Commercial Law Review Mam Lulu

Commercial Law Review
Lecture Notes of Atty. Maria Lulu Reyes

Transcribed: Charlotte Cario
Maam Lulu
COMMERCIAL LAW REVIEW 2
Corporate related laws
Tuesdays (6:30) and Fridays (5:30)
Bar Review Notes
Com law Rev 2
Recent cases (get outline from 3rd years)
-additional points
Only based on com law rev 2 list
Corporation
BP 68
Artificial being created by operation of law having
the right of succession and the powers, attributes
and privileges expressly authorized by law or
incident to its existence
4 basic attributes of a corporation
1. Artificial being
2. Created by operation of law
3. Right to succession
4. With power and privileges granted by law
expressly or incident to its existence
In relation that it is an artificial being, a private

corporation cannot as a rule recover moral damages
Because as stated by SC: a private corporation does
not have a central nervous system that will allow it
to feel anxieties, etc.
Only way to grant MD: when by reason of the
wrongful act, the good will or reputation is
besmirched
However, even if there is besmirched reputation
suffered by the corporation, there will be no
damages because at the time it was already facing
serious financial reverses so no longer has no
reputation to protect
2.created by operation of law
Theory or principle of state concession
the existence of a corporation is due to consent even
by the state
The very personality and legal existence of a
corporation is owed to law or statute
Without such concession
No such legal entity can exist
Since mere creation of law, all conditions pre
requisite of a private corporation must be fulfilled
Including submission of AOI
Doctrine of limited liability: SH cannot be made

liable of corporate debts except in so far as their
equity is concerned
Since a corporation legally exists with the consent

of state, that consent may be withdrawn on grounds
provided for my law
The share holdings of an individual SH is the

maximum extent of his/her liability in corporate
debts
Beyond that, the property of the SH or member is
protected against corporate liability
3. right of succession
Not from a civil law perspective
Right to continue in its existence as a juridical
entity for the term prescribed in its articles
1.it is an artificial being

As an artificial being, criminal liability cannot be
incurred by the corporation per se
Its the officers of the corporation that are directly
responsible for the offense that absorb the criminal
liability
In no case may a corporation be an accused in a
criminal case
And this is impervious to any changes that form the

corporation
So death, withdrawal, etc of a SH or member does
not cause dissolution of the corporation
Individuals and natural persons:
Are governed by general capacities
Possessed with inherent rights which can only be
regulated but are not granted by some sovereign
authority

Corporations:
their rights powers or privileges are limited only to
what the law expressly authorizes them or confers
Thus corporations do not have plenary powers or
rights unlike individuals consistent with theory of
special capacities
4. theory or principle of special capacities

As an artificial being, a corporation is imbued with
powers, authority and privilege granted or derived
from law itself
It is the law that defines what a corporation can and
cannot do
Whatever is not expressly granted to a corporation
must be understood as denied
However, out of the powers expressly given, we can
deduce certain implied powers
Implied powers: must necessarily be exercised
because they are closely connected to the express
powers
But since artificial being, aside from express and
implied powers, it also has inherent powers
Those deemed automatically conferred upon its
creation
And those incidental to its existence
Beyond these three kinds of power, a corporation is
not automatically allowed to exercise any other
powers
What are the legal effects of contracts entered into

by the promoter
(these contracts are presumed to be toward the
incorporation of the corporation)
May be entered into his own name or the
corporation as represented by the promoter
The contracts are entered into, they are considered
binding and enforceable only between the parties
The corporation, even if proposed, cannot be made
a party
It cannot possibly give its consent
It cannot therefore be held liable
The promoter is the one principally liable for
contracts entered into
And even if the corporation is later formed, it
cannot be bound by these pre incorporation
contracts
Unless there is either express or implied ratification
by the corporation
Marketing II v. hoson
A management contract was entered in the name of
the proposed corporation..
..
SC: since the corporation was not yet formed at the
time the contract was entered into and . Then the
management contract does not bound the
corporation
Transfer of property
These 4 requisites will come about only after it has

undergone necessary process for organization
STAGES IN THE LIFE OF CORPORATION
1.promotion
No yet legal entity
Tantamount to conception stage
Creation is a mere proposal
There is a group of individuals proposing to build a
corporation
Proposal usually comes from a promoter
Promoter: natural or juridical person engaged in the
business of forming corporations
Since yet no corporation, there is necessity of
entering and concluding certain contracts
How can the corporaion be bound by express

ratification
When after it has been bound, the board of the
corporation adopts the . As
. Accession
There is implied ratification..
It has reaped benefits for itself due to such
promotion or pre incorporation contracts

Example:
Once these pre.. have materialized, there is a need
to undertake the legal steps for actual formation of
Incorporation clauses:
Begins with drafting of
Aoi: refer to the document required by law to be
accomplished and submitted to the SEC in order to
obtain the primary franchise of the corporation
So its a condition precedent..
When approved: serves as a contract binding
between the corporation and the state
.
Between corporation and SH and Members and
Officers
AOI: form part of the charter of a private
corporation
Charter: not a special law that creates that
corporation
Applied here, much broader: not just AOI but all
other provisions of
Contents of AOI (Memorize sec. 14 and 15 of

Corporation Code)
1.Corporate name
Since corporation is a juridical person, it must have
a name
Name of the corporation must not bedceptively or
confusingly similar or identical to the name of an
existing corproaino or any other name protected by
law
It must alslo not be patently unlawful
This implies that a c.is a proprietary right once
approved by the SEC
Because tis under the corporate name that all
contracts are entered into.
Therefore, in the use and adoption of a corporate
name, courts use the so called prior right rule
A corp which registered under his name shall be
given exclusive rights to that name and all
subsequent registratns will be prohibited form using

the same or
Because the first registrant has priority in that right
..
SC adopted prior right rule
In the use and application of a corp name, if the
propsed name is already being used by an
existing
Use of Corporate names may involve application of
certain priciples
Includnign doct of secondary meaning
Lyceum case
Under this doctrine, an otherwise generic or
dictionaly word may be used exclusively.. if the
latters products have been long associated wit such
generic words
Also enfoces a pririty right
Here, Lyceum
Patently unlawfulness
Use of certain words are regulated by certain laws
.
Corporate name may be amended by amending AOI
Change in CN soes not change the entity itself
Case; rep planter bank v. ca
When a PN was
Second content:
Corporate purposes
Entry would depend on WON the corp is sotck or
NS
If nonstock: corporate purpose must not be
contradictory to its nature
Therefore what purpose may be stated by the NS
Anything not related to like lierary, charity etc
For stock: any business for profit of gain
In all cases: there should only be one primary
purpose which defines the core of the corporation
If the corporation wishes to engage in
They must likewise be stated as..

For NS the seconday purpose must be connected

to
And attach favourable recommendation from the

appropriate government agency
November 19, 2013
Thus if seeking to organize a bank, or quasi bank or

trust entity, the favourable recommendation: BSP
Dec. 14: 1st quiz (Saturday; 10am to 12am)

Insurance: Insurance commission
TREASURER IN TRUST
Land transportation: LTFRB
In filling out the AOI, especially for SC who are
required to place the required ACS, SCS, and PUCS
the name of treasurer in trust must also be stated
therein
And the TIT, the interim treasurer, who is appointed
or elected by the incorporators and incorporating
directors to accept and receive money or property as
payment or consideration for the capital stock of the
proposed corporation
Thats why its the TIT that oversees the
enforcement of pre incorporation subscriptions
Air transportation: Civil Aviation Authority of the

Philippines
Maritime transport business: MARINA
Electric power distribution, generation,
transmission: DOE
K12: DepEd
Skills or vocational training: TESDA
The TIT is required to execute TA or sworn

statement attesting to the fact that atleast 25% of the
ACS has been subscribed and atleast 25% of the
subscribed has been paid
Mandatory to place in AOI: the no transfer
clause
This clause is already written in sec. 14 and 15
Provision that no transfer of shares that would
reduce the minimum prescribed by the law for
Filipino ownership shall be recorded in the books of
the corporation and to make it not binding on the
corporation such provision should be omitted
Dont make life difficult
When youre required to draft TA
Just follow what is written in the law
***To signify that the AOI represents a contract, all
the incorporators are required to sign the same
They must affix their signature at the bottom of the
AOI
By that, it means that the AOI is a contract between
and among the incorporators
***To convert the AOI into a public document, it
must be acknowledged before a NP
Tertiary Education: CHED

Securities brokerage, dealership, financing
company, investment houses: SEC
Recruitment for overseas or domestic labor: POEA
All non stock corporations: DSWD
All other stock corporations not otherwise governed
by special law: DTI
Favourable recommendation under the corporation
code is technically called certificate of authority
to register(CAR)
This must be attached together with the TA and
appropriate bank certificates with the AOI to be
submitted to the SEC
SEC exercises discretionary powers when it
receives an application for registration

Thus, the SEC may reject the proposed AOI on

the ff grounds:
1. AOI are not in the form prescribed by law
2. purpose/purposes are contrary to law, public
policy, public safety, public order, public morals or
good customs
3. Fraud or misrepresentation in the TA
-And this is the reason why under sec. 61
and 62, pre incorporation subscriptions are
irrevocable once they are submitted to the SEC
-this is to prevent fraud and
misrepresentation in the TA
4. where required ownership by Filipinos is not met
5. Consistent with sec 18
If proposed name is illegal, identical, etc.
If none of these are present upon investigation by
the legal department by the SEC, then the SEC will
issue a certificate of incorporation (COI)
From the date indicated in the certificate itself, the
corporation begins to exist as a body politic
throughout the term stated in the articles and for the
purpose/s for which it was organized
So date of COI is the date of foundation and
beginning of the corporation itself ***
And from that moment on, it enjoys all the
characteristics and attributes of a corporation
That it has personality, separate and distinct from
all other persons, that it has right to succession,
powers, attributes, property and liabilities and
responsibilities as may be conferred by law
The issuance of COI represents the primary
franchise or privilege granted by state to exist as
such ***
It is also an affirmation of the contractual relations
created among the ff:
1.the state, the corporation and the latters SH or
members
Thats why the primary franchise, more than a
privilege, is an imprimatur showing legal
recognition to such entity
The permission given by state for a group of
individuals to exist as a corporate body is for mere
public convenience
It is a mere fiction granted by state
Thus, when the fiction of corporate entity is abused

or misused, in specific cases, courts are permitted to
pierce the veil of corporate fiction
What are the three categories of cases where the
doctrine of piercing the veil of corporate fiction
is applied: (hydro resources v. PNB)
1. public convenience cases
-Lifting the veil of corporate fiction will be
pierced if shown that the corporate entity is used to
defeat public convenience or evade a lawful
obligation such as payment of taxes
2. in fraud cases
-When the entity of a corporation is actually
used for the commission of wrong, defense of a
crime or in general a perpetuation of fraud or deceit
3. alter ego or instrumentality cases
-When shown that the corporate entity is
made as a mere business conduit or alter ego or
device for the benefit of an individual or group of
individuals or another corporation such that the
corporation no longer has a separate mind or will of
its own
Hydro resources case: (expounds further on alter
ego)
To justify piercing of veil of corporate fiction, it
must be shown that:
1. Control test
-corporation is subject to the control of
another
-Control is not just in stock holdings but
complete domination by the other of the
corporations policies, business practices, finances,
management
-In reference to previous cases, element of
control may be proved by the ff evidence:
a. identity of directors
b. identity of SH
c. identity of location of offices
d. identity of manner of keeping books/Records
e. identity in conducting their business

thus the first element here is described as control

test
2. fraud test
-Not enough to show that control is
exercised by another. It must be shown that control
was used for a wrongful or fraudulent purpose
3. harm test
-Must be shown that the control exercised
over the corporation is the proximate cause of the
injury suffered by the plaintiff
***These three tests must concur
***Failure to satisfy 1 of these tests prevents the
court from piercing
***In all cases, it must be shown further that
piercing is a last recourse by which no other means
can be used by the aggrieved party or offended
party to demand compensation or relief
Why?
***Because piercing the veil is not an ordinary
legal remedy but a mere equitable remedy
In instances where a parent-subsidiary
relationship is present between 2 corporations
To apply the alter ego doctrine, the court must
further inquire into the surrounding circumstances
as to the P-S relationship
What are the indicative factors that the
subsidiary is in fact under the complete control
of the parent corporation?
Pantranco employees association v. Pantranco
1. incorporators of the subsidiary are the same
persons controlling the parent
2. subsidiary has no other property or assets except
those provided by the parent
3. finances of the subsidiary come only from the
parent company
4. subsidiary is engaged in no other business except
that furnished by the parent
Or its a mere continuation of the business of the

parent company
5. ees of the subsidiary are considered ees of the
parent company
6. subsidiary does business exclusive of the parent
company
7. same members of the board and management
8. same practices, policies, process, rules and
regulations
Once majority of these indicative factors are
present, then the identity of the subsidiary are one
and the same as the parent company
PNEI v. Pantranco
Although DBP and PNB subsequently acquired the
assets of the close company which formerly
operated pantranco franchise, it cannot be said that
pantraco and DBP are parents of this company for
which they can be liable for the claims of its union
members
no such relationship as P and S existed because
PNB and DBP acquired the assets through
foreclosure proceedings and assignment pursuant to
satisfaction of legitimate debts
Meaning, the creditor banks, never acquired
business of pantranco, only the assets
KINDS OF CORPORATION
A duly registered corporation which is the grantee
of a COI must first obtain a secondary franchise or
the certificate of authority to engage in business
is a condition subsequent to the issuance of the COI
It shall be issued by the same office that grants the
favorable recommendation
It is only from the moment that the secondary
franchise or certificate of authority to engage in
business that the corporation can begin the purpose
for which it was organized
Without the secondary franchise and where it is
required, the corporation is said to be illegally
conducting its business***
Even if you have been issued a COI as a bank, you
cannot yet engage in banking transaction without a
secondary franchise from the BSP

Where there are fulfilment of conditions precedent

and subsequent to incorporation:
You have a de jure corporation
In the case of a de jure corporation, this is not just a

mere colourable attempt but a strict compliance
with the law as to incorporation
De Jure Corporation
A corporation that exists under the law and is
possessed of all rights and liabilities as such and
arising from its business or businesses
Therefore, once these four requisites are present for

a de facto corporation, as far as all parties, except
the republic of the Philippines is concerned, it is
possessed of all rights and liabilities as a de jure
corporation
De facto corporation
Exists merely as a fact but not legally
Hall v. Fictio
Requirements for a de facto corporation
1. a law authorizing the formation and
organization of corporations
-In the Phil: Corporation code of the
Philippines
Without the corporation code, even a de jure
corporation cannot exist
2. there is colourable compliance with the
requirements of law for formation of a
corporation
-The colourable compliance must be bona
fide attempt to incorporate
-meaning it drafted AOI, executed TA,
solicited pre incorporation subscriptions, etc.
There are bona fide illustrations of an attempt to
incorporate
3. there must be bona fide user of corporate
powers
-It began to enter into transactions in good
faith as a corporation in pursuit of a definite
purpose or business
4.in order to claim user of corporate powers in
good faith, there must be a COI
-Without COI, it cannot assume corporate
powers in good faith
-If we range a de facto corporation against a
de jure corporation, 3 out of 4 elements are present
The only 1 missing for a de jure corporation is mere
colourable attempt
***That is why no collateral attack is permitted

against the legal existence of a de facto corporation
What is allowed is a direct attack by way of quo
warranto by the OSG
***even a de jure corporation can be subject to quo
warranto proceeding
An unregistered corporation is neither de jure nor de
facto its a mere corporation by estoppel
Example:
DLUSA
Unregistered corporation but it is acting as a duly
constituted corporation when in truth and in fact it
is not
Mere corporation by estoppel
All persons representing or misrepresenting the
DLUSA as a corporation can be held liable for all
transactions entered into in the name of DLUSA as
general partners
As far as its transactions are concerned, In case
liability arises, then the same shall be borne by
person/persons who misrepresented themselves as a
corporation, when in truth, no such corporation
exists
So the purpose of a corporation by estoppel is not to
created third kind of corporation, its merely a
means of imposing liability
However, for both de facto and corporation by
estoppel, one who transacts with these entities or
groups cannot escape any resulting liability on the
mere fact that it is a de facto or an unregistered
corporation ***
So the principle of estoppel or equity will also apply
to prevent unjust enrichment

De Jure v. De Facto v. De Jure

If you compare them along side one another:
corporation de jure, de facto and by estoppel
Who has legal capacity to sue in its own name?
De jure and de facto
How about a corporation by estoppel can it sue
in its own name? No
Who can have the capacity to be sued in the
name they are called? De jure and de facto
How about a corporation by estoppel? How do
you sue it or implead an unregistered
corporation as defendant in a civil case?
names of the members of the board, for and in
behalf of DLUSA or acting as the DLUSA
Incase of judgment against the corporation, if it is
de jure, only property of the corporation may be
levied on execution and sold on execution.
How about de facto corporation? Likewise
How about a corporation by estoppel?
The private, separate properties of Jose Mari
Molintas, etc shall be levied on execution
Since the legal recognition accorded to a
corporation is a privilege, the privilege must be
exercised in accordance with the law
All grantees of a COI are required to exercise their
privilege and use their corporate powers
immediately and within 2 years from the issuance of
the certificate by overt acts manifesting the intent or
desire of the corporation to pursue the business or
purpose for which it was organized
To accord the corporation an opportunity to explain

why it let its privilege lapse for the two year period
Compare non user as a ground for revocation of
COI from continuous inoperation
Here there is acceptance that the corporation
actually began and commenced its business within 2
years except that subsequently, it was rendered
inoperative for a continuous period of 5 years
This is a ground for suspension or revocation of the
COI if it is found that the corporation is negligent or
at fault in failing to conduct and continue its
business for the 5 year period
MANAGEMENT OF A
CORPORATION
In a corporate structure, management is centralized
The business of the corporation is operated and
conducted by the collective decision of a governing
body
Governing body: BOD (SC) /BOT (NSC)
For NSC, the articles may prescribe a different
name as governing body
To be a director or trustee, one owes such position
to the right to vote on the part of the constituents of
the corporation
The constituency consists of the SH and members
as the case may be
In a SC: the right to vote for directors shall be
accorded to the ff owners: all owners of all
outstanding shares as of the date of the election
Unless the shares held are:
a. delinquent
b. subject of appraisal
c. classified in the AOI as non voting
Failure to comply with these subsequent

requirements warrants revocation of the COI
what classes of shares may be deprived in the

articles of voting rights?
Preferred or redeemable
Loyola Case
***Revocation for non user is not automatic
There must be hearing
With appropriate notices conducted by the SEC
***Treasury shares cannot be voted upon because

they belong to the corporation
They are not OS

His election as chair was nullified by the SC

In the same way that unissued shares cannot also
enjoy the right to vote
Treasury shares are shares that have been issued
except that they have been reacquired
2. must not have been convicted by final judgment

of any crime being punishable by more than 6 years
of more or a criminal violation of the corporation
code committed within 5 years preceding the
elections
How often should elections be conducted?

1.SC: 1 a year
2.NSC: 1 a year unless the AOI prescribe a longer
term for the members of its board
During meeting called to conduct elections, there
must be quorum either by actual presence or
representation of the SH or members of record who
must number a majority of the voting shares
***So basis is the # of shares and not the # of SH
Once there is proof that quorum has been obtained
The elections shall be made:
1.manner as indicated in the by laws
2.if by laws are silent, manner prescribed by the
corporation code which is by raising of hands
3.upon request by any SH, by secret ballot
Who qualifies to be elected as a director of the

corporation or as a trustee?
Minimum qualifications are stated in the
corporation code
Since they are the minimum, the AOI or by laws
cannot remove or minimize further these
qualifications
What the by laws can do is to add but not diminish
1. SC: must be an owner of atleast1 share in his/her
name (qualifying share)
By laws can prescribe a greater # of qualifying
shares
NS: must be a member
Villafuerte v. CA
Villafuerte was elected as chairman of the board of
a NSC, but was found out that he was not a member
3. additional qualifications must be met pursuant to

the by laws
4. For public companies, banks, insurance
companies, one member of the board must be an
independent director
Independent Director: One who is elected by
virtue of single ownership of SOS and whose
judgment is not impaired by close relationship with
the existing controlling SH of the corporation
Based on these qualifications, who are the
directors of the corporation?
Upon election, those who gain plurality of votes
whether the votes are cast individually or
cumulatively
Thus in casting votes, how many votes is a SH of
record entitled to?
# of shares multiplied by # of vacant seats
So if 1 SH of record has 1k OS and there are 10
vacant seats in the BOD, # of votes maximum for
that SH is 1k shares x 10 = 10k votes
Which may be apportioned by the SH in the manner
that he/she pleases
He may also decide to combine his votes with
another in which case they can cumulate
Cumulative voting was provided by law to protect
interest of minority SH
So that when they join together and vote as a group,
they may be represented in the board
However, the law likewise did not prevent
cumulative voting among the controlling SH
In by laws of many corporations, they have an ad
hoc commission on elections that has the power
under the by laws to conduct the elections and
proclaim the winners, canvass the votes, etc.

***Once there is plurality of votes, the corporation

shall proclaim the winners and must report results
of the elections within 1 month to the SEC
This is a mandatory duty
Failure to submit to SEC the list of the recently
elected directors means that as far as the
government and other 3rd persons are concerned,
those that appear in the SEC list are duly authorized
to represent the corporation
So if in the SEC, the republic of the Philippines and
3rd persons are concerned, those in the list still have
the power to represent the corporation and all
contracts entered into by them would bind the
corporation and contracts entered into by those
voted upon are not binding upon the corporation
November 22, 2013
For duly elected directors and trustees of a
corporation, how long shall they serve in that
capacity from the time of their election?
1.SC: fixed term: 1 year
Cannot be extended or lengthened under AOI or by
laws, its the law itself that prescribes the 1 year
term***
Thats why annual elections must be held
2.NSC: 1 year or 2 years or 3 years maximum
depending on what is stated in the AOI and by laws
However, the term fixed in the AOI and the law
may be extended in a hold over capacity if for some
reason elections for the succeeding period or term
are not conducted, then those elected the latest
should continue serving in that capacity otherwise
they may be held liable for abandonment of office
Similar to administrative officers
HO trustees and directors shall exercise the same
powers and authority, shall enjoy the same benefits
or rights, and subject to same duties and
responsibilities as regular D/T
They shall remain in such HO position until their
successor shall have been elected and qualified
If during the term, a vacancy occurs, then the

vacancy in the board may be filled depending on
cause:
1. If death/resignation/withdrawal/transfer of
interest or disqualification: (drwtd)
a. vacancy can be filled up by the remaining
members of board if still constituting a quorum
If authorized by the AOI to fill, they must choose
from the existing SH or members
Cannot choose an outsider
b. If remaining members no longer constitute a
quorum, then special elections can be held to fill up
the vacancy
2. If due to removal or expiration of term or
increase in the # of directors following a formal
amendment of AOI: (rei)
Vacancy can be filled up only through election
REMOVAL
***Power to remove is inherent to the SH or
members of the corporation
Since the D/T owe their position to their
constituency, therefore the constituency also have
the absolute right to remove them anytime and for
any cause
Removal of an incumbent D/T is legally equivalent
to withdrawal of trust and confidence reposed by
the SH or members upon its director
***Thus, SH or members need not cite a specific
ground in order to remove the director
The removal must be done in a meeting of the SH
or members
And that meeting must be called for by the
president or corporate secretary
If both are unwilling, any SH /M can petition the
special commercial court for the conduct of such
meeting
The court may likewise appoint the SH/M who will
preside during such meeting

A petition to conduct a meeting is no longer

cognizable by the SEC, it is an intra corporate
controversy
Valleverde v. Africa
Incumbent members of board were elected for a 1
year term
After expiration of their term, a meeting for such
election was called
There was no quorum
So there was hold over
After the extended term, another election was called
but cannot be held
So they are now into their 3rd year
2 of 5 tendered their resignation
Remaining 3 out of the 5 chose 2 others to replace
those who have resigned
Africa here is a SH of the corporation who
questioned the appointment
SC: appointment by the 3 was null and void
***Acting as mere HO directors means that their
regular terms have already expired
As such, the only means by which the vacant seats
could be filled up will be by elections
During the term when the vacancy occurred,
whoever succeeds shall serve only for the remainder
of the term***
COMPENSATION OF DIRECTORS
D/T serve pro bono
As such they are not entitled by law to salaries or
any kind of compensation
Legally they are only entitled to reasonable per
diems
Per diems: reimbursement for expenses incurred in
relation to attendance to meetings, and for D/T to
be entitled to salaries, there must be:
1.A specific provision in the by laws granting such
compensation
2.if silent, there must be a resolution from the SH
representing majority of the OCS granting the
compensation
Those are the only 2 instrumental sources of
compensation
The law itself is not a source of compensation
When compensation is granted, the totality shall not

exceed 10% of the net income of the corporation
before taxes***
Thus the corporation code provides for a salary cap
for D/T compensation
3. However, if the D/T also serve the corporation in
another capacity, they should be entitled to
compensation for such capacity
But for directors per se, they have no compensation
WHAT ARE THE POWERS OF THE BOARD?
Board itself which exercises all corporate powers,
conducts all business of the corporation, holds and
controls all property of the corporation
However, the power, authority and function of the
members of the board must always be exercised
collectively
Individually, the members of the board do not have
representative capacity vis a vis the corporation
Thus, as a collective body, all acts of the board
binding upon the corporation must be obtained by
way of a meeting
In that meeting, there must be present the quorum
How do we fix the quorum?
Majority of the #s stated in the articles
Where there is a quorum
It is enough for a vote of those majority of those
present to bind the corporation
So if the AOI state that there are 10 members of the
BOD, what is the quorum for a meeting? 6
In a meeting where there are only 6, what is the vote
necessary to bind the corporation in a particular act
or contract? 4
However, for instances of ABISIMID
When the law speaks of majority: majority of #s
stated in the AOI ****
Because of powers vested by law upon BOD
As a rule, all contracts entered into in the name of
the corporation must be with prior approval or
subsequent ratification of the board

All suits, for and in behalf of the corporation

whether as P or D should be approved by the BOD
Thus, if the corporation is a P in a civil case, who
must sign the certificate or verification as to forum
shopping? Ideally the members of the board
This requirement may be relaxed in the ff instances:
1.when the by laws designate some other officer
for that purpose
Ex. the president, in house counsel
The person named in the by laws will have the sole
authority, there is no need for the BOD to be asked
to sign the verification
2.if by laws are silent, board may delegate such
authority to some other person through a
resolution
3.jurisprudence: the ff do not required board
authorization of by law appointment
a. president of corporation if the suit is
directly related to ordinary course of
business of the corporation
b. personnel manager or HR manger in labor
cases
since the BOD by law is required to meet only 1 a
month unless the by laws require a meeting oftener
it may be necessary for the BOD to delegate or
apportion some of its powers to some other officers
Thus, who can in a limited capacity, also
represent the corporation?
1.statutory corporation officer:
President, corporate secretary, corporate treasurer
President: must by law, be a member of the BOD
President is the chief executive officer: principal
function is to implement policies, rules and
regulations laid down by the BOD
The corporate treasurer is the custodian of all
corporate funds or property including those received
for payment of capital stock
Legally, it is the corporate treasurer who is required

to complete all FS submitted to the appropriate
government agencies
Corporate secretary: custodian of all other
corporate books and records required to be kept and
maintained under the law
Including for SC, the stock and transfer book , in
NSC, the membership book
However, all certificates of stock must be issued by
the corporation under the signature of the president
and the secretary ***
It would be forbidden for president to also act as
secretary or treasurer
Treasurer and secretary need not be members of the
board unless prescribed by the by laws
Other qualifications and disqualifications may be
stated in the by laws
How long shall they serve in this capacity?
President: Co terminous with his term as member of
the BOD***
Who elects the president, corporate secretary
and treasurer?
1. Refer to the by laws
First instrument of reference
2. If silent, corporate code: chosen by members of
the BOD
Those by laws may require that the president must
be elected by the SH or members
Apart from president, secretary and treasurer
Some other corporate officers may be appointed or
elected if their positions are provided for in the by
laws
Meaning of corporate officer has been limited by
the SC through its recent decisions
In here, SC held that a corporate officer is one
whose position is found in the law (corporation
code) or in the by-laws ***

If the position is created by mere resolution of the

board
The incumbent is not a corporate officers
Whats the significance of the distinction?
All matters pertaining to or arising from a corporate
office with respect to term, tenure, hiring, firing,
benefits are considered intra corporate matters and
therefore cognizable by the special commercial
court
But if not a corporate office, that should be
construed as an ordinary labor dispute
Thus an ordinary eer-ee dispute cognizable by the
NLRC
For these corporation officers to represent the
corporation, they must observe the strict limits of
their authority
Otherwise their act will not be binding upon the
corporation
So how do we know if they are acting within the
scope of their authority?
the by laws itself would be the principal reference
of the resolution of the board may give them a
specific task
***By law amendments cannot be given
retroactive effect
Apart from these, the board may also convene or
create an Executive Committee
An execom can be created only if allowed by the by
laws and the by laws should also provide specific
powers and functions of the execom
However the execom must be composed of atleast 3
directors or trustees, plus some other officers that
can be specified in the by laws***
Law itself prohibits an execom from performing the
ff acts:
1. they cannot amend the by laws
2. Cannot fill out vacancies in the board
3. cannot declare dividends
4. cannot act on any matter that require approval or
ratification
5. cannot amend any resolution of the board that by

its terms cannot be amended
The convenience of an execom is for the benefit of
the board
Its the execom that oversees the day to day
operation of the corporation
They are the day to day administrators
The board is the policy making body
Who else may be delegated corporate powers,

including the power to represent?
Under the devise known as a management
contract
Who is the delegate of corporate powers here?
The managing corporation
The principal being the managed corporation
For the validity of a management contract:
1. it must pertain to all or some of the business of
the managed corporation
2. must be approved by a majority vote of the
respective boards of both the managed and the
managing corporation and majority of their
respective members or OCS
However, If there are interlocking interest to the
extent of more than 1/3 in both managing and
managed corporation, where such said interest is
held by the same person or group of persons
Or when there are interlocking directors
comprising the majority of the boards, then 2/3 of
the OCS of the managed corporation must approve
the contract
The 2/3 votes here is required as a check against
self dealing directors
To prevent or avoid conflict of interest
Same 2/3 vote in sec. 32
These are the lawful representatives of the board
In a limited capacity they may bind the corporation

However, some other person, not lawfully

authorized by the board may still bind the
corporation under the doctrine of apparent
authority
This is an equitable principle whereby the
corporation is guilty of knowledge and
acquiescence to the acts of an unauthorized person
where such act led an innocent 3rd person to an
injury
Thus the corporation and 3rd person shall be jointly
and severally liable to the aggrieved party
And the doctrine of apparent authority has been
applied by the SC in medical malpractice cases
In relation to corporate negligence or corporate
responsibility
However, that agency is a necessity for a

corporation is a juridical person, thus it must be
represented by natural persons
Following principle of agency, for as long as the
board acts within the scope of their authority they
cannot be held personally liable because their acts
are attributable the corporation which is the
corporation***
Thus even if there is no true eer and ee relations

existing between the corporation that operates the
hospital and the physicians who are accredited by
the hospital, when a third person, especially a
patient, suffers injury by reason of negligence of the
physician, then the hospital becomes liable as well
Thus, the concept of centralized management within

a corporate structure carries with it the tacit
implication that there is trust and confidence
reposed upon the board itself
After all they are elected
That is why to fulfil their fiduciary duties, they must
observe: obedience, diligence and loyalty
What is the doctrine of corporate responsibility

in relation to medical malpractice cases?
A corporation operating a hospital or providing
medical care must:
1.hire only qualified professionals
2.ensure that its facilities or equipment are adequate
to meet the needs of the patient
3.must exercise close supervision over the work of
all persons directly employed by it or authorized by
the corporation to work within its premises
So corporate responsibility does not only extend to
nurses who are paid by the hospital but also to
doctors who are not being paid salaries by the
hospital
This is a principle also applicable in tort
Other than the board, all other persons represented
by the corporation, can bind the corporation in a
limited capacity
What are the powers and functions and duties of
the board?
The Board as a collective body is not an ordinary
agent of the corporation
However, apart from being agents of the

corporation, the members of the board are also
fiduciaries or trustees
They are required to act in the best interest of the
corporation for the ultimate benefit of the SH or
members
Under duty of obedience, D/T must observe and

strictly comply with the law, AOI and with the by
laws of the corporation
Thus when the directors ascent to patently unlawful
acts of the corporation, they will acquire direct
personal liability
Ty v. NBI
A corporation was found to be engaged in the
illegal trade of petroleum, etc.
Based on investigation by the NBI, it was one of the
ees of the corporation who was responsible for the
act of several of its ees
However, in the criminal prosecution, included
were the members of the board, the president of the
corporation, the treasure, as well as other high
ranking officers of the corporation
According to the SC: in crimes which were
perpetrated through the corporation, criminal
liability is incurred only by the persons specified
under the law, and under BP 83, not all members of
the board can be held liable because the law
specifies president and general manager.

Duty of diligence
D/T must possess the requisite care, prudence,
knowledge and skill that will enable them to fully
discharge the functions of their office
And avoid harm or injury to the SH/M, to the
corporation or 3rd persons
Jurisprudence
When a derivative suit was filed seeking to hold the
director personally liable for the serious losses
suffered by the corporation due to the alleged
mismanagement, the defense raised by one of the
directors was that he did not know
Meaning, allegedly that director merely relied on
the vote of the other members of the BOD and
simply followed
And that in all meetings, he would normally take
the side of the majority and that he could not have
known that the decision of the others, including
himself, would lead to serious losses and that he
never participated to the alleged mismanagement
SC: that shows lack of knowledge of the part of the
director
By having invited confidence in himself through
election, he should have possessed the necessary
knowledge and skill as would have allowed him to
exercise independent discretion
Having failed to do so, he is guilty of negligence
and therefore should be held liable
Duty of loyalty
Since the trust requires them to act in the best
interest of the corporation, there are checks against
disloyal directors such as provision against self
dealings and interlocking directors and provisions
on corporate ____ship.
November 26, 2013
Members of the board of a corporation are not
ordinary agents
Although in truth, they act in a representative
capacity
Since the corporation is a juridical person, it can
only perform acts through natural persons
Through the BOD
As agents, they cannot be held personally liable so
long as they act within the scope of their authority
However, the position occupied by directors is not

just an ordinary agency but also a fiduciary trust
As such the law imposes upon them the 3 fold duty
of obedience, diligence and loyalty
Duty of obedience
They must not assent to patently unlawful acts of
the corporation, otherwise, they can likewise be
held civilly, criminally as well as administratively
liable
When directors assent to patently unlawful acts of
the corporation, as held in ty v. nbi, they can be held
personally liable provided there is a specific
provision of statute that makes them criminally
liable
Duty of diligence
Diligence on their part requires exercise of their
discretion and that discretion must always be
founded on knowledge and skill relevant to the
business or purpose of the corporation
That diligence must also be exercised with honesty
and to the best interest of the corporation at all
times
Business judgment rule
For as long as the judgment or discretion exercised
by the board in all matters relating to the
corporation is an honest judgment, appended by GF,
such judgment is not subject to judicial review
Courts have no authority to substitute their own
judgment with that of the board
Most important duty: loyalty
D/T and other key officers owe utmost fidelity to
the corporation as well as its cause or purpose
They will not be permitted to uphold their own
private interest to the detriment of the corporation
Thus, the corporation code has institutionalized
several checks against disloyalty of directors or
officers
1.rule with respect to self dealing directors
A SDD is one who, during incumbency, enters into
a contract with the corporation, in his or her
personal capacity

There is an immediate and inherent conflict of

interest in contracts entered into by these self
dealing directors
Because of the basic principle that they cannot serve
two masters at the same time
When there is a contractual dispute, they cannot be
expected to uphold the interest of the corporation to
their own detriment
Thats why all contracts entered into by SDD are
annullable at the instance of the corporation
This is on the presumption that the consent of the
corporation was vitiated by the undue influence
exerted by the self dealing director
Action for annulment of the contract with the self
dealing director: maybe subject of a derivative suit
However, by way of defense or to prevent
annulment of the contract the SDD has the burden
of proving any of the ff:
1.during the meeting where the contract with the
SDD was taken up, his/her presence was not
necessary to form a quorum
Meaning the meeting would have proceeded even if
he was not there
2.in the same meeting where the SDD was
discussed, the vote of the SDD was not necessary to
approve the contract
Even if he was present, he should abstain
Or if he did not abstain, his vote was useless
Would not have controlled the result
In the AOI there are 5 directors of the corporation
How many should be present for a meeting?
3
of the 3 who are present, the votes of how many is
required to carry a particular contract?
2, the majority of those present
Of the 5, 3 physically attended including the self
dealing director
The contract was approved on the vote of the 2
others
Voidable
Because his presence was necessary to constitute a
quorum
If the 1st or 2nd cannot be met
Then there is a 3rd remedy
3.a SH meeting can be conducted for that purpose

In this meeting, the SDD must first make a full and
honest disclosure of his/her adverse interest under
the proposed contract
Only after this disclosure that the contract must now
be submitted for SH ratification or approval by 2/3
of the OCS
Nonetheless, in the case of prime white
If the contract is found to be unfair or unreasonable
to the corporation itself, it can still be annulled
In this case, a 5 year exclusive dealership contract
was entered into by prime white in favor of one of
its directors and incumbent president
Under this contract, the single proprietorship
business of the president shall be the exclusive
dealer of all prime white products within a
particular area
However, what the SC found as offending
provision: the corporation was absolutely prohibited
from adjusting the dealer price in that same period
Thus even if production cost increased, the
corporation was bound by the price in the contract
This is detrimental to the corporation
If the SD contract is entered into by an officer
who is not a member of BOD
There must be approval by majority vote of the
BOD***
Are contacts entered into by interlocking
directors annullable?
No. They are generally valid
The mere presence of ILD between these
corporation does not invalidate the contract itself
Who is an ILD?
One who sits in the BOD of two or more
corporations simultaneously
Where these corporations are parties to a contract
Unless the ILD is also a SDD
When does this happen?
If the interest of the ILD is nominal in one
corporation and substantial in one corporation
And the law has fixed nominal interest at 20% or
less of the outstanding voting stock
Substantial would be beyond 20%

Thus
Pogi Inc entered into a sale of a parcel of land with
epal incorporated
The BOD of Pogi (seller) are
A
B
C
D
E
The BOD (Buyer) of Epal is
E
F
G
H
I
So common interest is held by E
If 20% under P and 60% in E
Is E a SDD? Yes
One is nominal and one is substantial
If in P: 10%
In E: 30%
Yes SDD
Where he has mere nominal interest
If in P: 30%
In E: 60%
Not SDD
both are substantial interests
If in P: 40%
If in E: 90%
Not a SDD
interest in both is substantial
If in P: 20%
If in E: 21:%
Yes SDD
In instances when ILD is SDD
he/she is only a SDD with respect to the corporation
where there is nominal interest***
So follow sec. 32
If SDD as far as pogi is concerned, during the
meeting of the board, to approve the contract
The presence of E is not necessary to constitute a

quorum
Or the vote of E is not necessary to approve a
contract
Or a SH meeting of pogi inc is called for and atleast
2/3of them vote in favor of the contract after full
and honest disclosure of the adverse interest of the
ILD
The GR: contracts with ILD are valid
Except : if there is fraud
But if ILD becomes SDD, apply rules on SDD
What is the doctrine of corporate or business
opportunity?
The provision under sec. 34 is also a check against
disloyal directors
Why?
Because they have seized and taken unnecessary
advantage for their own personal benefit of a
business opportunity that rightfully belongs to their
corporation***
keep in mind that the position of the BOD allows
access to information that may otherwise be
confidential to others
and such access, if misused, for purposes of
personal pecuniary benefit, amounts to disloyalty
A director of Petron
In a meeting, it was decided by the BOD of petron
that all destroyed gas stations in samar, leyte and
panay area shall be built by the corporation to
restore business operations in 2 months
One member of the BOD that attended such
meeting immediately went to a competing fuel
company and applied for a franchise in order to
open a gas station within such areas
Using his own personal funds
A director cannot compete with his own corporation
Thus that director is disloyal
To seize a business opportunity that should have
been beneficial for the corporation and for which
the corporation is in a financial position to
undertake

What is the penalty for a disloyal directors?

Under sec 34, all profits obtained by the disloyal
director shall be forfeited in favor of the corporation
Because that disloyal director is considered a mere
trustee of said profits
Even if the disloyal director used his own funds to
capitalize the business
Because those profits also belong to the corporation
Why? Because the business should have belonged
to the corporation
However, by way of remedy, in order to allow the
disloyal director to keep those profits, 2/3 of the
OCS may vote for that disloyal director to keep the
profits***
However, what can be cured are the profits obtained
In a derivative suit or a suit filed by the BOD, the
business itself which was established by the disloyal
director may be permanently enjoined
If there is further finding that the competing
business was put up using corporate property or
funds, the entire business as well as its assets may
now be seized by the corporation because he is the
true owner
Case
Shape case
Shape is a corporation for physical fitness and
recreation
It operates several gymnasium and purchased
equipment for that purpose
When one of its directors put up his own
gymnasium and accepted members to his gym, it
was found out that the equipment used in his own
gym were property belonging to the corporation
So that other members of the original corporation,
were confused because they thought a new branch
was being put up
SC: since those equipment and facilities rightfully
belong to the corporation and misappropriated, the
corporation has a right to seize them
Forbidden profits
Compare this profits that may be ratified under sec.
34 from what we call forbidden profits
FP refer to any form of pecuniary advantage or
benefit obtained by a director who misused his
office
Thus, kickbacks or so called commissions paid to

directors by contractors of the corporation are
considered FP
Thus cannot be subject of ratification
The law imposes these directors a disability to
act on their own behalf (sec. 31, par.2)
As such, if they did not refrain from acting in their
own behalf, and obtained any monetary advantage
they are guilty of accumulating FP
They can be seized by the corporation
What are the rules pertaining to liabilities of
D/T/O
GR: they cannot be held personally liable so long as
they act within scope of authority and follow 3 fold
duty***
However, personal liability will attach in the ff:
1.D/T violate sec 31 of the corporation code
2.violate sec 65 of the corporation code
Sec 65 requires that if the director did not vote for
issuance of watered down shares, there must be an
objection in writing filed with the corporate
secretary
Mere silence is not enough to release director from
liability
3.if by contractual stipulation, the director binds
himself liable along with the corporation
When a D/T or any officer signs a contract of
guaranty or suretyship for corporate debts, they will
incur personal liability
Or when they provide accommodation mortgage for
corporate debts
Or When D/T or officers bind themselves in a JSS
(join and solidary signature) arrangements in loan
or contracts entered into by the corporation
4. if by specific provision of law, a D/T or officer is
made personally liable
Thus in the labor code of the Philippines
Incase of illegal dismissal, a D/O of a corporation
may be held solidarily liable for damages only if
he/she acted with evident bad faith or malice
Under the corporation code

For unjust refusal to allow inspection and

examination of corporate books and records
Under securities and regulation code
Personally liable if he/she traded SOS while in
possession of material non public information
Guilty of insiders trading
Under the General banking act, personally liable
for unsafe and unsound banking practices
Including approving loans without collateral
Or where the value of the collateral was actually
insufficient vis a vis the amount of the loan
expected
These are just examples of provisions of law that
impose personal liability upon D/T/O
***However, if it is criminal liability, the position
or rank must be stated in the law itself in order to
create criminal liability
Thus if the law imposes only criminal liability upon
the president but not the directors, only the
president may be held criminally liable
Money laundering
Even directors, banks, insurance companies, etc
may be held criminally liable
That personal liability of D/T or officers
If civil in character, may be obtained or satisfied by
way of a derivative suit
Thus a Derivative Suit is one filed for and in behalf
and for the protection of the corporation whenever
the D/T are remiss in their duty
A DS may be in a form of action for damages or
injunctive relief or a mandamus***
To enjoin the offending directors to perform an act
that would be injurious to the corporation or to
compel them to perform an act to the benefit of the
corporation
In a DS, what are the requisites?
1. must be filed by a SH or member of record
At the time of the commission of the acts
complained of
# of shares held are immaterial

So to vest legal personality to the SH, it is enough
that he owns 1 share and is the owner of that share
when the act was committed and the ownership is
reflected in the stock and transfer book
2. there is allegation that the party or SH who
commenced the same has resorted to exhaustion of
all intra corporate remedies
Meaning, has sought the assistance of other
members of the BOD for purposes of seeking
redress or to correct the act of the erring director
This requisite need not be availed of if all members
of the BOD are subject of DS.
3. the party suing or commencing the DS must do
so to benefit and to protect the corporation who
must be impleaded as a plaintiff
The last requisite is a modification of early
decisions of the SC
Which said that for a DS to prosper, it is enough
that the corporation is impleaded either as a P or D
But in recent cases, the corporation itself must be
named as P because it is the real party in interest
Failure to include the corporation as plaintiff
warrants dismissal of the DS***
Under the 3rd requisite, the party or SH suing must
not be suing in his own behalf
Under the rules of court, you can combine
You are a SH, you invested SOS amounting to
several millions of pesos and because of
mismanagement of the incumbent board, your
investment through SOS has zero value at the
present because the corporation is rendered
insolvent
You can combine your personal suit to recover
money and property as well as the DS to prevent
splitting COA ***
***Essence of a DS is that injury is suffered by or
will be suffered by the corporation if the suit is not
filed in court
However, in 1 decision of SC
***a court in a DS has no power to order the
dissolution of the corporation and revocation of the
COI

Even if there are allegations of serious

mismanagement committed by members of the
board
That is not sufficient to order revocation of the
certificate of incorporation
Because revocation of the COI must be through quo
warranto proceedings
Thats for purposes of civil and criminal liability
How about personal administrative liability?
For violating the duties of their office,
administrative liability may be incurred under the
corporation code through removal
This is an administrative remedy
Or subjected to fines by the SEC
Under the general banking act, D may be removed
under the fit and proper rule
If Directors commit any wrong doing to the
detriment of their company during their term, the
monetary board may enforce this rule and remove
them
So this is an addition to what is provided for in the
corporation code
Who can remove directors under the corporation
code?
2/3 of the OCS
But under the GBB, the monetary board of the BSP
may also remove them
POWERS OF THE CORPORATION
Since a corporation is mere creation of law, it exists
purely for public convenience as a legal entity
Under THEORY OF SPECIAL CAPACITIES, it
can only exercise powers and enjoy rights and
privileges as are expressly conferred by law,
implied from those express powers or incidental to
its existence
Thus, a corporation exercises 3 powers:
Express such as those given to it by law, statute or
even the constitution, AOI specifically the purpose
clause
implied would be those which are necessary to
carry out the express powers
incidental are those inherent to it once it is formed

as a juridical entity
Acebedo v. CA
SC: Acebedo was not engaged in illegal practice of
profession in the Philippines when it hired licensed
optometrist and opthalmologists because the
engaging of these individuals is directly related to
its principal stated purpose of manufacturing optical
lenses
As you know in the constitution, a juridical entity
cannot engage in the practice of a profession
What are the express powers of a corporation?
(actually these are inherent powers of a corporation
which have become express because they are now
written in the corporation code, but even if not
written, the power to have its own name and seal is
incidental to its existence as a corporation. The seal
is necessary cause all stock certificates issued by the
corporation must be under the corporate seal)
1. Power to sue and be sued
2. Power to acquire, encumber, alienate property
whether R/P
However with respect to property, as a rule, only
those related or necessary to the promotion of the
business of the corporation***
Furthermore, acquisition by a corporation of a
property may be subject to constitutional limitations
Thus, can a private corporation acquire
alienable lands of the public domain?
Under the public land act or land registration
decree?
Can a private corporation apply for a homestead
patent?
No
Free patent?
Judicial or administrative confirmation of an
imperfect title?
No
Kailangan individual yan
Unless ung more than 30 years have elapsed and the
private corporation merely succeeded in the
possession
Lease of alienable lands of public domain?
Yes

December 3, 2013
Quiz: 40 leaf notebook
20-28 questions
Including objective type
No mcq
Among the inherent powers are those express under
sec. 36 of the corporation code
Any of these are natural powers just because it is a
juridical entity under the law
3. However, the power to donate may also be
exercised under the ff:
1.the amount of the donation is reasonable
Reasonableness of amount is dependent on the
financial condition of the corporation at the time it
was made
Thus if the donation is made by an insolvent
corporation, under the civil code of the Philippines,
that would be a rescissible donation because it will
be presumed as entered into in fraud of creditors
2.the donation must be for charitable, scientific,
literary or similar purposes
Under this requisite, the purpose is controlling thus
even another corporation may be the done***
Usually its your stock corporation that donates to a
non stock corporation organized for charity
So its not just to an individual donee
Because of the purpose required, no private
corporation is allowed to make a donation in favor
of:
a. political candidate
b. political party
c. partisan political activity
this is an absolute prohibition under the corporation
code and omnibus election code
in fact this is an election offense
Who must approve the donation?
As a rule, since it is an inherent power, only the
board
Unless the by-laws of the corporation require SH or
members approval ***
Under the code of corporate governance

Donations by a public company, which is a special
kind of stock corporation, are encouraged as part of
corporate social responsibility
Under the tax code, donations by corporation are
deductible
Under corporate social responsibility
Not just by way of making donations to charity,
etc., but the norm of corporate social responsibility
implies that business bears a social function in the
same way that private property does
Thats why under this principle, private
corporations must ensure the welfare not just the ees
or SH but all stakeholders
The concept of stakeholders include the public in
general
SPECIAL POWERS
Aside from the inherent or incidental powers, under
the corporation code, corporations may exercise
specific or special powers
They are special because most of them involve
corporate restructuring or corporate re organization
such there would be a subsequent change to the
fundamental character of the corporation itself
without necessarily going through dissolution
Why?
Because the CR or reorganization simply entails
amendments in the AOI
When necessary, said amendment must be approved
by a majority of the board
And by majority here we mean the majority fixed in
the AOI
And approved or ratified by the SH representing 2/3
of the OCS or the membership in a NSC
In co relating sec. 16 with these special powers
requiring amendment
If the amendment is innocent, or does not affect the
business or nature of the corporation itself, the 2/3
vote may be obtained by mere written assent
Without having to call for a meeting of the SH or
members
But if the change is substantial, such as change in
the capital stock, the amendment to the AOI must

always be by way of a meeting of the SH or

members***
That meeting must be preceded by notice in writing
to each SH or member of record who may be
directly or personally present or be represented in
said meeting
As a rule, all amendments must be submitted to the
SEC with a copy of the original AOI and the
amended AOI with the amendments underscored
And accompanied by the favourable
recommendation of the proper government agency
who assents to the proposed amendments
Thats why the appropriate recommendation by the
appropriate government agency is by way of
certificate of authority to amend articles
WHAT ARE THESE AMENDMENTS?
1. Increase of the capital stock
All SC are required to write a statement as to its
ACS which always fixes the maximum # of shares
that the corporation is permitted to issue
The sale of SOS from the ACS is the first form of
corporate financing
Its the most common form of corporate financing
By selling SOS, the corporation is able to realize the
necessary money or funds to prosecute or continue
the business for which it was organized
And when there is necessity of obtaining additional
funds either for maintenance or continuation or
even expanding its present business
Then one way of obtaining it would be to increase
the capital stock
Why?
Because if you increase the capital stock, you would
have more shares to dispose of or sell
However, since this is part of capital restructuring,
when you increase the capital stock, you are
restructuring the capital of the corporation,
new treasurers affidavit must be executed attesting
that atleast 25% of the increased capital stock has
been subscribed and atlesast 25% of the increased
capital stock has been paid in ***
That must be submitted along with the amended
AOI and favourable recommendation
When there is increase in CS as approved by the

SEC, normally that would result to new shares
However, the disposition or sale of the new shares
is always subject to pre emptive right of existing SH
PRE EMPTIVE RIGHT
Right of existing SH to be offered first the new
shares arising from an increase of CS or re issued
treasury shares or original shares being disposed of
for the first time
Thus the pre emptive right is a preferential option
vested by law upon the existing SH which the
corporation must respect
Purpose: for existing SH to maintain their equity or
interest in the corporation
Why?
Because whenever there is disposition of new
shares arising from an increase of CS, the risk there
is that
The OCS is likewise increased
That is why there must always be a corresponding
increase in the interest of each SH of record and that
can be done through exercise of pre emptive right
Under securities regulation code
Exercise of pre emptive right of existing SH is
considered an exempt transaction
Technically its called a rights offering
Why exempt?
Because the sale to existing SH, which is pursuant
to a statutory pre emptive right, need not be
registered with the SEC under the principle in the
SRC that every sale or disposition of securities must
be with prior permit with the SEC
The prior permit is not necessary in pre emptive
right offering
***However, the exercise of pre emptive right by
existing SH is not an absolute one
Thus, the limitations are:
The terms and conditions of pre emptive rights
offering shall be fixed by the BOD including the
subscription price for the shares
Example:
In the original AOI
The ACS consisted of 10M common shares

All at par value of P10/share

If all 10M shares are sold or disposed, then that
would bring a minimum P100M
So total value of ACS if fully disposed is=100M
15 years after the COI began, all the 10M shares
have been sold by the corporation
So the 100M was already used by the corporation to
buy equipment, construct its offices, etc
And the corporation now needs additional funding
for purposes of continuing or elaborating its
business
Thus it can amend its AOI by increasing the ACS
from 10M to 40M shares
All common
And maintaining par value of P10 per share
Of the 40M now state in the amended AOI
10M of these are original
So how many of the 40M are new shares
So 30M out of 40M
If X is a SH of Pogi
Owns 5M of the 10M
Therefore X SH controls the corporation to the
extent of 50%
Under the amended AOI, the 5M of X will only be
computed on the basis of 40M
And that would be equivalent to only
(?)%
less than 40%
Therefore under this pre emptive right, X may
demand that the corporation offer to him 50% of the
new shares
Therefore this is without pre emptive right
So with pre emptive right, his original 5M plus 50%
of the 30M new shares
That would be 15M
So if he exercises his pre emptive right offering
That would be 20M out of 40M
Bringing him back to 50%
If he abides by the terms and conditions laid down
by the bod
Even if, under the amended AOI, the par value of
each share is P10 per share, the board may decide,
using its business judgment, to offer this to existing
SH, abover par value
Because the corporation is raising money
So in the exercise of the pre emptive right, the
existing SH cannot insist on mere par value as
subscription price of the new shares
So the board can fix this at P15 per share

Thats why if X cannot afford to pay for the P15 per
share subscription price, then he cannot fully
exercise fully the pre emptive right
The purpose here is for the funds to finance the
Can X complain that he is being offered his
shares under his pre emptive right under a much
higher price?
No
For as long as the judgment of the board is
exercised honestly, the pre emptive right is not
fixed at par value
Furthermore, the period within which the right may
be exercised may be limited by the board
The customary period for pre emptive rights
offering is 30 days
Thats a long period
How is it that the pre emptive right is available
not just to new shares but also to re issued
treasury shares?
Treasury shares are shares of the corporation that it
had previously issued but later reacquired
And we said that TS are not outstanding shares and
therefore the corporation may exercise either 1 of 2
options:
1.retire those TS; or
2.re issue them
Thats why TS are ukay ukay shares, kasi
napagkakitaan mo na, mapagkakakitaan mo ulit
Meaning, when you first sold them, you acquired
money, once you reacquire them you can resell
them therefore you are making them OS again
So whenever TS are reissued, the OCS will be
increase
Thats why whenever there is an increase in the
OCS, there may be a corresponding dilution in the
interest of the existing SH
Example
1M Outstanding
1M TS
A owns 50% of the 1M

If the board decides to re issue the treasury shares

That would fix the OCS 2M
And the 50% of 1M belonging to a will no longer
be 50% when all 2M shares are made outstanding
Thats why when the TS are reissued, there must be
pre emptive rights offering to the existing SH
So that, when there is deprivation through

amendment, the dissenting SH are entitle to ROA
Because this is an amendment that restricts rights of
SH
The same is true for original shares being disposed

of by the corporation
That will also increase your CS
Thats why they must be offered first to the existing
SH
Also requires a formal amendment to the AOI

So also another form of corporate restructuring
So ung 2/3 jan should be in a meeting
and the decrease in the CS may be warranted by any
of the ff grounds:
1.When the corporation has surplus capital that it
wants to eliminate
The surplus capital may be from the ACS having
been fully issued or only a part thereof
However, even if the pre emptive right is a

statutory right of existing SH, it may be validly
denied in the ff:
1.when the issuance of shares (new shares, TS,
original shares), is to comply with requirements of
law prescribing minimum ownership by the public
2.with the approval of 2/3 of the OCS when the
share are to be used in a dacion en pago or barter
Dacion en pago: meaning when shares are used by
the debtor corporation to pay for its own debts or
loans
In which case the creditor becomes a SH of the
corporation
Barter: when shares are used as payment or in
exchange for property also needed by the
corporation
But for the pre emptive right to be excused from
any of these two transactions, they (dacion or
barter) must be approved by 2/3 of the OCS
2/3 approval is tantamount to implicit waiver to
their pre emptive right
3.if the pre emptive right is expressly denied in the
AOI
This may be contained in the original AOI
Or to deny the pre emptive right you can amend the
AOI
Majority vote of the board, 2/3 of the OCS
Co relate denial of pre emptive right by way of
amendment to the articles to appraisal right
2. Decrease in CS
Example:
The entire ACS
Original AC of 10M
Common shares
Par value of P10 per share
So out of the disposition, the corporation already
has 100M
But over time it no longer needs 40M of the 100M
It is enough for the 60M to sustain the business of
the corporation
So that you have surplus capital of 40M
therefore it has surplus capital of 40M
therefore the 40M can now be returned to the
existing SH through liquidating dividends
They will be cancelled from the ACS
Thats one way of decreasing
Or of the 10M only 6M were sold
Out of the 60M proceeds it is enough
So you have how many original, unissued and
unsold? 4M
You can cancel those
And in cancelling those, you are reducing your
capital stock
But in the latter reduction, no liquidating dividends
will be issued
Kasi walang ibabalik, hindi naman yan subscribed
2. true value of the assets of the corporation to be
reflected in its books
This is especially true when those assets have
suffered from depreciation in value

3. reduction of the capital stock may be necessitated

as a way of avoiding or forestalling the loses of the
corporation
In all cases however, the reduction of the CS must
comply with the trust fund doctrine
That such reduction should not deprive creditors of
the corporation of property or assets that they could
look upon for satisfaction of their claims against the
corporation
That is why if the reduction would have the effect
of absolving or freeing subscribers from their
obligation to pay all or part of their subscription
price, the same shall not be allowed because it will
violate the TFD***
That is why the SEC approves reduction of the CS
only when the SEC is satisfied that the corporation
reducing its CS does not have subsisting debts or its
present assets are sufficient to pay off all the
liabilities
However, in the reduction of the CS, the
corporation is not prohibited from later increasing
the same
That is a business decision
Example
Because there were only 10 friends to form the
corporation at the beginning
And they were not yet very knowledgeable as to the
business environment
So when they originally designed the AOI
They said that they will only have 20M shares
Which they hope to sell
But it turns out that they could only sell 1M at the
par value originally fixed in the AOI
So you have 19M non performing SOS
That does not bring in any money to the corporation
So what you can do is to eliminate those from your
ACS
So that you will only have your 1M OS as your CS
But later on if the business requires it, you can
increase it back to 20M, 10M, etc
3.To incur, create, or increase bonded

indebtedness
Another power of a corporation
GR: does not require amendment
Why?
Because this is the second form of corporate
financing
1st is when the corporation sells its own shares to
others
Thats what we call internal generation of financing
Incurring bonded indebtedness is a form of
corporate borrowing
Obtaining financing from outside sources
Corporate borrowing may take two forms:
1.ordinary loans from financing institutions
In civil law, these ordinary loans may be secured by
specific property of the corporation
Ung mga loan with mortgages, chattel with
mortgages, etc.
But this is a very limited source of corporate
borrowing
2.under art 38 (incurring bonded indebtedness)
A bond is a certificate or written evidence of
indebtedness by a corporation
usually, stipulating a fixed interest rate sold publicly
Thats the difference between a bond and an
ordinary loan
In an ordinary loan you simply borrow the amount
you need from the bank
If bond, the borrowing is from the public in general
Thats why bonds are secured by the general assets
of the corporation
And for these bonds to be issued by the corporation
Or to incur such kind of indebtedness, majority vote
of the board and 2/3 of the OCS or membership
the bond itself must be approved by the SEC
under the securities and regulations code, the bond
here is a form of security or investment contract
Bonds, since they are forms of indebtedness, may
have fixed maturity periods as may be determined
by the board
Thats why if it is 365 days or less maturity,
They are considered short term bonds or
commercial papers

Longer than that is considered long term

Thats why longer term bonds enjoy higher rates of
interest
4.Sell all or substantially all of its assets
Another power of a corporation
Does this require amendment of the AOI?
Depends***
If the sale would result to cessation of the business
for which it was primarily organized and to embark
on an entirely new business then the AOI must be
amended
But if the sale is only for the purpose of embarking
or prosecuting any of the secondary purposes
already stated in the AOI then the AOI can stand as
they are
No need to amend
However the sale, lease or exchange or disposition
of all or substantially of the assets of the
corporation must be approved by majority vote of
the board and 2/3 of the OCS or membership in a
meeting called for that purpose
This is a form of re organization of the business or
purpose
Why
Because the sale of all or substantially all of the
assets of the corporation means that the business is
rendered incapable of continuing the business for
which it was originally organized
Meaning it is retiring that original business
However, even if the sale would deplete the assets
of the corporation if that sale is done in the ordinary
course of business because of the innate nature of
the business of the corporation
Then no need to obtain SH approval***
As in Real estate development corporations
They are into land banking
So they accumulate lands in order to develop them
into subdivisions or condominium projects
And its for purposes of selling individual lots and
individual condominium units to interested buyers
So after all these assets have been sold separately,
the corporation no longer has fixed assets but it has
the proceeds
Therefore, Must the SH approve the sale of every
condominium unit?
No
Thats done in the ordinary course of business
If the selling corporation is engaged in production
or manufacturing, before it can sell all of its assets it
must comply with the bulk sales law
Bulk sales law is not applicable to retailers
Bulk sales law:
1.the prior written consent of the creditors of the
selling corporation must be obtained
Thats a condition for the validity of the bulk sale of
the assets
When you sell all your assets thats a bulk sale
Without the prior written consent, any of the
creditors may file an action for Annulment
The word annulment appears in the bulk sales law
Technically under the civil code, its an action for
rescission
What if
The buyer of the assets of the corporation is another
corporation
Can the buyer be held liable for the debts of the
selling corporation?
GR: no
Because there is no privity of contract
What are the exceptions to this general rule?
1.if the buyer corporation assumes such liability
whether expressly or impliedly
Example: deed of sale with assumption of mortgage
2.if the transaction amounts to merger or
consolidation of the corporations
When there is M or C, its not just the assets but its
also the liabilities that are automatically transferred
3.if the buyer corporation is a mere continuation of
the business of the seller
SC: for the buyer to be liable, it must be shown that
the buyer was formed or organized precisely to
continue the business of the seller
And that the only assets of the buyer are those
acquired from the seller
And that the buyer acquired such assets in a private
and not a public sale

Because even if another corporation acquired all the

assets of another corporation through purchase, if
the purchase is by way of auction, the buyer cannot
be held liable
4.if the transaction was to defraud creditors
For the3rd and 4th exceptions, we pierce the veil of
corporate fiction
However for the 4th to apply, violation of the bulk
sales law may also be invoked as an additional
ground
Can a corporation invest its funds in another
corporation or another business?
Yes
But to do so, it must be determined whether these
corporations or business is auxiliary to or in fact
foreign to the business of the investing corporation
Thus, when the investing corporation buys shares of
stocks, bonds or similar instruments of another
corporation as mere sources of passive income
There is no need to acquire SH approval
Because the basis there is the right or general
authority conferred by law to the corporation to
make additional profit***
It is only when the investment of corporate funds is
to be made in a corporation whose business is
totally different from that of the investing
corporation should SH approve
Thus, WON SH approval is required
Do the SH of San Miguel corporation have a
right to demand the right to vote to SMC buying
shares of stocks of PAL?
Yes
But for san Miguel to buy 98% of the CS of san
Miguel brewery or HK and brewery limited
does it require SH approval?
No
Because the business of these corporations are the
same as that of the investing corporation
How about SMC buying SOS of a
telecommunication company
Requires SH approval
SMC buying MERALCO shares
SH approval is necessary
SMC buying treasury bonds issued by the
Philippine government
Kasi di ba the Philippine government issued bonds
Treasury bills
No need
Kasi additional profit making lang yan eh
Passive income
When do we say that its mere passive income or
it requires SH approval?
If the business is totally alien to the investing
corporation and if the investing corporation will
now actively participate in running the business of
that foreign corporation
5. Power of a corporation to reacquire its own
shares
This power must be restrictively construed against
the corporation
Why?
Because of the danger it may pose on the trust fund
reserved for the benefit of corporate creditors
December 6, 2013
Power to reacquire own shares
Must be restrictively construed against the
corporation
Because the reacquisition of shares must not impair
the trust fund reserved by law for the benefit of
corporate creditors
For valid exercise of right:
1.the reacquisition must be for legitimate
purpose
What are the legitimate purposes?
a. eliminate fractional shares
FS: result from stock dividend declaration
Since they cannot be voted upon, those must be
eliminated by the corporation purchasing them from
its owners

b. compromise any indebtedness owed to the

corporation when such debt arose from delinquency
however, correlate to delinquency sales
the corporation may purchase the delinquency
shares only if there are no bidders during the
auction***
if there are other bidders, the corporation cannot
reacquire those delinquent shares
the reacquisition may be the whole or only a portion
of the delinquency subscription
c.to pay dissenting SH whenever they exercise their
to withdraw from the corporation or pursuant to
appraisal
so the payment of the FMV of the shares of this
dissenting SH is a valid course
There are two ways or decisions left to the

discretion of the board as what to do with URE
a. distribute them as dividends to your SH
you permanently part from that money of the
corporation
b. use URE or surplus profits to re acquire or buy
back the shares of your existing SH
so that all future profits, you need not pay the same
amount of dividends because you lessened the
amount of outstanding shares
so you have a lesser amount of dividends out of
future profits
so the board may decide to keep the profits for itself
or for the corporation at some future time
its actually the most common form of acquisition of
its own shares
d.to redeem redeemable shares

RS are in the form of debts incurred by the
corporation to which it is contractually bound to pay
back and therefore treat the redeemed shares as TS
2. the corporation at the time must have URE
Aimed at protecting the trust fund reserve for
corporate creditors
Thus, no part of money or property acquired by the
corporation out of payment for its capital stock
should be used for reacquisition of its own shares
They should come from the surplus profits
Meaning profits in excess of what the corporation
can retain to continue business
Profits must be obtained from operation of the
However, in the case of redemption of redeemable
shares
The court may use not just surplus profits but some
of its existing assets because those are valid debts
contracted by the corporation
Meaning, redemption is not dependent of the
presence of URE
Many corporations reacquire their own shares for
the purpose of keeping such excess or surplus
profits and future surplus profits within the
corporation
also based on URE would be dividends declared by

the corporation
dividends: refer to the distribution of profits
realized by the corporation from its business in
favor of its existing SH***
this is a power that can be exercised only SC and
never by a NSC
so exclusive right to SC
dividends always come from profits of the
corporation
never from the value of the capital stock to protect
the TFD
Dividends are due only if the ff are present:
1. dividends have been declared by the proper
authority in the corporation
Who has the power to declare?
Cash or property: entirely to the discretion of the
BOD
stock: majority decision of BOD and 2/3 of OCS
The SH alone and in that capacity cannot demand
and pay themselves dividends***
2. must come from URE
For as long as during the period of dividend
declaration, the corporation has URE or surplus

profits in its books, subsequent losses in its

operations will not prevent a valid declaration of
dividends
Because dividends come from a historical
accumulation of URE
Therefore, even if it has current losses, the same
will not militate against the right of the SH to
dividends because the same is construed on the
basis of past performance of the corporation
***Dividends once declared and pronounced by the
proper authority are considered irrevocable
Thats why the only right of the SH is to demand
payment thereof and the BOD cannot withdraw or
revoke a dividend declaration that has been made
known by the corporation
In the case of public companies
Those governed by the SRC
Dividend declarations must be published in a
newspaper of general circulation
As part of the requirement of disclosure under the
SRC
The dividend declaration in a public company is
considered a material and significant fact that
affects the prices and securities of the corporation
Who are entitled to the dividends?
Only SH of the corporation
Thus in the case of Nielsen v. gotamco

SC: nullified stock dividends payment made by the
corporation to a managing services it contracted
Absent showing that the manager is indeed an
existing SH of the corporation, the latter is deemed
as a complete stranger and therefore not entitled to
dividends
***Reckon material dates for dividends
a. declaration date
evidenced by resolution of the BOD or members as
the case may be
b. record date
date when books of corporation are closed to
determine who are entitled to the dividends
all SH whose names are listed in the stock and

transfer books after the record date are not entitled
to those dividends
thus transferees of shares must insure that their
names are recorded in the books of the corporation
on or before the record date
c. payment date
date from which the Sh may demand the cash or
property used to pay the dividend or the certificate
of stock in case of stock dividends
***these three dates are successive in character
they cannot be contemporaneous or identical date
the power to declare dividends is purely
discretionary upon the board
thats why it cannot be compelled by mandamus
however, the board cannot likewise abuse such
power by withholding and denying from the SH
their right to dividends incase the corporation
realize surplus profits in excess of 100% of its
capital stock ***
So when the amount of surplus profits exceeded
100% of the value of the paid in capital stock, thats
the time when dividends can be declared as a matter
of right on the part of the SH
It can now be compelled by mandamus
However, despite excessive profits realized by
the corporation
It can still validly deny dividends and retain the
same for the corporation in the ff:
a. if the excess profits will be used to pay subsisting
debts or use it to pay for properties need for the
corporation or the corporation is prevented by a
loan agreement without consent of the creditor and
When the excess profits will be used for corporate
expansion program
The expansion program should be a definite one
previously approved by the board
When a corporation exercises its powers, rights or
authority
The powers are either intra or ultra vires

Intra vires if justified by the express, implied or

incidental powers of a corporation ***
Beyond those, the act will be considered ultra vires
UV acts are not necessarily illegal
But illegal acts are necessarily ultra vires
For the UV but not illegal acts of the corporation,
the same may be committed by
An unauthorized officer, or by the BOD or the SH
An UV act committed by an officer or board of the
corporation, acting without authority or in excess of
authority can be ratified by the board in which case
the act is now binding on the corporation***
If the board which exceeded the authority, the act of
the board can be ratified by the SH or members
Usually by a 2/3 vote in which case the act of the
board is binding upon the corporation
But if the UV act is directly attributable to the
corporation, because it has been approved by the
board as well as the SH, but its not among the
express, implied or inherent powers
The only way to cleanse the act of defect is to
introduce the necessary amendments into the AOI
Provided that there is no law violated by reason of
such amendment
Meaning, the power to ratify UV acts rest upon a
higher authority
Because the board cannot ratify its own act, it must
be the SH
And the SH cannot ratify their own UV acts, in
which case the government must not intervene
If the ultra vires act of the corporation is prohibited
or even criminal in character then personal liability
may be incurred by the directors, and officer of the
corporation
But as far as the corporation is concerned, when it
offends the franchise given to it, and therefore it has
committed an UV or prohibited act, then that
warrants the revocation of the COI
However, in relation to ultra vires contracts
entered into with a 3rd person, apply the rules on
unenforceable contracts
a. if fully executory: no action for specific
performance or non performance will lie
this is to prevent violation of the charter of the
corproation
b.if one of the parties has performed but the other

has not, the latter cannot be compelled to perform
but may be compelled to return what he has
received
c.if fully executed and provided there is no
infringement on the charter of the corporation, then
the law will leave them as they are
neither party to the UV act can demand return of
whatever may have been paid or delivered
MEETINGS
Within a corporation, actions or contracts entered
into in the name of the corporation are usually
approved pursuant to a meeting held for that
purpose
Thus meetings may be that of
1.board
2.SH/members
1.regular
2.special
In all cases, there must be prior written notice for
said meetings whether for the board or the SH or
members
However, the conduct of the meeting cannot be
questioned even if there was no notice served in the
ff:
a. if the right to the notice has been waived
b. if after the conduct of meeting, the D/SH/member
concerned approves or ratifies or acquires to the act
or matter taken up during the meeting
or does not file any objection
in this case there would be estoppel that would
prevent any question from being raised as regards
the validity of the meeting and other matters taken
up thereto
however, in the case of issuance of watered down
shares, a director can only be released from civil
liability if he objects in writing whether absent or
present during the meeting that allowed the issuance
watered down shares***

during the meetings of the board or the SH, and

upon request made to the corporate secretary, the
vote taken individually by the D/SH must be
reflected in the minutes
As a measure of protection against personal liability
period for proxy

if the period of the proxy is not specified, then its
to be understood as for a particular meeting alone
if a period is provided, then it cannot go beyond 5
years
however upon written request, it may be an

identification of who cast affirmative vote or
negative vote, by majority vote of the directors, the
ff contract was approved, dissenting directors
For purposes of elections under the securities

regulation code, proxy solicitations must be with
prior approval of the sec
in meetings of the SH
the SH may be directly and personally attend if able
to do so
or may be represented
A meeting is mandatory in the ff cases:
the only way by which SH can attend meetings is

through representation
the representation is through a proxy
thats why a proxy must be understood in 3 ways
a.legal authority conferred by the SH to another for
the latter to vote and attend the meeting
b.written instrument to show such legal authority
as the instrument, it must comply with the form
prescribed in the by laws
so if the by laws require that the proxy must be in
the form of an SPA, it must be fulfilled, otherwise,
the corporate secretary can refuse admission of the
proxy during the meeting
if by laws are silent, the form must be in writing
submitted just before the meeting
c.person authorized
in NSC, the right to execute proxy may be
withdrawn by the by laws, its not inherent in
NSC***
because membership therein is purely personal
the best way to understand proxy is that there is
nothing more than an agent-principal relationship
and that relationship confers upon the agent the
right to represent the principal in the meeting
1.to elect D/T

required quorum: majority of the OCS or the
membership
Otherwise no meeting can push through
How many votes may be cast during such elections
by a SH?
# of shares multiplied by # of directors
In NSC: 1 vote for each vacant seat of the trustee
2.to remove an incumbent director
Vote required: 2/3 of the OCS or membership
In removal and all other subsequent requirements, 1
share is 1 vote
3.to elect the replacement for the removed director
4.grant compensation to the board
Vote required majority
5.to ratify contracts of self dealing directors to
avoid annulment
There must be full disclosure of adverse interest
Vote: 2/3
6.to ratify profits earned by a disloyal director
Vote: 2/3
7.to declare Stock dividends, to incur or decrease
capital stock, to incur bonded indebtedness, shorter
or increase corporate term , sell all or substantially
all assets of the corporation, to invest corporate
funds to another corporation, all special powers
(hindi lahat ng A pero lahat ng BISIMID, kasi ung
A pwedeng mere written assent for example to

amend name from pogi to epal, you dont need to

call a meeting)
8.to fix the value of no par value shares
Majority
If the AOI have not given that power to the
directors only
9.to approve a management contract
Majority or 2/3 as the case may be
10.petition for dissolution of the corporation
whether with or without creditors rights being
affected
If any of these matters are approved without having
conducted the meeting
The act may be assailed by any of the SH or
members in a derivative suit
During said meetings, votes are to be taken
Who are entitled to vote
GR: all shares that are outstanding
May exercise right to vote
Except the ff:
a.delinquent shares
during the period of delinquency, they are
suspended from their right to vote
until such time they are restored to their outstanding
status either by the same SH or by the bidder in a
delinquency
b.shares subject to appraisal
these are still outstanding shares except that all their
rights are suspended including the right to vote and
the only right remaining is to be paid the value of
his shares
c.those classified in the AOI as non voting
however, even if classified as non voting in the
articles, they enjoy the statutory right to vote in
ABISIMID
Can non voting shares vote during elections?
No
During approval of management contracts?
No
Remove directors?
No
Amendments of the AOI?
Yes
However in case of Sales v. CA
When a SH was refused the right to vote after he
attended and was present during a meeting on the
ground that that SH holds class B shares and which
were traditionally treated by the corporation as non
voting, a reference was required to the AOI and in
the AOI while the shares of the corporation were
divided into A shares and B shares, the mere fact
that by practice, the B shares were considered as
non voting was considered as non binding by the
SC?
Why?
Because only those classified in the AOI as
preferred or redeemable may be deprived of voting
rights
And B shares were never classified as preferred or
redeemable in the AOI of the corporation thats why
they should be considered as voting shares
Of these outstanding shares entitled to vote
In the case of gamboa v. teves
Its the right to vote for directors of the corporation
that determines exercise of control within the
corporation ***
That is why, its those shares vested with power to
vote directors that can determine compliance with
the 60/40 requirement under the constitution or
relevant laws
What else are denied to vote?
TS
They are not outstanding shares
Because they belong to the corporation after being
reacquired
Voting shall be exercised again personally or
directly by the SH of record or by the proxy in a
representative capacity in a voting trust agreement
VOTING TRUST AGREEMENT (VTA)
an agreement involving one or more SH of a
corporation on 1 hand and another whereby the

latter is conferred legal title over the shares of the

former
it may be entered into for any valid or legitimate
purpose including as additional security for
payment of a principal obligation
when the VTA is executed as a security for a
principal obligation, the trustee (the person entitled
to the legal title) is the creditor
The SH/trustor is now the debtor
To bind the corporation in a VTA
the same must be in the form in the by laws or
law***
So whats the form of a VTA under the
corporation code?
It must be in a public document, duly notarized
Must be submitted to the corporate secretary for
registration
How should the corporate secretary register a
VTA?
Once found that the VTA is sufficient in form and
substance
The Secretary will cancel the certificate of stock of
the trustor-SH
And issue a new one in favor of the trustee
So the corporate secretary will register the VTA by
cancelling the certificate of A for example so that
As name will be deleted from the stock and
transfer book
However, the cancellation shall be with the
corresponding inscription that its pursuant to a VTA
After which, the corporate secretary should issue a
new certificate in the name of B
Upon which the name of B will now be entered in
the stock and transfer book as the owner or holder
of those shares
The new issuance of certificate must bear the
inscription that its pursuant to a VTA
Thus, the VTA dichotomizes between legal and
beneficial or equitable title over the SOS
Similar to usufruct
Who holds the legal title during the VTA

its the trustee
Thats why, for purposes of qualifying as director of
a corporation, all the law requires is legal title
And how do we determine legal title over the
shares?
The stock and transfer book
That the name of that person is entered in the book
Thus B here acquire legal title in the shares
He is now qualified not just to vote the shares of A
But also to be voted for as director of the
corporation
After the registration of the VTA, a voting trust
certificate must now be executed by the trustee
in favor of the trustor
Why?
As proof on part of trustor that he retains the
beneficial or equitable title over the shares
***The VTcert may be transferred by the
trustor
So A here will be holding the VTC
Its executed and delivered by B
What does B hold?
The certificate of stock
But as proof of equitable ownership
A will have the VTC
And the VTC is transferable like any ordinary
certificate of stock
Meaning by endorsement plus delivery
But the transferee of the VTC cannot enjoy the right
to vote because the same is vested upon the trustee
Atleast when the VTA is effective
In no case may a VTA be valid for more than 5
years***
Does the law prohibit renewal of VTA?
The by laws can
In that sense, since the trustee is conferred the right
to vote, without having to absolutely or actually
have to own the shares, a VTA is a management
controlled device

Because even an outsider, one who is not really a

SH of a corporation because he has not actually
purchased shares of the corporation, can actually
vote and control the shares and therefore can
influence or actually dictate how the corporation
shall be managed
Thus, being a management control device, a VTA
cannot be used as device to circumvent citizenship
requirements of the constitution ***
A owns 60% of the stocks of a telecommunication
company
A is a Filipino
The 40% belongs to B
B is a foreigner
Can A execute a VTA in favor of B?
Cannot
That would confer upon B 100% voting rights
Telecommunications company
A
B
C
Filipinos
Owns 20% each
X owns 40%
X is Korean
Can A who owns 20% execute a VTA in favor of
X?
No
Because X will now be controlling 60%
That is against the constitution
In PNB Madecor v Uy
The SC clarified that even if 1 corporation who is
the debtor of another corporation has acquired a
VTA over certain shares of the debtor, a mere VTA
cannot transfer assets of the corporation to
another***
Meaning, the assets of the corporation whose shares
are held under a VTA will not be transferred in
favor of the trustee
Because what is transferred is merely the SH right
to vote***
Thats why when the trustee who was holding the
VTA was sued to pay the corporate debts, according
to the SC, the mere fact that the defendant here was
the holder of a VTA of certain shares of the
corporation, does not obligate the trustee to pay for

corporate debts
BY LAWS
Another source of authority and power for a
corporation and its agents
They are the rules for the internal government of the
corporation
So it is only binding only upon the corporation as
well as upon the members, SH or directors
3rd persons cannot be bound by by laws of a
corporation unless they have actual knowledge of
any relevant provisions therein***
They are a mandatory requirement for all
corporations whether stock or non stock***
They should be submitted before or after the
issuance of the certificate of registration within a
month from issuance of the certificate
Failure to file by laws is a ground for revocation of
the COI ***
The by-laws may contain any of the ff:
time, date, place and manner of calling meetings of
the board, SH, corporate meetings, form of proxies,
etc
memorize!
If the by laws are silent on these specific matters,
then the corporation code should apply
Adoption of the original by laws must be by a
unanimous vote of the incorporators
But subsequent amendments: majority vote of the
board and majority of the OCS***
Power to amend by laws may be delegated by the
SH
By a 2/3 vote to the directors
Once delegated, the directors may directly seek
approval of amendments directly to the SEC
In all cases, there must be favourable
recommendation from the appropriate government
agency

The amended by laws cannot be given retroactive

effect if to do so would result to impairment of
vested rights and impairment of existing contractual
obligations
December 10, 2013
CAPITAL STRUCTURE OF A
CORPORATION
Basic concepts and terms
AOI must state the ACS of a SC
And the ACS is the statement as to the maximum #
of shares that the corporation is legally allowed to
issue and to dispose of
And the issuance or disposition of the CS is through
the fractions of such totality
Those fractions known as SOS
The AOI may classify the SOS of the capital stock
into:
a. common or preferred
b. Voting or non voting
c. par and no par
***Any possible combination is allowed

However the ff limitations must be observed:
a. all preferred shares must be issued with par value
b. only preferred and redeemable shares may be
deprived of voting rights in the AOI
c. there should always be a class of shares that
enjoy full voting rights
d. any special rights or privileges granted to
preferred shares must be stated or written in the
AOI
without such statement, all shares are considered
equal in all respects
e. there is no limitation or maximum as to the # of
shares that may form part of the ACS
you can have 100k or 10k or 1k or 100 M shares
there is no fixed #, dependent on the prospective
business
from the ACS which is an expressed statement in
the AOI, the law requires a subscribed capital stock
at the beginning of the corporation which must not

be less than 25% of the ACS stated
and of the SCS, the law also requires that atleast
25% must be paid up in order for the SEC to
register the corporation
meaning, after the issuance of the COI, through the
BOD, the remainder of the ACS may be issued or
sold or disposed of by the corporation in a single
offering or in staggered offerings
meaning the necessity of issuing additional shares
after complying with the minimum prescribe d by
law is a discretionary act on the part of the BOD
why?
The issuance and disposition of SOS of a
corporation is principally to obtain corporate
financing
Or in certain cases, this may be justified by stock
dividend declaration
As used under the CC and in relation to the
constitution, the term capital refers to the capital
stock of a corporation***
However for accounting purposes, the term CS is
that not only the limited capital stock but also that
which refers to all profits out of its business or
proceeds of its loans borrowed by the corporation
The constitution and relevant laws use the term or
refers to the term capital, it usually associated with
citizenship requirements
Because only a corporation that meets the ratio or
proportion of Filipino ownership is qualified to
incorporate under certain business or enterprises
This is especially true under the Filipinization
policy laid down under the 1987 constitution
Thus under this policy, certain businesses, activities
or enterprises which involve exploration of natural
resources shall be reserved either exclusively to
Filipino citizens or partially to qualified Filipino
citizens or corporations
To meet this citizenship requirement, the SC has
held that in the case of gamboa v. teves and in the
MR decision heirs of gamboa v. teves, the capital of
public utilities refer to the OCS or # of shares that
are entitled to vote or elect directors in a
corporation

Thats the first gauge of compliance with the

constitution
Thus in the case of public utilities under art. 12, sec
11, no franchise shall be issued to a corporation
except when there is proof that atleast 60% of the
CS is owned by Filipinos
While the constitution refers to Filipino citizens,
correlating this law with the foreign investment act
of 1991, that ownership must likewise show control
on the part of the Filipino share holders
In the case of gamboa v. teves, how is control
measured?
By the right to vote for directors within the
corporation known as the voting control test
Which must concur with the second test which is
the beneficial ownership test***
These are concurrent requisites
Thus for art. 12, sec 11 involving public utilities
The constitution requires 60% ownership by
Filipino citizens as minimum
And 40% maximum ownership by non Filipinos
What do we mean by voting control test in
relation to PLDT?
Because PLDT is a grantee of a franchise by a
special law passed by congress
Gamboa was one of the SH of PLDT, who
questioned the capability of PLDT to continue
operating its franchise given certain transactions
As of 2009, out of the ACS of PLDT it was
discovered that the ACS consisted of common
shares
As well as preferred shares
Per the AOI, the common shares had a par value of
P5 per share
While the preferred shares had par value of P10 per
share
In the AOI also of PLDT, only the common shares
enjoy voting rights
Especially with respect to the right to vote for
members of the board of PLDT
However, per the AOI, the preferred shares were
completely denied of voting rights
So they are preferred non voting shares
Based on its statements in the AOI and on the ACS

statement, it was found that the common shares
constituted around 22% of PLDT
While the preferred shares constituted around 78%
of the OCS
Thus, in proportion, there were greater number of
preferred shares held by persons other than PLDT
However, of the 22% of common shares
Lets assume that there are 300M outstanding
shares covering 22% of the OCS
30% belonged to metro pacific, a foreign corp
15% belonged to a Japanese corporation
Around 7% belonged to ABS, a domestic
corporation
Around 35% belonged to various Filipino
The controversy arose when PTIC, which is the
domestic corporation became a wholly owned
subsidiary of first pacific incorporated
And by acquiring all the shares in PTIC, First
pacific became a direct and indirect owner of the
common shares of PLDT
Why?
because metro pacific is actually a subsidiary of 1st
pacific
Its 100% owned by first pacific
And then PTIC is also 100% owned by first pacific
When these PTIC shares were transferred wholly to
first pacific incorporated, that raised the holding of
First pacific to roughly 37%
So that adding the 37% control by metro pacific and
first pacific in PLDT plus the 15% belonging to the
Japanese corporation, that would increase or total to
around 53% of the OCS as far as the common
shares are concerned
However, upon further evidence, as of 2009,
because there are SH of PLDT that sold their shares
through the new York stock exchange, as of that
time around 64% of the common shares of the
PLDT already belong to non Filipino citizens
64% including metro pacific, first pacific, etc,
including PTIC which is now considered foreign
corporation since it 100% belongs to a foreigner
Although 22% of the OCS consisting of the
common shares are owned to the extent of 64% by
foreign owners, the preferred shares which is 78%
of the OCS, of this 99% belong to Filipinos
While less than 1% belong to non Filipinos
So all of these are outstanding shares

It so happened that the preferred shares are

subscribed by Filipino share holders because of a
presidential decree
There was a PD that required all subscribers of
PLDT to subscribe and purchase 1 preferred share
of PLDT
According to the contention of the Philippine stock
exchange and PLDT, that their capital as used in the
constitution, should be construed on the basis of the
total capital stock
If based on this, as offered by the respondents here,
then more than 60% of the OCS of PLDT belongs
to Filipino citizens
And therefore it never breached the 60/40
requirement
SC: upon scrutiny of practice within PLDT, it
revealed that as provided for in the AOI, only the
common shares are entitled to the exercise of the
right to vote during elections for members of the
board
Thus, even if the total OS, the common shares are a
minority
Its the minority that exercise control in PLDT
because only the common shares have the right to
vote for directors
And the right to vote for directors translates to
control because in a corporate structure, its the
BOD that is vested by law the power to manage and
control the corporation
Go back to sec 31
As such, since the minority (22%) which is a mix of
both Filipino and no Filipino SH hold the control in
the corporation, there is now a need to determine
using the grand father rule whether the 60/40
requirement is met under the constitution
And what was not disputed by the parties is that
indeed, around 64% of the common shares belong
to non filipino citizens
Thats why the SC did not have to make a
computation for the grand father rule
Because by admission of the parties, more than 40%
of the common shares belong to non Filipino
citizens
If you apply the GF rule, how much of the PTIC
shares
Di ba 100% of the OCS of PTIC belongs to First
pacific
So how much does that translate to the CS of

PLDT?
Thats how to apply the GF rule
However, the SC did not stop at voting control test
It also imposed for purposes of the 60/40
requirement, the beneficial ownership test
Meaning, that benefits accruing to the ownership of
such shares must likewise inure to Filipino SHs
Historically, those benefits are in the way of
dividends declared by PLDT on its SHs
And the finding is that, for several years (15 to 20),
dividends were paid at a higher rate to the common
shares while at a much lower rate, to the preferred
shares which is actually an oxymoron
Because if your holding preferred shares, you are
expecting to enjoy a higher share in the profits of
the corporation
And in 2009, it was discovered that, of all dividends
declared by PLDT on its Outstanding shares, each
common share was given a dividend of 70 per share
while each preferred share was only given P10 per
share
Thus, 80% of the total dividends declared by PLDT
for its SH inured to the common SH and therefore
inured to the foreign SH of PLDT
While only 20% of the total dividends are declared
and paid by PLDT to its Filipino SH
Furthermore, the stock market itself is proof of the
unusual capital structure of PLDT, in the stock
market, the preferred shares which are more
expensive in par value have a market value trading
price ranging from P10 to P11
While the common shares which have a par value of
P5 at the time was selling in the sock market
atP2,300 pesos
Meaning, the demand for PLDT shares was
concentrated on its common shares
Because of the expectation of the buyers of
investors that they can obtain control by way and
greater amount in case of dividends
Thus according to the SC, the term capital should be
construed as referring not to the total OCS but only
to the outstanding shares that are entitled to vote for
directors and that enjoy dividends
Therefore, in the case of PLDT, it must show that
60% of the voting rights are enjoyed by Filipinos
And that 60% of the dividend rights are also
enjoyed by Filipinos

That is why in the 1st decision, the SC directed the

EC to determine WON PLDT is complying with
that requirement
In the MR, sec 6 of the corp code became relevant,
why?
According to Pangilinan et al, the SC neglected to
remember that under the corp code, even those
share deprived of voting rights in the AOI are in
fact voting shares because the law itself grants them
the right to vote in all instances of ABISIMID
Thats why even if the AOI of PLDT deprive the
preferred shares of voting rights, they are still
nonetheless voting rights but in limited instances
such as amendment of articles, etc
That;s why according to the respondent, even if
they are preferred non voting, they still exercise
control within the corporation
SC: the fact that these preferred non voting shares
vote after the law, does not translate to immediate
control within the corporation
Because it is only in those specified instances that
they have the right to vote
What is important here is that in the AOI of PLDT,
there is total deprivation of voting rights to the
preferred shares
There is a provision in the AOI of PLDT that says
that preferred shares shall not vote in all matters
In trying to reconcile sec 6 of the corp code and the
provisions in the AOI, it appears that there was
intent atleast on the part of the management of
PLDT, not to accord or grant any voting rights at all
to preferred shares
And that they have no participation whatsoever in
the management of PLDT
even despite a statutory grant of voting rights in
case of ABISIMID
as such, how did the MR modify the ruling in the
original?
SC: whenever a corporation issues a mix class of
shares, that 60/40 requirement must be followed in
all and each class of shares
thus, if PLDT has common voting shares, then
60/40 for both voting control and beneficial
ownership must be met for that common voting
if it issues preferred voting
60/40 of the preferred voting must meet the two
tests
If it issues preferred non-voting, 60/40 to meet the

two tests
Or redeemable voting or non-voting must meet the
two tests
Express investment v. bayantel
This is a petition for corporate rehabilitation of
bayantel before it became insolvent
As a measure against its insolvency, a group of
creditors of bayantel entered into a MOA whereby a
satisfaction of the outstanding debts of bayantel
which was a domestic telecom company to these
group of creditors, bayantel will convey or
exchange its shares of stocks to the creditors
So by way of dacion en pago
And after the moa has been executed, there was a
series of transfer of shares of bayantel in favor of
these creditor banks
Unfortunately, for these groups of creditor banks,
all of them were foreign banks
They held around 70% of the outstanding debts of
bayantel
Under the equity swap agreement or dacion en
pago, the creditors agreed to be paid by way of SOS
Unfortunately, the convenyance of SOS to these
banks represented around 72% of the OCS of
bayantel
SC: violative of the constitution
Because the shares transferred were also voting
shares not just preferred non voting
They were common shares of bayantel
As such it would grant these foreign banks 72%
over another public utility
Thats why the moa was nullified
Term capital is used for purposes of computing
Filipinization is not the same as the term capital
in relation to the TFD (trust fund doctrine)***
The basic principle here is that all money and
property received by the corporation in payment of
its SOS shall form part of the capital stock and
therefore a TF reserved for creditors
Disengage yourself from the notion that
The money when you pay SOS of a company is
kept in tact
That is not correct

The money is a form of corporate financing,

therefore the same money you use for your
subscription will be used by the corporation to
purchase equipment, to buy land etc
Thats why under the TFD, technically, if the
portion of the assets of the corporation
corresponding to the Subscribed capital stock that
forms part of the TF
However, in the twin cases of NTC v. PLDT and
PLDT vs. SEC
The SC elaborated on the exact mathemathical
computation of the trust fund
How much should be computed for the purposes of
protecting the interest of corporate creditors
It is not just the par value of the OS that should be
used as basis but in fact the actual price or
consideration received or receivable by the corp for
those SOS***
why?
Keep in mind that when a corp disposes for the first
time its SOS, the corp can sell them not just at par
but even above par
Example:
Par value of P5
How much is the market value of PLDT shares as
mentioned in gamboa?
P2,300
If you subscribe to PLDT shares at a stipulated
price of P2,300, thats market price although the par
value is P5, the P2,300 will form part of the TF
Entire consideration received of receivable by the
corporation as payment for its SOS
Regardless of manner of payment (lump sum,
installment, cash, property, etc.)
However, in addition to the OS which are currently
subscribed, the TF shall also include the value of all
stock dividends already paid and declared
Because SD, although representing profits by the
corporation, they form part of the the OCS
So if 1 SD was declared at a value of P14
Then that P14 will also form part of the TF
However, a reference of these cases was also made
in the case of gamboa v. teves
According to the SC, the interpretation accorded by
the SC in the above cited twin cases, does not
define capital
It only defines how much of the capital stock of

PLDT must be used for purposes of computing
regulatory fees payable by PLDT to NTC
NTC being a creditor of PLDT as far as fees
prescribed in the public service act are concerned
What are the ways by which a person can
become the owner of shares in a corporation?
1.by subscription to original unissued or undisposed
shares of the corp
2.by purchase of re issued treasury shares between
the corporation and the SH
3.by acquiring the shares of another existing SH
Subscription
By subscribing to SOS, a unique kind of contract is
entered into by the corporation and the other party
The corporation being the issuer, and the buyer
being the subscriber
Under a subscription contract, the subject matter
refers to a definite # of SOS of the corp
Those SOS must be unissued prior to the SC
Thats why the corp is an issuer which refers to the
original disposition made by the corp of its capital
stock or a portion therefore***
Since the subject matter refers to original unissued
shares of the corporation, which must be delivered
by the corp to the subscriber
The SC also carries an unconditional promise on the
part of the subscriber to pay for the entire
subscription price
This is an obligation which is considered not
transferable***
Ownership of shares accrues from the moment that
the subscription contract is perfected unless the
existence thereof is dependent on a future and
uncertain event***
Quezon case
The SC entered into by the petitioner during her
lifetime was considered null and void because the
payment of the subscription price as stated in the
SC was dependent on a purely potestative condition
akoy magbabayad kapag akoy nakapg pahuli ng
isda.
Here the entire contract is aborted

Based on the TF, if that contract was nullified by

the SC because it was dependent on a purely
potestative condition
Are the shares covered by the SC part of the TF?
kasi lahat ng subscribed shares including SD form
part of the TF
No
Kasi hindi siya na issue
Hindi valid ung issuance
If the SC did not contain any condition, it shall be
considered as one with a term***
If the term or period is not further stipulated, then
the interpretation is that the term for payment shall
be immediate from the moment of demand by the
BOD
However, any kind of contract, the parties may
freely stipulate on losses or condition or terms that
are valid or not contrary to law
From the moment of perfection of the contract, the
subscriber can already demand that his or her name
be entered in the stock and transfer book whether or
not there has been full or only partial payment of
the subscription price
As such, once the name of the subscriber has been
recorded, legal title is now vested upon that
subscriber
And may enjoy all rights pertaining to those shares
As if fully paid
What are the rights accruing or emanating from
legal ownership of SOS of a corp
1.right to participate in management and control of
the corporation through voting for directors
2.right to participate in profits derived by the
corporation in its business expressed through
dividends
However, the power to declare dividends is
discretionary upon the board
And as a rule cannot be compelled by mandamus
3.entitiles him to assets of the corporation
However, during the lifetime of the corporation, the
asset rights of SH is a mere expectancy or an
inchoate right
And because of the separate and distinct personality
between the SH and the corp, property of the corp
are not property of the SH and therefore SH have no

actual right to posses or occupy or use corporate
property
The only exception that assets may be distributed
after dissolution is in the case of liquidating
dividends when the corp reduces its CS and it has
surplus capital
These rights are reciprocal to the obligation of the
subscriber to pay for the subscription price
The subscription price may be paid in cash, whether
in Philippine or foreign currency as may be
stipulated in the SC; promissory notes are not valid
forms of payment for SOS
Because of the uncertainty of the encashment of
these instruments
If there is uncertainty, then it would endanger the
TF reserved by law for corporate creditors
Apart from cash, property other than cash
However, for property whether real or personal, the
ff are the requisites as valid payment
1.the property must be needed by the corporation
for its business or purpose
2.the property belongs to the subscriber at the time
of the subscription
3.the property has value equivalent to the # of
shares in the subscription
Under this requisite, who has the authority to
appraise the value of the property?
Initially it shall be the BOD
However present rules also require that such
valuation made by BOD is preliminary and
recommendatory at best to the SEC
Thus, approval by the SEC for property received for
SOS, is an additional guarantee against the issuance
of watered shares
Because there is danger that the BOD might over
valuate the property in exchange for a greater # of
shares
Meaning there is no commensurate exchange
between the corporation and the subscriber
SOS may also be issued for labor or services
already rendered to the corporation
So it must be for past services

However in one case, there is nothing that prohibits

the corporation from entering into a management
contract where the compensation of the manager
contracted shall be by way of SOS
However, in the face of such contract
It must be shown that at the time when the SOS are
issued by the corporation as compensation, the
services due have already accrued to the benefit of
the corporation
Insert Previous Friday
December 17, 2013
Ownership of SOS in the corporation
Only fully paid shares are entitled to issuance of
COS***
The COS is a mere paper evidence of such right of
ownership and the absence thereof cannot negate
the exercise of rights already inuring to the SH for
as long as the latters name is entered in the
corporate books and records
Thats why the mere absence of a COS or failure to
issue a corresponding certificate should not prevent
the SH to exercise write to vote, assets or dividends
Principal benefit of having SOC:
convenient device for transfer of COS represented
thereby
To complete transfer, there must be endorsement
and delivery physically either by the SH of record
or his representative
The manner of COS represents its quasi
negotiability
That does not of itself convert the COS
Thus, in case a forged COS or one which was
transferred without proper authority is transferred to
an innocent 3rd party, the latter cannot acquire any
right or interest over the COS and the SOS that it
represents superior to those of the registered
owner***
With respect to COS which was forged or
transferred without authority, the defense of holder
in due course will not hold water
Is an untenable defense
Unless the SH of record is guilty of estoppel or

negligence by vesting another person with apparent
ownership over the certificate
Thus for as long as there is an authentic
endorsement and valid delivery of the certificate
itself
Regardless of WON the private transaction between
the SH and the transferee was violated, constitutes
negligence on the part of the SH of record because
by doing so, apparent ownership has been vested in
favor of another***
Because process of transferring has already been
completed by endorsement plus delivery
Example
When your bestfriend persuades you to endorse
your COS and then deliver it to him so that the
former can show that duly endorsed certificate as
proof of wealth when he applies for a Canadian visa
In support of that, the foreign embassy is requiring
proof of wealth in the Philippines so that there is a
guarantee that you will return to the Philippines
But in violation to that private agreement, your
friend sells that COS
By endorsing it, if you are the owner and delivering
it
There is nothing left to be done for the transferee
except to acquire ownership thereof even if only
apparent
Thus, if proved that the COS was transferred under
forgery or without authorization, that lawful owner
who is not guilty of negligence and estoppel can file
an action to recover possession from present
possessor
And no request for issuance of lost certificate will
be given due course
Because in that case, is the certificate lost or
destroyed?
no
Its in the hands of another
Similar to a transfer of certificate of title over
land***

Will these rights accrue if the shares held are

watered shares?
WS are issued by the corporation in violation of the
TF doctrine
So can you vote WS?

No
Can you demand dividends?
No
They may come in the ff forms:

1.SOS without consideration
2.gratuitous consideration
Issuance of WS can also give rise to a criminal

offense under the corp code
In violation of provisions of the law
Example
It was made to appear the that there was a
subscription contract entered into by pogi inc
With X as the subscriber
And purportedly for property conveyed or
exchanged by X for those SOS
But there is actually a simulated subscription
contract
Therefore the shares are without consideration
As such the shares are watered
2.gratutiotous
SOS of the corporation are the principal means by
which it can obtain financing for its operations
Thats why a stock corp is absolutely prohibited
from donating its own SOS
a.defeats way by which corporation can obtain
funds
b.danger that this will prejudice corporate creditors
3.when Stock Dividend are declared without URE
If WS are issued in favor of another by the
corporation, under sec 65, personal and solidary
liability is imposed upon the SH who acquired the
watered shares along with the directors and other
officers of the corporation who voted for the
issuance of the WS or having knowledge thereof
failed to object in writing
That personal liability is civil in character
This is a way for the corporation to recover the
value of the SOS thus issued
Thats why its an action for collection sum of
money essentially
Until such value or price for the WS is collected by
the corp,
The owner or holder of shares cannot exercise any
rights pertinent to those shares***
CORPORATE BOOKS AND RECORDS

For corporate books and records required to be kept
and maintained by the corporation code:
This includes minutes of meetings of BOD and
members
As well as stock and transfer book if stock
corporation and record of all business transactions
All these are required to be kept, maintained and
update by the corporate secretary
Except that in the case of stock and transfer book,
the maintenance therefore may be delegated by the
corporation to a stock and transfer agent
A stock and transfer agent is either an individual or
another juridical entity licensed by the SEC to
engage in maintaining books and records of a
corporation
This agent is authorized under the law to also act as
a clearing house for stock market transactions
However, apart from these, every corporation
must also have and execute FS
Inclusive of a statement of financial condition of the
corporation, profit and loss statement, balance
sheet, statement of assets, networth and liabilities(
SALN)
However for the FS of the corporation, the same
shall be executed by the corporate treasurer
And pursuant to SEC rules, all the FS must be
accompanied by an auditors report
And the auditor must be an independent one, among
those accredited by the SEC
All of these corporate books, records and statements
are subject to inspection by SH or members of the
corporation
This is a right inherent in ownership of CS

Or membership and it is deemed for the protection

of the interest that the SH or member may have in
the corporation
Thus, the right to inspect and examine corporate
books and records as a rule cannot be restricted
Not by law, never by the AOI or the by laws
The exercise thereof however can be regulated
What are the valid regulatory controls for the
exercise of inspection and examination?
1.demanded or exercised by the SH or his duly
authorized representative
Strangers have no right look into these records or
statements of the corp
However, strangers may gain access to corporate
books and records which are required to be
submitted to the sec or other government regulatory
bodies such as the AOI, copy of the by laws,
general information sheet
A by law provision prohibiting representatives from
exercising the right is null and void
In one case, the corporation had a specific provision
in the by laws stating that only SH of record can
inspect and examine the books and records or make
copies or take exerpts thereof and the by laws
required personal examination
The problem arose when of the SH of the
corporation happened to be another corporation
So the duly authorized officer of the SH corporation
demanded inspection and to make copies
And the corporate secretary invoked the by law
provision
SC: its absurd to require the corporate SH to
personally examine the corp books
2.Inspection or examination must be done during
reasonable hours during business days of the
corporation
A bylaw provision further limiting the period is null
and void***
Thus a provision in the by laws that the SH can

inspect only 1 month prior to conduct of annual
elections was nullified by the SC
Because what the law provides cannot be further
restricted by the corporation
3.the SH or member must not be prompted by ill
will, BF or an illicit motive or purpose
If there is showing that the SH or members
requesting inspection has misused information
obtained from previous inspection, the subsequent
inspection may be validly denied
Forms of misuse of information obtained from
inspection and examination
Gonzales case: mere fact that the SH was prompted
by curiosity in demanding inspection of all business
transactions of the corporation, especially those
with respect to loans extended by the bank is not
sufficient justification for the exercise of the right
Therefore there must be a legitimate private interest
financial in nature sought to be protected for the
right to be exercised***
Because in his request, the SH here stated that he
wants to inspect the business records of the
corporation to satisfy his curiosity and verify that
the accounts are true
That does not in anyway protect his investment in
the corporation
Another is corporate espionage
(misuse of information)
When information obtained by a SH is passed off or
sold to competitors of the corporation
In relation to which no SH or member may demand
as a matter of right, inspection or examination of
purely confidential information within the
corporation such as trade secrets
Such confidential info, while not accessible to SH
of the corporation, while not accessible to SH of the
corp, may in turn be given only to specified persons
within the corp
And as a rule, these specified persons include the
BOD
Thus in the case of oil companies

Yung special additives to fuel that would make the

engine more efficient
Chemical formula for such is considered
confidential information
The trial court must be given an opportunity to

asses and weigh the confidentiality of the
information and WON disclosure would be
prejudicial to the business of the D
In the case of pharmaceutical companies, yung

formulation for drugs
Especially if they are still in the development stage
Considered confidential
Another penalty or sanction that may be enforced

for misuse of confidential information is under the
Securities and regulations code involving insiders
trading
The information pertinent to insiders trading is
considered material and not public information
If youre a SH
Can you demand that the corp demand to you the
process of the chemical formula for the anti cancer
drug?
No
For SH of banks
Cannot demand inspection or examination of bank
deposits
In the case of industries
Ung mga industrial information
Wag mong ipapatent
Thats the key to prevent disclosure
If you apply, you are required to reveal the
formulation which may be modified
In one decision of the SC
This does not involve right of inspection and
examination of corp books and records but
The question arose as to WON there was a breach
of contract between two corporations where one
corporation agreed to supply special fuel additives
to the other corporation
And the contention of the latter corporation is that
the contract was breached because what was agreed
upon was that which was actually delivered
As a result, or in the course of the breach of contract
case, the P corporation demanded to know the
chemical formulation for the fuel additives that was
the subject of the contract
This was to determine WON in fact there was a
breach
But the D invoked that that is a confidential
information
And according to the SC on WON the chemical
formulation was confidential is a question of fact
Most recent case involving right of inspection

Yu v. Yu Kai
Members of the same family where the officers and
SH of the same corporation
However, because of certain conflicts that erupted
between the family, two of them, the incumbent
corporate secretary and treasurer were accused of
the others of misappropriating corporate funds and
making false entries in the corporate books and
records
Thats why criminal cases for falsification were
filed against the corporate treasurer and secretary
However the latter also filed counter cases for
inspection and examination of corporate books and
records
And when they tried on the ground that when they
tried to inspect the corporate books and records, the
others barred them from entering the premises of
the corporation
Thats why you have two civil cases filed by the
other SH for accounting and criminal cases for
falsification
While the accused also filed a civil case for
inspection and examination
According to the petitioners, the criminal case for
falsification raises a prejudicial question
The civil case being one for accounting of corporate
funds and records
SC: there is no prejudicial question here
The criminal case for falsification and estafa may
proceed WON the civil case for accounting results
to judgment
Because the civil case is not determinative of the
guilt or innocence of the two accused in the
falsification cases

However, the court also said that the civil case filed
by the accused for them to be allowed entry into the
premises of the corporation, and inspect and
examine books and records is a proper remedy
Why?
even if theyre the accused in the criminal cases,
they remain to be SH of the corp and therefore
cannot be denied their intrinsic right to inspect and
examine the corp books and records
In short, the principle laid down here is that
pendency of a criminal case for falsification of corp
books will not curtail the right to inspect and
examine corp books and records***
MERGERS AND CONSOLIDATION

These are two forms of corporate combination
Formal in character and requiring the ff steps:
1. there must be a plan of merger or a plan of
consolidation prepared by the participating
corporations
2. The plan must contain the names of the
participating corporations and the specific means by
which the MC will be carried
3. After the plan has been completed, the same must
be submitted for approval by the majority of BOD
and 2/3 of the OCS/members in each participating
corporation
Those who dissent are entitled to their appraisal
right
4. Nonetheless, with the duly approved plan, the
articles of consolidation or merger must now be
executed and submitted to the SEC
The AOI must incorporate all the provisions of the
plan, and contain a statement as to the # of SH or
members approving or voting in favor or against
and the status of the CS of the corp as of said date
Whats the difference between the plan and the
articles?
The plan, from civil law perspective is a proposal to

merge or to consolidate
There is yet no perfected merger or consolidation by
mere execution of the plan
However, once approved, the plan constitutes a
contract between or among all participating
corporations
And as far as they are concerned, the provisions
thereof are considered as valid and binding and
enforceable except to the state and to third persons
Thus the MC will be binding upon all, inclusive of
the republic and 3rd persons when the AOI have
been approved by the SEC***
When do we know that the AOI have been
approved by the SEC?
From issuance of certificate of MC
In which case the state and 3rd persons are included
in the contract between the parties
Therefore, any amendment to the plan must be
made prior to the execution of the AOI
However, the execution of the AOI will not prevent
abandonment of the MC
In a merger, two or more corporations unite
together and one of them shall be considered as the
surviving entity
All others are absorbed in the surviving entity
In a consolidation, all the participating corporations
unite together to form a new corporation
Meaning all of them are absorbed into the fresh
corporation
However, in all cases, its a marriage of
convenience
What are the legal consequences of a MC?
1. There shall be a single entity recognized for all of
them
It will be surviving corporation or in a merger
And the new corporation in a consolidation

2.that surviving corporation or new corporation

shall be possessed of all power, property, privileges
and attributes as any duly registered corporation
3.all other participating corporations shall lose their
separate and distinct personality
However, in the technical sense, they are not
dissolved as corporations
They continue their existence and juridical being
through the surviving or new corporation
As a result, all property, assets, franchises or
privileges of the absorbed corporation shall be
automatically transferred to the surviving or new
corporation unless otherwise specified in the plan of
MC
Since the law itself provides for automatic transfer,
there is no need for the participating corporation to
execute separate deeds or instruments to show such
transfer***
Thus, property, insurance rights originally
belonging to the participating corporations may now
be enjoyed by the surviving or new corp
Land titles already vested in the participating
corporations are not deemed belonging to the
surviving and new corporation
All of those are transferred
Subject to constitutional limitations on citizenship
If the MC with reduce Filipino ownership below
that required by law to qualify it for certain
activities, then the surviving or consolidated corp
cannot continue the business***
Another automatic transfer is the transfer of all
liabilities subject to those which were excepted in
the plan of merger or consolidation
So debts may now be enforced against the surviving
or new corp
In the case however of PNB v. ANdrada electric
The mere fact that PNB acquired the OCS of
another corp, does not amount to a merger or
consolidation
Its a mere acquisition of SOS
Even if PNB eventually acquired 75% of the OCS
Thus, any liability demandable from the corporation
whose shares were acquired by PNB remain to be a
liability of andrada and not PNB
In another case
In the absence of provision in the plan of MC that
certain debts shall not be charged against the
surviving or new corp, the same shall be construed
as pending liabilities of the absorbed corp
BPI ees union v. BPI
Are ees of far east bank considered as ees of BPI
after the merger with BPI as eh surviving
corporation?
So there are twin issues here
a.WON BPI has the authority to dismiss ees of FEB
by reason of redundancy
so there was a retrenchment program, because when
the operation of the two banks had to be
consolidated and streamlined, there was finding that
there was excess personnel and therefore BPI had to
undergo a retrenchment program but this mostly
affected FEB ees
SC: in the absence of specific stipulation in the plan
of merger, there is no obligation on the part of BPI
to continue those redundant ees ***
Thus, there is no case for illegal dismissal
b.For the FEB ees that were retained by BPI after
the merger, the question is WON BPI ees union can
compel them to abide by the closed shop agreement
SC:in the absence of a specific statement in the
merger plan, there is nothing that would prohibit the
ees union from compelling those FEB ees from
joining the union under the closed shop agreement
Because the court cannot condone a situation where
there are two classes of ees in FEB despite a closed
shop agreement
What would be two classes that might arise?
those FEB ees who are now considered as BPI ees
and yet they are not union members
While all others are considered or required to be
union members as a condition for continuation in
employment
That would result to discrimination
Are the retained ees new ees?
Not thoroughly discussed by the SC

APPRAISAL RIGHT
The appraisal right is the right of dissenting SH to
demand from their corporation the payment of the
fair value of their shares whenever they pass a
dissenting or negative vote in the ff matters:
1.amendment of the AOI
That will have the effect of either restricting the
rights of the existing SH of the corporation or
creating new rights or privileges not currently
enjoyed by the existing SH or where the
amendments of the AOI would either extend or
shorten the corporate term
In these instances of amendments, a meeting is
required for the SH
Therefore to exercise the right of appraisal, in the
minutes of the meeting, the dissenting vote must be
properly recorded***
Examples of amendments that restrict the rights of
existing SH would be an amendment to deny preemptive right
Example of amendment that creates new rights
would be an increase in CS which creates preferred
shares for the first time
The AR may also be exercised by those who
dissented to M/C, sale of all or substantially all of
assets and investment of corporate funds in another
corporation or business
Mere casting of dissenting vote does not
automatically authorize dissenting SH to payment
by the corporation of the fair value of the shares
Thats why the substantive and procedural
requirements must be followed:
1. there must be a written demand
Given by that SH for the corporation to pay the fair
value
Upon receipt of such demand, and in the absence of
any dispute, the corporation must pay the fair value
of the SOS of the dissenting or withdrawing SH
And fair value here is fixed as to value of the date
prior to the making of the vote or corporate act
Once the written demand has been received by the

corporation, those shares are now suspended in all
its rights including the right to vote, dividend rights,
the only right remaining is the right to be paid
Within 10 days from the written demand, there must
be a surrender of the corresponding COS for
purposes of annotation
What would be annotated?
The fact that the shares covered by the certificate
are the subject of appraisal
The annotation also carries the implicit restriction
against transfer of the COS
Within 60 days, the corporation must pay either on
the agreed price or price fixed by law or price fixed
by an ad hoc committee consisting of the rep of the
SH, rep of the corp and a common rep for the two
January 10, 2013
30 mins. for MCQs
Part 2 will be upto 8 30
Beginning to appraisal right
Todays lecture is not included
APPRAISAL RIGHT
While right of dissenting SH
It does not prevent corporation through the BOD to
make a direct offer to the dissenting SH to pay for
the value of these shares in exchange for their
withdrawal
As statutory right, its an inherent right on part of
the dissenting SH
But an offer may be given by the BOD of the
corporation
In this sense, if the offer comes from corporation,
the AR is actually similar to expropriation of private
property whereby the taking of SOS of the SH is
subject to payment of just compensation
Its one form of management control whereby
dissent is minimized or eliminated in the
corporation

DISSOLUTION
Represents the time when its privilege for the
purpose or business stated in the AOI is terminated
Represents also the legal death of the corporation
whereby the civil and juridical personality is
extinguished
METHODS OF CORPORATE DISSOLUTION
1. Expiration of the term
Maybe by reason of the lapssation of the original
term in the AOI or by the arrival of the shortened
term adopted through an amendment on the AOI
To shorten, the amendment should be approved by
the majority of BOD and 2/3 of SH or membership
Either way, whether expiration or lapssation, the
termination takes place ipso facto from the arrival
of the dates provided therein
Thus if today is the last day of the corporation,
tomorrow the corporation is deemed dissolved
Without further act or deed, the juridical personality
of the corporation as originally envisioned, is
extinguished and continues only for limited purpose
2. Petition for corporate dissolution
Voluntary act on the part of the corporation
Approved by majority of BOD and 2/3 of SH or
membership
Compliance with these requirements must be
alleged in the petition and certified to by way of
certification annexed to the petition
The petition, while voluntary in character may or
may not affect creditor rights
If it does not affect, either because the creditors
have been paid in full and there is no subsisting debt
or adequate provision for payment of these debts
have been made:
The corporation is deemed dissolved from the date
of filing of the petition
Any subsequent order by the SEC for this purpose
is only confirmatory of a fact which has already
transpired which is dissolution of the

corporation***
If C rights are affected or may be prejudiced due to
pending unpaid or maturing debts and no plan for
payment has been adopted: SEC should conduct a
hearing on the petition***
Purpose: to allow the C to file claims and for SEC
to verify these claims
Once the hearing is conducted, the SEC may now
issue an order granting the petition and dissolving
the corporation
In this instance, the date of dissolution, shall
coincide with date of finality of the SEC
Petition here is cognizable by the SEC
Not necessarily by the special commercial court
Mere filing for corporate rehabilitation is in direct
contrast with dissolution***
Rehabilitation implies that there is continuation of
corporate life
Mere insolvency on the part of the corporation does
not warrant its dissolution***
3. Petition for involuntary dissolution
Involuntary in character
Thats why the petition for dissolution here is in the
instance of the state
There are two views as to which body has
jurisdiction over such involuntary dissolution
a. SEC under PD 902-A
b. RA 8799: special commercial court
But actually, the two have concurrent jurisdiction
depending on ground
What are the grounds for involuntary
dissolution of a corporation?
Same grounds in section 6 of PD 902-A
1. Corporation is found to be guilty of misleading or
defrauding the public as to what it can do or what

cannot do where public interest is at stake or to the

great prejudice of the public
involves acts amounting to infringement of its
primary and/or secondary franchise
if this is the ground, the same may be the subject of
a quo waranto with the special commercial court
initiated by the state through the OSG
2. when there is failure to file or comply with
reportorial requirements
exclusively under the jurisdiction of the SEC
only it can monitor periodically the reports
3. Non user of its corporate charter or continuous
inoperation or wilful disobedience to any cease and
desist order issued by the court, SEC or any
government regulator
non user and continuous inoperation: commonly
with the jurisdiction of SEC
failure to comply with CDO: concurrent between
SEC and Special commercial court
among the grounds stated by the law, the law
requires that due process be accorded to the
corporation subject of petition
at minimum, there must first be notice and
opportunity for the corporation to be heard and
explain its side
in the case of special commercial court, petition for
involuntary dissolution may be accompanied by any
intra corporate controversy allowed under the
law
except in a derivative suit***
because a DS cannot be accompanied by a prayer
for involuntary petition for dissolution of the
corporation
whats the essence of a DS?
To enforce the liability of erring D/O of the
corporation or to compel them to do their positive
affirmative duty
To include a DS in a prayer for involuntary
dissolution, would be contrary to the nature of the
DS itself***
incase of involuntary dissolution, the corporation is

dissolved upon finality of the order of the court or
SEC***
in all cases, regardless of the ground ,a notice of
dissolution must be published in a newspaper of
general circulation atleast 1 a week for 2
consecutive weeks if the corporation concerned is a
public company
such as those whose SOS are listed in the exchange
Once the corporation is dissolved, its civil or
legal personality continues for the ff limited
purposes:
1. To prosecute and defend suits in the name of the
dissolved corporation
2. to settle and wind up affairs and close the
business
3. to transfer or convey whatever property remained
at the time of dissolution in favor of persons entitled
thereto
These are the powers of the corporation at the
time of its liquidation
Who may exercise them?
1.corporation itself
In its own name but through the BOD
Thus, with the dissolution of the corporation, there
is now a shift in the function of the BOD
Prior to dissolution: principal task was to oversee
the management and operation of the corporation
Upon liquidation: principal task is now to liquidate
and close the affairs of the corporation
GR: when the BOD itself is undertaking the
liquidation of the corporation, they must still act in
the name of the dissolved corporation
But only for a limited 3 year period***
As a rule, under the 1st method of liquidation, upon
expiration of 3 years, all rights obligations and
actions in the name of the dissolved corporation are
abated
And the expiration of the period extinguishes, for
all legal intents and purposes, the civil personality
of the corporation

2. Through a trustee
A trustee is a person either juridical or natural
voluntarily named or appointed by the corporation
or given that capacity by operation of law
Thus if a trustee is appointed by the BOD either
prior to the dissolution or within the 3 year
liquidation period, then all property in the name of
the dissolved corporation and all actions for or
against the corporation must be continued in the
name of the trustee
The trustee acts not only for the dissolved
corporation but also in behalf of the SH or members
and creditors
If no trustee is voluntarily named, members of the
BOD are by operation of law are considered as
trustees of the dissolved corporation after the
expiration of the 3 year period
They must now continue their duty and functions no
longer as liquidating BOD but as trustees
SC: as far as that particular case is concerned that

counsel was appointed as a trustee
For and in behalf of the corporation and for that
case only
Meaning he cannot make an inventory of all
property of the corporation
So to take care of that case and protect the
corporation on behalf of the beneficial holders of
the interest thereof
3. through a receiver
A receiver is one judicially appointed but do not
confuse a rehabilitating receiver from a liquidating
receiver
Why?
LR: the corporation has been dissolved
RR: under rehabilitation provided under the FRIA
LR is normally appointed as an offshoot of an intra
corporate controversy or quo warranto for
involuntary dissolution
The receiver becomes an officer of the court
If last set of BOD cannot or refuse to discharge duty

as trustees, any SH of the corporation may petition
the court to be appointed as trustee
Or subject to rules on conflict of interest, any
creditor
After all, it is for the consideration of the
corporation that the liquidation is undertaken
Because if there are pending debts, then the
creditors are preferred before other persons
including SH
In the case of Delano
Since there was a pending civil case in the name of
the dissolved corporation long before the
dissolution and it was still pending trial after the
corporation has dissolved and after the three year
period has elapsed
The counsel that represented the corporation prayed
to be discharged from his duties because allegedly
he can no longer contact his principals or the
officers of the corporation
And there was no trustee named or appointed after
the dissolution of the corporation
In all cases, the liquidation proceeding whether

judicial or EJ is akin to settlement of estate
proceedings
Thus first duty of the BOD/trustee or receiver is to
consolidate all assets, as well as debts of the
dissolved corporation
And ensure that from among the assets, adequate
provisions are made for payment of creditors
In the case of insolvent dissolved corporations,
follow rules on preference and concurrence of credit
under civil code***
How long shall the liquidation be undertaken if
through trustee or receiver?
no time limit***
The 3 year limit does not apply because the T or R
may take as much time as necessary to complete the
dissolution and liquidation and winding up of the
corporation
However, in all cases, the assignee or the receiver
must act under their own name because they acquire
legal title over all rights and obligations of the
corporation including property but toward the view

that that legal title keeps the beneficial or equitable

title in the name of the SH or members of the
corporation ***
Ultimately, the purpose of the liquidation is to pay
all creditors, distribute to the SH or members any
residual assets and permanently close the
corporation***
Thus, when a corporation is dissolved and
undergoing liquidation
The ff cannot be done by the dissolved
corporation:
1. issue new shares
Since the issuance of new shares is for financing the
business of the corporation, it cannot be done after
the corporation has been dissolved
Implies continuation of the business which is
prohibited to be done by a dissolved corporation
Purely private in character no longer registerable on

the books of the corporation unless allowed in the
by laws
As to the ff. acts, the qualification must be made:
1. filing of new civil case or similar cases in the
name of the corporation
Can a new civil complaint be filed during the period
of liquidation in the name of the corporation?
Yes
Within the 3 yr. period and with approval of the
liquidating directors
The same for cases where the dissolved corporation
is impleaded as a defendant
So the answer and verification and CNFS will now
be signed by the liquidating directors of by the
trustee, etc.
2. amend the AOI

Alhambra case***
After the corporation has been dissolved any
amendment to extend its term in the AI is null and
void
What it can do is to re incorporate with the consent
of the SH or members of the corporation
3. declare and pay dividends
Dividends are ratable distribution of the profits of
the corporation from its business
Only dividend allowed are liquidating dividends:
proportionate shares in the remaining assets of the
corporation
Remaining: after the debts have been fully paid is
similar to inheritance in succession
In the payment of LD, certain shares may be
preferred depending on classification of shares as
held in the books of the corporation ***
As to SH, after the corporation has been
dissolved or during liquidation, can a transfer of
COS be still made?
Yes
After the 3 year period, new suits may be

commenced?
yes
No longer in the name of the dissolving corporation
but in the name of the members of the BOD as
trustees or receiver or the duly name trustee or
receiver***
Correlate this to the rule under ROC, when a
corporation files a case or civil complaint, it must
allege that it is a duly registered corporation
existing under Philippine laws
So is a dissolved corporation duly registered?
Yes
Is it existing?
No
Thats why within the 3 year period, can still be in
the name of the corporation but beyond that, no
longer because it ceases to exist as such
Must be in the name of the trustee or receiver
How about Entering into contracts?
During liquidation period: as a rule the contracting
capacity of the corporation is suspended

Except for contracts directly connected to the

liquidation process such as sales of assets or
conveyance of such assets to SH ***
How about a contract of lease?

Can the contract as lessee renew the lease?
If relevant or connected to liquidation such as need
for office during liquidation, then allowed
When a corporation is dissolved, can any of the
SH or members still file an intra corporate
controversy?
Aguire case***
Aguire was one of the corporators of the petitioner
corporation
Purpose of the corporation: agriculture business
For this purpose, it accrued a parcel of land which it
intended to devote for agricultural purposes
The corporation was rendered inactive and many of
the incorporators did not mind the business at all
For continuous inoperation and failure to comply
with reportorial requirements, the SEC issued an
order dissolving the corporation
Subsequently, Aguirre the respondent, discovered
that there were recent filings with the SEC in the
name of the corporation
These filings involved changes in the ownership of
the CS of the corporation
So it appears that certain SH have transferred their
interest to 3rd persons and these persons appointed
themselves as president, secretary and treasurer of
the corporation
Some of the incorporators and SH remained the
same but here were new ones
The vast tract of land belonging to the dissolved
corporation was held and controlled by the new SH
and officers
There were several years when election was held
but he was never notified
To protect his own interest in the corporation, he
filed a DS for them to return the corporation the
parcel of land and account any profit from the
property and for them to be prohibited from
continuing and assuming the discharge of the
functions which they usurped without authority
MTD: the dissolved corporation represented by new

officers alleged that the allegation of Aguirre are
within the jurisdiction the of special commercial
court because they take the character of an intra
corporate controversy and thus cannot be filed since
the corporation has been long dissolved by the SEC
SC: the dissolution of a corporation cannot prevent
the filing of an intra corporate controversy
Why?
Since the civil complaint is for the protection of the
corporation in the nature of DS and for prohibition
to prevent the strangers from assuming their office,
the right and capacity of aguire as original
incorporator and one of the existing SH, to protect
the interest of the corporation remains despite the
corporations dissolution
Meaning, the intra corporate relationship has not
been terminated by the dissolution of the
corporation
Furthermore, according to the SC by way of an
obiter, since the purpose of the suit is to recover
property, it is also a proper action despite
dissolution because if there is proof that the
corporation had subsisting debts, then the only way
to pay those debts is to recover and liquidate the
property held in the name of the corporation
Iglesia Methodista Case
Originally it was incorporated as a corporation sole
By way of an amendment in the AOI it converted
into a corporation aggregate
It remained to be a religious corporation
Despite the change in the legal structure of the
religions corporation, the internal organization and
structure within the church remained the same
There was an archbishop who was the head of the
methodist church of the Philippines
Above him was the consistory equivalent to the
BOD
Consistory composed of all bishops and archbishops
It was the policy making body, and the one who
fixes doctrines, etc.
But archbishop remained to be the most powerful
figure within the church
Because he had power to assign or reassign and
transfer the bishops from one place to another

Is the transformation from a corporation sole to a

corporation aggregate a valid one because it was
merely done by amendment?
Complaint: conversion cannot be done by simple
amendment, the corporation sole must first be
dissolved before it can convert into a corporation
aggregate
As such, according to the complaint, since not
followed, the termination of the Bishop was null
and void because it was done during period of
liquidation of the corporation sole
Meaning there was no valid exercise of the powers
because the corporation was already dissolved
before it converted itself properly into a corporation
aggregate
Question here: should a religious corporation
originally organized as a corporation sole, be
considered as dissolved if it simply converted itself
into a corporation aggregate by mere amendment of
the AOI
SC: not dissolved
Transformation by mere amendment is valid
Therefore, the corporation continued in its existence
Religious corporations are not required to provide
for a definite term***
Non stock corporation v. Stock corporation
1. Purpose: NS: non profit
But it can conduct profit activities so long as it is
channelled back to its non-profit purpose***
January 21, 2014

DISCUSSION OF EXAM
1.againts JLN quo warranto
2.against Janet: Criminal and civil liability
3.cannot confiscate the property of the corporation
4.
Continuation of Discussion
A corporation which is organized outside the
Philippines or under foreign law is considered a
foreign corporation
But if organized in the Philippines and under the

corporation code of the Philippines, it is considered
a domestic corporation
Foreign corporation v. domestic corporation
Test of incorporation
The corporations identity or nationality is
determined by the law of the place of its
incorporation***
Subject to the citizenship test adopted by SC in
gamboa vs. teves
So even if domestically organized, it can still be
considered as foreign corporation by meeting
constitutional proscriptions as to citizenship ***
For corporations which were formed and organized
under other than Philippine law: they have no legal
capacity outside the territory of their incorporation
Thus, whatever privileges which have been granted
to them under the place of their incorporation, do
not automatically extend to outside jurisdiction
In the country or state where it was not organized,
that country or state may deny legal recognition
towards such FC or impose certain requirements
before a limited recognition may be accorded
Corporation code of the Philippines allows
imposition of certain limitations for legal
recognition of a FC:
That for a foreign corporation to do business in the
Philippines, it must apply for a license with the SEC
Issuance of a license by the SEC also contains a
condition that the country from which the FC
originated must accord such privilege also to
Filipino corporations
So there must be reciprocity ***
The FC must furnish the SEC a copy of its AOI,
present financial conditions, CS, present board, etc
What is mandatory is for the FC in its application to
designate a resident agent ***
Purpose of resident agent: to actually place the FC
within the jurisdiction of Philippine courts and other

administrative regulatory bodies through service of

summons and other processes
Thats why the agent may be natural or juridical and
must be domiciled in the Philippines
In its application for a license, the applicant FC
must specify the business mentioned in its articles
of incorporation and the business for which a
license is applied for cannot necessarily
comprehend all the businesses or purposes stated in
its AOI
Because of certain Philippine statutory or
constitutional requirements
Thus if in its AOI it has 20 business purposes, it can
only choose 1 or some in its application for business
here in the Philippines but not all
The issuance of license is also conditioned on
payment of fees, including certain securities and
deposits under trust with the SEC to answer for any
unpaid liability that the FC may incur in its business
in the Philippines
The amount if deposit may be adjusted by the SEC
So parang bond yan
At the discretion of the SEC, it may issue a license
And the implication: the FC is now placed under the
jurisdiction of Philippine laws
And that in relation to the business for which the
license was issued, it should consider itself bound
by all relevant laws, government rules and
regulations
So there may be 2 legal systems applicable to the
FC
1. Philippine law
2. Foreign law or law of place of incorporation
Depending on business of the FC, a secondary
license may be required from the appropriate
government regulator
Thus if banking, aside from SEC it must obtain a
license from the BSP
What may take place in relation to the license?
The license empowers the FC to do all acts

necessary to prosecute the business it sought to
engage in the Philippines
But legally, the license implies that the FC has
established domicile in the Philippines in relation to
its business ***
The license may either be surrendered by the FC
This is voluntary withdrawal of business from the
Philippines
January 24, 2013
Once issued a license by SEC, that implies that the
foreign corporation has established a domicile in the
Philippines for the purpose of business where the
license was applied for
However, the license itself may be withdrawn
voluntarily by the FC when it seeks to stop its
operation in the Philippines
So its tantamount to voluntary dissolution
Or that license may be subject to revocation by the
state thru the SEC whenever the FC is found guilty
of violating the license or pursuing a business other
than that granted by the license
The principal benefit of a license on the part of a FC
is that it is now protected similarly as DC especially
as far as legal capacity to sue in the Philippines is
concerned
Thus, a duly licensed FC doing business in the
Philippines has capacity to sue and be sued
However the necessary allegations must be made
with respect to that FC when it files a complaint or
made a defendant
Allegation: that it is a FC duly licensed to do
business in the Philippines
On the other hand, what about a FC who is found to
be doing its business in the Philippines without first
obtaining the requisite license?
A FC is not barred from doing business in the
Philippines
That would be an inaccurate statement

It is barred from doing business in the Philippines

without first securing the license
Therefore, when is the FC deemed to be doing
business in the Philippines?
These are not found in the corporation code but
section 3 paragraph d of the foreign investments act
of 1991
What are the acts of engaging in business?
a. soliciting orders
b. opening offices whether braches or liaison offices
city bank v. ca
city bank is a 100% owned FC licensed to open
branch in Philippines
when branch was sued along with the parent
company is US
the parent company sought the dismissal of
complaint on the ground that under their system,
any branch of city bank is considered an
independent entity because the depositors of the
branch outside the US are considered depositors
only of that branch and not of the entire company
which is principally based in the US
However the SC said that as far as the Philippines
and City banks depositors are concerned, the
branch in the Philippines is still such a branch,
therefore, having done business in the Philippines as
a branch, implies that the proper party is the parent
company
c. appointing a representative for its business in the
Philippines where the representative is domiciled in
the Philippines continuously or cumulatively for
atleast 180 days in a given year
Thus under the FRIA, for as long as there is
representation of that FC as to its business in the
Philippines by some other person such as its
business representative and that business
representative stays in the Philippines for 180 days
thats already sufficient for establishing domicile in
the Philippines
However, by way of exception also under the FRIA,
if the FC merely appointed a dealer or distributor
for its business in the Philippine and the latter is a
resident of the Philippines acting independently and

in its own name, the FC is not doing business in the
Philippines ***
Case
A manufacturer of certain ceramic products based
in the US entered into an agreement with a
Philippine company
The PC is into retail of construction supply of
materials
It has existed way before its contract with the FC
was entered into
Pursuant to the agreement, the domestic company
shall sell within the Philippines, products of that FC
However, there is no exclusivity clause in their
agreement so that despite the new agreement
entered into by the DC, it continued to sell products
of other corporations
Also from abroad and products of Philippine
companies
When a dispute arose regarding a particular deliver
and payment, the allegation is that the FC was
found to be doing business without license
SC: such license is not necessary because by the
terms and provisions between the two contracting
parties, the FC and the PC, the latter continues to do
business and in fact sells the products of the foreign
supplier in its own name
Thus it is acting independently from the FC
And the FC is thus not doing business in the
Philippines
Compare that with the landmark case of
communication and materials design
A US Texas based corporation, entered into two
separate exclusive agreements with two separate
domestic companies in the Philippines
The first exclusive agreement is for the sale and
distribution of its computer products in the
Philippines, the said computer products will be
made available in the Philippines only through that
DC
The other exclusive agreement is with respect to the
repair and servicing of those products
So it appointed a contractor to service all the repair
needs of all computer parts for those sold in the
Philippines

So one is for sale and distribution and the other is

for the servicing
Under terms of these contracts, the DC cannot
entered into contracts whether for sale or servicing
except in the name of the FC
And all ees of the DC must pass the qualification
standards set by the FC
And in all the dealings of the DC in the Philippines,
they were required to use the letter head and the
name of the FC
SC: the DC have lost their separate and distinct
identity by virtue of these contracts
So then the dispute arose, because the exclusivity
clause was violated, they were servicing or selling
products of other countries
Where the DC is constituted as a mere agent
without its separate and distinct personality, the FC
is in fact doing business in the Philippines through
that agent
Therefore it should have obtained a license to do so
Thus, if you buy in the Philippines rustans
A defective louie vitton bag, who will you sue?
There is a dealership agreement between louie
vitton with rustans
And rustans is selling in its own name
Therefore, louie vitton is not doing business in the
Philippines
So you sue its dealership in courts here in the
Philippines
d. It is participating in the management of a
domestic business, corporation or enterprise
Except: mere investment in a DC and exercising
rights inherent in such stock ownership is not
construed as doing business
e. when it enters into series of transactions that
imply a continuity of commercial dealings that is in
pursuit of the business for which the FC was
organized
what matters is not the # of transactions it enters
into but the nature of that transaction or series of
transactions
if directly or reasonably connected to the primary
business of the corporation, then the latter is doing
business in the Philippines***
When it is guilty of any of these acts without having

a procured a license first, the FC has no legal
capacity to sue within the Philippines but it can be
sued
thats why any action filed by that unlicensed FC in
relation to business it pursues in the Philippines is
dismissible on the ground of lack of legal capacity
to sue
There are exceptions to this rule:
1. although without license and doing business, any
action initiated by that licensed corporation may
still prosper if its for violation of the RPC or any
punitive laws it the Philippines, after all in a
criminal case it is people of the Philippine who acts
as offended party
2. second exception: when the unlicensed FC is
merely defending itself in a suit filed against it
it is not the unlicensed FC that initiated the court
action
having been sued or impleaded as D, it can avail of
all rights and remedies in Philippine law
3. Next exception: if the other party is in estoppel
it may happen that the FC is sued by 1, a resident
whether natural or juridical who knew that the FC is
doing business in the Philippine without license and
who may have benefited from that business
thus if that resident derived benefit from the
business of the unlicensed FC any suit involving
said business will place the resident in estoppel
so if the resident is sued by the FC, the latter is
barred from alleging lack of legal capacity of the P
to sue
incase the unlicensed FC is itself sued, we go to the
issue of acquisition of jurisdiction
New rules pertaining to services of summons
upon foreign unlicensed juridical entity:
Through any of the ff means
1.publicaiton of the summons in the state or country
where the FC has its domicile
2.service of summons issued by a Philippine court
served with the assistance of the DFA and a local

court in the country of state where that FC has its

principal office or domicile
3.by electronic means
A FC not doing business and as such not
required to obtain license
Has legal capacity to sue on the ff cases:
1.protection of property rights including IP such as
copyright, patent, service mark
These are rights in rem
Is local registration required for TM?
How about Copy right?
How about patents? Yes
2.may sue on an isolated transaction
Some reviewers say that an isolated transaction eh
pwede lang sa FC doing business in the Philippines
without a license: this is not accurate
If it is outside: bring it to the third classification

If it is within: bring it to the second classification:
unlicensed FC doing business
For the FC not doing business in the Philippines
If it has a limited capacity to sue in the Phil, can it
be sued?
No
Ground for lack of jurisdiction
It has not established any domicile in the
Philippines for its business
Mere participation in bidding for government
contracts is not per se doing business in the
Philippines
When will it be construed as doing business in the
Philippines?
When it wins that bidding ***
Read sec.137 et. seq. of the Corporation code
Also sec. 144 (criminal provision of the corporation
code)
Ung FC not doing business in the Philippines, thats

the only one who can sue on an isolated transaction
Why whats the nature of an isolated transaction?
This is a transaction or contract serving as basis for
the complaint of the FC that is set apart or entirely
different or not at all connected to the main body of
the business of the FC
So if it is a foreign insurance company not licensed
to do business in the Philippines
Suing on a quasi delict case committed against it,
here in the Philippines
Not at all related to any insurance contract, its an
isolated transaction
But a foreign bank, suing on a loan contract it
extended in the Philippines, is that an isolated
transaction?
No
Because its in fact inherent in the business of
banking
The term isolated may refer to a singular transaction
or a series of transactions
So its the nature of the transaction that determines
whether its outside or within the business of the FC
RA 8799 in relation to PD 902-A

Securities and Exchange Commission
SEC is a government office or agency that is
tasked with the ff:
a. to supervise and regulate all entities that are the
grantees of primary franchise from the state
PF: certificate of incorporation
b. regulate and supervise all investment houses,
financing companies, securities brokers, securities
dealers, and all other self regulatory organizations
under the SRC
in relation to the powers an function of the SEC,
read sec. 5 of RA 8799 an sec 6 of PD 902-A
these provisions can still be reconciled with each
other
thus in trying to harmonize these provisions, keep in
mind that the SEC is regulatory body and the
powers and functions enumerated are part of such
power

what was reminded in 8799 is the quasi-judicial

character of the SEC
thats why the SEC is divested of the powers to hear
and decide intra corporate controversies
and petitions for suspension of payment by
corporations for petitions for rehabilitation
What are the considered as intra corporate
controversies?
1. if it involves the corporation in relation to its
relationship with the state
Thats why a quo warranto proceeding which is in
the nature of an involuntary dissolution of a
corporation is an intra corporate controversy
2. between the corporation and its relation to the
public in general
thus, the first paragraph of sec. 6 of PD 902A
fraud in procuring its certificate, serious
misrepresentation
if you go back to the enumeration of the 4
categories of cases formerly cognizable by the SEC
these would contemplate a case of fraud
meaning devices or schemes amounting to fraud
committed by the corporation or by any of its
directors, or trustee or officers or any of its known
business associates against the public
This would include sale of unlicensed investment
contracts
3. Between corporation and its SH or members or
officers
4. Between or among the SH or members or officers
of the corporation
In relation to the last two: there is what we call two
tiered test to determine if there is an intra corporate
controversy
Why do we apply this test? Because it is a
jurisdictional issue
The two tiered test is met: its the special
commercial court that has exclusive jurisdiction
Two tiered test
1. relationship test
There is need to determine WON there is an intra
corporate relation between the parties
There is a need to determine if at the time of the
commission of acts complained of, there is such
intra corporate relationship, then its cognizable by
the SCC
It is not the date of filing of complaint that
determines the jurisdiction
Thus even if at the time the complaint was filed, the
intra corporate relationship has already seized the
special commercial court is not divested of tis
jurisdiction per se
When does corporate relationship end and
begin?
Stock corporation: begins from the time of
subscription whether by way of pre incorporation
subscription or a post incorporation one
One who agreed to buy and pay for a definite # of
shares of an issuing corporation is for all intents and
purposes considered a subscriber WON full
payment has been made
And the basis of such intra corporate relation may
be the subscription contract itself or the stock and
transfer book or if there are disputes as to the entries
made in the stocks and transfers book as when
initial subscribers name were not entered, then the
AOI
There was a case where theres a discrepancy
between the AOI originally filed with the SEC and
the subsequent stock and transfer book required to
be fulfilled by the SEC through the corporate
secretary
There were several whos names appeared in the
articles but when the time came for the SATB to be
accomplished, some of the names appearing in the
AOI were omitted in the SATB
Thus, while the SATB is considered prima facie
evidence of its contents, in the absence of proof that
there was already conveyance or transfer of the

shares of the incorporators or initial subscribers,

their name should be entered in the SATB
So the AOI there were considered as controlling
Their intra corporate relationship actually began at
the time their names were entered into the records
And its not dependent on full payment
When does it end?
When does intra corporate relationship end?
What are the ways that a SH ceases in such relation
from the corporation
1.if he transfer all or some of the shares to another
whether by endorsement and delivery of the COS or
by some other deed as may be required by the by
laws of the corporation
If the transfer covers all the shares
So the universality of the shares held by the SH in
the corporation
2.by full exercise of appraisal right after payment
by the corporation of the full value of the shares
Does delinquency terminate the relationship?
Example:
Subscriber X
Defaulted, despite call, to pay the balance on the
subscription price
Under the corporation code, the board may now sell
the shares thru auction in a delinquency sale
And the shares have been sold to another
Has the intra corporate relationship ceased?
There is still an intra corporate relationship
Becaue within the period prescribed under the
corporation code, the delinquent SH may still
question the sale on the ground of irregularity in
notice and conduct of sale itself
A civil complaint for nullification of the sale on
ground of defective notice: intra corporate
If the delinquent SH is questioning the conduct of
the sale, the ultimate prayer is for recovery of the
shares
Throughout that time, the intra corporate
relationship persists
Even if there is delinquency
Kalatagan v. CA and
Valley golf v. ________
These corporations are non stock sports and
recreational corporations
They are exclusive
The shares issued are non proprietary
The only purpose is to allow the members to use the
exclusive gold clubs
Each member is subject to payment of membership
dues
When the respondents were allegedly delinquent in
payment of membership dues
Their membership shares were sold by the
corporations
Invoked there was defect in the notices sent by the
corporation to the delinquent members
In one, the notice was sent to an address of record
but the corporation nonetheless sent it there after it
has acquired knowledge that the member was
abroad and has been in abroad for a long time
In another case, there was a defect in the notice
because the notice was sent after the sale of the
membership share
In both these cases, the alleged delinquent members
questioned the removal of their names from the
directory of the corporations as members
These are intra corporate controversies
They are insisting on their rights as members of the
corporation on the ground that the sale of the
membership sale was invalid
In the iglesia case
For a religious corporation sole, it can convert itself
into a religious aggregate by a mere amendment of
the AOI
But one of the issues here is WON there is an intra
corporate controversy when the bishop who refused
to leave the cathedral was expelled
He questioned his expulsion on the basis of
jurisdiction
Is it an ordinary labor case cognizable by the NLRC
or an intra corporate controversy
This was never resolved by the SC
But assuming that he made the proper allegation
If you look at the structure of the church, he is a BP
and a member of the consistory and the consistory
is the equivalent of the BOD

So when he was expelled as a bishop, its tantamount

to expulsion of director or officer
Therefore it should be considered as intra corporate
What are the examples of cases that meet the 1st
test:
Action for collection of sum of money filed by
corporation to enforce balance on subscription
To enforce unpaid subscription may be judicial or
extra judicial: derivative suits, mandamus to compel
the corporation to conduct a meeting of the SH, to
question elections or results or manner of
conducting the elections
Those are all intra corporate because they meet the
1st test
2.nature of the controversy test
Would a case prosper even without the intra
corporate relationship between the parties?
If yes, is it intra corporate controversy?
Then the question is, would the case still prosper in
the absence of an intra corporate relationship
between the parties
If the answer is yes, its not cognizable by the
special commercial court, because in that case the
intra corporate relationship is merely incidental
But without that intra corporate relationship, the
case cannot proceed
It means that its an intra corporate controversy
because its for the enforcement of rights and
obligations under the corporation code of the
Philippines
Or under the articles and by laws of the corporation
Insert February 4, 2013
Involuntary: creditor initiated

Jurisdictional allegations:
a. Atleast 3 creditors
b. Aggregate claim must be ateast 1M
Or atleast 25% of the SCS whichever is higher
c. There is no substantial issue of fact
d. Debtor has not paid obligations for the last
180 days prior filing of the complaint
e. There is no possibility of rehabilitation
f. Acts of insolvency
Acts of insolvency are presumed to be fraudulent
and include the ff:
1. prior to the filing of the petition, the debtor has
disposed of its assets
2. one or several of the creditors have accepted or
received voluntary payment or foreclosed or
proceeded against the property
When should the act of insolvency be committed to
give rise to fraud?
30 days prior to the filing
Thats why the creditors whos rights may have
been prejudiced by the voluntary but presumed to
be fraudulent acts may now go to court and seek
intervention so that their rights will not be
disadvantaged as against creditors who have already
proceeded against the debtor knowing that
insolvency had become imminent
Ultimate purpose of liquidation proceedings:
To pay outstanding debts of the corporation
What is the equivalent of a commencement order in
a liquidation proceeding?
Liquidation order
February 7, 2013
What is a liquidation order?
2 kinds of liquidation proceedings
1.involuntary
2.voluntary
Voluntary: debtor initiated
Corporation itself who files
Approved by the majority of the BOD and 2/3 of
the SH
What precedes the other?

Liquidation or dissolution?
Liquidation
Thats why what should the liquidation order
contain?
That the corporation should be dissolved

This is a form of creditor initiated involuntary

dissolution
Meaning at the instance of the creditors of the
insolvent corporation, they are ultimately seeking
that the corporation be dissolved so that the
remaining assets will be promptly distributed
Thats why the issuance of a liquidation order
should coincide with the date of dissolution of the
corporation
Thats why correlate liquidation proceedings under
the FRIA with dissolution and liquidation with the
corporation code of the Philippines
in the corporation code, the liquidation shall take
place as the cause of the dissolution, in the FRIA,
the liquidation shall take place because of
insolvency of the corporation and upon petition
Who shall oversee the liquidation of the

corporation?
The liquidator
Or liquidating receiver is the equivalent of a
rehabilitation receiver except that in rehabilitation,
the corporation is maintained as an ongoing
business
In liquidation, the juridical personality of the
corporation is not
Thats why a timely distribution of the receivable
assets must be made through the liquidator
Who are qualified and not qualified to be
liquidators?
Same qualification as rehabilitation receiver
But the court will not be the liquidator
Its always a third person appointed by court or
nominated by the parties
True or false
In liquidation proceedings, a pari passu principle is
not applicable
false
Pari pasu principle
All creditors are in equal footing
As laid down in express investment vs. bayantel
The purpose of this principle
It may be inserted either in rehabilitation and

liquidation
Depending on the sound discretion of the court, a
pari passu provision may also be inserted in a
liquidation plan
Whenever the circumstance warrant and to prevent
any of the creditors from gaining an unfair
advantage over the others, the court may enfoce and
equality principle so that all creditors will be treated
alike and that the secured and preferred creditors
may be required to waive or surrender their
preference or privilege so that under a pari passu
principle especially with respect to an insolvent
corporation, all creditors will be treated in equal
footing
Why?
Because in liquidation proceedings, when the
corporation is already insolvent, you can more or
les anticipate that the creditors rights will be
affected
How?
Because the assets are no longer sufficient to cover
all the liabilities or debts
And therefore, when required by the circumstances,
the liquidation plan may either:
1.distribute assets based on civil code: preference
and concurrence of credits
2.enforce pari passu provision
Dependent on the discretion of court
Exercise of judgment
Eastern investment vs. bayantel
Is the first case decided by the SC where the pari
passu principle was applied in a rehab proceeding
Rather than in a liquidation proceeding
Thats the historical root of the principle
SECURITIES AND REGULATIONS

CODE
Is known as the blue skies law
The provisions of the SRC are intended to protect
the investing public from unscrupulous visitors who
seek of make promise of profit as high as the blue

sky in exchange for investments made by the

innocent public
Thats why its a guard against unscrupulous
solicitations for investment
And one innovation under RA 8779 is that it
refocused the function of the SEC from a mere
quasi judicial body into one which is policy making
And this policy making power of the SEC is not just
with respect to corporations in general but toward
capital development in the Philippines
Thats why the regime guaranteed under the SRC:
the law does not guarantee guarantees profit on
investments but the law should guarantee a full
disclosure to enable the investing public to make
proper decisions on whether to buy or sell securities
Its the principle of full disclosure that is the aim
of the securities and regulations code
Thats why more crimes are punished now under
the SRC because they violate the full discourse to
public
Rule: all securities offered for sale in the
Philippines must abide by the requirements of the
SRC whose enforcement is under SEC jurisdiction
What is a security?
a. Participation in a corporation or any profit
making enterprise
b. as to form: may be written or electronic
c. And may include debt instruments such as bonds,
debentures, investment contract, etc.
What is an investment contract under the Howie
test?
1. Investment of money
2. In a common enterprise
3. Led to expectation of profit
4. Solely through the efforts of 3rd persons
***indispensable and concurring requirements
Meaning securities cover all transactions where the
investor earns passive income
In what way are SOS falling under investment

contracts?
Being a SH
Youre a SH of SMC
You purchased a subscription through SMC directly
the SOS
Did you enter into an investment contract?
When you enter into a subscription contract, you
become a SH and SH are investors
They are risk takers
So yes because:
a. Investment of Money: subscription price
b. Common enterprise: the corporation itself
c. Who is led to expectation of profits: the
subscriber is expecting profits through dividends
d. Efforts of 3rd persons: efforts of management of
the corporation especially through its board and ees
When you open a savings account in a bank, is
there an investment contract?
a. Investor: depositor
b. Common enterprise: business of the bank
c. Profit: interest on the deposit
d. 3rd persons: management
When you buy a life insurance:
Are you making an investment?
Dividends are not payable to the insured:
..
In a demutualized insurance company
True or false:
a. dividends are payable to the insured or policy
holders
in demutualization of insurance companies, the
policy holders become SH depending on amount of
policy
while they are SH, by converting them into SH,
they do lose their rights under the insurance contract
so that because you are a SH, you are entitled to
dividends (once asked in the bar)
so here there is an investment contract
When you enter into contract to sell condominium
unit with housing accredited by the HLURB
The contract to sell is pre selling for a condominium
unit yet to be built on 2018 but youre already
paying the installment today

Is there an investment contract?

Yes
a. There is payment of money
b. Profit: the real estate itself
For the investments involving contract to sell of
condominium units, the bank deposit and the
insurance policy, are they covered by the SRC?
No
Even if these are sold or offered for sale, the SRC
will not apply because they fall under exempt
securities
What are exempt securities?
Why are they exempt?
GR: no security shall be offered for sale or
disposition in the Philippines without a license or
permit issued by the SEC in accordance with the
SRC
But there are certain types of securities which are
exempt from registration therefore do not need a
permit from the SEC
the property seller

in royal who is the issuer?
The corporation itself
2. prospectus
What is a prospectus?
If the registration statement itself contains detailed
information regarding the issuer and the security
offered to be sold an for which a permit si being
obtained, the prospectus is the selling document
That itself must be approved by the SEC
It contains a summary or highlight of the contents
of the registration statement per se
It is similar to a brochure
Who must sign the registration statement?
Attach board resolution authorizing filing of
registration statement with the SEC
3. Attach also due diligence: analysis made by a 3rd
party expert as to the historical and financial
condition and prospects of the issuer and the
security
What are these exempt securities?
What securities are under the jurisdiction of the

BIR?
Tax credit certificates
What is the registration requirement of
securities?
How does the SEC issue the permit?
What are the prerequisites?
1.registration statement
What is a registration statement?
What does it contain?
1.must contain detailed information on the financial
and historical condition of the issuer, the one
seeking to sell securities within the Philippines
Who is an issuer?
The originator
In a subscription contract who is the issuer?
The corporation
In a contract to sell condominium units who is the
issuer?
4. Consent in writing
a. By the expert who took part in the registration
statement or any part thereof
b.incase what is involved are securities already in
the hands of existing owners, consent of that
owners such as SH
What do we do with the registration statement
now?
Filed with the sec
And the SEC will cause publication
What are the grounds for the SEC to reject the
registration statement?
1.the issuer is insolvent
This is an alarm bell
Because if the issuer is insolvent, that will likely
mean that issuance of security is for purposes of
providing cash to continue the nsovent corporation
And since the insolvency is already present, the
investors who may have been deceived into buying
those securities will not be collected by the
corporation

2.if there has been prior violation by the SRC

committed by the same issuer or registrant
3.there are material representations or concealment
in the registration statement itself
4.the SEC has reasonable ground to believe that the
issuer is about to commit fraudulent transaction
Such as selling securities without the necessary
permit from the SEC
5.any of the officers or the board of the corporation
has been convicted ___________
By a court of competent jurisdiction whether here or
abroad
To protect the investing public and to insure that
they are fully informed of the security or the issuer,
It is not just the issuer who must be trustworthy, all
of the officers of the corporation must likewise be
trustworthy
Thus, if they have been found guilty of committing
any of those crimes that would affect the trust
investment in the security, then the SEC will reject
the registration statement and deny issuance of the
permit
2 MARKETS FOR SECURITIES:
1. Primary market:
Refers to the original or initial disposition by the
security covered by a permit from the SEC
Its the first time sale or disposition
Ex. initial public offering
The shares of stocks for example are being sold for
the first time
For it to sell those SOS for the 1st time
It must have first obtained a license or permit from
the SEC
That is why when a transaction is done
Remember that the primary way of corporate
financing is to issue SOS
so when the corporation is unable to sell them to
existing SH, they sell they to outsiders
The issuer will appoint an underwrite
And the business of underwriting is guaranteeing
the sale of the securities
And it is the underwriter that will look for buyers of

these securities
Usually issuers appoint two or more underwriters to
guarantee that there is full subscription of the
securities that they are offering for sale
Thus, if you go back to the corp code, yung
subscription contract
If Pogi incorporation is selling its SOS for the first
time, under a subscription contract to X
Multiply that a hundred or a thousand fold
Thats a primary market transaction
Its not just to 1 of tis SH but to several who want to
buy those SOS
But the go between is the underwriter
2.secondary market:
February 11, 2014
Registration statement:
What is stated therein?
1.information on the issuer
2.prospectus
3.due diligence
4.written consent of experts who participated in the
preparation of the registration or the existing SH in
case the securities involved are those currently held
by SH
What is a prospectus?
What is contained there?
If the registration statement contains detailed
information, the prospectus is the second document
Contains the summary of the salient points in a
registration statement
Similar to a brochure
Who prepares the due diligence?

A person in charge of conducting surveys on the
financial condition of a corporation
When none of the grounds appear: assuming that
the registration statement is approved by the SEC:
SEC will now issue a permit or license to sell

The selling may be done in the primary or

secondary market
What is a primary market?
What is the business of underwriting securities?
Business of guaranteeing the sale or disposition of
securities in the Philippines
Done by:
1.investment houses
2.under GBA, by universal banks
The appointed underwriter for the 1st sale of the
100M of the corporation is BPI capital
BPI will underwrite 80M
Based on the AOI, the common shares are of the
value of P10
What is the obligation of the underwriter as to this
80M shares?
Secondary Market
What is the secondary market transaction involving
the same shares as above?
In the SM, existing owners buy or sell shares from
other existing SH or from a third person through the
facility of a stock exchange
Whats a stock exchange?
Public market for SOS
Its where shares currently held, other than those
held by the corporation, are actually disposed of,
bought or sold
In the Philippines: the only recognized SE is the

Philippine stock exchange
Who are members of a stock exchange?
Who is a dealer and a broker of securities?
In the agreement, the underwriting shall be for a

period of 30 days, within that 30 day period, what
must happen?
BPI must dispose to its clientel 80M shares
allocated under its agreement with Pogi
During that 30 day period, BPI was able to dispose
of only 60M
Unsold were 20M
Who should pay for the 20M unsold
The underwriter
That is its risk
There is a guarantee that all shares allocated to the
underwriter will be disposed
In essence it is a go between
BPI has to pay to POgi inc the value of the entire
80M shares
A broker is engaged in the business of selling or

buying securities for the account of others
Usually the UW is entitled to commission based on

shares sold
Or to mark up the selling price fixed by the issuer
Security dealership cannot be combined with

security brokerage
They are incompatible businesses
If pogi is selling its share at P15 each, BPI capital

guarantees that it will pay 15 per share
It may also be stipulated that from that minimum,
BPI capital may increase the price
Put a premium
So it can sell it at P20 per share
At which part in the cycle should the shares be

registered?
From the moment the SEC issues permit to sell
securities, it must be entered in the registry of
securities
That is the first step of registration
The SEC is the registrar of securities
A dealer sells and buys securities for his own

account in the ordinary course of business
Investment houses are also securities dealers
But investment houses cannot act as brokers
because under the SRC, the business of dealership
and business of brokerage must be divided by a
Chinese wall
They cannot be co mingled or cannot be undertaken
by the same corporation simultaneously because of
conflict of interest
You dont know if youre buying or selling for your
own account or for your client

Whats the second step of registration?

Every transaction involving registered securities
must also be registered with the SEC
Every sale must be reported to the SEC
Thats the second registration
Thus, in the UW agreement between BPI and Pogi,
the underwriting is part of the second registration
requirement
Or if they were booked
If BPI capital sells the shares in the secondary
market, those sales must likewise be registered with
the SEC
All subsequent dealings over the securities must be
registered
All subsequent dealings must be registered
What are exempt securities?
Why are they considered exempt securities?
They are issued by trustworthy sources
Public interest is not at stake
And securities themselves are not speculative in
character
What are exempt transactions?
Registration is a two step process
The first registration is the registration of the
security itself
This could be done with the sec
Second registration requirement is a reportorial
requirement
Thus in case of exempt transactions, the
presumption is that the securities involved are
covered by a license or permit except that the
transaction need not be reported to the SEC because
of the circumstances attending these transactions
They do not involve public interest
There is no public disposition
Its between the issuer and a limited # of persons
Determine if these are limited transactions:
Coming from the 80 M shares approved by the
SEC, the corporation after increasing its CS and the
increase is covered by the permit, made a pre

emptive right offering to its existing SH
Should it be reported to the SEC?
No
They are only affecting existing SH
Its between the SH and the corporation
And the right of the SH is already recognized by
law
You bought in the secondary market, from BPI
capital (dealer), 1M of the common shares
You were issued by pogi a certificate of stock
You want to encash your investment by selling
those SOS to A
You indorsed and delivered the certificate in
accordance with the corporation code
Should that be reported to the SEC?
Remember BPI is a dealer
From BPI capital to you is there need to register the
same?
Yes
You to the transferee?
No
Because its in the nature of a limited transaction
Public interest is not at stake
You are the current owner of 1M pogi shares
Which is covered by that permit
And you decided to sell these 1M shares to 100
persons
Exempt?
Not exempt
Why Not?
It involves public interest
What is the threshold of public?
20 or more
Thus even if you are an existing SH covered by a
certificate of stock, if you start selling your shares
to 20 or more persons then there is a need to report
those transactions to the SEC
But you sold them to only to 5
That is not a public transaction
Therefore no need to report to the SEC
Stock dividend declaration
Exempt

Its limited to SH of the corporation

BPI capital sold some of the shares of Pogi that it
acquired pursuant to its UW agreement to X
through facilities of price securities, a licensed
securities broker
Is price securities required to report the same?
No
Who is required to report the same?
BPI
Brokers transaction are exempt because they merely
act as go between seller and buyer so the reporting
must be done by the seller
The broker has no role in the transaction except to
bring the parties together
What if
BPI capital directly selling to BPI, its parent
company:
Exempt
What if
BPI selling to the government specifically to a
GOCC such as GSIS and SSS
Exempt:
They are considered as trusted entity
Any transaction involving a trusted entity is exempt
And they include banks, investment houses, etc.
All SRC provisions apply to public transactions
involving securities
There are many other guarantees and safeguards in
the law to protect the investing public
February 18, 2014

What is insiders trading?
Who is considered an insider?
Y: 20%
2 nights ago, both X and Y received the latest
audited FS of Pogi for the fiscal year 2013
Shows that at the end of 2013: pogi is suffering
from severe insolvency because many of its assets
have depreciated in value and booking fraud
committed previously
Many of the claims against pogi are now maturing
and there are no enough assets
X now looked for a broker without stating such fact
to the broker
And gave him instruction to sell the shares of X
Is X guilty of insiders trading?
Yes
When is IT committed?
When he gave instructions to the broker to sell his
shares, is there already IT?
What is a material non public information?
Its material if the information would, when made
public, likely affect the price of the security
Either increase or decrease it
When we say price: its market price
Because the presumption here is that the SOS of the
corporation are sold and traded between and among
existing SH in a corporation publicly
Usually through SE
When is it non-public with regard the security or the
issuer?
An information may be material or a fact of special
significance
If its material, it will likely affect the price of the
security
If its a fact of special significance then its one that
a reasonably prudent person would take into
account in determining a specific cause of action
Whether to buy or sell
When would these facts be considered non public?
Pogi inc is a public company and governed by the

SRC
One of its directors is X
Y is its chief financial officer
Both are SH of the corp
X: 10% of the CS
That FS showing insolvency on the part of the

corporation, as of the time it was presented to X and
Y
Was it already public?
No

A copy is not circulated to all members of the board

and key officers of the corporation
Public?
Non public
As required under SRC, that information was
caused to be published in the PDI
It was published for the first time today
Public or non public?
Non public
A press release was issued by pogi saying that they
regret to inform the public that the FS reflects that it
is insolvent and its liabilities exceed their assets by
1B
Still non public
30 days from today
The last day of publication
Is the information public or non public?
Public
When is an information public or non public?
Essence of insiders trading as a violation of the
SRC is that those insiders are prohibited from
buying or selling or engaging any transaction
involving their securities while in possession of
material or significant non public information
This is to prevent them from taking unnecessary
advantage of the confidential information they
acquire by virtue of their closeness or position in
the corporation to the detriment of other SH and the
public
Sec. 27 gives rise to a presumption of IT whenever
that insider buys or sells or transacts with the
securities that he or she owns while in possession of
the material non public information
Thats why for all material or significant
information, the SRC requires publication in a
Newspaper of general circulation through a
disclosure statement
This is a positive duty on the part of the companies
covered by SRC
But publication alone will not ipso fact convert
information into public info
Reasonable time is necessary for the public to

absorb such information before any of the insiders
can begin trading on the their securities
What is reasonable is a question of fact
Thus the persons who commit IT are those who
enjoy access to confidential information
a. Material: affect business of the corporation itself
in a direct manner
Results of election for members of BOD: material
So must be covered by a disclosure statement
The board has control over management of the
corporation
Determines the future and prospects of that
corporation
Fact that the corporation borrowed or incurred a
loan yesterday from PNB: not material
Its in the ordinary course of business
But if form of financing by a group of banks to pay
the expansion plan of the corporation for the next 5
years amounting to 5 billion dollars: material
Meeting of the BOD of 2 or more corps
simultaneously held to determine if they would
enter into a planned merger: material
Sale of all or substantially all of the assets: material
Amendment of the articles: depends
Change of address of principal office: no
Change of name: no
To convert the corporation from NS to stock:
material
Petition for dissolution: material
Petition for corporate rehab: material
Apple inc.
Steve jobs has died: material
FB
That the founder is retiring: fact of special
significance

A material fact is more or less fixed

A fact of special significance is more or less
subjective because judgement of a person is
involved
Correlate provision of who insiders are from
presumption of insider trading
Under the presumption, transactions of the spouse
of the insider and all other relatives by affinity or
consanguinity within the 2nd degree is presumed to
having been made while in possession of material
non public information
That will broaden the definition of who insiders are
Not just persons who came across material non
public information but also relatives of the insider
Kasi may presumption against them
While in possession of the material non public info,
X and Y started selling their shares with the
knowledge that if they sell their shares now they
can sell at a higher price
Because they know that once the information
becomes public, the market price of pogi will fall
They are now being prosecuted for criminal insiders
trading
What are the available defenses?

1.info was not gained from relationship as an
insider
2.insider had reason to believe that the buyer has
knowledge on the material non public information
Shares of X were sold to broker A to buyers or
investors BCDE
Upon complaint of BCDE, a criminal prosecution
against X is now pending for insider trading
Y sold to different persons
FGHI
X and Y are the insiders prosecuted for insiders
trading
What are the defenses available to them?
That the identity of the other party has been
established
Meaning the other party to the transaction is known
and the insider disclosed the information to the
other party or that the insider had a reasonable

ground to believe that the other party already knew
of the material non public information
Meaning, for X to escape liability from insider
trading
X must prove that he did not obtain the FS by virtue
of his position as a director of the corporation
But here this defense is not available
Or that when X sold his shares to B, he disclosed
such identity and that B is known to X and that B
also knew of the audited FS
Or that X had ground to believe that B knew of such
FS
What is the prescriptive period for cases
involving IT?
Manipulation of security prices vs. fraudulent

transactions
ABCD are the existing SH of pogi and also the
directors and officers
Pogi is a company covered by the SRC
While the shares are listed in SE no one is interested
in buying
A: 60%
B: 20%
C: 10:
D: 10%
So Pogi is dormant
So they talked to Broker X
broker X is the salesman or agent
A gave instructions to X to sell 300k pogi shares
Representing 20%
Broker X says, I will find a buyer and notify you
I will place the order
Order placed: 9:10am
Broker Y receives an instruction also from A to buy
300k shares of pogi if there are available in the
market
This order is placed at 9:30am of the same morning
Is there manipulation?
Yes
Giving false appearance of active trading
When in fact there is none
After 3 years of dormancy

This is the first transaction of pogi shares

Thats why similar to IT, the kinds of fraud are
normally committed by existing owners of the
securities
It is wash sale
There is no real change of beneficial ownership
Per se it is not illegal
When is it illegal?
If purpose is to give appearance of active trading of
security in the market or to increase or decrease
price of the security
Or it may be a form of price fixing if
The order is to sell the share at P10 per share par
value of 1P
Order to sell P20 per share
the one who sells earns P10 per share
thats a price fixing mechanism
Why?
Because if the investing public comes to know of
the increase int eh price of the security and want to
take advantage while the price is relatively low in
the hope of selling high
What the existing SH will do is that as the demand
is growing, they will start withholding supply in the
market
Hindi sila magssell
Because they are waiting for the time that the price
of the security will reach the level that they desire
for them to make a profit or cut a loss
So squeezing the float is also a form of
manipulation because an artificial shortage is
created
The law of demand and supply
When the demand increases but the supply is low:
the price increases
wash sale may be a single or a series of transactions

how is it different, as a price fixing mechanism,
from painting the tape and marking the close?
If A sells and buys and sells and buys for himself or
for his own behalf either in complicity with X and
Y, it may happen even if A is not privy to the
identity of X and Y, so that at 9:40 am to buy at P25
Again the price must be market driven
If prompted by a legitimate demand and shortness
in supply
Securities are only of a limited #
Only those covered by the permit
So what is offered should not exceed what is
covered by the permit
At 10:30
To buy at P40
Brokers X and Y also have BCD have clients
So they also gave simultaneous instructions to
brokers X and Y for a series of buy and sell
transactions
They are also guilty of wash sales and manipulation
How is marking the close and painting the tape
different from squeezing the float?
Squeezing the float: a violation usually committed
by existing SH or dealers of securities
A shortage is artificially created
Hype and dunk

An artificial market is created
Usually follows a squeezing in the float
So when the demand is already high
And the price level is already reached
Thats when they dunk the market with their
securities
Thats when they start selling
And when the supply is high, the tendency is to
decrease the price
But to those who engage in this manipulation, they
were already able to make a profit
Boiler room
Before: fly by night operations
Operations were made in sweaty rooms for purpose
of inviting investments to a particular type of
security
Purpose is to create a market whether the
inducement is by return or profit or otherwise
Daisy chain?
Any series of transactions for purposes of those
fraud or manipulation
A wash sale effected in a series of transactions
Matched order?
per se is not illegal

to prevent illegality, what must be ascertained by

brokers?
The order placed upon by X to sell matches the
order placed upon Y to buy
What are the matched manipulations?
1.the identity of the persons selling or buying the
security
Thats why the identity must be ascertained by the
brokers
2.time by which the orders were placed
3.size of the order
Its 300k shares to buy and sell
Identical security of the same size and practically at
the same time
In order to prevent illegality of the matched order,
all of those facts must be taken into account by the
broker before placing the orders of the customers
Otherwise, the brokers themselves will be held
liable for participation in the manipulation of
security prices
Those who intend to buy

Because they can buy at a lower price
February 21, 2014
What is a tender offer?

Is an offer coming from a person or group of
persons who intend to gain control over another
corporation
How?
By acquiring the outstanding securities of the other
corporation
Meaning the tender offeror has a target company
It may be voluntarily made
But under the SRC, a tender offer is mandatory in
certain instances
Bar Review Notes Due Date: March 14 Final

Deadline
Early bird plus points
SRC:
Governs transactions governs public disposition of
securities
And public disposition be subject to certain
manipulation of prices or fraudulent transactions for
purposes of inducing an artificial increase or
decrease in the price of the securities or false
appearance of active trading in those securities
Thus in trying to understand the application of
various forms of illegal manipulation of security
prices, keep in mind that those who will benefit
form these are either existing holders or those who
intend to acquire these securities
Incase of artificial increase in price of the security
who will benefit?
Existing owners
Because they can sell at higher price
If there is an artificial decrease who will benefit?
And usually that will be followed by an intent to

sell them at a higher price
Because investors buy or acquire at a time when the
price is low and then they sell at the time when the
price is high
So given that context, all forms of manipulation
with those fraudulent intent are considered
punishable
While manipulation is specific under sec. 24
Fraudulent transactions are more generic
Manipulation of security prices may not just apply
to those who intend to purchase the same but also in
case of tender offers and insider tradings
These illegal acts are usually committed in
combination
Under the SRC when is a tender offer

mandatory?
1.atleast 15% of the OCS of the target company in a
single transaction
2.atleast 35% over a period of 12 months in a series
of transaction
3.in a single or series of transactions of more than
50%
These provisions in the SRC have been suspended
by the SEC pursuant to its power to issue rules and
regulations
However the rule enforced at the present is:

Threshold amount of: atleast 35%

X is targeting pogi inc

X has studied the history of Pogi and has seen that
pogi is highly profitable
X has offered the purchase the shares of the
controlling SH of pogi but they have vehemently
refused the offer of X
But X really wants to take over
Thus, he offers a group of SH: ABC collectively
they own 40% of the OCS of pogi
While D owns: 55%
D refuses to sell to X
ABC have been given the offer and they have
accepted the offer of X to buy out the shares of
ABC
The remaining 5% is held by E
Upon who is X required to make a mandatory
tender offer?
E
Why?
Because E is a minority SH
So that what is the aim or purpose of the mandatory
tender offer?
To allow the minority SH to be given the
opportunity at the same terms and conditions and
for the same price as the controlling SH the
opportunity to withdraw from the corporation
Purpose here is to terminate the relationship
between those who accepted the TO
They will cease to be part of the corporation as they
allow another entity or person to take over
So its really an opportunity for the minority SH
Should X make a mandatory TO to D?
Who owns 55%
No
Why not?
He gains 40% from ABC
And then E joins ABC and so he now has 45%
Is the same tender offer for X to make upon D
D is a majority SH
No
This is precisely only for minority SH
Because D has already control
But this will not prevent the parties from making a
voluntary tender offer between and among
themselves
But under the law, its intended only to be for the

benefit of minority SH
ABCDEF are corporations
A is owned currently by B and C
B is an investment company
DEF are direct SH of B
Under this set up
D is an indirect SH of A through B
But D is also a direct SH of A
C is a minority SH of A
In a series of transactions through negotiations
E and F sold their shares in B to D
Making D the sole owner of the CS of B
Is B required to make a TO to C
Assume that the 35% threshold has been breached
Yes
TO involved direct and indirect acquisitions
For as long as the 35% or 51% ratio has been
breached by a single or series of transactions
whether direct or indirect, the Mandatory TO still
apply
If we add the stake holding of D
A direct SH
And an indirect SH to B
Thats more than 50% of the CS of A
Therefore in order not to deprive C of the
opportunity to withdraw from the corporation, a
MTO must be made by B to C
Equivalent to rules on TO are merger and
consolidation
In corporation code, there is a formal union between
the corporations involved
For that union to push through there must be asset
by majority of the members of the board and 2/3 of
the OCD of the respective corporations
Those who dissent are entitled to right of appraisal
This right of minority SH is equivalent to right of
appraisal
Why?
Because if there is a take over or acquisition of the
controlling stake is done through a series of
acquisition, a new management, new policies and
new practices will be in place because there is now
a new controlling stock holding in the corporation

And the minority SH have their voice as to the take

over of their company
Thats why one option for them is to withdraw from
the company and such withdrawal must be covered
by a mandatory TO
So thats equivalent to ROA
take note of our meaning of control

its not majority control, its control
in corporate law, its not necessarily majority
in fact its 20%
for purposes of TO, the SEC pegged it at 35%
provisions of SRC are applicable only to public
companies
including provisions on TO, manipulation, insiders
trading, registration, etc.
What are public companies?
1.those who have any of their class of shares listed
in the exchange
2. those who have any class of securities covered by
a registration statement approved by the SEC
3.those who have assets of not less than 50M with
atleast 200 SH where atleast 200 of those SH own
100 shares each
Phil. Veterans bank vs. SEC
SEC sought to penalize administratively the Phil vet
bank because of failure to file required reports
required under the SRC
Defense of Vet:
1. its a GOCC
A special chartered corporation, created by a special
law enacted by congress
As such, its not covered by the SRC
2. if it were made to comply with the reportorial
requirements imposed under the SRC, each report
would cost it around P47M because the reports are
required to be circulated among the SH
Therefore, it will infact deplete the government
bank of its necessary assets and cannot fulfil its
duties to its beneficiaries
3. its not an ordinary bank, its a trustee bank
SC:
Do you have assets of more than 50M? Yes
Do you have atleast 200 SH? Yes
Do 200 of them hold atleast 100 shares of the

company? Yes
Then youre covered by the SRC
Meaning its a public company even if its a GOCC
Union bank vs. CA
Union bank refused to comply with reportorial
requirements in the ground that it is a bank and the
regulator is BSP and not SEC
Same questions were raised by the SC and were
answered in the affirmative
Thus union bank is required to comply with the
SRC
In a related issue
Question was WON union bank was required to
obtain a registration statement or a license to sell its
securities
Since its a public company, mere permission from
the BSP is not enough
The registration statement under the SRC from the
SEC must be obtained
Kung 5 lang ung SH, its not a public company
Unless they begin to dispose their shares to more
than 20
It may have been originally consisted of 5
But once they dispose of their SH publicly or more
than 20, then the SC provisions must be followed
Since power to investigate violations of SRC are
given to SEC, SEC has no prosecutorial powers
Investigation may be suspended or stopped if the
person or persons under investigation would give a
settlement offer to the SEC
A settlement offer is an offer of compromise of
liability which may contain an offer to indemnify
not just the government but even private injured
parties and a promise not to commit the same acts
or violations in the future
Whenever the SEC receives a settlement offer, the
SEC is mandated to cause publication in a
And must take into account the timing of the SO
and primarily public interest

Timing: may happen that SO was given just before

the filing of the appropriate criminal cases
The SEC should reject
Its a form of escaping or evading criminal liability
or prosecution
Public interest is also at stake
Why?
The SEC should determine how much is invested by
the public in the security or the issuer by reason of
the violations committed
Purpose is to determine if the offer of indemnity is
sufficient to settle all the claims
However, there is nothing that prevents the SEC
from accepting a settlement offer without an
accompanying promise to indemnify
Once accepted, the settlement offer is final and
executory as to the content and conditions therein
but will effectively stop the investigation conducted
by the sec
However, there is still question as to the effects of
such accepted settlement offer on the rights of
private inured parties
Essentially, the accepted SO will only deter legally
the SEC from investigating
If youre the inured party, does it bar you from
filing a criminal or civil case?
One view: no
Not an effective bar to civil to criminal liability in
favor of private injured parties
Unlike in the US
In the US, a consent decree or nolo condere
judgment by the federal trade commission or even
by its SEC is a legal bar to all kinds of liability
Take note of prescriptive periods
To enforce liabilities, the same must be filed by the
injured party within 2 years form discovery of the
manipulation or fraud but not more than 5 years
form the commission of the transaction
So the year period is included in the 5 year period
BANKING LAWS
What is banking?
Business of asking the public for loans in the form
of deposits
How is it different from quasi banking?

The purpose of banking and quasi banking is to
obtain funds from the public for purposes of re
lending
Since that is the essence of banking and quasi
banking, what is the source of funds for banking?
Deposits
What is a deposit?
Represents the liability of a bank payable in
Philippine legal tender
And upon demand
The relationship between the depositor and the bank
is governed by loan
Simple loan or mutuum
It should not be misinterpreted as one of depositum
Because depositum is for purposes of safe keeping
personal property
In a simple loan transaction between the bank and
the depositor, the lender is the public, the bank is
the borrower
Since the deposit represents the liability of the bank,
and the deposit is payable on demand, how is the
demand?
Through withdrawal
What is the source of funds of quasi banks?
If banks have deposits
How about quasi banks?
Deposit substitutes
What is a deposit substitute?
Instead of cash, they come in form of documents
such as bonds, other certificate of indebtedness, etc.
Banks, both universal and commercial banks are
immediately authorized to engage in quasi banking
Banking business in the Philippines is the most
regulated business because there are two
government regulators:
1.BSP
2.Philippine Deposit Insurance Corporation
Both GOCC

Regulation of banking comes first and foremost

from the BSP act
The BSP act created that government agency in
compliance with the constitutional mandate to
establish a central monetary authority in the
Philippines
However, the BSP is a mere successor of the former
central bank of the Philippines
Under the BSP Act, the BSP is the sole authority
that lays down public policy with respect to the ff:
1.money
2.banking
3.credit
Its the BSP that also regulates pawnshops
As a policy making body, the BSP is headed by the
governor
Who is a presidential appointee
In political law
Although the BSP act required the submission of
the appointment to the CA, the SC qualified that
provision because the governor of the BSP is not of
those included for confirmation by the CA under the
constitution
What are the specific powers and functions of
the BSP
As bank regulator:
1.supervise and examine banks and quasi banks as
well as their affiliates
Power to examine is part and parcel of its
supervisory authority over banks and quasi banks
Cannot be subject of injunction or restraining order
issued by a court
If such is issued to prevent this power , the court
will be committing grave abuse of discretion
In the examination however of banks, the same may
be intended for:
1.monitor and determine compliance with relevant
laws, government rules and regulations
2.determine WON there has been violation of rules

and regulations and laws especially those with
DOSRI loans and single borrowers limits (SBLs)
Context of DOSRI loans is founded on sec 32 of
corp code, contracts of self dealing directors orr
officers
These are loans contracted by the director of the
bank, by the officer, SH of the bank and their
related interest
Single borrowers limit
Whether the max percentage for a single borrower
limit was breached by the bank
Purpose: to prevent exposure of the bank to a single
entity or group of affiliated companies
Minimize risk of non payment
Thats why if in the course of examination of bank
records, the BSP finds that the bank is suffering
from illiquidity, or cash flow difficulties, the BSP
through its monetary board has power to place the
bank under conservatorship
This power is granted under BS Act and GBL
If on the other hand, based on the inspection, the
bank is found to be suffering from insolvency, the
BSP through monetary board, may place the bank
under receivership
An order of BSP to place bank under receivership
or conservatorship is always final and executory
Not subject to appeal except on grave abuse of
discretion committed by the BSP
Specific to receivership:
Close the bank now and conduct hearing later
This is to protect public interest
Conservatorship or receivership orders by the
monetary board may rely purely on reports
submitted by the supervision and examination
departments of the BSP
Aside from being a bank regulator, the BSP is the
sole authority within the Philippines to mint coins
and print notes that form part of legal tender of the
Philippines

Basic principle that the BSP must observe in the

printing, issuance and circulation of legal tender is
that: the totality of the money or legal tender issued
by the BSP constitutes is total liabilities
and under the law, such liabilities, must have
equivalent assets of the BSP in gold
so the totality of value of money circulating in the
Philippines are debts owed by the BSP but those
debts must be equal to the gold reserve of the BSP
if there is an imbalance, you have a dysfunctional
economy
BSP is also the official depositary bank of all
government banks
Also, all funds which are classified as public funds
are required to be deposited in government banks or
directly through the BSP
Whether as UB or CB, the range of loans that they

can extend in transaction in the ordinary course of
business must comply with monetary board rules
Thus all banks loans must be extended with
appropriate collateral
For UB and CB, they are not allowed to grant
unsecured loans
The value of the loan may be anywhere from 65%
to 85% of the value of the collateral provided
Whether the collateral is through rent, CHM or
pledge
As a rule, for individual personal loans, the
collateral must be in the form of non risk assets
Example of risk assets of borrowers are SOS kasi
nagchchange ung value
March 4, 2014
In the case of banking corporations, there are
limitations as how they should be organized and
how they conduct their business
So that no bank or quasi bank should be allowed to
operate in the Philippines unless they obtain a
Certificate of authority from the BSP
That COA is the secondary franchise required by
law
Primary franchise is the COI from the SEC
Thus based on the classification, the primary
distinction under the GBL is between a universal
bank and a commercial bank
One of the measures enforced under the GBL is that
both kinds of banks need to meet minimum
capitalizations imposed by the monetary board.
And the minimum capitalization means the paid in
capital stock of the corporation
Which must be maintained at all times
So that if the banks fall short, it will be downgraded
At present, minimum capitalization
For UB: 5.7B pesos
For CB: 4.7B pesos
Rural and thrift banks: 200M, 100M, etc
In case of offer of prepayment, an offer of prepayment by the debtor, cannot be refused by the
bank***
This is especially for financing and other forms of
personal loans
Example
You obtained a financing loan from a bank to
provide for the purchase price of a house and lot
you want to acquire
After you gave your equity or ung portion na dapat
mong bayaran, the bank extends to you the
difference by way of a loan
So out of the 5M purchase price
The bank grants you a 3M peso loan
But that is payable over a period of 20 years
At stated monthly installments
On the 8th year of the loan, you won the lotto
So there is no further necessity in amortizing your
20 year loan because you now have the cash to wipe
out all your debts
And pay in full
So if you offer to pre pay your 20 year loan
Can the bank refuse?
No

This is an exception to the rule under the civil code

that when a period is imposed in an obligation, that
period is presumed to be for the benefit of both
debtor and creditor and as such, the debtor cannot
compel the creditor to accept early payment
This is the exception
Pre payment offers cannot be rejected by banks
However, the pre-payment may be subject to
conditions and terms and other stipulation that may
be required by the bank
Example:
Yung 12 years na interest income ng bank bka
singilin din sau
Its a valid stipulation
Kasi the more delinquent the borrower, the more
they earn
As to its lending business
In case of default by borrowers
The bank may resort to the usual remedies not just
to collect the balance but also to proceed against the
collateral
This would be subject to Maceda law or Recto law,
etc.
In case the bank acquires assets from its lending
business such as in case of foreclosure of
mortgages, the bank is prohibited form retaining
ownership over such acquired assets for more than 5
years
Once the bank has transferred that same to the SPC,

the 5 year limitation no longer applies to the SPV
Since the funds relent by a bank come from the
public in the form of deposits, there must be EO
diligence exercised by the bank and it is required to
treat with meticulous care money, property or assets
deposits and accounts of its clients
Thus, when there are mistakes or errors committed
by the bank in arbitrarily foreclosing a property
received or delivered as collateral, even if there is
no default or the grace period has not yet expired
for example
Then the usual remedies under the code of civil
procedure can apply
Example the bank foreclosed your property and
obtained the certificate of sale and registered it
despite the fact that there is no default
Whats youre remedy?
Petition for annulment of the sale and nullification
of the certificate of sale or cancellation of the
certificate of title as a result of the sale
However, sec. 47 of the GBL prescribes rules
regarding redemption of property or assets acquired
by the bank due to foreclosure
1.you have to distinguish between judicial from EJ
foreclosure of REM
Judicial vs. Extra Judicial foreclosure of REM
Meaning, within 5 years from consolidation of

ownership to the bank
The bank must dispose of such acquired assets
Why?
The bank is not in the business of acquiring assets
A bank may transfer those acquired assets to
another entity
Special Purpose Vehicles
The assets acquired by the bank as a lender May be
transferred to a SPV so that this SPV which is
actually a corporation engaged in the business of
buying debts or acquiring assets may re sell them
There are tax privileges to SPVs
Where to file
Rights of
debtor
mortgagor
(sec. 47)
Judicial
Court (which
court?)
1.equity of
redemption
Right of the DM to stop the
foreclosure sale
by offering to
pay the unpaid
balance as well
as the
accumulated
Extra judicial
By mere notice
of foreclosure
with the sheriff
Sec. 47 of the
GBL would
apply only if
the debtor is a
juridical entity,
(a corporate
borrower, or a
partnership
borrowing from
From a bank,
quasi bank or

penalties,
interest, cost
and expenses
Within 90 days
prior the date
of the sale
2.in addition to
#1, under GBL,
there is also
right of
redemption
Within 1 year
from
registration of
the sale
Just because
the CMortgagee is a
bank, quasi
bank or trust
entity, the 2nd
right is
accorded to the
borrower
trust entity)
1.what the
debtor acquires
is a right of
redemption
However, the
period of
redemption is
before
registration of
the sale which
shall not be
done more than
3 months from
foreclosure, the
sale itself
,whichever is
earlier
If creditor is
not a bank,
quasi bank or
trust entity, but
a natural
person, right of
redemption is
eliminated
Once a week for 3 consecutive weeks in a

When is the creditor mortgagee allowed to
participate in the bidding or conduct the sale
extrajudicially where the creditor-mortgage grants a
special authority to the creditor to foreclose the
property, otherwise hindi yan pwede
2. bidding
3. there is a highest bidder
4. issuance of the certificate of sale by the sheriff
5. c
Extra judicial sale
The auction sale was conducted on January 15,
2015
Upon which the highest bid was provided by the
bank
There will now be a certificate of sale issued by the
sheriff to the bank
Jan 16, 2015: bank registers sale
Can the debtor still redeem?
No
Because the sale has been registered
Even prior to the expiration of the period of
redemption under the GBL, the creditor-mortgagee
may already be entitled to a writ of possession
In ordinary foreclosure, can ___ acquire a writ of
possession?
After the period for redemption has elapsed
But under the GBL, even prior to redemption, a writ
of possession may already be granted to the creditor
mortgagee
Property thus acquired is subject to the 5 year
limitation
Thus the bank must resell within 5 years
Sec. 47 must be construed as applicable only

between the ff parties:
1.if the debtor is a natural or a juridical person
2.and the creditor is a bank, quasi bank or trust
entity
Anong steps sa EJ foreclosure?
1.notice by publication ng sheriff
In relation to the lending business of a bank,

what is the single borrowers limit?
The 25% is the ceiling based on what?
The networth of the bank
The networth of the bank is computed on the basis
of the value of its assets, liabilities including

depositary, and other profits that may have inured to

the bank itself
In short, the 25% ceiling cannot be breached if the
loans are granted to a single borrower
Who is considered a single borrower?
Who should fall within that 25% limit ceiling?
The purpose of the SBL is to prevent over exposure
of the bank to a single entity and therefore minimize
risk arising from losses that may be suffered by the
bank in case of default
Who are considered single borrowers?

Pogi inc
Members of the board consists of ABCDE
There are 5 directors
Pogi obtained financing loan from BDO
In the amount of 300M
Secured by mortgages, etc
And then, A also obtained a loan from BDO to
finance the acquisition of a brand new motor
vehicle amounting to 10M
Are Pogi and A considered a single borrower?
A borrowed in his personal capacity
No
The spouse of A, also borrowed or a child of A, also
borrowed form BDO an amount of 50M to finance a
personal sole proprietary business
Are A, and the spouse or child of A, considered a
single borrower?
A owns 60% of the OCS of Pogi
Pogi in turn is a subsidiary of cute incorporated
Whereby cute owns 55% of the OCS of Pogi
Pogis parent, cute, also borrowed from BDO
500M
Are cute and pogi, A and the spouse of A
considered single borrower?
Who in this case are considered as single
borrowers?
All of them are single borrowers
Its as if the loan of cute is also the loan of pogi is

also the loan of A is also the loan of the spouse of A
is also the loan of the child of A
Meaning, the totality of all these loans shall not
exceed 25% of the net worth of the bank
They will be treated as one and the same borrower
Regardless of the # of transactions, since A
exercises control over Pogi, being the owner of 60%
of the OCS, the personal loan of A even for his
personal benefit is considered as one and the same
as the loan of pogi therefore in computing the single
borrowers limit
The 10M for the car of A and the 300M to finance
the business of pogi should not exceed 25% of the
net worth of the bank
But because A is the controlling SH of Pogi,
Any loan contracted by the spouse or the child,
affiliated with the 1 who is a controlling SH of the
borrower, those loans are also considered as part of
the 25% maximum
Since cute is the parent of pogi, the loan obtained
by cute from BDO is also included in the
computation of the 25% asset
How is the SBL different form dosri loans?
What is a dosri loan?
Loans obtained by directors, officers, share holders
or related interests of the bank
The requirements for the dosri
True or false
Apply only to those obtained by these from their
bank
False
Why?
What if
Sm prime holdings is the holding company of the
members SY family
SMPH owns 100% of the CS of the SM investment
corp, the investment arm of the Sy family
SM investments is a SH of Sm malls incorporated,
the commercial real estate development corporation,
and then BDO as well as SMDC engaged in
residential property development

Hank Sy, Teresita SY, Henry Sy Are all directors of

BDO
If they borrow from BDO, for their personal use, is
that a DOSRI loan?
Yes
Under corp code and GBL
If SM mall borrows from BDO, is that a DOSRI

loan?
The directors of BDO interlock with those of SM
malls as well as SMDC
Would the loan of SM malls be considered a dosri
loan?
Yes
How about SMDC?
Yes
You are the director of your bank

You are also a depositor of your bank
Your deposit amounted to 1M
But you have a pending loan with the bank where
the unpaid balance is 300k
How much can the bank extend to you?
Whats the unencumbered part of your deposit?

700k
When a deposit account is oepend, the depositor
becomes the creditor of the bank
In which case..
The standard probision
Is that there shall be set off
.
Incase of default,
The unencumbered deposit is 700k
At present, SM investment inc and SMDC are

parties to a management contract
Assume that it is also included in the AOI with SM
investments as the managing corporation and the
SMDC as managed corporation
SM investments borrows from BDO is that a dosri
loan?
assuming that there are no interlocking directorship
No
How do you define related interests?
Either the managed or managing corporations are
considered as related interests because the success
of the managed corporation would bring income or
profit to the managing corporation
So transactions made by either would redound to
the benefit of the other
Since they are related interest, for the bankm then
the dosri rules could also apply
For the validity of a dosri loan, what are the
requiremetns?
DSRI rules apply not just to these dosri loans but
also to other
What else are the requirements?

..
Whats the final requirement ?

What kind of security must be provided by the
DOSRI?
By so called non risk assets
These include real estate, otherchattels but no SOS
of private companies but non risk assets can include
bonds belonging to the dosri but issued by the phil
gov or guaranteed by the phil government or by the
us government
Under the BSP act, the monetary board may also
examine bank accounts of the directors or oficeers
and SH of the bank
Its one eception to the law on secrecy
Pre finals: exclude securities
Beginning corpo to fria
40 leaf notebook
Who must approve a dosri loan?

..
March 7, 2013
In the approval of the DOSRI loan by the loan, can

the DOS vote?
No
Depending on whether it is UB or KB, how much

can a UB buy from the OCS of thrift / rural bank
And so on

UB
Thrift/rural
bank
One other
UB/KB
quasi bank
Financial
Allied
enterprises
(bank related
enterprises
but financial
in the sense
that they are
engaged in
some form of
lending
business, they
include credit
card
companies,
financial
companies,
leasing
companies)
Non-financial
but allied
100% of
equity (a
universal bank
can own a TB
as a fully
owned
subsidiary)
100% of the
voting stock
only if the
investing UB is
publicly
disclosed
(only 1 other
UB/KB)
40% of the
equity
100 of the
equity
KB
(Commercial
bank)
100%
100% of the
voting stock
only if
publicly listed
(its the
investing bank
which should
be publicly
listed,
otherwise must
remain a
minority SH)
40 % of the
equity
Minority SH
(these are
other financial
businesses
which are not
lending or
borrowing
businesses but
are usually
associated
with banking
functions such
as safety
deposit boxes
or warehouse
or trust
receipts)
100%
Non allied
enterprise
(not related at
all to banking
business)
prohibited
Correlate to
sec. 42 of the
corporation
code
UB*totality of investments in other companies not
more than 50% of the net worth of the bank but in a
single enterprise or in one other company cannot
exceed more than 35%
KB* totality of investments cannot exceed 35% of
the net worth but in a single enterprise not more
than 25%
This is to put a ceiling on risk taking in the case of
banks
Because the money used to buy the SOS will
always come from deposits
Thats why the value of the SOS specially those
publicly traded can fluctuate, these investments by
banks cause risks to the depositors
So there is a limit to investment banking in the
Philippines
100% of equity
100% of equity

Read carefully provisions of GBL regarding new

crimes such as engaging in unsafe and unsound
banking practices
These are considered sources of civil,
administrative and criminal liability whenever the
acts pose a systemic risk not only to the bank but to
the entire banking system
If you read the acts carefully, wording of the law is
a direct copy from the wording of sec. 3 of the antigraft and corrupt practices act
In short, the intent of congress in defining them is
that they are forms of graft and corruption
committed by bank officers
Thats why the highest criminal liability is imposed
under the law for this kind of transaction such as
entering fictitious loans or granting loans without
any collateral
Or making false records or violating secrecy of
bank deposits
All those are considered unsafe or unsound or
prohibited banking transactions
SECRECY OF BANK DEPOSITS

When first enacted, it was intended to encourage
savings in the Philippines
Part of that encouragement is to ensure
confidentiality regardless of denomination or
currency for as long as the deposit is maintained
within the Philippine banking system by an
accredited bank whether in a savings or checking
account or a time deposit account
The same is guaranteed confidentiality
To maintain secrecy of bank deposits, the ff are the
crimes that may committed under the law
1.any unauthorized examination or inquiry into a
bank deposit
This inquiry or examination may be committed not
just by bank officers or ees but also by officers of
BSP or PDIC
While BSP and PDIC exercise examination powers
over banks because they are regulators of banks
they are not allowed to scrutinize individual bank

accounts of depositors
They are limited to examining bank records for
purposes of complying with bank law, rules and
regulations subject to several exemptions
2.unathorized disclosure of any information relating
to any bank deposit
This crime may be committed by bank officers as
well as PDIC or BSP personnel
And this is the kind of crime that also may be
committed intentionally or even negligently
What if
During a drinking spree
The bank manager and other tellers and officers
were talking about the account of Pnoy which was
opened with their branch
And where the amount which was deposited therein
was subject to instruction from Pnoy that it should
be transferred to a tandem account with his
suspected girl friend
That was the subject of the discussion during the
drinking hour
If the next day, PDI features a banner story
regarding that bank account because beside the
table of the bank officers, there was a newspaper
man
Are they guilty of disclosure without authority?
yes
Although confidentiality is insured, there are
exceptions:
1. Bribery
2. Impeachment
3. Written order or consent of the depositor
4. any other matter where the subject matter is
subject of the litigation
5. under special laws such as:
a. NIRC
b. banking laws
c. unclaimed balances act
d. anti money laundering law
These exceptions apply only to 2 cases:

1. upon written consent of the depositor

2. upon order of competent authority
When is written consent necessary or
mandatory?
a. In case of DOSRI loans (the DOSRI has a
pre condition for the grant of the loan, will
be required to execute a written waiver of
the secrecy of bank deposits)
b. NIRC
- if a TP offers tax compromise to the BIR
- for purposes of computing estate tax
o who gives written consent since
the owner is already dead?
Representative of the estate or
the heirs
o BIR alone cannot
Which competent authority has power to issue an
order directing inquiry, examination or disclosure of
bank deposits?
1. In impeachment cases? The impeachment court
A proceeding does not mean that the bank account
of the impeachable official is subject to scrutiny by
anyone
there must be an order issued either by the
impeachment court or body which is investigating
the impeachment complaint
Who are the impeachment officials?

1. President
2. VP
3. SC justices
4. Members of the constitutional commission
Under the constitution, who is the impeaching
body? HR
Who is the impeachment court? Senate
During the impeachment of former chief justice
corona: one of his defenses against the subpoena
issued by the impeachment court is that these
accounts are not relevant to the proceedings because
they were already opened even before he assumed

his position as chief justice
Would that quash the subpoena issued by the
impeachment court?
No
Thats not relevant
His opposition on the ground that his accounts were
already there even before he became the CJ is
untenable because the purpose of the impeachment
is to determine WON there is full disclosure of his
SALN to the extent of his assets or wealth and
liabilities
And therefore, the bank accounts are necessary to
make that measurement
During Erap impeachment
Erap was ousted because of edsa people power 2
It arose because of the seeds of discontent because
of the refusal of the majority of the impeachment
court to open the second envelope which was
voluntarily submitted by equitable PCI bank that
time
And allegedly it contained information regarding
another bank account opened by Jose Velarde aka
Joseph Ejercito Estrada in the same bank
Aside from the 1B trust account
When they refused to allow the opening of the
second envelope, they were acting in accordance
with the law
Because there was no subpoena for that second
envelope
It was voluntarily forwarded by the bank itself
So the bank should have faced criminal prosecution
Had the enveloped been allowed or his contents
revealed
2. in case of bribery or dereliction of duty

Only the court trying the criminal case
In cases of bribery, whos accounts or bank deposits
are subject of the order?
Its the bank account of the accused
X accepted a bribe amounting to 20M in exchange
for his signature in a lucrative government contract
Thats just eh 1st installment

The second installment will be paid once the first

release of government funds is made
fortunately, before the final bribe, there was an
investigation
The original order applied for and issued by the
court did not disclose any bank account in the name
of X
he has no bank account whatsoever
Thus, An alias order was applied for for the bank
accounts of X, all the children of X, grand children,
other known relatives and friends, would that order
be a valid one?
Only X is being accused of bribery
This is also applicable for dereliction of duty or ill
gotten wealth under the anti graft and corrupt
practices act
Im the counsel for the wife of X, I opposed the
order on the ground that my client is not subject to
the criminal account or proceeding
Is it a valid defense?
No
Its not just because of ill-gotten wealth but all
instances involving public officials
Why?
An order to inquire into or examine bank deposits
May include deposits or accounts of others in who
the proceeds of the crime may have been concealed
with
Thats why you have to trace the paper trail
Will a pending case for plunder justify such
court order?
Yes
In the land mark case of Ejercito vs. sandiganbayan
Although there is no specific enumeration that
includes plunder in those crimes, the nature of the
crime itself involving as it does public officials who
atleat 50M pesos, requires that an order may be
given for such inquiry
Is there an exclusionary rule under the law on

secrecy of bank deposits for these kinds of crimes?
What is an exclusionary rule?
Lets say bank records were acquired, obtained and
used without in the course of the criminal
proceedings without the requisite order of a

competent court or authority
is the exclusionary rule applicable?
Meaning it should not be admitted as evidence
If bank information is obtained in relation to these
criminal proceedings, without the necessary court
order are they admissible or inadmissible in
evidence?
When is evidence inadmissible?
1.fruit of poisonous tree
2.declared inadmissible by specific provision of law
Are these evidence declared to be inadmissible by
law?
No
All the law requires is that there must be an order,
but there is no express provision stating that they
are rendered inadmissible
Thats why its up to the sound discretion of the
court on whether or not to consider them in the
appreciation of the evidence but they should not be
automatically excluded just because they were
obtained without the requisite order
Upon order of a competent court in criminal cases
of bribery, dereliction of duty, plunder or ill gotten
wealth under RA 3019
Any other exception?
Under AMLA, an order to inquire into a bank
account may be issued by the CA or any competent
court
Meaning RTC before whom the AMLC applies for
such order
But the issuance of an order to inquire into a bank
deposit for suspected unlawful activities cannot be
done ex parte
What can be issued by the CA ex parte is a freeze
order
Any other?
Upon order of competent court when the subject of
the litigation is the bank deposit itself
Or under the unclaimed balances act or upon order
of competent court or application by the
ombudsman

The most famous case involving an exception to the

law on secrecy of bank deposits is the case of:
Magsino vs. central bank
A hopeful but poor pnoy got information from
relatives that they will be sending him from
America 1k USD by bank transfer
When he checked his bank account, he found that
there was 1M dollars deposited in his accont
Thus, he promptly withdrew from account 999k of
the 1M leaving only the 1k he was expecting
and then went on a holdiy and travel trip
When the excess was discovered, the bank in the
US that committed the error in the transmittal filed
an action before a local court seeking to recover
under a solution in debiti payment
and the defendant invoked secrecy of bank deposits
Because as part of the evidence in chief of the
complainant, it had to establish that indeed the
money was deposited and such money was
excessive
To do that, there was necessity to look into the bank
account
SC: since the bank deposit is the very subject matter
of the litigation
And to allow confidentiality would result to unfair
or unjust enrichment, the court enforced the law
Its to ascertain the truth
The ombudsman, despite the wordings of the law
that creates the office of the ombudsman, does not
have authority per se to inquire into bank deposits
the ombudsman is still required to inquire even
before the filing of the information in court to apply
for a subpoena
As part of its investigation process
So there is no necessity for the ombudsman to show
that a criminal case is already pending in court
against a public official
In the case of union bank vs. CA and disierto
Issue here is WON the ombudsman upon court
order, can take out bank records in order to
complete its investigation
SC: what the ombudsman can do is to take an in
camera inspection of bank records in order to
prevent the scenario of such records being taken out
from the premises of the bank because they are

records in the ordinary course of business
What is an incamera inspection or examination?
He may take photographic files or video record files
of such bank accounts
Under the unclaimed balances act, although
summary in nature, escheat proceedings are
required to be filed against the banks holding such
unclaimed balances
Hindi automatic na nilalagay sa bureau of treasury
Does a writ of garnishment violate secrecy of
bank deposits?
no
in the return of the writ of garnishment, all that the
bank does is to disclose the information regarding
the existence or non existence of an account of the
judgement debtor and in case there is an account,
make a general statement that the amount deposited
is sufficient or insufficient to satisfy the judgment.
Amendments to the AMLC expanded the instances
when an order to inquire into bank deposits may be
issued
Recent case involving secrecy:
GSIS vs. CA
GSIS is not just the insurer of all gov ees but
engaged in all kinds of commercial insurances and
suretyship
It guaranteed the debt of a private debtor
Which is a corporation
This private debtor is a domestic corporation that
borrowed from another bank in the US
However, the bank in the US allegedly already
delivered the proceeds of the loan by wiring the
same to the bank account of the debtor, the loan is
denominated in US dollars
Foreign currency
When there was default, the guaranty of GSIS was
enforced
In guarantee whats the benefit of the guarantor?
Benefit of excussion
Thats why GSIS was trying to point out to the bank
account of the debtor alleging that the proceeds of

the loan were still present and held in tact in the

bank account
Thats why GSIS applied for an order requiring the
disclosure of the contents and information relating
to said account from the time that the proceeds of
the loan were allegedly transferred
Invoking the law on secrecy of bank deposits as one
of its exceptions
According to the GSIS, the order should be issued
because the subject matter of the litigation revolves
around the bank deposit
SC: while that contention may be correct, that the
subject matter of the litigation revolves around the
bank deposit, unfortunately the order cannot be
enforced because of the foreign currency deposits
act
FOREIGN CURRENCY DEPOSITS

ACT
This is the special law that guarantees absolute
confidentiality to all bank accounts, regardless of
nature, that are opened and maintained, within the
Philippine banking system in foreign currency
What are the benefits of maintaining a bank
deposit in foreign currency regardless of who the
depositor is?
1. the rate of interest payable to the deposit may be
subject to negotiation or stipulation between the
bank and the depositor
Unlike in peso denominated deposits which are
subject to contracts of adhesion
2.The foreign Currency bank account may be
opened through a numbered account
Unlike for ordinary accounts where in all
transactions you have to disclose the name of the
account holder, in foreign currency denominated
accounts, only the # of the account is sufficient to
transact
However, because of massive or to prevent money
laundering, the BSP now requires that even if the
FCA is by # only, the identity of the depositor of the
owner of such account must be known to the bank
And that the bank must maintain records of the
bank account, as well as specimen signature of
owner of said account
3. It is not subject to Withholding tax

4. Biggest benefit: the same cannot be subject to
any inquiry whether judicial or otherwise except
upon written consent of the depositor or owner
No court order whether by garnishment, execution
or attachment can permit inquiry or disclosure of
such FCD
March 11, 2014

For mock bar: for this part
50% for essay and MCQ from commercial law
review part 2
Coverage for this part: from the beginning
MCQ: 20 items (10 items comes from here)
Corp code, PD 902-A, FRIA, transferred
jurisdiction, SRC, banko central ng Pilipinas act,
GBL, law on secrecy of bank deposits and
exceptions thereto, AMLA, PDIC, law on extra
judicial foreclosure on REM, CHM law, bulk sales
law
Individual debtors under fria: not included
Quiz discussion
A SH of a corporation, who owns upto 100% of
another corp is an indirect Sh of the fully owned
subsidiary
As such, he/she has an interest in the book and
records and business of the subsidiary
Thus for as long as the books and records..
By unjustifiably refusing
The corp sec and directors may be held criminally,
civilly and administratively liable
Continuation of discussion
Purpose of law on secrecy of bank deposits is to
encourage savings by assuring absolute
confidentiality
And there are basically 2 crimes that may be
committed under the law:
While absolute confidentiality is guaranteed it
cannot be invoked in all instances

1.when there is written consent or waiver by the

depositor
a. NIRC
-tax compromise
-estate tax
b. BSP act requires consent with respect to DOSRI
loans
c. All other cases that the depositor finds necessary
2. by order of competent authority
Who are these competent authorities?
1.courts
May issue subpoena for presentation of bank
accounts regarding information in all cases
involving
Bribery, Dereliction of duty or violation of the
AMLA particularly in cases of forfeiture of ill
gotten wealth
2.by application to the court where the application
is made by the ombudsman
May include in camera inspection
Union bank vs. san tibanes
3.court order may be issued in investigation
conducted by the ombudsman
Meaning, the ombudsman does not have unilateral
or original power to conduct such inspection and
issue the order
4.court oder will be required upon application by
the AMLAC upon probable showing that the bank
deposit is the subject of an unlawful activity or a
court order is warranted when the subject matter of
the litigation is the bank deposit itself
Or may emanate from the impeachment court in all
cases of impeachment
These exceptions do not apply when the bank
deposit was opened and maintained in a foreign
currency
Thus, foreign currency bank deposits are not subject

to attachment or levy on execution or garnishment
without the written consent of the depositor
Thus, based on this, foreign currency bank deposits
are not subject to attachment or levy on execution
without the written consent of the depositor
They cannot be likewise be the subject of
garnishment
However, while absolute confidentiality is the
rationale of the FCDA, in the case of Salvacio vs.
central bank
Court found opportunity to determine the context
that led to the enactment of FDCA
Thus, the garnishment writ issued by the trial court
in a criminal case to satisfy criminal liability arising
from the conviction of the accused was upheld by
the SC
Why?
Because there was finding that that foreign currency
deposit maintained in a local bank was opened by a
mere transient tourist who is not among the class of
persons sought to be protected by the FCDA
That law was intended for the sole benefit of
foreign investors in the Philippines
In the foreign investments act
They have to maintain foreign currency deposits in
the Philippines as a preparatory step to repatriation
of those profits to their home country
Thats why they must be maintained as absolutely
confidential
Since the owner of the foreign currency bank
deposit here is not a foreign investor, he cannot hide
under cloak of secrecy under the special law
Other benefits of FCD in the Philippines: no
withholding tax on interest income
The interest rate may be subject to negotiation
Thus is a FCDA, absolute confidentiality is assured

for all bank deposits in foreign currency in the
Philippines
The only by which disclosure and/or disclosure may
be allowed is upon written consent of the depositor
Furthermore, the FC may be opened in a numbered

account

Numbered accounts: all transactions relating to the

account does not require identification of the
depositor
The transactions will be booked or entered by the #
of the account
4. all jewelry dealers whether engaged in precious

stones or metals but for transactions exceeding 1M
5. company service providers whether acting as
formation agents of other companies, providing
management services
ANTI MONEY LAUNDERING ACT
However, excluded from the coverage of covered

institutions are:
1.lawyers and accountants acting for and in behalf
of their clients where disclosure of any information
would violate the confidentiality of the relationship
Anti-Money Laundering Law and its subsequent

amendments
ML: in its board sense is the treatment of money
obtained from crimes and other unlawful means for
purposes of plowing such money back into the
legitimate economy by concealing the source or
origin therefore and making it appear that said
money came from lawful sources or legitimate
means
There is literally a wash cycle in money laundering
The dirty money will now be used to buy SOS, to
pay for insurance policies, to open accounts in
banks, used to incorporate corporations so they can
open as NGOs and use as channels for public funds,
etc
Under AMLA, the crime of ML may be committed
several ways:
1. by transacting money or property that came from
an unlawful activity
2. Or aiding or abetting in the transactions involving
such money or property
3. Or concealing the source of such money or
property where the source is unlawful activity
4. But AMLA also includes as an offense the failure
to report any of the above
Who are required to report under the AMLA?
These reports are required from covered persons or
institutions
The covered persons or institutions include:
1. banks, their subsidiaries or affiliates which are
subject to monitoring by the BSP
2. insurance companies
3. all entities acting as securities dealers or
securities brokers under SRC
What must be reported by these covered institution

and persons?
All information relating to covered transactions or
suspicious transactions
Covered transactions
Any transaction where the amount involved is
atleast 500k in a single banking day
May include cripping transactions
100k muna and then 200k, etc basta a total of 500k
What is a suspicious transaction?
Dati maintaining balance mo lang ang nasa account
mo
Dati 2k lang
On a particular banking day you received 5M or
500k
Eh dati ang pinapadala lang sau eh 15 per month
That is a suspicious transaction
No underlying legal or contractual justification or
its not commensurate to the capacity of the
depositor
March 14, 2014
MCQ: choose the best and not just the correct
answer
Important thing: the AMLA never provided for an
exception on Secrecy of Bank Deposits
The AMLA has no direct authority to make an
examination or inquiry into a particular bank
deposit

At best, AMLA can only require submission of

reports by covered institutions or covered persons
with respect to suspicious or covered transactions
Theres a difference between covered transactions
These pertain to any transaction where the amount
involved is alteast 500k
Whereas for suspicious transactions, the amount is
irrelevant
For as long as there is prima facie evidence or
showing that there is no other valid legal or
managerial or some other right or obligation that
will support the transaction or that the identity of
the party has not been established or the value of the
transaction is not commensurate to the means and
resources of the owner of the deposit or the party to
the transaction
As far as the power of the AMLC is concerned, it
has the right or power to apply for a freeze order
and an order to inquire into bank deposits
For a freeze order
Must be made upon application by the AMCL to the
CA
However the application may be made exporter
Or without need of prior notice to the owner of the
deposit or transaction involved
The FO issued shall be valid for 60 days and only
the SC can issue a TRO or injunction to prevent the
continuation or issuance of such FO
Purpose of FO
To preserve the suspicious account or covered
transaction so that the same may not be transferred,
dissipated or concealed while the investigation is
ongoing
For the FO to issue
It is material that there must be showing that the
transaction is related to an unlawful activity
Enumeration of predicate crimes and unlawful
activities under the amendments to the amla has
grown longer that is why it covers kidnapping for
ransom, arson, violations of the SRC, anti graft and

corrupt practices act, Plunder, laws prohibiting
gambling including jueteng ang maciao, Violations
of Human Security Act, Qualified theft
Differentiate a freeze order form an order to
inquire into a bank deposit
An order to inquire into a bank deposit may be
issued by any competent court
Usually applications are filed by the AMLC with
the RTC
Similar to search and seizure warrants
Inquiry or examination here is a search but limited
to certain documents or records
However, before the court can issue the order to
inquire, there must be notice to the other party
The inquiry order cannot be issued ex parte
Meaning, the order must be preceded by a
preliminary and summary hearing conducted by the
judge before whom the application was filed
And that the owner of the covered and suspicious
account and transaction must be given an
opportunity to rebut whatever prima facie evidence
the AMLC presents
Despite an authority given to AMLC to inquire into
bank deposits, AMLC is still prohibited from
making disclosures
Because the examination is only related to an
investigation
And the prosecution for crime of ML is not
anchored on conviction of the unlawful activities or
predicated crimes enumerated under the law unlike
fencing
TRUTH IN LENDING ACT

All banks or other entities or persons engaged in the
business of lending include quasi banks or other
financial institutions
Are required as a precondition to the grant or
extension of a loan
To make or execute a disclosure statement in favor
of the debtor or borrow
The DS is anchored on the public policy
To inform the D the exact cost of the borrowing

Thus the DS must be in writing containing the ff:

1. The total amount of the indebtedness
2. Total amount that is advanced by the D or
borrower / equity
3. All finance as well as non finance charges
Must be itemized in the DS
If not included therein, the lender cannot
enforce or collect the same
The finance charges are those additional fees that
are directly related to the borrowing which may be
stated by a fixed sum of money or a definite
percentage
Example:
The monetary interest or penalty in case of default
The non-finance charges
must be indicated as well, these are additional costs
imposed upon the borrower but not directly arising
from the transaction or loan
Such as mortgage registration fees
Or collection fees
Thus, the DS must contain all these in an itemized
faction , otherwise, any amount that is not stated or
included cannot be demanded and no modification
of what is stated in the DS shall be allowed without
the mutual consent of the parties
PDIC LAW
(Philippine Deposit Insurance
Corporation)
The PDIC is a GOCC that also exercises regulatory
powers over banks and quasi banks and their
affiliates
So basically the same power to examine banks as
that of the BSP
However, the purpose of examination conducted
by the PDIC is only to comply with the two
principal mandates under its charter:
1.PDIC is the statutory receiver of banks
Thus, when the MB issues an order placing a bank
under receivership then the PDIC is required to take
over the management, assets and liabilities of the

bank
During the period of receivership which shall not
exceed 90 days, the AOI and the by-laws of the
bank shall be deemed suspended and the bank shall
be closed for business
It shall be prohibited in engaging in business during
period of receivership
Thus, it cannot during such period, accept deposits ,
honor withdrawals nor grant new loans
And an order of the MB placing the bank under
receivership is always final and executory
May be questioned only by petition for certiorari
and only the SH of the bank may file such petition
By SH here, the law intended only majority of the
OCS can file the petition for the certiorari
None of the incumbent members of the board or the
officers of the bank can file the certiorari petition on
behalf of the bank
Why?
Because an order of receivership is presumed to be
an order questioning the acts of the management of
the bank
So directed against the board
Thats why they have no legal personality to file a
certiorari petition
Within the 90 day period, when the PDIC takes over
the control and management of the bank
The bank is closed in the meantime
The PDIC must determine WON the bank can be
rehabilitated or should be liquidated
These are opposing recommendations
Thats why if the business of the bank can be
continued without prejudice to the SH or without
incurring further losses on the part of the bank,
Then the rehabilitation shall be undertaken by any
competent person or entity appointed by both the
BSP and PDIC
Provisions of FRIA on bank rehabilitation are not
applicable
On the other hand

If the recommendation of the PDIC is that the bank
can no longer be rehabilitated and for the protection

of the public, the bank should be permanently

dissolved, then the bank should be liquidated
The liquidation of a bank is a judicial proceeding
that's why its the PDIC who shall file the Petition
for Assistance in the Liquidation (PAL)
Similar to a settlement of estate proceeding, the
PAL of the closed bank shall consolidate all claims
against the closed bank, thus all creditors of the
closed banks are required to file and later prove
their rights against the bank and in order to include
the same to the project of liquidation
And in order to include the same in the project of
the liquidation
And if the basis of the liquidation of the bank is
insolvency, as a GR the rules on concurrence and
preferences of credit in the civil code will apply
In the PAL, or during the liquidation proceedings,
the court shall oversee the liquidation with the
assistance of the PDIC
When a bank is closed, whether pursuant to
receivership or eventual liquidation
The second mandate of the PDIC becomes
enforceable
The PDIC is the insurer of deposits in the
Philippines
Thus, the insurance liability of the PDIC shall apply
only to legitimate deposits or similar accounts
maintained in the closed bank
No insurance liability arises from the ff:
1. fictitious bank deposits
2. bank deposits that contain proceeds of unlawful
activities under the AMLA
So the bribe deposited by a public official is not
covered by the insurance deposit
However under the amendment to PDIC law, the
maximum deposit liability of the PDIC is 500k
However, the insurance liability must be based or
reckoned on a per depositor per capacity basis
Its not even on a per branch basis
Because when a bank is closed or ordered to be

closed by the MB, its not per branch, its the whole
bank
Thats why if you maintain an account in two
separate branches of the same bank, and if you
maintain them in the same capacity, thats a
maximum of 500k
Thus, to enforce such insurance liability
Pogi bank was ordered closed by the MB
Has a savings account in his own name where the
deposit at the time of closure was 500k (Baguio
branch)
And has a checking account with a different branch
(dagupan branch)
If he maintains the account also in his personal
capacity with a pending balance of 300k
That shall be treated as 1 capacity
Meaning, the maximum insurance for both is only
500k
However if A also has a joint account with B
Because the joint account is for purposes of
maintaining their partnership business
And it has a pending balance of 1M in deposit at
time of closure
Maximum insurance coverage: 500k
But in case of joint accounts, the presumption is that
the balance thereon is co-owned by the parties or
owners of the join account
And in the absence of a specific stipulation, then the
balance is shared equally by the owners of the BD
Thus the 1M is presumed to be equally owned by A
and B to a maximum of 500k
Thus the 500k insurance cover will also be shared
equally by A and B
Meaning 250k will go to A
250k will go to B
Presumption here is that belongs to A
belong to B
However, for joint accounts, the presumption under
the PDIC is that each joint account is a separate
capacity
Thats why if A also has a joint account with C
That is separately covered by the 500k insurance
coverage
Therefore if this has an outstanding balance of 600k

The maximum insurance cover or this is also 500

They will also be shared by A and C
Thus, when Pogi bank is closed upon order of the
MB, for this checking and savings account
A can collect from PDIC 500k as well as 250k for
the first joint account as well as another 250k for
the second joint account
So a total of 1M
Transfer Deposit
A deposit made by the PDIC in an account that it
opened in a live bank in the name of the depositor
of the closed bank
However, if you look at the insurance cover and

compare it with the outstanding balance of these
accounts
How much is
(so this is 800k, this is the insurance cover and the
outstanding balance of the deposit)
(this one would be 500k over 1M)
(this one is 500k over 600k)
Difference between amount insured and the
outstanding balance is considered the uninsured
deposit
In that case, the depositor of the closed bank can

access or will be notified by the PDIC or the live
bank as to the deposit
Thus, how much is the uninsured deposit for the

savings and checking account for the first?
300k
For the joint about with B, the insured deposit totals
500k
For the second joint account with C: 100k
Therefore, the total uninsured deposit would be for
the joint account: (separate that as well)
Meaning, the share of A in the uninsured deposit is
250k
The share of B in the uninsured deposit is also 250
For the last, the share of A is 50k
And the share of C is also 50k
Thus, for A his uninsured deposit is 300k plus 250
plus 50k is 600k
For the insured deposit, the PDICs obligation
immediately arises from the moment of receivership
Meaning, the depositor of Pogi bank who is entitled

to the insurance deposit may be paid such insurance
liability thorough a TD
Once the PDIC pays the insurance liability, it

becomes subrogated to all the rights of the rights of
the depositor against the bank itself
So there is legal subrogation
Thus, if you look at the accounts of A
A will be paid either in cash or TD, the total of 1M
As far as that 1M insured deposit is concerned,
PDIC is considered legally subrogated
For the uninsured deposit, A must file the same as a
claim in the liquidation proceeding
And depositors of a bank are not preferred creditors
In fact, by law, whenever the PDIC pays the
insurance liabilities, the PDIC becomes a preferred
creditor of the bank
Amendment to the PDIC law expressly prohibits
splitting of deposits
Meaning, to open several accounts in different
capacities in order to avoid maximum liability
If the deposits are split and it is done with
fraudulent intent
The PDIC liability is limited to 500k for all the split
deposits
Read CHM and REM
How will the PDIC discharge its insurance

liability to the depositors of the closed banks?
1.cash
Usually if not more than 50k
2.transfered deposit
Under the AMLA amendments, no court order is

necessary for the AMLC to inquire into bank
deposits
If the unlawful activity to which it relates to is
Kidnapping of ransom, arson, violations of the
dangerous drugs act and Human Security Act

Commercial Law Review Mam Lulu

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Commercial Law Review

Lecture Notes of Atty. Maria Lulu Reyes

In relation that it is an artificial being, a private

Doctrine of limited liability: SH cannot be made

Since a corporation legally exists with the consent

The share holdings of an individual SH is the

1.it is an artificial being

And this is impervious to any changes that form the