doing Business in the PH, WITHOUT a license NOT doing business in the PH, on isolated transactions Can sue and be sued GR: Cannot sue, but may be sued in the PH EX: Capacity to sue may not be questioned if the other party is estopped May sue; may be sued Grounds for revocation of license Grounds for revocation of license: Failure to file its annual report or pay any fees as required by this Code; Page 263 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Failure to appoint and maintain a resident agent in the Philippines as required by this Title; Failure, after change of its resident agent or address, to submit to the Commission a statement of such change as required by this Title; Failure to submit to the Commission an authenticated copy of any amendment to its articles of incorporation or bylaws or of any articles of merger or consolidation within the time prescribed by this Title; A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title; Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions; Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; Transacting business in the Philippines as agent of or acting on behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or Any other ground as would render it unfit to transact business in the Philippines. [Sec. 151, RCC] 13. Merger and Consolidation Definition and Concept Merger – a corporation absorbs the other and remains in existence while the others are dissolved [Sec.75]. Mergers may be horizontal (between competing firms), vertical (if a corporation acquires another which uses or distributes its products) or conglomerate (neither competing nor related in the chain of production or distribution). [Campos] Consolidation – a new corporation is created, and consolidating corporations are extinguished [Sec.75]. Merger COMMERCIAL LAW Consolidation One or more corporations are Union of 2 or more absorbed by another corporations to form which survives and a new corporation continues the combined business One of the constituent corporations remains as an existing juridical person, whereas the other corporation shall cease to exist. All constituents corporations disappear with the emergence of a new corporate entity The surviving corporation shall acquire all the assets, rights of action, and assuming all the liabilities of the disappearing corporation/s. The new corporate entity shall obtain all the assets of the disappearing corporations, and likewise shall assume all their liabilities. There is no liquidation of the assets of the dissolved corporation, all rights, properties and franchises are acquired by the surviving/new corporation. Merger and consolidation involve fundamental changes in the corporation, the rights of stockholders and creditors. There must be an express provision of law that authorizes them. Otherwise, such combinations are ultra vires. With the approval of the Corporation Code, such express authority has been granted. [Campos] Distinguish: Constituent Consolidated Corporation and Constituent Corporations – the parties to a merger or consolidation Consolidated Corporation - The new single corporation created through consolidation. Page 264 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Surviving Corporation – one of the constituent corporations which remain in existence after the merger Plan of Merger or Consolidation (Sec. 75) Each of the constituent corporations must draw up a Plan of Merger or Consolidation which shall set forth: a. Names of the corporation involved; b. Terms and mode of carrying it to effect; c. Statement of changes, if any, in the present articles of the surviving corporation to be formed in the case of merger; and with respect to the consolidated corporation in case of consolidation The Plan must be approved by the board of directors or trustees of each constituent corporation by majority vote. Articles of Merger or Consolidation (Sec. 77) The Articles of Merger or Consolidation: a. take the place of the AOI of the consolidated corporation; or b. amend the Articles of Incorporation of the surviving corporation. Articles of Merger/Consolidation Requisites: ● Executed by each of the constituent corporations ● Signed by the president/vice-president ● Certified by the secretary/assistant secretary of each corporation Contents The Articles must contain the following: Plan of the merger/consolidation As to stock corporations, the number of shares outstanding, or in the case of nonstock corporations, the number of members; As to each corporation, the number of shares or members voting for or against such plan, respectively; COMMERCIAL LAW the carrying amounts and fair values of the assets and liabilities of the respective companies as of the agreed cut-off date; The method to be used in the merger or consolidation of accounts of the companies; The provisional or pro-forma values, as merged or consolidated, using the accounting method; and Such other information as may be prescribed by the Commission Procedure Approval of Plan of Merger or Consolidation by BOD and Stockholders of Constituent Corporations [Sec. 76] 1. Approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation. 2. Approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for that purpose. i. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. ii. Holders of non-voting shares are entitled to vote on the plan [Sec. 6, par. 6(6)]. 3. Notice of such meetings shall be given to all stockholders or members in the same manner as giving notice of regular or special meetings under Section 49. The notice shall state the purpose of the meeting and include a copy or a summary of the plan of merger or consolidation. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code. Provided, that if after the approval by the stockholders of such plan, the board of directors decides to abandon Page 265 of 450 U.P. LAW BOC the plan, the extinguished. BUSINESS ORGANIZATIONS appraisal right shall be Amendment to the plan of merger or consolidation An amendment to the Plan may be made by approval of the majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. Execution of Articles of Merger or Consolidation Articles of Merger or Articles of Consolidation shall be executed by each of the constituent corporations. Submission to SEC of the Articles Submission of of the Articles of Merger or Articles of Consolidation to the SEC for approval. Mergers and consolidations of corporations governed by special laws requires a recommendation from the appropriate government agency [Sec. 78 (1)]. Action by SEC Conduct hearing or issue certificate. [Sec. 78] a. If necessary, the SEC shall set a hearing, notifying all corporations concerned at least 2 weeks before. b. SEC shall issue a certificate approving the articles and plan of merger or of consolidation. Effectivity Upon issuance of the certificate of merger or consolidation, such merger or consolidation shall become effective [Sec. 78]. COMMERCIAL LAW Merger or consolidation does not become effective by mere agreement of the constituent corporations. The approval of the SEC is required [PNB v. Andrada Electric and Engr. Co., Inc. (2002)]. Notwithstanding Sec. 79 (now, sec. 78), parties may stipulate a specific effective date of merger (or consolidation) where no 3rd party will be prejudiced [SEC Opinion No. 09-13, July 1, 2009]. Limitations Consent of appropriate government agency: In the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained [Sec. 78]. Effects (Sec. 79) As enumerated in the RCC, the following are the legal effects of merger/consolidation: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities, and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and franchises of each constituent corporation; and all real or Page 266 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS personal property, all receivables due on whatever account, including subscriptions to shares and other choses in action, and every other interest of, belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each constituent corporation as though such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any constituent corporation may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of such constituent corporations shall not be impaired by the merger or consolidation. Although in a merger, there is dissolution of the absorbed corporations, there is no winding up of their affairs, because the surviving corporation automatically acquires all their rights, privileges, powers and liabilities (Associated Bank v. CA, 291 SCRA 511). Same goes for the consolidated corporation. Salient Advantages of Mergers/Consolidation Unlike regular transfer/acquisition, it is able to achieve a continuous flow of the juridical personalities and business enterprises of the constituent corporations. There is no “legal break” in their juridical personalities and business enterprises. Thus, merger/consolidation is not a violation of a non-transfer clause Surviving/consolidated corporation considered a transferee is not Unlike regular transfer of assets/business enterprise, there is no gain or loss in the pursuit of merger or consolidation, thus it is not subject to taxable gains under Section 40(C)(2)(a) of the NIRC, as amended by the Train Law. COMMERCIAL LAW AS TO THE CORPORATIONS CONSTITUENT Corporate existence The constituent corporations shall become a single corporation. The separate existence of the constituents shall cease, except that of the surviving or the consolidated corporation. The absorbed or constituent corporations are ipso facto dissolved by operation of law [SEC Opinion, July 16, 1981]. Assets and liabilities There is no liquidation of the assets of the dissolved corporations [CAMPOS]. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities, powers, and franchises of each constituent corporation and the properties shall be deemed transferred to and vested in the surviving or consolidated corporation without further act or deed. The surviving or the consolidated corporation shall be subject to all the duties and liabilities of the dissolving corporation(s). AS TO CREDITORS The creditors of a corporation cannot prevent its merger or consolidation with another even if the surviving or new corporation is not as acceptable a debtor as the absorbed corporation [CAMPOS]. Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporation; and The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation. Page 267 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS MERGERS/CONSOLIDATION EMPLOYEES ON Because there is no legal break by the act of merging, consolidating, it is logical to expect that the contractual rights of employees and the existing collective bargaining agreement, if any, would have to be absorbed by the surviving/consolidated corporation However, SC has made contrary rulings. Rule on automatic assumption/absorption does not impair the right of an employer to terminate the employment of the absorbed employees for a lawful or authorized cause or the right of such an employee to resign, retire, or otherwise sever his employment, whether before or after the merger, subject to existing contractual obligations (The Philippine Geothermal Inc. Employees Union vs. Unocal Philippines, Inc, September 26, 2016) 14. Investigations, and penalties Privacy Act of 2012) and other pertinent laws. Power to Coordinate with Other Agencies SEC is expressly granted the power to give reasonable notice to and coordinate with the appropriate regulatory agency prior to any such publication involving companies under their special regulatory jurisdiction. Administration of oath and issuance of subpoena of Witnesses and Documents The SEC, through its designated officer has the power to: to administer oaths and affirmations issue subpoena and subpoena duces tecum take testimony in any inquiry or investigation, and to perform other acts necessary to the proceedings or to the investigation. [Sec 155, RCC] offenses, Authority of Commissioner Investigation and prosecution of offenses Under Sec. 154 of the RCC (Revised Corporation Code) the SEC has the power to: 1. Power to Investigate The SEC is expressly granted the power to investigate any alleged violation of the RCC, or of a rule, regulation, or order issued pursuant thereto. 2. Power to Public Findings The SEC is expressly authorized to publish its findings, orders, opinions, advisories, or information concerning any such violation as may be relevant to the general public or to the parties concerned, subject to the provisions of Republic Act No. 10173 (Data COMMERCIAL LAW Cease and desist power (Sec. 156) 1. When the SEC has reasonable basis to believe that a person has violated, or is about to violate this Code, a rule, regulation, or order of the Commission, it may direct such person to desist from committing the act constituting the violation. 2. SEC may issue a cease and desist order ex parte to enjoin an act or practice which is: a. fraudulent or b. can be reasonably expected to cause significant, imminent, and irreparable danger or injury to public safety or welfare. The ex parte order shall be valid for a maximum period of 20 days, without prejudice to the order being made permanent after due notice and hearing. 3. Thereafter, the Commission may: a. proceed administratively against such person in accordance with Section 158 Page 268 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS of RCC (to impose administrative sanctions); and/or b. transmit evidence to the Department of Justice (DOJ) for preliminary investigation or criminal prosecution; and/or c. initiate criminal prosecution for any violation of RCC, rule, or regulation. Contempt (Sec. 157) Any person who, without justifiable cause, fails or refuses to comply with any lawful order, decision, or subpoena issued by the Commission shall, after due notice and hearing, be held in contempt and fined in an amount not exceeding P30,000 When the refusal amounts to clear and open defiance of the Commission’s order, decision, or subpoena, the Commission may impose a daily fine of P1,000 until the order, decision, or subpoena is complied with. COMMERCIAL LAW Prohibited Acts 1. Unauthorized Use of Corporate Name (Sec. 159) Sec. 17 of the RCC states the regulation regarding corporate names. In the last paragraph it states that if the corporation fails to comply with the Commission’s order, the Commission may hold the corporation and its responsible directors or officers in contempt and/or hold them administratively, civilly and/or criminally liable under this Code and other applicable laws and/or revoke the registration of the corporation. The crime of “unauthorized use of a corporate name” may also cover various situations under Sec. 17. Therefore, a criminal act arises under Sec. 159 only when the SEC’s previous order remains unheeded. Penalty: The penalty for violations under this provision ranges from Php10,000 to Php200,000 pesos. Sanctions for violations Administrative sanctions After due notice and hearing, when the Commission finds that any provision of this Code, rules or regulations, or any of the Commission’s orders has been violated, the Commission may impose any or all of the following sanctions, taking into consideration the extent of participation, nature, effects, frequency and seriousness of the violation: Imposition of a fine ranging from P5,000 to P2 Million, and not more than P1,000 for each day of continuing violation but in no case to exceed P2 Million Issuance of a permanent cease and desist order; Suspension or revocation of the certificate of incorporation; and Dissolution of the corporation and forfeiture of its assets under the conditions in Title XIV of this Code. 2. Violation of Disqualification Provision (Sec. 160) Despite the knowledge of the existence of a ground for disqualification as provided in Section 26 of RCC, a director, trustee or officer willfully holds office, or willfully conceals or withholds the existence of grounds for disqualification, they may be punished under the Code. Penalty: Punished by a fine ranging from Php 10, 000 to Php 200,000 at the court’s discretion, permanently disqualified from being a director, trustee, or officer of any corporation. If violation is injurious or detrimental to the public – penalty ranges from Php 20,000 to Php 400,000. Page 269 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS 3. Violation of Duty to Maintain Records, to Allow their Inspection or Reproduction (Sec. 161) The unjustified failure or refusal by the corporation, or by those responsible for keeping and maintaining corporate records, to comply with provisions on the: 1. adoption of by-laws (Sec. 45); 2. books to be kept (Sec. 73); 3. keep list of members and proxies (Sec. 92) 4. records in lieu of meetings (Sec. 128); and 5. reportorial requirements of corporations that must be submitted to the Commissioner (Sec. 177); 6. as well as other pertinent rules and provisions of RCC on inspection and reproduction of récords. Penalty: shall be punished with a fine ranging from 10,000 to 200,000 pesos. The penalties imposed under this section shall be without prejudice to the Commission’s exercise of its contempt powers under Section 157 hereof. 4. Willful Certification of Incomplete, Inaccurate, False, or Misleading Statements or Reports (Sec. 162) Any person who willfully certifies a report required under this Code, knowing that the same contains incomplete, inaccurate, false, or misleading information or statements, is punishable under the RCC. Penalty: a. fine ranging from Php 20,000 to Php 200,000 pesos, b. If wrongful certification is injurious or detrimental to the public – the auditor or the person responsible may be fined ranging from 40,000 to 400,000 pesos if the report be injurious or detrimental to the public. COMMERCIAL LAW 5. Collusion with the Independent Auditor (Sec. 163) An independent auditor who, in collusion with the corporation’s directors or representatives: certifies the corporation’s financial statements despite its incompleteness or inaccuracy; failed to give a fair and accurate presentation of the corporation’s condition; or certifies documents despite containing false or misleading statements Penalty: shall be penalized with a fine ranging from 80,000 to 500,000 pesos, or 100,000 to 600,000 pesos if injury was caused to the public. 6. Obtaining Corporate Registration Through Fraud (Sec. 164) Those responsible for the formation of a corporation through fraud, or who assisted either directly or indirectly therein shall be penalized. Penalty: Fine ranging from 200,000 to 2,000,000 pesos, or 400,000 to 5,000,000 pesos if injurious to the public. 7. Fraudulent Conduct of Business (Sec. 165) A corporation that conducts its business through fraud. Penalty: shall be punished with a fine ranging from Php 200,000 to Php 2,000,000 pesos, or Php400,000 to Php5,000,000 pesos if injurious to the public. 8. Acting as Intermediaries for Graft and Corrupt Practices (Sec. 166) A corporation used for fraud, or for committing or concealing graft and corrupt practices as defined under Republic Act No. 3019. Page 270 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS Penalty: shall be penalized with a fine ranging from Php100,000 to Php5,000,000 peso. Should there be a finding that any of its directors, officers, employees, agents, or representatives are engaged in graft and corrupt practices on the corporation’s failure to install: safeguards for the transparent and lawful delivery of services; and policies, code of ethics, and procedures against graft and corruption, It shall be considered prima facie evidence of corporate liability under this section. 9. Engaging Intermediaries for Graft and Corrupt Practices (Sec. 167) A corporation that appoints an intermediary who engages in graft and corrupt practices for the corporation’s benefit or interest. Penalty: shall be penalized with a fine ranging from 100,000 to 1,000,000 pesos. 10. Tolerating Graft and Corrupt Practices (Sec. 168) A director, trustee, or officer who: knowingly fails to sanction, report, or file the appropriate action with proper agencies; or allows or tolerates the graft and corrupt practices or fraudulent acts committed by a corporation’s directors, trustees, officers, or employees lawful employment or livelihood of the whistleblower). Penalty - shall, at the discretion of the court, be punished with a fine ranging from 100,000 to 1,000,000 pesos. Whistleblower – refers to any person who provides truthful information relating to the commission or possible commission of any offense or violation under this Code. 12. Other Violations of the Code (Sec. 170) Violations of any of the provisions of the Code or its amendments not specifically penalized shall be punished as well. Penalty: Fine of not less tan Php10, 000 but not more than Php1,000,000. If violation is committed by a corporation, the same may, after notice and hearing be dissolved in an appropriate proceeding before the SC. A corporation may be dissolved as long as: Dissolution shall not preclude the institution of appropriate action against the one responsible; or Nothing in this section shall be construed to repeal the other causes for dissolution of a corporation Liability for the foregoing offenses shall be separate from other administrative, civil, or criminal liabilities. Penalty: shall be penalized with a fine ranging from 500,000 to 1,000,000 pesos. 11. Retaliation (Sec. 169) Against COMMERCIAL LAW Whistleblowers Any person who knowingly and with intent to retaliate, commits acts detrimental to a whistleblower (e.g. interfering with the Page 271 of 450 U.P. LAW BOC Penalties Prohibited acts BUSINESS ORGANIZATIONS Penalties 1) Unauthorized Use fine ranging from of Corporate Name P10,000 to P200,000 (Sec. 159) 2) Violation of Disqualification Provision (Sec. 160) 3) Violation of Duty to Maintain Records, to Allow their Inspection or Reproduction (Sec. 161) fine ranging from P10,000 to P200,000 at the discretion of the court and shall be permanently disqualified from being a director, trustee or officer of any corporation fine ranging from P10,000 to P200,000 at the discretion of the court, taking into consideration the seriousness of the violation and its implications. fine ranging from P20,000 to P200,000 Who are liable COMMERCIAL LAW When the violation is injurious or detrimental to the public corporation and its responsible directors or officers in contempt and/or hold them administratively, civilly and/or criminally liable under this Code and other applicable laws and/or revoke the registration of the corporation (Sec. 17) director, trustee or penalty shall be a fine officer of any ranging from P20,000 corporation to P400,000 corporation, or by fine ranging from those responsible for P20,000 to P400,000 keeping and maintaining corporate records 4) Willful Certification of Incomplete, Inaccurate, False, or Misleading Statements or Reports (Sec. 162) 5) Collusion with the fine ranging from Independent P80,000 to P500,000 Auditor (Sec. 163) auditor or the fine ranging from responsible person for P40,000 to P400,000 the certification 6) Obtaining fine ranging from Corporate P200,000 to P2M Registration Through Fraud (Sec. 164) fine ranging from P400,000 to P5M independent auditor in collusion with the corporation’s directors or representatives and the responsible officer those responsible for the formation of a corporation through fraud, or who assisted directly or indirectly therein, Page 272 of 450 fine ranging from P100,000 to P600,000 U.P. LAW BOC BUSINESS ORGANIZATIONS 7) Fraudulent Conduct of Business (Sec. 165) 8) Acting as Intermediaries for Graft and Corrupt Practices (Sec. 166) fine ranging from P200,000 to P2M Corporation or person responsible fine ranging from P100,000 to P5M directors, officers, employees, agents, or representatives are engaged in graft and corrupt practices 9) Engaging Intermediaries for Graft and Corrupt Practices (Sec. 167) 10)Tolerating Graft and Corrupt Practices (Sec. 168) fine ranging P100,000 P1,000,000 Corporation, intermediary from to director, trustee, or officer who knowingly fails to sanction, report, or file the appropriate action with proper agencies, allows or tolerates the graft and corrupt practices or fraudulent acts committed by a corporation’s directors, trustees, officers, or employees 11)Retaliation Against fine ranging from Any person who, Whistleblowers knowingly and with P100,000 to P1M (Sec. 169) intent to retaliate, commits acts detrimental to a whistleblower such as interfering with the lawful employment or livelihood of the whistleblower 12)Other Violations of fine of not less than Corporation the Code (Sec. P10,000 but not more 170) than P1M. Dissolution shall not preclude the institution If the violation is of appropriate action committed by a for director, trustee, or of the corporation, after officer notice and hearing, be corporation dissolved in appropriate proceedings before the Commission fine ranging from P500,000 to P1M Page 273 of 450 COMMERCIAL LAW fine ranging from P400,000 to P5M U.P. LAW BOC BUSINESS ORGANIZATIONS COMMERCIAL LAW In imposing penalties and additional monitoring and supervision requirements, the Commission shall take into consideration the size, nature of the business, and capacity of the corporation. No court below the Court of Appeals shall have jurisdiction to issue a restraining order, preliminary injunction, or preliminary mandatory injunction in any case, dispute, or controversy that directly or indirectly interferes with the exercise of the powers, duties and responsibilities of the Commission that falls exclusively within its jurisdiction. Who are liable 1. Directors, Trustees, Officers, or Other Employees (Sec. 171) If the offender is a corporation, the penalty may, at the discretion of the court, be imposed upon such corporation and/or upon its directors, trustees, stockholders, members, officers, or employees responsible for the violation or indispensable to its commission. 2. Aiders and Abettors and Other Secondary Liability (Sec. 172) Anyone who shall: Aid. abet, counsel, command, induce, or cause any violation of this Code, or any rule, regulation, or order of the Commission Shall hall be punished with a fine not exceeding that imposed on the principal offenders, at the discretion of the court, after taking into account their participation in the offense. Authority of the Securities and Exchange Commission (Sec. 179) 1. Exercise supervision and jurisdiction over all corporations and persons acting on their behalf, except as otherwise provided under this Code; 2. Pursuant to Presidential Decree No. 902-A, retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution. The Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed; 3. Impose sanctions for the violation of this Code, its implementing rules and orders of the Commission; 4. Promote corporate governance and the protection of minority investors, through, among others, the issuance of rules and regulations consistent with international best practices; 5. Issue opinions to clarify the application of laws, rules, and regulations; 6. Issue cease and desist orders ex parte to prevent imminent fraud or injury to the public; 7. Hold corporations in direct and indirect contempt; 8. Issue subpoena duces tecum and summon witnesses to appear in proceedings before the Commission; 9. In appropriate cases, order the examination, search and seizure of documents, papers, files and records, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases, subject to the provisions of existing laws; 10. Suspend or revoke the certificate of incorporation after proper notice and hearing; 11. Dissolve or impose sanctions on corporations, upon final court order, for committing, aiding in the commission of, or in any manner furthering securities violations, smuggling, tax evasion, money laundering, graft and corrupt practices, or other fraudulent or illegal acts; 12. Issue writs of execution and attachment to enforce payment of fees, administrative fines, and other dues collectible under this Code; 13. Prescribe the number of independent directors and the minimum criteria in determining the independence of a director; Page 274 of 450 U.P. LAW BOC BUSINESS ORGANIZATIONS 14. Impose or recommend new modes by which a stockholder, member, director, or trustee may attend meetings or cast their votes, as technology may allow, taking into account the company’s scale, number of shareholders or members, structure, and other factors consistent with the basic right of corporate suffrage; 15. Formulate and enforce standards, guidelines, policies, rules and regulations to carry out the provisions of this Code; and 16. Exercise such other powers provided by law or those which may be necessary or incidental to carrying out the powers expressly granted to the Commission. (See also Powers and Functions of the Commission Sec. 5 of RA 8799 The Securities Regulation Code) Page 275 of 450 COMMERCIAL LAW U.P. LAW BOC SECURITIES SECURITIES COMMERCIAL LAW Page 276 of 450 COMMERCIAL LAW U.P. LAW BOC COMMERCIAL LAW SECURITIES v. A. STATE POLICY R.A. No. 8799 - The Securities Regulation Code The Securities Regulation Code (SRC) regulates public offering within the Philippines. Sec. 2. Declaration of State Policy The State shall: a. Establish a socially conscious, free market that regulates itself; b. Encourage the widest participation of ownership in enterprises; c. Enhance the democratization of wealth; d. Promote the development of the capital market; e. Protect investors; f. Ensure full and fair disclosure about securities; g. Minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market. B. DEFINITION OF SECURITIES Sec. 3. Definition of Terms. – 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, instruments, whether written or electronic in character. It includes: i. Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities; ii. Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of deposit for a future subscription; iii. Fractional undivided interests in oil, gas or other mineral rights; iv. Derivatives like option and warrants; Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; vi. Proprietary or nonproprietary membership certificates in corporations; and vii. Other instruments as may in the future be determined by the Commission. Additional Definitions under the 2015 Implementing Rules and Regulations of the SRC 1. Debt securities/instruments – include any evidence of indebtedness such as bonds, notes, debentures, commercial papers, treasury bills, treasury bonds, and other similar instruments as determined by the SEC. [Rule 3.1.20] 2. Equity securities – include shares of stock in a corporation. [Rule 3.1.20] 3. Commercial paper – means an evidence of indebtedness of any person with a maturity of 365 days or less. [Rule 3.1.6] 4. Derivative – a financial instrument whose value changes in response to changes in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or similar variable or underlying factor. It is settled at a future date. [Rule 3.1.9] 5. Options – contracts that give the buyer the right, but not the obligation, to buy or sell an underlying security at a predetermined price on or before a predetermined date. [Rule 3.1.9.1] 6. Warrants – rights to subscribe or purchase new or existing shares in a company on or before a predetermined date. [Rule 3.1.9.2] 7. Investment contract – means a 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. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits. [Rule 26.3.5] 8. Proprietary share or certificate – an evidence of interest, participation or Page 277 of 450 U.P. LAW BOC COMMERCIAL LAW SECURITIES privilege in a corporation which gives the holder of the share or certificate the right to use the facilities covered by such certificate and to receive dividends or earnings from the corporation. Upon liquidation of the corporation, the holder shall have proportionate ownership rights over its assets. [Rule 3.1.15] 9. Non-proprietary share or certificate – an evidence of interest, participation or privilege over a specific property of a corporation that allows the holder of the share or certificate to use such property under certain terms and conditions. The holder, however, shall not be entitled to dividends from the corporation or to its assets upon its liquidation. [Rule 3.1.13] Rationale: This is rooted in comity among nations. b. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. Rationale: This is not a public offering. Besides, protection is already afforded by that “proper adjudicatory body” and additional SEC protection is not necessary. c. Any security or its derivatives, the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue. Rationale: The issuers are governmental agencies covered by exception (a) above. SEC protection would be a duplication. C. KINDS OF SECURITIES 1. Exempt Securities [Sec. 9] The requirement of registration shall not, as a general rule, apply to any of the following classes of securities: d. Any security issued by a bank except its own shares of stock. [Sec. 9.1] Rationale: Banks are under the supervision of the Bangko Sentral. SEC protection is a duplication. Shares of stock were taken out of the exemption in the SRC. The previous laws (the original Securities Act and the Revised Securities Act) did not have this exception to the exemption. 1. Any security issued or guaranteed by the Government of the Philippines, its political subdivision or agency, its instrumentality, or any person controlled or supervised thereby. Rationale for the exception: The public does not need protection from the government itself. The government will always be solvent to pay its obligations because of its ability to raise revenues through taxation. a. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content for disclosures the Commission may prescribe. e. Any class of security with respect to which the SEC finds that registration is not necessary in the public interest and for the protection of investors. [Sec. 9.2] Note: The exemption of securities by the SEC must be made through the issuance of a rule or regulation. [Sec. 9.2] f. Under Rule 9.1 of the 2015 SRC-IRR, the following shall also be considered exempt securities: 1. Any evidence of indebtedness issued by a financial institution itself that has been duly licensed by the BSP to engage in banking or quasi-banking activity. [Rule 9.1.1] Page 278 of 450 U.P. LAW BOC COMMERCIAL LAW SECURITIES 2. Evidence of indebtedness issued to the BSP under its open market and/or rediscounting operations. [Rule 9.1.2.1] 3. Bills of exchange arising from a bona fide sale of goods and services that are distributed and/or traded by banks or investment houses duly licensed by SEC and BSP through an organized market that is operated under the rules approved by the SEC. [Rule 9.1.2.2] 4. Any security issued or guaranteed by multilateral financial entities established through a treaty or any other binding agreement to which the Philippines is a party or subsequently becomes a member. [Rule 9.1.2.3] 5. Evidence of indebtedness that meet the following conditions: (19-Lender Rule) (1) Issued to not more than 19 noninstitutional lenders; (2) Payable to a specific person; (3) Neither negotiable nor assignable and held on to maturity; and (4) In an amount not exceeding P150 million or such higher amount as the SEC may prescribe. [Rule 9.1.2.4] Note: This provision exempts from registration only the securities issued by banking or financial institutions mentioned in the law. Being an issuer of an exempt security does not exempt such issuer from the requirement of submission of reports. These regulations are meant to assure full, fair and accurate information for the protection of investors. Imposing such regulations is a function within the jurisdiction of the SEC. [Union Bank v SEC, G.R. No. 138949, (2001)] Securities exempt under this section are still subject to the anti-fraud and civil liability provisions contained in the Code, trading regulations where they are traded on an exchange, and the persons who sell these securities are subject to SEC regulation. [Decasa, Securities Annotated (2004)] Regulation Code 2. Exempt Transactions [Sec. 10] The requirement of registration shall not apply to the sale of any security in any of the following transactions: 1. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. Rationale: A court will presumably not order the sale if the public will be prejudiced thereby. 2. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of this Code, to liquidate a bona fide debt, a security pledged in good faith as security for such debt. Rationale: This is not a voluntary sale contemplated by the SRC. 3. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transactions of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. Rationale: Isolated and not meant to be an ongoing public offering. 4. The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its Page 279 of 450 U.P. LAW BOC COMMERCIAL LAW SECURITIES stockholders or other security holders as a stock dividend or other distribution out of surplus. 8. Broker’s transaction, executed upon customer’s orders, on any registered Exchange or other trading market. Rationale: The offerees are not the public, but shareholders already familiar with their company. Rationale: If broker’s transactions are registered each time, the transactions on the exchange will be unduly hampered. Besides, the brokers are subject to a “code of conduct” protective of the interest of the investors. 5. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. Rationale: Same as d. above. Note the condition for such exemption. 6. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. Rationale: This is not a public sale. 7. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provision of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion, the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. Rationale: The SEC has already registered the convertible security and presumably also passed upon the security to be issued upon conversion. 9. Subscriptions for shares of the capitals stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stocks, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased. Rationale: This is not a public offering. Besides, the SEC is involved in the subscription process, as a regulator. Note the condition that the exemption applies only in respect of issuance for compliance with the percentage needed for an increase in authorized capital stock, and the similar condition in f. where no compensation is paid or given. 10. The exchange of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. Rationale: This is not a public offering. Note the condition for exemption. 11. The sale of securities by an issuer to fewer than twenty (20) persons in the Page 280 of 450 U.P. LAW BOC Philippines period. SECURITIES during any twelve-month Rationale: This is not a public offering but a private placement. If the original purchaser shall resell said securities resulting in more than 19 holders, the registration requirement shall apply, notwithstanding the exemption of their issuances. [Rule 10.1.2.2] 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 person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management. [Sec. 10.1] Rationale: These are sophisticated investors who are presumed to know the risks of investing in the securities market. 12. Any transaction with respect to which the SEC finds that registration is not necessary in the public interest and protection of investors, such as by reason of the small amount involved or the limited character of the public offering. [Sec. 10.2] Note: Any person applying for an exemption under Section 10 shall file with the SEC: a. A notice identifying the exemption relied upon; b. Payment of fee equivalent to 1/10 of 1% of the maximum value aggregate price or issued value of the securities. COMMERCIAL LAW HOWEY TEST The Howey test is used order to determine if a particular transaction is an investment contract that requires registration. The SRC treats investment contracts as “securities” that have to be registered with the SEC before they can be distributed and sold. An investment contract is a contract, transaction, or scheme where a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. [SEC v. Prosperity.com, Inc, G.R. No. 164197 (2012)] To be a security subject to regulation by the SEC, an investment contract in our jurisdiction must be proved to be: 1. An investment of money, 2. In a common enterprise, 3. With expectation of profits, 4. Primarily from efforts of others. [Power Homes Unlimited Corp. v. SEC and Manero, G.R. No. 164182 (2008)] The commissions, interest in real estate, and insurance coverage given in a network marketing scheme to a buyer that becomes a down-line seller can hardly be regarded as profits from investment of money under the Howey test. Rather, these are incentives for down-line sellers to bring in other customers. [SEC v. Prosperity.com, Inc, G.R. No. 164197 (2012)] A scheme wherein an investor enrolls to be entitled to recruit other investors, and to receive commissions from the investments of those directly recruited by him, constitutes an investment contract, which is a security under RA 8799. Under the scheme, the accumulated amount received by the investor comes primarily from the efforts of his recruits. [Power Homes Unlimited Corp. v. SEC and Manero, G.R. No. 164182 (2008)] Page 281 of 450 U.P. LAW BOC COMMERCIAL LAW SECURITIES 3. Non-exempt transactions Section 8. Requirement of Registration of Securities. – 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. All other transactions not within the scope of exempt securities or exempt transactions, and not otherwise declared by the Commission as such, are non-exempt transactions and must follow the procedure on registration and provide prospective purchasers of information on the securities prior to such sale. Registration General rule: Securities are prohibited to be sold or offered for sale or distribution within the Philippines: a) Without registration statement duly filed with and approved by SEC; and b) Prior to such sale, information on the securities, in such form and with such substance as SEC may prescribe, must be made available to each prospective purchaser. Exceptions a) Exempt securities [Sec. 9] b) Exempt transactions [Sec. 10] D. POWERS AND FUNCTIONS OF THE SECURITIES AND EXCHANGE COMMISSION a. SEC may dispense with any requirement, or may require additional information or documents with respect to registration. [Sec. 12.2] b. The Commission may compel the production of all the books and papers of such issuer, and may administer oaths to, and examine the officers. [Sec. 13.2] c. If the Commission deems it necessary, it may issue an order suspending the offer and sale of the securities pending any investigation. Upon the issuance of the suspension order, no further offer or sale of such security shall be made until the same is lifted or set aside by the Commission. Otherwise, such sale shall be void. [Sec. 13.4] E. PROCEDURE FOR REGISTRATION OF SECURITIES 1. Registration of [Secs. 12 and 13] Securities a. Filing by the issuer of a sworn registration statement with the SEC in the form prescribed [Sec. 12.1] (1) Shall include any prospectus required or permitted to be delivered under Subsections 8.2, 8.3, and 8.4 [Sec. 12.1] Sec. 8. Requirement of Registration of Securities. – xxx 8.2 The Commission may conditionally approve the registration statement under such terms as it may deem necessary. 8.3 The Commission may specify the terms and conditions under which any written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale under this Section. 8.4. A record of the registration of securities shall be kept in Register of Securities in which shall be recorded orders entered by the Commission with respect to such securities. Such register and all documents or information with respect to the securities registered therein shall be open to public inspection at reasonable hours on business days. Page 282 of 450 U.P. LAW BOC SECURITIES (2) Shall include the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership [Sec. 12.3] (3) Shall be signed by the issuer’s executive officer, its principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary, or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation [Sec. 12.4] (4) Shall be accompanied by: a. Written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith; and b. 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. [Sec. 12.4] b. Payment to the SEC of a fee of not more than one-tenth of one per centum (1/10 of 1%) of the maximum aggregate price at which such securities are proposed to be offered [Sec. 12.5a] The Commission shall prescribe, by rule, diminishing fees in inverse proportion to the value of the aggregate price of the offering. This fee paid to the SEC is called a diminishing fee. c. Publication of the notice of the filing of registration statement [Sec. 12.5b] The notice must be published by the issuer, at its own expense, in two (2) newspapers of general circulation in the Philippines, once a COMMERCIAL LAW week for two (2) consecutive weeks, or in such other manner as the SEC shall prescribe. d. Declaration by the SEC whether the registration statement is effective or rejected Declaration is made within 45 days from filing of the registration statement or on such later date to which the issuer has consented, unless applicant has been allowed to amend the registration statement under Sec. 14. [Sec. 12.6] e. Statement under oath by the issuer in all prospectus that: 1. Registration requirements have been met; and 2. All information are true and correct as represented by the issuer or the one making the statement. Statement under oath must be made upon effectivity of the registration statement. [Sec. 12.7] Grounds for Rejection and/or Revocation of the Registration of Securities The SEC may reject a registration statement and reuse registration of the security thereunder, or revoke the effectivity of a registration statement and the registration of the security thereunder after due notice and hearing, if it finds that: The issuer: 1. Has been judicially declared insolvent; 2. Has violated any of the provision of this Code, the rules promulgated pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed; 3. Has been or is engaged or is about to engage in fraudulent transactions; 4. Has made any false or misleading representation of material facts in any prospects concerning the issuer or its securities; Page 283 of 450 U.P. LAW BOC COMMERCIAL LAW SECURITIES 5. Has failed to comply with any requirements that the Commission may impose as a condition for registration of the security for which the registration statement has been filed. [Sec. 13.1.a] The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statements of a material fact required to be stated therein or necessary to make the statement therein not misleading. [Sec. 13.1.b] The issuer, any officer, director or controlling person performing similar functions, or any under writer has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the Commission or other competent or administrative body for violations of securities, commodities, and other related laws. [Sec. 13.1.c] The term “competent judicial or administrative body” shall include a foreign court of competent jurisdiction. Note: Upon the issuance of such order of suspension and notification to the issuer, underwriter, dealer or broker known as participating in such offering, no further offer or sale of such security shall be made until the order is lifted by the SEC. Otherwise, such sale shall be void. [Sec 15.2] F. PROHIBITIONS ON FRAUD, MANIPULATION, AND INSIDER TRADING 1. Manipulation of prices [Sec. 24] security a. It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly: b. 1) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market ("Exchange"): If any issuer shall refuse to permit an examination to be made by the SEC. [Sec. 13.3] Wash sales - By effecting any transaction in such security which involves no change in the beneficial ownership thereof; Note: A registration statement may be withdrawn by the issuer only with the consent of the Commission. [Sec. 13.6] Matched orders - By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or Market rigging or jiggling - By performing similar act where there is no change in beneficial ownership. Grounds for suspension of registration [Sec. 15] a. If, at any time, the information contained in the registration statement filed is or has become misleading, incorrect, inadequate or incomplete in any material respect; b. If the sale or offering for sale of the security registered thereunder may work or tend to work a fraud; c. If the security registered is pending further investigation to ascertain whether the registration of such security should be revoked on any ground specified in the SRC; d. If there is refusal to furnish information required by the SEC. 2) To effect, alone or with others, a series of transactions in securities that: 1. Raises their price to induce the purchase of a security, whether of the Page 284 of 450 U.P. LAW BOC COMMERCIAL LAW SECURITIES same or a different class of the same issuer; 2. Depresses their price to induce the sale of a security, whether of the same or a different class of the same issuer; or 3. Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices. Examples of Prohibited Conduct under the 2015 SRC Rules for a.1 and a.2 Painting the tape - Engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security Marking the close - Buying and selling securities at the close of the market in an effort to alter the closing price of the security Improper matched orders - Engaging in transactions where both the buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties Hype and dump - Engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices or vice versa (i.e., selling activity at lower prices and then buying at such lower prices). Wash sales - Engaging in transactions in which there is no change in beneficial ownership of a security Squeezing the float - Taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way as to create artificial prices Boiler room operations – use of high pressure sales tactics to sell securities to clients who are called randomly Disseminating false or misleading market information through media, including the internet, or any other means to move the price of a security in a direction that is favorable to a position held or a transaction; Other types of prohibited conduct and/or manipulative practices which include, among others, the creation of temporary funds for the purpose of engaging in other manipulative practices. [Sec. 24.1, 2015 SRC-IRR] 3) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such security. 4) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. 5) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security; unless otherwise allowed by this Code or by rules of the Commission. [Sec. 24.1] c. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. [Sec. 24.2] MARGIN TRADING [Sec. 48] This is a form of trading whereby the customer purchases stocks by advancing only a portion of the purchase price, with the broker extending credit or making loan for the balance due. [Sundiang] Purpose Page 285 of 450 U.P. LAW BOC COMMERCIAL LAW SECURITIES To prevent the excessive use of credit for the purchase or carrying of securities [Sec. 48.1] Margin Requirements The credit extended must be for an amount not greater than whichever is the higher of— 1. Sixty-five per centum (65%) of the current market price of the security, or 2. One hundred per centum (100%) of the lowest market price of the security during the preceding thirty-six (36) calendar months, but not more than seventy-five per centum (75%) of the current market price. Note: However, the Monetary Board may increase or decrease the above percentages, in order to achieve the objectives of the Government with due regard for promotion of the economy and prevention of the use of excessive credit. [Sec. 48.1] PROHIBITIONS [Rule 48, 2015 SRC-IRR] a. A Broker Dealer shall not extend credit to a customer in an amount that exceeds fifty percent (50%) of the current market value of the security at the time of the transaction. In no event shall new or additional credit be extended to an account in which the equity is less than Fifty Thousand Pesos (PhP 50,000.00). b. The margin maintained in a margin account of a customer shall be no less than twenty five percent (25%) of the current market value of all securities "long" in the account and thirty percent (30%) of the current market value of securities "short" in the account. c. When there is an insufficiency of margin, a call for additional margin shall be issued promptly by the Broker Dealer to the customer. A call for initial margin shall be satisfied within 5 business days from receipt of the call. A call for maintenance margin shall be satisfied within 24 hours after the call is received. No purchase or sell order from the customer on the margin account shall be executed by the Broker Dealer from the time of insufficiency up to the satisfaction of the call (Mandatory Close-Out Rule). 2. Short sales [Rule 24.2-2, 2015 SRC IRR] No short sale shall be effected, nor any stop-loss order be executed in connection with the purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest for the protection of investors. [Sec. 24.2] ‘Short Sale’ means: 1. Any sale of a security which the seller does not own; or 2. Any sale which is consummated by the delivery of a security borrowed by, or for the account of the seller with the commitment of the seller or securities borrower to return or deliver said securities or their equivalent to the lender on a determined or determinable future date. [Sec. 24.2-2, 2015 SRC-IRR] ‘Stop Loss Order’ means: An order made by the customer to a broker to sell a security when it reaches a certain price. Stop loss orders are designed to limit an investor's loss on a position in a security. Prohibition on Short Sales under the 2015 SRC-IRR (1) No broker or dealer shall use any facility of a securities exchange to effect a short sale of any security unless: a. At a price higher than the last sale; or b. At the price of the sale if that price is above the next preceding different sale price on such day. (Uptick Rule) Note: Unless otherwise provided by the Commission, this price requirement shall not apply to a sale due to a bona fide market-making or arbitrage activity executed by a broker dealer authorized to engage in such activities. Page 286 of 450 U.P. LAW BOC COMMERCIAL LAW SECURITIES (2) No person shall, directly or indirectly, by the use of any facility of any securities exchange, effect a short sale in a security registered or listed on any securities exchange, where the seller does not intend or is unable to make delivery of the securities within the prescribed settlement period. (3) No director, officer or principal stockholder of a corporation shall make a short sale in securities of the corporation in which he is a director, officer or principal stockholder. (4) The SEC may, motu proprio or upon recommendation of the Exchange, prohibit short selling indefinitely or for such period as it may deem proper for the protection of the investors or as an emergency measure or whenever such short selling is necessary or appropriate in the public interest. [Sec. 24.2-2] 3. Option trading [Sec. 25] Prohibition on Option Trading under 2015 SRC-IRR No member of an Exchange shall, directly or indirectly endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to any security registered on a securities exchange. The terms "put", "call", "straddle", "option", or "privilege" shall not include any registered warrant, right or convertible security. Options – contracts that give the buyer the right, but not the obligation to buy or sell an underlying security at a predetermined price on or before a predetermined date. [Rule 3.1.9.1] 4. Fraudulent transactions [Sec. 26] Fraudulent Transactions It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: . Employ any device, scheme, or artifice to defraud; [Sec. 26.1] i. Obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading [Sec. 26.2] ii. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person [Sec. 26.3] ‘Material fact or information’ means: Any fact or information that may result in a change in the market price or value of any of the issuer’s securities, or may potentially affect the investment decision of an investor. [Sec. 3.1.12., 2015 SRC-IRR] PROHIBITED REPRESENTATIONS, DEALINGS AND SOLICITATIONS [Rule 26.3, 2015 SRC-IRR] It shall be unlawful for any: i. Person to represent that he has been registered as a securities intermediary with the SEC, unless such person is registered under the Code; ii. Broker Dealer to represent that the registration of the Broker Dealer under the Code, or the failure of the SEC to deny, suspend or revoke such registration, indicates in any way that the SEC has passed upon or approved the financial standing, business or conduct of such Broker Dealer, or the merits of any security or any transaction/s conducted thereby; iii. Person to represent that a security is a particular type of security when such representation is inconsistent with a stated definition under the Code or rules or regulations adopted thereunder; iv. Person to represent that a security to be sold, transferred, pledged, mortgaged, encumbered, used for delivery, or any other purpose to another entity or itself has been legally authorized by the registered owner when such representation is not true and documented in writing at the time and date it was used; Page 287 of 450 U.P. LAW BOC SECURITIES v. Person, whether as principal or agent, to buy, sell or deal in securities or solicit investments in securities and other investment contracts, unless he is a registered broker, dealer or licensed salesman of a broker dealer and the securities are registered under the Code or exempt from registration. 5. Insider trading [Sec. 61] An ‘Insider’ means: a. The issuer; b. A director or officer (or any person performing similar functions) or a person controlling the issuer; c. A person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; d. A government employee, director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or e. A person who learns such information by a communication from any of the foregoing insiders. [Sec. 3.8] ‘Issuer’ means: Any entity authorized by the SEC to offer to sell, sell or promote the sale to the public of its equity, bonds, instruments of indebtedness and other forms of securities. [Sec. 3.1.11, 2015 SRC-IRR] ‘Material non-public information’ means: It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or It would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security. [Sec. 27.2] COMMERCIAL LAW PRINCIPLES ON INSIDER TRADING What is sought to be addressed is the asymmetry in information about a “public company” (such as a company listed on the Philippine Stock Exchange) between insiders and outsiders. Insiders could have material information not yet known to the public about the company, and they might use this information to benefit themselves at the expense of the outsiders or the public. Therefore, they must not trade in the shares of the company pending the disclosure of such information to the public. UNLAWFUL ACTS OF AN INSIDER To sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: 1. The insider proves that the information was not gained from such relationship; or 2. If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: That he disclosed the information to the other party, or That he had reason to believe that the other party otherwise is also in possession of the information. [Sec. 27.1] Note: Presumption that purchase or sale made by an insider, or such insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, is effected while in possession of material nonpublic information arises: 1. If the purchase or sale is transacted after such information came into existence but prior to dissemination of such information to the public; and 2. The lapse of a reasonable time for the market to absorb such information. Presumption may be rebutted by showing of purchaser’s or seller’s lack of awareness of the material non-public information at the time of purchase or sale, [Sec. 27.1] Page 288 of 450 U.P. LAW BOC SECURITIES 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. [Sec. 27.3] UNLAWFUL ACTS INVOLVING INSIDERS IN CONNECTION WITH TENDER OFFER Where a tender offer has commenced, or is about to commence, it shall be unlawful for: a. Any person (other than the tender offeror) who is in possession of material non-public 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: (1) knows or has reason to believe that the information is non-public, and (2) has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer, or any insider of such issuer; and b. Any tender offeror, those acting on its behalf, the issuer, and any insider of such issuer — to communicate material nonpublic information relating to the tender offer to any other person where such is likely to result in a violation of Sec. 27.4(a)(i). [Sec 27.4] G. PROTECTION OF SHAREHOLDER INTERESTS 1. Tender offer rule Definition Tender Offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire: a. Outstanding equity securities of a public company, or b. Outstanding equity securities of an associate or related company of such public company which controls the said public company. COMMERCIAL LAW Stated differently, it is an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer. [Cemco Holdings, Inc. v. National Life Insurance Company of the Philippines, G.R. No. 171815 (2007)] A public company means any corporation: 1) With a class of equity securities listed on an Exchange, or 2) With assets in excess of Fifty million pesos and having 200 or more holders each holding at least 100 shares of a class of its equity securities. [Sec. 3.1, 2015 SRC-IRR] Purpose of Tender Offer Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments by: i. Giving them the chance to exit the company under reasonable terms, ii. Giving them the opportunity to sell their shares at the same price as those of the majority shareholders. [Cemco Holdings, Inc. v. National Life Insurance Company of the Philippines, supra] The rules aim to protect minority owners who may be left out, if the buyers extend the offer only to strategic partners or majority owners of a company. [Decasa] MANNER OF MAKING TENDER OFFER No tender offer shall be made unless: a. It is open to all security holders of the class of securities subject to the tender offer; and b. The consideration paid to any security holder pursuant to the tender offer shall be the highest consideration paid to any other security holder during such tender offer. [Sec 19.9.8, 2015 SRC-IRR] MANDATORY TENDER OFFER [Rule 19.2, 2015 SRC-IRR] Tender offer is mandatory whenever any person or group of persons acting in concert intends to: Page 289 of 450 U.P. LAW BOC When Mandatory SECURITIES How Effected a. Acquire fifteen They shall file a percent (15%) of declaration to that equity securities in a effect with the SEC. public company in one or more transactions within a period of 12 months. b. Acquire thirty five percent (35%) or more of the outstanding voting shares or such outstanding voting shares that are sufficient to gain control of the board in a public company in one or more transactions within a period of 12 months; They shall disclose such intention and make a tender offer for the percentage sought to all holders of such securities. c. Acquire thirty five percent (35%) or more of the outstanding voting shares or such outstanding voting shares that are sufficient to gain control of the board in a public company directly from one or more stockholders; They shall make a tender offer for all the outstanding voting shares. d. Acquire any number of shares that would result in ownership of over fifty percent (50%) of the total outstanding equity securities of a public company. They shall make a tender offer for all outstanding equity securities to all remaining stockholders of the company. The acquirer shall be required to accept all securities tendered. Note: If the tender offer is oversubscribed, the aggregate amount of securities to be acquired at the close of the tender offer shall be proportionately distributed. [Sundiang] COMMERCIAL LAW Obligations of a person making a tender offer [Rule 19, 2015 SRC-IRR] 1. Make an announcement of his intention in a national newspaper of general circulation, prior to the commencement of the offer. A copy of the said notice shall be submitted to the Commission on the date of its publication. [Rule 19.5] 2. File with the Commission SEC Form 19-1, including all its exhibits. [Rule 19.6.1.1] 3. Hand deliver a copy of the SEC Form 19-1, including all its exhibits, to the target company at its principal executive office and to each Exchange where such class of the target company's securities is listed for trading. [Rule 19.6.1.2] 4. File with the SEC copies of any additional tender offer materials as exhibit to SEC Form 19-1 and, if a material change occurs in the information set forth in such SEC Form, copies of an amendment to such form. Copies shall be hand delivered to the target company and to any Exchange as required above. [Rule 19.6.2] 5. Report the results of the tender offer to the SEC by filing, not later than ten (10) business days after the termination of the tender offer, copies of the final amendments to SEC Form 19-1. [Rule 19.6.3] Coverage of the Mandatory Tender Offer Rule The coverage of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or “any type of acquisition.” The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. [Cemco Holdings, Inc. v. National Life Insurance Company of the Philippines, supra]. Page 290 of 450 U.P. LAW BOC SECURITIES Exemptions from the mandatory tender offer requirement [Rule 19.3, 2015 SRC-IRR] Any purchase of securities from the unissued capital stock, provided, the acquisition will not result to a fifty percent (50%) or more ownership of securities by the purchaser, or such percentage that is sufficient to gain control of the board; a. Any purchase of securities from an increase in authorized capital stock; b. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where the acquisition is made by the debtor or creditor; c. Purchases in connection with a privatization undertaken by the government of the Philippines; d. Purchases in connection with corporate rehabilitation under court supervision; e. Purchases in the open market at the prevailing market price; and f. Merger or consolidation. Note: Purchasers of securities in the foregoing transactions shall, however, comply with the disclosure and other obligations under SRCIRR 18.1 and 23. When not required to make a tender offer Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%) of the outstanding voting shares or such outstanding voting shares that are sufficient to gain control of the board in a public company through the Exchange shall not be required to make a tender offer even if they acquire the remainder through a block sale if, after acquisition through the Exchange, they fail to acquire their target of thirty five percent (35%) or such outstanding voting shares that is sufficient to gain control of the board. [Sec 19.2.3, 2015 SRC-IRR] ISSUER TENDER OFFER “Issuer Tender Offer” means a publicly announced intention by an issuer to acquire any of its own class of equity securities, or by an associate of such issuer to acquire such securities. [Sec 19.1.5, 2015 SRC-IRR] COMMERCIAL LAW A reacquisition or repurchase by an issuer of its own securities shall only be made if such issuer has unrestricted retained earnings in its books to cover the amount of shares to be purchased, and is undertaken for any of the following purposes: a. To implement a stock option or stock purchase plan; b. To meet short-term obligations which can be settled by the reissuance of the repurchased shares; c. To pay dissenting or withdrawing stockholders entitled to payment for their securities; and d. Such other legitimate corporate purpose/s. [Sec. 19.4, 2015 SRC-IRR] PROHIBITED ACTS It shall be unlawful when a tender offer has commenced or about to commence for: 1. Any person (other than the tender offeror) who is in possession of material non-public 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; and 2. Any tender offeror, those acting on its behalf, the issuer of the securities sought or 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 Sec. 27.4(a)(i). [Sec. 27.4] 2. Rules on proxy solicitation Definition Proxy Solicitation involves the securing and submission of proxies. It is where the corporation obtains proxies of the stockholders to vote on corporate matters. [GSIS v. CA, G.R. No. 183905 (2009)] The terms solicit and solicitation shall include: 1. Any request for proxy or authorization; 2. Any request to execute or not to execute, or to revoke, a proxy or authorization; or 3. The furnishing of a form of proxy or other communication to security holders under Page 291 of 450 U.P. LAW BOC SECURITIES circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy. [Rule 20.2.2, 2015 SRC-IRR] The terms shall not apply to: a. The performance by any person of ministerial acts on behalf of a person soliciting a proxy; or b. Any solicitation made otherwise than on behalf of the issuer where the total number of persons solicited is not more than 19. [Rule 20.2.2, 2015 SRC-IRR] The SRC regulates proxy solicitation by requiring the issuer to transmit 1. An information statement, 2. Proxy form, and 3. Management report to every security holder of the class entitled to vote at least 15 days prior to the conduct of annual or other stockholders’ meetings. [Rule 20.3.1, 2015 SRC-IRR] Preliminary copies of the information statement and the proxy form shall be submitted to the SEC before sending the same to security holders. [Rule 20.3.3.1, 2015 SRC-IRR] Requirements Proxies must be: a. Issued and solicited in accordance with SEC rules and regulations [Sec. 20.1] b. In writing [Sec. 20.2] c. Signed by the stockholder or his duly authorized representative [Sec. 20.2] d. Filed before the scheduled meeting with the corporate secretary [Sec. 20.2] e. Valid only for the meeting for which it is intended unless otherwise provided in the proxy [Sec. 20.3] Note: No proxy shall be valid and effective for a period longer than five (5) years at one time. [Sec. 20.3] Rules with Regard to Brokers Or Dealers No broker/dealer shall give any proxy, consent or any authorization, in respect of any security carried for the account of the customer, to a COMMERCIAL LAW person other than the customer without written authorization of such customer. [Sec. 20.4] A broker or dealer who holds or acquires the proxy for at least ten percent (10%) or such percentage as the commission may prescribe of the outstanding share of such issuer, shall submit a report identifying the beneficial owner of ten days after such acquisition, for its own account or customer to the issuer of security, to the exchange where the security is traded, and to the Commission. [Sec. 20.5] Note: For proxy or consent solicitation, the SEC may require that the person making such filing pay a fee of not more than onetenth of one percent (1/10 of 1%) of the proposed payment in cash, and the value of any security or property to be transferred in the acquisition, merger or consolidation, or the cash and value of any securities proposed to be received upon sale or disposition of such assets in case of a solicitation. [Sec. 21] 3. Disclosure rule Issuers, equity holders, and insiders are subject to certain reportorial requirements under the SRC. (A) Disclosure by The Issuer [Sec. 17] To the SEC 1. Annual Report filed within one hundred thirty-five (135) days after the end of the issuer’s fiscal year, or such other time as the Commission may prescribe; 2. Such other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the Commission may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer. [Sec. 17.1] To the equity holders An annual report shall be furnished, by every issuer which has a class of equity securities satisfying any of the requirements in Subsection 17.2, to each holder of such equity security. [Sec. 17.5]. Page 292 of 450 U.P. LAW BOC SECURITIES Types of issuers subject to the reportorial requirements [Sec. 17.2] An issuer which has sold a class of its securities pursuant to a registration statement, Provided however, That the requirement shall be suspended for any fiscal year after the year such registration became effective if such issuer, as of the first day of any such fiscal year, has less than one hundred (100) holder of such class of securities or such other number as the Commission shall prescribe and it notifies the Commission of such; 1. An issuer with a class of securities listed for trading on an Exchange; and 2. An issuer with assets of at least 50 million pesos or such other amount as the Commission shall prescribe, and having 200 or more holders each holding at least 100 shares of a class of its equity securities. The obligation of such issuer to file reports shall be terminated ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one hundred (100) shares is reduced to less than one hundred (100) [Sec. 17.2] A “public company” is required to comply with the reportorial requirements set forth in Section 17.1 of the SRC. Under Rule 3(1)(m), a “public company” is defined as “any corporation with a class of equity securities listed on an Exchange or with assets in excess of Fifty Million Pesos (P50,000,000.00) and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its equity securities.” It is clear that a “public company,” as contemplated by the SRC, is not limited to a company whose shares of stock are publicly listed; even companies like the Bank, whose shares are offered ONLY to a specific group of people, are considered a public company, provided they meet the requirements enumerated. [Philippine Verterans Bank v. Callangan G.R. No. 191995 (2011)] COMMERCIAL LAW (B) Disclosure by Equity Holders [Sec. 18] Reports by Five per centum Holders of Equity Securities [Sec. 18] In every case in which an issuer is subject to the reportorial requirements, any person who acquires directly or indirectly the beneficial ownership of more than five of per centum (5%) of such class or in excess of such lesser per centum as the Commission by rule may prescribe, shall, within 10 days after such acquisition or such reasonable time as fixed by the Commission, submit to: The issuer of the securities; The Exchange where the security is traded; and The Commission, a sworn statement containing the following information – 1. The personal background, identity, residence, and citizenship of, and the nature of such beneficial ownership by such person and all other persons by whom or on whose behalf the purchases are effected; in the event the beneficial owner is a juridical person, the line of business of the beneficial owner shall also be reported; 2. If the purpose of the purchases or prospective purchases is to acquire control of the business of the issuer of the securities, any plans or proposals which such persons may have that will effect a major change in its business or corporate structure; 3. The number of shares of such security which are beneficially owned, and the number of shares concerning which there is a right to acquire, directly or indirectly, by: (1) such person, and (2) each associate of such person, giving the background, identity, residence, and citizenship of each such associate; and 4. Information as to any contracts, arrangements, or understanding with any person with respect to any securities of the issuer including but not limited to transfer, joint ventures, loan or option arrangements, puts or call guarantees or division of losses or profits, or proxies naming the persons with whom such contracts, arrangements, or understanding Page 293 of 450 U.P. LAW BOC SECURITIES have been entered into, and giving the details thereof; 5. Such other information as the Commission may require in the public interest or for the protection of investors. Note: If it appears to the SEC that securities were acquired by person in the ordinary course of his business and were not acquired for the purpose of and do not have the effect of changing or influencing the control of the issuer nor in connection with any transaction having such purpose or effect it may permit any person to file in lieu of the statement required by subsection 17.1, a notice stating: The name of such person; The shares of any equity securities subject to Subsection 17.1 which are owned by him; The date of their acquisition; and Such other information as the commission may specify [Sec. 18.3] COMMERCIAL LAW What is required to be disclosed is a fact of special significance, which may be: A material fact which would be likely, on being made generally available, to affect the market price of a security to a significant extent, or One which a reasonable person would consider especially important in determining his course of action with regard to the shares of stock. [SEC v. Interport Resources Corporation, G.R. No. 135808 (2008)] See also Insider and Material non-public information under Insider Trading above. Transactions of Directors, Officers and Beneficial Owners of more than ten per centum [Sec. 23] Every person who is: 1. The beneficial owner of more than 10% of any class of any equity security, or 2. A director or any officer of the issuer of such security, shall file a statement of – a. The amount of all the equity security of such issuer of which he is the beneficial owner; and b. Such changes in his ownership as may have occurred within 10 days after the close of each calendar month thereafter, to be filed with the SEC and, if the security is listed for trading on an exchange, also with the exchange. (C) Disclosure by Insider An insider has the duty to disclose material information with respect to the issuer or the security that is not generally available to the public when selling or buying securities of the issuer. [Sec. 27.1] Page 294 of 450 U.P. LAW BOC BANKING BANKING COMMERCIAL LAW Page 295 of 450 COMMERCIAL LAW U.P. LAW BOC 3. Responsibility and Primary Objective of BSP A. THE NEW CENTRALBANK ACT [R.A. 7653, as amended by R.A. 11211] The section numbers hereinafter generally pertain to RA 7653, unless otherwise indicated. 1. State Policies The State shall maintain a central monetary authority that shall: 1. Function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit; 2. Enjoy fiscal and administrative autonomy, while being a governmentowned corporation - Considering its unique functions and responsibilities. [Sec. 1] 2. Creation of the Sentral ng Pilipinas COMMERCIAL LAW BANKING Bangko Created by the NCBA, the Bangko Sentral ng Pilipinas (BSP) is the independent central monetary authority of the Philippines. Capitalization of the BSP The BSP has a capitalization of P200B subscribed by the Government. [Sec. 2, as amended] The BSP as transferee of Philippine Central Bank powers All powers, duties and functions vested by law in the Central Bank of the Philippines not inconsistent with the NCBA were deemed transferred to the BSP. All references to the Central Bank of the Philippines in any law or special charters shall be deemed to refer to the BSP. [Sec. 136] The BSP is an independent central monetary authority, which replaced the Central Bank of the Philippines and shares the same functions, but is a new entity altogether. Nature of the BSP b. A central monetary authority; c. An independent and accountable body; and d. A government-owned corporation that enjoys fiscal and administrative autonomy. [Secs. 1 and 2] Primary Objective and Other Responsibilities of the BSP a. Primary objectives 1. To maintain price stability conducive to a balanced and sustainable economic growth; 2. To promote and maintain monetary stability and the convertibility of the peso; 3. To promote financial stability and closely work with the National Government; 4. To oversee the payment and settlement systems in the Philippines; and 5. To promote broad and convenient access to high quality financial services and consider the interest of the general public. b. Other responsibilities 1. Provides policy directions in the areas of money, banking, and credit; 2. Supervises operations of banks; 3. Regulates the operations of finance companies and non-bank financial institutions performing quasi-banking functions. [Sec. 3] Page 296 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Salient Features of the BSP Under the NCBA a. Assurance of BSP independence by providing for the majority of the members of the Monetary Board (MB) to come from the private sector. [Sec. 6] b. The BSP now concentrates on monetary policy, and has phased out its fiscal agency functions and its responsibilities in respect of finance companies without quasi-banking functions, which in the past, had distracted the old Central Bank from its primary function. The latter has been assumed by the Securities and Exchange Commission. [Secs. 3, 129, & 130] c. Provides safeguards to ensure that, unlike the old Central Bank which sustained huge losses, the BSP would have a positive net income position by the following provisions: 1. Capitalization of P200B; [Sec. 2, as amended] 2. Maintenance of positive net foreign asset position; [Sec.71] 3. Charging interests on all loans and advances to banks; [Sec. 85] 4. Authority to collect interests on loans and advances to closed financial institutions; [Sec. 85] and 5. Prohibition against acquisition of shares, including by collateral, nor participate in neither ownership nor management of enterprises, nor engage in development banking or financing. [Sec. 128] Exception: Whenever the MB, by a vote of at least 5 of its members, deems an acquisition or investment to be necessary to qualify or as required for membership in international and regional organizations; or determines that investing in and/or operating an enterprise will be consistent with the effective fulfillment of its mandate and will not constitute any conflict of interest. 4. Corporate Powers The BSP is authorized: a. To adopt, alter, and use a corporate seal which shall be judicially noticed; b. To lease or own real and personal property and to sell or otherwise dispose of the same; c. To sue and be sued; d. To do and perform ay and all things that may be necessary or proper to carry out the purposes of the act Moreover, the BSP may: a. Acquire and hold such assets and incur such liabilities in connection with its operations authorized by the provisions of the NCBA, or as are essential to the proper conduct of such operations b. Compromise, condone or release, in whole or in part, any claim of or settled liability to the BSP, regardless of the amount involved, under such terms and conditions as may be prescribed by the MB to protect the interests of the BSP. [Sec. 5] 5. Operations of the BSP Authority to information obtain data and The BSP shall have the authority to request from government offices and instrumentalities, or government-owned or controlled corporations, any data which it may require for the proper discharge of its functions and responsibilities. Power to Issue a Subpoena The BSP through the Governor or in his absence, a duly authorized representative shall have the power to issue a subpoena for the production of the books and records for the aforesaid purpose. Those who refuse the subpoena without justifiable cause, or who refuse to supply the BSP with data requested or required, shall be subject to punishment for contempt in Page 297 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING accordance with the provisions of the Rules of Court. Data on Individual Firms Data on individual firms, other than banks, gathered by the Department of Economic Research and other departments or units of the BSP shall not be made available to any person or entity outside of the BSP whether public or private. Exception: under order of the court or under such conditions as may be prescribed by the MB. Collective data on firms may be released to interested persons or entities. In the case of banks, provisions of Sec. 27 shall apply. [Sec. 23] Supervision and Examination The BSP shall have supervision over, and conduct periodic or special examinations of: i. Banking institutions ii. Quasi-banks iii. Their subsidiaries engaged in allied activities - A subsidiary is a corporation more than 50% of the voting stock of which is owned by a bank or quasi-bank iv. Their affiliates engaged in allied activities - An affiliate is a corporation the voting stock of which: ▪ To the extent of 50% or less, is owned by a bank or quasi-bank; or ▪ Is related or linked to such institution or intermediary through common stockholders or such other factors as may be determined by the MB. The department heads and the examiners of the supervising and/or examining departments are hereby authorized: 1. To administer oaths to any director, officer, or employee of any institution under their respective supervision or subject to their examination 2. To compel the presentation of all: Books, documents, papers or records necessary in their judgment to ascertain the facts relative to the true condition of any institution Books and records of persons and entities relative to or in connection with the operations, activities or transactions of the institution under examination Note: These powers are subject to the provision of existing laws protecting or safeguarding the secrecy or confidentiality of bank deposits as well as investments of private persons, natural or juridical, in debt instruments issued by the Government. Restraining orders and injunctions The provisions of Rule 58 (Preliminary Injunction) of the Rules of Court insofar as they are applicable and not inconsistent with the provisions of this Section 25 of the NCBA shall govern the issuance and dissolution of the restraining order or injunction. General Rule: No restraining order or injunction shall be issued by the court enjoining the BSP from examining any institution subject to supervision or examination by the BSP. Exception: There is convincing proof that the action of the BSP is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond executed in favor of the BSP, in an amount to be fixed by the court. [Sec. 25] Bank deposits and investments Any director, officer or stockholder who, together with his related interest, contracts a loan or any form of financial accommodation from: 1. His bank; or 2. From a bank: a. Which is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries; or Page 298 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING b. In which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank i. In excess of five percent (5%) of the capital and surplus of the bank, or ii. In the maximum amount permitted by law, whichever is lower shall be required by the lending bank to waive the secrecy of his deposits of whatever nature in ALL banks in the Philippines. Any information obtained from an examination of his deposits shall be held strictly confidential and may be used by the examiners only in connection with their supervisory and examination responsibility or by the BSP in an appropriate legal action it has initiated involving the deposit account. [Sec. 26] Prohibitions Personnel of the BSP are prohibited from: a. being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the BSP, except non-stock savings and loan associations and provident funds organized exclusively for employees of the BSP, and except as otherwise provided in the NCBA; b. directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the BSP; c. revealing in any manner, except under orders of the court, the Congress or any government office or agency authorized by law, or under such conditions as may be prescribed by the MB, information relating to the condition or business of any institution. This prohibition shall not be held to apply to the giving of information to the MB or the Governor of the BSP, or to any person authorized by either of them, in writing, to receive such information; d. borrowing from any institution subject to supervision or examination by the BSP shall be prohibited unless said borrowings are adequately secured, fully disclosed to the MB, and shall be subject to such further rules and regulations as the MB may prescribe: Provided, however, That personnel of the supervising and examining departments are prohibited from borrowing from a bank under their supervision or examination. In addition to the prohibitions in RA 3019 and RA 6713. Examination and fees Examination The supervising and examining department head, personally or by deputy, shall examine the books of every banking institution: a. Once in every 12 months, and b. At such other times as the MB by an affirmative vote of 5 members, may deem expedient Provided, That there shall be an interval of at least 12. months between annual examinations. The bank concerned shall afford to the head of the appropriate supervising and examining departments and to his authorized deputies full opportunity to examine its books, cash and available assets and general condition at any time during banking hours when requested to do so by the BSP Provided, however, That none of the reports and other papers relative to such examinations shall be open to inspection by the public Exception: Insofar as such publicity is incidental to the proceedings hereinafter authorized or is necessary for the prosecution of violations in connection with the business of such institutions. Fees Banking and quasi-banking institutions which are subject to examination by the BSP shall pay to the BSP an annual fee [Sec. 28] Page 299 of 450 U.P. LAW BOC When Amount COMMERCIAL LAW BANKING Within the first 30 days of each year A percentage, prescribed by the MB, of its average total assets during the preceding year - As shown on its end-ofmonth balance sheets, AFTER deducting cash on hand and amounts due from banks 6. Monetary Board (MB); Powers and Functions The MB is the body through which the powers and functions of the BSP are exercised. [Sec. 6] Powers and Functions: a. Issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested in it; b. Direct the management, operations, and administration of the BSP, reorganize its personnel and issue such rules and regulations as it may deem necessary or desirable for this purpose; c. Establish a human resource management system which governs the selection, hiring, appointment, transfer, promotion, or dismissal of all personnel; d. Adopt an annual budget for and authorize such expenditures by the BSP as are in the interest of the effective administration and operations of the BSP in accordance with applicable laws and regulations; and e. Indemnify its members and other officials of the BSP. General Rule: Includes costs and expenses reasonably incurred by personnel of the departments performing supervision and examination functions in connection with any civil or criminal action, suit or proceeding, to which any of them may be made a party by reason of the performance of their functions or duties Exception: Unless such members or other officials are found to be liable for willful violation of the NCBA, performed in evident bad faith or with gross negligence. [Sec. 15] 7. How The BSP Handles Banks In Distress WHEN BANKS ARE IN DISTRESS Liquidity is the ability of an asset to be converted into cash. An entity is liquid when it is able to pay its liabilities when they fall due. Illiquidity occurs when the bank is not liquid. It means that the bank cannot meet its current liabilities. Illiquidity is handled by conservatorship. Insolvency When the actual market value of assets is insufficient to pay its liabilities, not considering capital stock and surplus which are not liabilities for such purpose. An entity is insolvent when it is unable to meet current and long-term obligations. 1. In contrast, a bank is solvent when current assets are more than current liabilities, providing the ability to pay debts. It is also solvent when it is able to meet its long-term obligations/liabilities. 2. Insolvency is handled by receivership and/or closure. Conservatorship Grounds for Appointment of a Conservator Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the MB finds that a bank or quasibank is: 1. In a state of continuing inability; or 2. Unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. [Sec. 29] Page 300 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Requisites for Placement of a Bank under Conservatorship 1. There must be a report submitted by the appropriate supervising or examining department of the BSP; 2. There must be a finding that the bank or quasi-bank falls under either of the grounds for conservatorship; and 3. The Board of Directors must be informed in writing of the order of the MB directing conservatorship. [Sec. 29] Duration: Shall not exceed 1 year [Sec. 29] Expenses The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned. [Sec. 29] Grounds for Termination of Conservatorship by the MB a. When the MB is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary; or b. When, on the basis of the report of the conservator or of its own findings, the MB determines that the continuance in business of the institution would involve probable loss to its depositors or creditors Effect: The bank or quasi-bank would then be placed under receivership. [Sec. 29] Effects of Conservatorship 1. Bank/Quasi-bank retains juridical personality; 2. Not a precondition to the designation of a receiver [Sec. 30]; and 3. Perfected transactions cannot be repudiated. [First Philippine International Bank v. CA, G.R. No. 115849 (1996)] Qualifications of a Conservator The conservator should be competent and knowledgeable in bank operations and management. [Sec. 29] The designation of a conservator shall be vested exclusively in the MB. [Sec. 30] Note: The conservator is a natural person to be appointed by the MB. In contrast, the receiver is generally the Philippine Deposit Insurance Corporation (PDIC). Powers and Duties of a Conservator a. To take charge of the assets, liabilities, and the management of the institution; b. To reorganize the management; c. To collect all monies and debts due said institution; d. To exercise all powers necessary to restore its viability; e. To report and be responsible to the MB; and f. To overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. [Sec. 29] Note: That the management of the bank is still with its board of directors and management. However, the conservator may revoke their actions. In contrast, in receivership, the receiver takes over the management of the bank. The Conservator Cannot Repudiate Perfected Contracts The powers of the conservator of a bank must be related to the preservation of the assets of the bank, the reorganization of the management and the restoration of viability. Such powers cannot extend to the post-facto repudiation of perfected transactions, otherwise they would infringe against the nonimpairment clause of the Constitution. [First Philippine International Bank v. CA, G.R. No. 115849 (1996)] Remuneration General Rule: The conservator shall receive remuneration in an amount not to exceed 2/3 of the salary of the president of the institution in 1 year, payable in 12 equal monthly payments. Exception: A conservator appointed by the MB connected with the BSP. Said conservator shall not be entitled to receive any remuneration or emolument. [Sec. 29] Page 301 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Closure Should the MB find that any of the grounds for receivership is applicable to a bank or quasibank, the Monetary Board may: 1. Forbid the institution from doing business in the Philippines; and 2. Designate the PDIC as receiver of the banking institution. Note: This is done summarily and without need for prior hearing. [Sec. 30] Close Now, Hear Later Scheme Sec. 30 of the NCBA does not contemplate prior notice and hearing before a bank may be directed to stop operations and placed under receivership. a. It is enough that such action is made subject of a subsequent judicial review. b. The rationale behind the scheme is to protect public interest. [Central Bank vs. CA and Triumph Savings Bank, G.R. No. 76118(1993)] In other words, when there is a ground for closure and receivership, such closure may be effected without notice and hearing. The validity of closure may be challenged afterwards. Receivership Concept The MB may summarily and without need for prior hearing close a banking institution and place it under receivership. Receivership is equivalent to an injunction to restrain the bank in any way. Thus, the appointment of a receiver operates to suspend the authority of the bank and of its directors and officers over its property and effects. [Villanueva v. CA, G.R. No. 114870 (1995)] Receivership refers to the stage within which the PDIC manages the affairs of the closed bank and preserves its assets for the benefit of creditors. [Sec. 10(a), (b), RA 9302] Requisites a. Report of the head of the supervising or examining department involving the bank; b. Finding of the MB of the existence of any of the grounds for receivership; c. Decision of the MB to forbid the institution from doing business, which decision may be done summarily and without need for prior hearing; and d. Notice in writing to the Board of Directors informing the institution of the order of the MB. [Sec. 30] Grounds for Receivership Whenever the MB finds that a bank or quasibank: 1. Has notified the BSP or publicly announced a unilateral closure, or has been dormant for at least 60 days or in any manner has suspended the payment of its deposit/deposit substitute liabilities, or is unable to pay its liabilities as they become due in the ordinary course of business. This shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; 2. Has insufficient realizable assets, as determined by the BSP, to meet its liabilities; 3. Cannot continue in business without involving probable losses to its depositors or creditors; or 4. Has willfully violated a cease-and-desist order under Sec. 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution. In which the MB may, summarily and without need for prior hearing, forbid the institution from doing business in the Philippines and designate the PDIC as receiver in the case of banks AND direct the PDIC to proceed with the liquidation of the closed bank pursuant to Sec. 30 and RA 3591. [Sec. 30, as amended by RA 11211]. The MB shall notify, in writing, through the receiver, the Board of Directors of the closed bank of its decision. Page 302 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Effect of the MB Decision General Rule: The actions of the MB taken under Secs. 29-30 shall be final and executory, and may not be restrained or set aside by the court [Sec. 30, as amended by RA 11211]. Exception: On petition for certiorari on the ground that the action taken was in excess of jurisdiction or with grave abuse of discretion. Requisites of the petition a. Filed by the stockholders of record representing the majority of the capital stock. b. Filed within 10 days from receipt by the BOD of the institution of the order directing receivership, liquidation or conservatorship. Who Acts as Receiver 1. If a banking institution: the PDIC 2. If a quasi-bank or non-stock savings and loan association: any person of recognized competence in banking, credit or finance may be designated by the BSP as receiver [Sec. 30] Note: The authority of the MB to summarily and without need for prior hearing forbid the bank or quasi-bank from doing business in the Philippines may also be exercised over nonstock savings and loan associations, based on the same grounds. Who Appoints Receivers The appointment of a receiver shall be vested exclusively in the MB. [Sec. 30] Conservatorship vis-à-vis Receivership The designation of a conservator is not a precondition to the designation of a receiver. [Sec. 30] Liquidation Concept Liquidation refers to the recovery and conversion of assets into cash for distribution to all creditors in accordance with the rules on concurrence and preference of credits. Kinds of Liquidation A. Involuntary liquidation B. Voluntary liquidation The Stockholders and the Board of Directors can decide to liquidate a bank in accordance with the procedure under the Corporation Code. However, as an additional requirement, written notice of the liquidation should be sent to the MB before the liquidation is undertaken. Further, the MB shall have the right to intervene and take such steps as may be necessary to protect the interests of creditors. [Sec. 68, General Banking Law of 2000 (GBL) (RA 8791)] Grounds for Liquidation See Grounds for Receivership above. [Sec. 30, as amended by RA 11211] After the designation of the receiver, the MB may, summarily and without need for prior hearing, direct the PDIC to proceed with the liquidation of the closed bank pursuant to Sec. 30 and RA 3591. [Sec. 30, as amended by RA 11211] - Should the receiver determine that the institution cannot be rehabilitated or permitted to resume business The MB shall notify, in writing, through the receiver, the Board of Directors of the closed bank of its decision. Effect of the MB Decision see Effect of the MB receivership Decision under Effects of Liquidation 1. Retention of juridical personality; 2. Suspension of operations/stoppage of business; 3. Assets are deemed in custodia legis, i.e., exempt from garnishment, levy or execution; 4. Stay of execution of judgment to prevent depletion of bank assets; Page 303 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING 5. Bank is not liable to pay interest on deposits which accrued during the period of suspension of operation; 6. Restriction of bank’s capacity to do new business (new loans, deposits) but with obligation to collect pre-existing debts; a. It cannot take new deposits or grant new loans. b. However, it can collect pre-existing debts. 7. Deposits do not become preferred credits. ii. iii. iv. 8. Administrative sanctions on supervised entities Without prejudice to the criminal sanctions provided in Secs. 34, 35, and 36, the MB may, at its discretion, impose administrative sanctions upon any bank or quasi-bank, their directors and/or officers. Resignation or termination from office shall not exempt such director or officer from administrative or criminal sanctions. Grounds for imposition & Administrative sanctions imposed (a) Any willful violation of its charter or by-laws; (b) Willful delay in the submission of reports or publications thereof as required by law, rules and regulations; (c) Any refusal to permit examination into the affairs of the institution; (d) Any willful making of a false or misleading statement to the MB or the appropriate supervising and examining department or its examiners; (e) Any willful failure or refusal to comply with, or violation of, any banking law or any order, instruction or regulation issued by the MB, or any order, instruction or ruling by the Governor; or (f) Any commission of irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the MB, the following administrative sanctions, whenever applicable: i. Fines in amounts as may be determined by the MB to be appropriate, but in no case to exceed v. Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or quasi-bank; Suspension of rediscounting privileges or access to BSP credit facilities; Suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments; Suspension of interbank clearing privileges; and/or Revocation of quasi-banking license. The administrative sanctions need not be applied in the order of their severity. [Sec. 37] 9. Rules on bank deposits and investments by directors, officers, stockholders and their related interests Any director, officer or stockholder who, together with his related interest, contracts a loan or any form of financial accommodation from: (1) His bank; or (2) From a bank: a. Which is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries; or b. In which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank i. In excess of five percent (5%) of the capital and surplus of the bank, or ii. In the maximum amount permitted by law, whichever is lower shall be required by the lending bank to waive the secrecy of his deposits of whatever nature in ALL banks in the Philippines. Any information obtained from an examination of his deposits shall be held strictly confidential and may be used by the examiners only in connection with their Page 304 of 450 U.P. LAW BOC supervisory and examination responsibility or by the BSP in an appropriate legal action it has initiated involving the deposit account. [Sec. 26] 10. Supervision and regulation of bank operations a. Loans and other accommodations COMMERCIAL LAW BANKING credit The rediscounts, discounts, loans and advances which the BSP is authorized to extend to banking institutions shall be used to influence the volume of credit consistent with the objective of price stability. Normal Credit Operations The BSP may normally and regularly carry on the following credit operations with banking institutions operating in the Philippines: (a) Commercial Credits - The BSP may rediscount, discount, buy and sell bills, acceptances, promissory notes and other credit instruments with maturities of not more than one hundred eighty (180) days from the date of their rediscount, discount or acquisition by the BSP and resulting from transactions related to: i. The importation, exportation, purchase or sale of readily saleable goods and products, or their transportation within the Philippines; or ii. The storing of non-perishable goods and products which are duly insured and deposited, under conditions assuring their preservation, in authorized bonded warehouses or in other places approved by the Monetary Board. (b) Production Credits - The BSP may rediscount, discount, buy and sell bills, acceptances, promissory notes and other credit instruments having maturities of not more than three hundred sixty (360) days from the date of their rediscount, discount or acquisition by the BSP and resulting from transactions related to the production or processing of agricultural, animal, mineral, or industrial products. 1. Documents or instruments acquired in accordance with this subsection shall be secured by a pledge of the respective crops or products 2. Provided, however, That the crops or products need not be pledged to secure the documents if the original loan granted by the BSP is secured by a lien or mortgage on real estate property seventy percent (70%) of the appraised value of which equals or exceeds the amount of the loan granted. (c) Other credits - Special credit instruments not otherwise rediscountable under the immediately preceding subsections (a) and (b) may be eligible for rediscounting in accordance with rules and regulations which the BSP shall prescribe. Whenever necessary, the BSP shall provide funds from non-inflationary sources: Provided, however, That the MB shall prescribe additional safeguards for disbursing these funds. (d) Advances [Sec. 82] Special Credit Operation The BSP may extend loans and advances to banking institutions for a period of not more than 7 days without any collateral for the purpose of providing liquidity to the banking system in times of need. [Sec. 83] Emergency Credit Operation In periods of national and/or local emergency or of imminent financial panic which directly threaten monetary and banking stability, the MB may, by a vote of at least 5 of its members, authorize the BSP to grant extraordinary loans or advances to banking institutions. While such loans or advances are outstanding, the debtor institution shall not, except upon prior authorization by the MB, expand the total volume of its loans or investments. [Sec. 84] Page 305 of 450 U.P. LAW BOC b. Selective Regulation i. Margin requirements against letters of credit The MB may at any time prescribe minimum cash margins for the opening of letters of credit, and may relate the size of the required margin to the nature of the transaction to be financed. [Sec. 105] ii. Required security against bank loans The MB may issue such regulations as it may deem necessary with respect to the maximum permissible maturities of the loans and investments which the banks may make, and the kind and amount of security to be required against the various types of credit operations of the banks. [Sec. 106] iii. Portfolio ceilings The MB may place an upper limit on the amount of loans and investments which the banks may hold, or may place a limit on the rate of increase of such assets within specified periods of time. The MB may apply such limits to the loans and investments of each bank or to specific categories thereof. In no case shall the MB establish limits which are below the value of the loans or investments of the banks on the date on which they are notified of such restrictions. The restrictions shall be applied to all banks uniformly and without discrimination. [Sec. 107] iv. Minimum capital ratios The MB may prescribe minimum ratios which the capital and surplus of the banks must bear to the volume of their assets, or to specific categories thereof, and may alter said ratios whenever it deems necessary. [Sec. 108] 11. COMMERCIAL LAW BANKING Rate of exchange a. Rate of Exchange The MB shall: a. Determine the exchange rate policy of the country; b. Determine the rates at which the BSP shall buy and sell spot exchange; c. Establish deviation limits from the effective exchange rate or rates as it may deem proper; d. Determine the rates for other types of foreign exchange transactions by the BSP, including purchases and sales of foreign notes and coins. [Sec. 74] Limitation: The margins between the effective exchange rates and the rates established by the MB may not exceed the corresponding margins for spot exchange transactions by more than the additional costs or expenses involved in each type of transactions. [Sec. 74] b. Purchases Currency and Sales of Foreign The BSP may: a. Buy and sell foreign notes and coins, and documents and instruments of types customarily employed for the international transfer of funds; b. Engage in future exchange operations; and c. In order to maintain the convertibility of the Peso, at the request of any banking institution operating in the Philippines, buy any quantity of foreign exchange offered, and sell any quantity of foreign exchange demanded, by such institution, Provided, the foreign exchange offered or demanded is freely convertible to gold or USD. [Sec. 70] Limitations: It may only transact with the following entities and persons: a. Banking institutions operating in the Philippines; b. The government, its political subdivisions and instrumentalities; c. Foreign or international financial institutions; d. Foreign governments and their instrumentalities; and e. Other entities or persons authorized by the MB to act as foreign exchange dealers under the rules and regulations prescribed by the MB. [Sec. 70] Page 306 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING c. Acquisition of Inconvertible Currencies General Rule: The BSP shall avoid the acquisition and holding of currencies which are not freely convertible. Exception: The acquisition of such currencies in an amount exceeding the minimum balance necessary to cover current demand for said currencies only when and to the extent that such acquisition is considered by the MB to be in the national interest. d. In Times of Crises The MB may exercise its emergency restrictions on exchange operations These restrictions may be exercised by a majority vote of the entire MB, i.e. 5 votes. The vote must be approved by the President. The restrictions the BSP may choose to impose are: a. Temporary suspension or restriction of sales of exchange by the BSP; b. Subjecting all transactions in gold and foreign to license by the BSP; or c. Requiring that any foreign exchange thereafter obtained by any person residing in or any entity operating in the Philippines be delivered to the BSP or to an agent bank, at effective exchange rates. [Sec. 74] These restrictions do not apply to Foreign Currency Deposits under RA 6426. B. LAW ON SECRECY OF BANK DEPOSITS ii. To discourage private hoarding; [Sec. 1] iii. To encourage the people to deposit their money in banks; and iv. To discourage private hoarding, so that the funds can be used by the bank to grant loans to assist in economic development. The absolute confidentiality rule in R.A. No. 1405 actually aims at protection from unwarranted inquiry or investigation if the purpose of such inquiry or investigation is merely to determine the existence and nature, as well as the amount of the deposit in any given bank account. [BSP Group, Inc. v. Go, G.R. No. 168644 (2010)] 2. Prohibited Acts a. Examination, inquiry, or looking into deposits and investments in Philippine government bonds by persons, government officials, bureaus, or offices; [Sec. 2] b. Disclosure by banking institutions' officials or employees to unauthorized persons regarding information about covered deposits and investments. [Sec. 3] 3. Deposits Covered and Investments General Rule All peso deposits of whatever nature with banks or banking institutions in the Philippines are considered as of an absolutely confidential nature. [Sec. 2] [RA 1405, as Amended] The section numbers hereinafter generally pertain to RA 1405, unless otherwise indicated. 1. Purpose i. To encourage the people to deposit their money in banking institutions; Also covered are investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, whether denominated in pesos or foreign currency. Note that investments in bonds in foreign currency are still covered by RA 1405. The Foreign Currency Deposit Act does not cover those investments. Page 307 of 450 U.P. LAW BOC Labelling RA 1405 as the Law on Secrecy of Bank Deposits is less than accurate. To be more accurate, RA 1405 should be called the Law on Secrecy of Bank Deposits and Investments in Government Bonds. Deposits and Funds Covered by Other Laws on Confidentiality i. ii. COMMERCIAL LAW BANKING Foreign currency deposits, which are governed by the Foreign Currency Deposit Act Funds placed in a bank not in the nature of a deposit by private individuals or entities. These may also not be disclosed, under Subsec. 55.1 of the General Banking Law of 2000. Trust Accounts The term "deposits" is to be understood broadly and not limited to accounts giving rise to creditor-debtor relations between the bank and depositor. The deposit of money which may be used by banks for authorized loans to 3rd persons also falls under RA 1405. Therefore, trust accounts are also covered. [Ejercito v. SB Special Division, G.R. Nos. 157294-95 (2006)] But see Morales, The Philippine General Banking Law (Annotated) (2017), pp. 220-221. Construction of Confidentiality By force of statute, all bank deposits are absolutely confidential, and that nature is unaltered even by the legislated exceptions. There is disfavor towards construing these exceptions in such a manner that would authorize unlimited discretion on the part of the government or of any party seeking to enforce those exceptions and inquire into bank deposits. If there are doubts in upholding the absolutely confidential nature of bank deposits against affirming the authority to inquire into such accounts, then such doubts must be resolved in favor of confidentiality. [Republic v. Eugenio, G.R. No. 174629 (2008)] Zones of Privacy Under the RA 1405, bank deposits are statutorily protected or recognized zones of privacy. [People v. Estrada, G.R. No. 164368 (2009); Marquez v. Desierto, G.R. No. 135882 (2001); Ople v. Torres, G.R. No. 127685 (1998)] It is conceded that while the fundamental law has not bothered with the triviality of specifically addressing privacy rights relative to banking accounts, there, nevertheless, exists in our jurisdiction a legitimate expectation of privacy governing such accounts. The source of this right of expectation is statutory, and it is found in R.A. No. 1405, otherwise known as the Bank Secrecy Act of 1955. [BSB Group, Inc., v. Go, G.R. No. 168644 (2010)] 4. Exceptions Deposits: a. Upon written permission of the depositor; b. In cases of impeachment; c. Upon order of competent court in cases of bribery and dereliction of duty; d. In cases where the money deposited or invested is the subject matter of litigation. If the case is for the recovery of money as a result of failure to inform regarding improper crediting, the money in the account is not the subject matter of litigation. This is because the amount sought to be recovered is different from the amount that is already in the account. By the terms of RA 1405, the ‘money deposited’ itself should be the subject matter of the litigation. [Union Bank v. Court of Appeals, G.R. No. 134699 (1999)] In contrast, where the case is for the recovery of amounts converted by the depositors, the amount sought to be recovered is exactly the money that is supposedly in the account. If the case necessarily involves inquiring into the whereabouts of the illegally acquired amount, this falls under the exceptions to bank secrecy under RA 1405. [Mellon Bank, N.A. v. Magsino, G.R. No. 71479 (1990)] Page 308 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Other Exceptions The Commissioner of Internal Revenue can inquire into the bank accounts of the following taxpayers: i. A decedent in order to determine his gross estate; or ii. A taxpayer who has filed an application to compromise his tax liability on the ground of financial incapacity; [NIRC, Sec. 6(f)] iii. A taxpayer, information on whose account is requested by a foreign tax authority. b. Unexplained wealth under Sec. 8 of the Anti-Graft and Corrupt Practices Act (RA 3019). [PNB v. Gancayco, G.R. No. L18343 (1965); Banco Filipino v. Purisima, G.R. No. L-56429 (1988); Marquez v. Desierto, G.R. No. 135882 (2001)] c. Inquiry by the Anti-Money Laundering Council under the AMLA (RA 9160, the Anti-Money Laundering Act of 2001, as amended) after obtaining a court order, when there is probable cause that the deposits or investments involved are in any way related to an unlawful activity or a money laundering offense [Sec. 11, AMLA, see infra], except that no court order is required if the covered investments are related to: 1. Kidnapping for Ransom [RPC]; 2. Dangerous Drugs [2002 Comprehensive Dangerous Drugs Act]; 3. Hijacking and other violations of RA 6235; 4. Destructive arson and murder; 5. Felonies similar to (i) to (iv) above which are punishable under the penal laws of other countries; and 6. Terrorism and conspiracy to commit terrorism under the Human Security Act of 2007. d. BSP inquiry or examination in the course of its periodic or special examination of the bank. [Sec. 11, AMLA] 1. Disclosure of certain information about bank deposits which have been dormant for at least 10 years, to the Treasurer of the Philippine in a sworn statement, a copy of which is posted in the bank premises. [Sec. 2, Unclaimed Balances Law, Act No. 3926, as amended by PD 679] 2. The PDIC and/or the BSP can inquire into or examine deposit accounts and all information related thereto in case there is a finding of unsafe and unsound banking practice. [Sec. 8, paragraph 8, RA 3591, as amended by RA 9576]. Not necessarily an exception: Power of the Ombudsman to “examine and have access to bank accounts and records” under Sec. 15[8] of RA 6770. [Morales, The Philippine General Banking Law (Annotated) (2017) citing Marquez v. Desierto, infra] 5. Garnishment of Deposits, Including Foreign Deposits General rule: The prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. [China Banking Corporation v. Ortega, G.R. No. L-34964 (1973); Philippine Commercial and Industrial Bank v. Court of Appeals, G.R. No. 84526 (1991)] In the garnishment of deposits to insure satisfaction of a judgment, there is no real inquiry, and if the existence of the deposit is disclosed, the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank. [China Banking Corporation v. Ortega, G.R. No. L-34964 (1973)] Exception: Foreign Currency Deposits The foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. [Sec. 8, FCDA – Foreign Currency Deposit Act] Page 309 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Classification of Banks 6. Penalties for Violation Any violation of this law will subject offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court. [Sec.5] C. GENERAL BANKING LAW OF 2000 (GBL) The section numbers hereinafter generally pertain to RA 8791, unless otherwise indicated. 1. Definition and classification of banks Universal Bank (UB) As the name implies, a universal bank has the most banking power, as it has the same powers as a commercial bank, plus the powers: To operate an investment house, whether as an integral unit or as a subsidiary. In turn, an investment house underwrites securities either on firm underwriting (good as sold) or best efforts (excess to be returned to the issuer) To invest in non-allied enterprises Commercial Bank (KB) Has the powers defined in Secs. 29. and 53, infra. a. Definition of Banks "Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits. [Subsec. 3.1] How Banks are Structured Generally, banks are stock corporations. However, cooperative banks may also be formed under the Cooperative Code. N.B. Note that under RA 10641, qualified foreign banks, with MB approval, may now enter the local banking system, through any of the following modes: 1. Acquiring, purchasing, or owning up to 100% of the voting stock of an existing domestic bank; 2. Investing in up to 100% of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or 3. Establishing branches with full banking authority. However, the foreign bank must be established, reputable, and financially sound. Further, it must be widely-owned and publicly listed in the country of origin. Thrift Bank Thrift banks are banks that focus on basic banking services for their clients, with an emphasis on individuals and small businesses. Thrift banks are primarily governed by RA 7906, the Thrift Banks Act. Thrift banks include: Savings and mortgage banks; Savings and loan associations; and Private development banks. Rural Banks These are banks that are formed for the purpose of providing adequate credit facilities to farmers and merchants, or to cooperatives of such farmers and merchants and in general, the people of the rural communities. They are primarily governed by RA 7353 (Rural Banks Act). Cooperative Banks These are banks organized as cooperatives under RA 6938, the Cooperative Code. Islamic Banks There is currently only one Islamic Bank in the Philippines, the Al-Amanah Islamic Bank, which aims to provide banking under the Shari’a principles governing banking. Page 310 of 450 U.P. LAW BOC However, RA 11439 (An Act Providing for the Regulation and Organization of Islamic Banks) was enacted in the recent past. This law expressly authorizes the BSP to license more Islamic banks and permit conventional banks to open Islamic windows or units. Other banks as classified by the BSP This includes Land Bank of the Philippines, the Philippine Veteran’s Bank, and Development Bank of the Philippines. 2. Distinction of banks from Quasi-banks and trust entities Banks QuasiBanks Entities Entities engaged in engaged in taking taking deposit deposits and substitutes lending and lending these funds these funds to to their own their own borrowers. borrowers or purchasing [Subsec. 3.1] receivables (which makes them the creditors of the obligors of the receivables) [Sec. 4] COMMERCIAL LAW BANKING Trust Entities Entities engaged in trust business that act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or behoof of others [Sec. 79] Quasi-banks refer to entities engaged in the borrowing of funds called “deposit substitutes” (i.e., “quasi-deposits”) as defined in Section 95 of the “New Central Bank Act” for purposes of relending those funds or purchasing of receivables and other obligations. Unlike banks, quasi-banks do not accept deposits but take deposit substitutes. Deposit substitutes are not insured with the PDIC. Deposit-Substitute Taking or QuasiBanking Deposit-substitute taking or quasi-banking is an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, bankers’ acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. Deposit substitute (like deposits) are with recourse to the quasi-banks (just like deposits are with recourse to the banks). Trust entities (Manual of Regulation for Banks) are: a. Trust departments of banks perform trust and other fiduciary functions; or b. Stand-alone trust corporations, authorized by the BSP to engage in trust and other fiduciary functions under the GBL. 3. Bank Powers and Liabilities Corporate Powers Aside from the banking powers, banks, generally being in the form of stock corporations, also have all the powers a stock corporation has. [See Sec. 35 of the Revised Corporation Code] The exception is cooperative banks, which are in the form of a cooperative, and have all the powers of a cooperative under the Cooperative Code. Granting of loans; security requirement The GBL no longer requires credit to be secured only by traditional security devices (such as a real estate mortgage or a pledge), in order to accommodate a different security arrangement for microfinancing. This is in contrast to the General Banking Act it replaced, Page 311 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING which requires all loans to be generally secured by traditional security devices. Banking Powers and Incidental Powers A commercial bank shall have, in addition to the general powers incident to stock corporations, all such powers as may be necessary to carry on the business of commercial banking such as: has the option [but not the obligation] to exercise. [BPI v. CA and Eastern Plywood, G.R. No. 104612 (1994)] 2. Issuing letters of credit; 3. Discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; 4. Accepting or creating demand deposits; 5. Receiving other types of deposits and deposit substitutes; 1. Accepting Drafts; Types of Deposits a. Time or Fixed Deposit - Interest rate stipulated depending on the number of days. During this period, the money deposited may not be withdrawn without incurring penalty. High interest rates. b. Savings Deposit - Bank pays an interest rate, but not as high as time deposits. c. Demand Deposits/Current or Checking Accounts - No interest is paid by the bank because the depositor can take out his funds any time. It is called demand deposit because the depositor can withdraw the money he deposited on the very same day when he deposited it or at any time thereafter. [Villanueva, Commercial Law Review (2012)] d. Negotiable Order of Withdrawal Accounts – Interest-bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings accounts [Sec. 221, Manual of Regulations for Banks] General rule: Only a UB and a KB can accept or create demand deposits [Sec. 33] Exception: Banks other than a UB or KB with prior approval of, and subject to such conditions and rules as may be prescribed by the MB. [Sec. 33] Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. [Art. 1980, NCC] Presumption of ownership of deposits It is presumed that money deposited in a bank account belongs to the person in whose name the deposit account is opened. A depositor is presumed to be the owner of funds standing in his name in a bank deposit account; and where a bank is not chargeable with notice that the money deposited in such account is the property of some other person than the depositor, the bank is justified in paying out the money to the depositor or upon his order, and cannot be liable to any other person as the true owner. [Fulton Iron Works Co. v. China Banking Corporation, G.R. No. 32576 (1930)] No duty to set-off A bank is under no duty or obligation to make an application or set-off against the deposit accounts of a borrower. To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank 6. Buying and selling foreign exchange and gold or silver bullion; 7. Acquiring marketable bonds and other debt securities; and 8. Extending credit. “Know your customer” rule Before granting a loan or other credit accommodation, a bank must ascertain that the Page 312 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING debtor is capable of fulfilling its commitments to the bank. [Sec. 40] The bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditure and such information as may be prescribed by law or by rules and regulations of MB to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the BIR. [Sec. 40] Credit enhancement If the borrower is less than creditworthy, third persons may enhance his credit by providing guarantees and other security devices in favor of the bank. [Morales (2017)] In addition to the operations specifically authorized in the GBL, a bank may perform the following services: (1) Receive in custody funds, documents and valuable objects; (2) Act as financial agent and buy and sell, by order of and for the account of its customers, shares, evidences of indebtedness and all types of securities; (3) Make collections and payments for the account of others and perform such other services for its customers as are not incompatible with banking business; (4) Upon prior approval of the MB, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and (5) Rent out safety deposit boxes. [Sec. 53] 4. Diligence required of banks in view of fiduciary nature of banking The banking industry is impressed with public interest. As such, the highest degree of diligence and standards of integrity and performance are required. Under Section 1001 of the Manual of Regulations for Banks, banks must adhere to the highest service standards, and embrace a culture of fair and responsible dealings in the conduct of their business. Banks must treat depositors’ accounts with meticulous care; Banks must always to have in mind the fiduciary nature of its relationship with their depositors and other clients. [Metrobank v. Rosales, G.R. No. 183204 (2014); Comsavings Bank v. Sps. Capistrano, G.R. No. 170942 (2013); Equitable Banking v. Special Steel Products, G.R. No. 175350 (2012)] Notwithstanding the degree of diligence required, a bank is not expected to be infallible. [Prudential Bank vs. CA, G.R. No. 125536 (2000)] Failure on the part of the bank to satisfy the degree of diligence required of banks may warrant the award of damages. Examples when a bank is deemed to be negligent: When the bank fails to credit funds deposited to the depositor’s account [Simex v. CA, G.R. No. 88013 (1990)]; When the bank itself fails to follow its own rules and procedures on withdrawals [BPI v. IAC, G.R. No. L-66826 (1988)]; When the bank simply relies on the face of SPAs before lending P200K [RBCI v. Melecio-Yap, G.R. No. 178451 (2014)]; When the teller loses the passbook [Consolidated Bank v. CA, G.R. No. 114286 (2011)]; When the bank fails to compare the signatures on the withdrawal slip and signature cards. [PNB v. Pike, G.R. No. 157845 (2005)] Under the doctrine of last clear chance, a bank may be held liable for loss despite the negligence of a depositor. Examples of these cases are the following: For disbursing funds to a dishonest employee despite the employee’s failure to strictly abide by the bank’s internal procedure. [Philippine Bank of Commerce v. CA, G.R. No. 97626 (1997)] Page 313 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Allowing the execution of a mortgage on parcels of land as security for a loan not owned by the prospective borrower. [Canlas v. CA, G.R. No. 112160 (2000)] Crediting the deposit in favor of another depositor, a check where the signature of the drawer was forged. [Westmont Bank v. Ong, G.R. No. 132560 (2002)]. 5. Nature of Bank Funds and Bank Deposits The deposit is a contract of loan with the bank being lent money by the depositor. Under the Civil Code provisions on loan, this means that the money deposited with the bank becomes its property, which it is free to use, subject to the condition that the depositor can demand repayment, in the form of withdrawals, at any time. Quasi-deposits Funds placed with bank (as deposit substitutes), but which are not in the nature of a deposit Must be on a with recourse basis As UB and KB no longer have to apply for authority to accept deposit substitutes, this may now be considered a core banking function of those banks. Creditor-Debtor Relationship The relationship between a depositor and a bank is that of a creditor and debtor in relation to the bank’s deposit functions [Gullas vs. PNB, G.R. No. L-43191, (1935)] and not that of depositor and depositary. The relationship being contractual in nature, mandamus is therefore not an available remedy. [Maclaring Lucman vs. Alimatar Malawi, G.R. No. 159794 (2006)] Simple Loan The contract between the bank and its depositor is governed by the provisions of the NCC on simple loan. [Consolidated Bank and Trust Corporation vs. CA, G.R. No. 138569 (2003)]. Current and savings deposits are loans to a bank because the bank can use the same and they earn interest. [BPI vs. CA, G.R. No. 104612 (1994)] Money deposited is commingled with other money constituting a common fund. Irregular Deposits Bank deposits are in the nature of irregular deposits. Therefore, Art. 1287 of the Civil Code, which prohibits compensation when one of the debts arises from depositum, does NOT apply. [Serrano vs. Central Bank, G.R. No. L30511 (1980)] 6. Grant of Loans and Security Requirements Ratio of net worth to total risk assets Concept: The minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts, i.e., net worth: total risk assets. [Sec. 34] General rule: A bank must conform to the riskbased capital ratio prescribed by the MB. Exceptions: The MB may alter or suspend compliance with such ratio whenever necessary for a maximum period of 1 year. 1. In case of a bank merger or consolidation; or 2. When a bank is under rehabilitation under a program approved by the BSP; [Sec. 34] Purpose A bank must not be allowed to expand the volume of its loans and investments in a manner that is disproportionate to its net worth. [Morales (2017)] Effect of non-compliance 1. The MB may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. Page 314 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING 2. The MB may restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and the BSP and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored. [Sec. 34] Single borrower’s limit General rule: The total loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, or corporation or other entity shall at no time exceed 20% of the net worth of such bank. [Subsec. 35.1] Exceptions 1. The MB otherwise prescribes for reasons of national interest. [Subsec. 35.1] Now, the single borrower’s limit is 25% of the net worth of the lending bank. 2. Wholesale lending activities of government banks to participating institutions for relending to end-user borrowers: separate limit of 35% net worth. [Sec. 362.f, Manual of Regulations for Banks] Increase of Limit The MB may increase the limit prescribed by an additional 10% of the net worth, when: 1. The additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title; 2. Covering readily marketable, nonperishable goods; and 3. Which must be fully covered by insurance. [Subsec. 35.2] Purpose To prevent the bank from making excessive loans and other credit accommodations to a single borrower or corporate group, including guarantees for the account of such borrower or group. The bank is prohibited from… placing many eggs in the basket of one client. [It] is a damage-control mechanism [and] a device for risk amelioration. [Morales (2017)] Basis for Determining Compliance The basis for determining compliance with the SBL is the total credit commitment of the bank to the borrower. [Subsec. 35.1] Inclusions in the Ceiling 1. The direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general indorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; 2. In the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; 3. In the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and 4. In the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. [Subsec. 35.3] Guidelines on the Wholesale Lending of Government Banks 1. It shall apply only to loans granted by participating financial institutions (PFIs) on a wholesale basis for on-lending to enduser borrowers; 2. It shall apply only to loan programs funded by multilateral, international, or local development agencies, organizations, or institutions, especially designed for wholesale lending activities of government banks; 3. The end-user borrowers of the PFIs shall be subject to the 25% SBL, not the increased ceiling of 35%; and 4. Government banks shall observe appropriate criteria for accrediting PFIs and for the grant/renewal of credit lines to accredited PFIs. [Sec. 362.f, Manual of Regulations for Banks] Page 315 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Exclusions from the Ceiling (Non-Risk Loans) Loans and other credit accommodations— 1. Secured by obligations of the BSP or of the Philippine Government; 2. Fully guaranteed by the government as to the payment of principal and interest; 3. Covered by assignment of deposits maintained in the lending bank and held in the Philippines; 4. Under letters of credits to the extent covered by margin deposits; and 5. Specified by the MB as non-risk items [Sec. 35.5] Combination of liabilities The MB may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of the following situations: 1. The parent-corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; 2. The liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or 3. The subsidiaries though separate entities operate merely as departments or divisions of a single entity. [Subsec. 35.4] Loans and other credit accommodations, deposits maintained with, and usual guarantees by a bank to any other bank or nonbank entity, whether locally or abroad, shall be subject to the prescribed limits. [Subsec. 35.6] Restrictions on bank exposure to directors, officers, stockholders, and their related interests General rule [Sec. 36]: No director or officer of any bank: 1. Shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank, nor 2. Shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank Exceptions [Sec. 36]: 1. Valid insider lending; 2. Loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders. Requirements for Valid Insider Lending 1. In the regular course of business; 2. Upon terms not less favorable to the bank than those offered to others; 3. There is a written approval of the majority of all the directors of the bank, excluding the director concerned; Exception: Not required where granted to officers under a fringe benefit plan approved by the BSP. 4. The required approval shall be entered upon the record of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the BSP; and 5. Limited to an amount equivalent to the DOSRI borrower’s unencumbered deposits and book value of his paid-in capital contribution in the bank [Sec. 36] Exceptions [Sec. 36, GBL]: 1. Non-risk items; and 2. Loans in the form of fringe benefits. Waiver of Bank Secrecy A DOSRI borrower is required to waive the secrecy of his deposits of whatever nature in all banks in the Philippines. [Sec. 26, NCBA] Purpose The general policy behind DOSRI rules is to level the lending field between the “insiders” and the “outsiders”. The objective is to prevent the bank from becoming a captive source of finance for DOSRI. [Morales (2017)] Page 316 of 450 U.P. LAW BOC Prohibited acts of borrowers No borrower of a bank shall: (1) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank; (2) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof; (3) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or (4) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application. [Sec. 55.2] Floating interest Escalation Clauses COMMERCIAL LAW BANKING rates and stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by the Monetary Board. Provided That: (1) Such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; and (2) The adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. [Sec. 305, Manual of Regulations for Banks] 7. Penalties for violations Fine, imprisonment Unless otherwise herein provided, the violation of any of the provisions of the GBL shall be subject to Sections 34, 35, 36 and 37 of the NCBA. [Sec.66] Floating Interest Rates The rate of interest chargeable on availments under the BSP liquidity window to banks shall be the rate equivalent to the reference rate for ninety (90) days determined and announced by the BSP for floating rate loans, plus or minus a rate to be determined by the BSP on the basis of the prevailing monetary situation. The additional or discount rate established for any given time shall be made public by the BSP and applied uniformly to all borrowers during that period. The additional rate to be imposed over and above the reference rate shall not be less than two (2) percentage points, with the applicable additional rate to be determined by the BSP on the basis of the prevailing monetary situation. [Sec. 284, Manual of Regulations for Banks] Escalation Clause Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may Refusal to make reports or permit for examination Any officer, owner, agent, manager, director or officer-in-charge of any institution subject to the supervision or examination by the BSP within the purview of the NCBA who, being required in writing by the MB or by the head of the supervising and examining department willfully refuses to file the required report or permit any lawful examination into the affairs of such institution shall be punished by: (1) A fine of not less than Fifty thousand pesos (P50,000) nor more than One hundred thousand pesos (P100,000); or (2) Imprisonment of not less than one (1) year nor more than five (5) years; or (3) Both fine and imprisonment, in the discretion of the court. [Sec. 34, NCBA] False Statement The willful making of a false or misleading statement on a material fact to the MB or to the examiners of the BSP shall be punished by: Page 317 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING (1) A fine of not less than One hundred thousand pesos (P100,000) nor more than Two hundred thousand pesos (P200,000); or (2) Imprisonment of not more than five (5) years; (3) Both fine and imprisonment, at the discretion of the court. [Sec. 35, NCBA] Proceedings Upon Violation of This Act and Other Banking Laws, Rules, Regulations, Orders or Instructions Whenever a bank or quasi-bank, or whenever any person or entity willfully violates this Act or other pertinent banking laws being enforced or implemented by the Bangko Sentral or any order, instruction, rule or regulation issued by the Monetary Board, the person or persons responsible for such violation shall unless otherwise provided in this Act be punished by: (1) A fine of not less than Fifty thousand pesos (P50,000) nor more than Two hundred thousand pesos (P200,000); or (2) Imprisonment of not less than two (2) years nor more than ten (10) years; or (3) Both fine and imprisonment at the discretion of the court. Administrative Sanctions on Banks and Quasi-banks Without prejudice to the criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of the NCBA, the MB may, at its discretion, impose upon any bank or quasi-bank, their directors and/or officers, the following administrative sanctions, whenever applicable: (a) fines in amounts as may be determined by the MB to be appropriate, but in no case to exceed Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or quasi-bank; (b) suspension of rediscounting privileges or access to BSP credit facilities; (c) suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments; (d) suspension of interbank clearing privileges; and/or (e) revocation of quasi-banking license. [Sec. 37, NCBA] Such administrative sanction may be imposed for: (1) Any willful violation of its charter or bylaws, willful delay in the submission of reports or publications thereof as required by law, rules and regulations; (2) Any refusal to permit examination into the affairs of the institution; any willful making of a false or misleading statement to the MB or the appropriate supervising and examining department or its examiners; (3) Any willful failure or refusal to comply with, or violation of, any banking law or any order, instruction or regulation issued by the MB, or any order, instruction or ruling by the BSP Governor; or (4) Any commission of irregularities, and/or conducting business in an unsafe or unsound manner as may be determined by the MB. Suspension or removal of director or officer If the offender is a director or officer of a bank, quasi-bank or trust entity, the MB may also suspend or remove such director or officer. [Sec.66] Dissolution of bank The bank itself may be dissolved by quo warranto proceedings instituted by the Solicitor General. [Sec. 66] Page 318 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT [R.A. 3591(“PDIC Charter”), as amended] 1. Basic Policy The Philippine Deposit Insurance Corporation (“PDIC”) shall, as a basic policy, promote and safeguard the interests of the depositing public by providing insurance coverage on all insured deposits and helping maintain a sound and stable banking system. [Sec. 1, PDIC Charter, as amended by R.A. No. 10846] 2. Powers and functions of the PDIC; prohibitions Board of Directors The powers and functions of PDIC shall be vested in, and exercised by, a Board of Directors which shall be composed of 7 members as follows: (a) The Secretary of Finance shall be the ex officio chairman of the Board without compensation (b) The Governor of the Bangko Sentral ng Pilipinas (“BSP”) who shall be ex officio member of the Board without compensation. [PDIC Charter, as amended by R.A. No. 9302] (c) The President of PDIC • The President of PDIC shall be appointed by the President of the Philippines from a shortlist prepared by the Governance Commission for Government Owned or Controlled Corporations (“GOCCs”), pursuant to R.A. 10149 • The President of PDIC shall serve on a full-time basis for a term of 6 years. • The President of PDIC shall also serve as the Vice Chairman of the Board. [PDIC Charter, as amended by R.A. No. 10846] (d) 4 members from the private sector a. The members are to be appointed by the President of the Philippines from a shortlist prepared by the Governance Commission for GOCCs pursuant to R.A. 10149. • The appointive directors shall serve for a term of 6 years unless sooner removed for cause and shall be subject to only 1 reappointment: Provided, That – (1) Of those first appointed, the first 2 appointees shall serve for a period of 3 years (2) The appointive director shall continue to hold office until the successor is appointed. • An appointive director may be nominated by the Governance Commission for GOCCs for reappointment by the President (3) Only if one obtains a performance score of above average or its equivalent or higher in the immediately preceding year of tenure as appointive director (4) Based on the performance criteria for appointive directors of PDIC. [Sec. 3, PDIC Charter, as amended by R.A. No. 10846] Appointment to any vacancy shall be only for the unexpired term of the predecessor pursuant to R.A. 10149. [PDIC Charter, as amended by R.A. No. 10846] Powers and Functions of PDIC (a) PDIC shall be entitled to the free use of Philippine mail in the same manner as the other offices of the national government. (b) The Board of Directors shall appoint examiners who shall have power, on behalf of PDIC, to examine any insured bank or any bank making application to become an insured bank • Each such examiner shall have power to make a thorough examination of all the affairs of the bank • In doing so the examiner shall have power: Page 319 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING (5) To administer oaths; (6) To examine and take and preserve the testimony of any of the officers and agents thereof; and (7) To compel the presentation of books, documents, papers, or records necessary in his judgment to ascertain the facts relative to the condition of the bank • The examiner shall make a full and detailed report of the condition of the bank to PDIC. (c) The Board of Directors shall appoint claim agents who shall have power to investigate and examine all claims for insured deposits and transferred deposits. Each claim agent shall have power – • To administer oaths; and • To examine under oath and take and preserve the testimony of any person relating to such claims. (d) PDIC may appoint or hire persons or entities of recognized competence in forensic and fraud investigations as its agents to conduct investigations on frauds, irregularities and anomalies committed in banks, based on: • Reports of examination conducted by PDIC and BSP; or • Complaints from depositors or from other government agency. (e) PDIC shall have access to reports of examination made by, and reports of condition made to the BSP or its appropriate supervising departments, Provided That – • PDIC shall use the reports and findings under similar terms and conditions prescribed by applicable laws on the BSP. [Sec. 10, PDIC Charter, as amended by R.A. 7400, R.A. 9302, and R.A. 10846] Prohibitions Personnel of PDIC are hereby prohibited from: a. Being an officer, director, consultant, employee or stockholder, directly or indirectly, of any bank or banking institution except as otherwise provided in the PDIC Charter; • Exception: Members of the Board of Directors and other personnel of PDIC may • become directors and officers of any bank and banking institution and of any entity related to such institution – 1. In connection with financial assistance extended by PDIC to such institution; and 2. When in the opinion of the Board, it is appropriate to make such a designation to protect the interest of PDIC 3. Receiving any gift or thing of value from any officer, director or employee thereof: 4. Revealing in any manner, except under order of the court or authorized herein in such condition or business of any such institution. The prohibition shall not be held to apply to the giving of information to the Board of Directors or to any person authorized by neither of them in writing to receive such information. [Sec. 10, PDIC Charter, as amended by R.A. 7400 and R.A. 10846] Prohibition on Borrowing From Institutions under Examination Borrowing from the particular bank or banking institution in which they are assigned, or are conducting an examination by the ff. is prohibited: • Examiners; and • Other personnel of the examination departments of PDIC From Institutions Undergoing any Action General Rule: All personnel of other departments, offices or units of PDIC shall likewise be prohibited from borrowing from any bank or banking institution during the period of time that a transaction of such institution with the corporation is being: 1. Evaluated, 2. Processed; or 3. Acted upon by such personnel Exception: Certain personnel may be exempted from the prohibition, as the Board may, at its discretion, indicate the position levels or functional groups to which the prohibition is applicable. Page 320 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING From Any Institution Borrowing by all full-time personnel of PDIC from any bank or banking institution shall be: a) Secured and disclosed to the Board; and b) Subject to such further rules and regulations as the Board may prescribe. [Sec. 10, PDIC Charter, as amended by R.A. 7400 and R.A. 10846] 3. Concept of insured deposits Insured Deposit The term “insured deposit” means the amount due to any bona fide depositor for legitimate deposits in an insured bank as of the date of closure but not to exceed P500,000.00. [Sec. 5(j)] Adjusting the Maximum Deposit Insurance Cover The maximum deposit insurance coverage is Five hundred thousand pesos (P500,000.00). However, in case of a condition that threatens the monetary and financial stability of the banking system that may have systemic consequences, as defined in Section 22 of the PDIC Charter, as determined by the Monetary Board, the maximum deposit insurance cover may be adjusted – • In such amount, • For such a period, and/or • For such deposit products, - As may be determined by a unanimous vote of the Board of Directors in a meeting called for the purpose, chaired by the Secretary of Finance - Subject to the approval of the President of the Philippines. [Sec.5(j)] Note: Definition of “deposit” under Sec. 5(g) Foreign currency deposits are also insured by PDIC pursuant to R.A. 6426 (“An act instituting a foreign currency deposit system in the Philippines, and for other purposes”). Depositors may receive payment in the same currency in which the insured deposit is denominated. [Sec. 9, R.A. 6426] Exception: Deposits in overseas branches of local banks are not insured with PDIC, as PDIC insurance only covers deposits in banks located in the Philippines. However, any insured bank with a branch outside the Philippines, subject to the approval of the Board of Directors, may elect to include for insurance its deposit obligations payable at such branch. [Sec. 5 (g), PDIC Charter, as amended by R.A. 9576 and R.A. 10846] Commencement of liability PDIC shall commence the determination of insured deposits due the depositors of a closed bank upon its actual takeover of the closed bank. PDIC shall give notice to the depositors of the closed bank of the insured deposits due them by whatever means deemed appropriate by the Board of Directors: Provided, That – a. PDIC shall publish the notice once a week for at least three (3) consecutive weeks in a newspaper of general circulation; or b. When appropriate, it shall be published in a newspaper circulated in the community or communities where the closed bank or its branches are located. [Sec. 18, R.A. 9302] Deposit accounts not entitled to payment 4. Liability to depositors Deposit liabilities required to be insured with the PDIC General Rule: The deposit liabilities of any bank shall be insured with PDIC. [Sec. 6, PDIC Charter, as amended by R.A. 10846] PDIC shall not pay deposit insurance for the following accounts or transactions: a. Investment products such as bonds and securities, trust accounts, and other similar instruments; Page 321 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING b. Deposit accounts or transactions which are fictitious or fraudulent, as determined by PDIC; c. Deposit accounts or transactions constituting, and/or emanating from, unsafe and unsound banking practice/s a. As determined by PDIC, in consultation with the BSP; b. After due notice and hearing, and publication of a cease and desist order issued by PDIC against such deposit accounts or transactions; and d. Deposits that are determined to be the proceeds of an unlawful activity as defined under the Anti-Money Laundering Act (Republic Act 9160, as amended). [Sec. 5(g), PDIC Charter, as amended by R.A. 9576 and R.A. 10846] Funds placed in the Manila Branch by the head office or the latter’s other offshore branches are not third-party deposits that are insurable with PDIC, since the Manila Branch and its head office and such other branches comprise only one juridical entity; hence, there is no depositary-depositor relationship between or among them [PDIC v. Citibank, N.A., 669 SCRA 191 (2012)]. Extent of liability PDIC covers only the risk of a bank closure ordered by the Monetary Board. Thus, bank losses due to theft, fire, closure by reason of strike or existence of public disorder, revolution or civil war, are not covered by PDIC. Determination of insured deposits In PDIC v. Gidwani, 867 SCRA 581 (2018), Gidwani used his helpers and rank-and-file employees to create several deposit accounts ostensibly held by them but actually beneficially owned by him, for the purpose of increasing his deposit insurance cover. The Supreme Court held that “the entitlement to a deposit insurance is based not on the number of bank accounts held, but on the number of beneficial owners.” In this case, there was only one beneficial owner of the several bank accounts (namely, Gidwani); hence, he was only entitled to P250,000 (then the maximum deposit insurance cover under the PDIC Charter) for all the deposit accounts. Note: No owner/holder of any passbook, certificate of deposit or other evidence of deposit shall be recognized as a depositor entitled to the rights provided in the PDIC Charter unless the same is determined by PDIC to be an authentic document or record of the issuing bank. [Sec. 5(j)] Calculation of liability i. Per depositor, per capacity rule In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his or her benefit either in his or her own name or in the name of others. [Sec. 3, R.A. 9576] ii. Joint accounts A joint account regardless of whether the conjunction ‘and’, ‘or’, ‘and/or’ is used, shall be insured separately from any individuallyowned deposit account: Provided, That – The amount of the insured deposit shall be determined according to such regulations as the Board of Directors may prescribe. In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his or her benefit either in his or her own name or in the name of others. [Sec. 5(j)] Page 322 of 450 U.P. LAW BOC Holder of Account Division of Maximum Insured Deposit If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities GR: The maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities. EX: Unless a different sharing is stipulated in the document of deposit If the account is held by a juridical person or entity jointly with one or more natural persons COMMERCIAL LAW BANKING The maximum insured deposit shall be presumed to belong entirely to such juridical person or entity. The aggregate of the interest of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of P500,000.00. [Sec. 5(j)] iii. Mode of payment Whenever an insured bank shall have been closed by the Monetary Board pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed bank shall be made by PDIC as soon as possible either: (a) by cash; or (b) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor. Provided, however, That PDIC, in its discretion, may: 1. Require proof of claims to be filed before paying the insured deposits; and 2. Require final determination of a court of competent jurisdiction before paying such claim, in any case where PDIC is not satisfied as to the viability of a claim for an insured deposit. [Sec. 19, PDIC Charter, as amended by R.A. 10846] iv. Effect of payment of insured deposits PDIC, upon payment of any depositor, shall be subrogated to all rights of the depositor against the closed bank to the extent of such payment. Such subrogation shall include the right on the part of PDIC to receive the same dividends and payments from the – 1. Proceeds of the assets of such closed bank; and 2. Recoveries on account of stockholders’ liability, as would have been payable to the depositor on a claim for the insured deposits. Note: However, such depositor shall retain his claim for any uninsured portion of his deposit. [Sec. 20, PDIC Charter, as amended by R.A. 10846] v. Payment of insured deposits as preferred credit All payments by PDIC of insured deposits in closed banks – 1. Partake of the nature of public funds; and 2. As such, must be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article 2244 of the New Civil Code a. This preference shall be likewise effective upon liquidation proceedings already commenced and pending as of the approval of the PDIC Charter, where no distribution of assets has been made [Sec. 20, PDIC Charter, as amended by R.A. 10846]. b. Note: Taxes due to the National Government are ranked 9th out of the 14 enumerated ordinary preferred credits under Art. 2244 Implications of Status as Ordinary Preferred Credit (1) Ordinary preferred credits enjoy a preference, excluding the credits that are Page 323 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING later in order, but only as against the value of the property not otherwise subjected to any special preferred credit. (2) Does not create a lien on specific property; (3) Creates rights in favor of certain creditors to have the free property of the debtor applied in accordance with an order of preference. [Art. 2244, NCC; Somera] vi. Failure to settle claim of insured depositor General Rule: The failure to settle the claim, within six (6) months from the date of filing of claim for insured deposit, shall, upon conviction, subject the directors, officers or employees of PDIC responsible for the delay, to imprisonment from six (6) months to one year, where such failure was due to – 1. Grave abuse of discretion, 2. Gross negligence, 3. Bad faith, or 4. Malice Exception: The six-month period shall not apply if the validity of the claim requires the resolution of issues of facts and or law – 1. By another office, body or agency; or 2. By PDIC together with such other office, body or agency [Sec. 19, PDIC Charter, as amended by R.A. 10846] vii. Failure of depositor to claim insured deposits If the depositor in the closed bank shall fail to claim his insured deposits with PDIC within two (2) years from actual takeover of the closed bank by the receiver, or does not enforce his claim filed with the corporation within two (2) years after the two-year period to file a claim: (a) All rights of the depositor against PDIC with respect to the insured deposit shall be barred; (b) However, all rights of the depositor against the closed bank and its shareholders or the receivership estate to which PDIC may have become subrogated, shall thereupon revert to the depositor. (c) Thereafter, PDIC shall be discharged from any liability on the insured deposit. [Sec. 18, R.A. 9302] Note: PDIC may waive abovementioned two-year period. the (a) Examination of banks and deposit accounts Power to Conduct Examination of Banks PDIC, as a corporate body, shall have the power to conduct examination of banks with prior approval of the Monetary Board, Provided, That – - No examination can be conducted within twelve (12) months from the last examination date; - However, PDIC may conduct a special examination, in coordination with the BSP, as the Board of Directors: a. By an affirmative vote of a majority of all of its members; and b. If there is a threatened or impending closure of a bank [Sec. 9(8), PDIC Charter, as amended by R.A. 9576 and R.A. 10846] Power to Inquire into Deposit Accounts PDIC and/or the BSP, may inquire into or examine deposit accounts and all information related thereto 1. In case there is a finding of unsafe or unsound banking practice 2. Notwithstanding the provisions of: a. Republic Act No. 1405, as amended b. Republic Act No. 6426, as amended, c. Republic Act No. 8791, and d. Other laws To avoid overlapping of efforts, the examination of banks and deposit accounts shall maximize the efficient use of the relevant reports, information, and findings of the BSP, which it shall make available to PDIC. [Sec. 9(8), PDIC Charter, as amended by R.A. 9576 and R.A. 10846] Page 324 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Refusal to Permit Examination Any unjustified refusal to permit examination and audit of the deposit records or the affairs of the institution shall, at the discretion of the court, be punished by imposing upon any director, officer, employee or agent of a bank: (a) The penalty of imprisonment of not less than six (6) years but not more than twelve (12) years; or (b) A fine of not less than Fifty thousand pesos (P50,000.00) but not more than Two million pesos (P2,000,000.00); or (c) Both imprisonment and the fine. [Sec. 26(f)(1)(b), PDIC Charter, as amended by R.A. 10846] (b) Prohibition against splitting of deposits Splitting of Deposits Occurs whenever a deposit account with an outstanding balance of more than the statutory maximum amount of insured deposit, maintained under the name of natural or juridical persons, is broken down and transferred into two or more accounts – In the name/s of natural or juridical persons or entities who have no beneficial ownership on transferred deposits in their names; Either: - Within one hundred twenty (120) days immediately preceding a bank holiday; or - During a bank-declared bank holiday, or - Within one hundred twenty (120) days immediately preceding a closure order issued by the Monetary Board of the BSP for the purpose of availing of the maximum deposit insurance coverage. [Sec. 26(f)(1)(e), PDIC Charter, as amended by R.A. 10846] Penalty for Splitting of Deposits The splitting of deposits or creation of fictitious or fraudulent loans or deposit accounts shall, at the discretion of the court, be punished by imposing upon any director, officer, employee or agent of a bank: (a) The penalty of imprisonment of not less than six (6) years but not more than twelve (12) years; or (d) A fine of not less than Fifty thousand pesos (P50,000.00) but not more than Two million pesos (P2,000,000.00); or (e) Both imprisonment and the fine. [Sec. 26(f)(1)(e), PDIC Charter, as amended by R.A. 10846] (c) Prohibition against issuances of temporary restraining orders The actions of the Board of Directors of PDIC, namely, determining and prescribing, by regulations, what are considered as deposit liabilities of the bank under Section 5(g) shall be final and executory. [Sec.5(g), PDIC Charter, as amended by R.A. No. 10846] Such actions may only be restrained or set aside by the Court of Appeals, upon appropriate petition for certiorari on the ground that – a. The action was taken in excess of jurisdiction; or b. The action was taken with such grave abuse of discretion as to amount to a lack or excess of jurisdiction. The petition for certiorari may only be filed within thirty (30) days from notice of denial of claim for deposit insurance. [Sec.5(g), PDIC Charter, as amended by R.A. No. 10846] 5. Concept of bank resolution Definition The term resolution refers to the actions undertaken by PDIC under Section 11 of the PDIC Charter to: a. Protect depositors, creditors and the DIF; b. Safeguard the continuity of essential banking services or maintain financial stability; and c. Prevent deterioration or dissipation of bank assets. [Sec.5(s), PDIC Charter, as amended by R.A. No. 10846] Page 325 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING Grounds for the Resolution of a Bank PDIC, in coordination with the BSP may commence the resolution of a bank under the PDIC Charter upon: (a) Failure of prompt corrective action as declared by the Monetary Board; or (f) Request by a bank to be placed under resolution. [Sec. 11(a), PDIC Charter, as amended by R.A. 10846] The Role of the PDIC in Bank Resolution PDIC shall: A. Inform the bank of its eligibility for entry into resolution. [Sec. 11(a), PDIC Charter, as amended by R.A. 10846] B. Have the authority to inquire and monitor the status of banks under prompt corrective action. [Sec. 11(b), PDIC Charter, as amended by R.A. 10846] C. Determine whether the bank may be resolved through the purchase of all its assets and assumption of all its liabilities, or merger or consolidation with, or its acquisition, by a qualified investor a. Within a period of one hundred eighty (180) days from a bank's entry into resolution b. Through the affirmative vote of at least five (5) members of the PDIC Board. [Sec. 11(e), PDIC Charter, as amended by R.A. 10846] Note: If PDIC determines that the bank may not be resolved, the Monetary Board may act in accordance with Section 30 of Republic Act No. 7653 or the New Central Bank Act. [Sec. 11(i), PDIC Charter, as amended by R.A. 10846] The Role of the BSP in Bank Resolution The BSP shall: a. Inform PDIC of the initiation of prompt corrective action on any bank; and b. Be authorized to share with PDIC all information, agreements or documents, including any order of the Monetary Board, in relation to the prompt corrective action. Failure of Prompt Corrective Action PDIC, its duly authorized officers or employees, may examine, inquire or look into the deposit records of a bank when there is a failure of prompt corrective action as declared by the Monetary Board due to capital deficiency. However, such authority may not be exercised when such failure is due to grounds other than capital deficiency. For this purpose, banks their officers and employees are hereby mandated to disclose and report deposit account information in said bank to PDIC or its duly authorized officers and employees. [Sec. 11(c), PDIC Charter, as amended by R.A. 10846] Obligations of the Bank Undergoing Resolution The stockholders, directors, officers or employees of the bank shall have the following obligations: (1) Ensure bank compliance with the terms and conditions prescribed by PDIC for the resolution of the bank; (2) Cause the engagement, with the consent of PDIC, of an independent appraiser or auditor for the purpose of determining the valuation of the bank consistent with generally accepted valuation standards; (3) Ensure prudent management and administration of the bank's assets, liabilities and records; and (4) Cooperate with PDIC in the conduct or exercise of any or all of its authorities under the PDIC Charter and honor in good faith its commitment or undertaking with PDIC on the resolution of the bank. [Sec. 11(d), PDIC Charter, as amended by R.A. 10846] 6. Role of the PDIC in relation to banks in distress Closure and takeover Whenever a bank is ordered closed by the Monetary Board, the Corporation shall: (1) Be designated as receiver; and Page 326 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING (2) Proceed with the takeover and liquidation of the closed bank in accordance with the PDIC Charter. For this purpose, banks closed by the Monetary Board shall no longer be rehabilitated. [Sec. 12, PDIC Charter, as amended by R.A. No. 10846] generally the PDIC. [Sec. 29, R.A. 7653, as amended] Note: The designation of a conservator is not a precondition to the designation of a receiver. [Sec. 30, R.A. 7653, as amended] Receivership Designation of PDIC as Receiver Upon the designation of PDIC as receiver of a closed bank, it shall: (1) Serve a notice of closure to the highestranking officer of the bank present in the bank premises; or (2) Post the notice of closure in the bank premises or on its main entrance, in the absence of such officer. Closure and Takeover of Bank The closure of the bank shall be deemed effective upon the service of the notice of closure. Thereafter, the receiver shall takeover the bank and exercise the powers of the receiver as provided in the PDIC Charter. [Sec.14(a), PDIC Charter, as amended by R.A. No. 10846] Conservatorship Grounds for Appointment of a Conservator Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or quasi-bank is: a) In a state of continuing inability; or b) Unwilling to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. [Sec. 29, R.A. 7653, as amended] The designation of a conservator shall be vested exclusively in the Monetary Board. [Sec. 30, R.A. 7653, as amended] Qualifications of a Conservator The conservator should be: (1) Competent and knowledgeable in bank operations and management; (2) A natural person to be appointed by the Monetary Board. In contrast, the receiver is Grounds The Monetary Board may summarily, and without need for prior hearing, forbid the institution from doing business in the Philippines and designate the PDIC as receiver of the banking institution whenever – Upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or quasi-bank: (a) Is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; (b) Has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or (c) Cannot continue in business without involving probable losses to its depositors or creditors; or (d) Has willfully violated a cease and desist order under Section 37 of the New Central Bank Act that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, Note: For a quasi-bank, any person of recognized competence in banking or finance may be designated as receiver. [Sec. 30, R.A. 7653, as amended] Specific Powers of the PDIC as Receiver In addition to the powers of a receiver provided under existing laws (see Sec. 30, R.A. 7653), PDIC, as receiver of a closed bank, is empowered to: (1) Represent and act for and on behalf of the closed bank; Page 327 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING (2) Gather and take charge of all the assets, records and affairs of the closed bank, and administer the same for the benefit of its creditors; (3) Convert the assets of the closed bank to cash or other forms of liquid assets, as far as practicable; (4) Bring suits to enforce liabilities of the directors, officers, employees, agents of the closed bank and other entities related or connected to the closed bank or to collect, recover, and preserve all assets, including assets over which the bank has equitable interest; (5) Appoint or hire persons or entities of recognized competence in banking, finance, asset management or remedial management, as its deputies, assistants or agents, to perform such powers and functions of PDIC as receiver of the closed bank, or assist in the performance thereof; (6) Appoint or hire persons or entities of recognized competence in forensic and fraud investigations; (7) Pay accrued utilities, rentals and salaries of personnel of the closed bank for a period not exceeding three (3) months, from available funds of the closed bank; (8) Collect loans and other claims of the closed bank and for this purpose, modify, compromise or restructure the terms and conditions of such loans or claims as may be deemed advantageous to the interests of the creditors of the closed bank; (9) Hire or retain private counsel as may be necessary; (10) Borrow or obtain a loan, or mortgage, pledge or encumber any asset of the closed bank, when necessary to preserve or prevent dissipation of the assets, or to redeem foreclosed assets of the closed bank, or to minimize losses to its depositors and creditors; (11) If the stipulated interest rate on deposits is unusually high compared with prevailing applicable interest rates, PDIC as receiver, may exercise such powers which may include a reduction of the interest rate to a reasonable rate: Provided, That any modifications or reductions shall apply only to earned and unpaid interest; (12) Utilize available funds of the bank, including funds generated by the receiver from the conversion of assets to pay for reasonable costs and expenses incurred for the preservation of the assets, and liquidation of, the closed bank, without need for approval of the liquidation court; For banks with insufficient funds, PDIC is authorized to advance the foregoing costs and expenses, and collect payment, as and when funds become available. (13) Charge reasonable fees for the liquidation of the bank from the assets of the bank: Provided, That payment of these fees, including any unpaid advances under the immediately preceding paragraph, shall be subject to approval by the liquidation court; (14) Distribute the available assets of the closed bank, in cash or in kind, to its creditors in accordance with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws; (15) Dispose records of the closed bank that are no longer needed in the liquidation in accordance with guidelines set by the PDIC Board of Directors, notwithstanding the laws on archival period and disposal of records; and (g) Exercise such other powers as are inherent and necessary for the effective discharge of the duties of PDIC as receiver. [Sec.13(b), PDIC Charter, as added by R.A. No. 10846] Liquidation The receiver is authorized to adopt and implement, without need of consent of the stockholders, board of directors, creditors or depositors of the closed bank, any or a combination of the following modes of liquidation: (a) Conventional liquidation; and (h) Purchase of assets and/or assumption of liabilities [Sec.13(a), PDIC Charter, as amended by R.A. No. 10846] Page 328 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING The placement of a bank under liquidation shall have the following effects: (1) On the corporate franchise or existence: Upon placement by the Monetary Board of a bank under liquidation, it shall continue as a body corporate until the termination of the winding-up period under Section 16 of the PDIC Charter. - The receiver shall represent the closed bank in all cases by or against the closed bank and prosecute and defend suits by or against it. - In no case shall the bank be reopened and permitted to resume banking business after being placed under liquidation. (2) On the powers and functions of its directors, officers and stockholders: The powers, voting rights, functions and duties, as well as the allowances, remuneration and perquisites of the directors, officers, and stockholders of such bank are terminated upon its closure. - Accordingly, the directors, officers, and stockholders shall be barred from interfering in any way with the assets, records, and affairs of the bank. - The receiver shall exercise all authorities as may be required to facilitate the liquidation of the closed bank for the benefit of all its creditors. (3) On the assets: Upon service of notice of closure as provided in Section 14 of the PDIC Charter, all the assets of the closed bank shall he deemed in custodia legis in the hands of the receiver, and as such, these assets may not be subject to attachment, garnishment, execution, levy or any other court processes. - A judge, officer of the court or any person who shall issue, order, process or cause the issuance or implementation of the garnishment order, levy, attachment or execution, shall be liable under Section 27 of the PDIC Charter. - Collaterals securing the loans and advances granted by the BSP shall not be included in the assets of the closed bank for distribution to other creditors; o The proceeds in excess of the amount secured shall be returned by the BSP to the receiver. - Any preliminary attachment or garnishment on any of the assets of the closed bank existing at the time of closure shall not give any preference to the attaching or garnishing party. - Upon motion of the receiver, the preliminary attachment or garnishment shall be lifted and/or discharged. (4) On labor relations: Notwithstanding the provisions of the Labor Code, the employer-employee relationship between the closed bank and its employees shall be deemed terminated upon service of the notice of closure of the bank in accordance with the PDIC Charter. - Payment of separation pay or benefits provided for by law shall be made from available assets of the bank in accordance with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws. (5) On contractual obligations: The receiver may cancel, terminate, rescind or repudiate any contract of the closed bank - If the contract is not necessary for the orderly liquidation of the bank; or - If the contract is grossly disadvantageous to the closed bank; or - For any ground provided by law. (6) On interest payments: The liability of a bank to pay interest on deposits and all other obligations as of closure shall cease upon its closure by the Monetary Board without prejudice to the first paragraph of Section 85 of Republic Act No. 7653 (the New Central Bank Act). - Thw receiver shall have the authority, without need for approval of the liquidation court, to assign, as payment to secured creditors, the bank assets serving as collaterals to their respective loans up to the extent of the outstanding obligations, including interest as of date of closure of the hank, as validated by the receiver. - The valuation of the asset shall be based on the prevailing market value of Page 329 of 450 U.P. LAW BOC COMMERCIAL LAW BANKING the collaterals as appraised by an independent appraiser on an ‘as is where is’ basis. (7) On liability for penalties and surcharges for late payment and nonpayment of taxes: From the time of closure, the closed bank shall not be liable for the payment of penalties and surcharges arising from the late payment or nonpayment of real property tax, capital gains tax, transfer tax and similar charges. (8) On bank charges and fees: The receiver may impose, on behalf of the closed bank, charges and fees for services rendered after bank closure, such as, but not limited to, the execution of pertinent deeds and certifications. (9) Actions pending for or against the closed bank: Except for actions pending before the Supreme Court, actions pending for or against the closed bank in any court or quasi-judicial body shall, upon motion of the receiver: - Be suspended for a period not exceeding one hundred eighty (180) days; - Referred to mandatory mediation; and - Referred back to the court or quasijudicial body for further proceedings upon termination of the mediation. (10) Final decisions against the closed bank: The execution and enforcement of a final decision of a court other than the liquidation court against the assets of a closed bank shall be stayed. The prevailing party shall file the final decision as a claim with the liquidation court and settled in accordance with the Rules on Concurrence and Preference of Credits under the Civil Code or other laws. (11) Docket and other court fees: Payment of docket and other court fees relating to all cases or actions filed by the receiver with any judicial or quasi-judicial bodies shall be deferred until the action is terminated with finality. - Any such fees shall constitute as a first lien on any judgment in favor of the closed bank or in case of unfavorable judgment, such fees shall be paid as liquidation costs and expenses during the distribution of the assets of the closed bank. (12) All assets, records, and documents in the possession of the closed bank at the time of its closure are presumed held by the bank in the concept of an owner. (13) The exercise of authority, functions, and duties by the receiver under this Act shall be presumed to have been performed in the regular course of business. (14) Assets and documents of the closed bank shall retain their private nature even if administered by the receiver. Matters relating to the exercise by the receiver of the functions under this Act shall be subject to visitorial audit only by the Commission on Audit. [Sec. 13(e), PDIC Charter, as amended by R.A. 10846] Page 330 of 450 U.P. LAW BOC INTELLECTUAL PROPERTY LAW INTELLECTUAL PROPERTY LAW COMMERCIAL LAW Page 331 of 450 COMMERCIAL LAW U.P. LAW BOC INTELLECTUAL PROPERTY LAW A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL 1. Intellectual Property Rights a. Definition Intangible property rights granted by law to owners of intellectual creations such as inventions, designs, signs and names used in commerce, and literary and artistic works. b. Intellectual Property Rights under the Intellectual Property Code (RA 8293) Copyright and Related Rights; Trademarks and Service Marks; Geographic Indications; Industrial Designs; Patents; Utility Models; [Chapter XII] Layout-Designs (Topographies) of Integrated Circuits; Protection of Undisclosed Information. [Sec. 4.1, RA 8293] 2. Differences between copyright, trademarks, and patents The difference between copyright, trademarks, and patent lies in the scope of protection. A trademark is any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise from that of another and shall include a stamped or marked container of goods. In relation thereto, a trade name means the name or designation identifying or distinguishing an enterprise. Meanwhile, the scope of a copyright is confined to literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation. Patentable inventions, on the other hand, refer to any technical solution of a problem in COMMERCIAL LAW any field of human activity which is new, involves an inventive step and is industrially applicable. [Kho v. Court of Appeals, 379 SCRA 410 (2002)] 3. Technology Arrangements Transfer Definition Contracts/Agreements involving: 1. The transfer of systematic knowledge for: a. The manufacture of a product, b. The application of a process, c. Rendering of a service including management contracts; and 2. The transfer, assignment or licensing of all forms of intellectual property rights, including the licensing of computer software except computer software developed for mass market. [Sec. 4.2, RA 8293] Functions of the Intellectual Property Office (IPOPHL) 1. Examine applications for grant of letters patent for inventions and register utility models and industrial designs; 2. Examine applications for the registration of marks, geographic indication, integrated circuits; 3. Register technology transfer arrangements and settle disputes involving technology transfer payments covered by the provisions of Part II, Chapter IX on Voluntary Licensing and develop and implement strategies to promote and facilitate technology transfer; 4. Promote the use of patent information as a tool for technology development; 5. Publish regularly in its own publication the patents, marks, utility models and industrial designs, issued and approved, and the technology transfer arrangements registered; 6. Administratively adjudicate contested proceedings affecting intellectual property rights; 7. Coordinate with other government agencies and the private sector efforts to formulate and implement plans and Page 332 of 450 U.P. LAW BOC INTELLECTUAL PROPERTY LAW policies to strengthen the protection of intellectual property rights in the country [Sec. 5, RA 8293]; 8. Undertake enforcement functions supported by concerned agencies such as the Philippine National Police, National Bureau of Investigation, Bureau of Customs, Optical Media Board, Local Government Units, among others [Sec. 7. (c) RA 8293, as amended by R.A. 10372]; 9. Conduct visits during reasonable hours to establishments and business engaging in activities violating intellectual property rights and provisions of this act based on report, information or complaint received by the office. [Sec. 7.(d) RA 8293, as amended by R.A. 10372] IPOPHL JURISDICTIONAL THRESHOLD in administrative complaints for violations of laws involving intellectual property rights: Two hundred thousand pesos (P200,000) or more in total damages claimed Role of the IPO with Respect to Technology Transfer Arrangements The IPO shall: 1. Register technology transfer arrangements and settle disputes involving technology transfer payments 2. Develop and implement strategies to promote and facilitate technology transfer; 3. Promote the use of patent information as a tool for technology development; 4. Publish regularly in its own publication the technology transfer arrangements registered. [Sec. 4.4, RA 8293] Voluntary Licensing & Registration of Technology Transfer Arrangements See 9. Licensing, a. Voluntary B. PATENTS 1. Patentable Invention a. Inventions; b. Utility Model; c. Industrial Designs; and COMMERCIAL LAW d. Lay-Out Designs (Topographies of Integrated Circuits) [Note: this is actually a sui generis regime but the amendment to RA 8293 placed this in the Law on Patents] Invention Patent A patentable invention is any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable. It may be, or may relate to, a product, or process, or an improvement of any of the foregoing. [Sec. 21, RA 8293] Non-patentable inventions [Sec. 22] 1. Discoveries, scientific theories and mathematical methods, and in the case of drugs and medicines: a. The mere discovery of a new form or new property of a known substance which does not result in enhancement of the known efficacy of that substance; b. The mere discovery of any new property or new use for a known substance; or c. The mere use of a known process unless such known process results in a new product that employs at least one new reactant. [RA 8293 as amended by RA 9502, The Cheaper Medicine Act of 2008] 2. Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers 3. Methods for treatment of the human and animal body by surgery or therapy and diagnostic methods practiced on the human and animal body. Exceptions: products and composition for use in any of these methods 4. Plant varieties or animal breeds or essentially biological process for the production of plants or animals Exceptions: micro-organisms; nonbiological and microbiological processes 5. Aesthetic creations 6. Anything contrary to public order or morality Page 333 of 450 U.P. LAW BOC INTELLECTUAL PROPERTY LAW Standards or requirements for registrability of Invention Patent [Sec. 21] i. Novelty; ii. Involves an inventive step; and iii. Industrially applicable. Additional Requirements iv. Patentable subject matter [Sec. 22] v. Sufficient disclosure [Sec. 35] i. Novelty An invention shall not be considered new if it forms part of a prior art. [Sec. 23, RA 8293] Prior art This shall consist of: a. Everything which has been made available to the public anywhere in the world, before the filing date or the priority date of the application claiming the invention; [Sec. 24.1, RA 8293] b. The whole contents of an application for a patent, utility model, or industrial design registration, published in accordance with this Act, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority date of the application: Provided, That – (i) The application which has validly claimed the filing date of an earlier application under Section 31 of this Act, shall be prior art with effect as of the filing date of such earlier application (ii) The applicant or the inventor identified in both applications are not one and the same. [Sec. 24.2, RA 8293] Non-prejudicial disclosures This is an exception to the General Rule on Prior Art under Sec. 24. It provides that the disclosure of the information contained in the application during the 12 months preceding the filing date or the priority date of the application shall not prejudice the applicant on the ground of lack of novelty if such disclosure was made by: a. The inventor b. A patent office and the information was contained COMMERCIAL LAW a. in another application filed by the inventor and should not have been disclosed by the office, or b. in an application filed, without the knowledge or consent of the inventor, by a third party which obtained the information directly or indirectly from the inventor c. A third party which obtained the information directly or indirectly from the inventor [Sec. 25, RA 8293] ii. Inventive Step An invention involves an inventive step if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention. [Sec. 26.1, RA 8293, as amended by RA 9502] Cheaper Medicines Act: In case of drugs and medicines, there is no inventive step if the invention results from: a. The mere discovery of a new form or new property of a known substance which does not result in enhancement of the known efficacy of that substance; b. The mere discovery of any new property or new use for a known substance; or c. The mere use of a known process unless such known process results in a new product that employs at least one new reactant. [Sec. 26.2, RA 8293 as amended by RA 9502] iii. Industrial Applicability An invention that can be produced and used in any industry shall be industrially applicable. [Sec. 27, RA 8293] 2. Non-Patentable Inventions The following shall be excluded from patent protection: a. Discoveries, scientific theories and mathematical methods, and in the case of drugs and medicines, the mere discovery of a new form or new property of a known substance which does not result in the Page 334 of 450 U.P. LAW BOC b. c. d. e. f. INTELLECTUAL PROPERTY LAW enhancement of the known efficacy of that substance, or the mere discovery of any new property or new use for a known substance, or the mere use of a known process unless such known process results in a new product that employs at least one new reactant. Salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations, and other derivatives of a known substance shall be considered to be the same substance, unless they differ significantly in properties with regard to efficacy; [Sec. 22.1, RA 8293 as amended by RA 9502] Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers; [Sec. 22.2, RA 8293] Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body. This provision shall not apply to products and composition for use in any of these methods; [Sec. 22.3, RA 8293] Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall not apply to microorganisms and non-biological and microbiological processes; [Sec. 22.4, RA 8293] Aesthetic creations; [Sec. 22.5, RA 8293] Anything which is contrary to public order or morality. [Sec. 22.6, RA 8293] Cheaper Medicines Act: In addition to discoveries, scientific theories and mathematical methods, the IP Code now includes (as non-patentable), in case of drugs and medicines: a. The mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance b. The mere discovery of any new property or new use of a known substance c. The mere use of a known process unless such known process results in a new product that employs at least one reactant COMMERCIAL LAW [Sec. 26.2, RA 8293 as amended by RA 9502] 3. Ownership of a Patent Right to a Patent General Rule: The right to a patent belongs to the inventor, his heirs, or assigns. When two or more persons have jointly made an invention, the right to a patent shall belong to them jointly. [Sec. 28, RA 8293] Exceptions: Inventions created pursuant to employment or a commissioned work 1. The person who commissions the work shall own the patent. [Sec. 30.1, RA 8293] 2. The employer has the right to the patent if the invention is the result of the performance of the employee’s regularly assigned duties. [Sec. 30.2, RA 8293] First-to-file rule RA 8293 changed the basis of ownership of a patent from First-to-Invent under RA 165 to First-to-File. If two or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or where two or more applications are filed for the same invention, to the applicant who has the earliest filing date or, the earliest priority date. [Sec. 29, RA 8293] Filing Date The filing date of a patent application shall be the date of receipt by the Office of at least the following elements: a. An express or implicit indication that a Philippine patent is sought; b. Information identifying the applicant; and c. Description of the invention and one (1) or more claims in Filipino or English. [Sec. 40.1, RA 8293] Page 335 of 450 U.P. LAW BOC INTELLECTUAL PROPERTY LAW Invention created pursuant to a commission/in the course of employment The person who commissions the work shall own the patent, unless otherwise provided in the contract. [Sec. 30.1, RA 8293] In case the employee made the invention in the course of his employment contract, the patent shall belong to: a. The employee, if the inventive activity is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer. b. The employer, if the invention is the result of the performance of his regularlyassigned duties, unless there is an agreement, express or implied, to the contrary. [Sec. 30.2, RA 8293] Right of priority An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered filed as of the date of filing the foreign application: Provided, That: 1. The local application expressly claims priority; 2. It is filed within 12 months from the date the earliest foreign application was filed; and 3. A certified copy of the foreign application together with an English translation is filed within 6 months from the date of filing in the Philippines. [Sec. 31, RA 8293] 4. Grounds for Cancellation of a Patent Any interested person may petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grounds: 1. That what is claimed as the invention is not new or patentable; 2. That the patent does not disclose the invention in a manner sufficiently clear and COMMERCIAL LAW complete for it to be carried out by any person skilled in the art; or 3. That the patent is contrary to public order or morality. [Sec. 61.1, RA 8293] Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be effected to such extent only. [Sec. 61.2, RA 8293] Effect of Cancellation of Patent or Claim The rights conferred by the patent or any specified claim or claims cancelled shall terminate. Notice of the cancellation shall be published in the IPO Gazette. Unless restrained by the Director General, the decision or order to cancel by Director of Legal Affairs shall be immediately executory even pending appeal. [Sec. 66, RA 8293] Remedies of a Person with a Right to a Patent Patent Application by Persons Not Having the Right to a Patent. — If a person referred to in Section 29 (First-to-File) other than the applicant, is declared by final court order or decision as having the right to the patent, such person may, within three (3) months after the decision has become final: a. Prosecute the application as his own application in place of the applicant; b. File a new patent application in respect of the same invention; c. Request that the application be refused; or d. Seek cancellation of the patent, if one has already been issued. [Sec. 67, RA 8293] 5. Remedy of the True and Actual inventor If a person, who was deprived of the patent without his consent or through fraud, is declared by final court order or decision to be the true and actual inventor, the court shall: (1) Order for his substitution as patentee, or (2) At the option of the true inventor, cancel the patent, and Page 336 of 450 U.P. LAW BOC INTELLECTUAL PROPERTY LAW (3) Award actual and other damages in his favor, if warranted by the circumstances. [Sec. 68, RA 8293] The action shall be filed within 1 year from the date of publication made in accordance with Sections 44 and 51, respectively. [Sec. 70, RA 8293] 6. Rights Conferred by a Patent Where the subject matter of a patent is a product Where the subject matter of a patent is a process Other rights of Patent Owners To restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing that product. [Sec. 71.1(a), RA 8293] To restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained directly or indirectly from such process. [Sec. 71.1(b), RA 8293] Patent owners shall also have the right to assign, or transfer by succession the patent, and to conclude licensing contracts for the same. [Sec. 71.2, RA 8293] b. c. d. e. 7. Limitations of Patent Rights The owner of a patent has no right to prevent third parties from performing, without his authorization, the acts referred to in Section 71 hereof in the following circumstances: a. Owner’s Consent: 1. National exhaustion - Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed after that product has been so put on the said market; 2. International exhaustion (for drugs and medicines) - A drug or medicine has f. COMMERCIAL LAW been introduced anywhere else in the world by the patent owner, or by any party authorized to use the invention. [Sec. 72.1, RA 8293 as amended by RA 9502] Parallel Importation: The right to import the drugs and medicines shall be available to any government agency or any private third party; [Sec. 72.1, RA 8293 as amended by RA 9502] Non – Commercial: Where the act is done privately and on a non-commercial scale or for a non-commercial purpose: Provided, That it does not significantly prejudice the economic interests of the owner of the patent; [Sec. 72.2, RA 8293 as amended by RA 9502] Experimental Use: Where the act consists of making or using exclusively for experimental use of the invention for scientific purposes or educational purposes and such other activities directly related to such scientific or educational experimental use; [Sec. 72.3, RA 8293 as amended by RA 9502] Drugs and Medicine: In the case of drugs and medicines, where the act includes testing, using, making or selling the invention including any data related thereto, solely for purposes reasonably related to the development and submission of information and issuance of approvals by government regulatory agencies required under any law of the Philippines or of another country that regulates the manufacture, construction, use or sale of any product: Provided, That, in order to protect the data submitted by the original patent holder from unfair commercial use provided in Article 39.3 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), the Intellectual Property Office, in consultation with the appropriate government agencies, shall issue the appropriate rules and regulations necessary therein not later than 120 days after the enactment of this law; [Sec. 72.4, RA 8293 as amended by RA 9502] Medicine Individual Preparation: Where the act consists of the preparation for Page 337 of 450 U.P. LAW BOC INTELLECTUAL PROPERTY LAW individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical shall apply after a drug or medicine has been introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention: Provided, further, That the right to import the drugs and medicines contemplated in this section shall be available to any government agency or any private third party; [Sec. 72.5, RA 8293 as amended by RA 9502] g. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country entering the territory of the Philippines temporarily or accidentally: Provided, That such invention is used exclusively for the needs of the ship, vessel, aircraft, or land vehicle and not used for the manufacturing of anything to be sold within the Philippines. [Sec. 72.6, RA 8293 as amended by RA 9502] There shall be no infringement of trademarks or tradenames of imported or sold drugs and medicines allowed as well as imported or sold off-patent drugs and medicines: Provided, That said drugs and medicines bear the registered marks that have not been tampered, unlawfully modified, or infringed. [Sec.159.4 RA 8293 as amended by RA 9502] Prior User Any prior user, who, in good faith was using the invention or has undertaken serious preparations to use the invention in his enterprise or business, before the filing date or priority date of the application on which a patent is granted, shall have the right to continue the use thereof as envisaged in such preparations within the territory where the patent produces its effect. [Sec. 73.1, RA 8293] The right of the prior user may only be transferred or assigned together with his enterprise or business, or with that part of his enterprise or business in which the use or preparations for use have been made. [Sec. 73.2, RA 8293] COMMERCIAL LAW Use by the Government A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where: 1. The public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires; [Sec. 74.1(a), RA 8293] 2. A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee, is anti-competitive; [Sec. 74.1(b), RA 8293] 3. In the case of drugs and medicines, there is a national emergency or other circumstance of extreme urgency requiring the use of the invention; [Sec. 74.1(c), RA 8293 as amended by RA 9502] 4. In the case of drugs and medicines, there is public non-commercial use of the patent by the patentee, without satisfactory reason; [Sec. 74.1(d), RA 8293 as amended by RA 9502] 5. In the case of drugs and medicines, the demand for the patented article in the Philippines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health. [Sec. 74.1(e), RA 8293, as amended by RA 9502] CONDITIONS ON THE USE BY GOVERNMENT OR THIRD PERSONS THE Unless otherwise provided herein, the use by the Government, or third person authorized by the Government shall be subject, where applicable, to the following provisions: a. In situations of national emergency or other circumstances of extreme urgency as provided under Section 74.1 (c), the right holder shall be notified as soon as reasonably practicable; b. In the case of public non-commercial use of the patent by the patentee, without satisfactory reason, as provided under Section 74.1 (d), the right holder shall be informed promptly: Provided, That, the Page 338 of 450 U.P. LAW BOC INTELLECTUAL PROPERTY LAW COMMERCIAL LAW Government or third person authorized by the Government, without making a patent search, knows or has demonstrable ground to know that a valid patent is or will be used by or for the Government; If the demand for the patented article in the Philippines is not being met to an adequate extent and on reasonable terms as provided under Section 74.1 (e), the right holder shall be informed promptly; The scope and duration of such use shall be limited to the purpose for which it was authorized; Such use shall be non-exclusive; The right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization; and The existence of a national emergency or other circumstances of extreme urgency, referred to under Section 74.1 (c), shall be subject to the determination of the President of the Philippines for the purpose of determining the need for such use or other exploitation, which shall be immediately executory. [Sec. 74.2, RA 8293 as amended by RA 9502] Issuance of a Special Compulsory License under the TRIPS Agreement) of this Code. [Sec. 76.1, RA 8293 as amended by R.A. 9502] All cases arising from the implementation of this provision shall be cognizable by courts with appropriate jurisdiction provided by law. No court except the Supreme Court of the Philippines, shall issue any temporary restraining order or preliminary injunction or such other provisional remedies that will prevent its immediate execution. [Sec. 74.3, RA 8293 as amended by RA 9502] Under the doctrine of equivalents, an infringement occurs when a device: (1) Appropriates a prior invention by incorporating its innovative concept, albeit with some modification and change, (2) Performs substantially the same function in substantially the same way, and (3) Achieves substantially the same result. [Godinez v. CA, G.R. No. L-97343 (1993)] 8. Patent Infringement The doctrine of equivalents thus requires satisfaction of the function-means-and-result test, the patentee having the burden to show that all three components of such equivalency test are met. [Smith Klein Beckman Corp. v. CA, G.R. No. 126627 (2003)] c. d. e. f. g. The making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the patentee constitutes patent infringement: Provided, That, this shall not apply to instances covered by Sections 72.1 and 72.4 (Limitations of Patent Rights); Section 74 (Use of Invention by Government); Section 93.6 (Compulsory Licensing); and Section 93-A (Procedures on Tests in Patent Infringement a. Literal Infringement In using literal infringement as a test, resort must be had in the first instance to the words of the claim. To determine whether the particular item falls within the literal meaning of the patent claims, the court must juxtapose the claims of the patent and the accused product within the overall context of the claims and specifications, to determine whether there is exact identity of all material elements. [Godinez v. CA, G.R. No. L-97343 (1993)] The test is satisfied if: The item that is being sold, made or used conforms exactly to the patent claim of another; One makes, uses or sells an item that has all the elements of the patent claim of another plus other elements. b. Doctrine of Equivalents Civil and Criminal Actions Civil Action for Infringement Any patentee, or anyone possessing any right, title or interest in and to the patented invention, Page 339 of 450 U.P. LAW BOC COMMERCIAL LAW INTELLECTUAL PROPERTY LAW whose rights have been infringed, may bring a civil action before a court of competent jurisdiction: 1. To recover from the infringer such damages sustained thereby, plus attorney’s fees and other expenses of litigation, and 2. To secure an injunction for the protection of his rights. [Sec. 76.2, RA 8293] If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court may award, by way of damages, a sum equivalent to reasonable royalty. [Sec. 76.3, RA 8293] The court may, according to the circumstances of the case, award damages in a sum above the amount found as actual damages sustained: Provided, That the award does not exceed three (3) times the amount of such actual damages. [Sec. 76.4, RA 8293] Criminal Action Only After Finality of Judgment in Civil Action and After Repetition of Infringement If infringement is repeated by the infringer or by anyone in connivance with him after finality of the judgment of the court against the infringer, the offenders shall: 1. Be criminally liable therefor, and 2. Upon conviction, suffer imprisonment for the period of not less than 6 months but not more than 3 years and/or a fine of not less than One hundred thousand pesos (P100,000) but not more than Three hundred thousand pesos (P300,000), at the discretion of the court. Note: Such criminal action is without prejudice to the institution of a civil action for damages: [Sec. 84, RA 8293] Criminal Action: 3 years from date of the commission of the crime. [Sec. 84, RA 8293] Defenses in Infringement for In an action for infringement, the defendant, in addition to other defenses available to him, may show the invalidity of the patent, or any claim thereof, on any of the grounds on which a petition of cancellation can be brought under Section 61. [Sec. 81, RA 8293] Patent found invalid may be cancelled In an action for infringement, if the court shall find the patent or any claim to be invalid, it shall cancel the same, and the Director of Legal Affairs upon receipt of the final judgment of cancellation by the court, shall record that fact in the register of the Office and shall publish a notice to that effect in the IPO Gazette. [Sec. 82, RA 8293] Doctrine of File Wrapper Estoppel Patentee is precluded from claiming as part of a patented product that which he had to excise or modify in order to avoid patent office rejection, and he may omit any additions he was compelled to add by patent office regulations. [Advance Transformer Co. v. Levinson, 837 F.2d 1081(1988)] 9. Licensing Kinds of License IPOPHL Office(s) with Jurisdiction Appellate Jurisdiction Voluntary (Secs. 8592) Documentation , Information and Technology Transfer Bureau (DITTB) Director General -----> Secretary of Trade and Industry (Sec/ 7, RA IP Code) Compulsory (General; Secs
