COMMERCIAL LAW

REVIEW NOTES

Outline by Atty. Renato Rondez

UC LAW
 1

ATTRIBUTES OF A CORPORATION
MODULE 1

BASIS RIGHT OF SUCCESSION

The basis of the enactment of the Corporation The right of succession refers to its continued
Code (BP68) and the Revised Corporation Code is existence unaffected by anything that happens to its
SECTION 16 , Article XXII, 1973 Constitution: stockholders or members limited only by the term stated
in its Articles of Incorporation.
“Congress shall not, except by General law
provide for the formation, organization or regulation of It does not contemplate corporate immortality
private corporations, government owned or controlled but rather a continuity of existence irrespective of that
corporations may be created by or established by special of its components.
charters in the interest of the public good and subject to
the test of liability.” Under Section 11 of the Revised Corporation
Code, a corporation has PERPETUAL EXISTENCE unless its
DEFINITION articles provide otherwise.

The law defines a corporation as an artificial Corporations in existence prior to the revision
being created by operation of law having the right of shall also have perpetual existence unless by a majority
succession and the powers, attributes and properties vote of the outstanding capital stock, notifies the SEC
expressly authorized by law or incidental to its existence. that it will retain its specific terms. The right of appraisal
(Sec. 2). is available to any change in the corporate term.

ATTRIBUTES The term of a corporation can be extended or

shortened by amendment of the articles. A renewal can
From the definition, the attributes of a corporation take place within 5 years prior to the expiration of its
are the following: original term or renewal thereof unless there are
a) it is created by operation of law justifiable reasons for an earlier renewal.
b) it is an artificial being
c) it only has the power, attributes and property REVIVAL OF CORPORATE EXISTENCE
expressly allowed by law or incident to its A corporation whose term has expired may apply
existence for a revival of its corporate existence together with all
d) it has the right of succession. the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts and
THE CONCESSION THEORY liabilities existing prior to its revival. Upon approval by
When a corporation is said to be created by the Commission, the corporation shall be deemed
OPERATION OF LAW , it means that it cannot come into revived and a certificate of revival of corporate existence
existence without the consent or any grant of authority shall be issued, giving it perpetual existence, unless its
from the sovereign government. application for revival provides otherwise.

The grant of authority by the sovereign No application for revival of certificate of

government is a concession. Thus the concept known as incorporation of banks, banking and quasi-banking
the “Concession Theory” or “Government Paternity institutions, preneed, insurance and trust companies,
Theory” or the “Franchise Theory”. non-stock savings and loan associations (NSSLAs),
pawnshops, corporations engaged in money service
PRIMARY & SECONDARY FRANCHISES business, and other financial intermediaries shall be
approved by the Commission unless accompanied by a
PRIMARY or Corporate or General Franchise favorable recommendation of the appropriate
refers to the privilege enjoyed by individuals to form a government agency.
corporation.
CORPORATION AS AN ARTIFICIAL BEING
SECONDARY or Special Franchise refers to the
privilege enjoyed by the corporation to be and to act as a The corporation is said to be an artificial being
corporation. that is invisible and intangible, it is said to exist only in
contemplation of law. The law treats as though it were a
person by process of FICTION . It is likewise said to be a
juristic person resulting from an association of human
beings being granted legal personality by the state.

– COMMERCIAL LAW REVIEW –

 2

Consequently, the corporation as a juridical Example: when a stockholder/member who has

person has a personality separate and distinct from the an unsavory reputation utilizes corporate fiction
persons composing it. This SEPARATE PERSONALITY is to hide his true identity for illegal purposes
recognized under Art.44(2) Civil Code, which begins the
minute it is said to be duly constituted according to law. b) it justifies a wrong, protects fraud or defends
crime. These are the referred to as the FRAUD
Article 46 of the Civil Code provides that as such CASES .
it may acquire and possess property of all kinds as well
as incur obligations and bring actions, civil or criminal, in INSTRUMENTALITY RULE
conformity with laws and regulations of their
In the Concept Builders and Lanuza cases, the court
organizations.
said that: to sustain the application of the doctrine to
ILLUSTRATION:
alter-ego cases, resort has been had to the
Instrumentality Rule, the requisites of which are:
In J.G. Summit Holdings v. CA, the court said: “an
agreement of co-shareholders to mutually grant a right a) There is complete domination or control of
of first refusal to each other, by itself, does not policy and business practice
constitute a violation of the provisions of the b) The control is used to commit the fraud
Constitution limiting land ownership to Filipinos or c) The control used is the proximate cause of injury
Filipino corporations. If the foreign shareholdings or loss.
exceeds 40%, it is not their ownership that is adversely
affected, but rather the capacity if the corporation to To allow piercing, the courts must be sure that the
own land. The fact of land ownership by the corporation corporation fiction was misused to such extent that
cannot deprive the stockholders of the right of first injustice, fraud, or a crime was committed upon another,
refusal. No law disqualifies a person from purchasing disregarding his rights. It is the protection of the interest
shares in a landholding corporation even if the latter will of innocent third persons, which the law aims to protect.
exceed the allowed foreign entity. This right belongs to Thus, one cannot be allowed to invoke the separate
the stockholders, while the right to the land belongs to identity doctrine to save itself from transactions, which it
the corporation. They are separate and distinct.” knew to be defective or contrary to law, rules or
regulations.
PIERCING THE VEIL OF CORPORATE FICTION
It bears repeating here the SC declaration that
The obligations of a corporation are not whether the existence of the corporation should be
obligations of its stockholders or members & vice-versa. pierced depends on questions of facts, appropriately
pleaded. Mere allegation that a corporation is the alter
The principle though is subject to an exception, if ego of the individual stockholders is insufficient. The
the Doctrine of Piercing the Veil of Corporate Fiction presumption is that the stockholders or officers and the
applies. This doctrine is also known as the Doctrine of corporation are distinct entities. The burden of proving
Disregarding the Fiction of Corporate Entity or Corporate otherwise is on the party seeking to have the court
Alter Ego Doctrine. It is an exception because the pierce the veil of corporate entity.
application of the doctrine seeks to hold the stockholder
or members of the corporation personally liable for Determining the existence of the grounds is the easy
corporate obligations. part. What must be determined is the nature of the
obligation because for piercing to be applicable, the
As a consequence of the application of the obligation must belong to the corporation. It is the
doctrine, the stockholders or members will become liable obligation which the corporation cannot fulfill or cannot
for a corporate obligation. settle. In which case, the third party going after the
corporation will now seek recovery from its
GROUNDS stockholders/members.
For the doctrine to apply, any of following
There is an instance where the obligation belongs to
circumstances must obtain:
an SH or member. This starts as an SH/M obligation, then
a) corporate fiction is being used to defeat public eventually the veil of corporate fiction would be used.
convenience. The convenience is the creation of This is possible when an obligation has already been
a separate and distinct person from the incurred by a SH/M then eventually he/she transfers
stockholder or members to facilitate the his/her assets to a corporation to avoid a situation where
transaction of business. These are referred to as his assets can be sought by the creditors for the
the ALTER-EGO CASES . satisfaction of the obligation.

The ground available for this case is that it defeats

public convenience.

– COMMERCIAL LAW REVIEW –

 3

EXTENT OF CORPORATE POWERS CORPORATIONS VS. NATURAL PERSONS AND

PARTNERSHIPS ON THEIR CAPACITIES
A corporation is said to have only those powers
CORPORATIONS can only exercise those
or properties expressly authorized by law or incident to
expressly authorized by law, can be implied or are
its existence.
necessary to carry out its purpose/s, such as acts in the
Incidental powers require that we look to what is usual course of business or incidental to its existence
provided for by law or its charter first, then determine a because they attach to a corporation upon its creation
causal connection between the act or power being and said to be inherent, such as the right of succession
exercised with what is express. or to sue.

EXAMPLE CASE: NATURAL PERSONS or PARTNERSHIPS , on the

other hand, can exercise or perform any act provided it
Teresa Electric Case: They were questioning the is not contrary to law. The reason being that
Cement Manufacturing Company having its own electric corporations owe their existence to the state, while
plant. Here, the manufacturing of cement is the express natural persons or partnerships do not.
power. The operation of the electric plant is an implied
power. EXPRESS VS. IMPLIED POWERS
Express and Implied powers can further be
The reasoning is simple: You need to have electricity
distinguished as follows:
to be able to manufacture cement.
a) Express powers deal with main business, object
IN SUMMARY:
or purposes of the corporation, while Implied
What kind of powers can be exercised? powers deal with the means and methods of
You say express or implied. attaining the object or purpose.
b) Express powers are determined by the language
If you’re asked to differentiate between the two: of the law and its charter while Implied powers
Express is what is found in the Law, Articles, and may change according to time, place and
Bylaws; Implied is what is necessary for the circumstances.
accomplishment of what is expressed. c) Test of Express powers is whether they are
found in the words of the law or charter while
If you are asked to determine WON a private the Test of Implied powers is whether they are
corporation can exercise a particular power, acquire a purely incidental to its express powers and is
particular property, or has a particular attribute, what reasonably necessary to their being carried out.
you need to do is to determine first: do you find it in
Laws, Articles, and By-laws? ULTRA VIRES:
When you cannot determine if the power is express
If you find it in any of those three, then it is express. or implied, what is it?
If you don’t find it in any of these three, then you find a
CAUSAL CONNECTION between what is expressly As long as it is outside of what is express or implied it
allowed and the act in question. is known as ultra vires.

You simply ask yourself: Is the act in question, which Ultra Vires may be legal or illegal.
is not express, one necessary to accomplish what is
A distinction has to be made because an act of a
expressed?
corp beyond its express and incidental powers is ultra
vires, but if legal, it can be ratified. If illegal, it cannot be
If Yes, then you have a power that may be exercised
ratified.
by the corp, a property that may be acquired by the
corp, or an attribute that may be enjoyed by the corp.
CORPORATE RESIDENCE & NATIONALITY
THEORY OF SPECIAL OR LIMITED CAPACITIES The residence of a corporation is ordinarily the
This attribute is recognition of what is known as PLACE OF INCORPORATION . For venue purposes, a
the Theory of Special or Limited Capacities. The opposite domestic corporation is a resident of a particular
of this theory is the “Theory of General Capacities” which province, city or municipality.
maintains that a corporation can exercise any and all Ordinarily a corporation cannot be said to be
powers that may be exercised by persons. possessed of nationality or citizenship as its very essence
is the duty to allegiance to the state and the exercise of
political rights, which only natural persons can perform.

– COMMERCIAL LAW REVIEW –

 4

However, the nationality of the corporation will have to THE GRANDFATHER RULE
be determined for purposes of engaging in business.
In the case of Narra Nickel Mining &
Constitution: Certain business activities are Development Corporation v. Redmont Consolidated
reserved for Filipinos. (Nationalized: At least 60% Filipino Mines, the Court said it could be utilized to resolve a
owned). So, we have to determine nationality. doubt as to who has beneficial interest and control even
when the corporation complies with the 60-40
TESTS OF NATIONALITY requirement.
The tests to determine nationality are: The grandfather rule looks at the percentage of
foreign holdings in a corporation, which is a stockholder
a) the ENTITY OR PLACE OF INCORPORATION TEST
in a Filipino corporation to determine whether or not the
which looks at the nation where the corporation was
percentage requirement of Filipino ownership has been
enacted. The applicable standard in the code is the
met.
latter test. – not sufficient for our purposes.
b) the AGGREGATE OR CONTROL TEST which requires TO ILLUSTRATE
looking into the nationality, domicile or residence of
the individuals who compose the corporation – Assume that Corporation “A”, a corporation
stockholders and members organized in the Philippines, wants to pursue an activity
which is limited under a statute to corporations where
However, for purposes of investments, the the equity participation of foreigners is limited to 40% of
applicable standard is the former as based on the the outstanding capital stock. Its outstanding capital is
Foreign Investments Act of 1991 which provides that a equivalent to P10, 000,000.00 divided into 1,000,000
Filipino national includes a corporation organized under shares. Around 450,000 shares in “A” is owned by
Philippine laws of which 60% of the outstanding capital Corporation “B” while the rest belong to Mr. X a Filipino.
stock entitled to vote is owned by Filipinos or a Sixty percent (60%) of the outstanding capital stock in
corporation organized abroad is doing business in the Corporation “B” belongs to Japanese nationals while
Philippines under the Corporation Code of which 100% forty percent (40%) belongs to Filipinos. If the
of the capital stock entitled to vote is owned 100% by Grandfather Rule will be strictly applied, the 450,000
Filipinos. shares owned by Corporation “B” cannot be said to be
entirely Filipino owned or Japanese owned. The
In Gamboa v. Teves, capital as used in Section percentage which can be said to be Japanese owned can
11, Article XII of the 1987 Constitution was defined as be determined using the formula “Number of Shares
referring only to shares entitled to vote in the election of multiplied by 60/100” or in this case 450,000.00 x
directors and not to 60% of the entire outstanding 60/100=270,000.00. Thus, 270,000 shares are deemed
capital stock. This is the VOTING CONTROL TEST or Japanese owned and the balance of 180,000 is owned by
BENEFICIAL OWNERSHIP TEST . Filipinos. If the 180,000 will be added to the shares of
Mr. X (550,000), then the total number of shares owned
Subsequently, the SEC promulgated SEC MC No.
by Filipinos in Corporation “A” is 730,000 or 73%. On the
8, Series of 2013 requiring covered corporations to
other hand, the 270,000 belong to foreigners or 27% of
comply with the requirement that the 60% SHALL APPLY
the outstanding capital stock in Corporation “B”.
TO the
Therefore, under the “Grandfather Rule”, Corporation
1) total number of outstanding shares entitled to “A” can pursue the proposed activity because the limit of
vote for the election of directors and equity participation of foreigners, which is 40%, has not
2) total number of outstanding shares of stock. been exceeded.

The validity of this circular was upheld in Roy v. SEC. TORT AND CRIMINAL LIABILITY

The application of the control test and Is a corporation liable for torts? Yes.
abandonment of the “grandfather rule” for investment
- Principal/Master – Agent/Servant Relationship
purposes is supported by the provision of the Foreign
Investments Act that provides: “where a corporation and In PNB v. CA, tort liability can be imposed on a
its non-Filipino stockholders own stocks in a SEC corporation because generally speaking, the rules
registered enterprise, at least 60% of the stock governing liability of a principal or master for a tort
outstanding and entitled to vote of each of both committed by an agent or servant are the same whether
corporations must be owned and held by citizens of the the principal or master is a natural person or a
Philippines and at least 60% of the members of the corporation. Hence, when an officer or agent of a
Board of Directors of each of both corporations must be corporation under express direction or authority of the
citizens of the Philippines, in order that the corporation corporation commits a tortuous act, it would be liable.
shall be considered a Philippine national”

– COMMERCIAL LAW REVIEW –

 5

Can a corporation be criminally liable? No. ENTITLEMENT TO MORAL DAMAGES

As a rule, no criminal action can lie against a Is a corporation entitled for moral damages?
corporation. A corporation cannot commit felonies as
provided for in the RPC because artificial beings are In Mambulao Lumber vs. PNB, the recovery of
incapable of intent, nor can it actually perform an overt moral damages for a besmirched reputation was
act. allowed. This ruling was eventually modified in Acme
Shoe vs. Court of Appeals where the court said: mental
In West Coast Life v. Hurd, to make a corporation suffering can only be experienced by one having a
criminally liable, the Supreme Court clarified that it is nervous system and it flows from real ills, sorrows and
necessary that the STATUTE , by EXPRESS W ords or by grief of life, all of which cannot be suffered by
necessary intendment, include corporations within the respondent banks as an artificial person.
persons who could offend against criminal laws and the
legislature must at the same time establish a procedure The pronouncement on the matter is Filipinas
applicable to corporations. Illustrating in Sia v. People, Broadcasting Network, Inc. vs. Ago Medical and
the court acquitted the president of a corporation who Educational Center where it was held that Article
signed a trust receipt as the law prevailing prior to the 2219(7) of the Civil Code ALLOWS THE RECOVERY of
enactment of the Trust Receipts Law did not provide for moral damages in cases of libel, slander or any other
the existence of corporate criminal liability. form of defamation WITHOUT QUALIFICATION as to
whether the plaintiff is a natural or juridical person.

In Crystal v. BPI (572 SCRA 697) it was held:

“While the court may allow the grant of moral damages
to corporations, it is not automatically granted; there
must be proof of the existence of the factual basis of the
damage and its causal relation to the defendant’s acts.”

– COMMERCIAL LAW REVIEW –

 6

KINDS OF CORPORATION & INCORPORATION

MODULE 2

STOCK CORPORATION NON-STOCK CORPORATION

A stock corporation is one whose capital stock is A non-stock corporation is one where no part of
divided into shares and are authorized to distribute to its income is distributable as dividends to its members,
the holders of such shares dividends or allotments of trustees or officers, and when any profit is obtained as
the surplus profits on the basis of the shares held (Sec. an incident of its operations it shall, whenever
3, Revised Corporation Code). necessary or proper be used for the furtherance of the
purpose/s for which the corporation was organized
For a stock-corporation to exist, what is (Sec. 86, Revised Corporation Code).
essential is it has capital stock, the capital stock is
divided into shares and they can give out dividends.
POWER TO ENGAGE IN A PROFIT -GENERATING
Sometimes, there is no mention of the power to give
ACTIVITY
dividends but as long as you can see that there is capital
stock that is divided into shares, notwithstanding the A non-stock corporation has the power to
absence of any express provision or statement that it is generate profits. What is essential for it to remain as
allowed to distribute dividends, it would not matter. non-stock is that any profit or income is not distributed
The corporation would still be a stock corporation as dividends to its members, trustees or officers.
because it has been said that the power of a stock Rather, these profits or income shall be used to further
corporation to distribute dividends is an inherent the purpose/s for which it was created.
power.
PURPOSE OF NON -STOCK CORPORATIONS
It may be organized for the following purposes:
charitable, recreational, fraternal, religious, trade,
cultural, educational, literary, scientific, professional,
social, civic service, industry, agricultural, chambers or
any combination subject to special provisions (Sec. 88).

DIFFERENCES BETWEEN STOCK AND NON -STOCK CORPORATIONS

STOCK NON-STOCK
Existence of capital Has capital stock divided into shares No capital stock.
stock Its capital is in the form of contributions or donations.
Purpose Organized for profit. Not organized for profit.
Distribution of Through dividends Not distributed.
profit Any profits earned is used for the furtherance of the
purpose/s for which it was organized.
Number of directors Not less than 5 but not more than 15. Not less than 5 and may be more than 15 except non-
or trustees Except corporation sole and banks (in stock educational institutions, max of 15 trustees
case of merger and consolidation which
can have a maximum of 21 directors
Term of office of 1 year until their successors are elected Subject to the provisions of AOI and by-laws, 3 years
directors and qualified, subject to the provisions on a staggered basis
of AOI and by-laws It may have any number of trustees as fixed in the
Articles of Incorporation or By-law from the ranks of
its membership.
The term of the original trustees is such that 1/3 of
their number shall serve for a year, the second 1/3 for
two years and the third 1/3 for three years
Trustees subsequently elected shall then serve for a
term of three years. Trustees elected to fill vacancies,
shall only serve for the unexpired portion.
Election of officers By the BOD The members elect corporate officers, unless
otherwise provided by Articles of Incorporation or By-
Laws.

– COMMERCIAL LAW REVIEW –

 7

Place of meeting SH’s meeting shall be held in city or May be held at any place outside the principal place
municipality where the principal office of business of the corporation
is located or at the principal office
Provided, there be notice of the date, time, and place
(May be held in or outside the and should always be in the Philippines.
Philippines)
Right to vote SH can resort to cumulative voting No cumulative voting unless allowed by the AOI

Only preferred and redeemable shares Right to vote may be limited, broadened or denied by
can be denied the right to vote subject the AOI or by-laws.
to some exceptions.
Unless so provided, each member is entitled to one
Voting of directors may be made only vote.
through general voting. Regional and
district voting of directors are not In exercising the right, he may vote by proxy and also
allowed. by mail or other similar means as authorized by the
Articles of Incorporation or By-Laws with the approval
One share = one vote of and under conditions prescribed by the SEC

Non-voting shares may vote on the 8 Regional and district voting of trustees are allowed.
instances mentioned under Sec.6 of the
RCC, and will still be one share = one
vote
Transferability of Right or stock ownership may be Membership and all rights are personal in character
shares/Membership transferred with or without consent of and is not transferable unless allowed by the AOI or
the corporation by-laws
*one of the essential characteristics of
stock ownership
Right to expel SH may be expelled only for grounds Membership shall be terminated in the manner and
members provided by law for the causes provided in the AOI or by-laws

Note that courts have no power to strip membership

as it constitutes an unwarranted and undue
interference with the right of a corporation to
determine its membership.

Termination of membership carries with it all rights to

property and other privileges unless the By-Laws
provide otherwise. Note that admission is an
expressly granted power in the Corporation Code.
Distribution of Assets of stock corporation shall be Assets of non-stock corporation shall be distributed in
Assets in case of distributed in the following order: the following order:
dissolution
1. Payment of claims of creditors who 1. Payment of claims of creditors
are not stockholders (based on 2. Assets held on condition of return or subject to
preference of credit) limitation of use shall be returned, transferred or
2. Payment of claims of SHs as conveyed.
creditors 3. Distribution to member based on distributive rights
3. Residual balance is distributed stated in AOI or by-laws
proportionately to preferred In case of default, distribution pursuant to Plan of
shares, if any, then to common Distribution of Assets.
stock.
Independent Only a SH can be elected as a director. Only a member of a non-stock corporation can be
Trustees Independent directors may be required elected as s trustee, except for independent trustees
in stock corporations but the of non-tock corporations vested with public interest.
requirement is these independent
directors should always be
stockholders.

– COMMERCIAL LAW REVIEW –

 8

ADDITIONAL DISTINCTIONS BETWEEN CORPORATIONS

AS TO THE STATE OF INCORPORATION AS TO LEGAL RIGHT TO EXIST

a) DOMESTIC CORPORATION - if incorporated under a) DE JURE - A de jure corporation is one that is

Philippine law considered as a legally constituted corporation,
b) FOREIGN CORPORATION - if incorporated under the having fully complied with all the requirements of
laws of another country. Note though that for law. There is no defect in its incorporation.
purposes of transacting business in the Philippines, b) DE FACTO – A de jure corporation is one that is
it must be one whose state of incorporation allows considered as a legally constituted corporation,
Filipino corporations or citizens to do business having fully complied with all the requirements of
therein. the law.

AS TO WHETHER IT IS OPEN TO THE PUBLIC It is one that appears to be legally constituted.

a) CLOSE CORPORATION – not open to the public; There is a defect in its incorporation. Notwithstanding
when it limits stockholders to a number not its not being compliant with what is required for its
exceeding 20, has limitations on transfers and does incorporation, it has a certificate of incorporation. There
not list in the stock exchange or makes any public is a defect in its incorporation but it was nevertheless
offering of its shares granted a Certificate of Incorporation.
b) OPEN CORPORATION – when its stocks are publicly A de facto corporation is one that is so defectively
traded created as not be a de jure corporation, but
• “Going public” – a stock corporation is opening its nevertheless is the result of bona fide attempt to
ownership to anybody. incorporate under existing statutory authority coupled
with the exercise of the corporate powers and is
• “Going private” – it is going from an open
recognized by the courts as such upon grounds of public
corporation to a closed corporation
policy in all proceedings, except upon a direct attack by
PUBLIC COMPANY – one with assets in excess of 50 the state questioning its corporate existence.
million and 200 or more stockholders who own at least
100 shares (SEC). As such, they are required to file the REQUISITES OF A DE FACTO CORPORATION
reports applicable to companies of that nature. 1) There is a valid law under which the corporation
may be recognized.
XPN : The Supreme Court considered the Philippine 2) There is a bona fide attempt in good faith to
Veterans Bank as a public company notwithstanding the incorporate
fact that the availability of its shares of stock is only to 3) There is an actual valid exercise of corporate
World War II veterans and not the general public powers.
(Philippine Veterans Bank vs. Justina Callangan)
DE FACTO DE JURE
AS TO WHETHER IT IS PUBLIC OR PRIVATE One which actually exists One created in strict or
for all practical purposes substantial conformity
a) PUBLIC CORPORATION - is one that is formed for
as a corporation but which with the mandatory
the government of a portion of the state for the
has no legal right to statutory requirements for
general good
corporate existence as incorporation.
b) PRIVATE CORPORATION - is one that is formed to
against the state.
undertake a private activity which includes
government owned or controlled corporations. It There is a colorable There is substantial
also includes quasi-public corporations that have compliance with the compliance with the
accepted from the state a franchise involving the requirements of the law requirements of the law
performance of a public activity for profit. creating the corporation. creating the corporation.
Can be attacked directly Its right to exist as a
but not collaterally. corporation cannot be
successfully attacked or
questioned by any party
even in direct proceeding
for that purpose by the
state.
Stockholders enjoy exemption from corporate liability
for corporate obligations.

– COMMERCIAL LAW REVIEW –

 9

CORPORATION BY ESTOPPEL that the only way by which is can be attacked is by way
of quo warranto proceedings to determine the right to
One that does not have any legal existence. It is the use or exercise of a franchise or office and to oust
not legally constituted. However, the persons who the holder from his enjoyment of the same, that is
compose the corporation by estoppel appear and act as initiated by the Solicitor General because:
if there is a corporation. There is no Certification of
Incorporation. It is governed by the provisions on a. it is the state’s right or authority that is usurped;
general partnership. b. it would produce endless confusion if it’s
existence is questioned in every suit that it is a
A corporation by estoppel arises when the party to;
persons assume to act as a corporation knowing it to be c. it is in the public interest to maintain the validity
without authority to do so; in this case said persons of the business transactions entered into with de
shall be liable as general partners for debts, liabilities facto corporations.
and damages and it cannot, as a defense, neither can
one dealing with it, resist performance. Hence, one who Meaning, when you have dealings with a
assumes an obligation to an ostensible corporation as corporation de facto, you cannot raise the issue of its
such cannot resist performance thereof on the ground being a de facto corporation as a means of avoiding the
that there was in fact no corporation. liability. In the same manner, the de facto corporation
cannot use its being de facto as a means of avoiding its
CORPORATION BY PRESCRIPTION liabilities to a third person because in so far as to the
enforcement of liability, whether against the
A corporation by prescription is one that is not corporation or the corporation against a third person, it
formally organized as such but has been duly recognized will be in the same manner as if the de facto corp was a
for a substantial length of time as a corporation, with de jure corporation.
rights and duties that are enforceable under the law. In
the Philippines, the Roman Catholic Church is A corporation by estoppel’s liability is like that of
recognized as such. a general partnership. The persons who represents
themselves as a corp but which corp does not exist in
DE JURE V. DE FACTO V. ESTOPPEL law and in fact would be liable to third persons as if it
were a general partnership – the lib does not extend
AS TO EXISTENCE: only to what is contributed; it extends to their personal
A corporation de jure exists law and in fact properties or goes beyond what they appear to have
contributed to the corporation by estoppel. And neither
A corporation de facto does not exist in law but can the fact of its being a corp by estoppel be utilized as
exists in fact. a means of avoiding the obligation.

A corporation by estoppel does not exist in law COMPONENTS OF A CORPORATION

and does not exist in fact.
CORPORATORS
AS TO LIABLITIES:
They can be stockholders for stock corporations
A corporation de jure can incur liability. or members for non-stock corporations. They are those
A corporation de facto can also incur liability. In who compose the corporation either as stockholders or
general, a de facto corporation is deemed to have members
substantial legal existence except as against the state.
INCORPORATORS
Consequently, it has the same corporate powers and
liabilities like a de jure corporation. It is obliged to pay They are those stockholders or members who
taxes, contracts that are entered into are valid and appear in the Articles of Incorporation as originally
binding, it is allowed to bring suit. forming the corporation and are signatories thereof.
The statement of incorporators is a non-amendable
What is essential is in so far as the treatment of item in the Articles of Incorporation. Whoever appears
liabilities, a corporation de jure and de facto shall be as in incorporator will remain to be an incorporator for
treated in the same manner. This means that a the entire duration of the corporation.
corporation de facto can incur liability in the same
manner as a de jure corporation and the liabilities of a AS TO NUMBER OF COMPONENTS - it
corporation de facto can be enforced in the same is a corporation aggregate if it consists of more than
manner as if it were a de jure corporation. one member, or a one-person corporation or a
corporation sole if it consists of only one member.
However, one distinction in so far as issues as to
existence, is that the existence of a corporation de facto
is not open to a collateral attack. Section 19 provides

– COMMERCIAL LAW REVIEW –

 10

OTHER COMPONENTS ARE: SUBSCRIBERS

PROMOTERS They are those who have agreed to take out and pay for
original unissued shares of a corporation formed or to
They are those who bring about the
be formed (Sec. 71, Corporation Code). They are
incorporation and organization of a corporation. They
intending stockholders who have not yet paid for their
bring together the would-be stockholders or members
subscription in full. Under Section 71 as long as they are
to form the corporation.
not delinquent, they enjoy all the rights of a
Promoters work as agents of the would-be corporation. stockholder. They shall transition into stockholders
Their principals prior to incorporation would be the upon full payment of their subscriptions.
intending stockholders or members. Subsequent to
incorporation, their principal will be the corporation.
Liability would now be determined by the law on agency
as long as the promoters act within the scope of their
authority, their principals become liable, except when
the promoters themselves assume the liability.

– COMMERCIAL LAW REVIEW –

 11

PROCESS OF INCORPORATION
MODULE 3

PROCESS OF INCORPORATION CONFLICT

✓ Incorporators There appears to be a conflict with Section 5, as

✓ Capitalization (Stock Corporation) an incorporator must appear to be a signatory to the
✓ Contributions (Non-stock Corporation) articles of incorporation. Further, Section 13 (5) does
✓ Execution of Articles and Contents not contain any specific directive as to how a juridical
entity incorporator should be referred to.
NUMBER AND QUALIFICATIONS OF
Note: Under Section 5, an incorporator as one
INCORPORATORS
who appears as having been part of the of the original
INCORPORATORS can refer to any person, formation of a corporation and who is a signatory to the
partnership, association, or corporation, singly or jointly Articles of Incorporation. So, if you are talking of a
with others, but not more than fifteen (15) in number, juridical person who is going to sign.
who may organize a corporation for any lawful purpose
or purposes. (Section 10) Under Section 13(5), there is no definite or
specific directive as to how a juridical entity incorporator
NATURAL PERSONS should be referred to. Sec 5 simply says that we have to
state the name, residence, and nationality of the
DISQUALIFICATION : Natural persons who are incorporator.
licensed to practice a profession, and associations and
partnerships organized to practice a profession shall not The reference to an incorporator under Section
be allowed to organize as a corporation (they cannot be 13 and under Section 5 pertains to a natural person
incorporators) unless otherwise provided by special only. However, we would have to read that together
laws with Section 10 which expressly recognizes juridical
persons as incorporators.
QUALIFICATION : Incorporators who are natural
persons must be of legal age. Note: Another change brought about by the law
is that the minimum numbers of incorporators which
JURIDICAL PERSONS was then 5 has been deleted. What is in place is a
maximum number of 15. A possible explanation of the
Corporation, partnerships, associations – can deletion of 5 is the creation of a One-Person
now be incorporators in a stock or non-stock Corporation.
corporation.
OTHER QUALIFICATIONS
ONE PERSON CORPORATION
1) A would-be incorporator must possess CAPACITY TO
A corporation with a single stockholder is CONTRACT because the act of forming a corporation
considered a One Person Corporation. is contractual in nature.
Can a One Person Corporation be organized or For natural persons, there is a requirement that
incorporated by a juridical entity? he be of legal age. Being of legal age comes with it
A: There is no clear answer to this question. the capacity to contract.
However, it appears, after looking at the deliberations For Juridical entity incorporators, our laws
of the Congress, that they are allowing the estate of a provide that upon their creation, they acquire
deceased person to incorporate as a one person juridical personality which comes with it their
corporation. (cannot be answered yet) capacity to contract.
Where does estate of a deceased person fall? 2) A MAJORITY must be RESIDENTS of the Philippines
A: It’s not a partnership, neither it is an because the business is presumably to be
association, nor a corporation conducted in the Philippines; and

Note: The previous requirement as to the 3) They must be CITIZENS of the Philippines if required
minimum number of incorporators has been deleted and by legal or constitutional requirements.
the ownership or subscription to at least one share for
incorporators of stock corporations has been retained.

– COMMERCIAL LAW REVIEW –

 12

Citizenship must be in accordance with the The Articles of Incorporation, the Attachments,
standard or threshold for a corporation to be and the Certificate of Incorporation, altogether shall
Filipino, and the minimum threshold is that it must constitute the Charter of the Corporation.
at least be 60% Filipino-owned.
The grant of the Certificate of Incorporation
CAPITALIZATION would signal the acquisition of juridical personality.

Stock corporations shall not be required to have CONCESSION THEORY

a minimum authorized capital stock, except as
otherwise provided by special laws. (Section 12) When a group of persons which to create a
corporation, they will have to execute documents and
Note: What must be understood is the reason comply with the requirements of the state before being
for requiring minimum capital stock is for the given juridical personality, since such is a mere privilege.
Corporation to have a sufficient working capital to This is another explanation for what is known as the
pursue the purpose or purposes for which it was “Concession Theory”.
created.
Note: This grant of Certificate of Incorporation
It would appear now that the law leaves the by the State pursuant to compliance with the
judgment as to the sufficiency of the capital to a requirements of the law is what is known as the
Corporation or to those who are forming the Concession theory.
corporation.
CONTRACT THEORY
However, when we speak of requirements by
law, we are talking of corporations which are vested Since incorporation involves the execution of
with public interest. There is a public interest which the contracts among members, between incorporators,
State is trying to uphold and that is to ensure that these between members or stockholders by themselves, and
corporations vested with public interest have the the corporation, and between members or the
necessary capital to be able to pursue their operations corporation and the state, the actual process of
and accomplish the purpose or purposes for which it incorporation is known as the “Contract Theory.”
was created.
IN SUMMARY:
EXAMPLE: Concession theory is the execution by the
A bank. Going back to the discussions as to incorporators of the required documents required by
Banking Requirements. Certain types of bank have the law and the eventual grant to them of a Certificate
minimum capital requirement. Based on Section 12, of Incorporation. The State has now given a concession
they shall not be subject to minimum capital to the corporation to be and to act as a Corporation.
requirements, but because there is a law (General This is the grant of the secondary franchise to the
Banking Law) requiring them to have minimum capital corporation.
requirements, then Section 12 should yield to that On the other hand, contract theory refers to the
specific or special law which provide for the minimum process of execution of contracts and documents
capital requirements. between and among the members of the corporation,
between and among the members of and the
PROCESS OF INCORPORATION
corporation, and the corporation and the State. These
The process of incorporation begins with the are the documents that is required for it to be granted a
EXECUTION of the ARTICLES of Incorporation, which Certificate of Incorporation.
upon return by the SEC, together with the CERTIFICATE
of Incorporation constitutes it as the CHARTER of the ARTICLES OF INCORPORATION
corporation. The contents are:
The ARTICLES OF INCORPORATION is defined as
1. NAME OF THE CORPORATION
the document prepared by the persons originally
composing the corporation and subsequently filed with SIGNIFICANCE : It is through the name that a
the SEC containing requirements of law. corporation acquires juridical personality; it is through
the name that it exercises the power of succession; it is
Note: Articles of Incorporation and required how it is distinguished from another corporation.
attachments → Submitted to the SEC → SEC, after an
examination of the AoI and required attachment → Section 18 requires the intending incorporator/s
Return to the Corporation a copy of the AoI together to submit the intended corporate name to the SEC for
with the Certificate of Incorporation VERIFICATION .

– COMMERCIAL LAW REVIEW –

 13

If the name is DISTINGUISHABLE under Section FAILURE TO COMPLY WITH SEC’S ORDER
17, the name shall then be reserved for the
If the corporation fails to comply with the SEC’s
incorporators and shall allow them to file the Articles
order, it may hold the corporation and its responsible
and By-Laws.
directors or officers in contempt and/or hold them
STANDARDS FOR ACCEPTANCE
administratively, civilly and/or criminally liable under
this Code and other applicable laws and/or revoke the
Section 17 provides that: No corporate name registration of the corporation.
shall be allowed by the Commission if:
2. SPECIFIC PURPOSE FOR WHICH IT IS BEING
a) it is not distinguishable from that already INCORPORATED.
reserved or registered for the use of another
corporation, If it has more than 1, the Articles must state
b) if such name is already protected by law, or what is the PRIMARY PURPOSE to facilitate its
c) when its use is contrary to existing law, rules classification and categorize all the other purposes as
and regulations. secondary purposes. Provided, a non-stock corporation
may not include a purpose that would change or
A name is NOT DISTINGUISHABLE even if it contradict its nature as such.
contains one or more of the following:
RATIO : The primary purpose must be identified
a) The word “corporation,” “company,” is for the corporation to be properly classified.
“incorporated,” “limited,” “limited liability,” or
an abbreviation of one of such words; and In addition, the stated purpose/s will:
b) Punctuations, articles, conjunctions,
contractions, prepositions, abbreviations, a) operate as authorization to management to
different tenses, spacing, or number of the enter into contracts, the directors / officers are
same word or phrase. made aware of the scope of the allowable
business activity
EXAMPLE: Note: It is also an indication of the extent of the
contracts that can be entered into by the
If there is a similarity, and because of the management to be able to accomplish the
similarity you simply abbreviated the word Corporation purpose for which it was created.
to Corp. Or you simply added Limited Liability to
b) allow a person who invests to know where and
distinguish it from the other. It is still not
in what kind of business his money will go
distinguishable. c) allow 3rd persons to know whether the
In the same manner, if you changed the word corporation is transacting within its authority. It
“The” in the corporate name and simply used letter “D”, gives them the idea of the extent of the powers
it is still not distinguishable. of the corporation and the extent of powers of
the representative.
What does “distinguishable” mean?
3. PLACE WHERE PRINCIPAL OFFICE IS LOCATED IS
A: It means that your intended corporate name REQUIRED FOR EFFECTIVE REGULATION AND
should be capable of being distinguished from others. SUPERVISION.

The SEC , upon determination that the corporate It refers to the place were the BOOKS and
name is: RECORDS are kept.

1) not distinguishable from a name already Note: The rule is if it is to be changed, and it
reserved or registered for the use of another remains to be the same city or municipality, mere
corporation; notification to the SEC is sufficient.
2) already protected by law; or
BUT, if you are changing the principal office to a
3) contrary to law, rules and regulations,
place which is outside the city or municipality, ut will
may summarily order the corporation to immediately require an amendment of the articles.
CEASE AND DESIST from using such name and require
the corporation to register a new one. 4. STATEMENT OF NAME, NA TIONALITIES AND
RESIDENCES OF INCORPORATORS DETERMINES
The SEC shall also cause the removal of all PRIMA FACIE COMPLIANCE WITH CONSTITUTIONAL
visible signages, marks, advertisements, labels, prints AND LEGAL REQUIREMENTS
and other effects bearing such corporate name. Upon
the approval of the new corporate name, the SEC shall
issue a certificate of incorporation under the amended
name.

– COMMERCIAL LAW REVIEW –

 14

5.A CORPORATION SHALL HAVE PERPETUAL (D) UNISSUED CAPITAL STOCK

EXISTENCE UNLESS ITS ARTICLES OF
is the portion of capital stock not issued or
INCORPORATION PROVIDES OTHERWISE.
subscribed.
Note: Relate to the discussion on succession
(E) PAID UP CAPITAL STOCK
6. NUMBER OF DIRECTORS WHICH SHALL NOT BE is the portion of subscribed or outstanding
MORE THAN FIFTEEN (15) OR THE NUMBER OF capital stock that is already paid .
TRUSTEES, WHICH MAY BE MORE THAN FIFTEEN
(15). Illustration: (Hindi ko gets yung discussion ni sir
dito, sorry) 4:26 sa video lecture, and sabi…

25% daw ng Subscribed Capital Stock (312,500

7. NAMES, NATIONALITIES AND RESIDENCES OF THE
PERSONS WHO SHALL SERVE AS INITIAL DIRECTORS sana, pero ang figure ni sir):
/ TRUSTEES UNTIL THE FIRST REGULAR ELECTION.
62,500 (25% ng 250,000. Saan galing tong
250,000???)

8. IF A STOCK CORPORATION, THE FOLLOWING Plus 250,000 (san ulit ‘to galing?)
MUST BE STATED:
= 312,500.
a) amount of authorized capital stock
b) number of shares into which it is divided *Pero nagtally yung 25% ng 1,250,000 sa
c) if it be with or without par value computation ni sir.
d) names, nationalities, residences of original
This figure is important when we come to
subscribers and the amount subscribed and paid.
dividends, because while dividend declaration is
discretionary, if the corporation has surplus income,
DEFINING CAPITAL STOCK AND RELATED TERMS that is equal to, or in excess of 100% of paid in capital
stock, it becomes mandatory for the corporation to
(A) AUTHORIZED CAPITAL STOCK (ACS)
declare a dividend, if the exception does not apply. So,
is the amount fixed in the Articles to be if the surplus in our illustration is already equal to
subscribed and paid, or agreed to be paid by the 312,500 or greater than 312,500. It becomes mandatory
stockholders in money, property services or other to issue a dividend.
means at the organization of the corporation and
afterwards and upon which it is to conduct business (F) LEGAL CAPITAL
is the amount equal to the aggregate par value
(B) SUBSCRIBED CAPITAL STOCK (SCS)
and/or issued value of outstanding capital stock
is the amount of capital stock that is subscribed.
EXAMPLE:
SUBSCRIBED - subject of subscription contracts
We have valued the shares at one pesos per
or contracts for the acquisition of shares in a
share using the same illustration. And assuming likewise
corporation that is still to be formed, or which has been
that the entire 1,250,000 subscribed capital stock has
formed.
eventually been paid, then its value is 1,250,000, pesos.
ILLUSTRATION: And that would be its legal capital, which is again the
ACS 5,000,000 amount equal to the aggregate par value, or issued
value of the outstanding capital stock.
SCS 25%
ACS subject of 1,250,000
Subscription Agreement DIVISION OF ACS INTO SHARES

(C) OUTSTANDING CAPITAL STOCK (A) CLASSES/SERIES OR BOTH

is the portion of capital stock issued and held ACS may further be divided into classes/series
persons other than the corporation itself. or both, having rights, privileges or restrictions as stated
in the Articles and in the certificate of stock. Absent
Note: It can happen that your outstanding such, they are equal in all respects. This is also known as
capital stock in our illustration is also 1,250,000, the DOCTRINE OF EQUALITY OF SHARES . This
because that is the amount or the portion of your classification may also be undertaken for the purpose of
capital stock. complying with constitutional or legal requirements.

– COMMERCIAL LAW REVIEW –

 15

(B) COMMON OR PREFERRED SHARED ILLUSTRATION:

When so classified, they may further be divided Outstanding Capital Stock – 2,000,000
into:
Not Voting shares – 500,000
1) COMMON SHARES entitled to a pro-rata
division of profits or In determining whether the thresholds, as to
two thirds of the outstanding capital stock or majority
2) PREFERRED SHARES that are given preference of the outstanding capital stock has been met, you
in the distribution of assets, dividends or other initially only look at two thirds or majority of 1,500,000,
privileges, provided such are not in violation of the because you have 500,000 of outstanding capital stock
Corporation Code or do not have a right greater than that is non-voting.
those granted to corporate creditors. Such preferences
are decided by the Board, as it may be authorized to fix However, if what needs to be voted upon is any
terms and conditions, which shall be effective only upon of the eight items mentioned and specified in Section 6,
filing of the appropriate certificate with the SEC then the two thirds or the majority will be based on the
entire 2M outstanding capital stock.
(C) IF CLASSIFIED AS COMMON:
(E) IF SHARES ARE WITHOUT PAR VALUE:
They MAY or MAY NOT have PAR VALUE except
when it is a bank, trust insurance or pre-need company, They:
utility, building or loan association, and other
1) are considered FULLY PAID and NON-ASSESSABLE ,
corporations authorized to obtain or access funds from
meaning the holder of such share shall not be liable
the public, whether publicly listed or not (Sec. 6, RCC).
to the corporation or to its creditors in respect
The reason why these corporations are not thereto,
allowed to issue no par value shares: they are vested
For example, one entered into a subscription
with PUBLIC INTEREST .
contract for the purchase of 10,000 shares, valued at
(D) IF CLASSIFIED AS PREFERRED:
one peso per share, and they are no par value shares.
When we say fully paid non assessable, then that means
(1) It should ALWAYS have PAR VALUE ; even if the subscriber has only paid 50%, in so far as a
third person is concerned, they are considered fully paid
(2) It MAY be DEPRIVED of VOTING RIGHTS ,
and non-assessable.
together with redeemable shares but if so, there must
be a class/series with shall have full voting rights. In This has something to do with claims against the
addition, even if voting rights are not enjoyed, holders corporation. So as far as a third person is concerned, the
of such shares shall still vote in the following instances: subscriber does not owe the corporation, anything. But
mind you, it applies only in so far as a third party with
a) amendment of articles;
whom the corporation has dealings with. But insofar as
b) adoption or amendment of by laws;
the corporation is concerned, it is still at pay, meaning
c) sale, lease, exchange, pledge or other
the subscriber is still liable for the balance, or 50%.
disposition of all or substantially all of
corporate property; 2) CANNOT be issued for less than PHP 5.00
d) increase/decrease of corporate bonded
indebtedness;
e) increase/decrease of capital stock; This is the minimum value (5.00), that should have
f) merger/consolidation; been received by the Corporation for the issuance of no
g) investment in another corporation or par value shares.
business; and
h) dissolution. 3) entire consideration is treated as capital and shall
NOT be available for DISTRIBUTION as DIVIDENDS .
Except as herein provided, the vote necessary
to approve a particular corporate act as provided in this This means that whatever is received by the
Code shall be deemed to refer only to stocks with voting Corporation is not available or is not going to be
rights. available for dividends.

So in determining whether or not the required

percentage of votes has been obtained, which is either
two thirds, or a majority of the outstanding capital
stock, if it is NOT any of the eight, you exclude non-
voting shares. But if it is any of the eight instances, you
will have to include your voting shares.

– COMMERCIAL LAW REVIEW –

 16

ILLUSTRATION: really, that it is regardless of the existence of

Because of good unrestricted retained earnings? Yes, to a certain point.
management &
Shares The situation was actually defined in the case of
profitability, the
have Surplus:
value of the Republic Planters Bank vs Agana (G.R. No. 51765, March
value of:
Par Value shares are now 3, 1997), where a redemption of a redeemable share
shares worth: can take place, even if it has no unrestricted retained
1.00 earnings, provided that it has sufficient assets in its
5.00 4.00
/share books to cover debts and liabilities, inclusive of capital
Income stock.
→Dividend
No less And normally redeemable shares are no longer
No par than 5.00 10.00 5.00 re-issued, unless allowed by its articles.
value /share
TREASURY SHARES are shares that have been
shares Capital ↛
issued and paid for but subsequently reacquired by
Dividend
purchase, redemption, donation or any other lawful
means. It may again be disposed of for a reasonable
price as determined by the Board. Note that its
(F) FOUNDER’S, REDEEMABLE, OR TREASURY acquisition must be always be funded by surplus profits,
Shares may also be classified as : otherwise it violates the Trust Fund Doctrine as capital
is impaired.
FOUNDER’S SHARES , which are classified in the
Articles as having been given certain rights or privileges Treasury Shares speaks of a share that is
not, enjoyed by others. Provided, if the exclusive right subsequently reacquired. Since redeemable shares are
to vote and be voted for in the election of the board of no longer supposed to be issued, unless allowed,
directors, it should be for a limited period not exceeding redeemable shares are retired. If they are not retired,
5 years subject to SEC approval. Provided further, that it they become Treasury shares.
will not violate Commonwealth Act No. 108 or the Anti-
Dummy Law; Republic Act No. 7042 or the Foreign What other situations would allow Treasury shares?
Investments Act, and other pertinent laws. When there is a delinquency, the purchase by
REDEEMABLE SHARES which the corporation the Corporation of the delinquent shares will cause it to
may issue when expressly allowed by the Articles and be brought in the Treasury, or they will be called
may be purchased and taken up by the corporation Treasury shares.
upon the expiration of a fixed period, regardless of the Also a corporation, assuming the opportunity
existence of unrestricted retained earnings and such presents itself, and it has unrestricted retained earnings,
other terms and conditions stated in the Articles and they can buy back their own shares.
the certificate of stock representing the shares, subject
to rules and regulations issued by the SEC. In Republic Why would a corporation buy back its own shares?
Planters Bank v. Agana, it was held that the corporation
after redemption must have sufficient assets in its Because shares are in the nature of property,
books to cover debts liabilities inclusive of capital stock. and it is possible that the situation is that a stockholder
As a rule, redeemable shares are not to be re-issued or an entity holding shares of the corporation would
unless allowed by its Articles. wish to dispose of them, and in the mind of the
corporation or those having management of the
Redeemable shares are shares that will be corporation, they will eventually increase in value. So as
retrieved or bought back by the Corporation – that is a a form of property, the corporation itself can acquire the
right or a privilege. So redeemable shares are shares provided the acquisition is funded by unrestricted
considered as preferred shares of stock. retained earnings. These shares now go to the treasury,
and they may eventually be disposed of, at a reasonable
The issue with redeemable shares is the matter price, as determined by the Board.
of redemption. The law says that they can be redeemed,
regardless of the existence of unrestricted retained Redeemable shares – why are they retired?
earnings. This is an issue because when a corporation
will purchase its own shares, it is as a general rule, Normally redeemable shares are issued as a
supposed to be funded by unrestricted retained means of raising capital. However, the mode or the
earnings. Otherwise, the trust fund doctrine is being main way by which this capital is raised, is to a
violated. However, when we speak of redeemable borrowing, and the form of borrowing is a redeemable
shares the condition is different. But, does it mean share.

– COMMERCIAL LAW REVIEW –

 17

If you recall your discussions in banking laws, corporation’s articles of incorporation, bylaws, or in a
there is what is known as tier one or two capital for separate agreement.
banks. These are actually borrowings in the form of
redeemable shares. The arbitral tribunal shall have the power to
grant interim measures necessary to ensure
9. IF NON-STOCK, AMOUNT OF CAPITAL, NAMES, enforcement of the award, prevent a miscarriage of
NATIONALITIES, RESIDENCES OF CONTRIBUTORS justice, or otherwise protect the rights of the parties.
AND AMOUNTS.
A final arbitral award under this section shall be
executor after the lapse of 15 days from receipt thereof
by the parties and shall be stayed only by the filing of a
10. SUCH OTHER MATTERS NOT INCONSISTENT bond or the issuance by the appellate court of an
WITH LAW, WHICH THE INCORPORATORS MAY
injunctive writ. (In this case would be the Court of
DEEM NECESSARY AND CONVENIENT.
Appeals.)
Note that while not indicated in Section 13,
Section 14 prescribing the form states that if the The Commission shall formulate the rules and
corporation is to engage in a nationalized business regulations, which shall govern arbitration under this
activity, a PROHIBITION must be stated that it will not section, subject to existing laws on arbitration.
allow any transfer of stock or interest that will reduce
its ownership to less than the percentage required by FORM AND ATTACHMENTS TO ARTICLES
law. The Articles, as written in Filipino or English,
must be accompanied by
An arbitration agreement may be provided in
the Articles pursuant to Section 181. (this is an a) a favorable recommendation, if required, and
amendment in the RCC) b) it should be acknowledged to guard against
fictitious names and signatures.
An arbitration agreement may be provided in
the articles of incorporation or bylaws of a corporation FAVORABLE RECOMMENDATION OF A GOVERNMENT
of an unlisted corporation. When such an agreement is AGENCY OR BODY
in place, disputes between the corporation, its
stockholders or members, which arise from the e.g. When organizing a bank - it should be accompanied
implementation of the articles of incorporation or by a favorable recommendation from the BSP.
bylaws, or from intra-corporate relations, shall be
PROCEDURE FOR AMENDMENT
referred to arbitration. A dispute shall be non arbitrable
when it involves criminal offenses and interests of third Unless otherwise provided by the code or
parties. special law, and for legitimate purposes, amendments
may take place by:
The arbitration agreement shall be binding on
the corporation, its directors, trustees, officers, and a) a MAJORITY vote of the Board, and
executives or managers. b) 2/3 VOTE or written assent of outstanding
capital stock or members, without prejudice
To be enforceable, the arbitration agreement
to the right of appraisal
should indicate the number of arbitrators and the
c) the original and amended articles are then
procedure for their appointment. The power to appoint
submitted to the SEC with underscorings,
the arbitrators forming the arbitral tribunal shall be
duly certified by corporate secretary and a
granted to a designated independent third party.
majority of the directors that it has been
Should the third party fail to appoint the arbitrators in
duly approved by the required vote;
the manner and within the period specified in the
d) in case of corporations that are regulated by
arbitration agreement, the parties may request the
another government agency, a favorable
Commission to appoint the arbitrators. In any case,
recommendation must be submitted
arbitrators must be accredited or must belong to
likewise.
organizations accredited for the purpose of arbitration.
Once these are submitted to the Securities and
The arbitral tribunal shall have the power to
Exchange Commission, then the Securities and
rule on its own jurisdiction and on questions relating to
Exchange Commission, assuming that it has found
the validity of the arbitration agreement. When an
everything to be in order, will then issue an amended
intra-corporate dispute is filed with a Regional Trial
Certificate of Incorporation formalizing approval of the
Court, the Court shall dismiss the case before the
amendments of the articles of incorporation.
termination of the pretrial conference, if it determines
that an arbitration agreement is written in the

– COMMERCIAL LAW REVIEW –

 18

WRITTEN ASSENT - means that it is not GROUNDS FOR DISAPPROVAL OF THE

necessary to have a meeting to obtain the required two AMENDMENT
thirds vote. It is, hence, possible for the corporation to
require or to suggest to the stockholders or members The submitted articles or amendments may be
for them to send in their either in conformity, instead of rejected or disapproved if:
having a meeting to obtain the required two thirds vote.
a) not substantially in accordance with the
The rule that allows written assent does not prescribed form;
apply when the object of the amendment is to extend b) purpose is unconstitutional, illegal, immoral or
or shorten the term or to an increase or decrease of contrary to government rules or regulations;
capital stock. c) certification concerning the amount of capital
stock subscribed and/or paid false;
In these two instances, written assent will not d) required percentage of ownership of capital
apply, and there is a need to have a meeting to approve stock under the Constitution and existing laws
the amendment. has not been complied with; or,
e) no favorable recommendation for banks, quasi-
THE AMENDMENTS ARE EFFECTIVE banking, building and loans associations, trust
a) upon approved by the SEC, or companies and other financial intermediaries,
b) from date of filing with the SEC, if not acted insurance companies, public utilities,
upon within 6 months from date of filing for a educational corporations and other government
cause not attributable to the corporation. corporations covered by special laws indicating
that the amendments are in accordance with
This rule is not applicable to an amendment to law is submitted.
shorten the term as a means to dissolve the
corporation. Provided, that the corporation be given by the
SEC a reasonable time within which to correct or modify
When the term of the corporation is to be the objectionable portions of the articles or
shortened, that is in effect dissolution of the amendments thereto.
corporation. Since we have discussed earlier, that the
corporation can only come into existence with the COMMENCEMENT OF CORPORATE EXISTENCE
consent of the State, it also holds true that it can only
be resolved with the consent of the state. And when we Also under Section 18, corporation commences
speak of consent, it should be expressed consent. to have existence from the issuance by the SEC of a
Therefore, since shortening the term is an amendment, certificate of incorporation under its official seal. The
there must be express consent of the State. Hence, the effect of which is to constitute its stockholders or
implied approval provision is not applicable. members and their successors as a Body Corporate
under the name and for the term stated in the articles
Insofar as foreign corporations are concerned, unless extended or sooner dissolved.
the amendment of their articles, is to be governed by
their own law or the law of the state of incorporation. The exception is a Corporation Sole, which is
Here in the Philippines… deemed incorporated upon filing of its Articles.

If it is a foreign corporation amending its NON USER

Articles, it must file within 60 days, a duly authenticated
A corporation has 5 years from date of
copy of its articles of incorporation, which should not
incorporation to formally organize and commence
enlarge or alter the purpose for which it was granted a
transaction of business.
license.
If it fails to do so, its certificate of incorporation
That is relevant because if the amendment has
is deemed revoked as of the day following the end of
altered or enlarge the purpose for which it was granted
the 5-year period.
a license, then that foreign corporation may be
considered as transacting business in the Philippines,
without a license.

– COMMERCIAL LAW REVIEW –

 19

DELINQUENT CORPORATION The SEC shall give reasonable notice to, and
coordinate with the appropriate regulatory agency prior
If it commences, but becomes continuously to a suspension or revocation of companies under their
inoperative for at least 5 years, the SEC upon due notice special regulatory jurisdiction.
and hearing, place the corporation under delinquent
status. Like for example if it were an insurance
company, the SEC must coordinate and give notice to
A delinquent corporation shall have a period of the Insurance Commission.
2 years to resume operation and comply with all the
requirements of the SEC. Upon compliance, the SEC These effects shall not apply, if they occur due
shall issue an order lifting its delinquent status. The to causes beyond the control of the corporation as may
failure to comply with the requirements and resume be determined by the SEC.
operations within the period prescribed by the SEC shall
cause revocation of its certificate of incorporation.

– COMMERCIAL LAW REVIEW –

 20

BOARD OF DIRECTORS OR TRUSTEES

MODULE 4

CORPORATE HEIRARCHY The number of directors to be elected in a stock

corporation should be no more than 15, while in a non-
THE BOARD stock corporation, there may be more than 15. Section
106 provides that in a non-stock educational
It determines corporate policy and prescribes
corporation, there should be at least 5 no more than
the manner of general management of its business
15, and the number of trustees shall be in multiples of
activities. Towards this end, the law provides that
5. Section 96 provides that in a close corporation, there
unless otherwise provided in this Code, the board of
may be no board when the stockholders agree to
directors or trustees shall exercise the corporate
manage the corporation themselves.
powers, conduct all business, and control all properties
of the corporation. This is so for the purpose of There is no board for a One Person Corporation
efficiency in exchange for profits. On top of the officers, and a corporation sole, there is no board.
stockholders, or members. The board runs the
corporation in a more convenient manner especially INDEPENDENT DIRECTORS
with regard to third persons.
An INDEPENDENT DIRECTOR is a person who,
THE CORPORATE OFFICERS apart from shareholdings and fees received from the
corporation, is independent of management and free
They are charged with the mandate to execute from any business or other relationship which could, or
the decisions of the board and who, oftentimes, could reasonably be perceived to materially interfere
determine the best manner by which the business is to with the exercise of independent judgment in carrying
be run. President, secretary, and treasurer (plus out the responsibilities as a director.
compliance officer).
Section 22 also provides that the board of the
THE STOCKHOLDERS OR MEMBERS following corporations vested with public interest shall
have independent directors constituting at least
They are considered as having residual power
twenty percent (20%) of such board:
over fundamental corporate changes as they are
required by law to give their assent by the exercise of a) Corporations covered by Section 17.2 of Republic
the right to vote. Act No. 8799, otherwise known as “The
Securities Regulation Code,” namely those whose
GR: THE BUSINESS JUDGMENT RULE – The courts or the
securities are registered with the Commission,
SEC cannot interfere with the corporation
corporations listed with an exchange or with
XPN: unless the acts are so unconscionable and assets of at least Fifty million pesos
oppressive so as to amount to a wanton destruction of (P50,000,000.00) and having two hundred (200) or
the rights of the minority. more holders of shares, each holding at least one
hundred (100) shares of a class of its equity
As long as they are undertaken in good faith, shares;
they are not reviewable. The principal remedy to b) Banks and quasi-banks, Non Stock Savings and
internal dissension are corporate elections as the Loan Association (NSSLA), pawnshops, corporations
majority must be allowed to rule as long as it keeps engaged in money service business, preneed, trust
within the powers provided in the charter. and insurance companies, and other financial
intermediaries; and
ELECTION OF DIRECTORS AND TRUSTEES c) Other corporations engaged in business vested
with public interest similar to the above, as may
Section 22 provides that directors shall be
be determined by the Commission, after taking
elected for a term of 1 year from among the holders
into account relevant factors which are germane to
of stocks registered in the corporation’s books, while
the objective and purpose of requiring the election
trustees shall be elected for a term not exceeding 3
of an independent director, such as the extent
years from among the members of the corporation.
of minority ownership, type of financial products
Each director and trustee shall hold office until the
or securities issued or offered to investors,
successor is elected and qualified. A director who
public interest involved in the nature of business
causes to own at least one (1) share of stock or a
operations, and other analogous factors.
trustee who ceases to be a member of the corporation
shall cease to be such.

– COMMERCIAL LAW REVIEW –

 21

Object is minimize the incidence of fraudulent The TERM LIMIT is five consecutive years and a
conduct in the board and is meant to call attention to tenure of at least 6 months is considered as 1 year.
deviations from the path of good corporate governance.
A person can be re-elected as an independent
director after he undergoes a “cooling off” period of
THE GUIDELINES ON THE NOMINATION AND
2 years, during which time he should not commit
ELECTION OF INDEPENDENT DIRECTORS REQUIRE
THAT HE MUST: any act that would disqualify him from being an
independent director. Note that under SEC
a) not have any personal, financial, or professional ties Memorandum Circular 09-09 there is also a 2 year
with the corporation, its affiliates, and subsidiaries “cooling off” period for a REGULAR DIRECTOR (elected
that may adversely affect his ability to act by the stockholders to serve as director and not within
objectively the qualifications of an independent director) who
b) not have been employed in any executive capacity resigns or whose term expires before he can be elected
by the corporation, related companies or any of its as an independent director.
substantial shareholders within the last 5 years
c) not retained as a professional adviser by the A person subsequently elected after the “cooling
corporation, related companies or any of its off” period can ONLY serve for another 5 consecutive
substantial shareholders within the last 5 years years. One who has served for 10 years shall
d) not engaged in any transaction with the be PERPETUALLY BANNED from serving as an
corporation, related companies or any of its independent director. This is without prejudice to an
substantial shareholders, other than those appointment in other companies outside of the
conducted at arms-length and are immaterial or business conglomerate.
insignificant.
QUALIFICATIONS FOR ELECTION
OTHER QUALIFICATIONS:
A STOCKHOLDER or MEMBER who would like
a) ownership of at least one share to be elected to the board should possess the
b) college graduate or has been engaged or following qualifications:
exposed to the business of the corporation for
not less than 5 years, and 1. He must own at least 1 share or at least it
c) be a person of integrity, probity and should be listed in his name as owner, if it is a non
hardworking stock corporation, he must be a member.
An independent director must not own more than The presumption is that one who has financial
two percent of the shares of the covered company stake will devote attention to the business.
and/or related companies or any of its
substantial shareholders as per RA 8799, Independent What matters is LEGAL TITLE to the share. A
directors must be elected by the shareholders present person who does not hold beneficial title, like the
or entitled to vote in absentia during the election of voting trustee in a voting trust agreement is allowed to
directors. Independent directors shall be subject to elected as a director.
rules and regulations governing their qualifications,
disqualifications, voting requirements, duration of term OWNERSHIP is absolute necessary upon
and term limit, maximum number of board assumption to the office of an elected director. Hence,
memberships and other requirements that the a person can be elected even if he does not own the
Commission will prescribe to strengthen their stock at the time of election.
independence and align with international best The type of ownership being referred to in this
practices. situation, are shares that are subject of a VOTING
Term limits for independent directors-Effective TRUST AGREEMENT . The two owner is the voting
January 12, 2010 independent directors shall have trustor, and the voting trustee has legal title in his
board and term limits in all listed, public and name, but without any beneficial title.
mutual fund companies, pursuant to SEC If it is a nonstock Corporation, the candidate for
MEMORANDUM CIRCULAR NO. 9, SERIES OF 2011 ,
trusteeship should be a member.
December 5, 2011. A person can be elected as an
independent director in any number of companies. Q: When is ownership or membership, absolutely
However, where a person is an independent director of necessary?
a business conglomerate (parent company, subsidiary
and affiliate), he may be elected as such in only 5 of such A: Ownership of a share, or membership is absolutely
companies. necessary. At the time the elected stockholder or the
elected member assumes the office of a director or a
trustee.

– COMMERCIAL LAW REVIEW –

 22

2. Every director must CONTINUOUSLY own at On the other hand, if we are speaking of a
least a share during his term, otherwise, he shall cease violation of the code committed within a period of five
as a director. Any subsequent repurchase does not years prior to the date of the election. It is not a
return the director to his previous position perpetual disqualification, because if the offense is
committed earlier than the five year period, prior to
If it were a nonstock Corporation, he must election, then that would mean the candidate would
continue to be a member during his term. still be qualified.
If for any reason, a director will lose ownership If a candidate has committed an act that is in
of at least one share, or a member or a trustee will lose violation of the code, let us say on this year, then he will
his membership. It will come with it. The loss of the have to wait for the lapse of five years before he can
directorship or the trusteeship. again stand for election as a director or a trustee.
If they were to subsequently re acquire 5. CITIZENSHIP in the instances required by
ownership of their shares or re-acquire membership. It law. Example: Corporation engaged in mass media is
doesn't mean that they also acquire a directorship or a required to be one hundred percent (100%) owned and
trusteeship. Because the only way by which one can be managed by Filipinos.
a director, or one can be a trustee is by way of
election— not taking into consideration Appointments But citizenship is only a requirement. If the law
arising from the filling up of vacancies. requires it. Meaning, if the business, or the transactions
that are entered into or will be entered into by the
3. A MAJORITY must be RESIDENTS of the Corporation is one that requires Filipino citizenship or is
Philippines as the business is primarily undertaken in one that is nationalized or partially nationalized. Then
the Philippines there's need for the directors or a certain percentage to
be Filipinos.
This is required, because it is assumed that the
business of the corporation is going to be undertaken in EXAMPLE : If a corporation is 60% Filipino own,
the PH and since the board is supposed to exercise all and 40% foreign owned, then the representation in the
corporate powers and conduct all the business of the directorship should be 60% Filipino, and only up to 40%
corporation, they should do so by way of a majority foreign.
vote.That is the reason why a majority of the directors
or trustees are required to be residents of the A SEC Opinion, February 26, 1990 provides that
Philippines. in partially nationalized activities, a foreigner may be
elected as a director in proportion to their allowable
4. Under Section 26, he must not have been participation in the capital.
CONVICTED BY FINAL JUDGMENT of an offense
punishable by a period in excess of 6 years or a EXAMPLE : So if you have a five month board
VIOLATION OF THE CODE , committed within a period and 20% of the outstanding capital stock is owned by
of 5 years prior to the date of election. foreigners. Then they are entitled to 20%
representation in the board. So that means out of a five
In addition, he should not have been found man board. One of them can be elected as a director.
liable: (a) for violating RA 8799 or the Securities
Regulation Code, (b) administratively for any offense 6. Such other qualifications that may be
involving fraudulent acts, and (c) for similar acts, provided by the BY-LAWS .
violations or misconduct by a foreign court or
regulatory authority. It would not be acceptable, however, if the by-
laws will provide that the qualifications or
These are also without prejudice to disqualifications shall be subject to the judgment or
qualification or other disqualifications, which the SEC, determination of the board, what is required is that
the primary regulatory agency, or the Philippine the same be expressly spelled out in the by-laws. A SEC
Competition Commission may impose in its promotion Opinion, June 16, 1995 provides that absent a
of good corporate governance or as a sanction in provision, a corporation cannot require additional
administrative proceedings. qualifications other than that prescribed by law.

Note that there are two things mentioned, the While no age requirement has been provided
first, the non-conviction by final judgment of an offense by law, SEC Opinion, February 2, 1981 states that a
punishable by a period in excess of six years is a stipulation allowing a minor to be elected as a member
perpetual disqualification. of the board is not sound corporate practice as they
have limited capacity to act. It has also been said that
So if the candidate has that conviction, he is since incorporators are required to be of legal age, the
perpetually disqualified. same requirement should be applied to subsequent
directors.

– COMMERCIAL LAW REVIEW –

 23

The sixth qualification is one that may be no capital stock, a majority of the members entitled to
provided for in the bylaws, but for other qualifications vote. When so authorized in the bylaws or by a
to be imposed upon one who wants to be elected as a majority of the board of directors, the stockholders or
director or a trustee. It is important that it appears in members may also vote through remote
the bylaws. There must be a clear provision in the communication or in absentia. Provided, that the right
bylaws, providing for additional qualifications. to vote through such modes may exercised in
corporations vested with public interest,
While the law does not really require any age notwithstanding the absence of a provision in the
requirement previously. bylaws of such corporations.
There is a SEC Opinion dated February 2, 1981, A stockholder or member who participates
stating that a stipulation that allows a minor to be through remote communication or in absentia, shall be
elected as a member of the board is not sound deemed present for purposes of quorum.
corporate practice because of their limited capacity to
act. So it has also been argued that since an Q: What is the quorum for purposes of election?
incorporator or a natural person incorporator is
required to be of legal age, it should follow that the A: For purposes of an election. There should be a
same requirements should be applied to directors. majority of the outstanding capital stock or a majority
of the members who are qualified to vote. This is what
HOW ELECTED will constitute a quorum for purposes of electing
directors or trustees.
NOMINATION
Q: How will the quorum be determined?
The nomination process as laid down by
Section 23 is as follows: A: the quorum will be determined by presence in the
meeting that is called for the election of directors. It will
Except when the exclusive right is reserved for also include those who are allowed to vote by way of
holders of founders ’shares under Section 7 of this remote communication, or in absentia
Code, each stockholder or member shall have the right
to nominate any director or trustee who possesses all When we speak of PRESENCE , we are referring
of the qualifications and none of the disqualifications to those who are actually present actually be physically
set forth in this Code. present and we also refer to those who are present
because they issued proxies. So their presence is
— The process begins with a nomination. through their designated proxies.
Q: Who will nominate persons who will stand for When we speak of those allowed to vote by
election as directors or trustees? REMOTE COMMUNICATION or IN ABSENTIA , we are
talking of those who are voting, or will be allowed to
A: In a stock Corporation, a stockholder may nominate a
vote by themselves, but they are not physically in the
person to stand for election as a director.
meeting, or they have not physically attended the
In a non stock Corporation, a member may nominate a meeting for the election of directors or trustees. So they
person to stand for election as a trustee provided these are said to be voting by remote communication, or by
persons so nominated possess all of the qualifications, absentia.
and none of the disqualifications to be elected as a
There's also the matter of the need for voting
director or a trustee.
by remote communication or absentia to be stated in
There's also the matter, of the holders of the bylaws of the corporation. If the corporation is
founder shares. If you recall our discussion of founders vested with public interest whether the bylaws contain
shares. They may be given the right to vote for and to a provision, allowing remote voting by remote
elect a director. So, it can happen that this condition is communication or absentia or not — they will be
present. You have holders of founder shares. So among allowed to vote by remote communication, or in
themselves, they may nominate one to stand for absentia.
election, as a director. Remember though, that this is
However, in corporations that may not be
only for a limited period, not to exceed five years.
vested with PUBLIC INTEREST . There is a requirement
that they be allowed to vote or that they will only be
QUORUM
allowed to vote by remote communication or in
The quorum requirement requires that at all absentia if there is a provision in the bylaws.
elections of directors or trustees, there must be
present, either in person or through a representative
authorized to act by written proxy, the owners of
majority of the outstanding capital stock, or if there be

– COMMERCIAL LAW REVIEW –

 24

MANNER OF VOTING This is also significant when we talk about, or when

we get to the point of removal or discuss removal of
The election must be by ballot if requested by directors. Because directors who are elected by
any voting stockholder or member. cumulative voting are not subject to removal without
costs.
The manner of voting in stock corporations
provides that stockholders entitled to vote shall have And finally, please note that no delinquent stock
the right to vote the number of shares of stock shall be voted.
standing in their own names in the stock books of the
corporation at the time fixed in the bylaws or where In a non-stock corporation, unless otherwise
the bylaws are silent, at the time of the election. provided in the articles of incorporation or in the
bylaws, members of nonstick corporations may cast as
The said stockholder may: many votes as there are trustees to be elected by may
not cast more than one (1) vote for one (1) candidate.
(a)vote such number of shares for as many persons as
Nominees for directors or trustees receiving the
there are directors to be elected;
highest number of votes shall be declared elected.
— For example, He has 10 shares. And there are five
So, if a member one he has one vote. But he can cast as
directors to be elected, so he can vote his 10 shares for
many votes as there are trustees to be elected. So, if
director or candidate A another 10 for candidate B.
there are five trustees to be elected. He can cast one
Another 10 for candidate C. And now, another 10 for
vote for five trustees, so his choice of trustees are A, B,
candidate D. And the last stand for candidate E because
C, D, and E. He will be giving one vote to each of these
he can vote his shares for us many number or for us
trustees, or these persons who are standing for election
many persons, as there are directors to be elected.
as trustees.
(b)cumulate said shares and give one (1) candidate as
Section 23 requires the directors or trustees
many votes as the number of directors to be
elected to then perform their duties as prescribed by
elected multiplied by the number of the shares
laws, rules of good corporate governance, and bylaws
owned; or
of the corporation.
— Using the illustration above, he can have cumulative
voting — do one of two things, so he can give his 50 WHEN NO ELECTION IS HELD
votes to only one candidate. Like for example, the If NO ELECTION is held, or the owners of
vector A, So, 50 votes will be counted for director A. majority of the outstanding capital stock or majority of
(c)distribute them on the same principle among as the members entitled to vote are NOT PRESENT in
many candidates as may be seen fit: Provided, that person, by proxy, or through remote communication
the total number of votes cast shall not exceed the or not voting in absentia at the meeting, such meeting
number of shares owned by the stockholders as may be adjourned and the corporation shall proceed in
shown in the books of the corporation multiplied accordance with Section 25 of this Code.
by the whole number of directors to be elected. The provision requires that the non-holding of
Provided, however, that no delinquent stock shall elections and the reasons shall be REPORTED to the
be voted. SEC within 30 DAYS from the date of the election. It
should also specify a NEW DATE for the election, which
EXAMPLES:
should not be more than 60 DAYS from the scheduled
He can use the same 50 shares allocate it as he date.
deems fit.
ILLUSTRATION:
For example, He can give to the director, for
candidate A— 20, candidate C another 20, and two Let us say that elections were supposed to be
candidate E — 10 conducted on August 1 but the elections were not
conducted. Probably because of a typhoon intervened.
But in no case, should the number of votes cast So no elections were conducted, or you have a situation
exceed the number of shares that he has multiplied by where they proceeded with the meeting, however, they
the number of first ones or directors to be elected. could not get the required majority of the outstanding
capital stock or of the members, entitled to vote. They
Two, and three are all or both examples are of had no option now, but to adjourn the meeting. So if
cumulative voting. The purpose of community voting is that is the case, within 30 days. From August 1 or up to
to afford the minority representation in the board of August 31. The SEC must be notified that no elections
directors. were held. And the reason why no elections were held
— this must be given 30 days after the date on which
the elections were supposed to be held.

– COMMERCIAL LAW REVIEW –

 25

— The Notice must also specify a new date for the outstanding capital stock or majority of the members
election which should not be more than 60 days from entitled to vote, that will constitute or they will
the scheduled date so in our illustration. It should constitute a quorum.
specify the new date, and it should not be more than 60
days from August one. Therefore, no later than There is no problem if these majority of the
September 30. outstanding capital staff are majority of the members
entitled to vote, are present. The situation that is being
If no date is designated, or the rescheduled referred to is when you don't have a majority of the
election is not held, the SEC upon application of a outstanding capital stock. Let us say you only have 40%
stockholder, member, director, or trustee and after of the outstanding capital stock or 40% of the members
verification of the unjustified non-holding of the entitled to vote. That ordinarily would not constitute a
election, can summarily order an election to be held. courtroom sufficient to hold an election. But if it is one
The SEC can also issue orders as may be appropriate, that is called by the SEC pursuant to the provision that
including orders to direct issuance of notice, setting we are discussing, then that 40% of the outstanding
the time and place of the election, designated capital stock or 40% of the members entitled to vote
presiding officer, and the record date/s for the will constitute a core home for the purpose of
determination of the stockholders or members conducting an election.
entitled to vote.
FORMAL ORGANIZATION
Notwithstanding any provision in the Articles
or By-Laws to the contrary, the shares of stock of Section 24 requires that immediately after
membership represented at such meeting and entitled their election, the directors of a corporation must
to vote shall constitute a quorum for purposes of formally organize, by the election of a PRESIDENT , who
conducting an election. shall be a director, a TREASURER , who may or may not
be a director, a SECRETARY , who must be a resident
Once the SEC avails of this option, then, and citizen of the Philippines and such OTHERS as
notwithstanding any provision in the articles or bylaws may be provided for in the By-Laws.
to the contrary, those who are present during the
election scheduled by the Securities and Exchange If the corporation is vested with public
Commission shall now constitute quorum , for the interest, the board shall elect a COMPLIANCE OFFICER .
purpose of electing or conducting an election.
Any person may hold concurrent positions
So no elections are held for a valid reason or the except that of President–Secretary or President-
required quorum is not obtained. The SEC is notified Treasurer, unless otherwise allowed by the Code. The
within 30 days from the original date as to be done exception refers to a One-Person Corporation where
holding together with the reason, and there should be a the single stockholder who under Section 121 is the
statement as to when new elections are going to be president may appoint himself as the treasurer under
conducted. They should now hold the elections on the Section 122.
specified date.
The power to elect corporate officers is a
If they hold elections on that specified date. power that is to be exercised by the board and cannot
What is the quorum requirement? The quorum be delegated. In a non-stock corporation, the members
requirement remains to be the same as that of the may exercise the power.
original election, meaning a majority of the outstanding
In Matling Industrial Commercial Corporation
capital stock or a majority of the members entitled to
vs. Coros (G.R. No. 157802, October 13, 2010), the
vote in computing the quorum, we look at those who
court said that a position must be expressly mentioned
are present, attending by proxy, or voting by remote
in the by-laws in order to be considered as a corporate
communication or in absentia.
office. Specifically, only the following are considered
If the elections are scheduled are not held, as corporate officers: (1) President, (2) Treasurer, (3)
again, or the Notice did not specify a new date upon Secretary, and (4) such officers provided in the by-
petition of a proper party repairing to a stockholder laws.
member director or trustee or the SEC itself upon its
Consequently, corporate officers whose
own initiative may conduct, or may schedule a meeting
positions are not expressly stated in the Corporation
for the purpose of holding an election.
Code or in its by-laws are deemed regular employees
When the SEC will do that, there will be a and may only be dismissed from service for: (a) for
change in the quorum requirement. During that election valid causes, and (b) after strict compliance with due
pursuant to the SEC directive, those who are attending, process. In case of dispute, jurisdiction will be vested
or who are represented at that meeting, regardless of with the NLRC. On the other hand, those whose
where they're, they constitute the majority of the positions are expressly stated may only be dismissed

– COMMERCIAL LAW REVIEW –

 26

by an act or refusal to act by the board. In case of the emergency action necessary and the term shall
dispute, jurisdiction shall be vested with the RTC cease within a reasonable time from the termination
sitting as a special commercial court. of the emergency, or upon election of a replacement
director or trustee, whichever comes earlier. The
Section 25 requires that 30 days after election, corporation should notify the SEC within 3 days form
the secretary or any other officer shall submit to the the creation of an emergency board, stating the reason
SEC the names, nationalities and residence of the for its creation.
Directors/Trustees/Officers elected. It further requires
that should anyone of them die, resign or cease to hold INCREASE IN NUMBER
office, such shall immediately be reported to the SEC
within 7 days from knowledge. A directorship or trusteeship by reason of an
increase in number shall only be filled by election in a
VACANCIES regular or special meeting called for that purpose or in
the same meeting authorizing the increase if so stated
Section 28 provides that should a vacancy arise in the notice of meeting.
in the board due to causes other than removal or
expiration, the Board may fill it by MAJORITY VOTE of REMOVAL OF DIRECTORS OR TRUSTEES -
the REMAINING DIRECTORS if still constituting a
QUORUM . Otherwise, the vacancy should be filled by Section 27 provides for the removal of
the stockholders or members in a regular or special directors, with or without cause. Removal requires
meeting, the stockholder or member so designated or that (a) it must take place at a regular meeting of the
elected shall only serve the unexpired portion of the corporation or a special meeting called for that
term. purpose (b) there must be previous notice to
stockholders or members of the intention to propose
In Valle Verde Country Club Inc. v. Africa, (G.R. such removal. The notice must be specific and in
No. 151969, September 4, 2009) it was held that the writing, by publication or sending of a copy of the
vacancy can only be filled by the Board if they are still notice (c) the removal is effected by 2/3 vote of capital
acting within their term of office, or “the time during stock /members entitled to vote except that a director
which the officer may hold claim to his office as a elected by cumulative voting cannot be removed
matter of right, and fixes the interval after which without cause as its effect is to deprive minority
several incumbents shall succeed one another.” This stockholders or members of their representation.
period is fixed by law. They cannot fill a vacancy if
their terms have expired but they continue to hold the Any special meeting to cause removal is to be
position as holdover directors. In this instance, they called by the Secretary on order of the President or
are said to have filled up the vacancy within their upon written demand of stockholders representing at
tenure, or “the period where the incumbent actually least a majority of the outstanding capital stock or of
holds office, which can be shorter or longer than the the members. If the Secretary, refuses, does not exist
term.” or fails to give notice, the call for a meeting may be
addressed directly to stockholders or members by the
When the vacancy is due to term expiration, stockholders or members signing the demand.
the election shall be held no later than the day of such
expiration at a meeting called for that purpose. If by The election of new directors may take place in
removal, it may be held on the same day of the the same meeting.
meeting authorizing removal and this fact must be
The SEC shall, motu propio or upon verified
stated in the agenda and notice of meeting. In all other
complaint, and after due notice and hearing, order the
cases, it must be held no later than 45 days from the
removal of a director or trustee elected despite a
time the vacancy arose.
disqualification, or whose disqualification arose or is
In all elections to fill vacancies, the procedure discovered subsequent to the election. The removal is
set forth in Section 23 and 25 shall apply. without prejudice to sanctions that the SEC may
impose on directors or trustees, who with knowledge
EMERGENCY BOARD of the disqualification, failed to remove the director.

When the vacancy prevents the remaining COMPENSATION FOR DIRECTORS -

directors from constituting a quorum and emergency
action is required to prevent grave, substantial and Section 29 provides that directors or trustees
irreparable loss or damage to the corporation, the as a rule do not receive compensation other than
vacancy may be TEMPORARILY FILLED from among the reasonable PER DIEMS .
officers of the corporation by a unanimous vote of the
Other or additional compensation may be
remaining directors or trustees. The action taken by
granted only if (a) fixed in the By-Laws (b) is granted
the designated director or trustee shall be limited to
and approved by a majority vote of the outstanding

– COMMERCIAL LAW REVIEW –

 27

capital stock or a majority of the members at a regular In Western Institute of Technology v Salas (278
or special meeting but in no case shall compensation SCRA 216) the grant of compensation by resolution to
exceed 10% of the income before income tax of the directors in their capacity as corporate officers was
preceding year. allowed.

Directors or trustees shall not participate in Corporations vested with public interest shall
the determination of their own per diems and or submit to its stockholders and the SEC, an annual
compensation. report of compensation for each of their directors or
trustees.
In computing any additional compensation, per
diems are not included to determine whether the limit
has been reached.

– COMMERCIAL LAW REVIEW –

 28

OTHER BOARD MATTERS

MODULE 5

• A Compliance Officer is one who assures or has

I. FORMAL ORGANIZATION the responsibility of insuring that the corporation is
Section 24 requires that immediately after compliant with all rules and regulation that are
their election, the directors of a corporation must applicable to it in the course of its operations.
formally organize, by the election of a President, who
The power to elect corporate officers is a
shall be a director, a Treasurer, who may or may not
power that is to be exercised by the board and cannot
be a director, a Secretary, who must be a resident and
be delegated. In a non-stock corporation, the members
citizen of the Philippines and such others as may be
may exercise the power.
provided for in the By-Laws.
In Matling Industrial Commercial Corporation
If the corporation is vested with public
vs. Coros (G.R. No. 157802, October 13, 2010), the
interest, the board shall elect a compliance officer.
court said that a position must be expressly mentioned
• Formal Organization refers to the election by in the by-laws in order to be considered as a corporate
the board of the officers of the corporation. office. Specifically, only the following are considered
as corporate officers: (1) President, (2) Treasurer, (3)
• The officers being referred to are the President, Secretary, and (4) such officers provided in the by-
Secretary and the Treasurer and others. If the laws.
corporation is vested with public interest, there is a
need for a Compliance Officer. Consequent, corporate officers whose
positions are not expressly stated in the Corporation
Any person may hold concurrent positions Code or in its by-laws are deemed regular employees
except that of President–Secretary or President- and may only be dismissed from service for: (a) for
Treasurer, unless otherwise allowed by the Code. The valid causes, and (b) after strict compliance with due
exception refers to a One-Person Corporation where process. In case of dispute, jurisdiction will be vested
the single stockholder who under Section 121 is the with the NLRC. On the other hand, those whose
president may appoint himself as the treasurer under positions are expressly stated may only be dismissed
Section 122. by an act or refusal to act by the board. In case of
dispute, jurisdiction shall be vested with the RTC
• Insofar as other officers are concerned, there is sitting as a special commercial court.
a requirement that they be specifically named and
indicated in the By-laws. • You have your corporate officers, the president,
secretary and treasurer and others. Does it mean that
• So we have basic officers namely, a President, the corporation or the board cannot appoint other
Secretary and Treasurer, can there be other officers officers who to their mind would be necessary for
appointed by the Board in a stock corporation? effective management of the corporation and
implementation of the policies determined by the
• Yes, provided they are specifically designated in
board?
the By-laws. Absent any specific provision in the By-
laws, then we would have to go with the basic officers - No, it means the opposite. They can elect other
as laid down by the Revised Corporation Code and that officers but when we have to distinguish as to the
is to have a President, Secretary and a Treasurer. tenure of these officers, these corporate officers who
are mandated by law, mandated by the By-laws, their
• In a non-stock corporation, the officers are
terms and renewals and eventually if it happens their
elected by the members. However, it is possible for the
removal are going to be considered as intra corporate
board, if they are given power in the By-laws to be the
disputes which are under the jurisdiction of a
one to elect the officers.
commercial court. Speaking of other officers, in the
• If you recall in our previous discussion, event of a controversy related to their being appointed
distinguishing between a stock and a non-stock as officers, the functions, duties and eventually their
corporation, this is one of the factors that distinguishes removal, jurisdiction will not be vested in the special
as stock corporation from a non-stock corporation. commercial court but rather in the NLRC.

• Furthermore, it is required under section 24 Once formally organized, Section 25 requires

that a Compliance Officer is elected by the Board if the that 30 days after election, the secretary or any other
corporation is vested with public interest. officer shall submit to the SEC the names, nationalities
and residence of the Directors/Trustees/Officers

– COMMERCIAL LAW REVIEW –

 29

elected. It further requires that should anyone of them longer acting within their specified term of 1 year which
die, resign or cease to hold office, such shall expired in December 31.
immediately be reported to the SEC within 7 days from
knowledge. WHEN SHOULD THE VACANCY BE FILLED?
When the vacancy is due to term expiration, the
II. VACANCIES election shall be held no later than the day of such
Section 28 provides that should a vacancy arise expiration at a meeting called for that purpose. If by
in the board due to causes other than removal or removal, it may be held on the same day of the meeting
expiration, the Board may fill it by majority vote of the authorizing removal and this fact must be stated in the
remaining directors if still constituting a quorum. agenda and notice of meeting. In all other cases, it must
Otherwise, the vacancy should be filled by the be held no later than 45 days from the time the vacancy
stockholders or members in a regular or special arose.
meeting, the stockholder or member so designated or
In all elections to fill vacancies, the procedure
elected shall only serve the unexpired portion of the
set forth in Section 23 and 25 shall apply.
term.

• What is important to be able to understand the III. EMERGENCY BOARD

rule in vacancy is to determine the cause. So if the cause
is expiration of the term, or it is removal, the only way WHEN CAN THERE BE AN EMERGENCY BOARD?
to fill it up is by election. If on the other hand, we are When the vacancy prevents the remaining
talking of other causes, they can also be filled up by directors from constituting a quorum and emergency
election or they can be filled up by a majority vote of action is required to prevent grave, substantial and
the remaining members of the Board provided they still irreparable loss or damage to the corporation, the
constitute a quorum vacancy may be temporarily filled from among the
In Valle Verde Country Club Inc. v. Africa, (G.R. officers of the corporation by a unanimous vote of the
No. 151969, September 4, 2009) it was held that the remaining directors or trustees.
vacancy can only be filled by the Board if they are still • An emergency board is one of the new items
acting within their term of office, or “the time during introduced in the Revised Corporation Code.
which the officer may hold claim to his office as a
matter of right, and fixes the interval after which • For example, if we have a 7 member board and
several incumbents shall succeed one another.” This there are now 4 vacancies, there are only 3 members of
period is fixed by law. They cannot fill a vacancy if the board remaining, they cannot constitute a quorum.
their terms have expired but they continue to hold the They need to decide on a matter to prevent grave,
position as holdover directors. In this instance, they substantial and irreparable loss or damage to the
are said to have filled up the vacancy within their corporation. The remaining 3, by a unanimous vote can
tenure, or “the period where the incumbent actually appoint an officer of the corporation to serve as an
holds office, which can be shorter or longer than the emergency director.
term.”
• Who can they appoint? They can appoint the
• In this case, when they exercise the power they treasurer, secretary and other officers.
must do so while they are still in their specified term.
This specified term is fixed by law. • How many should they appoint? For them to
have a quorum, they should appoint at least one so that
• To Illustrate, in a stock corporation the term is 1 they shall have 4 out of the 7 so that they can make a
year. Let us say the term is from January 1 to December decision. However to appoint any of these officers, all 3
31. If the vacancy occurs on October 1, the vacancy if must agree to the appointment.
the cause is not expiration or removal can be filled by a
majority vote of the remaining members of the board. HOW LONG WILL THERE BE AN EMERGENCY BOARD?
Here, it can be done and they can fill it up and the
The action taken by the designated director or
person who is elected by the Board to fill it up serves
trustee shall be limited to the emergency action
the unexpired portion of the director whom he
necessary and the term shall cease within a reasonable
replaces. They can do so because they are still acting
time from the termination of the emergency, or upon
within their term.
election of a replacement director or trustee, whichever
• The case of Valle Verde vs Africa refers to a comes earlier. The corporation should notify the SEC
situation where in our example, if they hold over and let within 3 days form the creation of an emergency board,
us say it is March 31 of the next year, they cannot fill up stating the reason for its creation.
the vacancy even if the remaining members of the
board still constitute the quorum because they are no

– COMMERCIAL LAW REVIEW –

 30

IV. INCREASE IN NUMBER The SEC shall, motu propio or upon verified
complaint, and after due notice and hearing, order the
A directorship or trusteeship by reason of an removal of a director or trustee elected despite a
increase in number shall only be filled by election in a disqualification, or whose disqualification arose or is
regular or special meeting called for that purpose or in discovered subsequent to the election. The removal is
the same meeting authorizing the increase if so stated without prejudice to sanctions that the SEC may impose
in the notice of meeting. on directors or trustees, who with knowledge of the
disqualification, failed to remove the director.
• If the situation is there is by way of an
amendment, an increase in the number of directors, the VI. COMPENSATION FOR DIRECTORS
only way directors can fill the vacancy arising from an
increase is by election. There is no other way by which Section 29 provides that directors or trustees as
the vacancy can be filled up. a rule do not receive compensation other than
reasonable per diems.
V. REMOVAL OF DIRECTORS OR TRUSTEES
They may however be entitled to or granted
Section 27 provides for the removal of additional compensation if one or both of the
directors, with or without cause. circumstances are present:

REMOVAL REQUIRES THAT: a) allowed and fixed in the By-Laws

b) is granted and approved by a majority vote of the
a) it must take place at a regular meeting of the
outstanding capital stock or a majority of the
corporation or a special meeting called for that
members at a regular or special meeting but in no
purpose;
case shall compensation exceed 10% of the income
b) there must be previous notice to stockholders
before income tax of the preceding year.
or members of the intention to propose such
removal. The notice must be specific and in Directors or trustees shall not participate in the
writing, by publication or sending of a copy of determination of their own per diems and or
the notice; compensation.
c) the removal is effected by 2/3 vote of capital
stock /members entitled to vote except that a In computing any additional compensation, per
director elected by cumulative voting cannot be diems are not included to determine whether the limit
removed without cause as its effect is to has been reached.
deprive minority stockholders or members of
their representation. In Western Institute of Technology v Salas (278
SCRA 216) the grant of compensation by resolution to
Any special meeting to cause removal is to be directors in their capacity as corporate officers was
called by the Secretary on order of the President or allowed. This means that there can be a resolution
upon written demand of stockholders representing at granting compensation to directors not in their capacity
least a majority of the outstanding capital stock or of as directors but rather in their capacity as corporate
the members. If the Secretary, refuses, does not exist or officers.
fails to give notice, the call for a meeting may be
addressed directly to stockholders or members by the Corporations vested with public interest shall
stockholders or members signing the demand. submit to its stockholders and the SEC, an annual report
of compensation for each of their directors or trustees.
The election of new directors as replacement
may take place in the same meeting. As earlier
mentioned, when we are talking of replacing a director
or trustee who is to be removed in the same meeting,
the notice must specifically state that after a removal is
effected there will be following immediately an election
to replace the director or trustee who has been
removed.

– COMMERCIAL LAW REVIEW –

 31

EXERCISE OF CORPORATE POWERS

MODULE 6

corporation, acting through the board, may validly

HOW CORPORATE POWERS ARE EXERCISED delegate the exercise of corporate power, or a specific
GR : Corporate powers are exercised and performed by corporate power in favor of a particular person/persons
the Board through meetings. or another entity.

Individually, the members of the board cannot A VALID DELEGATION CAN TAKE PLACE WHEN:
independently of each other exercise corporate powers. 1. Valid resolution that would designate the:
They have no power to act other than as a board.
a. Representative
In short, corporate powers would exercise corporate b. Authority
powers, the conduct of the business of the corporation c. Frame or fixed scope of his authority; and
and holding control over its corporate powers is a d. The time up to when can the representative
collective power that is vested in the board. can exercise the particular or specific corporate
power.
NOTE : This so because it must act as a body and a
decision must be always be reached after affording an The board can create an executive, management or
opportunity for consultation. In addition, directors or other special committee under the provisions of the
trustees have no power to act other than as a board. by-laws. (Section 34)

XPN : SPECIAL COMMITTEE

EXCEPTION AS TO THE EXERCISE OF THE CORPORATE For Specific purposes, there can be a special committee.
POWER OF THE BOARD:
They may be special committees of:
1. Directors happen to be the only stockholders 1. Temporary Nature; or
(Commonly known as Closed Corporation) 2. Permanent Nature
NOTE : In a Closed Corporation it is possible for the And the board can determine:
corporation not to have a Board, however, this 1. who the members will be;
requires that the stockholders acting as members of 2. term of the members;
the Board or acting a Directors, for purposes of 3. compensation;
complying the requirements of the revised 4. powers; and
corporation code, should assume the 5. responsibilities
responsibilities and liabilities of Directors.
2. Act is undertaken by someone authorized by the EXECUTIVE COMMITTEE
board. An executive committee is a body composed of no less
NOTE : There is a valid delegation of Corporate than 3 members of the board.
power in this case.
3. Stockholders waive the necessity of having a
PURPOSE OF EXECUTIVE COMMITTEE
meeting
4. When there is an executive committee 1. To exercise corporate powers as may be delegated
5. When the corporation enters into a management to assure prompt and speedy action and solution
contract. without necessity of board meetings; and
NOTE : In which case, the board of the managed
corporation will to some degree give up the power 2. To exercise general management of the corporation
of management over the corporation where they sit in between meetings of the board.
as a board in favor of the board of the managing
NOTE : Meeting of the Board should be on a monthly
corporation
basis. That is the requirement as to the frequency of
6. When the act is ratified at a subsequent meeting.
its regular meeting. (Refer to discussion on
meetings)
DELEGATION OF CORPORATE POWERS
So, an executive committee is supposed to be running
A corporate act may be performed by somebody who is and managing the corporation in between those
authorized by the board. monthly regular meetings of the Board.

A corporation is a juridical person, the only way which it

can act is through an authorized representative. So the

– COMMERCIAL LAW REVIEW –

 32

EXECUTIVE COMMITTEE MAY ACT BY A MAJORITY NOTE : As to other committees, the board may
VOTE create special committees of temporary or
Assuming the executive committee is composed only of permanent nature and to determine the members’
three members of the Board, they can act on matters term, composition, compensation, powers and
that have been delegated to it in the By-Laws or on responsibilities.
majority vote of the board.
DOCTRINE OF APPARENT AUTHORITY
EXAMPLE : If two members of the three members of the
This doctrine provides that a corporation will be
executive committee have voted on a particular matter
estopped from denying the authority of an agent if it
or have voted together on a particular matter, the
knowingly permits one of its officers or any other agent
matter coted upon is carried.
to act within the scope of apparent authority, and it
holds him out to the public as possessing the power to
THE EXECUTIVE COMMITTEE HAS NO POWER TO ACT do those acts.
ON:
1. Approval of action requiring stockholder or member CALLED TO APPLY WHEN:
approval There are issues as to whether a representative of the
corporation can bind the corporation.
EXAMPLE : In the provisions on the power of a
corporation, which are considered fundamental or GR : A representative must be duly authorized to be able
will constitute a substantial change in the to bind the corporation.
corporation there is always a requirement for
stockholder or member approval of either a WHEN IS REPRESENTATIVE DULY AUTHORIZED
majority vote or 2/3 vote. Thus, those matters are There must be an appropriate resolution.
beyond the competence of the executive
Committee. XPN : A representative may act to further the interest or
the welfare of the corporation and he finds himself in a
Example, the matter of increasing authorized capital situation where he may not be able to secure the
stock, that is a matter which is beyond the resolution in a timely manner.
competence of an executive committee because it
requires approval by a majority vote of the Board In this case, there is an issue whether the act of the
plus 2/3 of the outstanding capital stock. representative binds the corporation. This is now where
you apply Doctrine of apparent authority.
2. Filling of vacancies in the board
CONSEQUENCE OF THE APPLICATION OF THE
3. Amendment or repeal of by-laws and the adoption
DOCTRINE:
of new by-laws
“Although an officer or agent acts without, or in excess
NOTE : Amendment or repeal of the By-laws require of, his actual authority if he acts within the scope of an
a majority vote of the entire Board plus the apparent authority with which the corporation has
approval of the stockholders or members. clothed him our or permitting him to appear as having
such authority, the corporation is bound thereby in
4. Amendment or repeal of any board resolution favor of a person who deals with him in good faith in
which by its terms is not so repealable or reliance on such apparent authority, as where an officer
amendable is allowed to exercise a particular authority with respect
to the business, or a particular branch of its business
Here, the limitation as to the power of the
continuously and publicly, for a considerable time.”
executive committee is expressly provided in the
(TERP Construction Corporation v. Banco Filipino Savings
Board resolution which they are seeking repeal or
and Mortgage Bank G.R. No. 221771, September 18,
amend. And what is expressly provided is that they
2019)
cannot repeal it neither can they amend it.
NOTE: There is a need to take a look at several things
5. Distribution of cash dividends to stockholders.
before the Doctrine of apparent authority applies.
This is a power that is to be exercised by the
WE NEED TO TAKE A LOOK AT :
majority of the Board.
What appears to the third person as the authority of the
In the same manner they cannot distribute Stock
person or the representative of the corporation with
dividends because the declaration and distribution
whom he has dealt with.
of stock dividends will sometimes require the
approval of the stock holders.

– COMMERCIAL LAW REVIEW –

 33

Because when you look at the third person, who deals extend to personal equipment that is not utilized by the
with the corporation through an agent, the third person corporation. Since the purchase is not related to the
must be looking at the agent as possessed with the object or purpose of the corporation, the DOAA may
authority to enter into the subject transaction. not be called to apply. As a consequence, the
corporation may not be held liable for the purchase of
WHEN CAN THE THIRD PERSON LOOK AT THE AGENT AS personal equipment.
BEING POSSESSED WITH APPARENT AUTHORITY:
1. Functions of the Agent or Representaive. THE DOCTRINE WILL NOT FIND APPLICATION:
1. If the transaction in question is not part of the
QUESTIONS TO BE ASKED : What are the usual function functions of the officer or the agent of the
of the agent? corporation upon whom the doctrine is sought to
Is he entering into the transaction or performing an act apply or
in connection with his designated functions or 2. If he transaction is not related to the purpose or
2. Purpose or Object of the corporation. objective of the corporation.

QUESTIONS TO BE ASKED : Is the act being performed is BOARD MEETING

related to the purpose or object of the coporation.
THE REQUISITES OF A VALID BOARD MEETING ARE:
If the answer to the inquiry is yes, meaning the
1. The directors / trustees must be duly assembled as
transaction is related to the functions of the agent or
a board.
representative or the transaction is one that is related
to the purpose or objective of the corporation then the NOTE : Directors/trustees cannot attend or vote by
Doctrine of Apparent Authority may find application. proxy as their personal judgment is required.
ILUSTRATION: Thus there is a requirement that they be duly
Q: If a third person dealing with the agent or notified in accordance with what is provided for in
representative of the corporation who is its purchasing the Revised Corporation Code and the By-laws of
officer, the Doctrine of apparent authority will apply if the corporation.
the Third Person will enter into a transaction for the
NOTE : Do not confuse this requirement by their
amount of 500k which is well within the authority of
attending through video conferencing. For all
the agent or representative purchasing officer of the
intents and purposes, they are still the ones who
corporation.
will be called upon to vote. The prohibition extends
A subsequent transaction now would appear that it to attending or voting through a representative
would more profitable or beneficial to the corporation
2. Presence of a required quorum
to acquire a greater volume. The purchasing officer
now will purchase 1M although he is only authorized 3. The decision is reached by a majority vote of the
for 500k. quorum or by entire board as required by law.
4. Meet at the time, place and manner provided in the
1. Will the Doctrine of Apparent Authority find
by-laws.
application in this case?
NOTE : In the absence of a provision in the By-Laws,
2. In the same case, what If the agent is a majority of the directors/trustees as stated in the
authorized only to purchase office supply and articles of incorporation shall constitute a quorum.
what he purchased from the third person are
personal equipment not normally utilized by FORMULA FOR QUORUM
the corporation, will the DOAA apply?
The formula to determine the quorum is the majority
A.1.: Possibly, because the transaction is related to (one half plus one) of the entire number of
functions of the purchasing officer, agent representative directors/trustees notwithstanding the existence of
of the corporation. vacancies in the board. (Stated in SEC Opinion, 1987)

When the third person seeks payment of the 1M NOTE : This formula applies in the absence of any
purchase, the corporation may be estopped from provision in the by-laws that would provide for a
denying the authority of the purchasing officer because greater number to constitute a quorum. There can be
the transaction is related to the function of the no number less than a majority to constitute a quorum.
purchasing officer. If less than the majority, it would be violative of the
provisions of the Revised Corporation Code. So, in a
A.2.: No. While it is true that the purchasing officer of quorum, there can be a greater number than the
the corporation has apparent authority, it does not Majority to constitute a quorum.

– COMMERCIAL LAW REVIEW –

 34

MAJORITY OF THE QUORUM V. MAJORITY OF THE MEET AT THE TIME, PLACE, MANNER PROVIDED IN THE
ENTIRE NUMBER/ENTIRE BOARD BY-LAWS
The decision that is required to be reached by a NOTE : SEC Opinion Jan 25, 1990 A quorum once
majority of the quorum or the majority of the entire established is not broken by the subsequent withdrawal
number of a part or a faction of those present, unless the
transaction requires the affirmative vote of a greater
MAJORITY OF THE QUORUM proportion. (SEC Opinion, January 25, 1990)

EXAMPLE: ILLUSTRATION:
7-member board. The Quorum is 4. For ordinary actions 7 member board where 4 have attended to constitute a
of the board, if you have a quorum of 4 and the majority quorum. If for example, one of the members of the
of the 4 will vote in favor or 3 will vote together, board will leave the meeting. Does it mean that there is
meaning 3 against 1, then the matter which is voted no longer any quorum?
upon is carried.
The answer based from the SEC opinion cited is that a
The second requirement for the Board meeting to be quorum continues to exist. So if there is now a need to
validly held is that there should be the presence of a vote. The vote of the 3 remaining members which
quorum. would constitute the majority of this quorum would be
essential for validity. If however, what is required to be
The presence of 4 means there is a quorum. voted upon requires again the majority of the entire
number, it means that they cannot get the entire
For purposes of the validity of the action. If we are
number of votes because it is required to have 4 of the
talking of ordinary action , a majority of quorum (3-1)
7 members of the board carrying the action.
would be sufficient for validity. That is a valid decision
of the Board.

WHEN MAJORITY OF THE ENTIRE NUMBER/ENTIRE

BOARD IS REQUIRED

Involves fundamental and substantial changes in the

Corporation.

EXAMPLE : Amendment of the articles – this requires

the majority of the entire number. You have a quorum,
but for validity the vote should be 4-0. The 4 members
of the board who constitute the quorum must vote in
favor of the amendment.

This is where the distinction is material. Even if there is

a quorum, but for the validity of the action, you have to
look at what is being decided because sometimes it will
not require a simple majority of the quorum but the
majority of the entire board.,

– COMMERCIAL LAW REVIEW –

 35

CORPORATE GOVERNANCE
AND RESPONSIBILITIES
MODULE 7

CORPORATE GOVERNANCE So, for a director to be diligent, he should, in

the exercise of his functions, observe reasonable care
The SEC Code of Corporate Governance and prudence; and before assuming the position of
provides: directorship or trustees, he should, at the very least,
have sufficient knowledge and skill as to what the
Corporate Governance is a system whereby
operations of the corporation is all about. and must
shareholders, creditors, and other stakeholders of a
have some basic knowledge as to what he should be
corporation ensure that management enhances the
doing as a director or as a trustee.
value of the corporation as it competes in an
increasingly global marketplace. This duty is specifically imposed by Section 30
that provides that: directors or trustee who willfully
It prescribes that the board of directors is
and knowingly vote for or assent to patently unlawful
primarily responsible for the governance of a
acts of the corporation or who are guilty of gross
corporation.
negligence in directing its affairs shall be liable jointly
and severally for all damages resulting therefrom
OBLIGATIONS OF DIRECTORS
suffered by the corporation, its stockholders or
We can summarize the requirements, or the members, and other persons.
obligations of directors, based on the principles
enunciated in the Code of Corporate Governance. So So if you go to the provision, you will see there
directors should be TRANSPARENT , ACCOUNTABLE , and that if a director willfully and knowingly votes for or
FAIR (FAT). So, there should be transparency in their
assents to a patently unlawful act or is guilty of gross
dealings. They should take responsibility, or be negligence, then he does not possess the adequate
accountable for all their actions, and they should be fair knowledge and skill required of him to be a director or a
in everything that they decide to do for the corporation. trustee, and neither did he exercise his obligation of
reasonable care and prudence.
Hence, a director’s office is one of trust and
confidence. He should act in the best interest of the LOYALTY
corporation in a manner characterized by They must be loyal by keeping the interest of
transparency, accountability and fairness. He should the corporation above personal motives. Compliance
exercise leadership, prudence and integrity in directing with this duty requires that the director act in manner
the corporation towards sustained progress over the characterized by transparency, accountability and
long term. A director assumes certain responsibilities fairness.
to different constituencies or stakeholders, who have
the right to expect that the institution is being run in a Insofar as the duty of loyalty, the duty of loyalty
prudent and sound manner. is really putting the corporation ahead of one's personal
interest. In the same manner as the duty of diligence
Based on the revised Corporation, the finds basis under Section 30, the duty of loyalty finds
obligations of the directors are DILIGENCE , LOYALTY , basis under Section 31 (referring to your self-dealing
and OBEDIENCE (OLD). So it would be easy to remember director, trustee or officer), Section 32 (referring to your
what the duties and responsibilities of directors and interlocking directors) and 33 (which is really the
trustees are. They should be OLD and FAT, meaning Corporate Opportunity Doctrine).
they have the duty of obedience, loyalty and diligence.
And in their dealings, they should be fair, accountable This duty is specifically imposed in Sections 31,
and transparent. 32 and 33 pertaining to SELF-DEALING directors,
INTERLOCKING directors and DISLOYAL directors.
THREE-FOLD DUTIES OF DIRECTORS
SELF-DEALING DIRECTOR
DILIGENCE
A self-dealing director, trustee or officer is a
They must be diligent. Compliance with the director, trustee or officer who enters into a transaction
duty of diligence requires the exercise of reasonable with the corporation where he is a director, trustee or
care, prudence, adequate knowledge and skill. officer. Section 31 provides that the contract is voidable
at the option of the corporation.

– COMMERCIAL LAW REVIEW –

 36

This should tell you that the contract per se, is place by a two thirds vote of the outstanding capital
valid; however, the corporation may exercise the option stock provided there's full disclosure of the interest, and
to void the contract. it is fair and reasonable.

The general rule is that a contract between a Speaking of corporations vested with public
self-dealing director/trustee or officer and the interest, the requirement now, in addition to while to 1,
corporation is voidable at the option of the 2 and 3, is that two thirds of the board should have
corporation. The amendment now includes spouses approved the contract, and a majority of the
and relatives within the fourth civil degree of independent directors have likewise approved the
consanguinity or affinity. contract. So you now have to take a look at the makeup
of the board. You now have your self-dealing director --
Notwithstanding, the contract shall be valid his presence should not be necessary to constitute a
when the following circumstances are present: quorum; his vote should not be necessary to approve
the contract. The contract should be fair and
a) presence of the director/trustee in the board
reasonable. And in addition, the contract should have
meeting in which the contract was approved was
been approved by two thirds vote of the entire board,
not necessary to constitute a quorum
and your independent directors who constitute 20% of
b) his vote is not necessary to approve the contract
the board or a majority of them should have approved
c) that the contract is fair and reasonable under the
the contract.
circumstances, and
d) if the corporation is vested with public interest, So if for example you're looking at a five-man
the contract must be approved by at least 2/3 of board. Then, the three directors should have approved
the entire board, with at least a majority of the it, or four of the directors should have approved it. And
independent directors voting to approve the that includes your independent director. If you're
material contract. In the case of an officer, the looking at a 15-man board. So you now have to take
contract has previously been authorized by the away one of the directors so you have 14. That means
board. two thirds of their number should have approved it
meaning, at least 10 directors should have voted to
If however, conditions (a) and (b) are absent, the
approve the contract. And since you now have 20%
contract may be ratified by 2/3 vote of the outstanding
independent directors that means there are three of
capital stock in a meeting duly called for such purpose
them, then you must have a situation where two out of
with full disclosure of the adverse interest being made
the three independent directors likewise, approve the
at the meeting and that the contract is nevertheless
contract.
fair and reasonable.
When it is officer who is involved, then the only
Let us examine the rule again. The contract
requirement is that there should have been previous
entered into by a self-dealing director, trustee or officer
authority given by the Board for approval of the
is voidable at the option of the corporation. It also
contract.
extends to spouses and relatives up to the fourth
degree of consanguinity or affinity. It also says it is valid
if the presence of the director or trustee is not required INTERLOCKING DIRECTOR
to constitute a quorum in the meeting where it is As far as contracts between corporations with
approved, and the vote, his vote is not necessary to interlocking directors, the contract is valid as long as
approve the contract, and the contract is fair and there is no fraud and the contract is fair and
reasonable. reasonable. However, if a director’s interest in one
corporation is substantial and his interest in the other
Without going into the two other qualifications. corporation/s is nominal, the contract shall be subject
So if, for example, the two other qualifications do not to the provisions of Section 31 insofar as the
apply, meaning it is not the corporation vested with corporation/s where he has a nominal share as it is as
public interest, and it is not an officer involved. So, we if the corporation is transacting with a self-dealing
are only looking at three conditions. If these conditions director. Shareholdings in excess of 20% of the
are present. The contract is valid. This means therefore, outstanding capital stock shall be considered
that if at the onset, the conditions were already substantial.
present, the contract is valid. The corporation has no
option to declare it as voidable, the option to declare it Section 32 refers to your interlocking director or
as voidable will only be available if the conditions are trustee. An interlocking director or trustee has
not met. So, if the conditions are not met, then the something to do with a contract between two
corporation can declare it to be voidable. And there is corporations who share directors. The rule is the
now one other situation where even if the conditions contract between these two corporations is valid as
are not met the contract, despite being declared long as there is no fraud and it is fair and reasonable.
voidable, can now be ratified and ratification will take There is however the requirement to look at the

– COMMERCIAL LAW REVIEW –

 37

percentage shareholdings or ownership of the with the corporation, oftentimes with the advantage
interlocking directors because if the interlocking of inside information thus depriving it of the profits
directors’ interest in a corporation is substantial in one, that it would have otherwise earned. Whether the
nominal in another. Then in the corporation where his particular opportunity is one, which properly belongs
interest is nominal, you would have to apply the rule on to the corporation, is a question of fact, which must be
self-dealing. decided in the light of the circumstances of each case.
This rule is premised on the principles of “trust.” It is
For purposes of determining the extent of the the position of domination and control that makes the
shareholdings as substantial or nominal, the threshold is taking of corporate opportunity objectionable.
20% of the outstanding capital stock, 20% and below
the interest is nominal; above 20%, the interest is I mentioned earlier that this is the Doctrine of
substantial. And you will only apply the rule on self- Corporate Opportunity. The basis of this is: a director
dealing directors if the interest is substantial in one normally is precluded from acquiring an opportunity
nominal in the other. If substantial in both or nominal in that is open to the corporation because if he's allowed
both the rule does not have any application. You simply to acquire an opportunity open to the corporation, he is
determine whether or not there is no fraud and it is fair competing with the corporation, and he has more often
and reasonable. If there is no fraud and it is fair and than not, the advantage of inside information. So, if he
reasonable, the contract is valid. avails an opportunity that belongs to the corporation,
he is being disloyal.
If it is substantial in one nominal in the other,
then you apply the rule on self-dealing insofar as the And what should happen? He should refund the
corporation where the interest is nominal. So insofar as profits that he generated to the corporation, even if he
the corporation or interest is substantial, the contract is has risked his own funds.
valid. Insofar as the corporation where the interest is
nominal, the corporation has the option to declare it Is there a remedy? The remedy is a ratification by
voidable, but that option will not be present if the the stockholders owning or representing two-thirds of
conditions for validity, are present. Notwithstanding if the outstanding capital stock. When there's a
the conditions for validity are incomplete, there can still ratification, then he may be allowed to keep whatever
be ratification. That is what is meant by applying the profits he may have generated.
rule on self-dealing directors
Note: Doctrine of corporate opportunity would not
find application if the director in acquiring a supposed
DISLOYAL DIRECTOR opportunity for the corporation acted in good faith. In
Section 33 refers to a director who is considered other words, he was not aware of any interest by the
as disloyal if he acquires for himself a business Corporation in that opportunity, or the situation is the
opportunity that should belong to the corporation, opportunity has presented itself but the Corporation
thereby obtaining profit. He must now account for it by does not have the necessary funds or resources to take
refunding the same for the corporation, even if he advantage of the opportunity or while it may indeed be
risked his own funds in the venture, unless it is ratified an opportunity, it is not one that is essential to the
by a vote of stockholders owning or presenting two operations of the corporation.
thirds of the outstanding capital stock.
Distinguishing between Section 30 and Section 33,
A director is disloyal if by virtue of his office, the former speaks of the acquisition of any personal or
he acquires for himself a business opportunity which pecuniary interest in conflict with his duty in respect to
should belong to the corporation, thereby obtaining a matter reposed in him in confidence as to which
profit, he must account for it by refunding the same to equity imposes a disability to deal in his own behalf,
the corporation, even if the director risked his own he shall be liable as trustee and must account for all
funds in the venture, unless, his act is ratified by a vote profits that would have otherwise accrued to the
of the stockholders owning or representing 2/3 of corporation.
outstanding capital stock. This is also known as the
DOCTRINE OF CORPORATE OPPORTUNITY . The What is violated is the trust specifically reposed,
provision does not apply if: thus there is no ratification, and the latter speaks of a
violation of the general trust that is reposed on a
a) he acts in good faith, or, director.
b) the corporation is unable to undertake the
opportunity or the same is not essential to the Notwithstanding the difference in wording, the
corporation. concept remains to be the same. Section 33, he refunds
the profits that he had generated from taking
The duty of loyalty of a director precludes the advantage of the corporate opportunity. Section 30
director from acquiring an opportunity that is open to speaks off the director concern being considered as a
the corporation because that is in effect competing

– COMMERCIAL LAW REVIEW –

 38

trustee who needs to account for all the profit that PERSONAL LIABILITIES OF A DIRECTOR*
would have otherwise accrued to the corporation.
In the cases of Tramat Mercantile v Court of
In essence, the end result between the two is the Appeals (238 SCRA 14) and Malayang Samahan ng
same, or as compared is the same, the profits will be mga Manggagawa sa M. Greenfield v Ramos (357
attributable to the corporation. But the difference lies SCRA 77) A director may be held to be personally liable
in ratification. Under Section 33, ratification is possible. if he:
Under Section 30, there is no ratification. The reason for
absence of ratification under Section 30 is because a) willfully and knowingly assents or votes to a
there was a specific trust reposed upon a director. In patently unlawful act of the corporation
short, it was as if he was told not to take advantage of b) he is guilty of gross negligence or bad faith in
the opportunity, but he nevertheless took advantage of directing the affairs of the corporation.
the opportunity, there was a specific trust. Under c) acquisition of any personal or pecuniary
Section 33, there is only the general obligation of trust interest in conflict with his duty in respect to a
that if there is the possibility that is a corporate matter reposed in him in confidence,
opportunity, a director must not take advantage of it to d) consents to the issuance of watered stock or
the detriment of the corporation, that is what section having knowledge of the issuance of watered
33 provides. Section 30 says there was a specific trust stock does not notify the corporate secretary
that was reposed upon him – that is why when it was in writing of the fact of issuance
violated, there is no possibility of ratification. e) agrees to be personally liable
f) is made liable by specific provision of law.
OBEDIENCE
*these two cases contain an enumeration of six
They must be obedient by keeping within the instances where a director or trustee assumes personal
powers of the corporation. The duty of obedience liability. I suggest that you commit these instances to
simply means that directors are bound to observe the memory, considering that it has frequently been asked
limits of their authority. They should not perform acts, in the bar examination.
which are beyond the powers of the corporation, nor
should they assume to act in situations where the law The first three are found in Section 30.
has given such prerogative to the stockholders. Should
they go beyond the limits, they are personally
responsible for any damages which the corporation
may suffer unless they acted in good faith and with
due care in the exercise of their business judgment.

This means that the board must keep within

the powers of the institution as prescribed in the
articles of incorporation, by-laws, and in existing laws,
rules and regulations. Conduct and maintain the affairs
of the institution within the scope of its authority as
prescribed in its charter and in existing laws, rules, and
regulations.

The principle is embodied in the concept of

ultra vires pronounced in Section 44: No corporation
under this Code shall possess or exercise any corporate
powers except those conferred by this Code in its
articles of incorporation and except such as are
necessary or incidental to the exercise of the powers
so conferred.

So, when a director or trustee acts beyond the

scope of his authority or collectively they act beyond
the scope of their authority, then they are committing
an ultra vires act. As we will discuss in the future, an
ultra vires act is one beyond the powers of the
corporation, and there will be certain consequences
when appropriate.

– COMMERCIAL LAW REVIEW –

 39

CORPORATE POWERS
MODULE 8

— There are limitations contained by law, and the

GENERAL POWERS OF A CORPORATION Constitution in so far as ownership of property. So you
Section 35 contains an enumeration of powers have the provisions for nationalized industry, which can
that can be exercised by every corporation be fully or partially nationalized.
incorporated under the Revised Corporation Code:
— there must be compliance by the corporation with
(This will partake of the nature of Express powers the requisite percentage of Philippine ownership, as
because we find them in the words of the law.) compared to foreign ownership, before it can actually
hold real property.
They are:
— Then you have the matter of they being able to
(a) To sue and be sued in its corporate name. exercise this power, it is in connection with the
transaction of its lawful business, and may reasonably
(b) To have perpetual existence unless the Articles unnecessarily be required by its purpose.
provide otherwise.
— When we talk about this power, we need to be able
(c) To adopt and use a corporate seal. to determine if there is a causal connection between
the nature of the activity undertaken by the
Section 62 requires stock certificates to be sealed.
Corporation, as laid down or authorized in its purpose
Although not a mandatory requirement, it has been
clause.
held to be desirable to have a seal, as it is prima facie
evidence that the instrument to which it is attached is (h) To enter into a partnership, joint venture,
the act of the corporation mergers and consolidations or any other commercial
agreement with natural or juridical persons.
(d) To amend its articles in accordance with the
provisions of the code. Mergers and consolidations are covered by Sections
75-79.
The applicable provision is Section 15 as far as
amendments pertaining to the name, purpose, place of (i) To make reasonable donations, including those
principal business, term, and authorized capital stock for the public welfare or for hospitals, charitable
of the corporation. cultural, scientific, civic or similar purposes. Provided,
that no foreign corporation shall give donations in aid
(e) To adopt by-laws not contrary to law, morals
of any political party or candidate or for purposes of
or public policy and to amend or repeal the same.
partisan political activity.
The applicable provisions are Section 45 insofar as
— If you take a look at the law, as previously worded,
adoption and Section 47 insofar as amendments.
there was a general prohibition in so far as donations in
(f) In cases of stock corporations, to issue or sell aid of any political party or candidate or for purposes of
stocks to subscribers and to sell treasury stocks in partisan political activity. It would now seem that by
accordance with the provisions of the code. If it is a taking or by qualifying it to be applicable only to a
non- stock corporation, to admit members and obtain foreign corporation, that donations now made by
capital by increasing the number of persons sharing Filipino corporations or domestic Corporation in aid of
the same purpose or mission. any political party or candidate or for purposes of
partition political activity is now allowed.
(g) To purchase, receive, take or grant, hold,
convey, lease, pledge mortgage or otherwise deal with (j) To establish pension, retirement and other
real and personal property, including securities and plans for the benefit of directors, trustees, officers and
bonds of other corporations as the transaction of the employees.
lawful business of the corporation may reasonably and
The purpose is to create / foster better relations
necessarily require, subject to the limitations
between the corporation and its employees, which
prescribed by law and the Constitution.
ideally should result in greater productivity
Note that investments as long as stated in the Articles,
— This is really for the purpose of establishing better
like involving the purchase of shares or securities are
relations between those who are in charge of
valid, if not stated stockholder approval is required.
management, and those who are actually doing the day
to day work of the corporation, in the hope that by

– COMMERCIAL LAW REVIEW –

 40

creating incentives or giving them them these benefits that means the dissolution of the corporation is
that it would result in greater productivity. delayed, and the dissolution or the distribution of assets
of the surplus and the assets that comes with a
(k) To exercise such power as may be essential or dissolution will likewise be delayed.
necessary to carry out the purpose/s stated in the
Articles. One other reason that he may avail off, is because he
might feel that extending the term would now resolve
Extending or shortening the corporate term- into a lower income for the corporation or may cause a
reduction in the value of his shares.
This power takes significance for corporations that
have opted to have specific terms or have decided to — However, I'd like to point out that when the term of a
dissolve by taking the option of shortening their terms. corporation is shortened, it may not be necessary
anymore to avail of the right of appraisal, especially so
— Because, in the absence of any specific term, or when
when the term is shortened is really going to be short.
they have chosen the option of having perpetual
existence, then Section 36, in so far as the power to In other words, from the time the amendment is made
extend would no longer be required by it. However, in to the time it expires, there is only a short period of
so far as the power to short end, it will still have some time that will intervene because in that particular
significance, when they now dissolve the corporation. situation, a stockholder who chooses to exercise his
Because this is one of the ways by which a corporation right of appraisal would nevertheless, get the same
can be voluntarily dissolved in and that is to shorten the thing if he is willing to wait for a dissolution to take
term. place and that is for the value of his shares to be paid
back to him.
— What I'm referring to is a situation where a
corporation has perpetual existence, but has decided to — The only difference though in exercising the right of
dissolve the corporation already. They will now choose appraisal which, depending on upon the finances of the
to avail of shortening of the term as the mode of corporation would be the matter of liabilities because if
dissolution. So if that is the case, they will avail of the you take a look at the exercise of the right of appraisal
provisions of Section 36. And eventually, after the — the value that is to be paid to the stockholder
approval of the amendment to put a term. The exercising the right of appraisal is the value on the day
corporation upon the expiration of the term or the date prior to the date on which the vote was taken — That is
or upon the arrival of the date stated will now be the value that is to be paid to him without considering
considered as having been dissolved. the liabilities of the corporation.

SECTION 36 So, if he will wait for dissolution, the difference would

be, his share or the value of what he receives will be
Under Section 36, the power to extend or shorten the
subject to the settlement of liabilities first before there
corporate term is undertaken by a majority vote of the
is a determination of his percentage share or
Board and vote of 2/3 of the stockholders holding the
proportional share in the assets of the corporation.
corporation’s outstanding capital stock or members at
a meeting, of which they were given written notice Note also that requirement under Section 11 that an
addressed to them at their given address as shown in extension must be secured during the lifetime of the
the books of the corporation deposited at the post corporation and not earlier than three years prior to
office or delivered personally. the original or subsequent expiry date unless there is a
justifiable reason to do it earlier.
In case of an extension, a stockholder is allowed to
exercise his appraisal right. Section 80 also allows it Example of Justifiable Ground: If the corporation
when the term is shortened. It must noted that if the intends to take out a loan, and the loan is payable over
reason to shorten is to dissolve, the exercise of the a term of 10 years, but the term of the corporation now
right of appraisal may be unnecessary. as stated in the articles will expire in five years. Then, in
all likelihood, a bank will not grant the loan. So the
— Regardless if the power to extend is utilized, the right
corporation now for purposes of being able to secure
of appraisal is available. The same is true if the term is
that loan may ask the SEC to allow it to extend the term
shortened.
earlier.
Q: Why would a stockholder choose to avail of the right
When a corporation allows its term to expire, it was
of appraisal if the term is extended?
held in PNB v. CFI of Pasig (G.R. No. 63201, May 27,
A: The common reason for a stockholder to avail of the 1992), that it will cease to exist and is dissolved ipso
right of appraisal when the term is extended is because facto. This ruling will have to yield to the option under
he would wish to have a return of his investment Section 11 allowing a revival.
already. Because when the term is to be extended then

– COMMERCIAL LAW REVIEW –

 41

— Since a corporation is allowed to be by its corporate bonded indebtedness, they can have, or issue bonds
term, then the ruling in the case of PNP versus CFI of which approximate the value of the security, which in
Pasig, where it was held that the corporation, which our illustration is 50 million.
allows you the term to expire would cease to exist, and
be dissolved ipso facto will now have to yield to the The difference is instead of owing only one entity which
right of a corporation as found under Section 11 to is the bank. They will eventually owe the bondholders,
cause or to apply for a revival of its term. or those who will purchase the bonds that they will
subsequently issue upon approval of the Securities and
SECTION 37 Exchange Commission. So these bond holders will hold
bonds that can be redeemed over time, subject to the
Increasing or decreasing capital stock and incurring, payment of interest. The main advantage of doing
creating or increasing corporate bonded indebtedness- corporate bonded indebtedness in addition to being
able to obtain the maximum allowable amount by way
An increase in capital stock is usually motivated by
of a borrowing that approximates the value of the
need for additional capital, to acquire corporate
security are the following.
assets, to convert debt to equity or to support a stock
dividend. When a corporation goes to a bank. The bank dictates
when they should pay. When it is corporate bonded
A decrease in capital stock is usually motivated by the
indebtedness — the corporation dictates when they will
existence of a capital surplus that is not required by
redeem over time, because a corporation can issue
the corporation.
bonds that are redeemable in 5 years or 10 years, or in
Corporate bonded indebtedness is a long term any period, as long as it is approved by the Securities
borrowing by the corporation that is to be secured by and Exchange Commission.
an encumbrance on corporate assets. This will also
And the third advantage has something to do with
require compliance with the SRC as the issued bonds
interest. When a corporation goes to a bank. The bank
partake of the nature of securities.
determines the rate of interest. When the corporation
Q: Why does a corporation, increase or wide this, find performs a corporate bonded or takes on corporate
the need to increase capital stock? bonded indebtedness, they dictate the interest. They
can say to five year bond holders that they will pay a
A: The common reasons for increasing capital stock is to certain percentage of interest. It is possible that if you
have additional capital, to be able to acquire corporate are one who will secure a longer time bond that the
assets, to be able to convert debt to equity or to percentage of interest will be greater.
support a stock dividend,
This now, creates flexibility in payment, which would
Q: How about a decrease? not be available if they went the traditional way, and
secured a loan from a financial institution.
A: The common reason for a decrease, is that there is
surplus capital surplus capital referring to capital, which Power to increase or decrease capital stock, incur
the corporation no longer requires for its continued create or increase corporate bonded indebtedness is
operations. So one way by which this can eventually be undertaken by a majority vote of the Board and vote
distributed without necessarily dissolving the of 2/3 of the stockholders holding the corporation’s
corporation is to decrease authorized capital stock. outstanding capital stock or members must favor the
increase or decrease at a meeting to which they have
Q: Why does a corporation resort to corporate bonded received written notice addressed to their residences
indebtedness as a means of raising capital? as shown in the books deposited at the post office or
delivered personally or through electronic means
A: It really has something to do with getting the
recognized in the corporation’s by-laws and/or SEC
maximum amount for the security.
rules as a valid mode of service of notices.
If a corporation has an asset that is worth 50 million. If
After the meeting – a certificate in duplicate must be
they go to a bank to try and secure a loan. The most
signed by a majority of the directors, countersigned by
that they may probably get would be about 70% of the
the chairman and secretary of the meeting stating
value of the asset. So that means they probably would
that: (a) requirements of this section have been
get a loan of 35 million, because no bank would give a
complied with (b) amount of increase or decrease of
loan of 50 million, because the bank would need the
capital stock (c) if capital is increased (1) amount of
30% as a buffer for interest, penalties or charges in the
capital stock or number of no par value shares
event that there is a default.
subscribed (2) names, nationalities, residences of
Corporations resort to bonded indebtedness to be able persons subscribing and the number or amount
to maximize the amount that they can get from a subscribed by each, the amount paid in cash or
security that it offers. Because when they do, corporate property (3) or, amount of capital stock or number of

– COMMERCIAL LAW REVIEW –

 42

par value stock allotted to each stockholder if such proportion to their respective shareholdings, unless
increase is for the purpose of making effective a stock the articles of incorporation or an amendment deny
dividend therefore authorized (d) any bonded such right thereto.
indebtedness to be incurred, created or increased (e)
amount of stock represented at the meeting (f) vote The reason for the grant of pre-emptive rights is to
authorizing the increase/diminution of capital stock, or preserve a stockholder’s unaltered and unimpaired
the incurring increasing or creating of corporate influence in the corporation.
bonded indebtedness.
Example: a corporation as authorized capital stock of 1
Any increase or decrease in the capital stock, or million. That is divided into shares with a par value of
incurring, creating or increasing of any bonded 100 per share. That means there are 10,000 shares. So if
indebtedness shall require prior approval of the SEC, a stockholder has 1000 shares. That means he has a
and where appropriate, of the Philippine Competition 10% interest in the corporation.
Commission. The application with the SEC shall be
Only 500,000 of the authorized capital stock is
made within six months from the date of approval of
considered outstanding capital stock. There is 500,000
the board and stockholders, which period may be
that remains as unsubscribed capitals stock.
extended for justifiable reasons.
So if stockholder A, in our illustration will purchase
One copy of the certificate is kept in the corporate
another 10% of the 1 million authorized capital stock,
officer; the other filed with the SEC and attached to its
coming from the 500,000 unsubscribed capital stocks
articles. Other attachments required are proof of the
with another 1000. He will end up owning 20% of the
transfer of cash or property to the corporation and a
authorized capital stock. The reason I am explaining it in
treasurer’s affidavit showing compliance with the
this way is because a question may come up later on,
25/25 rule by payment or transfer of property, the
whether a stockholder has a pre emptive right to a new
valuation of which is equal to 25% of the subscription.
issuance or to a disposition, or any disposition.
If corporate bonded indebtedness, the registration of
the bond for the SEC to determine sufficiency of Normally, we should interpret the exercise of pre
terms. emptive rights to apply on the to a new issuance.
From and after SEC approval and issuance of a Illustration: authorized capital stock. 1 million, there is
certificate of filing, the capital stock shall stand an increase in authorized capital stock to 2 million, stock
increased or decreased or that bonded indebtedness holder A has 1000 shares, equivalent to 10%. There is an
has been incurred created or increased. Provided, no increase of 1 million. He will now purchase another
decrease shall be approved if creditors are prejudiced 1000 shares. He would now have 10% of the 2 million.
or terms of bond issue is not sufficient. So prior to the increase in authorized capital stock, his
interest in the corporation is 10%.
The ways of increasing or decreasing capital stock are
as follows: (a) Increase or decrease the number of So by exercising pre emptive right, he has 10% of the 2
shares without increasing or decreasing par value (b) million. His interest has been preserved. That is the idea
Increase or decrease par value without increasing the behind the grant of pre emptive rights.
number or shares, or (c) both
Q: The problem is the law uses the words issues and
Note: that there can be no reduction of the authorized disposition. This is an issue. This is a disposition. So the
capital stock. If the effect of the reduction of the question now is, would there be pre emptive rights to
authorized capital stock is to relieve stockholders or a disposition in the illustration?
subscribers from being there and paid subscriptions.
It appears that the law does not qualify, so there would
Example: So if you have stockholder A, who has a now be pre emptive rights in this disposition.
subscription for 100,000 pesos worth of shares. He has
only paid for 50,000. There can be no reduction of the But what makes it debatable is the Purpose — The
authorized capital stock. If the effect of the reduction of purpose for the existence of pre emptive right, is to
the authorized capital stock is to relieve stockholder or preserve one's interest in a corporation to preserve it
subscriber A of his obligation to pay his balance of meaning to keep it, an altered, and I'm embarrassed.
50,000. To do that, or if a corporation will do that. It is a
violation of the trust fund doctrine. His interest prior to issuance of a noose new series or
class of shares is 10%. After issuance, and exercise of his
PRE-EMPTIVE RIGHTS pre emptive right he continues to have 10%, there is no
increase as compared to this situation where from 10%.
Section 38 provides that all stockholders of a stock He now has 20%.
corporation shall enjoy a preemptive right to subscribe
to all issues or disposition of shares of any class, in

– COMMERCIAL LAW REVIEW –

 43

They will not exist when In a non-stock corporation where there are no
members with voting rights, the vote of majority of the
(a)the shares are issued in compliance with laws trustees will be sufficient authorization.
requiring stock offerings or minimum stock
ownership The contemplated disposition is when the corporation
is rendered incapable of continuing the business or
(b)the shares are issued in good faith with approval of accomplishing its purpose. It does not apply to
stockholders representing 2/3 of the outstanding dispositions that are necessary and in the regular
capital stock in exchange for property needed for course of business or the proceeds of which are to be
corporate purposes or in payment of a previously appropriated for the conduct of its remaining business
contracted debt. as nothing in the law is intended to restrict such
action.
On the other hand, When the exercise of pre emptive
rights are denied because the articles are amended to “ALL OR SUBSTANTIALLY ALL “: What is really
allow or to disallow the exercise of pre emptive rights, contemplated here is one that will resullt in a
and the situations as I enumerated when there are no corporation being rendered incapable of continuing the
pre emptive rights are not applicable. Then a business for which it is organized or one that will
stockholder can exercise his right, or pretty sad, prevent it from accomplishing the purpose for it was
because it is now, in effect, a change or a restriction on organized.
his rights as a stockholder or may authorize preferences
in any respect that the superior to those of outstanding The determination of whether or not the sale involves
shares or any class. all or substantially all of the corporation’s properties
and assets must be computed on the basis of its net
Stockholders can also waive the exercise of the pre- asset value as shown in the latest financial statement.
emptive rights.
HOW IS THIS COMPUTED?
If restricted by an amendment, a stockholder may
exercise his right of appraisal if it can be shown that It is computed on the basis of the net asset value of the
the amendment has the effect of changing or corporation as shown in its latest financial statement.
restricting his rights or authorizes preferences in any
PCA (PHIL COMPETITION ACT) – regulates acquisitions.
respect superior to those of outstanding shares of any
class. If an acquisition of all/substantially all of corporate
assets will meet the regulatory treshold under the PCA,
SALE AND OTHER DISPOSITIONS then there is need to comply with not only Sec 39
OF CORPORATE PROPERTY provides, but also to the PCA or other mandates of Phil
Competition Commission.
Under Section 39, subject to the provisions of the
Philippine Competition Act and other related laws, a Neither should the disposition result in violation of
corporation may by a majority vote of its board of laws or illegal combinations and monopolies.
directors or trustees cause the sale, lease, exchange,
mortgage, pledge or other otherwise dispose of its Furhtermore, ther can be no disposition of corporate
property and assets upon such terms and conditions property if it will be VIOLATIVE OF THE LAW . The
and for such consideration, which may be money, common example would be if it will violate the Bulk
stock, bonds or other instruments for the payment of Sales Law or will result in illegal combinations or
money or other property or consideration, as its board monopolies.
may deem expedient.
A dissenting stockholder is given the right of appraisal.
A sale of all or substantially all of the corporation’
properties and assets, including goodwill must also be In relation to this matter, if there will be sale or other
authorized by a 2/3 vote of the outstanding capital disposition of corporate assets, any stockholder ho
stock or of the members in a duly called meeting. dissents can excercise the RIGHT OF APPRAISAL .

When we speak of a sale or any other disposition of ACQUISITION OF ITS OWN SHARES
corporate property, that is usually undertaken upon a
majority vote of the board. However, if the disposition The power of a corporation to acquire its own shares
is one that involves all or substantially all of corporate can only be undertaken if it is for legitimate corporate
assets together with goodwill, then we eill have to have purpose and provided that it has unrestricted retained
2/3 vote of the OCS or a 2/3 votes of its members. earnings.

– COMMERCIAL LAW REVIEW –

 44

The shares of a corporation are in the nature of This arises in the excercise in the right of appraisal.
property. As property, they may be subject to
transactions, which do not necessary involve Sh and Other legitimate purposes are:
third person, but may also involve the corporation.
a) exercise of the right of appraisal
b) redemption of shares
THE CONDITIONS THAT MUST OBTAIN TO BE ABLE NOTE : recall discussion on redeemable shares.
TO EXERCISE THE POWER ARE: c) decrease of capital stock
a) capital is not impaired That is one way by which it can reduce ACS by
reacquiring its own shares and eventually retiring them
b) there must be unrestricted retained earnings.
d) resolving a deadlock in a close corporation.
Absent the conditions, there is a violation of the
The SEC, for purposes of resolving a deadlock, may
Trust Fund Doctrine which holds that the assets of
order the purchase of the shares of the party
a corporation as represented by its capital are trust
causing deadlock.
funds that are to be maintained unimpaired and to
be used by the corporation to pay its creditors and
INVESTMENTS IN ANOTHER CORPORATION OR
that no distribution of the same can be made
without provisions for the payment of corporate BUSINESS
debt Section 41 allows a corporation to invest its funds in
c) that it be for a legitimate and proper purpose another corporation or business or any other purpose
d) the corporation acts in good faith and without other than the PRIMARY PURPOSE .
prejudice to stockholder rights
e) condition of corporate affairs warrant it. REMEBER : When we were discussing the contents of the
AOI, we talked about the purpose. The purpose really is
The basic condition for the acquisition of the the guide insofar as the investments of a corporation.
corporation of its own share is that it should be:
This Section refers to investments in another
• For a legitimate purpose, and corporation or in another business that is not supported
• Should have unricted retained earnings (URE) by the purpose clause.
Note: The absence of URE, transaction will push EXAMPLE : If the corporation is engaged in
through, wil result to a violation of the TRUST FUND manufacturing, if it acquires a business that is similarly
DOCTRINE . engaged in the same business, then that is an
acquisition not covered by Section 41 because it is for
LEGITIMATE PURPOSE S
the same purpose.
Section 40 enumerates legitimate corporate purposes
EXAMPLE : If the corporation is engaged in this activity,
for acquisition:
and then it purchases a hotel, which is not connected in
a) elimination of fractional shares or those less than 1 the manufacturing business, then that is covered by
share Section 41.

If it is covered:
FRACTIONAL SHARE – a share that is less than one.
This can be undertaken by a majority vote of the Board
EXAMPLE : a SH has 15 shares, and the corporation and 2/3 vote of stockholders or members in a meeting
declares a 10% stock dividend, that would mean duly called for this purpose.
that the SH will be entitled to 1.5 shares. The .5 is
your fractional share – this is something that can be If the investment is reasonably necessary to
eliminated. accomplish its purpose as stated in the Articles,
stockholder or member approval is not necessary.
b) to collect or compromise an indebtedness to the
corporation arising out of an unpaid subscription In case of dissent, the right of appraisal may be
in a delinquency sale and to purchase delinquent exercised.
shares at the auction
DECLARATION OF DIVIDENDS
The corporation may be a PURCHASER subject to
Section 42 deals with the POWER of a stock
certain conditions in a delinquency sale. Here, the
corporation to DECLARE DIVIDENDS .
corporation may acquire its own shares.
DIVIDENDS refer to that part or portion of the profits
c) to pay dissenting or withdrawing stockholders of a corporation, set aside, declared and ordered by
entitled to the payment of their shares. the Board to be paid ratably to stockholders. As
distinguished from profits, profits are the source of

– COMMERCIAL LAW REVIEW –

 45

dividends but not all profits are dividends until so EXAMPLES:

declared or set aside.
Let us see that the authorized capital stock is 5 million.
ARE DIVIDENDS EQUAL TO PROFITS? This is already fully subscribed or issued. Now, the
corporation has 1 million in profits, which it would now
This does not necessarily hold true. What holds true is like to declare by way of a stock dividend. So that would
that profits are always the source of dividends. Profits now mean that since I said earlier, it's a transfer from
do not necessarily translate to dividends because for profit to stated capital, that would mean that when you
profits to be dividends, they must be set aside, transfer the 1 million in profit to stated capital, the
declared, and ordered by the board to be paid in stated capital becomes 6 million.
proportion to the SH.
There is now a discrepancy between what appears as
The Board may declare dividends out of unrestricted capital actually. And what is stated as capital. So the
retained earnings or total assets less liabilities and two thirds vote of the outstanding capital stock is
legal capital, they must be accumulated from normal necessary to amend the articles. So, the stated capital
and continuous operations not allocated for any now appears to be 6 million, instead of 5 million.
managerial, contractual or legal purpose and which are
free for distribution to stockholders as dividends To get a better understanding. Using the same figure
payable in cash, in property or in stock to all that the same 5 million, but only 50% has been
stockholders on the basis of outstanding stock held by subscribed and paid. So that means even with the
them. The basis is the total subscription. stated capital of 5 million. It's actual capital is only 2.5.
million, there is still another 2.5 million that is unissued
If a stock dividend is declared, it may only be issued Corporation now would like to declare 1 million as a
with approval of the stockholders representing 2/3 of stock dividend. So the 1 million in stock dividend profits
the outstanding capital stock at meeting duly called for will now be transferred to stated capital, thecapital will
such purpose. be 2.5 actually, there's still 2.5 million unissued. This 2.5
million now will be after the declaration with stock
BASIS OF ONE’S ENTITLEMENT TO DIVIDENDS: dividend will amount to 1.5 million, and the 1 million
It is going to be in PROPROTION . goes to legal capital, making your legal capital, 3.5.

EXAMPLE: In this particular situation. There is no necessity to

amend the articles of incorporation because there is still
If a cash dividend of 1 peso per share is declared then a unissued shares that can be issued to file, or to support
SH has ten shares, then he receives 10 pesos. a stock dividend declaration.
What if he is simply a subscriber and has only paid 5 Only stockholders are entitled to a dividend, as it is an
pesos or 50% of his subscription for the 10 shares. Is he incident of stock ownership. An exception is when it is
entitled for 5 pesos or 10 pesos? made payable to a stockholder on record at a specified
date. If so, it is the seller who is entitled to the
He is entitled to 10 pesos. The basis of a dividend
dividend except when there is a contrary stipulation.
declaration is always the total subscription.
The rule also applies to other unrecorded dispositions.
What about in a situtation where the subscriber is
The right of a stockholder to the dividend is immediate
delinquent?
if it is a cash dividend. The corporation becomes a
• If it is a cash dividend which is declared, it is going debtor of the stockholder. If it is a stock dividend, it is
to be applied to his delinquency. subject to a stockholder vote and an increase of capital
• If it is a stock dividend that is declared, it is going to stock, if it comes from a new issuance.
be withheld and eventually given to him and be
Provided, however, that any cash dividend due on
given back to him upon payment of his delinquency.
delinquent stock shall first be applied to the unpaid
A STOCK DIVIDEND is one that likewise comes from balance, costs, and expenses or if it were a stock
profit, but is essentially a move on the part of the dividend, it is withheld until the unpaid subscription is
corporation to transfer profit to capital. That is the paid.
reason why there is sometimes a requirement for two
The person entitled to a dividend is a stockholder who
thirds of the outstanding capital stock to approve or
appears as such as of, a record date. Normally when a
validate a stock dividend declaration.
stock dividend or dividends are declared the dividend
The purpose of requiring a 2/3 vote of the outstanding declaration will state that the dividend is to be given to
capital stock is for the purpose of amending the articles stockholders on record as of a specified date. That is the
to reflect a higher ACS. record date.

– COMMERCIAL LAW REVIEW –

 46

EXAMPLE paid in capital stock. However, there are exceptions, and

you have your three exceptions.
The specified date is August, 31 2020. That means all
stockholders who appear stockholders in the books of CASH DIVIDENDS AS DISTINGUISHED FROM STOCK
the corporation as of August 31st 2020 are entitled to DIVIDENDS:
receive dividends.
a) a cash dividend is a disbursement of accumulated
Also, when stock dividends are declared, they constitute earnings, while a stock dividend is not a
that on the part of the corporation and are to be given disbursement
out and paid immediately. Or at the very latest, upon b) a cash dividend causes assets to diminish while a
the date stated in the declaration. stock dividend causes assets to increase
c) a cash dividend when declared becomes property
Dividend declaration is generally discretionary but of the stockholder, while a stock dividend is still
becomes mandatory when its surplus profits are in part of capital and can still be reached by creditors
excess of 100% of paid in capital stock. d) a cash dividend does not increase capital, while a
stock dividend increases capital
As to the issue of whether a dividend declaration can be
e) the declaration of a cash dividend creates a
compelled.
corporate debt, while that of stock dividend does
The GENERAL RULE is: a dividend declaration is not create a debt
discouraged from other words, it cannot be compelled f) a cash dividend is declared by the board, while a
stock dividend is declared by the board with
The EXCEPTION to the general rule is, when the surplus stockholder concurrence.
profits are already in excess of 100% of paid-in CS.
Remember when we were discussing section 6, we MANAGEMENT CONTRACTS
defined paid in capital stock, and I pointed out its
significance. Section 43 authorizes a corporation to enter into a
management contract. Any contract whereby a
EXAMPLE: corporation undertakes to manage or operate all or
substantially all of the business of another corporation
ACS is 1,000,000. 50%, has been subscribed and paid. is a management contract even if called a service or
That means: of the 1 million authorized capital stock,
operating contract.
there is paid in, or actually received by the Corporation,
500,000 pesos. that is paid in capital stock. This can be undertaken with the approval by a
majority vote of the Board and majority vote of the
So if the surplus profits are already in excess of 500,000 stockholders or members of both the managed and the
pesos, then the general rule the dividend declaration is
managing corporation.
discretionary will yield to the exception. It now
becomes mandatory to declare a dividend. Provided that, if the stockholder/s representing the
same interest of both the managing and managed
But notwithstanding the exception. There are
corporations own or control more than 1/3 of the
exceptions to the exception:
outstanding capital stock entitled to vote of the
managing corporation or a majority of the Board of the
THE MANDATORY CHARACTER SHALL NOT OBTAIN:
managing corporation likewise constitute a majority of
a) when justified by definite corporate expansion the board of the managed corporation, the contract
projects or programs approved by the Board must be approved by 2/3 vote of the outstanding
b) when it is prohibited by a loan agreement with any capital stock or of the members of the managed
financial institution or creditor from declaring corporation.
dividends without its consent and the consent is
not yet obtained In a management contract there is a managing
c) when it can be shown that such retention is Corporation and there is a manage Corporation.
necessary under special circumstances obtaining in
When there's a management contract entered into, it
the corporation, as there is a need for a special
should carry the approval of a majority of the board,
reserve for probable contingencies.
and the majority of the board of both the managed and
So going back. If the question I ask of you is, is the the managing Corporation.
declaration of a dividend something that can be
However, in a situation where the stockholders
compelled?
representing the same interest in both the managing
As a general rule, no, because it is discretionary. It can and the managed Corporation own or control, more
be compelled. If surplus profits are in excess of 100% than 1/3 of the outstanding capital stock of the
managing corporation or the board of the managing
corporationis also a majority of the board of the

– COMMERCIAL LAW REVIEW –

 47

managed Corporation, there will be change in the ULTRA VIRES ACTS

requirement for stockholder or member approval.
Ultra Vires acts are acts that are in violation of the
Normally, absent this condition, the requirement would Code as it provides in Section 44 that: no corporation
be you have: shall possess or exercise corporate powers except
those conferred by the Code, its Articles and except as
• a majority vote or sort of standing capital stock
such are necessary or incidental to the exercise of the
or of the members, and
powers so conferred.
• the majority of outstanding capital stock or of
the members In Republic v Acoje (7 SCRA 361) it was held that
ratification is possible provided the act is not illegal.
But in the situation where the common stockholders
with the managing and manage Corporation owned or Remember when we were discussing directors and
controlled more than one third of the outstanding trustees, so they should be obedient loyal and diligent.
capital stock of the managing corporation or a majority In so far as the duty of obedience, so they must keep
of the board of the managing and a majority of the within their prescribed limits. So speaking of the powers
board of the managed Corporation, are identical, then of the corporation, you have Express, and you have
there will be a change in the stockholder or member Implied.
approval requirement in so far as the Managed
Corporation. This will now change to two thirds. When the limits are not observed, they will mean that a
ultra vires act has been committed.
The duration of a management contract cannot be for
periods longer than 5 years at any given time. Except Does it mean that it cannot be implemented?
when it relates to exploration, development or
utilization of natural resources, which is to be It would really depend on whether it is legal or illegal.
governed by pertinent laws or regulations. • If it were legal, there is the possibility of
By way of a limitation in a management contract, in ratification.
interpreting its provisions, it must be read as • If it were illegal. there is no possibility or
subjecting its terms to the right of the Board of the ratification
managed corporation to give specific duties or recall
the delegation, as to hold otherwise violates Section IF THE CONTRACT ENTERED INTO BY THE
22 of the Code. CORPORATION IS ULTRA VIRES, THE FOLLOWING
APPLY:
There is these exceptions because of the nature of
these activities where sometimes the return on a) If merely executory on both sides, it cannot be
investment is going to take longer than five years. enforced by either
b) if fully performed, neither party can set it aside
Furthermore, when there is an issue as to interpretation c) if performed on one side, recovery is allowed as
of the management contract, the interpretation of the retention of benefits without performance cannot
management contract should yield to Sec 22. be allowed.

Sec 22 is the provision that requires all corporate If ultra vires in part only and if separable, it is valid as
powers, all business to be conducted in all properties to the part not ultra vires, invalid as to the other part.
will be controlled by the board.
THE ULTRA VIRES DOCTRINE MAY BE INVOKED BY:
So, what is meant by this is, if there is a dispute as to
how the management contract is to be interpreted it a) the State as a corporation allows its existence to
should be interpreted to read or to mean that the board the State, its powers are limited by the grant of
of the Managed corporation can give specific duties or authority by the State
recall a delegation, because the whole otherwise would b) Stockholders as they have a right to expect and
mean that Sec 22 is being violated. And that is how a insist that the corporation adhere to the limits of
management contract is to be construed. its granted powers
c) Strangers, if they are party to the contract
d) competitors only if allowed by statute
e) creditors, if the acts are in fraud of creditors.

– COMMERCIAL LAW REVIEW –

 48

– COMMERCIAL LAW REVIEW –

 49

BY-LAWS
MODULE 9

NOTE : Sec 45 does not mention any approval that

ADOPTION OF BY-LAWS comes from the Board prior to adoption. It simply
BY-LAWS: The rules of action adopted by a corporation makes mention of an adoption by affirmative vote of
for its internal government and for the government of stockholders or members and such vote must be by a
its stockholders or members and those having the majority. The reason for this is that the terms
direction, management and control of its affairs in “stockholders” or “members” are already inclusive of
relation to the corporation and among themselves “Directors” or “Trustees”.
(Loyola Grand Villas Homeowners (South) Association
➢ It is to be signed by stockholders or members and is
Inc. vs. Court of Appeals (276 SCRA 681).
kept in the principal office subject to inspection.
By-laws apply only to the components of a corporation
➢ A copy certified by a majority of the directors /
– stockholders, members, and officers of the
trustees countersigned by the corporate secretary is
corporation
filed with the SEC and attached to the Articles.
NATURE AND FUNCTIONS OF BY-LAWS *The By-laws are rendered valid upon the issuance by
➢ The nature of power to have by-laws is inherent in the SEC of a certification that it is not inconsistent with
every corporation. It is not essential to a the Code.
corporation and not a condition precedent for the
*If the corporation is regulated by specific agencies, it
corporation to exist.
requires a certification from said agency that the by-
➢ The by-laws supplement the AOI. laws are in accord with the laws. The SEC shall not
accept for filing or any amendment thereto of a bank,
➢ The function of by-laws is to define the rights and banking institution, building and loan association, trust
duties of corporate officers and directors or company, insurance company, public utility, educational
trustees, and of stockholders or members towards institution or other special corporations governed by
the corporation and among themselves with special laws unless accompanied by a certificate of the
reference to the management of corporate affairs appropriate government agency to the effect that such
and to regulate transaction of the business of the by-laws are in accordance with law.
corporation in a particular way.
NON-ADOPTION OF BY-LAWS
➢ Distinguished from a resolution; approved by-laws
is a permanent rule of action and mode of conduct ➢ The non-adoption of by-laws does not result in the
of corporate affairs while a resolution ordinarily demise of the corporation. This can be implied from
applies to a single act of the corporation. the act that while it is given the power to adopt by-
laws, it doesn’t make it a matter of necessity to
➢ When it is in conflict with AOI, the AOI prevails. exercise the power to ensure corporate life or to
validate corporate acts (Gokongwei Jr. v SEC (89
PROCEDURE FOR ADOPTION OF BY-LAWS SCRA 3364).

This can be implied from the given power to a

BEFORE INCORPORATION corporation to adopt by-laws and absence of any
- It is to be approved and signed by all incorporators provision that makes it a matter of necessity for the
and filed simultaneously with the articles corporation to adopt by-laws for it to have corporate
existence or for corporate acts to be validated.
AFTER INCORPORATION
➢ However, if the provision is interpreted to require
- Within a month after receipt of the certificate of by-laws, the non-adoption can be ground for a
incorporation. suspension or a revocation of its
corporate franchise, as it constitutes a violation of
➢ By-laws are adopted by the affirmative vote of the Code.
stockholders or members representing a majority of
the outstanding capital stock or its members (Sec.
45)

– COMMERCIAL LAW REVIEW –

 50

ELEMENTS OF VALID BY-LAWS BINDING EFFECT OF BY -LAWS ON THIRD PERSONS

GENERAL RULE : The by-laws binds only the stockholders

a) they must not be contrary to the code, it is void if or members, officers, and the members of the Board
contrary to the code and the Corporation itself. Insofar as a third person, the
b) not contrary to moral or public policy by-laws is not binding.
c) must not impair obligations of contract - as a
general rule EXCEPTION : Unless he has been specifically notified of a
d) they must be general and uniform in application provision in the by-laws that would have a material
e) they must be consistent with the Charter / Articles effect on the transaction with the Corporation.
f) they must be reasonable or capable of compliance.
By-laws cannot bind or affect 3rd persons that deal with
the corporation unless they have full knowledge of the
THE FOLLOWING HAVE BEEN HELD TO BE VOID
STIPULATIONS:
pertinent portion of the by-laws affecting their
transaction. A contract signed by the chairman of the
1.) Requiring the attendance of 4 members of a 5- board, even if not mentioned in the by-laws as an
member board for a meeting to void a resolution authorized signatory is valid (PMI Colleges v NLRC 277
enacted by 3 members although constituting a majority SCRA 462). Absent any knowledge or indication that
(Pena v. CA 193 SCRA 717). they are notified of a by-law provision that would be
material to their dealings with or transactions with the
Explanation: When we speak of a quorum, we mean
Corporation, then any provision in the by-laws would
one half plus one. So when, in this particular case, the 3
not affect them.
members of a 5-member Board had already decided
upon the subject action, the provision on the by-laws The purpose of by-laws is to regulate the conduct and
where 4 out of the 5 can void the resolution, was define the duties of stockholders or members towards
considered to be contrary to the Code. the corporation and among themselves. They are self-
imposed and, although adopted pursuant to statutory
2.) Granting a shareholder permanent representation in
authority, have no status as public law. Notice to third
the board (Grace Christian High School v. CA 281 SCRA
persons will not be presumed (China Banking
133).
Corporation v Court of Appeals 270 SCRA 503).
Explanation: Membership in the Board is
pursuant to an election. DOCTRINE OF APPARENT AUTHORITY

This is otherwise known as Doctrine of Ostensible

3.) The amendment of a by-law provision to undermine
Authority
the right to security of tenure of a regular employee of
the corporation cannot be allowed. Admittedly, the By the Doctrine of Apparent Authority, the corporation
right to amend the bylaws lies solely in the discretion of will be estopped from denying the agent’s authority if it
the employer, this being in the exercise of management knowingly permits one of its officers or any other agent
prerogative or business judgment. However this right, to act within the scope of an apparent authority and it
extensive as it may be, cannot impair the obligation of holds him out to the public as possessing the power to
existing contracts or rights. A contrary interpretation do those acts.
would not find justification in the laws or the
Constitution. If we were to rule otherwise, it would “When in the usual course of business of the
enable an employer to remove any employee from his corporation, an officer or agent is held out by such
employment by the simple expediency of amending its corporation, or has been permitted to act for it in such
bylaws and providing that said position shall cease to way as to justify third persons who deal with him in
exist upon occurrence of a specified event (Salafranca assuming that he is doing an act or making a contract
vs. Philamlife Village Homeowners Association 300 SCRA within the scope of his authority, the corporation is
469). bound thereby even though such officer or agent does
not have the actual authority to do such act or make
EXAMPLE OF VALID PROVISIONS IN BY-LAWS: such contract.
1. Declaring a person employed in the service of a
➢ Notice to third persons will not be presumed.
rival company to be ineligible for the
Corporation’s BOD ➢ A contract signed by the chairman of the board,
even if mentioned in the by-laws as an authorized
2. A director who is ineligible, if elected, subjects
signatory is valid.
him to removal, if he is also a director in a
corporation whose business is in competition ➢ No provision in the By-Laws may be adopted if it is
with or is antagonistic to the corporation. contrary to law. (Tolerance cannot be considered
ratification. The practice no matter how long

– COMMERCIAL LAW REVIEW –

 51

continued cannot give rise to vested right if it is Provided that the delegated authority may be revoked
contrary to law.) by majority vote of stockholders or members at a
regular or special meeting. Note the omission of the
CONTENTS OF BY-LAWS (SEC. 46) phrase “at a meeting duly called for the purpose”. In
other words, the revocation can happen in any meeting.
1) Time, place, manner of calling and conduct and
There is no necessity for a meeting to be called
regular or special meetings of Directors or Trustees,
specifically for purposes of a revocation.
stockholders or members and the mode of notifying
them The amendment is then attached to the original by-laws
2) Required quorum in meetings of stockholders or in the office of the corporation and a copy thereof duly
members and the manner of voting certified under oath by the secretary and a majority of
the Board is filed with the SEC. It is effective upon
3) The mode by which a stockholder, member,
issuance by SEC of a certification that it is not
director or trustee may attend meetings and case
inconsistent with the Code and other relevant laws.
their vote
4) Form of proxies of stockholders or members and If the corporation is regulated by specific agencies, it
the manner of voting them requires a certification from said agency that the
amendments are in accord with the laws.
5) Directors’ or trustees’ qualifications, duties and
responsibilities, the guidelines for setting
compensation for directors or trustees or officers, BY-LAWS ARTICLES
and the maximum number of other board
representations that an independent director or By-laws provide rules Articles is the fundamental law
trustee may have which shall, in no case, be more or regulations of the Corporation
than the number prescribed by the SEC
By-laws are usually Articles executed before
6) Time of the holding of elections of
executed after incorporation
Directors/Trustees and the manner of giving notice
incorporation
thereof
7) Manner of election or appointment and the terms The filing of By-laws The filing of Articles is a
of officers other than Directors/Trustees may be a condition condition precedent to
8) Penalties for violation of By-laws subsequent incorporation
9) In stock corporation manner of issuing certificates
In case, of a conflict between
10) Such other matters as may be necessary for the the Articles and the By-laws,
proper conduct or convenient transaction of its the former shall prevail as the
corporate business and affairs. Code provides that the
An arbitration agreement may also be provided. contents of the latter shall be
subject to the contents of the
Note: In determining whether a particular situation shall former. Hence, if the articles
be in the by-laws or shall be allowed to be in the by- provide for a definite number
laws, ascertain if the situation is applicable to those of directors, a contrary
within or inside the Corporation. If yes, then it shall be provision in the By-laws must
in the by-laws. Otherwise, it shall not. yield to the stated number in
the articles (Loyola Grand
AMENDMENTS TO THE BY-LAWS (SEC. 47) Villas Homeowners)

TWO WAYS:
1.) It can be undertaken by a majority vote of the
Board and majority vote of stockholders or
members in a meeting duly called for that purpose;
or

2.) By vote of the Board, if the power to amend has

been delegated by 2/3 vote of the outstanding
capital stock or members.

– COMMERCIAL LAW REVIEW –

 52

MEETINGS
MODULE 10

KINDS NOTICE REQUIREMENTS

1. REGULAR MEETINGS OF STOCKHOLDERS OR
MEETINGS OF DIRECTORS, TRUSTEES, STOCKHOLDERS MEMBERS – require 21 days notice, unless a
AND MEMBERS MAY BE: different period is fixed in the by-laws, laws or
1. A REGULAR MEETING – one that is held a pre- regulation.
determined date or dates known in advance or the
occurrence or frequency is known to those required 2. SPECIAL MEETINGS OF STOCKHOLDERS OR
MEMBERS – require 1-week notice unless a
or enjoined to attend.
different period is fixed in the by-laws, laws or
2. A SPECIAL MEETING – one that is not scheduled in regulation.
the calendar but is called due to special reasons or
3. REGULAR MEETINGS OF DIRECTORS OR TRUSTEES –
circumstances that require the calling of a meeting
require two-day notice unless a longer time is
A meeting implies a concurrence or coming face to face provided in the by-laws. (Section 52)
of at least two persons. However, it cannot be disputed
that in the context of corporations, the attendance of WAIVER OF NOTICE
one might satisfy the requirements of a meeting. Notice can however be impliedly or expressly waived.

WHY MEETINGS ARE NECESSARY SO one can expressly waive the requirement of notice
by saying that he doesn’t need to be notified. And there
PURPOSE : For corporate powers to be exercised -
is no doubt that is his intent to notify the information
Meetings are necessary because corporate powers are
that there is really no need for him to be given a written
vested in the Board or stockholders or members as a
notice of the meeting.
body and not as individuals. Likewise, it is also Because
the power resides on them collectively. It can be impliedly waived by actually attending the
meeting. SO even if one doesn’t receive a notice but he
It serves as protection and assurance to stockholders or
is entitled to attend the meeting. Attendance will be
members as it affords them an opportunity to be heard
considered as a waiver of notice.
and to discuss the matter at hand and vote thereon.
IF IT IS NOT WAIVED – the validity of the proceedings or
WHEN HELD (SCHEDULE) the business undertaken may be questioned by a
1. REGULAR MEETINGS OF STOCKHOLDERS OR
stockholder or a member.
MEMBERS – held annually on the date fixed in the
by-laws or if not so fixed, on any date after April 15 FORM OF NOTICE
as determined by the Board. (Section 49) GR : Written notice is the norm.

2. SPECIAL MEETINGS OF STOCKHOLDERS OR XPN : The SEC can allow electronic mail or other modes.
MEMBERS – held at anytime as deemed necessary
or as fixed in the By-Laws. (Ibid) THE NOTICE SHALL BE ACCOMPANIED BY:

3. REGULAR MEETINGS OF DIRECTORS OR TRUSTEES – 1. Agenda,

held monthly unless the by-laws provide for another 2. Proxy form which shall be submitted to the
schedule or frequency for their regular meetings corporate secretary within a reasonable time prior
(Ibid) to the meeting,

4. SPECIAL MEETINGS OF DIRECTORS OR TRUSTEES – 3. When attendance and voting are allowed by remote
held at anytime upon call of the president or as communication or in absentia, the requirements to
provided in the by-laws. (Section 52) be followed when a stockholder or member elects
either option, and
4. When it is for the election of directors or trustees,
the requirements and procedure for nomination
and election.

– COMMERCIAL LAW REVIEW –

 53

WAIVER OF NOTICE 3. A detailed, descriptive, balanced and

comprehensible assessment of the corporation’s
GR : Notice may be waived, expressly or impliedly. performance, which shall include information on
any material change in the corporation’s business,
XPN : General waivers of notice in the articles of
strategy, and other affairs;
incorporation or the by-laws are not allowed.
Attendance shall constitute a waiver unless made 4. A financial report for the preceding year, which shall
specifically for the purpose of objecting to the include financial statements duly signed and
transaction of business because the meeting was not certified in accordance with this Code and the rules
lawfully called or convened. the Commission may prescribe, a statement on the
adequacy of the corporation’s internal controls or
POSTPONEMENT OF MEETINGS risk management systems, and a statement of all
In case of a postponement, written notice and the external audit and non-audit fees;
reason thereof shall be sent to stockholders or 5. If it is a stock corporation - An explanation of the
members on record at least 2 weeks prior to the date of dividend policy and the fact of payment (or non-
the meeting, unless a different period is required under payment, as the case may be) of dividends or the
the law, by-laws or regulation. reasons for nonpayment thereof;
GR : Meetings may be postponed. 6. Director or trustee profiles which shall include,
XPN : Annual meetings cannot be postponed if the
among others, their qualifications and relevant
purpose is to extend the term of office of directors or experience, length of service in the corporation,
trustees. trainings and continuing education attended, and
their board representations in other corporations;
AGENDA FOR A REGULAR MEETING OF THE 7. A director or trustee attendance report, indicating
STOCKHOLDERS OR MEMBERS the attendance of each director or trustee at each
Agenda is supposed to be attached in the notice of of the meetings of the board and its committees
meeting should contain the following: and in regular or special stockholder meetings;

At each regular meeting of stockholders or members, 8. Appraisals and performance reports for the board
the board of directors or trustees shall endeavor to and the criteria and procedure for assessment;
present to stockholders or members the following:
9. A director or trustee compensation report prepared
1. The minutes of the most recent regular meeting in accordance with this Code and the rules the
which shall include: Commission may prescribe;

a. A description of the voting and vote tabulation 10. Director disclosures on self-dealings and related
procedures used in the previous meeting; party transactions;
b. A description of the opportunity given to 11. The profiles of directors nominated or seeking
stockholders or members to ask questions and a election or reelection. (Section 49)
record of the questions asked and answers
given; NOTE : A director, trustee, stockholder, or member may
propose any other matter for inclusion in the agenda at
c. The matters discussed and resolutions reached;
any regular meeting of stockholders or members.
d. A record of the voting results for each agenda
item; The law specifically states only regular meeting. The
absence of any statement as to special meetings can be
e. A list of the directors or trustees, officers and
taken to mean that as far as special meetings are
stockholders or members who attended the
concerned, they are called for special purpose or there
meeting; and
are circumstances affecting the corporation that may
f. Such other items that the Commission may need to be attended to – it is the only matter that needs
require in the interest of good corporate to be taken.
governance and the protection of minority
stockholders. Notwithstanding tho it is (Atty. Rondez’s) opinion that
during a special meeting depending upin the
2. A members’ list for nonstock corporations and, for
importance or significance of the matter being raised,
stock corporations, material information on the
the corporation or the board or the stockholders or
current stockholders, and their voting rights;
members may consider any other matter.

– COMMERCIAL LAW REVIEW –

 54

WHERE MEETING IS TO BE HELD 2. The stockholder or member is allowed to preside

(PLACE OF MEETING) until a presiding officer is elected where the
meeting is called by a stockholder or a member
STOCKHOLDERS OR MEMBERS MEETINGS are to be held upon showing of good cause to the SEC.
in the city or municipality where the principal office is
set forth in the Articles of Incorporation, or if not EXAMPLES :
practicable, in the city or municipality where the
principal office is located. • When they are proposing a removal of a
director or trustee. There maybe a situation
Provided, that any city or municipality in Metro-Manila, where either there will be no one to call the
Metro Cebu, Metro-Davao or any metropolitan area meeting or the one who is supposed to call the
shall for this purpose be considered a city or meeting is either the one to be removed or
municipality. (Section 50) refuses to call a meeting. In which case, a
petitioning stockholder or member may ask the
BOARD MEETINGS can be held anywhere in or outside SEC for authority to call the meeting and shall
of the Philippines unless the By-laws provide otherwise. preside until a presiding officer is elected.
(Section 52)
WHO CALLS
WHO PRESIDES
The PERSON DESIGNATED IN THE BY-LAWS , a director
GR : The chairman shall preside in all instances. or trustee, or officer entrusted with management, or in
(regardless of whether it is a stockholders or members proper cases, a petitioning stockholder or member upon
meeting, or board meeting) order of the SEC when there is no person authorized to
call the meeting or the person authorized refuses to call
XPNS :
a meeting.
1. The president presides, in the absence of the
NOTE : This shall refer to the person who should appear
chairman, at all meetings of directors or trustees as
as having initiated the holding of a meeting or who has
well as stockholders and members unless otherwise
called a meeting. Normally, a provision in the by laws
provided in the by-laws. (Section 53)
that should meeting must be called by either the
NOTE : Voting power of a presiding officer - Since the President or the Corporate Secretary upon the order of
presiding officer is also a member of the board, he the President.
would be allowed to vote and a provision of the By-
The petitioning stockholder or member shall preside
Laws or a resolution providing that he can only vote
until a majority of the stockholders or members have
in case of a tie is not allowed, neither can it be
chosen among themselves a presiding officer.
provided that a resolution is deemed approved in
case of tie as the required number of votes is not
met. (Per SEC Opinion, August 4, 1995 and January
25, 1990)

NOTE : This has been invalidated because the

presiding officer as a member of the board is
allowed to vote regardless of any conditions. Stated
otherwise, you cannot prescribe that he only votes
in case of a tie.

– COMMERCIAL LAW REVIEW –

 55

ACQUISITION & PAYMENT OF SHARES

MODULE 11

PAYMENT FOR UNISSUED SHARES

ACQUISITION OF STOCKS
(What is acceptable as payment?, What are
A person may become a stockholder of a
acceptable considerations?)
corporation by acquiring a share through a purchase
(most common way) from the corporation or other Section 61 provides that shares are paid for by
shareholders. or any combination of:
The purchase from the corporation is a) cash
primarily effected by means of a subscription b) property – tangible or intangible, actually
contract if the object is unissued shares. received by the corporation and necessary or
convenient for its use and lawful purpose at a
If the objects of the purchase are issued
fair valuation equal to par or issued value
shares, they may be purchased from other
c) labor performed or services actually
shareholders or from the corporation itself when it
rendered
disposes of treasury shares. If the shares have
d) previously incurred indebtedness
previously been issues, purchase of shares are in the
e) amounts transferred from unrestricted
treasury. The purchase is to be through sale with the
retained earnings to stated capital
price determined by the board.
f) outstanding shares exchanged for stocks in the
As to unissued shares/stocks, they are acquired event of a reclassification or conversion
through subscription contracts. (class a shares may be acceptable consideration
for class b shares),
SUBSCRIPTION CONTRACTS g) shares of stock in another corporation,
h) other generally accepted form of consideration.
Section 59 defines a subscription contract as Where the consideration is other than case
any contract for the acquisition of unissued stock in or consists of intangible property such as
an existing corporation or one that is still to be patents or copyrights, the valuation thereof
formed regardless of whether it is referred to as a shall initially be determined by the stockholders
purchase or some other contract. or the board, subject to approval by the SEC.
The kinds of subscription contracts are Shares cannot be issued in exchange for
PRE-INCORPORATION (before corporation is formed) promissory notes or future services because they are
and POST INCORPORATION contracts (after the supposed to and are intended to represent a value
corporation is formed). received by the corporation to form part of its capital.
Section 60 provides that a pre-incorporation is NOTE : The enumeration of acceptable consideration
irrevocable for a period of at least 6 months, counted is also acceptable as consideration for the issuance of
from the date of subscription because there is a bonds.
need to ensure that the corporation shall have
capital to undertake the business for which it was The AMOUNT TO BE PAID is the par value as fixed or
created. The irrevocable nature of the contract shall if no par value, the value which may be fixed in the
stand unless all subscribers consent to the revocation Articles or by the Board pursuant to the authority
or the corporation fails to materialize within the conferred by the Articles / By Laws or in its absence by
period or such period fixed in the contract. the stockholders in a meeting duly called by a majority
There is a possibility that there is a longer period vote of the outstanding capital stock. (at least the par
stipulated in the subscription contract. However, no value or at least the no par value)
pre-incorporation subscription contract can be
revoked if the Articles have already been submitted Section 65 provides that interest is also due for all
to the SEC. unpaid subscriptions from the date of the subscription,
if so required by and at a rate of interest fixed in the
subscription contract. If not fixed, the prevailing legal
rate shall apply.

– COMMERCIAL LAW REVIEW –

 56

WHEN PAYMENT FOR SHARES MUST BE MADE REMEDIES TO ENFORCE A DELINQUENCY

As provided by Section 66, subject to the The remedies are to collect the unpaid
provisions of the subscription contract, the board may, subscription by judicial action under Section 69 or to
at any time, declare due and payable to the conduct a delinquency sale under Section 67
corporation unpaid subscriptions and may collect the
same or such percentage thereof, in either case, DELINQUENCY SALE
with accrued interest, if any, as it may deem necessary.
A delinquency sale requires:
THEY ARE PAYABLE ON:
d) Resolution by the Board ordering the sale of
(a) date fixed the subscription contract, or delinquent stocks, specifying the amount due,
(b) upon call. interest, and the date, time, place which shall
not be less than 30 days nor more than 60
A call is the act of the board in declaring due days from the date of delinquency
and payable unpaid subscriptions in full or such e) Notice is sent to the subscriber personally or by
percentage, in either case, with accrued interest, registered mail and published in a newspaper of
counted from date of subscription, if so required by general circulation in the province or city where
the By-laws and at the rate fixed thereon. If no interest the corporation has its principal office once a
rate is fixed, the legal rate. Absent such provisions for week for 2 consecutive weeks.
the collection of interest and a rate, it cannot be
collected. At the auction sale, the winning bidder shall be
the one who shall pay the full amount of the balance
THE PURPOSE OF THE CALL IS TO FIX THE
and all expenses for the least number of shares or
PERIOD OF PAYMENT but is not necessary if the
fraction of a share. Note that there is no deficiency
corporation is insolvent or payment is provided for in the
because the winning bid cannot be less than the
contract.
amount due.
NOTE : The problem arises when no payment is
EXAMPLE : If subscriber subscribed to 100 shares at 100
made. See discussion below.
pesos per share for a total of 10,000 pesos, and if he
If no payment is made on such date, it shall only paid 5,000 pesos, he has a balance of 5,000 pesos.
render the entire balance due and payable and shall Delinquency shares, 1,000 pesos and interest of 1,000
make the subscriber liable for interest, computed pesos. The total balance is 7,000 pesos. It will also be
from the date specified until paid. the minimum bid amount. Any bid less than such
amount will not meet the requirement. Here, there shall
If 30 days after due date or after the date stated be no way to have any such deficiency.
in the call, it remains unpaid, all stocks covered by the
subscription shall be considered to be delinquent NOTE : As to bidders, the one who is willing to pay the
and subject to sale, unless the board orders otherwise. most or full amount for the least number of shares shall
prevail.
Consequently under Section 70:
The stock so purchased is transferred in the
a) they shall not be voted for or be entitled to name of the purchaser; the rest if any goes to the
vote or representation at a shareholders meeting delinquent subscriber.
(the holder of these delinquent shares cannot stand
for election as directors or officers of the If there is no bidder at the auction sale, the
corporation, even if they continue to be subscribers corporation may purchase the shares and the total
or owners of shares in the books of the corporation) amount due shall be credited as paid in the
b) no rights may be exercised, except the right to books of the corporation and credited in its name as
receive dividends. This situation will obtain until the treasury shares. Under Section 68, if delinquent stock is
amount due, interest and expenses are paid (they sold, it may be recovered on the ground that:
cannot attend neither can they appoint a proxy;
a) There is a defect or irregularity in the notice of sale
they are still entitled to dividends. As to cash
b) There is a defect or irregularity in the sale itself.
dividend, it is applied to the delinquency. As to
Provided, the party bringing the action pays to
stock dividend, it will be withheld).
the person holding the stock the sum paid, plus
Under Section 71, if the subscriber is not legal interest from date of sale and the action is
delinquent, he exercises all rights of a shareholder. brought within six months from date of sale.

– COMMERCIAL LAW REVIEW –

 57

The defect or irregularity in the notice of sale, in

relation to the resolution issued by the board. Not less
than 30 but not more than 60 days. If earlier than 30
days or more than 60 days, it will be a defect in the
notice of sale. The defect may also pertain to the
publication or notice to the subscriber.

The defect or irregularity in the sale shall lie in the

violation of the rule that: as to bidders, the one who is
willing to pay the most or full amount for the least
number of shares shall prevail.

– COMMERCIAL LAW REVIEW –

 58

STOCK CERTIFICATES & STOCKHOLDER RIGHTS

MODULE 12

as regards the corporation in the absence of a statute

DEFINED or agreement.
A stock certificate is the written instrument signed by
— So this means that even without a stock certificate,
the proper officer of a corporation stating or
one can be considered as a stockholder.
acknowledging that the person named therein is the
owner of a designated number of shares of stock. Q:What will be the basis of one stock ownership or
exercise of rights as a stockholder?
Section 63 provides that it is issued once the
consideration, plus interest and expenses due on a A: We would have to take a look at what is in the stock
delinquency, if any, have been paid. and transfer book Because the stock and transfer book
will recognize, or will indicate one's right to the shares
— This means when you enter into a subscription
pursuant to a subscription contract.
contract, the full amount must be paid. If subsequently
thereafter, a delinquency occurs, the amount that is And we also have what is provided for in Section 71,
due on the delinquency together with interest and that even if you are simply a subscriber you exercise, all
expenses should have been paid likewise. your rights or all the rights as a stockholder as long as
you are not delinquent.
— It is only when full payment has been made, that
there will be a right to have stock certificates issued.
BAR EXAM QUESTION:
Example: In a situation where your subscription Where a stockholder was being prevented from voting,
contract is for 10,000 pesos, or 100 shares at 100 pesos due to the absence of a stock certificate.
per share that would mean that if you paid 5000, it is as
if you have paid one half, or 50 pesos for every share. It The suggested answer was that an actual stockholder
is not a situation where you have paid 5000 and this preparing to one was paid his subscription in full can
represents payment in full for 50 shares. exercise the right to vote, or all rights as a stockholder,
even if he does not have a stock certificate.
So any payment is really pro rated thru out the entire
number of shares stated in the subscription contract — AMENDMENT IN THE REV ISED CORPORATION CODE
pursuant to the doctrine of indivisibility of the
subscription. Pertains to stock corporations whose securities are
traded in a trading market, and who can reasonably
On the topic on delinquency sale — in our illustration. demonstrate their capability to do so, to issue their
securities or shares of stock in uncertificated or
The entire 100 shares would be up for auction during a scriptless form in accordance with the rules of the
delinquency sale. Securities and Exchange Commission.
THE FORMAL REQUIREMENTS FOR THE ISSUANCE OF — What you have, would be uncertificated or scriptless
A STOCK CERTIFICATE form shares of stock,
(a) signed by the president or vice-president
UNCERTIFICATED — referring to shares of stock that are
(b) countersigned by the corporate secretary or not covered by a stock certificate.
assistant secretary
SCRIPTS — referring to simple written
(c) sealed with the corporate seal acknowledgments of the facts of ownership, which do
not actually look like nor comply with the formal
(d) issued in accordance with the by-laws requirements of a stock certificate.

Q: Since a stock certificate is the written instrument — this is allowed to facilitate transactions.
that acknowledges that the person named is the owner
of a designated number of shares of stock. Does it mean Q: If one does not hold a certificate of stock, can he
now that a person cannot exercise his rights as a exercise the right to vote, or any other right as a
stockholder without a stock certificate? stockholder?

In First Philippine Holdings vs. Sandiganbayan, (253 A: YES, the only time one will be prevented from
SCRA 30) it was held that a stock certificate is not exercising his rights as a stockholder would be if under a
essential to the creation of a stockholder relationship subscription contract, he's already delinquent or his

– COMMERCIAL LAW REVIEW –

 59

name doesn't appear in the books of the corporation as issuance of watered stock together with the
a subscriber of, or as a stockholder who was paid for his shareholders there would be solidarily liable to the
subscription in full, or is a transferee, in a transaction Corporation for the difference. Not only to the
between a stockholder, and himself. corporation, but likewise, to the creditors of the
corporation.
WATERED STOCK
The liability arises because the situation creates a
Watered stock is stock issued not in exchange for its violation of the trust fund doctrine.
equivalent in cash, property, shares, stock dividends or
services. There is liability because a party giving credit to a
corporation is entitled to rely upon its ostensible
— In the issuance of a stock certificate, it should be paid capitalization as the basis for the credit given. Thus if
in full. However, while it may appear to be paid in full. watered stock is issued, the ostensible capital is in
If it is not actually paid in full, then it is said to be excess of real assets, thereby he recover less.
watered.
Only originally issued stock may be watered, as a
IT INCLUDES STOCK THAT IS ISSUED subsequent transfer is a sale, the provision says
a) without consideration issuance.
b) issued as fully paid when the corporation receives
— Issuance refers to the first transfer from the
a sum less than par or issued value
corporation to the stockholder.
c) issued for a consideration other than cash, the fair
valuation of which is less than par or issued value — any subsequent transaction between the
d) stock dividend without sufficient returned stockholder, and another party can no longer result in
earnings or surplus. the issuance of watered stocks, because the stockholder
can dispose of his shareholding in any manner and for
Q: When watered stock has been issued, what liability
any consideration that he would wish to receive for His
will follow?
disposition.
Section 64 provides that the director or officer
— What is important here is that at the time the
consenting to the issuance of stock for a consideration
corporation first issued the stock certificate, the
less than par or issued value, or issuance for a
corporation should have received an amount that is
consideration other than, valued in excess of its fair
equal to the par or the issued value.
value or having knowledge of the insufficient
consideration, and does not express that same in A subsequent increase in value will not eliminate the
writing and files it with the corporate secretary shall “water”, as the last paragraph of Section 64 states that
be solidary liable with the shareholder to the point of reckoning of liability is issuance.
corporation and its creditors for the difference
between the fair value received at the time of issuance — Going back to our illustration, where there is liability
and its actual par or issued value. for 20.

A: the liability that will follow, is that any director or If for example, at the time, the liability is being enforced
officer that consents to the issuance of stock for a the value of the shares have now plunged or gone down
consideration less than par or issued value or concerns to 80, or even 70. That does not mean that the liability
with the issuance for a consideration, other than cash has been extinguished. The liability remains, because
valued in excess of its fair value or having knowledge of the point of reckoning of the violation is when the
the insufficient consideration and does not express the shares are issued.
same in writing and files it with the corporate Secretary
would be solidarily liable with the person named in the NATURE OF STOCK CERTIFICATES
stock certificate or the shareholder.
Stock certificates are in the nature of personal
— The liability is for the difference. The difference property.
between what was actually given as consideration and
Transfers may be effected by delivery and indorsement
what is required to have been given as consideration.
by the owner, his attorney-in-fact, or any other person
EXAMPLE : If what is required is 100. But what was legally authorized to make transfer.
actually given is 0, or less than 100 like 80 or the value
If the By-laws do not provide otherwise, delivery and
of the property was appraised at what 100, but the
sale may also be through another document but an
actual fair market value is less than 100.
indorsement is a mandatory requirement.
Then, the difference of 20, the director or officer who
— as personal property, there is free disposition of
has knowledge or who has consented to the fact of
stock certificates.

– COMMERCIAL LAW REVIEW –

 60

— for purposes of disposition. What is essential for any constitutes a novation requiring the consent of the
disposition or transfer would be delivery and creditor. (Article 1293, New Civil Code)
endorsement — that means that the transferring stock
holder should deliver the certificate of stock to the THE REGISTRATION OF TRANSFER TO:
transferee together with his endorsement. a) enable the corporation to know at all times who its
shareholders are as mutual rights and obligation
— If the by laws do not provide. Otherwise, there is the
exists between them
possibility of a transfer being undertaken by virtue of a
b) to afford the corporation a right or opportunity to
transfer document.
object or refuse consent to a transfer in case it has
Like for example, a deed of sale or a deed of donation. a claim
c) to avoid a fictitious or fraudulent transfer.
— But it is essential that the stock certificate should
always contain an endorsement. AN UNREGISTERED TRANSFER IS:
a) valid between transferor and transferee
EXAMPLE : At the time of delivery and endorsement,
b) invalid against the corporation except if notice is
stockholder A to his transferee B, there is delivery, and
given
there is endorsement. At this point in time the transfer
c) invalid against corporate creditors when the veil of
is valid only between A and B.
corporation fiction is pierced or there is liability for
For purposes of validity to the corporation, there's a watered stocks
need for registration or recording. The registration or d) invalid against creditors of transferors
recording happens in the stock and transfer book of the e) transferor has the right to vote and be voted upon
corporation. until challenged
f) transferor can collect the dividends
What will happen subsequently is either A or B, in our
example, would present the stock certificates, The SEC may require corporations whose securities are
containing the endorsement to the corporate secretary, traded in trading markets and which can reasonably
so that the transfer can be recorded in the books of the demonstrate their capability to do so to issue their
corporation. securities or shares of stock in uncertificated or
scripless form in accordance with SEC rules.
If the transfer has been recorded or registered in the
books of the corporation, then the transfer is now valid LOST CERTIFICATES
between A and B, and also between the corporation.
Section 72 lays down the procedure for the
However, under Section 62 no transfer shall be valid procurement of a lost or replacement certificates:
only between the parties unless it is recorded in the
The registered owner or legal representative shall file
books of the corporation. What are to be recorded are
an affidavit in triplicate setting forth
the names of the transferor and transferee, date,
number of shares and number of the certificate. a) circumstances of the loss, theft, or destruction
b) number of shares, number of certificate and name
In Torres vs. Court of Appeals, (278 SCRA 793), it was
of the corporation
held that it must be recorded by the corporate
c) such other matter or evidence he may deem
secretary or the designated stock and transfer agent, if
necessary
one has been appointed. Otherwise, it is invalid.
Upon verification of the affidavit and books, the
— As a general rule, recording should be ministerial.
corporation shall cause notice of loss to be published
However, the corporation may refuse to record or
at shareholder’s expense for 3 consecutive weeks,
register a transfer if it has an unpaid claim.
stating the specifics of loss and that 1 year from date
UNPAID CLAIM — refers to any delinquency or any of publication, should no contest be presented, it will
amount subsequent to a delinquency that may still be cancel and issue new certificates.
due the Corporation.
The publication requirement can be dispensed with if
— If there is such an unpaid claim while it is true that the shareholder files a bond or surety good for 1 year
recording is ministerial, the corporation can refuse, or satisfactory to the board.
deny recording until the unpaid claim has been paid.
Provided, in any case, if contest or suit is
Further, no share over which the corporation holds an brought/presented, the issuance of the certificate shall
unpaid claim or a delinquency shall be transferable. be suspended until a final decision of the court or
determination of ownership is made.
If what is transferred is a subscription, the corporation
must consent by resolution because the transfer

– COMMERCIAL LAW REVIEW –

 61

— As long as the corporation complies with the THE REQUISITES FOR A DERIVATIVE SUIT ITS ARE:
procedure laid down in Section 72. It will not be liable
a) there must be an existing cause of action
for any damages arising from the issuance of a
b) That demand to sue has been made, unless
certificate.
demand is useless
EXCEPTIONS : Except in case of fraud, bad faith or c) That he must have been a stockholder or member
negligence of the corporation, no action can be at the time the act was committed unless it be
brought against it for issuing a certificate/s pursuant to continuing
the procedure laid down by law. d) action is brought in the corporate name.

— If you are going to be asked if the derivative suit is

RIGHTS OF STOCKHOLDERS
proper —
Under the Corporation Code, stockholders exercise
and enjoy the following rights The way to do it is to ask yourself — to whom does the
course of action belongs to. If it belongs to the
a) right to attend and vote at meetings corporation, and you now see that there is a refusal to
b) elect or remove directors act or they cannot act, or those who are required to act
c) approve corporate acts are themselves, the ones who should be sued. Then the
d) adopt / amend by-laws matter is proper for a derivative suit.
e) compel the calling of a meeting
f) issuance of a stock certificate Section 1, Rule 8, Interim Rules of Procedure
g) receive dividends Governing Intra-Corporate Controversies, AM No. 01-
h) receive property upon dissolution 2-04 SC provides additional requisites:
i) transfer stock
a) no appraisal rights are available for act complained
j) pre-emption of and
k) inspection of books
l) secure financial statements b) that it is not a nuisance or harassment suit.
m) recover stock at delinquency if unlawfully sold
n) enter into voting trust agreements The shareholder is a nominal party; the real party in
o) exercise the right of appraisal interest is the corporation. It is an indispensable party.
p) participate in dissolution
q) bring derivative suits. The number of shares held is of no consequence. What
is required is that the party bringing suit is a
A SUMMARY OF RIGHTS CAN BE HAD AS FOLLOWS: shareholder without regard to the number of shares
held.
a) right to dividends
b) right to participate in management An action brought in the name of the shareholder is an
c) right to share in corporate property upon individual suit or if the act is committed against
dissolution. shareholders as a group, it is a representative suit.
— If it were a non-stock Corporation, then we would
basically be having only two rights, and that is to INDIVIDUAL SUIT
participate in management, and to receive property - the cause of action belongs to the individual.
upon dissolution. But then again, the right to receive
property upon a dissolution in a non-stock Corporation, EXAMPLE : If we are talking of a stockholder being
will be subject to the plan of distribution, which we will prevented from exercising the right to vote, and he's
take up when we discuss non stop corporations. the only one being prevented from exercising the right
to vote, then the cause of action belongs to him alone.
Note that a subscriber cannot exercise the right to
demand the issuance of a stock certificate. REPRESENTATIVE SUIT
— because there must be full payment. - the cause of action belongs to a group or individuals.

DERIVATIVE SUIT EXAMPLE : As a class, or as holders of a class or a series

of shares, They have not yet been given their dividends.
A derivative suit is one brought by one or more Assuming that they hold preferred shares of stock. If the
stockholders or members in the name of the failure of the corporation to give dividends would
corporation and in its behalf to redress wrongs constitute a cause of action.
committed against it or to protect or vindicate
corporate rights whenever the officials of the What they should finally say representative sued
corporation refuse to sue, are the ones to be sued or because the cause of action belongs to them as a group.
hold control of the corporation.

– COMMERCIAL LAW REVIEW –

 62

ILLUSTRATION: THIRD REQUIREMENT OF DERIVATIVE SUIT:

In so far as the compensation or directors or officers or The party bringing the suit must have been a
trustees, there is a violation on the rule on stockholder or member. At the time the act was
compensation. They have by way of a resolution committed. Unless the act be continuing
granted themselves excessive per diems. The excessive
per diems may constitute a cause of action. — When you are the stockholder or member bringing
the derivative suit. You must be a stockholder or
FIRST REQUIREMENT OF DERIVATIVE SUIT: member at the time the act constituting the cause of
action was committed. You can bring a derivative suit,
Q: Who is damaged by the excessive burden times.
even if you were not a stockholder or member at the
Would it be the stockholders or the corporation?
time of the Commission if the act is continuing.
A: in this particular situation, it is the corporation that is
— So if we go back to our illustration, as to excessive
going to be damaged by the excessive per diems.
per diems — If at the time the resolution was passed
— In this case now a cause of action to question the you were not yet a stockholder there. You can only
excessive per diems — the cause of action belongs to bring the derivative suit, if that violation is continuing at
the corporation. It does not belong to the stockholders. the time you became a stockholder.

SECOND REQUIREMENT OF DERIVATIVE SUIT: FOURTH REQUIREMENT OF DERIVATIVE SUIT:

Q: Is there a refusal to sue or they cannot act or are The action should always be brought in the name of the
they themselves the one to be sued. corporation. Because the corporation is really the real
party in interest.
— There will be a demand for the excessive per diems
to be returned. Q: The last issue is the matter of the number of shares ,
is there a requirement as to the number of shares for
— If the excessive per diems are not going to be one to be able to being a derivative suit?
returned. Then there is not a cause of action that
belongs to the corporation. And since the directors are A: No. As long as you have at least one share, or if you
the ones concerned, you now have the second situation are a member that entitles you to bring a derivative
where they themselves are the ones to be sued. So suit.
these this issue is proper for a derivative suit.

– COMMERCIAL LAW REVIEW –

 63

CORPORATE BOOKS & RECORDS

MODULE 13

The stock and transfer book shall be kept in the

CORPORATE BOOKS AND RECORDS principal office of the corporation or in the office of its
stock transfer agent and shall be open for inspection by
WHAT CORPORATE BOOK AND RECORDS THAT HAVE any director or stockholder of the corporation at
TO BE MAINTAINED? reasonable hours on business days.
Section 73 requires the following corporate books and
STOCK AND TRANSFER AGENT
records to be kept and preserved at its principal office:
A stock transfer agent or one engaged principally in the
1. Articles of Incorporation and by-laws, and all their business of registering transfers of stocks in behalf of a
amendments stock corporation shall be allowed to operate in the
2. The current ownership structure and voting rights Philippines upon securing a license from the
of the corporation, including lists of stockholders or Commission and the payment of a fee to be fixed by the
members, group structures, intra-group structures, Commission, which shall be renewable annually:
ownership data, and beneficial interest. Provided, That a stock corporation is not precluded
3. The names and addresses of all members of the from performing or making transfers of its own stocks,
board of directors and executive officers. in which case all the rules and regulations imposed on
4. Record of all business transactions. stock transfer agents, except the payment of a license
5. A record of resolutions of the board and fee herein provided, shall be applicable: Provided,
stockholders and members. further, That the Commission may require stock
6. Copies of the latest reportorial requirements corporations which transfer and/or trade stocks in
submitted to the SEC. secondary markets to have an independent transfer
7. Minutes of stockholders or Board meetings, setting agent.
forth: time and place, how authorized, notice given,
the agenda, whether regular or special, its object if INSPECTION OF CORPORATE RECORDS
special, those present/absent, every act done or
ordered. Upon demand, the time that the a The rule is corporate records, regardless of the form in
director, trustee or officer entered or left, the yeas which they are stored, shall be open to inspection by
and the nay, and any protest may be recorded in full any director, trustee, stockholder or member of the
upon their demand. corporation in person or by a representative at
reasonable hours on business days, and in addition,
STOCK AND TRANSFER BOOK there can be a demand in writing made by such
director, trustee or stockholder at their own expense,
Stock corporations must also keep a stock and transfer
for copies of such records or excerpts from said records.
book, which shall contain a record of all stocks in the
names of the stockholders alphabetically arranged; the • The rule is as follows, so if you are going to be ask who
installments paid and unpaid on all stocks for which can inspect the books and records of the corporation,
subscription has been made, and the date of payment they are the following: Director, Trustee, Stockholder or
of any installment; a statement of every alienation, sale a member.
or transfer of stock made, the date thereof, by and to
whom made; and such other entries as the bylaws may • If the question is when? The answer would be: at
prescribe. reasonable hours on a business day.

• Stock corporations are also required to maintain • And they can exercise the right of inspection regardless
what is known as a stock and transfer book. of the from in which the record is being kept.

• The stock and transfer book is where we will see a • In addition to inspection there is what is called the
record of all the stocks that are issued by the “right of reproduction”
corporation, to whom they have been issued if they
have been dispositions by the person or • The right of reproduction refers to a demand in writing
stockholders to whom they have been issued, it will for copies of records or excerpts from the records. This
also contain a record of all subscriptions, the total demand must be inwriting and the expense is at the
amount paid and outstanding in these subscriptions party asking for inspection or reproduction.
and when they should be paid.
The inspecting or reproducing party shall remain bound
by confidentiality rules under prevailing laws, such as

– COMMERCIAL LAW REVIEW –

 64

the rules on trade secrets or processes under Republic 1. that the person demanding to examine and copy
Act No. 8293, otherwise known as the “Intellectual excerpts from the corporation’s records and
Property Code of the Philippines”, as amended, minutes has improperly used any information
Republic Act No. 10173, otherwise known as the “Data secured through any prior examination of the
Privacy Act of 2012”, Republic Act No. 8799, otherwise records or minutes of such corporation or of any
known as “The Securities Regulation Code”, and the other corporation. This extends to other
Rules of Court. corporations, so if the party requesting inspection
or reproduction has a history of improper use of
WHO CANNOT EXERCISE THE RIGHT OF INSPECTION information gathered from inspection and
AND REPRODUCTION? reproduction of records of other corporations, then
it is a valid ground to refuse the exercise of the right
The same section says that, a requesting party who is
of inspection and reproduction in that corporation.
not a stockholder or not member of record, or is a
2. Or the party who wishes to do an inspection or
competitor, director, officer, controlling stockholder or
request reproduction was not acting in good faith
otherwise represents the interests of a competitor shall
3. or for a legitimate purpose in making the demand to
have no right to inspect or demand reproduction of
examine or reproduce corporate records, or is a
corporate records.
competitor, director, officer, controlling stockholder
It would seem to be implied that even if one is a or otherwise represents the interests of a
stockholder but he is likewise a director, officer, a competitor.
controlling stockholder or otherwise represents the
interests of a competitor, that would now constitute a WHAT CAN THE SEC DO?
valid ground to refuse inspection or reproduction. If the corporation denies or does not act on a demand
Any stockholder who shall abuse the rights granted for inspection and/or reproduction, the aggrieved party
under this section shall be penalized under Section 158 may report such to the Commission. Within five (5) days
of this Code where he may be liable for a fine or may be from receipt of such report, the Commission shall
the subject for a permanent cease and desist order, conduct a summary investigation and issue an order
without prejudice to the provisions of Republic Act No. directing the inspection or reproduction of the
8293, otherwise known as the “Intellectual Property requested records.
Code of the Philippines”, as amended, and Republic Act
RIGHT OF SHAREHOLDER OR MEMBER TO
No. 10173, otherwise known as the “Data Privacy Act of
FINANCIAL STATEMENTS
2012”.
As provided by Section 74, a corporation shall furnish a
Any officer or agent of the corporation who shall refuse
stockholder or member, within ten (10) days from
to allow the inspection and/or reproduction of records
receipt of their written request, its most recent financial
in accordance with the provisions of this Code shall be
statement, in the form and substance of the financial
liable to such director, trustee, stockholder or member
reporting required by the Commission.
for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 161 of In addition, at the regular meeting of stockholders or
this Code which provides for a penalty or a fine of members, the board of directors or trustees shall
20,000 to 200,000 and if detrimental to the public, the present to such stockholders or members a financial
fine will be from 20,000 to 400,000 both without report of the operations of the corporation for the
prejudice to the citation for contempt issued by the SEC. preceding year, which shall include financial statements,
duly signed and certified in accordance with this Code,
Provided, That if such refusal is made pursuant to a
and the rules the Commission may prescribe.
resolution or order of the board of directors or trustees,
the liability under section 161 for such action shall be However, if the total assets or total liabilities of the
imposed upon the directors or trustees who voted for corporation is less than Six hundred thousand pesos
such refusal. (P600, 000.00), or such other amount as may be
determined appropriate by the Department of Finance,
the financial statements may be certified under oath by
the treasurer and the president.
DEFENSES AVAILABLE AGAINST THESE VIOLATIONS:

– COMMERCIAL LAW REVIEW –

 65

MERGER & CONSOLIDATION

MODULE 14

MERGER VS CONSOLIDATION 2. After the plan of merger or consolidation is

executed, it will now be subject to approval.
MERGERS
Requirements of approval:
Mergers refer to the absorption by one corporation by
another, which is called the surviving corporation. a. Approval by a majority vote of each of the
boards of the constituent corporations,
EXAMPLE : Corporation A and Corporation B agreed to
merge, you would have a situation where only either Notice of the plan of merger or consolidation
Corporation A or Corporation B will remain. shall be submitted to the stockholders of each
of the corporations at separate meetings duly
On account of the merger, only corporation A remains.
called, notice of which is given in the same
The situation now will be, A and B are the constituent
manner as that of regular and special meetings
corporations or party to the merger. After the merger
under Section 49. It shall state the purpose of
takes place, where A corporation remains, it will now be
the meeting and a copy or summary of the plan
the surviving corporation in a merger.
of merger or consolidation. (Section 76)
CONSOLIDATIONS
b. The affirmative vote of stockholders
Consolidations refer to the combination of two or more representing 2/3 of the outstanding capital
corporations to form a new corporation, called the stock or at least 2/3 of the members shall be
consolidated corporation. necessary for the approval of the plan.

EXAMPLE : Corporation A and Corporation B agreed to NOTE : Dissenting stockholder may exercise the
consolidate, there will now be a new corporation, right of appraisal, the exercise of which can be
Corporation C. extinguished if the plan is abandoned by the
board.
A and B in a consolidation are considered the
constituent corporations. After the consolidation, NOTE : Any amendment of the plan shall be
where a new corporation is formed, Corporation C is subject to the same procedure.
will now be known as consolidated corporation.
3. The plan, together with amendments, if any, shall
PROCEDURE FOR A MERGER OR be considered as the agreement of merger or
CONSOLIDATION consolidation.

4. After approval, articles of merger or consolidation

HOW CAN A MERGER/CONSOLIDATION TAKE PLACE: shall be executed by each of the constituent
Initially, there is a need for execution and approval of a corporations signed by the President or Vice
plan of a merger or consolidation. President, certified by the Corporate Secretary or
Assistant Corporate Secretary stating:
NOTE : It shall be executed individually.
a. the plan of merger or consolidation
1. The board of each participating or constituent b. in stock corporations, the number of shares
corporation shall execute and approve a plan of outstanding and in non stock corporations, the
merger or consolidation setting forth: number of members
c. in each corporation, the number of shares or
a. names of the corporations proposing to merge
members voting for or against the plan,
or consolidate
d. the carrying amounts and fair value of the assets
b. the terms of the merger or consolidation and
and liabilities of the respective companies as of
the manner of carrying it into effect
the agreed cut-off date,
c. statement of changes, if any, in the articles of
e. the method to be used in the merger or
the surviving corporation, in case of a merger or
consolidation of accounts of the companies,
with respect to the consolidated corporation, all
f. the provisional or pro-forma values, as merged
statements required by Section 14 to be
or consolidated, using the accounting method,
contained in the Articles of Incorporation
and
d. such other provisions that may be deemed
g. such other information as may be prescribed by
necessary or desirable. (Section 75)
the SEC. (Section 77)

– COMMERCIAL LAW REVIEW –

 66

EFFECTIVITY OF MERGER OR CONSOLIDATION b. The value of the assets or revenues of the

UNDER (SECTION 78) acquired entity is at least P2.4 Billion

1. After the articles of merger or of consolidation has Assuming this situation is applicable, the SEC action on
been jointly prepared, signed and certified as the issuance of the certificate of merger or
required by this Code, shall be submitted to the consolidation will be put on hold until the Philippine
Securities and Exhange Commission for its approval. Competition Commission has given its approval to the
proposed merger or acquisition.
NOTE : In the case of merger or consolidation of
banks or banking institutions, loan associations, NOTE : This thresholds will eventually be put on hold for
trust companies, insurance companies, public the time being with the passage of the BAYANIHAN LAW
utilities, educational institutions, and other special which has increased the threshold to 50 billion to the
corporations governed by special laws, the next 2 years.
favorable recommendation of the appropriate
government agency shall first be obtained. EFFECTS OF A MERGER OR CONSOLIDATION

2. If the Commission is satisfied that the merger or THE EFFECTS OF A MERGER OR CONSOLIDATION ARE:
consolidation of the corporations concerned is
consistent with the provisions of this Code and 1. The constituent corporations shall become a single
existing laws, it shall issue a certificate approving corporation which,
the articles and plan of merger or of consolidation, a. in case of merger – shall be the surviving
at which time the merger or consolidation shall be corporation designated in the plan of merger;
effective. and,
NOTE : Once the certificate of merger or b. in case of consolidation – shall be the
consolidation is issued, that would mean the of consolidated corporation designated in the plan
merger or consolidation is now effective. of consolidation.
3. If, upon investigation, the Commission has reason 2. The separate existence of the constituent
to believe that the proposed merger or corporations shall cease, except that of the
consolidation is contrary to or inconsistent with the surviving or the consolidated corporation.
provisions of this Code or existing laws, it shall set a
hearing to give the corporations concerned the While a merger or consolidation causes dissolution,
opportunity to be heard. there is no need for the affected corporations to
undertake dissolution because one of the
Written notice of the date, time, and place of consequences of the merger or consolidation is that
hearing shall be given to each constituent the surviving or consolidated corporation acquires
corporation at least two (2) weeks before said all rights, privileges, powers and liabilities of the
hearing. The SEC shall thereafter proceed as absorbed corporations.
provided in this Code and make a determination
whether or not there is compliance with the 3. The surviving or the consolidated corporation shall
requirements of the law. possess all the rights, privileges, immunities, and
powers and shall be subject to all the duties and
EXAMPLE : One possible requirement that may also liabilities of a corporation organized under this
be required to be complied with, would be what is Code;
found in the Philippine Competition Act and
Circulars issues by Philippine Competition 4. The surviving or the consolidated corporation shall
Commission because this body is task with possess all the rights, privileges, immunities and
reviewing mergers and acquisitions. franchises of each constituent corporation; and all
real or personal property, all receivables due on
TWO INSTANCES whatever account, including subscriptions to shares
and other choses in action, and every other interest
where a merger that would require notification to the
of, belonging to, or due to each constituent
Philippine Competition Commission so that it will
corporation, shall be deemed transferred to and
subject it to review to determine whether or not, it is
vested in such surviving or consolidated corporation
anti-competitive:
without further act or deed; and
a. The value of the assets or revenues of the
TO SIMPLIFY : All assets of whatever nature, shall be
ultimate parent entity of at least one of the
transferred to the surviving or consolidated
parties is at least P6 billion
corporation without need further act or the
execution of any deed

– COMMERCIAL LAW REVIEW –

 67

5. The surviving or consolidated corporation shall be GR : Where one corporation sells or otherwise transfers
responsible for all the liabilities and obligations of all of its assets to another corporation, the latter is not
each constituent corporation as though such liable for the debts and liabilities of the transferor,
surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any XPN :
pending claim, action or proceeding brought by or
1. Where the purchaser expressly or impliedly agrees
against any constituent corporation may be
to assume such debts;
prosecuted by or against the surviving or
2. Where the transaction amounts to a consolidation
consolidated corporation. The rights of creditors or
or merger of the corporations;
liens upon the property of such constituent
3. Where the purchasing corporation is merely a
corporations shall not be impaired by the merger or
continuation of the selling corporation; and
consolidation. (Section 79)
4. Where the transaction is entered into fraudulently
IN EFFECT, AMONG THE IMPORTANT THINGS THAT
in order to escape liability for such debts. (Edward j.
NEEDS TO BE REMEMBERED: Nell company v. Pacific farms, inc. G.r. no. L-20850,
november 29, 1965)
a. Transfer of assets
In the latter case, there may be a need to comply with
b. Transfer of all liabilities. the tender offer rule. As a consequence, there will be no
need for stockholder approval and there will be no
This takes place upon issuance of the certificate of exercise of the right of appraisal.
merger or consolidation
SALE OF A CONTROLLING INTEREST
Q: “Does the surviving corporation have a right to
enforce a contract entered into by the absorbed What will happen is that shares of stock will be sold to
company subsequent to the date of the merger but another and the purchaser will acquire controlling
prior to issuance of a certificate of merger by the SEC”? interest.

A: The court held in the affirmative as the merger EXAMPLE : Corporation ABC will sell Controlling Interest
agreement contains a stipulation that all references to to XYZ. XYZ becomes the controlling stockholder of ABC
the absorbed corporation shall be deemed a reference which in effect would allow it to deal with the property
to the surviving corporation. (Associated Bank v Court of or assets of ABC.
Appeals, 291 SCRA 511)
NOTE : The provision of the Securities Regulations Code
Q: Corporation A and Corporation B agreed to merge, insofar as the tender offer rule, it may be applicable.
and you have employee X who has been with
corporation A for 10 years, will he now be the This option does not require stockholder approval or
employee of Corporation B, assuming B is the surviving neither there will be right to exercise of the right of
Corporation? appraisal because it is a situation where shares are
being sold to XYZ for it to eventually control ABC
A: In the absence of any stipulation to the contrary, it corporation. the tender offer rule will be applicable
was held that the surviving corporation should assume depending on the nature of the corporation whether it
the employees of the dissolved corporation. Their one that is listed or not or is considered as public
tenure should be treated as having started when they corporation and the extent of the interest that is being
started with the dissolved corporation. (In Filipinas Port acquired.
Services Inc. vs. NLRC 200 SCRA 773)
DE FACTO MERGER
OTHER FORMS OF CORPORATE ACQUISITIONS
A situation where a corporation acquires the assets and
Besides mergers or consolidations, corporations can liabilities of another corporation in exchange for an
engage in the sale of all or substantially all of the assets equivalent value of shares, making the corporation a
of a corporation or a sale of a controlling interest. stockholder of the corporation, which acquires the
assets and liabilities. (Bank of Commerce v. Radio
ISSUE OF THE LIABILITY WHEN THERE IS Philippines Network, Inc. (G.R. No. 195615, April 21,
DISPOSITION OF ALL OR SUBSTANTIALLY ALL OF THE 2014)
ASSETS OF A CORPORATION (NEL DOCTRINE):
EXAMPLE : Corporation ABC selling all or substantially all
Where the court ruled on the issue of the liability of the of its assets to Corporation XYZ. The consideration that
transferee of all the assets of a corporation for debts will be received by ABC will be shares in XYZ, thereby
and liabilities of the transferor corporation, by quoting making ABC stockholder of XYZ. This is De facto merger.
and applying the rule set forth in (Fletcher Cyclopedia
Corporations, Vol. 15, Sec. 7122, pp. 160-161) as
follows:

– COMMERCIAL LAW REVIEW –

 68

RIGHT OF APPRAISAL
MODULE 15

Another thing that mitigates against I not being

RIGHT OF APPRAISAL considered an exercise of the right of appraisal is the
Under Section 80, the right of appraisal is the right of amount that needs to be paid. If one is to exercise his
stockholder to demand payment of the fair market right of appraisal, he is supposed to be paid the fair
value of his shares after dissenting from a proposed market value of his shares on the day prior to the date
corporate action involving a fundamental change in on which the vote was taken. So this can be a situation
the corporation in the cases provided for by law. where if the par value is 100 but because of good
management, the value now is 120 pesos, then the
IT IS AVAILABLE WHEN amount that should be paid will be 120 pesos, because
that is the value of the share on the day prior to the
a) Articles are amended and such has the effect of
date on which the vote was taken.
changing or restricting the rights of a shareholder
or a class of shares or authorizing preferences in On the other hand, let us say that the value has
any respect superior to those outstanding shares deteriorated or depreciated, and it is now worth 70
of any class pesos on the market. So you have par value at 100. But
b) extending or shortening the corporate term the actual or the fair market value is only 70. If that is
c) in cases of sale, lease, exchange transfer, the value on the day prior to the date on which the vote
mortgage, pledge or disposition of all or was taken, then the amount that should be paid is 70
substantially all of corporate assets or property pesos per share. Compare with section 104 -- when a
d) in cases of mergers/consolidations stockholder in a close corporation compels the payment
e) investment by the corporation in another of the fair market value of his shares, there is a
corporation or business other than its primary condition that it should not be less than par or issued
purpose value. So that is another reason that mitigates against
f) a stockholder in a close corporation for any reason considering the provisions of Section 104 as a ground
may compel the said corporation to allow the for the exercise of the right of appraisal.
exercise of his appraisal right.
MANNER OF EXERCISE
So there are five fundamental changes where the right
appraisal would be available. Under Section 81, after voting against the proposed
corporate action, the dissenting stockholder shall
Some authorities say that what you find in Section 104, make a written demand on the corporation within 30
which is the Chapter on Close Corporations, where a days after the date on which the vote was taken for
stockholder in a close corporation may, for any reason, payment of the fair value of his shares.
compel a corporation to allow or to compel it to
purchase his shares at its fair market value. Some If no demand is made within 30 days, he is deemed to
authorities say that this is pursuant to the exercise of a have waived the exercise of the right
right of appraisal. However, if you read the provision
closely. It says there, he may compel or a stockholder in Under Section 85, the stockholder must also submit his
a close corporation may compel the purchase of his certificate of stock within 10 days for notation that
shares at its fair market value FOR ANY REASON . So such shares are dissenting shares.
going back to the definition of the exercise of the right
of appraisal -- you have a demand for payment of fair If the certificate is not submitted for notation within
market value after dissent with a proposed corporate 10 days, the corporation may consider the exercise of
action. Section 104 does not contain any condition the right terminated at its option. If the shares bearing
regarding the need to dissent to a proposed corporate a notation is transferred and the certificates
action. Although it may be understood to have been consequently cancelled, the rights of the transferor as
implied from the demand to compel payment of the fair a dissenting stockholder shall cease and the transferee
market value of the shares, because why would a shall have all the rights of a regular stockholder, and all
stockholder in a close corporation just demand payment dividend distributions which would have accrued are
of the fair market value of his shares? There must be paid to the transferee.
some compelling reason for him to demand payment of Under Section 82, upon a demand, all rights accruing
the fair market value of his shares. to the share are suspended including voting and
dividend rights, only the right to receive the fair value
is not suspended but, if there is no payment within 30
days after the award, he is restored to all his rights.

– COMMERCIAL LAW REVIEW –

 69

However, under Section 83 the exercise of the right WHICH AMOUNT SHOULD BE PAID WITHIN 30 DAYS
after demand is made shall cease if: AFTER AN AWARD?

(a) stockholder withdraws his demand and the An award is a determination of fair market value. So,
corporation consents once the fair market value has been determined that
would constitute an award. And there should be
(b) proposed action is abandoned or rescinded payment within 30 days after an award is determined or
arrived at.
(c) SEC disapproves the action, if its approval is
necessary Sometimes though, an award cannot be determined
mutually between the stockholder and the corporation.
(d) SEC determines that the stockholder is not entitled If an award or the fair market value cannot be arrived at
to the exercise of the right. The effect is that he is mutually, then there can be a submission to appraisers.
restored to all rights and accrued dividends are paid to So, they will now appraise the fair market value if within
him. 60 days from the date the corporate action was
approved, it cannot be determined. These appraisers
The corporation then pays the stockholder the fair
now -- one chosen by the stockholder, one chosen by
value upon surrender of the certificate.
the corporation and one chosen by both
The value paid is the value as of the day prior to the representatives shall make a determination of fair
date on which the vote is taken, excluding any market value. A decision of a majority of the appraisers
depreciation or appreciation in anticipation of the shall be final, and the award should be paid within 30
corporate action. days after such date.

If the fair value cannot be determined within 60 days So, if we were to outline the process -- so you have the
from the date corporate action was approved, it shall determination of fair market value -- this can happen
be appraised by 3 disinterested persons one chosen by mutually or it can happen by way of appraisers.
the stockholder, one chosen by the corporation and If it happens mutually and let's say they decide that the
one chosen by both representatives. A decision of a
fair market value is 100 per share. Then, on the date
majority shall be final and the award paid within 30 they decided on the fair market value -- within 30 days,
days after such award is made. it should be paid.

AND WHAT PROCESS IS TO BE FOLLOWED WHEN ONE If it cannot be decided within 60 days after approval of
WISHES TO EXERCISE THE RIGHT OF APPRAISAL? the corporate action, then we would have to go to
Under Section 81, there must be a vote first as against appraisers who are now supposed to determine it by
the proposed corporate action. For example, if the way of a majority vote. And once they have so
proposed corporate action is to extend, there must be a determined it – that should also be paid within 30 days
vote against extension. from a determination.

After a vote or a dissenting vote has been registered, If there is no payment within the 30-day period,
then there must be a written demand for payment of irrespective of how the fair market value was arrived
fair market value within 30 days from the dau on which that, then the stockholder, who is exercising the right of
the board was taken. For example, the vote was taken appraisal is restored to all his rights as a stockholder.
on March 1, then within 30 days from March 1, there When payment is to be made, do not forget that there
must be a written demand for the payment of the fair should always be unrestricted retained earnings.
market value of the shares pursuant to the exercise of Without unrestricted retained earnings, no payment
the right of appraisal. can be made.
And under Section, 85, there must also be a And once there has been payment, there will now be a
SUBMISSION OF THE CERTIFICATE OF STOCK SO THAT
transfer of all shares to the corporation.
THERE CAN BE A NOTATION THAT THEY ARE
DISSENTING SHARES . If the certificate of stock is not
UNDER SECTION 84, THE COST OF THE VALUATION
submitted for notation within 10 days, the corporation SHALL BE SHOULDERED AS FOLLOWS:
may now consider the exercise of the right of appraisal
terminated at its option. a) the corporation, unless the fair value as
ascertained is equal to or approximates that which
So once this has been done, upon a demand and it offered, then it will assessed against the
submission of the certificate of stock, all rights of the shareholder
stockholder are now suspended except the right to b) if suit is brought to recover payment, the
receive the fair market value of his shares. corporation shall be liable unless the shareholder

– COMMERCIAL LAW REVIEW –

 70

is found to have an unjustifiable reason not to SO THE FIRST QUESTION NOW IS, CAN HE EXERCISE THE
receive payment. RIGHT OF APPRAISAL?

Provided, in all cases The answer is yes. As long as he is not delinquent, he

can exercise all the rights of a stockholder, which would
a) no payment can be made if the corporation has no include the exercise of the right of appraisal.
unrestricted retained earnings, and
b) that the shareholder shall forthwith transfer his The next issue now is when he has successfully exercised
shares to the corporation. the right of appraisal, how many shares are to be
bought from him or how many shares are supposed to
FOR PURPOSES OF SHOULDERING THE COST OF be paid for? So the answer to these would be, he would
VALUATION, WHO IS TO SHOULDER THE COST OF have to be paid the fair market value of the 100 shares.
VALUATION?
AND WHY IS HE SUPPOSED TO BE PAID THE FAIR
If eventually, the fair value that is ascertained is equal MARKET VALUE OF 100 SHARES WHEN HE HAS ONLY
to or approximates the amount offered by the PAID 50%?
corporation, then the valuation or the cost of valuation
will be shouldered by the stockholder. This is based on the doctrine of indivisibility of the
subscription. That is why he must be paid the entire
If it turns out that the offered fair market value by the value or for 100 shares.
Corporation is much less than the determined fair
market value upon a valuation, that is going to be The next issue now is what happens to the balance of
shouldered by the corporation. the subscription? The balance on the subscription is to
be deducted from the amount that is to be paid.
And if suit is eventually brought to recover payment,
the corporation shall be liable for the valuation, unless TO ILLUSTRATE : The 100 shares would have a
it is determined that the stockholder or shareholder is determined fair market value of Php100 per share. So
found to have an unjustifiable reason not to receive that would mean the stockholder is entitled to the
payment. payment of 10,000 pesos because he's to be paid the
fair market value of all the shares covered by his
The last issue that I would like to discuss with you is the subscription. He has a balance of 5000 pesos. When he
matter of a subscription. is to be paid the amount or the fair market value as
determined which is Php10,000. That is going to be less
So let us say stockholder A subscribed to 100 shares at than Php5000 that he owes on his subscription, and he
100 pesos per share and he has only paid 50% of the would receive a net amount of Php5000.
value or the amount due under the subscription
contract.

– COMMERCIAL LAW REVIEW –

 71

NON-STOCK CORPORATIONS
MODULE 16

On the other hand, is not possessed by a non-stock

DEFINED Corporation, because the definition specifically states
Section 86 defines a non stock corporation as one that no part of its income can be distributed as
where no part of its income is distributable as dividends, and the profits, if any, it will be utilized for
dividends to its members, trustees or officers, and furthering the purpose or purposes for which the
when any profit is obtained as an incident if its Corporation was organized.
operations shall, whenever necessary or proper be
used for the furtherance of the purposes for which the CAN A NON-STOCK CORPORATION, ENGAGE IN A
corporation was organized. PROFIT MAKING ACTIVITY?

Under Section 87, the purposes for which a non-stock A: The answer to that question is yes, it can engage in a
corporation may be organized are: charitable, profit making activity. However, the profits should be
recreational, fraternal, religious, trade, cultural, utilized to further the purpose or purposes for which it
educational, literary, scientific, professional, social, was organized.
civic service industry, agricultural, chambers or any
Previously there was a bar examination question as to
combination subject to special provisions.
conversion – a conversion from non-stock to stock, and
A non-stock corporation cannot amend its articles and a conversion from stock to non-stock.
convert itself into a stock corporation, as the members
- A conversion from non-stock to stock will not be
are not entitled to share in the profits of the
allowed because the members are not entitled to
corporation as all present and future profits belong to
any share in the profits of the corporation. If they
the corporation. By converting to a stock corporation it
are converting to a stock Corporation, then that
will be deemed to have distributed corporate assets
means the assets of the non-stock Corporation will
among members without a prior dissolution. On the
now be distributed to the members who will now
other hand, if it were a stock corporation at the onset, it
be stockholders of the corporation.
may be converted to a non-stock corporation as the
corporation is not distributing assets without - A conversion from stock to non-stock is allowed,
dissolution, but rather, they are waiving their rights to because this will be a situation where the assets are
any profits or dividends. not going to be distributed but rather the members
of the stock Corporation or stockholders will just be
The nationality is determined on the basis of the
waiving their rights to any profits or dividends, with
nationality of the members and not on the basis of the
all the assets transferring to a non-stock
contributions.
Corporation, with no expectation of any share in the
profits or the dividends.
DIFFERENCES BETWEEN STOCK AND NON -STOCK
CORPORATIONS
NATIONALITY OF A CORPORATION
The manner by which we can distinguish is to go to the
- stock Corporation - It is a national of the country of
definition of a stock corporation is one which has capital
incorporation but depending upon the nature of the
stock divided into shares and would be authorized to
activity that will be entered into where it may be
distribute to the holders of those shares surplus profits
required to be Filipino, then we would have to take
or dividends, on the basis of the number of shares held.
a look at stock ownership, as being determinative of
- this is the main distinguishing factor between a nationality.
stock Corporation in a non-stock Corporation.
- non-stock Corporation - nationality is determined
Another way by which this question can be answered is, by the nationality of the members.
by showing you, or indicating a situation where a
1. Subject to the Articles of Incorporation or By-
corporation will be distributing profits.
Laws, the right to vote may be limited, broadened or
- The minute a corporation distributes profits, then denied to some extent.
your conclusion should be that it is a stock
Section 88 states that unless so provided, each
Corporation, because the distribution of profits or
member is entitled to one vote. In exercising the right,
dividends as the case may be, is an inherent power
he may vote by proxy and also by mail or other similar
of a stock Corporation.
means as authorized by the Articles of Incorporation or

– COMMERCIAL LAW REVIEW –

 72

By-Laws with the approval of and under conditions A non-stock corporation may have more than fifteen
prescribed by the SEC. The By-laws can also provide for trustees to afford more representation for
voting through remote communication or in absentia. corporations with a nationwide membership.
However, the number should not exceed the
2. Under Section 89, membership and all rights membership as per SEC Opinion, dated August 21,
are personal and nontransferable unless provided in 1987. The SEC has adopted a policy of requiring a
the articles of incorporation or by-laws. A SEC Opinion, registrant to explain or justify why it wants to have
dated December 11, 1996 states that the reason for more than fifteen trustees which would allow it to
the rule is that membership in a stock corporation has disapprove the stipulation if the circumstances do not
personal elements, which require qualification by warrant it.
social and other ties.
Trustees shall hold office for not more than three years
- I refer you back to the purposes for the creation of a until their successors are elected and qualified.
non-stock Corporation. When you become a Trustees elected to fill vacancies, shall only serve for
member of a non-stock, more often than not, you the unexpired portion.
chose to be a member of that non-stock
Corporation, because you are likewise bound by the 4. Corporate officers are elected by the members,
purpose for which it was created. unless otherwise provided by the articles of
incorporation or by-laws.
Section 90 provides that it may be terminated in the
manner and for causes provided in the articles of List of members, proxies and place of meetings-
incorporation or by-Laws. To be valid, the member
must be give reasonable notice and be given an Section 92 requires that the corporation shall at all
opportunity to be heard as required in a SEC Opinion, times, keep a list of members and their proxies in the
dated September 29, 1987. form required by the SEC. The list shall be updated to
reflect members and proxies of record twenty (20)
In Chinese YMCA v Ching (71 SCRA 460), it was held days prior to any scheduled election.
that courts have no power to strip membership, as it
constitutes an unwarranted and undue interference The By-laws can provide that meetings can be held
with the right of a corporation to determine its outside the place of principal business. Provided,
membership. there be notice of the date, time, and place but should
always be in the Philippines.
- if once membership is terminated, it carries with it
termination of all rights to properties and other DISTRIBUTION OF ASSETS UPON DISSO LUTION
privileges. Unless the by laws provides otherwise.

Termination of membership carries with it all rights to IN A STOCK CORPORATION, THE ASSETS WILL BE
property and other privileges unless the By-Laws DISTRIBUTED IN THE FOLLOWING MANNER:
provide otherwise. Note that admission is an expressly 1. It will be applied to obligations and thereafter,
granted power as stated in (6), Section 36.
2. any surplus will be apportioned among the
3. Under Section 91, it may have any number of stockholders. That is how the assets of a stock
trustees as fixed in the Articles of Incorporation or By- Corporation, will be disposed of subsequent to
laws, which may or may not be more than 15. Except a dissolution
with respect to independent trustees of non-stock
corporations vested with public interest, only a In a Non-stock Corporation, there is a need to comply
member shall be elected as a trustee. with section 93.
- However, in a nonstock Corporation vested with Section 93 requires the assets of a non-stock
public interest, where you have an independent corporation to be distributed in accordance with the
director. There is no requirement that your following rules:
independent director should be a member. So that
is the exception to the rule that a trustee must be a 1. Liabilities and obligations of the corporation
member. shall be paid, satisfied or discharged, or adequate
provisions made therefore
As per SEC Opinion, dated May 12, 1995, the trustee
may be a nominee when the membership of a non- 2. Assets held under a condition requiring return,
stock corporation consists of corporations or juridical transfer, conveyance and which condition occurs by
persons. reason of dissolution should be returned, transferred
and conveyed.

– COMMERCIAL LAW REVIEW –

 73

- Sometimes non-stock corporations receive property 5. In any other case, assets shall be distributed to
which upon dissolution should be returned to the such persons, societies or organizations whether
source of the property or conveyed to some other organized for profit or not as provided in the plan of
entity as dictated by the conditions of acquisition. distribution. There can be a provision as to
distribution in the articles. However, the provision
- when there are such conditions, and the conditions cannot cover a distribution of the items in referred to
occur by way or on account of dissolution, then they in 1 to 3 above.
should be returned transferred or conveyed.
- these assets, however, can only refer to assets that
3. Assets received and held by the corporation are not used to pay or Satisfy or discharge
subject to limitations permitting use only for obligation, assets that are not required to be
charitable, religious, benevolent, educational or similar returned transferred or reconveyed or assets that
purposes, but not subject to return, transfer or are not being held, subject to use only for charitable
reconveyance by reason of dissolution shall be and religious benevolent, educational, or similar
transferred to one or more corporations undertaking purposes
similar activities pursuant to the plan of dissolution.
Section 94 requires the plan of distribution to be
- We are now referring to properties that can only be consistent with the distribution rules in Section 93 and
used for specific purposes but are not supposed to is to be adopted pursuant to a majority vote of the
be returned, transferred or reconveyed. Board of Trustees, then submitted for the affirmative
vote of 2/3 of the members having voting rights at a
- They can now be transferred to other entities who
regular or special meeting, prior notice having been
share or engage in the same or similar purposes,
given.
meaning there are likewise charitable religious
benevolent, educational, or engage in similar
activities for any other asset.

4. Other assets shall be distributed in accordance

with the Articles of Incorporation or By-Laws
determining the distributive rights of its members or
as provided.

- after going to the conditions, laid down one two

and three, the assets can now be given or
distributed to the members provided there is a
provision in the articles or in the bylaws that
determine how these assets should be distributed
and to what extent are they entitled to.

– COMMERCIAL LAW REVIEW –

 74

CLOSE CORPORATIONS
MODULE 17

However, if XYZ owns more than, or at least 2/3 of the

CLOSE CORPORATION DEFINED- voting stock of ABC that fact will make ABC Corporation,
not a closed Corporation.
SECTION 95 DEFINES A CLOSE CORPORATION AS A
CORPORATION WHOSE ARTICLES PROVIDE THAT: LIMITATIONS : No close corporation can be formed if
will be engaged in the following business activities:
1) All the corporation’s issued stock of all classes, mining or oil companies, stock exchange, banks,
exclusive of treasury shares, shall be held of record insurance company, public utility or educational
by a specified number of persons not to exceed 20. corporations or are otherwise vested with public
interest as determined by the Code or SEC.
So you have a limited number of shareholders, and
that number is not to exceed 20. Other provisions of the Code shall have supplemental
effect in the absence of express provisions found in the
2) All issued stock of all classes shall be subject to one title on close corporations.
or more specified restrictions on transfer
permitted in this title. THE FACTORS THAT DISTINGUISH IT FROM AN
ORDINARY STOCK CORPORATION ARE:
Under Section 97, any restriction can be put
provided: a) limited ownership,
b) restrictions on transfer,
a) the restriction must appear in the articles of c) it should remain private or unlisted.
incorporation, by-laws as well as the certificate
of stock, otherwise it is not binding on a Distinguished from a “closely held corporation”
purchaser in good faith referring to the number of shareholders at a particular
b) it or they should not be more onerous than time, indicating that they are few in number or a
that granting the existing stockholders or the corporation whose shares are owned by a relatively
corporation the option to purchase the shares small number of shareholders.
with such reasonable terms, conditions or
periods stated therein. If at the CONTENTS OF THE ARTICLES OF
end/expiration of the period, a stockholder/s INCORPORATION OF A CLOSE CORPORATION
or the corporation fails to exercise the option
to purchase, the transferring stockholder may In addition to what is required by Section 13 of the
sell his shares to any third person. Code, Section 96 provides that the articles of
incorporation of a close corporation may provide for:
3) The corporation must not list in any stock 1) Classification of shares or rights and the
exchange or make any public offering of any of its qualifications for owning or holding then and
stock of any class restrictions on their transfers
Notwithstanding, if 2/3 of its voting stock or voting 2) Classification of directors into one or more classes
rights is owned or controlled by another corporation each of which may be voted for or elected solely
that is not a close corporation within the meaning of by a particular class of stocks
the Code, the corporation shall not be deemed a close 3) Greater quorum or voting requirements for
corporation. stockholder or board meetings
4) Provide that the corporation’s business shall be
If for example, ABC Corp meets all the conditions to managed by the stockholder rather than the board
make it a close Corporation. If you take a look at the as long as:
ownership of the shares of ABC Corp, you will find XYZ a) no meetings of stockholders are necessary to
Corp. If XYZ Corp is a closed Corporation, then, ABC be called to elect directors
Corp continues to be a closed Corporation, even if it b) unless the context clearly requires otherwise,
owns more than two thirds of the voting stock of ABC stockholders shall be deemed directors for the
Corporation. purpose of applying the provisions of the code
c) stockholders and the corporation shall be
If XYZ corporation is not a closed Corporation, ABC may subject to all liabilities of directors
still be a closed Corporation as long as the ownership of
XYZ does not exceed 2/3 of the voting stock of ABC So this means that since stockholders are managing
Corporation. the corporation, all references in the corporation

– COMMERCIAL LAW REVIEW –

 75

code as to directors will be deemed to be 4) The effects of such is that the corporation may at
references to the managing stockholders. All its option refuse to register the transfer of stock in
liabilities imposed on directors will likewise be the name of the transferee but the corporation
imposed upon the managing stockholders. may record it if it is consented to by all the
stockholders or if the close corporation had
5) May provide that all officers or employees or that amended its articles under Section 102 with the
specified officers shall be elected or appointed by affirmative vote of 2/3 of the outstanding capital
stockholders instead of the Board. stock, with or without voting rights, and the effect
of such amendment is to terminate the status of
You must remember that the close corporation is a
the corporation as a close as it:
stock Corporation. And as we discussed previously,
a) deletes or removes a provision required under
corporate officers in a stock Corporation are to be
the title to be contained in the articles of
elected or appointed by the board. But in a closed
incorporation,
Corporation, the articles can provide that they are
b) reduces the quorum or voting requirement
to be appointed or elected by the stockholders.
stated in the articles of incorporation. No
written assent is allowed because a meeting is
RULES TO APPLY TO TRANSFERS OF STOCK IN
required to be duly called and held.
BREACH OF QUALIFYING CONDITIONS
The rules are not limited to transfers for value and
Has something to do with restrictions on transfer provisions shall not impair any right, which the
transferee may have to rescind the transfer or recover
SECTION 98 PROVIDES THAT: the stock under any express or implied warranty.
1) QUALIFICATIONS : A person holding stocks in a
close corporation in conclusively presumed to have By the way, for these kinds of an amendment, no
notice of the fact of his ineligibility to be a written assent is allowed, because the provision is
stockholder if he is not entitled under any of its specific. It requires a meeting to be duly called and held.
provisions in the Articles of Incorporation to be a Furthermore, when we speak of transfers under the
holder of record of stock and the certificate for provisions. It is not limited to a transfer for value.
such stock conspicuously shows the qualifications
of the persons entitled to be holders. So, it may include transfers by succession, or gratuitous
2) NUMBER : If the Articles of Incorporation state the transfers.
number of persons NOT EXCEEDING 20 entitled to
be holders of stock and the certificate for such However, not withstanding the inability of the transfer
stock states such fact, the person to whom stock is fee to have a transfer registered in his name, he
issued or transferred that will exceed the number transferee has the power to receive the transfer or to
is conclusively presumed to have knowledge or recover the stock under any express or implied
notice of such fact. warranty that attaches to the transaction.
3) OTHER RESTRICTIONS : If stock certificate
conspicuously shows a restriction on transfer, the VALIDITY OF STOCKHOLDER AGREEMENTS
transferee is conclusively presumed to have notice
Section 99 speaks of stockholder agreements.
of the fact that he has acquired stock in violation
of the restriction, if such acquisition violates the Stockholder agreements are peculiar to a closed
restriction. Corporation because presumably, in other corporations,
So section 98 says that if there is a transfer, that once they execute the articles, it is assumed that all
would be in breach of a qualification/ in breach of agreements are embodied in the articles. That is why
the prescribed number/ or in breach of other we do not bind any similar provision, insofar as
restrictions, there will be a conclusive presumption organized corporations and nonstock corporations.
that the transferee, he's aware that he is in breach These will be shown can only be found under the title
of either the qualification, the number or the other on closed corporations.
restrictions as long as the qualifications, the number
or other restrictions is conspicuously stated in the It speaks of several agreements:
certificate of stock.
Consequently, he cannot actually ask that the SECTION 99 PROVIDES:
corporation record the transfer in his favor because
1) Agreements signed by and among all the
he is in breach of either the qualifications, the
stockholders executed before the formation or
maximum number, or the other restrictions, or the
organization of the corporation shall survive
corporation now can refuse to record or registered
incorporation and shall continue to be valid and
the transfer in the name of the transferee.
binding if such be their intent as long as they are
This is not absolute, however, because of number 4. not inconsistent with the Articles, irrespective of

– COMMERCIAL LAW REVIEW –

 76

whether or not they are embodied in the Articles For example, they have agreed on a particular
or not, but aspects requiring it to be embodied supplier. When we have discussed that the board is
must be so embodied. the one that is supposed to conduct the business of
the corporation. The agreement as to a particular
One example would be an agreement between supplier will be binding upon the board.
stockholder a and stockholder B, the air, they will
sell or transfer their shares, they would transfer But since this agreement prevails over the decision
their shares to each other before any possible of the board, the stockholders who are parties to
transfer to any third person. So when they enter this agreement will be subject to all liabilities of
into the close corporation, that agreement will directors.
remain to be valid.
To the extent that a stockholder is actively
Does it needs to be stated in the articles? engaged in the management or operation of the
It needs to be stated in the articles because it is a business affairs of a close corporation. The
restriction on transfer. stockholder shall be held to strict fiduciary duties
to each other and among themselves, said
2) An agreement between 2 or more stockholders in stockholder shall be personally liable for corporate
writing and signed by them may provide that in torts unless the corporation has obtained
exercising any voting rights, the shares held by reasonably adequate insurance.
them shall be voted as provided, as they may
agree or as determined by the procedure agreed EFFECTS OF ACTIONS TAKEN WITHOUT BOARD
between them. MEETINGS OR ACTIONS TAKEN DURING
IMPROPERLY HELD BOARD MEETINGS
Because of the limited number of stockholders,
there may be arrangements, or agreements SECTION 100 PROVIDES THAT UNLESS THE BY-LAWS
between stockholders that they will vote one way PROVIDE OTHERWISE, ALL ACTIONS ARE VALID IF:
or the other. These agreements are valid.
a) signed and written consent of all directors is
3) No provision in any written agreement signed by a obtained before or after the action
stockholder relating to any phase of corporate b) all stockholders have actual or implied knowledge
affairs shall be invalidated as between the parties and no prompt objections in writing is made
on the ground that its effect is to make them c) directors are accustomed to take informal action
partners among themselves. with express or implied acquiescence of all
stockholders
An example would be an agreement as to the use of d) all directors have express or implied knowledge of
dividends – if they agree that they will use the the action in question and no one makes a prompt
dividends to acquire more shares, then that objection in writing.
agreement remains to be valid.
Action taken within corporate powers is deemed
ratified by the director who fail to attend unless he
4) Neither will an agreement among some or all of
promptly files a written objection with the secretary
the stockholders in a close corporation be
after having knowledge thereof.
invalidated on the ground that it relates to the
conduct or business of the corporation as to
PRE-EMPTIVE RIGHTS
restrict or interfere with the discretion of the
board. Provided that such shall impose on Under Section 101, pre-emptive rights extend to all
stockholders who are partners thereto liabilities stock issued, including a re-issuance of treasury shares,
for a managerial acts imposed on directors. whether for money, property, personal services or in
payment of corporate debts unless otherwise provided
So stockholders in a close corporation can agree, as in the articles.
to how management is going to be undertaken.
DEADLOCKS
Now if there are agreements as to how
management will be undertaken, these agreements DEFINITION
will prevail over the board.
Deadlocks occur if directors or stockholders are so
In other words, the board will yield to these divided regarding the management of the
agreements. However, the parties to this corporation’s business and affairs that the necessary
agreement will be subject to liabilities of directors. vote cannot be obtained, the consequence of which is
that the business and affairs of the corporation can no
longer be conducted to the advantage of stockholders.

– COMMERCIAL LAW REVIEW –

 77

MANNER OF RESOLUTION WITHDRAWAL OR DISSOLUTION

Section 103 provides that deadlocks can be resolved by Section 104 provides that without prejudice to other
the SEC, who upon written petition by any remedies, a stockholder may for any reason compel
stockholder, may arbitrate and in the exercise of its the corporation to purchase his shares at their fair
powers market value, which shall not be less than par or
issued value when the corporation has sufficient assets
a) cancel or alter a provision in the articles, by-laws to cover debts and liabilities, exclusive of capital stock.
or agreements
b) cancel, alter or enjoin any resolution or act of the If you remember, I made mention of this when I
corporation or its board, stockholders, officers or discussed the right of appraisal. Some author say that
other parties to the action there is a right of appraisal that exists in a closed
c) prohibiting or directing any act of the corporation, Corporation.
its board, officers, stockholders or parties party to
the action I pointed out the conditions as to why it is (Atty.
d) requiring the purchase at fair market value of the Rondez’s) position that it should not be considered the
shares of a stockholder, either by the corporation exercise or an exercise of the right of appraisal:
regardless of the existence or availability of
unrestricted retained earnings, or by any other 1) It can be compelled for any reason, the exercise of
stockholder the right of appraisal is specific as to reasons that
e) appointing a provisional director who shall be can be utilized or ground that can be utilized.
impartial neither a stockholder nor a creditor of 2) the purchase at their fair market value in an
ordinary stock Corporation pursuant to the exercise
the corporation, its subsidiaries or affiliates ,and
whose further qualifications, if any may be of the right of appraisal, the value that is paid is the
determined by the corporation value of the shares on the date prior to the date on
f) dissolving the corporation which the vote was taken, which means it can be
g) granting such other relief as the circumstances less than or greater than par or you should value.
may warrant. Under Section 104, there is a limitation that the
payments should not be less than par or issued
NOTE : the petition to resolve a deadlock can be brought value.
by any stockholder, even if there is a contrary provision 3) The exercise of the right of appraisal requires the
in the articles, the bylaws or the agreements. presence of unrestricted retained earnings. Under
Section 104, these one requires that the
If there is something in the articles or the bylaws or the corporation has sufficient assets to cover debts and
agreement that prevent the stockholder from reading liabilities exclusive capital stock. So that is a
this petition that provision will not be followed. And it withdrawal well as a stockholder from a closed
will have to yield to the right granted under Section 103 Corporation.
to any stockholder to bring a written petition to the SEC
to resolve the deadlock. There might be some issues with this provision because
if a corporation is not doing well, and the stockholder
PROVISIONAL DIRECTOR
can see these, he can actually compel the purchase of
shares at their fair market value, and he will be able to
A provisional director shall be an impartial person, recover what he paid by will power or issued value,
neither a stockholder nor creditor of the corporation, even if the value now of his shares are much less than
its subsidiaries or affiliates, and whose further par or issued value.
qualifications are determined by the SEC. He:
A STOCKHOLDER MAY BY WRITTEN PETITION TO THE
a) Is not a receiver and does not have the powers of a SEC COMPEL DISSOLUTION WHEN:
custodian or receiver, he does not have title
b) He has the rights and powers of a duly elected (a) the acts of director, officers or persons in control
director, including the right to notice, vote until are:
removed by the SEC or all stockholders
1) illegal;
c) His compensation is determined by agreement
2) fraudulent;
with the corporation, approved by the SEC, or
3) dishonest;
fixed by agreement
4) oppressive or unfairly prejudicial to the
The petition to resolve a deadlock is initiated by corporation;
written petition by any stockholder notwithstanding 5) corporate assets are being misapplied or
any contrary provision in the article by-laws or wasted.
agreements.

– COMMERCIAL LAW REVIEW –

 78

SPECIAL CORPORATIONS
MODULE 18

they can be incorporated as corporation sole or

2 TYPES OF SPECIAL CORPORATIONS: religious society.
The special corporations provided for by law are
educational and religious corporations. CORPORATION SOLE

– a Corporation Sole is one formed by the archbishop,

EDUCATIONAL CORPORATIONS
bishop, priest, minister, rabbi, or other presiding elder
– Educational corporations are stock or non-stock of a religious denomination sector church for the
corporations organized to provide facilities for teaching purpose of administering and managing as trustee-the
or instruction and are governed by special laws and by affairs, property and temporalities or money revenues
general provisions of the code (Sec. 105, RCC). of such religious denomination, sect, or church (Sec.
108, RCC).
MANAGEMENT OF A STOCK EDUCATIONAL Section 109 requires the articles of incorporation to
CORPORATION provide:
A stock educational corporation shall be governed by
a) that he is the archbishop bishop, priest, minister,
the general provisions on stock corporation
rabbi or presiding elder;
b) rules are not inconsistent with his becoming a
MANAGEMENT OF A NON -STOCK EDUCATIONAL corporation sole nor is it prohibited;
CORPORATION c) that he is charged with the administration of its
Section 106 provides that the board of trustees shall temporalities and the management of its affairs
not be less than 5 nor more than 15 but always in within its territorial jurisdiction;
multiples of 5, so classified so that 1/5 of its members d) the manner vacancies are filled;
shall have terms that expire every year and those e) place where the principal office is located, which
subsequently elected shall serve for a term of five years. must be in the Philippines.
Notwithstanding this provision, its articles and the by-
Once the articles are formulated and prepared, they are
laws may provide otherwise.
to be filed with th Securities and Exchange Commission
and, unlike other corporations, do not need to wait for
VACANCIES
the issuance of a Ccertificate of Incorporation. Section
Any vacancies are only filled up for the unexpired 110 provides that a corporation sole is deemed
portion but if organized as a stock corporation, the incorporated once the verified Articles are submitted to
provisions applicable to stock corporations shall govern. the SEC together with an affidavit of affirmation.
Henceforth, he becomes a corporation sole.
QUORUM
For the conduct of its business, a majority of the board ACQUISITION AND ALIENATION OF PROPERTY:
shall constitute a quorum
Section 111 provides that a corporation sole may
purchase and hold real estate and personal property for
RELIGIOUS CORPORATIONS
its church, charitable, benevolent, or educational
– Religious corporations are corporations incorporated purposes, and may receive bequests or gifts for such
by one or more persons and are classified as either a purposes. Such corporation may sell or mortgage real
corporation sole or religious society and is to be property held by it by obtaining an order for that
governed by this chapter and generally by other purpose from the Regional Trial Court of the province
provisions governing non-stock corporations (Sec. 1907, where the property is situated upon proof that the
RCC). notice of the application for leave to sell or mortgage
has been made through publication or as directed by
PURPOSE : take charge of the temporalities of the the Court, and that it is in the interest of the
church – the revenue or assets of the church corporation that leave to sell or mortgage be granted.
The application for leave to sell or mortgage must be
NOTE: What makes these corporations as special made by petition, duly verified, by the chief archbishop,
corporations is the fact that they are governed by a bishop, priest, minister, rabbi, or presiding elder acting
specfic chapter of the Revised Corporation Code. Insofar as corporation sole, and may be opposed by any
as Educational Corporations, they can be incorporated member of the religious denomination, sect, or
as stock or non-stock. Insofar as religious corporations,

– COMMERCIAL LAW REVIEW –

 79

corporation sole: Provided, That in cases where the RELIGIOUS SOCIETY

rules, regulations and discipline of the religious
denomination, sect or church, religious society, or order – a Religious Society under Section 114 is the same as a
concerned represented by such corporation sole corporation sole as far as purposes are concerned. Their
regulate the method of acquiring, holding, selling, an difference is the manner on which they are
mortgaging real estate and personal property, such incorporated.
rules, regulations and discipline shall govern, and the A religious society is incorporated by 2/3 vote or written
intervention of the courts shall not be necessary. consent of its members, who then file its articles with
the SEC, verified by affidavit of the presiding elder,
VACANCIES
secretary, clerk or member stating that:
Section 112 provides that vacancies can be filled by the
filing with the SEC of his commission or certificate of a) that the society is a religious organization of some
election or proof of assumption. religious denomination, sect or church;
b) that 2/3 of its member have given their written
DISSOLUTION consent or vote to incorporate at a duly convened
meeting of the body;
Section 113 provides that dissolution takes place by the c) that its incorporation is not forbidden by competent
filing with the SEC of a verified declaration of dissolution authority or by is constitution, rules, regulations or
setting forth: discipline of the religious denomination, sect or
a) name; church to which it belongs;
b) reason for dissolution; d) that its purpose is to manage or administer its
c) authorization for dissolution; affairs, properties or estate;
d) name and address of the persons who will e) location of its principal office ,which must be in the
supervise dissolution or winding up of its affairs. Philippines;
f) names, nationalities and residences of the trustees
Upon SEC approval, it ceases to carry on its operations. elected to serve the first year or such other period
as prescribed, which board must not be less than 5
or more than 15.

What is peculiar with a religious society is that the

incoporators would be those who are voting for its
incorporation or has given written consent for its
incorporation, unlike other corporations where there is
a specific requirement as to incoporators.

– COMMERCIAL LAW REVIEW –

 80

ONE-PERSON CORPORATION
MODULE 19

Section 120 requires that it shall indicate the letters

DEFINITION “OPC” either below or at the end of its corporate name.
A one-person corporation as a corporation with a single OPC means one-person corporation for the purpose of
stockholder. Only a natural person, trust, or an estate indicating that it is incorporated as a one-person
may form a one-person corporation. (Section 116) corporation.
This type of corporation was included to encourage, Section 119 provides that it is not required to submit
micro, small and medium enterprises not yet formally and file corporate bylaws.
organized to convert to corporations to avail of
privileges and benefits peculiar to corporations. CORPORATE OFFICERS

WHO OR WHAT CANNOT ORGANIZE AS A ONE - Section 121 provides that the single stockholder shall be
PERSON CORPORATION - the sole director and president of the One Person
Corporation.
Banks and quasi-banks, pre-need, trust, insurance,
public and publicly listed companies, and non-chartered Other officers may be appointed under the Articles of
government-owned and -controlled corporations may Incorporation or subsequent to the submission of the
not incorporate as one-person corporations. AOI or eventual incorporation:

A natural person who is licensed to exercise a Within fifteen (15) days from the issuance of its
profession may not organize as a One Person certificate of incorporation, the One Person Corporation
Corporation for the purpose of exercising such shall appoint a treasurer, corporate secretary, and other
profession except as otherwise provided under special officers as it may deem necessary, and notify the
laws. Commission thereof within five (5) days from
appointment.
APPLICABILITY
TREASURER
As to applicable law, Section 115 provides that the
provisions of the title shall primarily apply to One Under Section 122, a single stockholder who is likewise
Person Corporations. Other provisions of the Code the self-appointed treasurer of the corporation shall
apply suppletorily, except as otherwise provided. give a bond to the Commission in such a sum as may be
required: Provided, That the said stockholder/treasurer
CAPITALIZATION shall undertake in writing to faithfully administer the
One Person Corporation’s funds to be received as
As to capitalization, Section 117 provides that it shall treasurer, and to disburse and invest the same
not be required to have a minimum authorized capital according to the articles of incorporation as approved
stock except as otherwise provided by special law. by the Commission. The bond shall be renewed every
two (2) years or as often as may be required.
INCORPORATION AND BY-LAWS
SECRETARY
Section 118 requires that it shall file articles of
incorporation in accordance with the requirements The single stockholder may not be appointed as the
under Section 14 of this Code. corporate secretary.
It shall likewise substantially contain the following: This is because one of the functions of a corporate
secretary is to give notification to the nominee or the
a) If the single stockholder is a trust or an estate, the alternate nominee in the event of the death or
name, nationality, and residence of the trustee,
incapacity of the single stockholder. SO the corporate
administrator, executor, guardian, conservator, secretary acts as the bridge between the single
custodian, or other person exercising fiduciary stockholder and the nominee/ alternate nominee. He is
duties together with the proof of such authority to the one charged with the duty of notifying the nominee
act on behalf of the trust or estate; and or alternate nominee that the single stockholder has
b) Name, nationality, residence of the nominee and died or is suffering from an incapacity.
alternate nominee, and the extent, coverage and
limitation of the authority.

– COMMERCIAL LAW REVIEW –

 81

Under Section 123, the corporate secretary shall in TO ILLUSTRATE : In case of an incapacity, the director
addition to the functions designated by the corporation shall now sit as a director and manage the affairs of the
shall: corporation until the stockholder, by self-determination,
regains capacity. In this case, the exercise of
a) Be responsible for maintaining the minutes book management powers by the nominee is temporary until
and/or records of the corporation; there is, by self determination, a restoration of the
b) Notify the nominee or alternate nominee of the capacity to assume duties on the part of the single
death or incapacity of the single stockholder, which stockholder
notice shall be given no later than five (5) days from
such occurrence; .In case of death or permanent incapacity of the single
c) Notify the Commission of the death of the single stockholder, the nominee shall sit as director and
stockholder within five (5) days from such manage the affairs of the One Person Corporation until
occurrence and stating in such notice the names, the legal heirs of the single stockholder have been
residence addresses, and contact details of all lawfully determined, and the heirs have designated one
known legal heirs; and of them or have agreed that the estate shall be the
d) Call the nominee or alternate nominee and the single stockholder of the One Person Corporation.
known legal heirs to a meeting and advise the legal
heirs with regard to, among others, the election of a (In this case, the exercise of powers by the nominee will
new director, amendment of the articles of have to go on until a determination of legal heirs and a
incorporation, and other ancillary and/or decision that one of them will be the stockholder or the
consequential matters. estate will be the single stockholder)

NOMINEE ALTERNATE NOMINEE

Section 124 requires the single stockholder to designate The alternate nominee shall sit as director and manage
a nominee and an alternate nominee who shall, in the the One Person Corporation in case of the nominee’s
event of the single stockholder’s death or incapacity, inability, incapacity, death, or refusal to discharge the
take the place of the single stockholder as director and functions as director and manager of the corporation,
shall manage the corporation’s affairs. and only for the same term and under the same
conditions applicable to the nominee. (he will act as
The articles of incorporation shall state the names, such depending on the situation that leads to allowing
residence addresses and contact details of the nominee them to act as such i.e. either temporary incapacity or
and alternate nominee, as well as the extent and death or permanent incapacity)
limitations of their authority in managing the affairs of
the One Person Corporation. MINUTES BOOK

The written consent of the nominee and alternate A one-person corporation is required to maintain a
nominee shall be attached to the application for minutes book, which shall contain all actions, decisions,
incorporation. Such consent may be withdrawn in and resolutions taken by the One Person Corporation.
writing any time before the death or incapacity of the (Section 127)
single stockholder.
When action is needed on any matter, it shall be
NOTE : Section 126 allows the single stockholder may, at sufficient to prepare a written resolution, signed and
any time, change its nominee and alternate nominee by dated by the single stockholder, and recorded in the
submitting to the Commission the names of the new minutes book of the one-person corporation. The date
nominees and their corresponding written consent. For of recording in the minutes book shall be deemed to be
this purpose, the names of the new nominees and their the date of the meeting for all purposes under this
corresponding written consent. For this purpose, the Code. (Section 128)
articles of incorporation need not be amended.
REPORTORIAL RECORDS
Section 125 as to the TERM OF THE NOMINEE AND
ALTERNATE NOMINEE . When the incapacity of the Under Section 129, the one- person corporation
single stockholder is temporary, the nominee shall sit as shall submit the following reportorial records within
director and manage the affairs of the One Person such period as the Commission may prescribe:
Corporation until the stockholder, by self-
determination, regains the capacity to assume such a) ANNUAL FINANCIAL STATEMENTS audited by an
duties. (or until there has been a significant change in independent certified public accountant: Provided,
the affairs of the one person corporation). That if the total assets or total liabilities of the
corporation are less than Six Hundred Thousand
Pesos (P600, 000.00), the financial statements shall

– COMMERCIAL LAW REVIEW –

 82

be certified under oath by the corporation’s To illustrate further –

treasurer and president.
b) A REPORT containing explanations or comments by A OPC is capitalized at 1M and you have a single
the president on every qualification, reservation, or stockholder. The OPC transacts business with a third
adverse remark or disclaimer made by the auditor person and the business conducted with the latter
in the latter’s report; involves 750K. When this 3rd person seeks to enforce
c) A DISCLOSURE OF ALL SELF-DEALINGS AND the liability of this OPC, the single stockholder must be
RELATED PARTY TRANSACTIONS entered into able to prove that it is adequately financed. This means
between the One Person Corporation and the single that at the time the transaction was entered into there
stockholder; and must be a showing that the OPC can sufficiently answer
d) OTHER REPORTS as the Commission may require. for the liability or the contract. Or if not present at that
time means were forthcoming to be able to allow the
NOTE : For purposes of this provision, the fiscal year of a OPC to assume and answer for the probable liability
One Person Corporation shall be that set forth in its under the contract.
articles of incorporation or, in the absence thereof, the
calendar year. Consequently, if there is a showing that it is adequately
financed, then the liability pertains to the OPC only.
The Commission may place the corporation under
delinquent status should the corporation fail to submit For example, at the time the liability is being enforced,
the reportorial requirements three (3) times, the only assets available would be only 500K. So can the
consecutively or intermittently, within a period of five third person enforce the balance of 250K against the
(5) years. single stockholder?

A: If he is able to prove that the OPC is adequately

LIABILITY
financed, then the answer is No. The 3rd person will
A sole shareholder claiming limited liability has the have to bear a loss of 250K.
burden of affirmatively showing that the corporation
If he is unable to prove, then the liability with respect to
was adequately financed. (Section 130)
the 250K is solidary between the OPC and the single
Where the single stockholder cannot prove that the stockholder.
property of the one-person corporation is independent
If the grounds for the piercing the veil are present so it
of the stockholder’s personal property, the stockholder
will now mean that the third person may enforce the
shall be jointly and severally liable for the debts and
liability after trying to enforce the liability of the OPC,
other liabilities of the one-person corporation.
he can then subsequently go after the single
NOTE : Section 130 provides that the principles of stockholder
piercing the corporate veil applies with equal force to
one-person corporations as with other corporations. CONVERSION

So what does this mean? 1. When a single stockholder acquires all the stocks of
an ordinary stock corporation, the latter may apply
Q: Would the doctrine of separate and distinct for conversion into a One Person Corporation,
personality apply likewise to a one person subject to the submission of such documents as the
corporation? Commission may require (Section 131)

A: Yes. If you have a one person corporation and the If the application for conversion is approved, the
single stockholder, the liabilities of the OPC and the Commission shall issue a certificate of filing of
single stockholder are separate and distinct from each amended articles of incorporation reflecting the
other. However, when liability is sought to be enforced, conversion of the ordinary stock corporation to a
the single stockholder must be able to prove that the one person corporation.
OPC is adequately financed. SO that the liability remains
to be the liability of a OPC and will not extend to his Effect: The OPC now assumes all the debts and
individual or personal property. liabilities of the ordinary stock corporation.

If he is unable to prove that it is adequately financed 2. The One Person Corporation converted from an
then the liability incurred bv the OPC will likewise be ordinary stock corporation shall succeed the latter
considered as the liability of the single stockholder and be legally responsible for all the latter’s
because the provision says that he will be jointly and outstanding liabilities as of the date of conversion.
severally liable with the debts of the OPC. The liability in
This is when the situation or circumstances indicate
this case is solidary.
that it is no longer feasible for an OPC to have one
or a single stockholder.

– COMMERCIAL LAW REVIEW –

 83

EXAMPLE : When a single stockholder dies and he has If all requirements have been complied with, the
several heirs and they cannot make a decision that one Commission shall issue a certificate of filing of amended
of them would be a single stockholder or that the estate articles of incorporation reflecting the conversion.
will be the single stockholder.
The ordinary stock corporation converted from a One
If he ahs 7 heirs is no decision can be made, then the Person Corporation shall succeed the latter and be
only option that remains is for it to convert as an legally responsible for all the latter’s outstanding
ordinary corporation. If this is the case, they would have liabilities as of the date of conversion.
to comply for Section 132.
NOTE : In case of death of the single stockholder, the
Under Section 132, a one person corporation may be nominee or alternate nominee shall transfer the shares
converted into an ordinary stock corporation after due to the duly designated legal heir or estate within seven
notice to the Commission of such fact and of the (7) days from receipt of either an affidavit of heirship or
circumstances leading to the conversion, and after self-adjudication executed by a sole heir, or any other
compliance with all other requirements for stock legal document declaring the legal heirs of the single
corporations under this Code and applicable rules. Such stockholder and notify the Commission of the transfer.
notice shall be filed with the Commission within sixty Within sixty (60) days from the transfer of the shares,
(60) days from the occurrence of the circumstances the legal heirs shall notify the Commission of their
leading to the conversion into an ordinary stock decision to either wind up and dissolve the One Person
corporation. Corporation or convert it into an ordinary stock
corporation.

– COMMERCIAL LAW REVIEW –

 84

DISSOLUTION & LIQUIDATION

MODULE 20

d) the date, time and place of the vote, and

DEFINED e) details of the publication.
Dissolution is the extinguishment of its franchise to be a
THE CORPORATION SHALL SUBMIT TO THE SEC:
corporation at the termination of its corporate
existence. a) A copy of the Resolution authorizing dissolution is
then certified by a majority of the Board,
Section 133 provides that a corporation formed under countersigned by the secretary,
the code may be dissolved VOLUNTARILY or b) proof of publication, and
INVOLUNTARILY . c) favorable recommendation from the appropriate
regulatory agency, if necessary, as no application for
Voluntary - upon the initiative of the corporation that it
dissolution by banks, banking and quasi-banking
is being dissolved.
institutions, pre-need, insurance and trust
Involuntary - dissolution is brought about by the companies, non-stock savings and loan associations,
Securities and Exchange Commission; or, upon the filing pawnshops, and other financial intermediaries will
by an interested party of a complaint, subject to the be approved by the SEC without it.
grounds enumerated by law.
Within 15 days from receipt of the verified request for
What is covered is a de jure dissolution, or one that is dissolution, and in the absence of any withdrawal, the
adjudged and determined by judicial sentence, or SEC shall approve the request and issue the certificate
brought about by an act of or with the consent of the of dissolution, which will take effect upon issuance by
state, or which results from the expiration of the period the SEC of a Certificate of Dissolution.
of corporate life, as opposed to a de fact dissolution
So when there are no creditors prejudiced, the approval
that is brought about by cessation of business or
of the dissolution will be through what is known as a
insolvency
CERTIFICATE OF DISSOLUTION.
THE STEPS IN DISSOLUTION ARE:
2. WITH CREDITORS PREJUDICED UNDER SECTION
a) termination of corporate existence as far as the 135
right to go on doing ordinary business
b) winding up of corporate affairs, payment of debt, It is initiated by the filing of a petition with the SEC,
distribution of assets signed by a majority of the Board or other officers
having management, verified by the President,
MANNER OF VOLUNTARY DISSOLUTION - Secretary or one of its directors or trustees.

THE PETITION WILL SET FORTH:

1. WITH NO CREDITORS PREJUDICED UNDER
SECTION 134
a) all claims and demands against it
b) that dissolution was resolved upon the affirmative
It is initiated by a majority vote of the Board and a vote of 2/3 of outstanding capital stock or members
resolution adopted by a majority of outstanding capital at a duly called meeting.
stock or members at a meeting to be held upon call of
the Board after publishing notice of the time, place and IT SHALL ALSO STATE:
object once in a newspaper or general circulation and
a) the reason for dissolution,
notice to a shareholder or member given by registered
b) the form, manner and time notices were given,
mail or delivered personally 20 days prior to the
c) the date, place, and time of the meeting in which
meeting. The notice must specifically state that the
the vote was made.
purpose of the meeting is to vote on dissolution.
Attached will be a copy of the resolution authorizing
A VERIFIED REQUEST FOR DISSOLUTION SHALL BE dissolution, certified by a majority of the board,
FILED WITH THE SEC STATING: countersigned by the secretary, and a list of all
a) the reason for dissolution, creditors.
b) the form, manner and time notice was given,
If the SEC finds the petition to be in proper form, an
c) the names of the stockholders and directors or
order will be reciting the purpose of the petition, fixing
members and trustees who approved the
a deadline for filing objections, which date shall not be
dissolution,

– COMMERCIAL LAW REVIEW –

 85

less than 30 days nor more than 60 days after the entry from the date of the issuance of the certificate of
of the order. Publication will also required once a week dissolution, the finality of the judgment of dissolution,
for 3 weeks and posted in 3 public places. or the expiration of the provided term.

Upon 5 days, given after the date on which the right to WITHDRAWAL OF REQUEST OR PETITION FOR
file objections as fixed in the order has expired, the SEC DISSOLUTION
shall proceed to hear the petition and try any issue
raised in the objections filed, and if no such objection is Section 138 provides that a withdrawal of the request
sufficient, and if all material allegations are true, it shall for dissolution shall be made in writing, duly verified by
render judgment dissolving the corporation and any incorporator, director, trustee, shareholder, or
directing disposition of assets as justice requires, and member and signed by the same number of
may appoint a receiver to collect such assets and pay incorporators, directors, trustees, shareholders, or
the debts of the corporation. members necessary to request for dissolution as set
forth in the foregoing sections.
The dissolution takes effect only upon issuance by the
SEC of a certificate of dissolution. The withdrawal shall be submitted no later than fifteen
(15) DAYS from receipt by the Commission of the
3. AMENDMENT TO SHORTEN THE TERM UNDER request for dissolution. Upon receipt of a withdrawal of
SECTION 136 request for dissolution, the Commission shall withhold
action on the request for dissolution and shall, after
Here it presupposes that there is a stated term, and it is investigation:
the intent of the corporation not to wait until the expiry
of the stated term. So there is now need to amend the a) make a pronouncement that the request for
articles to provide a shortened term. dissolution is deemed withdrawn;
b) direct a joint meeting of the board of directors or
It is initiated by a majority vote of the Board and subject trustees and the stockholders or members for the
to the affirmative vote of 2/3 of the outstanding capital purpose of ascertaining whether to proceed with
stock or members, followed by the submission to the dissolution; or
SEC of the amended articles duly certified by the c) issue such other orders as it may deem appropriate.
secretary and a majority of the Board together with an
affidavit of publication. A withdrawal of the petition for dissolution shall be in
the form of a motion and similar in substance to a
The dissolution takes effect upon expiration of the withdrawal of request for dissolution but shall be
shortened term without further proceedings, subject to verified and filed prior to publication of the order
the provisions of the Code on liquidation. setting the deadline for filing objections to the petition.
In case of expiration of the corporate term, dissolution
INVOLUNTARY DISSOLUTION
shall take effect on the day following the last day of the
corporate terms stated in the articles of incorporation Section 138 provides that involuntary dissolution is
without need for the issuance by the SEC of a certificate undertaken by the SEC motu propio or upon the filing
of dissolution. by any interested party of a verified complaint, on the
following grounds or instances contemplated by law:
Since corporations created under the corporation code
or Revised Corporation code now possess or have an 1) Non-use of corporate charter as provided under
option to have perpetual existence, would this mode of Section 21 of this Code;
voluntary dissolution still be available? - Yes. Because 2) Continuous inoperation of a corporation as
what will happen now is, instead of an amendment to provided under Section 21 of this Code;
shorten the term, they will amend and provide for a 3) Upon receipt of a lawful court order dissolving the
term, and upon expiration of the provided term, the corporation;
corporation will be deemed dissolved. 4) Upon finding by final judgment that the corporation
procured its incorporation through fraud;
The significance here is, if there are no creditors
5) Upon finding by final judgment that the
prejudiced - the certificate of dissolution; If there are
corporation:
creditors prejudiced - the judgment; If it is amendment
a) Was created for the purpose of committing,
to shorten the term, then expiration. So those are the
concealing or aiding the commission of
material periods or dates when the corporation is
securities violations, smuggling, tax evasion,
deemed to be dissolved.
money laundering, or graft and corrupt
So when it is now considered as having been dissolved, practices;
then that means it should cease the conduct of its b) Committed or aided in the commission of
regular business; and, it should now transition to securities violations, smuggling, tax evasion,
liquidation; and, the three year period is to be counted

– COMMERCIAL LAW REVIEW –

 86

money laundering, or graft and corrupt BAR Q: How may a corporation, continue the process
practices, and its stockholders knew; and of liquidation beyond the three year period of
c) Repeatedly and knowingly tolerated the liquidation?
commission of graft and corrupt practices or
other fraudulent or illegal acts by its directors, The answer to that would be: The appointment of
trustees, officers, or employees. Trustees, or receivers, who may continue to act for the
benefit of stockholders members and creditors and
If the corporation is ordered dissolved by final judgment other persons in interest, even beyond the three year
pursuant to the grounds set forth paragraph (5) above, period.
its assets, after payment of its liabilities, shall, upon
petition of the Commission with the appropriate court, Section 139 provides that except for banks, which shall
be forfeited in favor of the national government. be covered by the applicable provisions of Republic Act
No. 7653, otherwise known as the “New Central Bank
Such forfeiture shall be without prejudice to the rights Act”, as amended, and Republic Act No. 3591, otherwise
of innocent stockholders and employees for services known as the Philippine Deposit Insurance Corporation
rendered, and to the application of other penalty or Charter, as amended, every corporation whose charter
sanction under this Code or other laws. expires pursuant to its articles of incorporation, is
annulled by forfeiture, or whose corporate existence is
The SEC shall give reasonable notice to, and coordinate terminated in any other manner, shall nevertheless
with, the appropriate regulatory agency prior to the remain as a body corporate for three (3) years after the
involuntary dissolution of companies under their special effective date of dissolution, for the purpose of
regulatory jurisdiction. prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, dispose of and
As a general rule, a shareholder cannot sue to demand
convey its property, and distribute its assets, but not for
dissolution unless they are unable to obtain redress and
the purpose of continuing the business for which it was
protection for their rights or violations to require the
established.
filing of quo warranto proceedings. Note though the
Code now recognizes the right of a stockholder by the At any time during said three (3) years, the corporation
use of the term “interested party.” is authorized and empowered to convey all of its
property to trustees for the benefit of stockholders,
EFFECTS OF DISSOLUTION- members, creditors and other persons in interest. After
any such conveyance by the corporation of its property
THE EFFECTS OF DISSOLUTION ARE: in trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which the
a) legal title to corporate property is vested in
corporation had in the property terminates, the legal
shareholders
interest vests in the trustees, and the beneficial interest
b) corporation ceases as a body politic to continue the
in the stockholders, members, creditors or other
business for which it was organized
persons-in-interest.
c) it cannot be revived
d) dissolution does not by itself imply the diminution Except as otherwise provided for in Sections 93 and 94
or extinguishment of rights of this Code, upon the winding up of corporate affairs,
e) upon expiration of the winding up period of 3 years, any asset distributable to any creditor or stockholder or
the corporation ceases, it can no longer sue or be member who is unknown or cannot be found shall be
sued. escheated in favor of the national government.

LIQUIDATION- Except by decrease of capital stock and as otherwise

allowed by this Code, no corporation shall distribute any
This is the 2nd phase of dissolution. of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities.
It is the process of converting the assets into cash and
being debts and liabilities, and eventually distributing
DISTRIBUTION OF ASSETS-
the surplus or apportioning loss.
The preference will apply only if assets are insufficient
WHO CAN UNDERTAKE THE PROCESS OF LIQUIDATION?
to pay the claims.
This can be undertaken by the Corporation itself, or in
the alternative. They can have trustees who will now IT IS AS FOLLOWS:
undertake the process of liquidation, which includes a) creditors
receivers. b) shareholders, members, directors, officers who are
also creditors
c) shareholders in proportion to shareholdings in the
absence of a contrary provision.

– COMMERCIAL LAW REVIEW –

 87

If the shares are divided into classes, preferred THE EXCEPTIONS ARE:
shareholders before common shareholders.
a) Decrease of capital stock under Section 37
Shareholders may get more than the fair market value. b) Redeemable shares under Section 8
If assets are just enough, they get the par value or c) Treasury shares under Section 9
issued value, or less if the assets are insufficient. d) Acquisition by the corporation of its own shares
under Section 40
If creditors or shareholders cannot be found, the assets e) Dividends under Section 42
will be escheated in favor of the municipality or city f) Deadlocks under Section 103
where the assets are found. g) Withdrawal under Section 104
Note that assets can only be distributed upon lawful In a non-stock corporation, the rules and plan of
dissolution and payments of debts/liabilities. distribution as required by Sections 93 and 94 must be
followed.

– COMMERCIAL LAW REVIEW –

 88

FOREIGN CORPORATIONS
MODULE 21

corporation has issued, itemized by class,

DEFINED par value, shares without par value, and
Section 140 defines a foreign corporation as one series, if any,
formed or organized or existing under any laws 9) statement of amount actually paid in
other than the Philippines whose laws allow Filipino 10) such other information that may be necessary
citizens and corporations to do business in its own or appropriate to determine whether
country or state. corporation is entitled to a license to
transact business, and to determine and
These corporations can transact business after it has assess the fees payable.
obtained a license and a certificate of authority from
the appropriate government agency. ATTACHED TO THE APPLICATION ARE:
a) Certificate under oath of the officials of the
Section 141 provides that corporations already doing
jurisdiction of its incorporation attesting that its
business in the Philippines with licenses shall continue
laws allow Filipino citizens and corporations to do
to have such authority under the terms of its license
business thereon and that the applicant is an
subject to the provisions of the Code and other special
existing corporation and in good standing, which
laws.
if in a foreign language, should be accompanied
by an English translation under oath by the
PROCEDURE IN THE APPLICATION FOR A
translator,
LICENSE b) Statement under oath by the president or
authorized officer showing to the satisfaction of
SECTION 142 PROVIDES THAT THE FOREIGN the SEC that it is solvent and in sound financial
CORPORATION MUST SUBMIT TO THE SEC THE condition: setting forth its assets and liabilities as of
FOLLOWING DOCUMENTS: a date not exceeding 1 year prior to the filing of its
application.
a) Articles and By-laws, certified in accordance with
law and translated to an official language if Foreign banking, financial and insurance corporations
necessary shall also comply with existing laws applicable to
b) Application containing: them. In case of other foreign corporations, no
1) date and term of incorporation application for a license shall be accepted by the SEC
2) address, including the street number of the without previous authority from an appropriate
principal office of the corporation in the government agency, whenever, required by law.
country or state of incorporation
3) name and address of a resident agent RESIDENT AGENT
authorized to accept summons and process in
all legal proceedings and pending Section 144 provides that the resident agent can
establishment of the office, all notices be an individual or a corporation who is a resident
affecting the corporation of and is transacting business in the Philippines. If an
4) place in the Philippines where it intends to individual, he must be of good moral character and
operate of sound financial standing.
5) the purpose/s which it intends to pursue in
transacting business ,which should be stated If a domestic corporation, it must be of sound
in the certificate of authority issued by financial standing and must show proof that it is in
the appropriate government agency good standing to the SEC.
6) name and address of present directors and
Section 145 provides that as a condition to the
officers of the corporation
issuance of the license for a foreign corporation to
7) statement of authorized capital stock and
transact business in the Philippines, such
the aggregate number of shares that the
corporation shall file with the SEC a written power
corporation has authority to issue, itemized
of attorney designating a person who must be a
by class, par value of shares, shares without
resident of the Philippines, on whom summons and
par value, and series, if any issued duly
other legal processes may be served in all actions or
itemized
other legal proceedings against such corporation,
8) statement of outstanding capital stock and
and consenting that service upon such resident
the aggregate number of shares which the
agent shall be admitted and held as valid as if

– COMMERCIAL LAW REVIEW –

 89

served upon the duly authorized officers of the That within six (6) months after each fiscal year of
foreign corporation at its home office. Such foreign the licensee, the SEC shall require the licensee to
corporation shall likewise execute and file with the deposit additional securities or financial instruments
SEC an agreement or stipulation, executed by the equivalent in actual market value to two percent
proper authorities of said corporation, in form and (2%) of the amount by which the licensee’s gross
substance required by law. income for that fiscal year exceeds Ten million
pesos (P10,000,000.00). The SEC shall also require the
Whenever such service of summons or other deposit of additional securities or financial instruments
process is made upon the SEC, the SEC shall, within if the actual market value of the deposited securities or
ten (10) days thereafter, transmit by mail a copy of financial instruments has decreased by at least ten
such summons or other legal process to the corporation percent (10%) of their actual market value at the time
at its home or principal office. The sending of such they were deposited.
copy by the SEC shall be a necessary part of and
shall complete such service. All expenses incurred by The SEC may, at its discretion, release part of the
the SEC for such service shall be paid in advance by the additional deposit if the gross income of the licensee
party at whose instance the service is made. has decreased, or if the actual market value of the
total deposit has increased, by more than ten
It shall be the duty of the resident agent to immediately percent (10%) of their actual market value at the
notify the SEC in writing of any change in the resident time they were deposited. The SEC may, from time to
agent’s address. time, allow the licensee to make substitute deposits
for those already on deposit as long as the licensee
WHEN THE LICENSE IS ISSUED is solvent. Such licensee shall be entitled to collect
the interest or dividends on such deposits. In the event
Section 143 provides that if the SEC is satisfied that
the licensee ceases to do business in the Philippines, its
the applicant has complied with all the
deposits shall be returned, upon the licensee’s
requirements of this Code and other special
application and upon proof to the satisfaction of the
laws, rules and regulations, the SEC shall issue a
SEC that the licensee has no liability to Philippine
license to transact business in the Philippines to the
residents, including the Government of the
applicant for the purpose or purposes specified
Republic of the Philippines. For purposes of
in such license. Upon issuance of the license, such
computing the securities deposit, the composition of
foreign corporation may commence to transact
gross income and allowable deductions therefrom
business in the Philippines and continue to do so
shall be in accordance with the rules of the SEC.
for as long as it retains its authority to act as a
corporation under the laws of the country or State The corporation shall then transact business only for the
of its incorporation, unless such license is sooner purpose/s for which it was granted a license.
surrendered, revoked, suspended, or annulled in
accordance with this Code or other special laws. APPLICABLE LAW

AFTER THE LICENSE HAS BEEN ISSUED Section 146 provides that a foreign corporation
lawfully doing business in the Philippines shall be
Within sixty (60) days after the issuance of the license to bound by all laws, rules and regulations applicable
transact business in the Philippines, the licensee, except to domestic corporations of the same class, except
foreign banking or insurance corporations, shall deposit those which provide for the creation, formation,
with the Commission for the benefit of present and organization or dissolution of corporations or those
future creditors of the licensee in the Philippines, which fix the relations, liabilities, responsibilities, or
securities satisfactory to the SEC, consisting of bonds duties of stockholders, members, or officers of
or other evidence of indebtedness of the corporations to each other or to the corporation.
Government of the Philippines, its political
subdivisions and instrumentalities, or of government- AMENDMENTS OF THE ARTICLES OR BY -LAWS-
owned or -controlled corporations and entities,
shares of stock or debt securities that are registered Section 147 provides that amendments are to be
under Republic Act No. 8799, otherwise known as governed by the laws of the country of
“The Securities Regulation Code”, shares of stock in incorporation but it must within 60 days after the
domestic corporations listed in the stock exchange, effectivity of the amendment file with the SEC
shares of stock in domestic insurance companies and appropriate government agency, a duly
and banks, any financial instrument determined authenticated copy of the Articles or By-Laws clearly
suitable by the SEC, or any combination thereof with underscoring the changes, duly certified by the
an actual market value of at least Five hundred authorized official of the state of incorporation but the
thousand pesos (P500,000.00) or such other amount filing thereof shall not of itself enlarge or alter
that may be set by the SEC:

– COMMERCIAL LAW REVIEW –

 90

the purpose for which foreign corporations was c) Fails, after change of a resident agent or his
granted a license. address, to submit to the SEC a statement of
such change
Section148 provides that if so enlarged or amended d) Fails to submit an authenticated copy of any
it must obtain an amended licensed or if it changes its amendment of its Articles/By-Laws or any
corporate name by submitting an application with the articles of merger or consolidation within the
SEC favorably enclosed by the appropriate regulating time prescribed
agency. e) Misrepresentation of any material matter in the
application, report, affidavit or other document
MERGERS AND CONSOLIDATIONS submitted pursuant to the required documents
f) Failure to pay any and all taxes, imposts,
Under Section 149, if the foreign corporation
assessments, penalties
merges or consolidates with a domestic corporation,
g) Transacting business outside the purpose/s for
it will be allowed if such is permitted by Philippines laws
which it was issued a license
and laws of the state of incorporation, provided it
h) Transacting business in the Philippines as an
complies with the laws of the Philippines on merger or
agent of or acting in behalf of a foreign corporation
consolidation
or entity not duly licensed in the Philippines
If it merges or consolidates with another i) Any other ground that would render it unfit to
corporation in the country or state of incorporation, transact business.
it shall file a duly certified copy of the articles of
Section 152 provides that upon a revocation, the
merger or consolidation with the SEC and
SEC shall issue a certificate of revocation furnishing
appropriate regulating agency within 60 days from its
the appropriate government agency and it shall also
date of effectivity.
mail to the corporation at its registered office in the
Provided, that if the absorbed corporation is the Philippines a notice of revocation with a corresponding
foreign corporation, the corporation must file a certificate of revocation.
petition to withdraw its license because it is in
effect dissolved. TRANSACTION OF BUSINESS-

Upon the grant of a license, a foreign corporation can

WITHDRAWAL-
now transact business.
Under Section 153, subject to existing laws and
Under Section 150, if it is without a license, it can still
regulations, it may file a petition for withdrawal of the
transact business but the difference is that if it is
license but no certificate of withdrawal can be
transacting business with a license it is permitted to
granted if the following requirements are not met:
maintain or intervene in any action suit or
1. All claims that have accrued in the proceeding in any court or administrative agency
Philippines have been paid, compromised or with the Philippines, otherwise it, or its successors
settled or assigns will not permitted to maintain or
intervene in any action, suit or proceeding in any
2. All taxes, imposts, assessments, penalties, if court or administrative agency of the Philippines but
any, lawfully due the Philippine Government, may be proceeded against before Philippine courts on
any of its agencies or political subdivisions have any valid cause of action.
been paid
THE PRINCIPLES GOVERNING A FOREIGN
3. The petition for withdrawal has been CORPORATION’S RIGHT TO SUE ARE:
published in a newspaper of general
circulation in the Philippines once a week for 3 a) if it does business without a license, it cannot
consecutive weeks. sue before Philippine courts
b) if it is not doing business, it needs no license to
HOW IS A REVOCATION SUSPENSION OR sue before Philippine courts on an isolated business
ANNULMENT EFFECTED transaction or on a cause of action entirely
independent of any business transaction
Under Section 152,without prejudice to the other c) if it does business with the required license, it
grounds, a suspension or revocation of the license can sue before Philippine courts on any
may arise when the foreign corporation: transaction
d) (d) if it does business without a license, a
a) Fails to pay fees or file annual reports Philippine national who has contracted with
b) Fails to appoint and maintain a resident agent it might be estopped from challenging the
foreign corporation’s personality in a suit before
Philippine courts.

– COMMERCIAL LAW REVIEW –

 91

Based on the governing principles, there is a need to Philippines to which a patent has been granted or
define transacting business- assigned under the Intellectual Property Code may
bring an action for infringement of patent whether
The simplest way of defining it is to take a look at the or not it is licensed to do business in the Philippines
character of the act of the foreign corporation. The under existing law.
question is: Is it of such a character as to
distinctly indicate a purpose to do other business in However, it is indispensable under both Section 160 and
the state or the performance of act/s for which it 77 that the right of the foreign national or juridical
was created? person to file a case is conditioned on the
satisfaction of the reciprocity rule under Section 3
TRANSACTING BUSINESS CAN BE INFERRED FROM: of the Intellectual Property Code. Section 3 provides
a) continuous business acts or transactions that any person who is a national or who is domiciled or
b) isolated transaction or business act if an inference has a real and effective industrial establishment in a
can be drawn or of such a character as distinctly to country which is a party to any convention, treaty or
indicate a purpose or the part of the foreign agreement relating to intellectual property rights or
corporations to do business and to make the the repression of unfair competition, to which the
state the base of its operations for the conduct Philippines is also a party, or extends reciprocal
of its ordinary business. rights to nationals of the Philippines by law, shall
be entitled to benefits to the extent necessary to
EXCEPTIONS give effect to any provision of such convention,
treaty or reciprocal law, in addition to the rights which
1.When the foreign corporation is suing to seek any owner of an intellectual property right is
redress for an isolated business transaction, which otherwise entitled by the Intellectual Property Code.
is a transaction or a series of transactions set
apart from the common business of a foreign In addition, under the “reverse reciprocity rule”
enterprise in the sense that there is no intention to under Section 231 of the Intellectual Property Code,
engage in the progressive pursuit of the “any condition, restriction, limitation, diminution,
object/purpose of the business organization. This is requirement, penalty or any similar burden imposed
an exception as it is not the intention of the law to by the law of a foreign country on a Philippine
favor a domestic corporation who later on National seeking protection of intellectual property
repudiate obligations on account of the foreign rights in that country shall reciprocally be enforceable
corporation’s lack of a license. upon the nationals of said country, with Philippine
jurisdiction.”
THE REQUISITES FOR ITS APPLICATION ARE:
3. The foreign corporation is suing to enforce a
a) It must disclose that it is not doing business in right not arising out of business transaction with a
the Philippines and is suing under the Isolated party in the Philippines.
Business Transaction Rule
b) It must prove its juridical personality as a 4. To hold it liable for acts and omissions.
foreign corporation Conversely, if a foreign corporation is allowed to
c) It must name its duly authorized representatives or sue without a license, it may also be sued in the
resident agent. Philippines for acts done to persons in the
Philippines. It means that it cannot avoid suit due to
2.The foreign corporation is suing to protect its the lack of a license. A foreign corporation shall not be
name reputation and goodwill. If the foreign allowed to impugn jurisdiction due to the lack of a
corporations are well known through products license.
bearing its corporate and trade names, it has a legal
right to maintain an action and it is also allowed by That notwithstanding, the Supreme Court has ruled:
treaties to which the Philippines is a party to.
In Home Insurance Company v. Eastern Shipping (L-
Section 160 of Republic Act No. 8293 otherwise 34382, July 1983) that the contract that is entered
known as the Intellectual Property Code provides into is not void ab initio. Thus, when a foreign
that any foreign national or juridical person who corporation, which is doing business without, a
does not engage in business in the Philippines may license, contracts with a third party, any defect will
bring a civil or administrative action for opposition, subsequently be cured if it obtains a license to
cancellation, infringement, unfair competition, or transact business.
false designation of origin and false description,
In Merrill Lynch Futures v. CA (211 SCRA 824) If a foreign
whether or not it is licensed to do business in the
corporation is doing business in the Philippines
Philippines. Similarly, Section 77 of the Intellectual
without a license, the move of the defendant to
Property Code provides that any foreign national or
dismiss the complaint that the foreign corporation filed
juridical entity and not engaged in business in the

– COMMERCIAL LAW REVIEW –

 92

might still be neutralized by invoking the doctrine of

estoppel. The principle will be applied to prevent a
person contracting with a foreign corporation from later
taking advantage of its noncompliance with the statues,
chiefly in cases where such person has received the
benefits of the contract.

In Top-Weld Manufacturing v. ECED SA the in pari

delicto rule was adopted holding that no remedy
could be afforded to the parties because of
their presumptive knowledge that the transaction
was tainted with illegality. The Court said that
equity could not lend its aid to the enforcement of
an alleged right claimed by virtue of an agreement
entered into in contravention of law.

– COMMERCIAL LAW REVIEW –

 93

INSURANCE PRELIMINARIES
MODULE 22

THE LAW ON INSURANCE CONCEPT OF INSURANCE

 The concept is that the premiums that are paid are

THE LAWS GOVERNING INSURANCE IN THE ORDER OF accumulated in a pool from which payment of
PRIORITY ARE: claims are to be obtained.
1) The Insurance Code of 1978 which has its origins  It is assumed that the people contributing
from PD 612, as amended by PD 1141, 1280, 1455, premiums are in excess of those making claims
1460, 1814 and 1981. Subsequently by Batas resulting in a larger pool of money than the
Pambansa Blg. 874 and lately by RA No. 10607 amounts being claimed
2) In absence of applicable provisions, the Civil Code - There is an assumption that the premium is
3) In the absence of applicable provisions in the greater than the claims that is why insurance
Insurance Code and Civil Code, the general companies are in business.
principles on the subject in the United States. - When they accept premiums which they will put
in a pool and which they are going to invest to
Q: HOW DOES IT APPLY?
generate some profits, the totality of what is in
A: The hierarchy would be: the pool will always be greater than what is in the
claim.
1. If the situation that needs to be addressed can be
addressed by the insurance code, then that is the Q: WHY ARE THE INSURERS ABIDING BY THIS CONCEPT?
applicable law.
2. It is only when the insurance code is deficient, then A: They are abiding by this concept because they are
relying on natural instinct of self-preservation.
the civil code will come into application.
3. In the absence of either provisions of the Insurance
BASIS OF THE ASSUMPTION
Code and Civil Code, the general principles on
insurance in the United States.  The basis for the assumption is an actuarial analysis.
HOW INSURANCE WORKS  An actuarial analysis is an essential task performed
by insurance companies to analyze data and
 “LIFE IS A RISK ”. There are risks everywhere. Some estimate the probability of an insurance claim being
we can live with, but most we cannot. filed for a given event. This work allows insurance
 Insurance is the means by which one seeks to be companies to predict with a reasonable degree of
covered against the consequences of an event that accuracy the amount of claims they will pay out,
may cause loss or damage. It does not prevent the which helps them determine what premiums they
event from happening! must charge to remain profitable.
 When insurance is purchased, one hopes that he
never has to use it.
INSURANCE IS A RISK DISTRIBUTING DEVICE (BARQ)
PURE AND SPECULATIVE RISKS  Insurance is a risk distributing device because when
the insurer assumes the risk, it is distributing
 The risks that may be insured against are what are potential liability, in part, among others.
known as pure risks as opposed to speculative risks.
 It is not risk shifting because the entirety of risk of
 A pure risk is whether a person will suffer or will not loss is not shifted to another.
suffer a loss from the occurrence of an event.
- The consequence of the happening of this risk is - The basis for the assumption of risk by the insurer
really going to be a loss or damage from the is based on the fact that when he actually
occurrence. assumes the risk, he is really distributing the
- This can be the subject of insurance. liability in part to all those who are exposed to the
- Example: Fire is a risk. The inevitable consequence same kind of risk.
would either be loss, damage or liability. - Example: Property Insurance against fire – Insurer
 A speculative risk is whether a person will profit or issues fire insurance policies, he will put all the
suffer a loss from the occurrence of an event. premiums of all the insured who secured fire
- Example: Lottery or Gambling – there is a risk insurance policy in a pool of money from where
because may gain or loss something. the claims are going to be paid. Since he has done
- This is not subject of insurance.

– COMMERCIAL LAW REVIEW –

 94

actuarial analysis, he knows that the claims will Why is an insurance contract an ALEATORY
going to be less than in the pool of premiums. CONTRACT ?
- While he has assumed the risk, the assumption of  By an aleatory contract, one of the parties or both
the risk was to distribute it to among all those reciprocally bind themselves to give or to do
who are exposed to the same kind of risk. That is something in consideration of what the other shall
why Insurance is a risk distributing device. give or do upon the happening of an event which is
uncertain, or which is to occur at an indeterminate
THE ELEMENTS OF INSURANCE time.
1) The insured should possess “insurable interest”. Why is an insurance contract a CONTRACT OF
2) The insured is subject to risk of loss through the INDEMNITY ?
destruction or impairment of that interest by the
happening of the designated risks.  It is a contract of indemnity if it is a non-life
3) The insurer assumes the risk of loss insurance contract because recovery must always
4) Such assumption is part of a general scheme to be commensurate to the loss.
distribute actual loss among a large group of
persons bearing somewhat similar risks  It is an investment or a contract to pay a sum
5) As a consideration for the insurer’s promise, the certain in money upon death if it is a life insurance
insured makes a ratable contribution called a contract as it is secured by the insured as a measure
premium to the general insurance fund. of economic security for himself during his lifetime
and for his beneficiary upon his death.
INSURABLE INTEREST
 An exception is when it is secured by the creditor on
 It is an interest in life, health or property of some the life of the debtor.
kind, that is susceptible of pecuniary estimation.
Why is an insurance contract a PERSONAL CONTRACT ?
 Generally a person has insurable interest in the
subject matter insured when: He has such a relation  It is a personal contract as an insurer contracts with
or connection with, or concern in, such subject reference to the character of the insured and vice
matter that he will derive pecuniary benefit or versa.
advantage from its preservation or will suffer
 It might be willing to make good the loss of a person
pecuniary loss or damage from its destruction,
by the destruction of his property, while it would
termination, or injury by the happening of the event
altogether be unwilling to insure the same property
insured against.
if owned by another.
WHY IS INSURABLE INTEREST REQUIRED IN AN  On the other hand, the insurance taken by one
INSURANCE CONTRACT? person will not apply to the interest of another
 It is necessary because its absence renders the person in the same property.
contract of insurance void.
 This is based on the principle that insurance is a - Contract of indemnity means recovery must be
contract of indemnity. If the insured has no interest, commensurate to the loss but this applies to
he will not stand to suffer loss or injury by the property insurance.
happening of the event insured against. - Life insurance is not a Contract of indemnity. It is
an investment because it is for the purpose of
- Insured must have a relation or connection with securing the insured as a measure of economic
the subject matter of the insurance. security for his lifetime and for his beneficiary
- The relationship is one that will derive pecuniary after his death.
benefit if the subject matter continues to be - EXCEPTION: when it is procured by the creditor
preserved or will cause the injured pecuniary loss over the life of the debtor – it becomes capable
if the subject matter is going to be destroyed, of pecuniary estimation because the interest of
terminated or injured by the happening of the the creditor is only up to the extent of the credit.
event that is insured against. This becomes contract of indemnity.
- Without insurable interest, the contract is void. - Insurance taken by one person does not
necessarily apply to the interest to another
person to another property. Example: Interest of
a lessor vs. Interest of the Lessee

– COMMERCIAL LAW REVIEW –

 95

When is an insurance contract an EXECUTORY or Why is an insurance contract a CONTRACT OF PERFECT

EXECUTED CONTRACT ? GOOD FAITH ?

 On the part of the insurer, it is executory and  It is a contract of perfect good faith for both insurer
conditional because upon the happening of the and insured as they are obligated to perform their
event insured against, the conditions having been respective obligations in good faith, avoiding any
met, it has the obligation to execute the contract by concealment or misrepresentations.
paying the insured.
 It is more pronounced insofar as the insurer due to
 On the part of the insured, it is an executed contract its dominant bargaining position.
after the payment of the premium.

- This will be qualified if he has certain warranties

or representations that he needs to comply with
which are promissory in character.

– COMMERCIAL LAW REVIEW –

 96

MARINE INSURANCE
MODULE 23

MARINE INSURANCE the sea (b) ordinary wear and tear of the ship (c) the
negligent failure of the ship owner to provide the
 Marine insurance is really transportation insurance. vessel with the proper equipment to convey the
cargo under ordinary conditions.
IT HAS TWO GENERAL KINDS:
 Marine insurance as we know it, will only cover
a) Ocean Marine Insurance pertaining primarily to sea losses or damage arising from perils of the sea and
perils of ships and cargoes, and they will not cover losses or damages arising from
b) Inland Marine Insurance pertaining primarily to land perils of the ship.
or over land, but sometimes water transportation
perils of property shipped by railroads, motor  Now this is important because when you are going
trucks, airplanes and other means of transportation. to be asked on whether the loss is covered or not,
the two things that you need to look at would be,
MARINE INSURANCE POLICIES first, was it caused or is it attributable to the perils
of the sea or second, is it a risk that is contemplated
INCLUDE FOUR BASIC POLICIES: by the policy. So first is a determination of whether
is it a peril of the sea or of the ship and second, take
1. PROPERTY IN TRANSIT - providing protection to
a look at the contract.
property frequently exposed to loss while in
transport from one place to another  Another distinction that we need to take a look at is
2. BAILEE LIABILITY - providing protection to persons determining whether it is a peril of the sea or peril
who have temporary custody of goods or personal of the ship, to some degree does not have anything
property of others to do with the actual condition of the vessel. It’s
3. FIXED TRANSPORTATION PROPERTY INSURANCE - more of the circumstances that attend to the use or
providing protection to fixed property considered utilization of the vessel.
aids to the movement of property, like bridges and
tunnels, and o For example, if you are simply navigating a river,
4. FLOATER INSURANCE - providing protection to and you will force a brand new large vessel to
personal property, such as precious stones, jewelry, navigate the river and it is not equipped to
works of art, wherever it may be located subject navigate the river, and loss or damage occurs
always to the territorial limits of the contract and then that would be a peril of the ship not of the
need not necessarily be in the course of sea because the circumstance that attend the
transportation. use of the vessel really would make the vessel
inappropriate for navigation. On the other hand,
 Basically, marine insurance generally covers all if we are talking of a smaller vessel not new, old
kinds of transportation insurance. But for our and even rusted, but if appropriate for
discussion, we will only be concentrating on what is navigating the river then if that vessel will
known as ocean marine insurance. eventually capsized because of something
inevitable or something that could not be
PERILS OF THE SEA AND OF THE SHIP foreseen, then that would be a peril of the sea
regardless of the actual condition of the vessel.
WHAT IS MEANT BY PERILS OF THE SEA? BY PERILS OF So the point here is you have to make a
THE SHIP? determination based on the attendant
circumstances.
In ocean marine insurance, we need to make a
distinction on what is meant by perils of the sea and a WHO HAS INSURABLE INTEREST
peril of the ship:

o PERILS OF THE SEA refers to all kinds of marine WHO HAS INSURABLE INTEREST IN MARINE
casualties and damages done to the ship or goods at INSURANCE?
sea by the violent action of the winds or waves, one
 First, the owner of the vessel has insurable interest.
that could not be foreseen and is not attributable to
So if you have the vessel, the owner in his capacity
the fault of anybody.
as such has insurable interest in the vessel. The
o PERILS OF THE SHIP are losses or damages that owner of a vessel has insurable interest in the
result from (a) the natural and inevitable action of vessel, and such shall continue even if the vessel

– COMMERCIAL LAW REVIEW –

 97

has been chartered by one who covenants to pay  The owner of the cargo also has insurable interest,
the owner the value of the vessel upon loss but in and his interest extends to the value of the cargo
case of loss, the insurer is liable only for the part of and also the expected profit that he will realized
the loss which the insured cannot recover from the from the sale of the cargo.
from the charterer.
o For example A has a cargo that is shipped in the
 When there is charter, the owner of the vessel vessel owned by B. A is expected to pay B 10k
remains to have insurable interest in the vessel but for carriage. So when we now talk of insurable
the extent of his insurable interest in the vessel will interest, B, the owner of the vessel, has
be affected or may be affected by a provision in the insurable interest in the 10k that he is expecting
charter contract that indicates that the charterer to be paid by A. A has insurable interest in the
will pay the owner of the vessel an amount in case value of his cargo, let’s say worth 100k and in
of loss. addition has insurable interest in the expected
profit on the cargo. At the point of destination
o For example, the vessel in insured 1M by the he will sell the 100k worth of cargo for 120k,
owner and the charterer now will say in the thereby realizing a profit of 20k, he has
contract that in case of the loss of the vessel, he insurable interest in the 20k expected profit.
will pay the owner 800k. So what happens in the
insurable interest of the owner in the vessel? The CONCEALMENT
owner still have insurable interest in the vessel
up to 1M but since the charter provides that the  Concealment is a neglect to communicate what one
charterer will pay him 800k in case of loss, then knows and ought to communicate because it is a
the owner collects from the charterer first and material fact. Material in the sense that it will be
how does this affect his insurable interest in the determinative whether the risk will be accepted and
vessel? His insurable interest in the vessel now likewise determinative of the extent of premium
will only allow him to collect 200k which is the that is going to be paid.
difference of what he collected from the
charterer and what is the extent of his interest in  The rules in concealment as it is applied in other
the vessel as the owner. So in the end, he is still kinds of insurance also applies to marine insurance.
getting his 1M. However, there is a limitation insofar as marine
insurance is concerned because there are certain
 The same is true when it is hypothecated by a loan facts even if concealed will not vitiate the contract.
on bottomry, the insurable interest of the owner is In other words, it will not lead to a rescission of the
not affected but if it is secured by a loan on contract but it will exonerate the insurer. Referring
bottomry by the same figure, the loan on bottomry to facts involving the:
is 800k the vessel is lost, he no longer has to pay
800 to the creditor but he can still claim the balance a) the national character of the insured
of 200k from the insurer because that is the extent b) the liability of the thing insured to capture and
of his interest on the vessel if it is secured by a loan detention
on bottomry. The insurable interest of the owner of c) the liability to seizure from breach of foreign
a ship hypothecated by bottomry is only the excess laws of trade (d) the want of the necessary
of its value over the amount secured by bottomry. documents
d) the use of false/simulated documents.
 Finally, the owner has insurable interest in the
freightage or the amount it would earn or that can  These are 5 facts that even if concealed will not
be earned from the carriage of its own goods or cause a rescission, it would now mean that the
that of the other. So if there is freightage or there is insurer is simply exonerated. In ordinary insurance,
a contract to carry goods, then the owner of the any concealment of a material fact results in a
vessel has insurable interest on his expected income rescission, that is true in marine insurance also
from the carriage of goods. except that if what is concealed is any of the 5, the
insurer is exonerated. In other words, if loss or
PARTIES WITH INSURABLE INTEREST damage occurs, the insurer does not pay. However
if loss or damage occurs on account of a peril of the
sea, the insurer will still pay. Unlike in other kinds of
WHO ARE THE OTHER PARTIES WHO MAY HAVE
insurance, as long as there is concealment there is
INSURABLE INTEREST?
no ifs or buts about it that it entitles the insurer to
 The charterer has insurable interest in marine rescind. In marine insurance, that if what is
insurance to the extent that he would be liable or concealed is any of the 5, the insurer is exonerated
damnified by the loss of the vessel chartered. or does not pay.

– COMMERCIAL LAW REVIEW –

 98

 The other difference is concealment in other forms IMPLIED WARRANTIES

of insurance requires you to know the fact
concealed because the definition of concealment is  In every contract of marine insurance upon a ship or
the neglect to communicate what one knows and freight, freightage or upon anything which is the
ought to communicated. That is why you cannot be subject of marine insurance, there are implied
held liable for concealment if you are not aware of warranties:
the material fact. Example, if the insured was not
aware of any ailment that he is suffering from, he a) that the ship is seaworthy;
cannot be held liable for concealment if eventually b) It shall carry the requisite documents to show
the ailment will surface and knowledge is now its nationality or neutrality and that it shall not
acquired by the insurer. carry any document that will cast reasonable
suspicion on the vessel;
 In marine insurance, the standard is less than c) That the vessel shall not make any improper
knowledge, it is possession. Meaning, if the insured deviation; and
has possession of a material fact and it is not d) That the vessel does not or will not engage in
disclosed or communicated, there is concealment. any illegal venture.
Example, if there is a matter that makes the vessel  Let us talk about the last warranty, “That the vessel
unseaworthy, it is communicated by the captain to does not or will not engage in any illegal venture.”
the owner. But the owner is not yet aware of the
communication but it has already reached him. For  So this implied warranty exists because nobody in
example, the captain has already sent an email to his right mind will say to the insurer that he will
the owner. The owner now procures insurance and apply for insurance that he would undertake where
does not disclose the information emailed by the the vessel will be engaging in an illegal venture or
captain. There can be concealment in this case activity. Since nobody will say that, the law creates
because the owner is already in possession of a an implied warranty. Thus, when you get insurance,
material fact. Concealment in marine insurance you are saying that you are not engaging in an
requires that one is in possession of a material fact. unlawful venture because if it turns out now that
the loss occurs as a result of an unlawful activity,
PRIOR LOSS the violation of that implied warranty will exonerate
the insurer from payment.
 Only in marine insurance where you can insure
against a prior loss. Meaning you can get insurance  The second warranty to be discussed is the
for the loss of the vessel even if the vessel has warranty that it will “carry the requisite documents
already been lost. But to be able to do that, the to show its nationality or neutrality and that it shall
insured must really have no knowledge of the prior not carry any document that will cast reasonable
loss. suspicion on the vessel.” This warranty arises from
an express warranty. An express warranty being the
a) Let us say insurance is procured on Nov 20 but the owner of the vessel will say “I sail under the flag of a
vessel has already been lost on Nov 16, so the particular country or that I am neutral. So when he
insurance here that is procured to cover the loss of says this, it is an express warranty of nationality or
the vessel says it is for insurance for the loss of the neutrality. The implied warranty that follows now is
vessel or non-loss. So even if the vessel has already that when I say that I am impliedly warranting that I
been lost prior to Nov 20, that is still a covered loss. have the documents to show my nationality or
But here the requirement is absolute good faith neutrality and further I am not going to carry any
meaning the insured has no knowledge of a prior other document that will show otherwise or cast
loss so let us say on Nov 21, the insured now reasonable suspicion on the vessel.
obtains knowledge of the loss that occurred on Nov
16. The requirement now is that he must overcome  The first warranty now is seaworthiness.
a presumption that he has knowledge of the prior
loss. So when he makes a claim for payment of the  SEAWORTHINESS is when a ship is reasonably fit to
prior loss, he must be able to show the insurer that perform the service and to encounter the ordinary
he really did not have knowledge of the prior loss. perils of the voyage, contemplated by the parties to
That is the presumption that he has to overcome. the policy.

 When is the IMPLIED WARRANTY of seaworthiness

complied with? At the start of the voyage it must
be seaworthy.

– COMMERCIAL LAW REVIEW –

 99

NOW THERE ARE 3 PARTICULAR CIRCUMSTANCES THAT  The other implied warranty is that it will not make
WE SHOULD BE AWARE OF: an improper deviation.

a) when the insurance is made for a specified length of A DEVIATION CONSISTS OF SEVERAL THINGS. IT CAN BE:
time, it must be seaworthy at the commencement
of every voyage it undertakes at that time a) departure from the course of the voyage as
defined by law or
Example, 1 year. The vessel must be seaworthy at b) an unreasonable delay in pursuing the voyage
the commencement of every voyage undertaken or
within the 1 year period. So that means if it will c) the commencement of an entirely different
undertake a voyage every month or 12 voyages, at voyage.
the start of every voyage during that 1 year, it must
be seaworthy.  The implied warranty is that it will not make an
improper deviation. So we need to determine first,
b) when the insurance is upon cargo, which by the what is the course of sailing.
terms of the policy, description of the voyage, or
established custom of trade, is required to be THE COURSE OF SAILING IS:
transshipped at an immediate port, in which case – a) that established by mercantile usage. In other
each vessel upon which the cargo is shipped or words, it depicts course of sailing from one
transshipped must be seaworthy at the point to another. For example, from Manila to
commencement of each particular voyage Cebu. Vessels sailing from Manila to Cebu or
vice-versa, follow a fixed course of sailing
So what is insured in this case is the cargo that is
determined by mercantile usage
required to be transferred from one vessel to
b) in the absence of fixed course of sailing
another. Is the voyage is from point A to point B and
determined by mercantile usage, we will take a
in between point X, the cargo will be transferred to
look at that determined by a master or the
another vessel. From vessel 1 to vessel 2, before it
captain of ordinary skill to be the most direct
reaches the point of destination B. So when vessel
and advantageous course of sailing. So the
1 leaves point A, it must be seaworthy for purposes
captain will now determine what is the best way
of carrying the cargo. When it reaches point X, and
to get from point A to point B.
it is transferred to vessel 2, it must also be
seaworthy at the commencement of its part of the  Any departure or deviation from the course of
voyage to eventual point of destination B. sailing will be a deviation.
c) where different portions of the voyage  When it is an unreasonable delay, it may adhere to
contemplated in the policy differ in respect to the the course of sailing but there is a change in the
things requisite to make the ship seaworthy, in schedule. Now if it is a different voyage altogether
which case it must be seaworthy at the we still take a look at the course of sailing. Let’s say
commencement of each portion from Manila to Cebu, it now becomes Manila to
Iloilo, that is now a different voyage, it will become
So from point A to point B, you have river-ocean-
a deviation.
river. So the vessel must be seaworthy to navigate
the river, navigate the ocean when it goes out to  Now that we are aware of the fixed course of
the open sea and back to the river, it must be sailing, we will now know whether the deviation is
seaworthy. proper or improper.
 What happens when the vessel becomes
IF THE DEVIATION IS NOT ONE THAT FALL WITHIN THE
UNSEAWORTHY ? If the vessel becomes
4 PROPER DEVIATION, IT IS IMPROPER, NAMELY:
unseaworthy, it doesn’t mean that the implied
warranty is violated. The implied warranty will only a) When it is caused by circumstances over which
be considered as having been violated, if there is an neither the master nor the owner of the ship
unreasonable delay in repairing the defect. The has any control.
vessel now is compliant of seaworthiness at the b) When necessary to comply with a warranty, or
commencement of the voyage and during the to avoid a peril, whether or not the peril is
voyage it becomes unseaworthy, the implied insured against.
warranty has not yet been violated because the c) When made in good faith, and upon reasonable
vessel is given a reasonable opportunity to repair grounds of belief in its necessity to avoid a peril.
the defect. It is when there is an unreasonable delay d) When made in good faith, for the purpose of
in repairing the defect that the implied warranty of saving human life or relieving another vessel in
seaworthiness is violated. distress

– COMMERCIAL LAW REVIEW –

 100

 Again, we determine if it is a deviation and then we EXAMPLE : if you remember previous discussion, a
determine if it is proper or improper. If any of the 4, cargo of rice that got wet. The rice which was
it is proper. If not any of the 4, it is improper. So intended for human consumption got to And it was
when there is now a determined improper considered as an actual total loss, because it is now
deviation, the consequence is the insurer is no valueless to the owner of rice . Because he had
longer liable for any loss happening to the thing intended to resell it for human consumption, he can
insured subsequent to an improper deviation and no longer do that, meaning he can no longer
this applies whether or not the risk has been accomplish the purpose for which he held it and
increased or it has been diminished. that is to sell it for human consumption, he can only
now sell it for animal consumption, that will
 So note that it says for any loss happening to the constitute a total loss.
thing insured subsequent to an improper deviation.
This means also if there was an improper deviation 4) any other event which effectively deprives the
and eventually the vessel reverted back to a fixed owner of the possession, at the port of
course of sailing and loss occurs, that is still a loss destination, of the thing insured.
that occurs subsequent to an improper deviation.
Here the thing is not physically lost, except that a
LOSSES IN MARINE INSURANCE circumstance intervene that will now prevent the
owner from taking possession.
KINDS OF LOSSES IN MARINE INSURANCE: Example: if let us say the cargo or the thing insured
Losses in marine insurance may be: was carried by a vessel and a disease breaks out
within the vessel affecting the cargo.
1. TOTAL LOSS – may be
a. actual or “ABANDONMENT”
b. constructive; or Abandonment is the act of the insured by which he
2. PARTIAL LOSS – A loss that is not total is partial. declares to the insurer the relinquishment in its favor of
his interest in the thing insured.
ACTUAL TOTAL LOSS
Abandonment can take place when a constructive total
What constitutes an actual total loss? loss occurs.
An actual total loss occurs when there is: CONSTRUCTIVE TOTAL LOSS
1) total destruction of the thing insured; What is a constructive total loss?
2) an irretrievable loss of the thing by sinking or by There be a right to abandon or a constructive total loss
being broken up; in the following situations:
POSSIBLE ISSUES : In this situation, there is the 1) more than ¾ thereof in value is actually lost or
possibility that the vessel is still there. In fact, it is would have to be expended to recover it from the
still there, you know where it is, but the difficulty of peril
trying to recover it because it has sunk or has
broken up is really difficult or may even be So you're talking of a partial loss, but it is not a total
impossible. So, here there is no physical loss, but it loss. But us to extend it is more than three fourths
cannot be retrieved. of the value of getting insured. Or in the alternative,
the thing insured like for example, a ship has sunk
3) any damage to the thing which renders it valueless or run aground. And to recover it, you would have
to the owner for the purpose that he held it; or to spend more than 3/4 of its value. A constructive
total loss now can be claimed
It is here where the issue was centered because the
thing is not physically lost, but it has suffered a 2) if it is injured to such extent as to reduce its value
damage that has rendered it valueless to the owner by more than ¾ of value
for the purpose that he held it. So, it would still the
situation here is that it is not physically lost. It does EXAMPLE : Let us say the ship catches fire and fire or
not lose any it does not totally lose value, meaning the nature of the fire is one or is a risk that is ensure
it still has value. But what is important here is the gains the fire is eventually put off. However,
insofar as the owner is concerned, it is no longer of looking at the ship now or the vessel, the value of
value to him for the purpose that he held it. the vessel has been reduced by more than 3/4. Or if
the vessel is to be sold, it can only be sold for an
amount that is no more than 1/4 of its actual value
for previous value.

– COMMERCIAL LAW REVIEW –

 101

3) if the thing injured is a ship, and the contemplated CO-INSURANCE

voyage cannot lawfully be performed without
incurring either an expense to the insured of more Co-insurance exists when the subject matter is insured
than ¾ the value of the thing abandoned or a risk for an amount less than it value. In this case, the
which a prudent man would not take under the insured is considered as a co-insurer for the portion not
circumstances covered by insurance. This is also known as the
“average clause.”
EXAMPLE : The vessel is sailing from point A to
point, point B. While undertaking the voyage, it is NOTE: This will apply only if the loss is partial.
now going to be exposed to a risk or will have to
incur an expense to be able to continue on with the EXAMPLE:
voyage. Now, the expense is more than three ports, You have a vessel that is worth 5 million pesos, it is on
its value, like for example, it was hijacked by pirates, the insured for 3 million. So there is no insurance for
and to allow or to get the pirates to release the the 2 million. in this case, now, the owner of the vessel
vessel and allow it to continue on. They're asking to will be considered as a co-insurer for the portion of the
be paid an amount more than 3/4 its value. In that value that is not covered by insurance, which in our
case, the vessel can be abandoned. illustration is 2 million.
Or, the situation is prior to encountering the So, in case of a partial loss, where the determined
pirates, the vessel was advised that if it proceeds, it percentage would be 3/ 5 and 2/5, and there is a partial
may be taken by the pirates. And what will happen loss of for example, 1 million, the issurer will cover 3/5
now is there is no other way by which it can actually of the loss for the insurer and 2/5 of the loss will be
proceed to the port of destination without going to covered by the owner.
the area occupied or where there are pirates. So,
regardless of what it will do, it will nevertheless be In which case now, applying the fractions or the
or it will really be taken over or hijacked by pirates. percentages to the 1 million partial loss, the insurer only
pays 600,000 or the 1 million partial loss.
4) if the insured is freightage or cargo and the voyage
cannot be performed, nor another ship procured Of course, when the loss is total, the insurer has to pay
by the master, within a reasonable w/ reasonable the full 3 million, but as you can see, the best one is
diligence to forward the cargo without incurring worth 5 million. So that means the owner will bear a 2
the like expense or risk mentioned in item million loss because he only recovers 3 million. So, this
is what is known as coinsurance and it applies only
Meaning let us say, you have cargo that is on vessel when the loss is partial.
number one, vessel number one can no longer
proceed to the port of destination. to be able to RULE ON LIABILITY FOR AN AVERAGE:
carry the cargo to the eventual port of destination.
vessel number one is asking vessel number two, if it As a rule, when it has been agreed that an insurance
would be possible for the cargo to be transferred upon a particular thing or class of things shall be free
for it to carry it to the port of destination. vessel from a particular average, a marine insurer is not liable
number two is imposing a fee or an amount or for a particular average loss not depriving the insured at
requiring an amount that is equivalent to more than the port of destination, of the whole such thing, or class
3/4, the value of the cargo or more than 3/4, what of things, even though it becomes entirely worthless,
the expected us freight age in this case now, there but such insurer is liable for his proportion of all general
can be abandonment of the freightage or the cargo average loss assessed upon the thing insured.

5) but freightage cannot be abandoned unless the UNDER TRANSPORTATION LAWS, AVERAGES CAN BE:
ship is also abandoned.
1. general or
If a constructive total loss is claimed, then what 2. particular.
happens now is that the insured is paid for a total
loss but he would have to relinquish all his rights WHAT IS COVERED BY INSURANCE?
and interest in the thing insured.
As a general rule, marine insurance policies will indicate
EXAMPLE : The insurer is able to salvage the vessel, that the insurer is free from a particular average loss
the insured no longer gets anything out of the cost but it is liable for its proportion of a general average
of salvage, because that now belongs to the insurer. loss.
Because the effect of accepted abandonment is for
the insured to be paid as if a total loss occurs and he NOTE : An average is in the form of a loss, damage or
relinquishes all rights and interests in the thing expense.
insured in favor of the insurer.

– COMMERCIAL LAW REVIEW –

 102

When we say it is a general average loss, it is one that So, if you have let's say three cargo owners, the cargo
benefits all those with an interest a particular average see is thrown overboard and it is worth 1 million and it
loss is only or effects on the one party. is now a general average loss, the owner of the vessel
that is same from the rough seas, the owner of the
EXAMPLE: cargoes A and B will all contribute to make good a
A jettison. If you have a vessel and you have the cargo general average or a general average loss as suffered by
on the vessel and the vessel encounters rough seas and C. So, that is how averages are going to be resolved.
there is need to lighten the vessel and cargo will have to Here, there is a claim that is made on an insurance
be thrown overboard to save the vessel and the rest of policy.
the cargo that would constitute a general average loss. And marine insurance policy generally provides that the
insurer is not liable for a particular average loss, but is
liable for the proportion of the insurance liability in a
general average loss. Those are the more important
things in so far as losses in motion.

– COMMERCIAL LAW REVIEW –

 103

OTHER KINDS OF INSURANCE

MODULE 24

So here the rule is simple. When there is an alteration in

FIRE INSURANCE the change or meaning of change in the use of the thing
 Is insurance against loss by fire, lightning, subject of insurance, as defined in the policy, without
windstorm, tornado or earthquake and other allied the consent of the insurer and the result of this would be
risks, when such risks are covered by an extension to increase the risk, the insurer will not be liable.
to a fire insurance policy or another policy. Now, there can also be an alteration, but it does not
So when you speak of fire insurance, the principle risk increase the risk. It doesn't mean that the insurer is not
that is insured against is fire; however, there can be liable, because the key really is whether or not their risk
losses arising from lightning, windstorm, tornado, has been increased. So if, for example, the fire insurance
earthquake, and other allied risk. But when you're policy covers a building intended to be used as a
talking of other allied risk, they must specifically be residence, so that is the use as stated in the policy. If the
provided for in the policy. Absent any such provision, use now is changed to commercial, and the consent of
then we are only talking of insurance as against fire. the insurer is not obtained, and a fire causing loss or
damage occurs -- that is an alteration that would
The next thing that we need to discuss insofar as fire exonerate the insurer.
insurance is the requirement that a fire, MUST BE
HOSTILE . On the other hand, if it is originally insured as a
commercial building, and eventually converted into a
IT IS HOSTILE IF IT: purely residential building, then yes, you may have an
alteration, but since it did not meet the criteria that it
a) burns at a place where it is not intended to burn increases the risk, assuming it really does not increase
b) starts as a friendly fire but becomes hostile if it the risk. Even if there is such an alteration, the insurer
should escape from the place where it is intended still is liable. Because the key here in alterations would
to burn and becomes uncontrollable be understanding what it is. And number two,
c) is a friendly fire which becomes hostile by not recognizing whether it increases or decreases the risk. If
escaping from its proper place but because of the the alteration increases the risk, the insurer is no longer
unsuitable material used to light it and it becomes liable. If the alteration decreases the risk, the insurer is
inherently dangerous and uncontrollable. still liable.
So that is what is meant by a hostile fire, as opposed to
CASUALTY INSURANCE
a friendly fire. Just so things can be made easier. All you
need to remember is, what a FRIENDLY FIRE is -- it is  Casualty Insurance is one that covers loss or liability
one that burns where is supposed to burn. arising from an accident or a mishap, excluding
those that fall exclusively within other types of
So if it is burning where it is supposed to burn it is
insurance.
friendly. So, If loss or damage occurs, arising from a
friendly fire -- that is not compensable. What is  Examples are: (a) employer liability, (b) public
compensable is if it results from a hostile fire. liability, and (c) burglary and theft.
The other thing is the matter of FIRE REQUIRING Loss or liability arising from a fire is not covered by
COMBUSTION . In other words, there must really be a casualty insurance. Casualty insurance is a general
fire. So if the damage is due to heat, where there is no classification of all other insurances that cover loss or
combustion, then that is not a compensable risk under a liability that arise from an accident or a mishap.
fire insurance policy. Examples would be your public liability insurance,
employer liability insurance, those that are issued, or
The third thing that we must remember in so far. fire
that are facilitated by, in our setting, the GSIS or the SSS,
insurance would be an ALTERATION . An alteration is a
are forms of employer liability insurance or workman's
change in the use or condition of a thing insured from
compensation insurances, which are all part of what is
that to which it is limited by the policy, made without
known as casualty insurance.
the consent of the insurer, by means within the control
of the insured, and increasing the risk, which entitles
the insurer to rescind the contract of insurance (Section
168).

– COMMERCIAL LAW REVIEW –

 104

SURETYSHIP continues to be alive at the end of a specified period.

The common period specified in these types of life
 Suretyship is an agreement whereby a party called insurance policies would be 20 years. So at the end of 20
the surety guarantees the performance by another years if he's still alive, he is to be paid.
party called the principal or obligor of an obligation
or undertaking in favor of a 3rd party called the On the other hand, it can be contingent. So some
obligee. insurance policies will pay out if he's still alive at the end
of a specified period, and will pay out again if he
 It is deemed to be an insurance contract when subsequently dies or the insured subsequently dies.
made by a surety who or which, as such, is doing an
insurance business as provided by the Insurance THE LIABILITY OF THE INSURER IN CASE OF A
Code. SUICIDE

 The liability of the surety is solidary with the obligor  Suicide, if committed after the policy has been in
but limited to the amount of the bond and force for a period of two years from date of issue or
determined strictly by the terms of the contract in last reinstatement is compensable unless policy
relation to the principal contract between obligor provides a shorter period.
and obligee.
 Notwithstanding, it will be compensable if
Suretyship is also a form or kind of insurance. But you committed in the state of insanity regardless of date
must be able to understand that when you have a of commission.
suretyship, It may be covered by the Insurance Code or
may be covered by the Civil Code. So it will be covered So if the insured commits suicide and it is committed
and it will be considered as an insurance contract if it is more than two years from the date of the issuance of
undertaken by one who is allowed to act as an insurer the policy or its last reinstatement, then that is going to
under the Insurance Code. So, if the suretyship contract be compensable. There can be a shorter period if the
is issued by an insurer, then the suretyship contract is contract provides for a shorter period. Furthermore, if
governed by the provisions of the Insurance Code. the insured commits suicide while under a state of
insanity, that is compensable, regardless of the date of
The liability of the surety here is solidary together with the commission of the suicide.
the obligor but it is limited to the amount of the bond or
the suretyship contract and determined strictly by the CAUSES OF DEATH WHICH CAN BE EXCLUDED FROM
terms of the contract in relation to the principle contract INSURANCE COVERAGE
between the obligor and the obligee, meaning, the
liability of the surety arises when the contract between  Causes of death can be excluded by law, by the
the obligor and the obligee clearly indicates a liability on policy or public policy.
the part of the obligor, and that liability was clearly The other thing that we must concern ourselves with
indicated in the suretyship contract, in which case now, would be the causes of death that are excluded by law,
the surety is liable solidarily with the obligor. by the policy or public policy.
LIFE INSURANCE Excluded by law refers to that where the beneficiary is a
principal or an accomplice in the willful killing of the
 It is insurance on human lives and insurance insured. So, that death is excluded by law, as a
appertaining thereto or connected therewith. compensable item. Excluded by the policy would be
 It is payable on: (a) death of the person, or (b) his military service. Excluded by public policies when there is
surviving a specified period, or (c) or otherwise, an imposition of the death penalty on the insured.
contingently on the continuance or cessation of life.
COMPULSORY THIRD PARTY MOTOR VEHICLE
When we speak of life insurance, the risk being insured LIABILITY INSURANCE
against is death.
 It provides protection or coverage to answer for
And you have to understand that while death is the risk bodily injury or property damage that may be
insured against, it doesn't automatically mean that the sustained by another arising from the use of a
insurer pays only upon death. Yes, the insurer pays upon motor vehicle.
death, but the insurer also PAYS UPON SURVIVAL , or it
will also PAY CONTINGENTLY UPON DEATH OR  It is an insurance policy that directly insures against
SURVIVAL , depending upon the policy. liability. The insurer’s liability accrues immediately
upon the occurrence of the injury upon which
So normally when it is an ordinary life insurance policy liability depends, and does not depend on the
that is only payable upon death. You have other policies recovery of judgment by the injured party against
where the insured will be paid if he survives, or the insured.

– COMMERCIAL LAW REVIEW –

 105

So this is insurance that provides for protection or however, the right of party paying claim to recover
coverage for bodily injury or property damage arising against the owner of the vehicle responsible for the
from the operation of a motor vehicle. What is accident shall be maintained.
compulsory however, as of the present time is only
bodily injury. And this is insurance against liability If we were to illustrate that. So if you have a VEHICLE #1
meaning, if you have A (as the insured), B (as the person where X was riding in, mounting or dismounting from,
injured) and XYZ (as the insurance company) While the he can claim from the insurer of VEHICLE #1.
contract is between A and XYZ. B as the insured can go
If you have a situation where VEHICLE #1 and VEHICLE
directly as against XYZ regardless of the absence of
#2 were involved in a collision caused by Vehicle #2, X
privity between B and XYZ company, because it is
can claim from the insurer of VEHICLE #2 or can claim
insurance against liability.
from the insurer of VEHICLE #1. So, if he claims from the
insurer of VEHICLE #1, then there is a right that is
WHAT IS THE “NO FAULT INDEMNITY CLAIM”?
preserved for the insurer of VEHICLE #1 to recover from
 A no fault indemnity claim is a claim for payment for the insurer of VEHICLE #2 because it is the vehicle that is
death or injury to a passenger or third party without responsible for the accident.
necessity of proving fault or negligence.
HOW IS THE “AUTHORIZED DRIVER” DEFINED?
 This is payable by the insurer provided (a) indemnity
in respect of one person shall not exceed PHP  The authorized driver clause is interpreted to refer
15,000.00, and (b) the necessary proof of loss under to the insured or any person driving on the order of
oath to substantiate the claim are submitted. the insured or with his permission provided, such
person is permitted to operate a motor vehicle in
 A claim under the no fault indemnity clause may be accordance with our licensing laws or regulations
made against one motor vehicle insurer only as and who is not otherwise disqualified.
follows: (a) in case of an occupant of a vehicle-
against the insurer of the vehicle in which the  When the insured is the one driving the vehicle, a
occupant is riding, mounting or dismounting from license is not necessary. He has a right to recover
(b) in any other case, from the insurer of the the damage even if he has no driver’s license or that
directly offending vehicle (c) in all cases, the right of the same had expired at the time of the accident.
the party paying the claim to recover against the
Another thing that must be remembered in relation to
owner of the vehicle responsible for the accident
this type of insurance is the Authorized Driver Clause,
shall be maintained.
which has previously been asked in Bar Examinations. So
And part and parcel of compulsory third party motor the authorized driver clause refers to the insured or
vehicle liability insurance would be the matter of what is anyone driving or using the vehicle with authority from
known as, no fault indemnity. No fault indemnity is a the insured.
provision in a motor vehicle liability insurance policy
That should be simple, but what complicates it is the
where payment for death or injury to a passenger or
matter of a requirement as to a driver's license, the
third party can be had with without necessarily proving
insured if he's the one driving the vehicle does not need
fault or negligence.
to have a driver's license. Anyone driving it with
In case of a no fault indemnity claim, it is payable in authority from the insured will require a driver's license.
amount not to exceed 15,000 pesos. And there should
Now here in this case, the insured is driving it without
be necessary proof of loss under oath to substantiate
the driver's license, the insurer is liable. If anyone else is
the claim that is submitted, and a no fault indemnity
driving it with authority from the insured, there must be
claim can be made against one motor vehicle insurer
a driver's license. So, if anyone is driving with a driver’s
only in case of an occupant of a vehicle against the
license and with authority from the insured, the insurer
insurer of the vehicle where the claimant was riding,
is liable. If it is anyone driving it with authority of the
mounting or dismounting from, in any other case, from
insured, without a driver’s license, the insurer is not
the insurer of the directly offending vehicle. In all cases,
liable.

– COMMERCIAL LAW REVIEW –

 106

INSURABLE INTEREST
MODULE 25

in the life of the debt or because the debtor is

INSURABLE INTEREST under a legal obligation to you for the payment of a
Insurable interest is vital to the validity of a contract of sum of money. And if the debtor dies or suffers
insurance, because if the insured did not have it, or some illness that may prevent or delay performance
does not have insurable interest, then the insurance or peace obligation to pay you.
contract is void. 4) Any person upon whose life an estate or an
Insurable interest exists in life, or health of a person. It interest is vested.
also exists in property. - An example would be a usufruct. If you have been
granted a usufruct, and the usufruct is effective
INSURABLE INTEREST OVER
until such time that the grantor of the usufruct is
THE LIFE OR HEALTH OF A PERSON alive, then you would have insurable interest in his
life, and in his health. Because his death, or his
ON WHOSE LIFE OR HEALTH DOES A PERSON HAVE illness might result in the termination of your
INSURABLE INTEREST IN? usufruct.
1) Himself, his spouse and of his children. What does insurable interest in property consist of?
2) Any person on whom he depends wholly or in part
for education or support, or in whom he has a 1) An existing interest.
pecuniary interest. 2) An inchoate interest founded on an existing
3) Any person under a legal obligation to him for the interest.
payment of money, respecting property or services, 3) An expectancy, coupled with an existing interest in
of which death or illness might delay or prevent that out of which the expectancy arises.
performance. 4) A carrier or depository of any kind has insurable
4) Any person upon whose life, any estate or interest interest in the thing held by him as such to the
vested in him depends. extent of his liability but not to exceed the value
thereof.
Q: WHO HAS INSURABLE INTEREST IN LIFE OR IN
ONE'S HEALTH? INSURABLE INTEREST OVER PROPERTY
A: Insurable interest in life, or in one's health is 1. This will exist if one has an existing interest in the
possessed by the insured himself over his: property.
1) Person, over the person of his spouse, and over - When we see existing interest in the property he
the persons of his children. has a relationship or connection to the property as
2) Life of any person on whom he depends wholly or of the present time and he will enjoy pecuniary
in part for his education or support or in whom he benefit from its continued preservation, or with
has a pecuniary interest. suffer pecuniary damage from its loss destruction or
injury.
- Example the insured is being supported, or it is
being sent to school by some other person, the - Example would be ownership. If one is the owner.
insured now would have insurable interest in the He has a clear existing interest.
life of the person, providing him support or
providing him, education, or sending him to school 2. An inchoate interest founded on an existing
or in whom he has some sort of pecuniary interest. interest.
The best example of a person in whom one has
pecuniary interest would be an employee. - Inchoate is an expectation but this expectation
must have some basis at the present time.
3) Life of a person who has a legal obligation to him
for the payment or for the rendition of services, - Example of an inchoate interest founded on an
and whose death or illness might delay or prevent existing interest would be ownership in shares of
performance. stock because the interest of a stockholder in
corporate property is inchoate - an expectancy, that
- Best example of this would be when you have a becomes a vested interest upon a dissolution.
debtor or as creditor – you have insurable interest

– COMMERCIAL LAW REVIEW –

 107

- So that is an inchoate interests in the context of - Example, you deposit goods in a warehouse where
insurance. That is founded on an existing interest, 10,000 vessels. The warehouse man has insurable
meaning the existence of shareholdings is interest in the goods that are deposited up to what
continued ownership of shares, is the existing extent? If the contract says liabilities on the up to
interest on which is expectancy, the right to receive 5000, then that is the extent of his insurable
corporate property upon a new solution is founded. interest. If the contract says, up to the extent of the
declared value and if the person making the deposit
- Do not confuse this with the right to inherit because declares a value of 10,000, then that is the extent of
when we speak of the right to inherit while it is to the insurable interest of the warehouse man.
inchoate interest. It is not founded on an existing
interest because the person, from whom you expect DISTINGUISHING INSURABLE INTEREST IN LIFE FROM
to inherit from has full disposition of his property INSURABLE INTEREST IN PROPERTY
prior to death and the inchoate interest only
becomes founded on existing interest upon death  AS TO BASIS : Insurable interest in life can be based
that is when it becomes a vested right. on consanguinity, affinity, contract or a pecuniary
interest, while insurable interest in property is
3. An expectancy, coupled with an existing interest in based on pecuniary interest.
that out of which the expectancy arises.
 AS TO WHEN IT WILL EXIST : Insurable interest in
- Expectancies are simply that expectancy, to receive life must exist only at the effectivity of the contract
something or to receive property. except that taken by a creditor on the life of the
debtor while insurable interest in property must
- But for the expectancy to receive money, or any exist at the time of effectivity of the contract and
property to be insurable, it must be coupled with an when loss occurs, although it may not exist in the
existing interest from which the expectancy arises. meantime.
- Example would be rental payments – provided  AS TO EXTENT : The value of insurable interest in life
there is a contract of lease that stipulates the is not limited unless taken by a creditor on the life
payment of a rental at specified intervals. The of the debtor while insurable interest in property is
payment of rental is an expectancy. That can be limited to the actual value of the interest in the
insured the gains, because it is coupled with an property.
existing interest from out of which expectancy
arises, the existing interest, being the existence of a Q: Why is it that insurable interest in life is required to
lease contract, which indicates that the insured as exist only upon effectivity?
lessor is entitled to receive certain amounts at
specified intervals, by way of rentals. A: Because life insurance as a general rule is not a
contract of indemnity. It is in effect a contract or an
- Another example would be freightage. In marine investment that provides security. It is only required to
insurance, the owner of the vessel has insurable exist at the time the contract becomes effective.
interest in freightage – it is the amount that will be
paid for the carriage of goods on the vessel. So that EXCEPTION: when the creditor procures life insurance
is an expectancy. it is normally to be paid after the on the life of the debtor because when the creditor
goods have been delivered from point A to point B procures life insurance on the life of the debtor his
the point of destinations. interest is only up to the extent of the obligation. And if,
at the time of the death of the debtor, there is no
- There is now an expectancy that if it reaches the longer any obligation, or if it has been extinguished,
point of destination, the freightage will be paid. then the creditor acquires nothing from the insurance
That is insurable. And while it is an expectancy, it is company because it is then a contract of indemnity,
founded on an existing interest in the form of a there must be loss or damage at the time of the
contract for the carriage of goods. happening of the risk insured against.

4. A carrier or depository of any kind has insurable The situation with property insurance – it is required to
interest in the thing held by him as such to the be present at every activity, and upon loss. Because if
extent of his liability but not to exceed the value one no longer has insurable interest upon loss. There is
thereof. nothing for which you should be indemnified for,
although it is allowed not to exist in the meantime,
- They have insurable interest in the thing that is there can be a possibility, where the insured may lose
being carried or deposited. But only to the extent his insurable interest during the effective term of the
that they are to be liable. But not to exceed the insurance contract. But when loss has occurred, he has
value of the thing, which has been carried or re-acquired it like when he has sold it, he loses his
deposited. insurable interest, and this normally results in a

– COMMERCIAL LAW REVIEW –

 108

suspension of the policy. He may eventually though interest in property. But the nature of their interest is
reacquire the property. different from each other.

As long as he has insurable interest, upon its effectivity, Example: The owner has insurable interest in property.
meaning effectivity of the contract. And when the loss If the owner would have his property carried or
occurs or he has to reacquired insurable interest when transport. The carrier has insurable interest in the same
the loss occurs, then that would be compensable, and it property. Although the value or the extent of one's
is consistent with the requirement that the insurable interest in the same property may not necessarily be
interest in property must exist at the time of the activity equal to the value. In so far as the owner, it may be
of the contract and at the time, loss occurs even if it equal to the value, but in so far as the carrier, it is or it is
may not exist in the meantime limited by the extent of his liability

Third Distinction: Take note that it is not the value of If the carrier is only liable to pay 5000 pesos, then that
the property, but rather the value of one's interest is the extent of the value of his interest in the property.
because it can happen that in property insurance, there Even if the property is worth 10,000 pesos. In all
may be several persons who would have insurable probability, the 10,000 is the value of the interest in so
far as the owner is concerned.

– COMMERCIAL LAW REVIEW –

 109

WHAT CAN BE INSURED &

PARTIES TO AN INSURANCE CONTRACT
MODULE 26

WHAT CAN BE INSURED AGAINST WHAT CANNOT BE INSURED AGAINST

Whether past or future, which means identifying the One cannot insure against the drawing of any lottery or
first one having insurable interest or create the liability for or against any chance or ticket in a lottery, drawing a
or being seen maybe insured against. price.

So we are talking, either UNKNOWN or CONTINGENT So here, if you remember our initial discussion on
event. insurance, we had a discussion as to pure and
speculative risk.
These unknown or contingent in the past or in the
future, and which may damnify one with insurable PURE VS SPECULATIVE RISK
interest or create a liability can be insured against.
Only PURE risk can be insured against.
CONTINGENT EVENTS
SPECULATIVE risk cannot be insured against.
Contingent events are events that will certainly happen,
but we are not aware as to when they will happen. Just by way of reminder, pure risk is one where there is
certainty of loss damage or injury.
EXAMPLE : death. It is certain to happen, but you are not
aware when it is going to happen. In a speculative risk there is either loss damage or injury
or there is some gain or profit from the copying of the
UNKNOWN EVENTS risk

Then, when we speak of unknown, you must EXAMPLE : in s lottery or in raffle drawing, where one
understand that it is not truly unknown. These are risks, may actually lose what he has invested or paid to obtain
which are known, but what is unknown about it is the a ticket or buy a ticket. But on the other hand, in
certainty that it will happen. consideration of buying the ticket, and the possible
eventuality that you will not win anything, you may,
EXAMPLE : Like a fire, that is a known risk, but unknown however win a price. So the risk, in that sense, is
in the context of determining what can be insured speculative. It cannot be insured against.
against.
PARTIES TO A CONTRACT OF INSURANCE
PAST VS FUTURE EVENTS
a) the insurer,
Normally insurance on the cover, future events. b) the insured,
c) and the beneficiary,
But in one instance, a past event can be the subject of
insurance, and this only happens in marine insurance, INSURER
where the insurance will state that it covers the loss of
the vessel, or it will cover any loss of the vessel, An insurer is one who assumes the risk.
whether or not that vessel has actually been lost.
For one to be an insurer, he must qualify with the
What you will see in the policy is the vessel is covered provisions of Insurance Code as to the requisites or
loss, or not lost. requirements to be considered an insurer and
eventually get authority from the Insurance Commission
But if you remember our discussion on marine to sell or offer to sell insurance.
insurance if the insured seeks to recover for a past
event, he has to overcome the assumption that he was INSURED
aware of the happening of the loss.
the insured has been defined as anyone who is not a
Public Enemy.

A PUBLIC ENEMY has a specific definition. The definition

being, he is one who is a citizen or a subject of a nation,
at war with the Philippines.

– COMMERCIAL LAW REVIEW –

 110

EXAMPLE : So if one is classified as a public enemy, he IRREVOCALBE AND REVOCLABE BENEFICIARY

would not be insurable. Neither can he be the insured,
because it would run counter to the concept of The irrevocable beneficiary as against revocable
insurance with one, the supplier with that country, the beneficiary is a situation that arises from a designation
object is to destroy that country and its assets and in a life insurance policy.
properties. So it will run counter to the nature of If the life insurance policy will name a person, and there
insurance where after destroying the enemy during a is no waiver of the right to replace or change the
war, you will not compensate him or reverse him for the beneficiary, the beneficiary is the REVOCABLE .
damages that he has sustained. That is why a public
enemy cannot qualify as an insured. If the designation now contains some sort of reference
or indication that the right to change the beneficiary has
In an ISSUE INVOLVING DUAL CITIZENSHIP , we would been waived, then the designation is IRREVOCABLE .
have to take a look at the country to which the insured
swears allegiance to. Because sometimes dual DISTINCTION:
citizenship arises, not by choice, but rather by
application of law. So there is always the choice now What is the distinction between the two besides what is
given to the insured to swear allegiance to one obvious that you can change every vocable beneficiary?
particular country over the other. If he swears
The main distinction is that when it is an irrevocable
allegiance to the country with which we are at war with,
beneficiary, he acquires a VESTED RIGHT in the policy,
then he would not be insurable.
meaning that any changes in the policy or anything, or
alteration or amendment of the policy requires his
BENEFICIARY
CONSENT .
who qualifies as a beneficiary?
EXAMPLE : if the policy allows a loan, that will require
We will have to distinguish between property and life the consent of the irrevocable beneficiary.
insurance
However, if the policy is CONTINGENT , meaning, as we
In PROPERTY INSURANCE , the beneficiary is more often when it is a life insurance policy, it can be payable upon
than not, the insured, because the insured in property survivorship or upon death.
insurance must always have insurable interest in the
thing insured, and any property insurance policies, So when you have an irrevocable beneficiary, his
always drawn out for the benefit of the insured. He is interest now is not vested, but rather contingent upon
the one who is entitled to the proceeds of the death – because if the insured would survive the period
insurance. stipulated in the contract, then the insured is the one
entitled to the proceeds of insurance.
In LIFE INSURANCE , anybody can be an insured, except
those who are prohibited from accepting donations. AMENDMENT IN THE INSURANCE CODE
I NSOFAR AS REVOCABLE BENEFICIARIES:
There's an enumeration in the Civil Code of the persons
prohibited from receiving donations. So they are the A beneficiary may initially be revocable.
ones who are prohibited from being beneficiaries. The law now provides that upon the death of the
insured, the designation of a revocable beneficiary
SO YOU HAVE:
becomes irrevocable if there was no change made
a) those guilty of adultery or concubinage during the lifetime of the insured.
b) those guilty of the same criminal offense
c) those given to public officers in consideration of This amendment was brought about by the need to deal
their offices with situations where there are claims that arise after
death as to the right of the beneficiary.
When insurance is AGAINST LIABILITY , the party in
whose favor or liability exists, is considered as the So the law now states that if one is an irrevocable
beneficiary, beneficiary, and there is no change in that designation,
upon the death of the insured, that designation now
EXAMPLE : You have a warehouseman, and he obtains becomes irrevocable.
insurance to cover him against loss or damage, where
the property is deposited. So he is the one who incurs
the liability. So, he is the beneficiary.

– COMMERCIAL LAW REVIEW –

 111

“IF- LIVING” CLAUSE: WHEN BENEFICIARY PARTICIPATED IN THE KILLING

OF THE INSURED:
In a situation where there is a PREDECEASED where the
beneficiary dies, ahead of the insured. In a situation where the beneficiary is the PRINCIPAL ,
ACCOMPLICE or ACCESSORY in the willful KILLING of the
So what would now be the rights of the beneficiary or insured, the beneficiary will forfeit his rights to the
the heirs or legal representatives of the beneficiary? proceeds in the policy.
If the designation is IRREVOCABLE , then that would Now, in whose favor, is it forfeited?
mean that the legal representative predeceasing the
irrevocable beneficiary would be entitled to the Previously, it would go to the estate of the insured.
proceeds of the insurance upon the death of the
insured, provided the insurance does not contain what But with the amendment to the law, the proceeds now
is known as “IF LIVING” CLAUSE . would go to the other beneficiaries if so stipulated, and
we take a look at the provisions of the policy if there is
An “if living” clause is a provision that will allow a such a provision declaring where the proceeds should
payout to the beneficiary only if he's still alive at the go.
time of the death of the insured.
In the absence of which, that is the only time it goes to
the estate of the insured.

– COMMERCIAL LAW REVIEW –

 112

DOUBLE INSURANCE &

MULTIPLE INSURABLE INTEREST
MODULE 27

In a situation where two insurance companies which

DOUBLE INSURANCE insure the house for P1M, both will share
DOUBLE INSURANCE exists when there is the same proportionately. Since they both insured it for P1M,
insured who is insured by several insurers in respect to they would have to bear the loss at 50% each, or
the same subject and the same interest. P500,000 for each of the insurance companies to make
up the P1M loss incurred by the insured. Provided, that,
EXAMPLE : X obtains insurance from ABC Insurance and the double insurance has the consent of either or both
XYZ Insurance – he insures the same subject, for of the insurance companies.
example, a house; and the same interest, meaning, the
subject or the foundation of the interest is ownership MULTIPLE INSURABLE INTEREST
(he insures the house in his capacity as the owner).
When we speak of MULTIPLE INSURABLE INTEREST ,
Double insurance per se is not prohibited. However, we there is a single subject, but there are different parties
must take a look at the presence of other insurance who have insurable interest and the insurable interest is
clause. An OTHER INSURANCE CLAUSE requires the founded on other rights to it.
consent of one insurer before additional insurance can
be procured. EXAMPLE : In a contract of mortgage, the subject is the
property that has been mortgaged by the mortgagor to
EXAMPLE : X is originally insured by ABC Insurance over the mortgagee. The mortgagor has the same insurable
his house and the risk is fire. He wants to obtain interest to the property and so as the mortgagee. But
additional insurance form XYZ Insurance. Can he do so? the nature of their interest differs from each other.
Insofar as the mortgagor, it is based on his ownership of
A: He can insure the same house against the same risk the property. Insofar as the mortgagee, it is based on
with XYZ Insurance. his interest in the security offered to him to secure the
obligation of the mortgagor.
Is the SUBSEQUENT INSURANCE valid?
The main difference between the insurance procured by
A: It depends. If ABC Insurance’s policy contains an the mortgagor and the one procured by the mortgagee
other insurance clause, X needs to obtain the consent of is that, if it is the mortgagor who procures it, it is an
ABC Insurance prior to securing insurance from XYZ insurance in his own interest. The same is true with the
Insurance. If XYZ Insurance contains an other insurance mortgagee. However, the extent of the interest of the
clause, X must inform XYZ Insurance that he has mortgagor goes up to the VALUE OF THE PROPERTY
insurance form ABC Insurance. while the extent of the interest of the mortgagee is to
NOTE : When there is a failure to comply, there is a the extent of the credit secured by the property.
breach of the policy. Furthermore, when you have a mortgagor procuring the
*The reason why we have rules on double insurance is interest and in case of a loss, loss is paid to the
we would like to prevent over insurance by double mortgagee. The debt is extinguished.
insurance. When the mortgagee procures the insurance, loss is
OVER INSURANCE is a situation where the value of the also paid to the mortgagee but the debt still remains.
insurances exceeds the value of the subject. Instead, there will be subrogation in favor of the
insurer.
EXAMPLE : The value of the house is P1M but the
insurance that is procured is P2M. (This is prohibited OTHER EXAMPLES : In the case of trustor and trustee or
because insurance is for the purpose of indemnity. lessor and lessee, both have insurable interest in the
When we speak of indemnity, you can only be paid an same property. Stated otherwise, there are several
amount that is commensurate to your loss). parties with insurable interest in the same property.

– COMMERCIAL LAW REVIEW –

 113

PERFECTION OF AN INSURANCE CONTRACT

MODULE 28

PROPERTY INSURANCE
BASIC RULE:
When the insured applies for an insurance, he is already
An insurance contract is perfected when the assent or
making an offer to the insurer who may accept, reject,
consent is manifested by the meeting of the minds as to
or make a counter-offer.
the offer and the acceptance upon the thing and the
cause which are to constitute the contract. HOW ACCEPTANCE IS INDICATED:
As between the parties to a contract of insurance, The manifestation of acceptance occurs in the same
specifically the insurer and the insured, there must be a manner as life/health insurance – the issuance of a
manifestation of assent or consent insofar as the offer policy is the manifestation of acceptance (and that is
and the acceptance. You would have to be able to figure where you will have to take a look – if the policy is in
out who is making an offer and who is supposed to accordance with the terms of the offer, you now have a
accept. Once you have figured that out, you can easily perfected contract of insurance).
determine whose assent or consent is required for the
perfection of the insurance contract. In the case of Eternal Gardens Memorial Park v. Philam
Life Corporation, there was an acceptance without
PERFECTION FOR SPECIFIC FORMS OF manifestation of consent. This case involved the sale of
INSURANCE memorial lots where if the buyer is going to purchase
on installments, it is to be accompanied by life
LIFE OR HEALTH INSURANCE insurance in the amount of the balance of the purchase
price of the memorial lot. It is an automatic life
When there is an application for insurance and there is insurance procured by the creditor (Eternal Gardens) in
no payment of the premium, it is an invitation to the favor of the purchaser. In this case, notwithstanding the
insurer to make an offer which the insured must accept. absence of actual acceptance, there was a perfected
contract of insurance because of the arrangement as
If the premium was paid at the time the application is
between the insurance company and the memorial park
made, it is considered as an offer on the part of the
developer (Eternal Gardens).
insured and it is the insurer who is supposed to accept.
The other issue in the case is the matter of acceptance
HOW IS ACCEPTANCE INDICATED: by mail. We do not adhere to perfection of an insurance
Acceptance is indicated when a policy is issued strictly contract once the acceptance has been deposited in the
in accordance with the offer. But if the insurer offers a mail. What we adhere to in the Philippines is the
policy which does not comply strictly with what the COGNITION THEORY – the insured must have actually
insured has offered, the insurer is making a counter- received the copy of the acceptance, or the mail
offer to the insured which the insured can either accept indicating the acceptance.
or reject. Furthermore, there will be an implied
acceptance if unreasonable delay on the return of the
premium happens.

As stated earlier, when an application is made together

with a premium, the insured is making an offer to the
insurer. If the insurer is minded to reject the offer, it
must do so by returning the premium. If it unreasonably
delays to return the premium, such delay will give rise
to the presumption that the offer has been accepted.

– COMMERCIAL LAW REVIEW –

 114

PREMIUM
MODULE 29

2. WHEN THE INSURER MAKES A WRITTEN

THE SIGNIFICANCE OF THE PREMIUM ACKNOWLEDGMENT OF THE RECEIPT OF
PREMIUM , such is conclusive evidence of the
The premium is the agreed price for assuming and
payment of the premium to make it binding and
carrying the risk. The insurer is entitled to the payment
effective notwithstanding any stipulation therein
of a premium as soon as the thing insured is exposed to
that it shall not be binding until the premium is
the peril insured against.
paid;
The payment of a premium is essential to the validity of
Note: It is only conclusive evidence of the payment of
an insurance policy.
the premium to make it valid and effective, but it is not
This is known as the “cash and carry basis” or “no conclusive evidence of payment.
premium payment no policy” rule.
So, that means there is a receipt, but there is still no
Q: What is the meaning of the cash and carry rule? or payment that receipt makes the insurance valid and
What is the cash and carry rule in insurance? binding, but it is not conclusive proof of payment,
because in fact and into there is still no payment.
A: It is the rule that requires the payment of a premium,
so, that you can carry out your policy. So, without 3. where the OBLIGEE HAS ACCEPTED THE BOND OR
payment of the premium, there is no valid and effective SURETYSHIP CONTRACT .
insurance contract.
Note: Here we are talking of property insurance, but
Note: The qualifications to the rule is in life insurance, there is still or liability insurance specifically and there is
because in life insurance, there are instances when still no payment of the premium. But the obligee has
despite non payment of the premium, there is still a already accepted the insurance or the suretyship
valid and effective insurance contract. contract.

So, this is how it works. In suretyship you have an

SO, THE EXCEPTIONS ARE - EFFECTIVE INSURANCE obligor and you have an obligee. so the obligor is
DESPITE NON -PAYMENT OF THE PREM IUM: required by the obligee to get a suretyship contract to
This occurs: guarantee the performance by the obligee of his
obligation. So the obligor now obtains a suretyship
1. IN CASE OF LIFE OR INDUSTRIAL LIFE where the contract presents it to the obligee the obligee accepts
premium is payable monthly or oftener, whenever The suretyship contract. So even if the obligor has not
the grace period applies; yet been the insurer, the contract insofar as the obligee
is concerned is already valid and effective.
Note: Industrial life referring to a situation where the
premiums are paid on a monthly basis. There is
AS TO THE MATTER OF ESTOPPEL –
effective insurance when the grace period is applicable.
So, in life insurance, premiums are payable in advance. It also occurs when the insurer is estopped from
claiming otherwise.
Example: Your life insurance coverage for the year
2020, you have to pay your premium on let's say it There are three instances, and one of which are to be
follows the calendar year in January and you normally specific there are two instances in life. And when you
would have a grace period of 30 days in which for which speak of property, there are also two instances because
you are allowed or in which you are allowed to pay for the first the grace period is applicable to life. The
your premium. second exception, where there is a written
acknowledgement applies both to life and to property.
So, if for example, the premium is due on January 1 And the third, when you speak of a surety, that applies
2020, and you do not pay, you normally would have a only to property or specifically, liability insurance, these
30 day grace period or up to the end of January 2020 to are your exception,
pay the premiums for your life insurance policy for the
year 2020. Then, to jurisprudence, the matter of estoppel. If the
circumstances indicate that the insurer has consented,
So, during that period or during the grace period, despite non payment of the premium to be bound, then
notwithstanding failure to pay, there is a valid and estoppel will be applicable insurer now will be stopped
effective life insurance coverage. from claiming otherwise.

– COMMERCIAL LAW REVIEW –

 115

Examples: Some examples of these would be when Note: So, if you have not paid the premiums, the policy
there is a postdated check the insurer by accepting if by will lapse and you can apply for a reinstatement within
practice, he has or he is willing to accept a post dated what period within a period of three years or such other
check in payment, then there might be a valid and stipulated longer period from the date of your default.
effective insurance policy. But you have to be careful,
because we would have to contend ourselves with the This is not an absolute right as it is conditioned on
rule as to when a post dated check is equivalent to insurability of the insured or evidence of good health
payment. Because normally when it is to be paid by and the payment of all overdue premiums and
cheque, it is only when the check is cleared, that indebtedness, if any.
payment becomes effective. So there must be other
So here, insurance company determines whether you
attendant circumstances indicating an intent to be
remain to be insurable. So, again, going back or in
bound.
preparation for our subsequent discussion on
concealment and misrepresentation, there will be
NON-DEFAULT OPTIONS IN LIFE INSURANCE
applicable the rules on concealment and
The non-default options are: representations in condition in connection rather in
connection with your insurability.
1. GRACE PERIOD
REFUND OF PREMIUMS
Meaning even if you have not paid as long as you're still
within the grace period, there is valid and effective life
insurance. WHEN CAN THERE BE A REFUND OF PREMIUMS?
1. To the whole premium, when no part of the interest
2. CASH SURRENDER VALUE in the thing insured is exposed to any of the perils
The cash surrender value refers to a value that is insured against.
attached to the life insurance policy. if you have been Note: This usually happens in property insurance.
paying for a significant amount of time, you can
exchange the policy for its cash surrender value. Example: In marine insurance, where the insurance is
for a voyage and the voyage is canceled. So in that
3. PAID UP INSURANCE particular situation, the insured vessel is not exposed to
any of the perils insured against.

2. Where the insurance is made for a definite period

4. AUTOMATIC LOAN CLAUSE, AND of time and the insured surrenders his policy before
Paid up insurance refers to a situation where you are no the expiration of the period. It does not apply if a
longer unable to pay the premiums Instead of the policy short period rate has been agreed upon or it is a life
being terminated The premiums that you have paid will insurance contract.
be computed. And the insurer will determine how much Note: Here there will be a refund of the policy or of the
of your initial coverage you have already paid for. premiums. It does not apply however, when there is a
Example: You secured 5 million pesos worth of short period rate or it is a life insurance contract.
insurance, and you have been paying premium for at So here, let us say you plan to engage in a particular
least or for a period of let's say two to three years and kind of business activity for a period of six months. And
you are no longer unable to continue the payment. if you're able to complete it in four months, you can
What will happen is the insurer will compute what is the return the policy before the six month period expire and
equivalent of the premium paid and will gishu to you you may be entitled to a refund of a portion of the
paid up insurance. So instead of 5 million insurance, you premium. This will not apply however, when there is a
may have insurance now on the for 1 million or 500,000 short period rate.
and it is considered as fully paid.
When there is a short period rate there is a specific
5. REINSTATEMENT amount that is refundable when the policy is to be
returned
A reinstatement is a remedy that is available after your
policy lapses. Lapses in the sense or account of the 3. When the contract is voidable on account of fraud
non-payment of a premium. or misrepresentation of the insurer or the agent.

REINSTATEMENT OF THE POLICY Note: Here, they're the ones guilty of fraud or
misrepresentation. So they are supposed to or they are
Reinstatement can be permitted within 3 years, or a not entitled to keep any part of your premium.
stipulated longer period, from the date of default.

– COMMERCIAL LAW REVIEW –

 116

4. Where the contract is voidable on account of facts, NOT RECOVERABLE PREMIUMS:

the existence of which the insured was ignorant
without his fault. Premiums cannot be recovered:

Example: An example would be you insure your 1. if the perils insured against has existed, and the
property not knowing that you no longer have the insurer has been liable for any period, the period
property or you no longer own the property. being entire and indivisible.

So here you do not have insurable interest, that is what Example: An example would be a voyage that is
makes the insurance voidable. supposed to take three days. But if it is completed in
two years, that is an indivisible period. So even if it was
5. When by any default of the insured other than completed in two days, there can be no refund of the
actual fraud, the insurer never incurred any liability policy for the one day that was saved because the
under the policy. insurance was for the entire voyage

6. In case of over-insurance. 2. in life insurance because it is considered as an

entire contract of assurance for life, and

3. when the insured is guilty of fraud or

misrepresentation.

Note: If he is the one guilty of fraud or

misrepresentation as a penalty for the fraud or
misrepresentation, there is no right to get a refund of
the premiums.

– COMMERCIAL LAW REVIEW –

 117

CONCEALMENT AND REPRESENTATIONS

MODULE 30

2. By neglect to make further inquiries.

CONCEALMENT AND REPRESENTATIONS
- This may be dictated by the kind of answer or
CONCEALMENT response that the insured makes to a question
coming from the insurer
- A neglect to communicate what one knows and
ought to communicate. - For example, the insurer will ask if the insured has
been confined in a hospital. The insured will
REPRESENTATIONS respond by saying, “Yes, I have been confined in a
hospital.”
- Oral or written statements of a fact or condition
affecting the risk. - One other way by which the insured can respond, is
to say, “Yes, I was confined in a hospital for
WHAT WE NEED TO REMEMBER! pneumonia. During these days and in this particular
hospital. “
Concealment Representations - So you have two types of responses to the same
passive inducement active inducement question.
They tend to induce the insurer to assume the risk or fix
the premium or both. This is also known as the test of - There is a neglect to make further inquiries, when
materiality. the response, requires further inquiries or questions
A material fact is not A material fact is or clarifications.
revealed communicated.
- The first response requires further inquiries as to
when, why and what must be done.
REQUISITES OF CONCEALMENT:
- The second inquiry or second the second response
1. Facts are within the knowledge of the insured; to the same inquiry is complete in itself. So that
- You cannot insure something you are not aware of. statement can be relied upon already.

2. Facts must be material; - So, if there is an allegation of concealment, because

the insured was confined in several hospitals, and
- Materiality has something to do with how it will the answer he gave was simply “yes, I was confined
affect the decision of the insurer to assume the risk to the hospital”, then there is a waiver of
or fix the premium. information.
3. The other party has no means to ascertain the facts; - If the answer is complete, and it was discovered
- The party to whom the communication is due, in that the insurance was confined in another hospital
concealment, or to whom the communication is for another ailment, and that was not disclosed,
made, in representation, has no ability to determine there will be concealment, because here, there is no
the facts independently. waiver of information. The answer was complete,
and could be relied upon.
4. The party with a duty to communicate does not
make any warranty. WHEN CONCEALMENT TAKES PLACE
- Because if a warranty is made, then the obligation
It takes place prior to or at the effectivity of the policy.
to communicate the fact becomes superfluous.
It may take place after effectivity in the case of
WAIVER OF INFORMATION
reinstatement of a lapsed policy.
In connection with concealment, a waiver of
information can take place in two ways:

1. By the terms of the insurance policy.

- It must be noted that a “no medical examination”
insurance does not involve a waiver of information.

– COMMERCIAL LAW REVIEW –

 118

KINDS OF REPRESENTATIONS: after the policy is issued. So, is there a

misrepresentation?
AFFIRMATIVE The answer is no. There is no misrepresentation,
because the representation while false at the time it
refer to facts existing when the contract begins;
was made, they were already true at the time the
PROMISSORY contract takes effect.
CONSEQUENCES OF CONCEALMENT AND
refer to facts or circumstances that will happen during
the term of the insurance. MISREPRESENTATION

They do not form part of the contract. They are Both entitle the injured party to rescind the contract of
collateral inducements to the contract. They may, insurance. It cannot be argued that the concealment or
however, qualify an implied warranty. misrepresentation was unintentional because there will
be ground to rescind, regardless of whether it is
FOR EXAMPLE: intentional or not.

implied warranty in marine insurance – sea worthiness. There is no need for a causal connection between the
facts concealed or misrepresented, and the reason for
- If the insured says to the insurer, “I need to replace the loss.
my navigation system, and I have not gotten around
to doing that.” – This is a representation. It refers to EXAMPLE:
a fact existing when a contract begins.
- Here, the policy is nevertheless issued by the The insured conceals that he is suffering from a heart
insurer. The insured goes voyage and loss occurs ailment, and he dies on account of a motor vehicle
which is attributable to a violation of the implied accident. Prior to payment of the proceeds, there is a
warranty of sea worthiness. determination that he concealed his heart ailment.
- Upon investigation, it was determined that the Would there be concealment? Yes, there will be
defective navigation system has something to do concealment, even if there was no connection between
with the loss. the fact concealed and the reason for the loss.
- Question: Is the insurer still liable?
- Yes. Because the representation qualified the LIMITATIONS OF THE RIGHT TO RESCIND:
implied warranty. 1. Waiver arising from acceptance of the payment of
- When the insured said, “my navigation system the premium knowing that there exists ground to
needs to be replaced”, and the policy is rescind;
nevertheless issued, he cannot be cited for a
violation of the implied warranty because the - If the insurer is aware that there is concealment or
insurer accepted his representation that the representation, but nevertheless accepts payment
navigation system has to be replaced of the premium, they are waiving the right to
rescind.
WHEN IS A REPRESENTATION BECOMES
MISREPRESENTATION 2. Incontestability clause

A misrepresentation exists when the facts fail to REQUISITES:

correspond with the assertions. a. Life insurance payable upon the death of the
In determining whether a representation is false, there insured;
is a presumption that when it is made, it refers back to
the date the contract takes effect. b. It has been in force for a period of 2 years from
the date of issue or last reinstatement.
- If a representation is false at the time it is made, but
already true when the contract takes effect, there is - If incontestability clause applies, even if
no misrepresentation. concealment or misrepresentations attends the
- On the other side, if it were true when made but issuance of the policy, but the policy has already
already false when the contract takes effect, there will been in force for a period of 2 years from the date
be a misrepresentation. of issue or last reinstatement, then the insurer can
no longer rescind on the ground of concealment or
EXAMPLE: misrepresentation.
Insured says, “I have already completed my yearly
medical examination.” But in truth, he has not yet
undergone his yearly medical examination. So the next
day he undergoes the medical examination, and the day

– COMMERCIAL LAW REVIEW –

 119

NOTE these rulings: NOW, in the advent of the two rulings above, if the
insured has already died, the policy becomes
Manila Bankers Life v. Aban (702 SCRA 417) and Sun incontestable. This means that the insurer only has a
Life of Canada v. Sibya (GR no. 211212, June 8, 2016) two-year period within which to contest the policy
provided the insured has not yet died.
Ruling: When the insured dies within the 2-year period,
the policy is already incontestable. If the insured dies two months from the time the policy
is issued, then, it can no longer rescind the policy even if
Previous to these 2 rulings: the period of 2 years is
subsequently discovers concealment or representation,
available to the insurer to contest the policy on the
even if the discovery takes place within two years from
ground of concealment or misrepresentation. It is fully
the date of issue or last reinstatement.
available even if the insured has already died.

- Example: The insured dies after the policy has been

issued. Eventually, they are able to discover
concealment after the death. – they can still rescind
the policy.

– COMMERCIAL LAW REVIEW –

 120

WARRANTY
MODULE 31

DEFINITION WHEN A WARRANTY IS VIOLATED

A WARRANTY is a statement or promise stated in the When a warranty is violated, it entitles the injured party
policy or incorporated therein by reference, whereby to rescind.
the insured expressly or impliedly, contracts as to the
past, present, or future existence of certain facts, A BREACH WITHOUT FRAUD exonerates the insurer
conditions, or circumstances, the literal truth of which is from the time it occurs or where it is broken at its
essential to the validity of the contract. inception prevents the policy from attaching to the risk.

They can be affirmative, referring to matters that exist EXAMPLE : If warranty of seaworthiness is violated and
at or before the issuance of the policy or promissory, fails to take necessary repairs, the insurer now will be
referring to promises or undertakings that will exist, be exonerated from the time there is failure to bring the
done, or omitted to be done after the policy takes ship back to a state of seaworthiness.
effect.
A BREACH OF A PROMISSORY WARRANTY is excused
KINDS when upon the arrival of the time for performance: (a)
loss has already occurred, (b) performance becomes
1. AFFIRMATIVE unlawful, or (c) performance becomes impossible.

2. PROMISSORY “BROKEN AT ITS INCEPTION” means there is breach of

affirmative warranty; the policy does not attach to the
Warranties may also be EXPRESS (rider; that which is risk hence there is no insurance.
found in the contract) or IMPLIED (exists only in Marine
Insurance) When the breach is excused, the insurer continues to be
liable until the expiration of the period in the policy.
IMPLIED WARRANTIES IN MARINE INSURANCE -
Seaworthiness, Not engage in illegal or unlawful activity,
carry requisite documents to show nationality or
neutrality, against improper deviation.

– COMMERCIAL LAW REVIEW –

 121

NOTICE OF LOSS, PROOF OF LOSS,

AND CLAIM SETTLEMENT
MODULE 32

NOTICE OF LOSS AND PROOF OF LOSS CLAIM SETTLEMENT

NOTICE OF LOSS It is the indemnification of the loss suffered by the

insured, who may also be reinsured, the insurer in
Notice of loss is the formal notice of the occurrence of subrogation, or a third party in insurance against
the loss insured against. It is given by the insurer or liability.
some person entitled to the benefit of the insurance to
the insurer (ex. Insurance against liability, here the
UNFAIR CLAIM SETTLEMENT OCCURS WHEN THE
person in favor of whose disability has been insured,
INSURER:
may give notice to the insurer).
a) knowingly misrepresents facts or policy provisions,
As a rule, the notice of loss shall be given without b) fails to acknowledge communications with
unnecessary delay. This will provide the insurer the reasonable communications with reasonable
chance to determine whether it is liable and to what promptness,
extent it is liable. c) fails to adopt and implement reasonable standards
for prompt investigation of claims,
PROOF OF LOSS
d) does not attempt to effectuate prompt, fair, and
Proof of loss is the evidence given by the insured to the equitable settlement where liability is clear, or
insurer upon the occurrence of the loss stating the e) compelling policy holders to sue by offering
particulars and the necessary data to enable the insurer amounts substantially less than that which they are
to determine its liability and the extent thereof. entitled to.

Unfair claim settlement is a ground for the suspension

or revocation of the certificate of authority of the
insurance company.

PAYMENT OF CLAIMS

LIFE INSURANCE - must be paid upon maturity or if

payable in installments, when they fall due. If it matures
by death, within 60 days after presentation of a claim or
proof of death. The refusal or failure to pay entitles the
beneficiary to collect interest at twice the ceiling
prescribed by the Monetary Board during the delay,
unless the same is due to a ground that the claim is
fraudulent.

NON-LIFE INSURANCE - within 30 days after proof of loss

has been received and loss has been ascertained by
agreement or arbitration. If ascertainment is not made
within 6 days from receipt of proof of loss, it is payable
90 days after receipt of proof of loss. Unreasonable
refusal or failure to pay within the periods will entitle
the insured to payment of interest at the same rate as
life insurance, and in the event of litigation these acts
shall be prima facie evidence of unreasonable delay
amounting to unfair claim settlement.

– COMMERCIAL LAW REVIEW –

 122

PRESCRIPTION & SUBROGATION

MODULE 33 & 34

PRESCRIPTION
THINGS TO REMEMBER:
The prescriptive action for the filing of an action on the 1. Applies only in property insurance.
policy is not less than 1 year from the time the cause
of action accrues. - It does not apply in any other form of insurance.
- The period here should always be at least 1 year. 2. It occurs without need of assignment or express
stipulation.
- The cause of action accrues from the time of the
denial of the claim. - Once the insurer has paid in the property insurance
policy, subrogation takes place as a matter of
- There is no extension of the prescriptive period by course. That means that the insurer takes the place
the filing of submission of any reconsideration on of the insured as against the wrongdoer, it can now
the denial of the claim. recover whatever it has paid to the insured from the
- The minute the claim is denied, the prescriptive wrong doer,
period commences to run. - The insurer is constituted as a subrogee in equity.
Any agreement as to the period can be longer but not Note: If the insured does something, that will affect the
shorter, otherwise it is void. right of the insurer to subrogation, then it would not be
Absent any agreement, it will be 10 years as prescribed entitled to payment.
the Civil Code. Once there is now an injury or damage sustained by the
In motor vehicle insurance, a written notice of claim insured, and the insured absolves the wrongdoer where
must be filed within 6 months from the date of the the insured cannot claim from the insurance. Because
accident, otherwise the claim is waived even if the once he has absolved the wrongdoer, it is as if the
action is brought within 1 year. insured is saying he has sustained no damage or injury
- For example, there is a 2-year period to bring an that will in turn make the insurer liable.
action to bring a motor vehicle insurance policy,
FOR EXAMPLE
there is still a need to file a written notice of claim
must be filed within 6 months from the date of the The insured sustained damage or injury in the amount
accident. of 50,000 pesos. It has already recovered 25,000 from
- If no written notice of claim is filed within 6 months, the wrongdoer that recovery will have to be charged as
even if you are bringing the action within the 2-year against the liability of the insured. So if the liability of
period, that action is considered as having been the insurer is 50,000, the insured has already recovered
waived already. Therefore, there can be no action 25,000 from the wrongdoer, then that would mean the
brought on the motor vehicle insurance policy. recovery of the insured from the insurer will now be
limited only to 25,000.
On the other hand, if, for example, the insured has
SUBROGATION recovered the entire 50,000 and furthermore recovers
another 50,000 from the insurer. In this case, the
Subrogation is act of substituting the insurer in place liability of the insured, is to return the 50,000 that it has
of the insured as against the wrongdoer after it has recovered from the insurer. Because by receiving
paid the claim. 50,000 from the wrongdoer where the insured no
It occurs: longer has any loss damage or injury. That should be
paid for by the insurer.
(a) to make the person who caused the Loss legally
responsible,
(b) prevent the insured from recovering twice,
(c) uphold public policy so that the tortfeasor will not
be absolved from liability.
This applies property insurance and occurs without
need of assignment or express stipulation. The insurer
is constituted as a subrogee in equity.

– COMMERCIAL LAW REVIEW –

 123

TRANSPORTATION
MODULE 35

1.1 The specific aspects that will be discussed are:

SUBJECT COVERAGE (a) Public Utilities as covered by the Public Service Act 2
The discussion on transportation will cover the (b) Common Carriers as covered by the Civil Code3 (c)
following topics as outlined in the 2020 Bar Syllabus Commercial Contracts for Transportation Overland4 (d)
for the combined 2020 and 2021 bar examinations: Maritime Commerce5

a) common carriers, 2. Both the primary and secondary laws however

b) bill of lading, are subject to the Constitution as the supreme law.
c) maritime commerce, 2.1 Section 11, Article XII- National Economy and
d) Public Service Act, and Patrimony provides that the grant of any franchise or
e) Warsaw Convention. any form of authorization to operate a public utility is
limited to Filipinos or Filipino corporations owned at
TRANSPORTATION DEFINED
least 60% by Filipinos. The participation of foreigners
Generally speaking, it has been referred to as the in the equity and the governing body is thus limited to
movement of goods or persons from one place to 40% but it is required that all executive and managing
another, by a carrier. officers must be Filipino. Note the ruling in the case of
Gamboa v. Teves providing for the determination of
Simply, it refers to the movement of persons or things Filipino nationality.
from one place to another, and is immaterial whether
the carrying be over land, water or air. It includes 2.2 The Constitution does not prohibit the mere
waiting time, loading or unloading, stopping in transit, formation of a public utility corporation without the
and all other accessorial services in connection with required proportion of Filipino capital. What is
the loaded movement.1 prohibited is the grant of a franchise or other form of
authorization for the operation of a public utility to a
As a contract, it is one whereby a person, natural or corporation already in existence but without the
juridical, obligates himself to transport persons, goods requisite proportion of Filipino capital.6
or both, from one place to another, by land, water or
air, for a price or compensation. 2.3 The Constitution does not require a franchise
before one can own the facilities needed to operate a
LAWS ON TRANSPORTATION THAT HAVE public utility as long as it does not operate them to
serve the public. The ownership per se of the facilities
APPLICATION IN THE PHILIPPINES
of a public utility does not constitute the owner
As part of our discussion, we will be taking up the thereof as a public utility. It is the use thereof to serve
following laws: the public that will constitute it as a public utility.7

1. Provisions of the Civil Code for common carriers 2.4 There is a clear distinction between operation
2. For bills of lading and maritime commerce, and ownership of facilities to serve the public.
3. Provisions of the code of commerce, and Ownership is defined as a relation in law by virtue of
4. Carriage of goods which a thing pertaining to one person is completely
5. Public Service Act in so far public utilities subject to his will in everything not prohibited by law
6. Warsaw and Montreal Conventions in so far as or the concurrence with the rights of another.8 This use
transportation by air
as an incident of ownership is limited by law when it is
to be operated and used to serve the public as a public
1. Whether transportation is by land, sea or air, utility.9 The right to operate may exist independently
the primary law are Articles 1732 to 1766 of the New
Civil Code. The secondary laws, particularly as to the
rights and obligations of a common carrier are the
Code of Commerce and/or special laws.

2
Commerce Act No. 146, as amended by the Warsaw Convention of 1929 as to carrier liability
3
Articles 1732-1766
4
Articles 349-379, Code of Commerce
5
Articles 673-736, Article 580-584, Code of Commerce as superseded by RA 6106, Articles
806-845, Code of Commerce, Carriage of Goods by Sea Act, Commerce Act No. 65
6
People vs. Quasha, 93 Phil 333
7
Iloilo Ice and Cold Storage vs. Public Service Board, 44 Phil 551
8
Tolentino II, Commentaries and Jurisprudence on the Civil Code of the Philippines
1
87 C.J.S. Transportation 9
Tatad vs. Garcia, 243 SCRA 436

– COMMERCIAL LAW REVIEW –

 124

and separately from ownership of the facilities. A Q: When is there need to comply with the requirement
person can thus own the facility but not operate it as a of the Constitution?
utility or may operate a public utility without owning
the facilities, like in the lease of airplanes/vessels. A: There is a need to comply with the requirement of
the Constitution, when there is an application that is
2.5 Hence, the mere formation of a public utility made for the grant of a franchise or some form of
corporation does not ipso facto characterize it as one authorization. Prior to that, there is really no absolute
that is operating a public utility. The moment of requirement, as of yet, that the entity is at least 60%
determination of Filipino nationality is when it applies Filipino owned.
for a franchise to operate a public utility.
This will only be material at the time of the filing of its
2.6 This grant is always subject to the condition application for a franchise or any grant of authority.
that it may be amended, altered or repealed when the
common good so requires as Section 17, provides that Furthermore, the grant of authority is always subject to
in times of national emergencies, when public interest the provisions of Sections 17, 18 and 19 of the same
requires and under reasonable terms, it may Article or Provisions of the Constitution.
temporarily take over the operation of a privately
owned public utility or business affected with public CONSTITUTIONAL LIMITATIONS ON THE GRANT
interest. OF A FRANCHISE OR AUTHORITY TO OPERATE A
PUBLIC UTILITY
2.7 Under Section 18,10 if in the interest of national
welfare or defense, upon payment of just 1. Section 17 has something to do with the right of the
compensation, there may be a transfer to public state to have the grant of authority or the franchise
ownership of utilities and other private enterprises. amended, altered or repealed when the common
good, requires it. Specifically, Section 17 also makes
2.8 Under Section 19,11 the state may regulate or mention of times of national emergencies when
prohibit monopolies when the public interest requires public interest requires and under reasonable
and no combination in restraint of trade or unfair terms, there may be temporary takeover of the
competition shall be allowed.12 operation of a privately owned public utility or
business affected with public interest.
Note: Always remember that all these laws are subject
to the Constitution as the supreme law. 2. Section 18 refers to the right of the state to
expropriate in the interest of national welfare or
Specifically to Section 11 Article 12 of the 1987
defense, and upon payment of just compensation,
constitution, which provides that the grant of any
there can be a transfer to public ownership of this
franchise or any form of authorization to operate a
utilities, and other private enterprises.
public utility is limited to Filipinos, or Filipino
corporations, owned at least 60% by Filipinos. 3. Section 19 where the state may regulate or prohibit
monopolies when the public interest requires, and
In so far as juridical entities are concerned, the
that no combination in restraint of trade or unfair
participation of foreigners in the equity and governing
competition, shall be allowed.
body of this public utilities will be limited to 40%.

There is also an additional requirement that all

executive and managing officers must be Filipino.

CASE: GAMBOA V. TEVES RULING

Because that case is determinative of whether a
juridical entity is Filipino for purposes of securing a
franchise or any authorization to operate as a public
utility.

10
Article XII, National Economy and Patrimony, 1987 Constitution
11
Article XII, National Economy and Patrimony, 1987 Constitution
12
NPC vs. Court of Appeals, GR No. 112702, September 26, 1977

– COMMERCIAL LAW REVIEW –

 125

COMMON CARRIERS
MODULE 36

offer such goods as it is accustomed to carry and

DEFINITION tender reasonable compensation for carrying them
1. A common carrier is defined as: Persons, c) A common carrier is subject to regulation as it is a
corporations, firms or associations engaged in the public service. A private carrier is not
business of carrying or transporting passengers or goods d) The common carrier is bound to exercise
or both, by land, water or air, for compensation, extraordinary diligence while a private carrier owes
offering their services to the public. only diligence of a good father of a family
e) A common carrier cannot stipulate that it is exempt
1.1. The elements of a common carrier are: from liability for the negligence of its agents or
employees. Such stipulation is void as it is against
a) persons, corporations, firms or associations public policy. A private carrier may validly enter
b) engaged in the business of carrying or transporting into such stipulation.
passengers, goods or both
c) the means of carriage is by land, water or air 2. A common carrier is required to obtain a certificate of
d) the carrying of passengers, goods or both is for public convenience. However, the absence thereof does
compensation not mean that it is not a common carrier nor is it
e) the service is offered to the public without required to incur liability as a common carrier. The
distinction. liability arises upon acting as a common carrier.

1.2. Engaged in the business is deemed to cover 2.1. To exempt it from the liabilities because it has not
operations whether regular or scheduled, occasional, obtained the necessary certificate of public convenience
episodic or unscheduled. is offensive to sound public policy; that would be to
reward such carrier precisely for failing to comply with
1.3. One is a common carrier even if he has no fixed and the applicable statutory requirements.
publicly known route, maintains no terminals and issues
no tickets. DEGREE OF DILIGENCE REQUIRED OF A
COMMON CARRIER
1.4. The law does not make any distinction whether the
carriage of goods or persons is the principal or merely 1. Regardless of whether the object are goods or
ancillary activity of the carrier as in the case of a junk passengers, a common carrier must observe extra
dealer who back-hauls cargo of merchants on its return ordinary diligence.
trip.
1.1. While there is no expressed definition, it should
1.5. The true test of whether the character of the use is mean greater than ordinary diligence as may be
whether the public may enjoy it by right or by required by the nature of the obligation and the
permission. Note that the contract of transportation is a circumstances of persons, time and place.
consensual contract. Hence, a common carrier engages
in a continuous offer. If you flag a common carrier 1.2. The requirement is such because of the nature of
down, the contract becomes perfected and is consistent the business and by reason of public policy.
with the idea that entering with a contract with the
common carrier is a matter of right and not permission. 2. The failure to exercise the required degree of
You would know when the carrier you are going to flag diligence is a breach of the contract.
down is a common carrier because it should hold itself 2.1. If loss, destruction or deterioration of the goods
out principally as such. occurs or death or physical injuries is suffered by a
1.6. To further distinguish: passenger, there is a presumption of negligence that
arises.
a) The common carrier holds himself out in common,
that is, to all persons who choose to employ him, 2.2. If the damage does not fall within the instances
ready to carry for hire while the private carrier or stated, it does not mean that there is no recovery
special carrier agrees in some special case with against the common carrier. The grounds for recovery
some private individual to carry for hire will have to be proven as there is no presumption of
b) A private carrier is not bound to carry for any negligence that arises. An example would be damages
reason unless it enters a special agreement to do due to a delay in delivery.
so. A common carrier is bound to carry for all who

– COMMERCIAL LAW REVIEW –

 126

TRANSPORT NETWORK COMPANY AND place and in a proper manner to be transported. This is
TRANPORTATION NETWOR VEHICLE SERVICE when the contract of carriage is perfected.

1. A transport network company is an organization Such person must have a bona fide intention to use the
that utilizes a mobile application to enable people to facilities of the carrier, possess sufficient fare with
secure individual and carpooling rides from drivers who which to pay for his passage, and present himself to the
use their own vehicles. They are also referred to as ride- carrier for transportation in the place and manner
hailing companies, while a transportation network provided. If he does not do so, he will not be
vehicle service (Tnvs) refers to the driver and his vehicle considered a passenger and the carrier does not owe
that is utilized to provide the individual or carpooling him extraordinary diligence.
ride that is arranged through the TNS.
When an airline issues a ticket to a passenger,
1.1 Previously a TNVS was already considered a confirmed for a particular flight on a certain date, a
common carrier under Land Transportation Franchising contract of carriage arises. The passenger has every
and Regulatory Board (LTFRB) Circular No. 2015-018-A, right to be transported on that flight and that date, and
while a TNC was defined in Department of it becomes the airline’s obligation to carry him and his
Transportation Order No. 2015-011 as "an organization luggage safely to the agreed destination without delay.
whether a corporation, partnership, sole proprietor, Further, the contract of carriage is perfected if it can be
that provides pre-arranged transportation services for established that the passenger has checked in at the
compensation using an internet-based technology departure counter, passed through customs and
application or digital platform technology to connect immigration, boarded the shuttle bus and proceeded to
passengers with drivers using their personal vehicles.” the ramp of the aircraft and that his baggage has
already been loaded in the aircraft to be flown with the
Under Department of Transportation Order No. 2018- passenger to his destination.
013, effective June 11, 2018, a TNC and TNVS, are
expressly considered as common carriers and classified 3. Prior to perfection of the contract of carriage of
as public utilities. passengers, there is the contract to carry, that is, an
agreement to carry a passenger at some future date.
2. The principal consequence of the classification This contract is consensual and is therefore perfected
is to require both to secure a certificate of public by mere consent. In this instance, an action for damages
convenience from the LTFRB. For this purpose, they based on a breach of the contract to carry may be
must be considered under the law as a Filipino citizen. sustained, even if no ticket is issued.

WHEN THE CONTRACT AND EXERCISE OF SPECIFIC OBLIGATIONS OF A COMMON CARR IER
DILIGENCE BEGINS AND ENDS
1. As far as goods, a common carrier is responsible
1. In a contract for carriage of goods – it for its loss, destruction or deterioration.
commences from the time the goods are
unconditionally placed in the possession of, and The common carrier must exercise vigilance in the care
received by the carrier for transportation until the same and custody of the goods. Unless the exceptions apply,
shall have been delivered actually or constructively by a common carrier is presumed to have been at fault or
the carrier to the consignee who has the right to receive acted negligently.
them. It is the unconditionally placing of the goods in
2. The exceptions is an exclusive list. No other
the possession of and receipt by the carrier that will
justifications will excuse liablity:
signal perfection of the contract.
2.1 Flood, storm, earthquake, lightning, or other
It remains in full force and effect even if they are
natural disaster or calamity. For it to apply, the
temporarily off-loaded or stored in transit unless the
following must be present:
shipper or owner has made use of the right of stoppage
in transit. a) such must be the proximate and only cause
b) due diligence was exercised to prevent or minimize
It continues even during the time they goods are stored
the loss, before, during and after its occurrence,
in a warehouse of the carrier at the place of destination
and
until the consignee has been advised of the arrival and
c) the common carrier is not guilty of delay in
has had a reasonable opportunity thereafter to remove
transporting the goods. Note that fire is not a
or otherwise dispose of them.
natural disaster or calamity unless cause by
2. In a contract for the carriage of passengers- it lightning or some other natural disaster.
commences the moment the person who purchases the
ticket from the carrier presents himself at the proper

– COMMERCIAL LAW REVIEW –

 127

2.2 Act of the public enemy in war, whether 3.1 The common carrier is also liable if the death or
international, one that presupposes the existence of an injury arises from the negligence or willful acts of its
actual state of war, and refers to the government of a employees, although the employees may have acted
foreign nation at war with the country to which the beyond the scope of their authority or in violation of
carrier belongs, or civil, when parties in rebellion occupy orders. The liability does not cease upon proof of the
and hold in a hostile manner a certain portion of the exercise of diligence of a good father of the family in the
territory, when they have declared independence and selection and supervision of the employees. This liability
have in the field a regularly organized force in armed extends only to acts which the carrier could foresee or
hostility. For it to apply, the following must be present: avoid through the exercise of the degree of diligence
(a) such must be the proximate and only cause (b) due required and neither can it be eliminated or limited by
diligence was exercised to prevent or minimize the loss, stipulation, by the posting of notices, by statements on
before, during and after the act of the public enemy. the ticket or otherwise. However, in a like manner the
Note that pirates on the high seas stand as an exception passenger must observe the diligence of a good father
as they are considered as enemies of all civilized of a family to avoid injury to himself.
nations, and their depredations on a common carrier
will excuse him from liability. 3.2 If the acts of the employee is not undertaken in
the line of duty, the carrier is not liable. However the
2.3 Act or omission of the shipper or owner of the rule on strangers or other passengers will apply as the
goods. For it to apply, such must be the proximate and common carrier is liable for injuries suffered by a
only cause. If the shipper or owner merely contributed passenger on account of the wilful acts of other
to the loss, destruction or deterioration, the proximate passengers or strangers, if the common carrier’s
cause being the negligence of the common carrier, it employees through the exercise of the diligence of a
shall still be liable for damages but it shall be equitably good father of a family, it could have prevented or
reduced. An example would be a misdirection of the stopped the act or omission.
shipment by the shipper, or interference by the shipper
with the goods after acceptance. Note that a shipper 3.3 The contributory negligence of a passenger is
who delivers the goods to the carrier during a storm is not a defense that will excuse a carrier from liability for
not guilty of negligence so as to excuse the carrier damages on account of death or injury, if the proximate
which consents to receive them from liability for loss cause thereof is the negligence of the common carrier,
sustained as a result of the storm. but the amount shall be equitably be reduced. Hence,
the only effect of such is to mitigate the liability.
2.4 The character of the goods or defects in the
packaging or in the containers. For it to apply, such PROHIBITED AND ALLOWABLE STIPULATIONS IN
must be the proximate and only cause. The common A CONTRACT OF CARRIAGE
carrier must have protested if visible and still exercise
due diligence to forestall or lessen the loss. If the carrier 1. The following or similar stipulations shall be
accepts despite the condition, it is not relieved of considered unreasonable, unjust and contrary to public
liability for loss or injury. policy:
a) that the common carrier shall not be responsible for
2.5 Order or act of competent authority resulting in
the acts or omissions of his or its employees
the seizure or destruction. For it to apply, the public
b) that the common carrier’s liability for acts
authority must have the power to issue the order and
committed by thieves, or of robbers who do not act
that the same be lawful.
with grave or irresistible threat, violence or force, is
3. For passengers, a common carrier is bound to dispensed with or diminished
carry them safely as far as human care and foresight can c) that the common carrier is not responsible for the
provide, using utmost diligence of a very cautious loss, destruction, or deterioration of goods on
person with due regard for all circumstances. In case of account of the defective condition of the car,
death or injury , common carriers are presumed to have vehicle, ship, airplane or other equipment used in
been at fault or to have acted negligently, unless they the contract of carriage.
exercised extra-ordinary diligence.
2. In a contract for the carriage of goods, the
The other known exception as to liability is when parties can stipulate on the exercise of a lesser degree
carriage is gratuitous where the parties can stipulate of diligence, but not that below the diligence of a good
against the presumption as liability for negligence may father of a family, provided:
be limited, but it should not include limitation of liability a) the stipulation be in writing and signed by both
for willful acts or gross negligence. If the fare is just parties
reduced, it will not justify any limitation on liability. b) that it be supported by valuable consideration other
than the service rendered by the common carrier
c) that it be just and reasonable, and not contrary to
law.

– COMMERCIAL LAW REVIEW –

 128

2.1 A stipulation limiting the common carrier’s c) the spouse, legitimate or illegitimate descendants
liability for delay on account of strikes or riots is valid. and ascendants may demand payment of moral
damages for mental anguish by reason of death.
2.2 A stipulation fixing the amount that may be
recovered is allowed provided: Prevailing jurisprudence has fixed indemnity for death
a) it is reasonable and just under the circumstances at PHP 50,000.00.
b) it is fairly and freely agreed upon. The computation of net earning capacity is life
2.3 A stipulation that the liability of the common expectancy [80 less the age of the deceased multiplied
carrier is limited to the value of the goods as appearing by 2/3] multiplied by [gross annual income- necessary
in the bill of lading, unless the shipper or owner living expenses (in the absence of proof it will be
declares a greater value is binding. computed at 50% of gross annual income)].

The agreement limiting liability may be annulled by the Loss of earning capacity can also be held to apply when
shipper or owner if the common carrier refused to carry the breach by the carrier results in plaintiff’s permanent
the goods, unless the former agreed to the stipulation. incapacity.

If the common carrier, without just cause, delays 2.1 Generally exemplary damages will be adjudged
transportation or changes the stipulated route, the against a common carrier when:
contract limiting liability cannot be availed of in case of a) he authorized the wrongful acts of his agent, or
loss, destruction or deterioration. b) he ratifies the same thereafter.
3. In a contract for the carriage of passengers, 2.2 Interest on a claim for damages for breach of a
there can be no stipulation dispensing with contract of carriage shall be computed a 6% per annum
responsibility or reducing the amount that may be as it is not based on loan or forbearance of money.
recovered. This applies notwithstanding the posting of However, after finality of judgment until execution,
notices or statements in the tickets. interest shall be computed at 12% per annum.
RECOVERABLE DAMAGES AND PENALTIES 3. The Public Service Commission (now the LTFRB)
may on its motion or petition of an interested party
1. Damages may be recovered as provided for by cancel the certificate of public convenience granted to a
the provisions on damages as found in the Civil Code. common carrier that repeatedly fails to comply with the
In case of death of a passenger or even if death does exercise of extra-ordinary diligence.
not result but the carrier is guilty of fraud or bad faith, 4. Concurring causes of action exist from the
moral damages may be recovered. In the latter case, negligent act of the common carrier.
only the injured may demand payment of the moral
damages. If there is contributory negligence of the In culpa contractual, the carrier is primarily liable and
passenger, moral damages cannot be recovered. not the driver as there is no privity between the latter
and the passenger. The defense of due diligence in the
In breach of a contract of air carriage, moral damages selection and supervision of an employee is not
may be recovered where available.
a) the mishap results in the death of a passenger In culpa aquiliana, the breach of the contract is also a
b) carrier is guilty of fraud or bad faith tort notwithstanding the contract. The carrier and driver
c) where negligence is so gross and reckless as to are solidary liable as joint tortfeasors. The defense of
virtually amount to bad faith. In addition, exemplary due diligence in the selection and supervision of an
damages may be recovered if it acted recklessly and employee is available. Exception is maritime tort
malevolently in transporting its passengers. resulting in a collision.
2. In addition, the carrier may also be liable for: In culpa delictual, the driver is primarily liable for the
a) loss of earning capacity of the deceased unless the civil liability arising from the crime and the carrier is
deceased on account of a permanent physical only subsidiarily liable upon conviction and declaration
disability not caused by the defendant had no of insolvency.
earning capacity at the time of his death
b) if the deceased was obliged to give support
according to Article 291, Civil Code, the recipient
who is not an heir, may demand support from the
person causing death for a period not exceeding 5
years, the exact period to be fixed by the court

– COMMERCIAL LAW REVIEW –

 129

PASSENGER BAGGAGE 2.1 The common carrier cannot free himself from
this responsibility by posting notices to the effect that
1. Passenger’s Baggage is deemed to include he is not liable for the articles brought by the passenger.
whatever articles a passenger usually takes with him for Any stipulation whereby the responsibility set forth in
his own personal use, comfort and convenience Articles 1998 to 2001 of the Civil Code is suppressed or
according to the habits or wants of the particular class diminished is void.
to which he belongs, either with reference to his
immediate necessities or the ultimate purpose of his 3. Checked-in baggage or baggage that is not in
journey. Baggage may be hand-carried or check-in or is the personal custody of the passenger or that of his
delivered to the carrier. employee will be governed by Articles 1733 to 1753.
Thus it will be treated in the same manner as goods
2. Baggage that is hand-carried and in the custody that are being shipped and the carrier will be required
of the passenger will be considered as a necessary to exercise extra-ordinary diligence while they are in its
deposit, where the carrier is responsible as a custody and control.
depository, provided that notice is given to the carrier
and that the passenger took the necessary precautions 4. The carrier cannot be said to be remiss in the
which the carrier has advised him relative to care and exercise of the required degree of diligence when it
vigilance. does not cause to be opened the luggage or baggage of
its passengers, who upon an inquiry have disclosed the
In case of loss or injury that are caused by servants, contents to the satisfaction of the carrier. However, air
employees as well as strangers, the carrier would be carriers are given the power to open and if the owner,
liable, but not for that which may proceed from force shipper or their representative refuses to have opened
majeure. The act of a thief or robber, who entered the and inspected, they may be refused loading. Hence,
premises of the carrier is not force majeure unless done their failure to exercise the power amounts to a failure
with the use of arms or through an irresistible force. to exercise the required degree of diligence.

If the loss or injury is caused by the acts of the

passenger or those acting in his behalf or due to the
character of the thing, the carrier would not be liable.

– COMMERCIAL LAW REVIEW –

 130

BILL OF LADING
MODULE 37

The bill of lading is the law between the parties and is

PRELIMINARIES legal evidence of the contract. As such it is an actionable
1. Definition of overland transportation- the document.
transport on land and on small bodies of water,
As a receipt means that the issuance of a bill of lading
waterways, both natural and artificial including
carries the presumption that the goods were delivered
transport on rivers which are not very large.
to the carrier issuing the bill, for immediate shipment
1.1 If it involves transport on sea, it will be referred and it is nowhere questioned that a bill of lading is
to as maritime admiralty prima facie evidence of the receipt of the goods by the
carrier. Since it is a prima facie evidence of receipt, the
2. The provisions of Articles 352-379 of the Code carrier may be allowed to present proof that he
of Commerce involves commercial contracts only. received the cargo on a date different from the date of
However, the applicability of laws shall be as follows: the bill of lading.

2.1 Commercial contracts involving common Since it also is a symbol of the goods, it is considered a
carriers shall be governed primarily by the Civil Code document of title to the goods.
and supplemented by the Code of Commerce
A document of title is any document used in the
2.2 Commercial contracts involving private carriers ordinary course of business in the sale or transfer of
shall be governed primarily by the Code of Commerce goods, as proof of the possession or control of goods, or
and supplemented by the Civil Code provisions. authorizing the possessor of the document to transfer
or receive, either by endorsement or delivery, goods
3. A contract of transportation by land or represented by such document
waterways of any kind shall be considered commercial
when: 2. The form of the bill of lading is not material. If it
contains an acknowledgement by the carrier of the
a) it involves merchandise or any object of commerce receipt of goods for transportation, it is in legal effect, a
or bill of lading.
b) no matter what its object may be, the carrier is a
merchant or is customarily or habitually engaged in The Bill of Lading constitutes the legal evidence of the
transportation for the public or is a common carrier. contract of transportation as all disputes between the
parties regarding the execution and performance of the
3.1 The transportation of persons or news will be contract shall be decided by its contents. The law
deemed commercial only if it is undertaken under (b) admits no exception other than falsity and material
error in its drafting.
3.2 A contract of air transportation may be regarded
as commercial since it is analogous to land and water But the execution of a bill of lading is not essential to a
transportation. contract of transportation. The making of such is not
obligatory. The fact that a Bill of Lading is not issued
4. Art. 1766 of the Civil Code provides that in all
does not preclude the existence of a contract of
matters not regulated by this Code, the rights and
transportation.
obligations of common carriers shall be governed by the
Code of Commerce and by special laws In the absence of a bill of lading, the respective claims
of the parties shall be decided by the legal proofs that
BILL OF LADING DEFINED each one may submit in support of his claims. However:
1. A bill of lading may be defined as a written
a) if the value is PHP 300.00 or less, testimonial
acknowledgment of the receipt of goods and an
evidence is allowed
agreement to transport and to deliver them at a
b) if the value exceeds PHP 300.00, testimonial
specified place to a person named or on his order. It
evidence is not sufficient, there should be proof
comprehends all methods of transportation.
through other writing/s.
The nature of a Bill of Lading is as follows:
Note that the Electronic Commerce Act allows data
a) is a contract in itself and the parties are bound by messages or electronic documents to be used in lieu of
its terms transport writing or paper documents.
b) it is a receipt
c) it is a symbol of the goods covered by it

– COMMERCIAL LAW REVIEW –

 131

3. A ticket ordinarily refers to passengers but opportunity, when such goods are delivered, of
when it refers to a thing it covers baggage, while a bill of examining them sufficiently to judge from their outward
lading always refers to goods that are denominated appearance of their identity, and whether they are in a
usually as cargo. proper condition, and take them away.

4. Distinguishing common kinds of bills of lading: 1.2 A common carrier cannot refuse a particular
class of goods to the prejudice of the traffic in those
A clean bill of lading is one in common form without any goods
memorandum in the margin or on its face showing that
the goods are to be carried on deck contains any defect. 1.3 The exception is when the goods are unfit for
A foul bill of lading is one that carried a memorandum. transportation but if transportation is insisted upon,
common carriers cannot refuse to carry them, but they
On board bill of lading is one that states that the goods shall be exempt from all responsibility if their objections
have been received on board the vessel that will are made to appear in the bill of lading.
transport such goods. A received for shipment bill of
lading is one that states that the goods have been 1.4 If by reason of well-founded suspicions of falsity
received without specifying the vessel that will in the declaration of the contents of a package, the
transport the goods. carrier should decide to examine it, he shall do so
before witnesses, in the presence of the shipper or the
A custody bill of lading is one where the goods are consignee. If the shipper or consignee cannot appear, it
already received by the carrier but the vessel indicated shall be done before a notary. Expenses for the
therein has not yet arrived in port. A port bill of lading, examination and repackaging shall be defrayed by the
the vessel indicated in the bill of lading transporting the carrier if the declaration of the shipper be correct and in
goods is already in port. a contrary case for the account of the shipper.
A through bill of lading is one issued by a carrier who is
RESPONSIBILITIES OF THE CARRIER
obliged to use the facilities of other carriers as well as
his own facilities for the purpose of transporting the 1. The responsibilities of a carrier are as follows:
goods from the city of the seller to the city of the buyer,
which bill of lading is honoured by the second and other a) If a common carrier, observe extra-ordinary
interested carriers who do not issue their own lading. diligence
b) to deliver goods to the consignee without delay,
PARTIES TO A BILL OF LADING otherwise, make judicial deposit
c) to deliver goods in the same condition
1. The parties to a bill of lading are: d) not to deviate from the route
e) to keep a registry
a) shipper/consignor – a person to be transported or
f) to comply with law and regulations during the
owner of the goods to be transported; one who
whole course of the trip and upon arrival at the port
gives rise to the contract of transportation
of destination, except when the failure shall arise on
b) carrier – one who binds himself to transport
account of a falsehood on the part of the shipper in
persons, things or news as the case may be; one
the declaration of merchandise.
engaged in the business of carrying goods for others
for hire 1.1 The responsibilities shall be equally applicable
c) consignee – the party to whom the carrier is to to those, who although do not personally effect
deliver the things being transported; one to whom transportation, contract to do so through contractors
the carrier may lawfully make delivery in for a particular and definite operation or as agents for
accordance with its contract of carriage. Note that transportation and conveyances.
the shipper and consignee may be 1 person.
1.2 In such case, they are subrogated in the place of
COMMENCEMENT OF THE RESPONSIBILITY OF the carrier, with respect to responsibilities and rights.
THE CARRIER
DELIVERY OF THE GOODS WITHOUT DELAY
1. Commencement of the responsibility of the
carrier is upon receipt of the merchandise from the 1. Where a period is fixed for delivery: the carrier
shipper, either personally or through a person charged must deliver the goods within the time fixed.
for that purpose, at the place indicated for their
reception. 1.1 For failure to do so, the carrier shall pay the
indemnity stipulated in the bill, neither the shipper nor
1.1 This responsibility shall endure and continue the consignee being entitled to anything else.
after the arrival of the goods at their destination until
they are ready to be delivered at the usual place of 1.2 If no indemnity has been stipulated and the
delivery, and the owner or consignee has a reasonable delay exceeds the time fixed in the bill, the carrier shall

– COMMERCIAL LAW REVIEW –

 132

be liable for the damages that the delay may have consignee or legitimate holder of the bill appears with
caused. such bill before the carrier and makes himself a party to
the contract as prior to that time, he is a stranger to the
2. Where no period was fixed: the carrier shall be contract.
bound to forward them in the first shipment of the
same or similar goods which he makes to the point 2. A misdelivery occurs when delivery to a person
where he must deliver them. different from that indicated in the bill is made.

2.1 Should he not do so, the damages caused by the 3. The carrier must deliver to the consignee
delay shall be for his account without delay or obstruction, the goods which he may
have received, by the mere fact of being named in the
3. Concept of Conversion: Where property in the bill of lading to receive them, and if he does not do so,
hands of a carrier is not delivered within a reasonable he shall be liable for damages which may be caused
time after it has reached its destination, the carrier in thereby.
the absence of any legal exemption and after demand
has been made and delivery refused, is liable for a 3.1 If a consignee is not present upon arrival, he is
conversion of the property. entitled to reasonable notice from the carrier of their
arrival and a fair opportunity to take care of and remove
3.1 The consignee may waive title to the property them.
and sue for conversion and is entitled to the value of
the goods at the time they should have been delivered If the consignee is unknown to the carrier, the latter
to him. Subsequent tender of the goods by the carrier is must use proper and reasonable diligence to find him.
not available as a defense.
When the consignee cannot be found at the domicile
3.2 If there has been demand and the carrier indicated in the bill or should refuse to pay the
tenders the goods, the consignee cannot refuse to transportation charges and expenses, or to receive the
receive the goods and sue for conversion. His sole goods, the deposit of said goods shall be ordered by the
remedy is an action for damages on account of the municipal judge, to be placed at the disposal of the
delay. There can only be conversion if there has been shipper or sender, without prejudice to a person having
demand and the carrier refuses delivery. a better right. This deposit shall have all the effects of a
delivery.
3.3 Note the remedy of judicial deposit when
consignee cannot be found. CONDITION OF THE GOODS UPON DELIVERY

HOW AND TO WHOM DELIVERY IS MADE 1. The general rule is that the merchandise shall
be transported at the risk and venture of the shipper, if
1. Where the bill of lading is issued to the order of the contrary has not been expressly stipulated.
the shipper, the carrier is under no duty to deliver the
merchandise mentioned in the bill of lading except 1.1 As a consequence, all losses and deterioration
upon the presentation of the bill of lading duly indorsed which may be suffered by the goods through
by the shipper.
a) fortuitous event
1.1 Prior to the appearance of the consignee or b) force majeure or
legitimate holder of the bill of lading, with such bill c) the inherent nature and defect of the goods are for
before the carrier, the consignee or legitimate bill the account of the shipper.
holder is not a party to the contract. The carrier is still
subject to the orders of the shipper. 1.2 Proof of these accidents is however incumbent
upon the carrier.
1.2 Hence, the shipper may, without changing the
place where the delivery is to be made, change the 1.3 Note that while the Code of Commerce appears
consignment of the goods delivered to the carrier, and to allow a contrary stipulation, the same has been
the latter must comply with his orders, provided that at repealed by Article 1745 of the Civil Code by the
the time of making the change of the consignee the bill requirement that a common carrier should exercise
of lading subscribed by the carrier, if one was issued, be extra-ordinary diligence, qualified by a stipulation that
returned to him, exchanging it for another containing can allow for a lesser degree of diligence not below that
the novation of the contract. of a good father of a family under Article 1744 of the
Civil Code.
1.3 Hence, in case of conflicting orders of the
shipper and the consignee, there is no other recourse 2. The carrier is liable for losses or damages
than to determine at what moment the right of the resulting from its negligence or by the failure to take
shipper to countermand the shipment terminates. This precautions which usage has established among careful
moment can be no other than the time when the persons.

– COMMERCIAL LAW REVIEW –

 133

2.1 This liability will not arise if there is fraud on account of damage or average found therein on
committed by the shipper in the bill of lading when he opening the packages, provided that the signs of the
represented the goods to be of a kind or quality damage or average giving rise to the claim may not be
different from what they really were. known from the exterior part of the packages, and in
case that they may be so ascertained, said claim shall
2.2 Note the power given the carrier, who only be admitted at the time of the receipt of the
notwithstanding the exercise of the precautions packages.
required, to sell the goods by placing them in the hands
of judicial or appropriate authority when they run the 1.1 The periods prescribed shall commence to run
risk of loss due to their nature or unavoidable accident, only from the time the consignee is in actual possession.
there being no time for their owners to sell them.
1.2 The 24-hour rule is counted from the receipt of
3. Consequently, with the exception of the causes goods except if:
mentioned in (1.1) and (2.1), the carrier shall be obliged
to deliver the goods transported in the same condition a) the defect is due to the packing of the goods or may
in which, according to the bill of lading, they were at the be seen from outside the goods, or
time of their receipt, without any damage or b) owner/shipper never received the goods as there
impairment, and should he not do so, he shall be can be no question as to the right to bring a claim.
obliged to pay the value of the goods not delivered at
1.3 The 24-hour rule of notice is not a prescriptive
the point where they should have been and at the time
period, it is merely a condition precedent before a
the delivery should have taken place.
complaint may be filed. Remember that failure to
3.1 If only part of the goods transported should be comply with a condition precedent is a ground for
delivered, the consignee may refuse to receive them, dismissal, except when there is fraud. The prescriptive
when he proves that he cannot make use thereof period for an action based on written contracts is 10
without the others that were not delivered. years

3.2 The determination of the usefulness of the 1.4 After the periods mentioned have elapsed or
goods individually depends upon the consignee, but he after the transportation charges have been paid, no
cannot be arbitrary and must justify his determination. claim whatsoever shall be admitted against the carrier
with regard to the condition in which the goods
4. If the effect of the damage due should only be a transported were delivered.
reduction in the value of the goods, the obligation of
the carrier shall be reduced to the payment of the 1.5 The periods may be the subject of a stipulation
amount of said reduction in value, after appraisal by extending them.
experts.
2. If there should occur doubts and disputes
5. If, on account of the damage, the goods are between the consignee and the carrier with regard to
rendered useless for sale or consumption for the use for the condition of goods transported at the time of their
which they are properly destined, the consignee shall delivery to the former, the said goods shall be examined
not be bound to receive them, and may leave them in by experts appointed by the parties, and in case of
the hands of the carrier, demanding payment of their disagreement, a 3rd one appointed by the judicial
value at the current market price that day. authority.

5.1 If among the goods damaged there should be 2.1 The result of the examination being reduced to
some in good condition and without any defect writing; and if the persons interested should not agree
whatsoever, the foregoing provision shall be applicable to the report of the experts and could not settle the
with regard to the damaged ones, and the consignee disputes, said judicial authority shall order the deposit
shall receive those which are sound, this separation of the merchandise in a safe warehouse, and the parties
being made by distinct and separate articles, no object interested shall make use of their rights in the proper
being divided for the purpose, unless the consignee manner.
proves the impossibility of conveniently making use
thereof in this form. EFFECT OF DEVIATION FROM AGREED ROUTE
1. If there is an agreement, the carrier cannot
5.2 The same provision shall be applied to
change the route unless there is force majeure. When
merchandise in bales or packages with distinction of the
there is no agreed route, the carrier must select 1 which
packages which appear sound.
may be the shortest, least expensive and practically
TIME FOR MAKING A CLAIM FOR DAMAGES passable

1. Within 24 hours following the receipt of the 2. Should the route be changed without such
merchandise, a claim may be brought against the carrier cause, the carried is liable for any damage suffered by

– COMMERCIAL LAW REVIEW –

 134

the goods transported for any cause whatsoever, delays cannot exceed the current price of the goods
besides paying the amount which may be stipulated for transported on the day and at the place where the
such cause. delivery was to have been made. The same provision
shall be observed n all cases where there this indemnity
2.1 On the other hand, if such cause exists causing is due
an increase in the transportation cost, the carrier shall
be reimbursed for the increase after formal proof. OBLIGATION TO PAY FOR TRANSPORTA TION
CHARGES
RIGHTS & OBLIGATIONS OF SEVERAL CARRIERS
1. The consignees to whom the remittance may
1. The carrier who makes delivery by virtue of combined have been made may not defer the payment of the
agreements or services shall assume the obligations of expenses and transportation charges on the goods that
those who preceded him. However, he has a right to they received after 24 hours have elapsed from the time
proceed against those who preceded him if he was not of the delivery.
the party directly responsible.
1.1 In case of delay in making this payment, the
2. The carrier who makes delivery shall also acquire all carrier may demand the judicial sale of the goods he
actions and rights of those who preceded him. transported to a sufficient amount to cover the
3. The shipper and the consignee shall have an transportation charges and the expenses incurred.
immediate right of action against the carrier who 2. The goods transported shall be specifically
executed the transportation contract, or against carriers bound to answer for the transportation charges and for
who may have received the goods without reservation. the expenses and fees caused by the same during their
However, the reservation shall not relieve them for transportation, and until the time of their delivery.This
responsibilities which they may have incurred by their
special right shall be limited to 30 days after the
own acts. delivery has been made, and after said prescription, the
carrier shall have no further right of action than that
RIGHTS OF THE SHIPPER OR CONSIGNEE
corresponding to an ordinary creditor
1. A right to the payment of damages when goods
3. The preference of the carrier to the payment of
are lost or mislaid.
what is due him for the transportation and expenses of
1.1 The value of the goods stated in the bill is the goods delivered to the consignee shall not be
conclusive between the parties and the shipper is not affected by the bankruptcy of the latter, provided the
allowed to prove a higher value. action is brought within the specified 30 days.Once his
preference prescribes, his only remedy is by ordinary
1.2 It is only when the carrier’s fault is so gross as to action.
amount to actual fraud, that the actual amount of the
losses and damages suffered may be proved by the OBLIGATION TO RETURN THE BILL OF LADING
shipper against the carrier.
1. The obligation to return the bill of lading arises
2. A right to abandon exists in cases of delay on after the contract has been complied with.
account of the fault of the carrier as the consignee may
leave the goods transported in the hands of the carrier, 1.1 The bill of lading shall be returned to the carrier
informing him thereof in writing before the arrival of who may have issued it, and by virtue of the exchange
the same at the point of the destination. of this title for the article transported, the respective
obligations and actions shall be considered cancelled,
2.1 It also exists when: unless in the same act the claims which the parties may
wish to reserve are reduced to writing, with the
a) there is of partial non-delivery where the consignee exception of that provided by Article 366.
proves that he cannot make use of the goods
capable of delivery independently of those not 1.2 The claims referred to are those for damages
delivered that can be ascertained from the outside of the
b) where the goods are rendered useless for sale and packages at the time of receipt.
consumption for the purposes for which they are
properly destined. 2. In case the consignee, upon receiving the
goods, cannot return the bill of lading because of its loss
2.2 When this abandonment occurs, the carrier or of any other cause, he must give the latter a receipt
shall satisfy the total value of the goods, as if they had for the goods delivered, this receipt shall produce the
been lost or mislaid same effects as the return of the bill of lading.

2.3 Should the abandonment not occur, the 2.1 The bill of lading that has not been returned is
indemnity for loss and damages on account of the called a spent bill of lading.

– COMMERCIAL LAW REVIEW –

 135

ADMIRALTY & MARITIME COMMERCE

MODULE 38

1.3 As a rule, subject to limited exceptions, if the

PRELIMINARIES vessel is lost, the ship owner or ship agent will have no
1. Origin of Maritime Law is found in the liability. If the vessel is not lost, the ship owner or the
customary rules adopted and utilized by ports and ship agent may abandon the vessel to the creditors in
communities connected with the sea which eventually satisfaction of their claim. A ship owner is the natural or
crossed boundaries because of the merchants and juridical person who owns the vessel, while the ship
shipowners who travelled the seas guided by the said agent is the ship owner’s representative in all the places
rules. where his vessel makes port.

1.1 They later came to be known as the law of the The only person who could avail of the limited liability
seas or the body of laws applied to maritime cases. rule is the ship owner. He is the very person whom the
rule has conceived to protect and the charterer cannot
2. Maritime Law is distinguished from Civil Law invoke this as a defense.
and Mercantile Law in general by its real and
hypothecary nature which means that the liability of the 2. Under our laws, the ship owner and ship agent
agent or shipowner in relation to maritime contracts is are primarily liable for the following acts:
limited to the res or the vessel. a) acts of the captain
2.1 Maritime law and Admiralty law are used b) contracts entered into by the captain to repair,
synonymously. equip and provision the vessel, provided that the
amount claimed was invested for the benefit of the
2.2 It includes Book III of the Code of Commerce, vessel
Salvage law, Carriage of Goods by Sea Act, Ship c) indemnities in favor of third persons which arise
Mortgage Decree of 1978 and other special laws related from the conduct of the captain in the care of the
to maritime commerce. goods or well as safety of the passengers,
d) damages to third persons for torts or quasi-delict
2.3 The Philippines also adopts the generally committed by the captain, except in a collision with
accepted principles of international law as part of another vessel
maritime law such as United Nations Convention on the e) in case of collision due to the fault, negligence or
Law of the Sea (UNCLOS), International Conventions for want of skill of the captain, sailing mate or any
the Safety of Life at Sea 1974 (SOLAS 1974) and the member of the complement. These are the
Tonnage Convention of 1969. liabilities that would be extinguished by loss or
abandonment of the vessel.
2.4 There is also adherence to treaties not because
of adoption but rather due to observance by Philippine The liability under (a) exists because the ship owner, in
vessels as a matter of international custom such as the the person of the captain, has complete and exclusive
Convention for the International Regulations on the control of the crew and the navigation of the ship, as
Prevention of Collisions at Sea 1972 (COLREGS 1972). well as the disposition of the cargo at the end of the
voyage. It is therefore proper that any person has a
REAL AND HYPOTHECARY NATURE OF right of action directly against the ship owner for breach
MARITIME LAW of any duty which the law may have imposed on the
captain with respect to his cargo.
1. The effect is that the vessel is hypothecated or
is the guarantee for the settlement for obligations The liabilities under (b), (c), (d) and (e) exists as these
under maritime contracts. obligations arise as consequence of the contract of
agency between the captain and the ship agent. Liability
1.2 This originated in the prevailing conditions of under (b) and (c) is subject to: (1) proof shown by the
the maritime trade and sea voyages during the medieval creditor that the amount claimed was invested for the
ages. To offset against the adverse conditions and to benefit of the vessel, and (2) the captain does not
encourage shipbuilding and maritime commerce, it was exceed the scope of his authority.
deemed necessary to confine the liability of the owner
or the agent arising from the operation of the vessel to The qualification under (d) as to collisions is due to the
the vessel, its equipment, and freight or insurance, if fact that the owner of the vessel at fault is liable for
any, so that if the shipowner or agent abandoned the indemnification to the owner of the vessel which was
ship, equipment, and freight, his liability was not a fault but the former may not actually be liable to
extinguished. This is known as the limited liability rule.

– COMMERCIAL LAW REVIEW –

 136

pay as it may be extinguished by the loss of the vessel 6. Any maritime lien is also extinguished by the
which is bound for its payment. total loss of the vessel as there is no longer any res to
which it can attach.
3. A ship agent is liable notwithstanding the
insolvency of the principal/owner. But the ship agent 6.1 A maritime lien is a privileged claim or charge
may exempt himself from liability by abandoning the upon a ship, which claim or lien travels with the ship
vessel with all her equipment and the freight it may secretively and unconditionally and may be enforced by
have earned during the voyage. an action in rem. Once it attaches, it adheres to the res.
Hence, any purchaser or charterer of the res takes title
3.1 The effect of abandonment is to extinguish the to it subject to the maritime lien and he cannot plead
liability of the ship agent. The ship agent’s liability is want of notice to defeat the lien.
confined to that which he is entitled as a matter of right
to abandon: the vessel with all her equipment and the 6.2 Examples of maritime liens are:
freight it may have earned during the voyage and to the
insurance thereof. The limited liability will not be a) taxes, expenses, costs and fees imposed by the
applicable when no abandonment of vessel is made. state
b) wages of the crew
4. The abandonment of the vessel does not c) a general average
require any specific procedure.The ship owner can just d) salvage
say he abandons the vessel in favor of the claimants. e) maritime liens prior in time to the recording of a
There is no prescriptive period within which the ship preferred ship mortgage
owner can make an abandonment. He may do so for as f) damages arising out of tort
long as he is not estopped from invoking the same or do
acts inconsistent with abandonment, like salvage. SPECIAL CONTRACTS IN MARITIME COMMERCE

4.1 The effect of abandonment is that it amounts to CHARTER PARTY

an offer of the value of the vessel, of her equipment,
and freight money earned in satisfaction of the 1. A Charter Party is a contract whereby the owner
liabilities. of a vessel lets a part thereof and/or his complement
and crew to a person named as a charterer which
4.2 When the vessel is co-owned, a co-owner can contract can be for a specific time, known as a time
exempt himself from liability by abandonment, before a charter or for a specific voyage, known as a voyage or
notary, of the part of the vessel belonging to him. trip charter.

4.3 Abandonment cannot be refused by creditors. 1.1 A time charter occurs when the vessel is leased
for a specific period of time. The owner and his crew
5. The exceptions to the doctrine of limited continue to avigate and maage the vessel, but her
liability: carrying capacity is taken by the charterer for a fixed
a) where the ship owner is at fault or is due to the time or on as many voyages as may fit into the charter
concurring negligence of the ship owner and captain period. The master of the vessel is under a dual agency.
as the doctrine is premised on the condition that Insofar as navigation and seaworthiness are concerned,
the death or injury to the passenger occurred by he remains the agent of the shipowner, but with respect
reason of the fault or negligence of the captain only to loading, stowing and discharging the cargo at
b) in cases of Workmen’s Compensation designated ports, he is an agent of the charterer.
(compensation for injury to an employee arising out 1.2 A voyage charter occurs when the owner
of and in the course of employment) as such undertakes to provide a vessel for the carriage of
compensation has nothing to do with maritime specified goods on one or several voyages between
commerce, it is an item in the cost of production named ports. This is a contract of affreightment. In this
which must be included in the budget of nay well- form, the ship is engaged to carry a full cargo on a single
managed industry voyage.
c) when the vessel is insured, the insurer cannot avoid
liability. But if it is a claim of an insurer in 1.3 There are 2 kinds of charter parties:
subrogation, it is avoided.
d) Total destruction of the vessel does not affect the a) contract of affreightment – involves the use of
liability of the owner for repairs on the vessel shipping space or vessels leased by the owner in
completed before its loss as owners of a vessel are part or as a whole, to carry goods for others. Here
liable for necessary repairs and it shall remain the vessel is still a common carrier.
unaffected by the loss of the thing. b) charter by demise or bareboat charter – the whole
vessel is let to the charterer with a transfer to him
of its entire command and possession and
consequent control over its navigation, including

– COMMERCIAL LAW REVIEW –

 137

the master and the crew, who are his servants. The 2.4 When the vessel is not seaworthy at the
vessel in this case becomes a private carrier. The commencement of the contract, the captain shall lose
charterer in this case is the owner "pro hac vice." all rights to freightage. If it becomes unseaworthy later,
Note though that while all bareboat charters are the obligation of the captain is charter another vessel as
demise charters, the term bareboat should not his expense. If he fails to do so due to malice of
apply strictly speaking to a demise charter which indolence, the shippers themselves may charter another
provides that the master and crew is to be provided vessel. If notwithstanding due diligence, he is unable to
by the ship owner, who become agents and find a vessel, he must deposit the cargo at the disposal
servants of the charterer. of the shippers, to whom he shall communicate the
facts at the first opportunity. If this happens, the
2. The governing law in the Philippines are Articles captain wholly abandons any claim for the payment of
652-692 of the Code of Commerce, as well as RA 913. freight unless it has been made payble in advance or
However, in Companie Franco-Indochinoise v. Deutch, irrespective of delivery. If made payble on delivery, no
39 Phil 474, a charter party executed in Paris between a part of the freight is earned until it is delivered.
French shipper and a German carrier for the carriage of
goods from Saigon is not to be construed exclusively by 3. The charter-party evidences the hire of an
Philippine law nor by the local law of the country in entire ship, or at any rate, a large part of her, such as a
which it was executed but by the general maritime law. hold. It is clearly not a suitable form of contract for a
person who wishes to send small parcels of goods. Such
2.1 Consequently, freedom of contract is the rule in person must look out for a ship which is carrying
charter parties. As a rule though, time and voyage general cargo to the port to which he wishes to send his
charter parties are concluded on the basis of a standard goods. A vessel of this kind may be sailing regularly
contract form. That is Gencon for a voyage charter party along a certain line of ports at advertised items, in
for dry cargo or Baltime for a time charter party for dry which case she is called a liner, or may be sailing from
cargo. port to port looking for cargo, in which case she is a
called tramp. Such ships are often called by lawyers
2.2 In every contract there are to be found two
“general ships” and by owners as “common carrier.”
kinds of terms,
The contract of affreightment in this case is made by a
a) essential terms going to the root of the contract, bill of lading which is usually issued after the loading of
the breach of which avoids the contract as a whole the goods.
which are called conditions;
3.1 However, even in the case of chartered ships a
b) terms which though containing engagements are
bill of lading is invariably issued. It is then not used as
not of so essential a nature that their breach should
evidence of the terms of a contract but as evidence of
cause the whole contract to be invalidated. In the
the shipment of goods, i.e. as a receipt. Moreover it has
general law of contract these are called warranties.
by mercantile usage come to represent the goods, in
The breach of a warranty entities the other party to
such a way that the transfer of it to a third party may
damages only.
transfer to the latter the property in the goods and the
2.3 Implied terms in contracts are: right to receive delivery of them from the ship at her
port of discharge. This very valuable quality on which
a) Seaworthiness to ensure its fitness for the voyage, the legal machinery of overseas commerce has largely
and been built, is obviously just as useful to charterer
b) Due Dispatch and Proper Route to ensure that the shippers, as to shippers on general ships. For instance, a
vessel will commence and carry out her voyage with Filipino importer buys a shipload of sardines from
reasonable diligence and will not deviate from her Portugal. He charters a ship, thus arranging for its
route. transport to this country. At the moment of his doing,
so he may not yet know to whom he is going to resell
Under Article 670 of the Code of Commerce, the the goos but he expects to dispose of them to an
shipowner is mandated to undertake the voyage at the ultimate buyer. The transport takes some weeks. During
time agreed upon, or with 15 days from loading if not that period, the importer will try to effect the resale, so
time is stipulated, even if the ship owner whould not that on the arrival of the ship in Manila the ultimate
find any cargo to make up at least 3/5 of the amount buyer can take delivery immediately. To this end the
which the vessel will hold, where he fails to exercise the importer must have some means of transferring the
right to change the vessel. If applicable, under Article cargo while afloat to his buyer. This is done by means of
673, the ship owner answers for the losses arising from the bill of lading, which the importer will transfer to the
delay if the charterer shall judicially or notarially buyer. The latter will, on arrival of the ship at her port
request the same. of discharge, present the bill of lading to the master and
obtain delivery of the goods.

– COMMERCIAL LAW REVIEW –

 138

3.2 A time or voyage charter is a contract of 3. The kinds of averages are:

affrieghtment. As a rule, a bill of lading is the principal
and only document evidencing shipment on a vessel, 3.1 Simple or Particular which is an expense
but often a bill of lading is issued under a charter party. incurred or damage suffered which has not inured to
Hence, when a time charterer operates as vessel as a the common benefit and profit of all persons interested
general ship will issue through the master bills of lading in the vessel and its cargo. The effect is that no
to the shippers who engage his services. A voyage reimbursement is allowed. Examples of particular
charterer will frequently, for the purpose of making averages are:
documentary presentation to banks or buyers, take a
a) The losses suffered by the cargo from the time of its
bill of lading from the owner. This may create questions
embarkation until it is unloaded, either on account
as to which of the documents control: the charter
of inherent defect of the goods or by reason of an
agreement or the bill of lading.
accident of the sea or force majeure, and the
expenses incurred to avoid and repair the same;
BOTTOMRY OR RESPONDENTIA
b) The losses and expenses suffered by the vessel in its
1. Loans on Bottomry or Respondentia are hull, rigging, arms, and equipment, for the same
contracts of loan whereby the ship owner borrows causes and reasons, from the time it puts to sea
money from a lender at an unusually high rate of from the port of departure until it anchors and
interest whereby the ability of the lender to recover lands in the port of destination;
depends on the safe return of the vessel. If the vessel is c) The losses suffered by the merchandise loaded on
lost, the contract is extinguished. deck, except in coastwise navigation, if the marine
ordinances allow it;
1.1 A loan on bottomry is a contract in the nature of d) The wages and victuals of the crew when the vessel
a mortgage, by which the owner of the ship borrows is detained or embargoed by legitimate order or
money for the use, equipment and repair of the vessel force majeure , if the charter has been contracted
for a definite term, and pledges the ship as a security for a fixed sum for the voyage;
for its repayment, with maritime or extraordinary e) The necessary expenses on arrival at a port, in order
interest on account of the maritime risks to be borne by to make repairs or secure provisions;
the lender, it being stipulated that if the ship be lost in f) The lowest value of the goods sold by the captain in
the course of the specific voyage or during the limited arrivals under stress for the payment of provisions
time, by any of the perils enumerated in the contract, and in order to save the crew, or to meet any other
the lender shall also lose his money need of the vessel, against which the proper
amount shall be charged;
1.2 A loan on respondentia is one made on the g) The victuals and wages of the crew while the vessel
goods on board the ship, and which are to be sold or is in quarantine;
exchanged in the course of the voyage, the borrower’s h) The loss inflicted upon the vessel or cargo by reason
personal responsibility being deemed the principal of an impact or collision with another, if it is
security for the performance of the contract. The lender accidental and unavoidable. If the accident should
must be paid his principal and interest, though the ship occur through the fault or negligence of the captain,
perishes, provided that the goods are saved. the latter shall be liable for all the losses caused;
i) Any loss suffered by the cargo through the fault,
AVERAGES
negligence, or barratry of the captain or of the
1. Averages in shipping and maritime insurance refer to crew, without prejudice to the right of the owner to
a loss. recover the corresponding indemnity from the
captain, the vessel, and the freightage.
2. An average may consist of either:
3.2 General/Gross which is an expense or damages
2.1. An expense to the carrier, in which case it must be: suffered deliberately in order to save the vessel, its
a) extraordinary or accidental cargo or both from a real and known risk. It is the
b) incurred during the voyage deliverance from an immediate peril, by a common
c) incurred in order to preserve the vessel, cargo or sacrifice, that constitutes the essence of general
both. average. The effect is that the person who incurred the
damage/expense can ask reimbursement from those
2.2. A damage or a deterioration, in which case it must: who benefited, which of course, may include the ship
owner.
a) have been suffered from the time the vessel puts to
sea from the port of departure until it casts anchor Examples of general or gross averages shall include all
in the port of destination, and the damages and expenses which are deliberately
b) have been suffered by the merchandise from the caused in order to save the vessel, its cargo, or both at
time they are loaded in the port of shipment until
they are unloaded in the port of consignment

– COMMERCIAL LAW REVIEW –

 139

the same time, from a real and known risk, and be lost, no liability may be demanded of the
particularly the following: salvage.
b) If, as a necessary measure to extinguish a fire in a
a) The goods are cash or invested in the redemption of port, roadstead, creek, or bay, it should be decided
the vessel or of the cargo captured by enemies, to sink any vessel, this loss shall be considered gross
privateers, or pirates, and the provisions, wages, average, to which the vessels saved shall contribute.
and expenses of the vessel detained during the time
the settlement or redemption is being made; 3.4 The requisites of a General Average are:
b) The goods jettisoned to lighten the vessel, whether
they belong to the cargo, to the vessel, or to the a) there must be a common danger, meaning that the
crew, and the damage suffered through said act by ship and cargo are subject to the same danger and
the goods which are kept on board; that danger arises from accidents of the sea,
c) The cables and masts which are cut or rendered dispositions of the authorities or faults of men,
useless, the anchors and the chains which are provided that the circumstances producing the peril
abandoned, in order to save the cargo, the vessel, should be ascertained and imminent
or both; b) for the common safety, part of the vessel or the
d) The expenses of removing or transferring a portion cargo or both is sacrificed deliberately
of the cargo in order to lighten the vessel and place c) from the expenses or damages caused follows the
it in condition to enter a port or roadstead, and the successful saving of the vessel and cargo
damage resulting therefrom to the goods removed d) the expenses or damages should have been
or transferred; incurred or inflicted after taking legal steps and
e) (e)The damage suffered by the goods of the cargo authority.
by the opening made in the vessel in order to drain
In summary: The general average must:
it and prevent its sinking;
f) The expenses caused in order to float a vessel a) deliberately incurred
intentionally stranded for the purpose of saying it; b) intended to save vessel and cargo
g) The damage caused to the vessel which had to be c) real and known risk to which the shipper and the
opened, scuttled or broken in order to save the carrier must be exposed to
cargo; d) success in saving the vessel and the remaining
h) The expenses for the treatment and subsistence of cargo.
the members of the crew who may have been
wounded or crippled in defending or saying the Note that if notwithstanding the jettison of
vessel; merchandise, breakage of masts, ropes, and equipment,
i) The wages of any member of the crew held as the vessel shall be lost running the same risk, no
hostage by enemies, privateers, or pirates, and the contribution whatsoever by jettison of gross average
necessary expenses which he may incur in his shall be proper. The owners of the goods saved shall not
imprisonment, until he is returned to the vessel or be liable for indemnification of those jettisoned, lost or
to his domicile, should he prefer it; damaged.
j) The wages and victuals of the crew of a vessel
chartered by the month, during the time that it is 3.5 The formalities for incurring gross average:
embargoed or detained by force majeure or by
a) There must be an assembly of the sailing mate and
order of the government, or in order to repair the
other officers with the captain including those with
damage caused for the common benefit;
interests in the cargo
k) The depreciation resulting in the value of the goods
b) There must be a resolution of the captain
sold at arrival under stress in order to repair the
c) (c)The resolution shall be entered in the log book,
vessel by reason of gross average;
with the reasons and motives and the votes for and
l) The expenses of the liquidation of the average.
against the resolution
3.3 Other general averages: d) (d)The minutes shall be signed by the parties
e) Within 24 hours upon arrival at the 1st port the
a) If in lightening a vessel on account of a storm, in captain makes, he shall deliver 1 copy of these
order to facilitate its entry into a port or roadstead, minutes to the maritime judicial authority thereat.
part of the cargo should be transferred to lighters or
barges and be lost, the owner of said part shall be 3.6 The distinctions between general or gross
entitled to indemnity, as if the loss had originated averages and simple or particular averages are as
from a gross average, the amount thereof being follows:
distributed between the vessel and cargo from
a) In general or gross averages, both the ship and
which it came. If, on the contrary, the merchandise
cargo are subject to the same danger which is real
transferred should be saved and the vessel should
and known, whereas in simple or particular

– COMMERCIAL LAW REVIEW –

 140

averages, there is no such common danger to both 4.4 The extent of liability rule cannot be applied in
the vessel and the cargo; determining liability when there is negligence as
b) In the former, part of the vessel or of the cargo or common carriers cannot limit their liability for injury or
both is sacrificed deliberately, whereas in the latter, loss caused by its own negligence. Thus negligence must
the expenses and damage caused to the vessel or to first be determined before applying the extent of
her cargo are neither deliberately made nor subject liability rule.
to any legal step or authority;
c) In the former, from the expenses or damage caused 5. The order of jettison of the captains shall be in
follows the successful saving of the vessel and her the following order:
cargo, whereas in the latter, the expenses or
a) those which are on deck, beginning with those
damages suffered have not inured to such common
which embarrass the maneuver or damage the
benefit;
vessel, preferring, if possible, the heaviest ones with
d) In the former, all the persons having an interest in
least utility and value, then
the vessel and cargo saved shall contribute to
b) those which are below upper deck, always
indemnify the expenses or damages caused,
beginning with those of greatest weight and
whereas in the latter, the owner of the things which
smallest value, to the amount and number
gave rise to the expenses or suffered the damages
absolutely indispensable.
shall bear the same.
6. If, after the vessel has been saved from the risk
As when: Expenses incurred towards refloating the
which gave rise to the jettison, it should be lost through
vessel after it was intentionally run aground to save it
another accident taking place during the voyage, the
and the cargo is a general average. Compare with
goods saved and existing from the first risk shall
expenses incurred in refloating the vessel after it
continue to be liable to contribution by reason of the
accidentally ran aground in order to be able to proceed
gross average according to their value in the condition
to its destination, which is a particular average in the
in which they may be found, deducting the expenses
absence of imminent danger to the ship and cargo.
incurred in saving them.
4. The general average is borne by all persons pro-
rata having an interest in the vessel and cargo therein at ARRIVALS UNDER STRESS
the time of the occurrence of the average shall
1. An Arrival Under Stress is the arrival of a vessel
contribute.
at the nearest and most convenient port, if during the
4.1 Included are lenders on bottomry and voyage the vessel cannot continue the trip to the port
respondentia who shall suffer, in proportion to their of destination due to:
respective interest, the general average which may take
a) lack of provisions, except if the failure to take the
place in the goods on which the loan is made.
necessary provisions was due to the carrier’s fault
4.2 Those entitled to receive the general average like when it was not able to stow them properly or
contribution are the owners of the goods sacrificed. that there was a failure to adequately determine
However, the following goods even if sacrificed are not what was required
covered: b) well-founded fear of seizure of privateers or pirates,
except when the risk of privateers or pirates is well-
a) goods carried on deck, unless the rule, special law known
or customs allow the same c) by reason of any accident of the sea disabling it to
b) goods that are not recorded on the books or navigate except defect in vessel was due to
records of the vessel, it being required that insofar captain’s fault in failing to properly repair, rig, equip
as the cartgo concerned that their existence on or prepare the vessel or some erroneous order of
board be proven by a bill of lading and those the captain or when malice, negligence, want of
belonging to the vessel, by means of an inventory foresight, or lack of skill on the part of the captain
prepared before departure, and exists in the act causing the damage.
c) fuel for the vessel if there is more than sufficient
fuel for the voyage. 2. The significance of determining whether the
arrival is under stress or not is because the same is a
4.3 The claims for payment of averages shall not be deviation. Hence, if it will not constitute an arrival under
admitted if they do not exceed 5% of the interest which stress it is an improper deviation and liability will ensue
the claimant may have on the vessel or in the cargo if it for the damages caused to the cargoes by such arrival
be a gross average or 1% of the goods damaged if it be a under stress.
particular average, deducting in both cases the
expenses of appraisal, unless there is an agreement to 2.1 The rule is that the expenses of an arrival under
the contrary. stress shall always be for the account of the ship owner
of agent, but they shall not be liable for the damages

– COMMERCIAL LAW REVIEW –

 141

which may be caused the shippers by reason of the 1.3 There are three zones in collision:
arrival provided the latter is legitimate. Otherwise, the
ship agent and captain shall be jointly liable. a) the first zone refers to all the time up to the
moment when the risk of collision may be said to
2.2 If in order to make repairs to the vessel or have begun-no rule applies as each vessel is free to
because there is a danger that the cargo may suffer navigate without reference to the movement of
damages, it should be necessary to unload, the captain another vessel
may request authorization from a competent judge or b) the second zone refers to the time between the
court for the removal, and carry it out with the moment when risk of collision begins and the
knowledge of the person interested in the cargo, or his moment it becomes a practical certainty, and
representative if there be any. In a foreign court, it shall c) the third zone covers the time of actual contact. If
be the duty of the Philippine consul where there is one during the third zone, the sailing vessel changed
to give authorization. In the first case, the expenses will course to port in order to avoid, if possible, the
be for the account of the ship agent or owner, and in collision, the act may be said to be done in extremis,
the second case, they shall be chargeable to the owners and even if wrong, the sailing vessel is not
of the cargo for whose benefit the act was performed. If responsible for the result.
the unloading be done for both reasons, the expenses 1.4 Causes of Collision and the Legal Effects:
shall be divided proportionately between the value of
the vessel and that of the cargo. Cause Effect
2.3 The custody of the cargo that is unloaded shall Due to the fault, The shipowner shall be
be entrusted to the captain who shall be responsible for negligence or lack of skill liable for the losses and
the same, except in cases of force majeure. of the captain or the damages
complement of the vessel
2.4 If the entire cargo or part thereof should appear Due to the fault of both Each vessel shall suffer its
to be damaged, or there is an imminent danger of its vessels own losses, but as regards
being damaged, the captain may request of a the owners of the
competent judge, court or consul, the sale of all or part cargoes, both vessels shall
of the goods. be jointly and severally
liable
3. The formalities for arrival under stress:
Where it cannot be Each vessel shall suffer its
a) assembly of the officers including all interested determined which of the 2 own losses, and both shall
parties vessels is at fault also be solidarily
b) drafting and entering in the log book the proper responsible for the losses
minutes, which shall be signed by all and damages caused to
c) entry in the log book of the objections and protests their cargoes
of the persons interested in the cargo Collision due to a Each vessel shall bear its
fortuitous event or force own damages
4. The captain has the duty to continue the voyage majeure
without delay after the cause of the arrival under stress A vessel which is properly The vessel run into shall
has ceased. Otherwise, he shall be liable for damages anchored and moored suffer its own damages
caused by the delay. may collide with those and expenses
nearby by reason of a as they are considered as
4.1 If the cause for arrival under stress should have storm or other cause of a particular average of the
been the fear of enemies, privateers, or pirates, a force majeure vessel run into
deliberation and resolution in a meeting of the officers Where 2 vessels collide The owner of the 3rd
of the vessel and persons interested in the cargo who with each other without vessel causing the
may be present shall precede the departure. their fault but by reason collision shall be liable for
of the fault of a 3rd vessel the losses and damages,
COLLISIONS the captain thereof being
civilly liable to the owner
1. A Collision refers to the impact of two vessels
both of which are moving.

1.1 Allision refers to the striking of a moving vessel 1.6 In addition, when a vessel that is run into sinks
against one that is stationary. immediately, as well as that which, having been obliged
to make port to repair the damages caused by a
1.2 Note though that a shipowner or ship agent can collision, is lost during the voyage or is obliged to be
be held liable even if his vessel did not hit or collide with stranded in order to be saved, it shall be presumed as
another as Article 831 makes the owner of a third lost be reason of collision.
vessel liable if it forced a vessel to hit another.

– COMMERCIAL LAW REVIEW –

 142

1.7 If the vessels colliding with each other should 4.1 However, with respect to damages caused to
have pilots on board discharging their duties at the time persons or to the cargo, the absence of a protest may
of the collision, their presence shall not exempt the not prejudice the persons interested who were not on
captains from the liabilities they incur, but they shall board or were not in a condition to make known their
have a right to be indemnified by the pilots, without wishes.
prejudice to the criminal liability which the latter may
incur. 5. The civil liability incurred by ship owners in case
of a collision shall be understood as limited to the value
3. Classes and Effects of Collisions: of the vessel with all its appurtenances and the
freightage earned during the voyage.
a) Fortuitous when the vessels collide with each other
though fortuitous event or force majeure . Each 6. Should a collision between Philippine vessels
vessel and each cargo shall bear its own damages or take place in foreign waters, or if having taken place in
a vessel which is properly anchored and moored the open seas, and the vessels should make foreign
may collide with those nearby by reason of a storm port, the Consul of the Republic of the Philippines in
or other cause of force majeure – vessel run into said port shall hold a summary investigation of the
suffers its own damages accident, forwarding proceedings to the Secretary of
b) Culpable when the collision is due to the fault, the Department of Foreign Affairs for continuation and
negligence or lack of skill of the captain or the conclusion.
complement of the vessel – owner of the vessel at
fault shall be liable for the losses and damages or CARRIAGE OF GOODS BY SEA ACT
due to fault of both vessels – each vessel suffers its
own losses regardless of degree of fault, hence rules PRELIMINARIES
on contributory negligence does not apply, with
1. Was originally Public Act No. 521 as passed by
regard to the owners of the cargo, both vessels shall
the Congress of the USA on April 16, 1936 and
be jointly and severally liable even if their cause of
subsequently adopted by the Philippine Commonwealth
actions may be different or 2 vessels may collide
on October 22, 1936 as Commonwealth Act No. 65.
with each other without their fault but by reason of
the fault of a 3rd vessel – owner of the 3rd vessel 2. Since the objective of the law is bring our laws
will be liable on cargo covered by bills of lading by vessels engaged in
c) Inscrutable where it cannot be determined which foreign trade in harmony with the rest of the
of the 2 vessels is at fault – each vessel suffers its international shipping community, once a vessel is
own losses and damages; both will be solidarily engaged in foreign trade, referring to contracts for the
liable for losses and damages caused to their carriage of goods by sea to and from Philippine ports,
cargoes. Hence the effect is that you treat it as a the law should be applied regardless of the destination
culpable collision. of the vessel. It applies up to the final port of
destination even if the transhipment was made on an
3.1 The doctrines of contributory negligence and
inter-island vessel.
last clear chance are not applicable. Article 827 of the
Code of Commerce holds that if both vessels were 3. There is a need to take into consideration the
negligently operated, it does not matter if the other has Act Allowing Foreign Vessels To Transport and Co-Load
the last clear chance of avoiding injury because each Foreign Cargoes For Domestic Transhippment And For
must suffer its own damage. This applies although the Other Purposes (RA 10668), that applies exclusively to
negligence on the part of the mate of the incoming foreign vessels carrying foreign container vans or
vessel preceded the negligence on the part of the mate foreign cargoes as it explicitly provides that Carriage
of the outgoing vessel by an appreciable interval of conducted in accordance with this Act shall be governed
time, the first vessel cannot on that account be by Commonwealth Act No. 65, otherwise known as the
absolved from liability. "Carriage of Goods by Sea Act" with respect to the
liability of the carrier for the loss of, or damage to,
4. A maritime protest is necessary as the action for
goods carried.
recovery of losses and damages arising from a collision
cannot be admitted if a protest or declaration is not 3.1 The law allows a foreign vessel:
presented within twenty four hours before the
competent authority of the point where the collision a) Arriving from a foreign port, shall be allowed to
took place, or that of the first port of arrival of the carry a foreign cargo to its Philippine port of final
vessel, if in Philippine territory, and to the consul of the destination, after being cleared at its port of entry;
Republic of the Philippines, if it occurred in a foreign b) Arriving from a foreign port, shall be allowed to
country. carry a foreign cargo by another foreign vessel
calling at the same port of entry to the Philippine
port of final destination of such foreign cargo;

– COMMERCIAL LAW REVIEW –

 143

c) Departing from a Philippine port of origin through 5.1 Whenever loss or damage arises from
another Philippine port to its foreign port of final unseaworthiness, the burden of proving the exercise of
destination, shall be allowed to carry a foreign cargo due diligence is on the carrier and neither shall the
intended for export; and carrier or ship be liable unless it is caused by want of
d) Departing from a Philippine port of origin, shall be due diligence on its part to make the ship seaworthy.
allowed to carry a foreign cargo by another foreign
vessel through a domestic transshipment port and 6. To establish a prima facie case of liability
transferred at such domestic transshipment port to against the carrier, the shipper has the burden of proof
its foreign port of final destination. that the cargo was received by the carrier in good
condition and that it was damaged upon delivery by the
For purposes of this Act, an empty foreign container van carrier at its destination.
going to or coming from any Philippine port, or going to
or coming from a foreign port, and being transshipped 6.1 The bill of lading is prima facie evidence of
between two (2) Philippine ports shall be allowed. receipt of the goods as described therein and creates a
rebuttable presumption that the goods were delivered
3.3 Foreign vessels engaging in carriage conducted in good condition.
in accordance with this Act shall not be considered
common carriers as provided in Republic Act No. 386, 6.2 Once the shipper has made his prima facie case,
otherwise known as the "Civil Code of the Philippines"; the carrier has the burden of proving that it exercised
neither shall such foreign vessels be considered as due diligence to prevent the damage and the loss was
offering a public service and thus shall fall outside the occasioned by one of the excepting causes or
coverage of Republic Act No. 9295, otherwise known as immunities. Further, a deviation to save or attempt to
the "Domestic Shipping Development Act of 2004". save life or property at sea is a reasonable deviation
that will avoid liability for loss or damages. However, a
4. Note however that the when Article 1753 of the deviation to load or unload passengers or cargo, shall
Civil Code was held to apply, it would mean that a vessel prima facie be regarded as unreasonable.
coming to the Philippines would be subject to a higher
standard of care, while that destined for a foreign port 6.3 The immunities can be grouped into three
would be subject to due diligence under COGSA. categories:

4.1 Accordingly, Article 1753 regarding the a) overwhelming outside forces, i.e. acts of war, acts
applicability of the law of the country to which the of public enemies, arrest of princess, quarantines,
goods are shipped in case of loss, damage or strikes, lockouts, riots and civil commotions,
deterioration or Article 1766, as to the applicability of b) overwhelming natural forces, i.e. perils of the sea or
the Code of Commerce shall be limited to domestic acts of God, and
carriage of goods over water. In the same case, cargo c) faults of the shipper, i.e. act or omission of the
shipped from New York, USA aboard with freight shipper or his agents, wastage in bulk or weight,
prepaid for Cebu where the carrier transhipped the losses due to inherent vice, insufficiency of packing,
cargo on a domestic vessel from Manila to Cebu, COGSA insufficiency of marking and latent defects.
was held to apply.
7. The term “carriage of goods” covers the period
4.2. Notwithstanding that the Civil Code applies to from the time the goods are loaded to the time they are
common carriers and COGSA applies only to foreign discharged.
trade, when parties to a contract of private carriage
7.1 This is the period within which the carrier is
stipulate to apply the Civil Code or COGSA, they do not
required to exercise due diligence.
apply “ex propio vigore” or of their own force but rather
as mere terms of a contract. This means that in case of 8. The maximum liability of the carrier is $500 per
dispute, they are simple contractual terms which call package or per customary freight unit, or its equivalent
out for judicial interpretation. This is a paramount in other currency, unless the shipper or owner declares
clause. a greater value. The liability of the carrier for the loss of
the goods is limited to $500.00 even if the bill of lading
5. The degree of diligence required is due
indicated the amount stated in the letter of credit
diligence before and at the beginning of the voyage to:
obtained by the buyer, because it is not a declaration of
a) make the ship seaworthy the value of the goods for the purposes of the bill of
b) properly man, equip and supply the ship, and lading. A stipulation in the bill of lading limiting the
c) make the holds, refrigerating and cooling chambers, liability of the vessel to $500 per package does not
and all other parts of the ship in which goods are apply if the nature and value of the goods have been
carried, fit and safe for their reception, carriage and inserted in the bill of lading.
preservation.
8.1 The parties, however, may stipulate a lesser
amount in the bill of lading.

– COMMERCIAL LAW REVIEW –

 144

8.2 In no event will the carrier be liable for an 9.4 Loss is defined as a situation where no delivery
amount more than the damage actually sustained. at all was made because the same had perished, gone
out of commerce or disappeared in such a way that
8.3 Neither will the carrier nor the ship be liable in their existence is unknown or they cannot be recovered.
any event for loss or damage to or in connection with It however includes damages by reason of unreasonable
the transportation of the goods if the nature or value delay in the transportation so that if the goods are lost
thereof has been knowingly and fraudulently misstated or damaged by reason of the delay, the carrier is liable.
by the shipper in the bill of lading.
9.5 Loss does not include a situation where there is
8.4 Note the use of the term package defines the delivery but is made to the wrong person. Hence,the
extent of liability as a container van can be considered prescriptive period will not apply to cases of misdelivery
as a single package unless the contents and the number of the goods or delivery to wrong person. What will
of packages or units are disclosed. When the goods apply is either the Civil Code provision prescribing ten
being shipped are packed in cartons placed in container (10) years for breach of a written contract or four (4)
supplied by the carrier and the number of cartons is years for quasi-delict.
disclosed in the shipping documents, it is the number of
cartons and not of the containers that should be used in 9.6 An action under the Carriage of Goods by Sea
computing the liability of the carrier for the loss of the Act must be filed within one year from the date the last
goods, as it is the cartons that constitute the packages. item was delivered to the consignee.

9. Notice as to damage on the goods should be 9.7 The period is counted from the date of the
given upon receipt of the goods, unless such damage is delivery of the goods. If no delivery was made, from the
not apparent or externally visible in which case notice date when the goods should have been delivered. To
should be given within three (3) days from receipt of the illustrate the latter, if the carrier arrived on January 2,
goods. 2021 and left on January 4, 2021 without delivering the
cargo, it was on the latter date that the carrier had the
9.1 No notice is required when the state of the opportunity to deliver the goods. The period then
goods has at the time of receipt been the subject of a commenced to run on January 5, 2021 and will expire
joint survey inspection. on January 4, 2022.
9.2 When there is a failure to comply with a bill of 9.8 The period will not interrupted by a written
lading provision that a notice of claim must be given by extrajudicial demand or claim by the consignee to the
the consignee to the carrier within 30 days from receipt carrier as it has been held that the provisions of Article
of the cargo but the action is nevertheless filed within 1155 cannot be made to apply as its application would
one (1) year from delivery, the action was held to be have the effect of extending the period of prescription
properly brought as the clause was deemed to be null and would permit delays in the settlement of questions
and void for being contrary to COGSA. affecting transportation contrary to the clear intent of
the law. The provision in the Civil Code that a written
9.3 The carrier and the ship shall be discharged
demand tolls the prescriptive period does not apply to
from liability in respect to loss or damage unless suit is
the COGSA cases, since matters affecting the
brought within one (1) year after delivery of the goods
transportation of goods by sea must be decided as soon
or date when the goods should have been delivered.
as possible.
Note thought that failure to give notice does not bar the
filing of the suit for loss or damage to the goods. Failure
to file notice of loss does not bar an action against the
carrier if the action was filed within one year.

– COMMERCIAL LAW REVIEW –

 145

WARSAW & MONTREAL CONVENTION

MODULE 39

Chicago. The domicile and place of business of TWA is

WHAT IS THE WARSAW CONVENTION Kansas City, Missouri, USA. Plaintiffs left Manila via PAL
1. The Warsaw Convention refers to the to LA. From LA, they boarded TWA to NY. Upon arrival
convention for the Unification of Certain Rules Relating in Boston, the plaintiffs were missing four of their
International Carriage by Air which was signed in luggages. An eventual suit was filed in Manila against
Warsaw, Poland on October 12, 1929, and amended by TWA, who moved to dismiss saying that jurisdiction is
the Hague Convention signed on September 28, 1955. not vested in the Manila court, which subsequently
dismissed the action applying the rule on venue as per
2. The Philippines is a party to the convention and the Warsaw Convention. Upon appeal, the dismissal
it became applicable on February 9, 1951. was reversed as the Convention was held inapplicable
as the contract of transportation was not an
2.1 It does not operate as an exclusive enumeration international one as LA, the place of departure and
of instances for declaring a carrier liable for breach of Chicago, the place of destination are within the territory
the contract of carriage or as an absolute limit of the of the USA, neither does it fall in the second type as
extent of that liability. It must not be construed to there was no agreed stopping point in another territory.
preclude the operation of the Civil Code and other
pertinent laws. It does not regulate, much less exempt, 3.3 Under Article 1, MC 99, the rule to determine
the carrier from liability for damages for violating the whether it is international air carriage remains basically
rights of passengers under the contract of carriage the same, the qualifications pertaining to gratuitous
especially if wilful misconduct on the part of the transport and the effect of successive carriage on the
carrier’s employees is found or established. character of the carriage.

2.2 However, on August 10, 2015, the Philippine This Convention applies to all international carriage of
Senate ratified the Convention for the Unification of persons, baggage or cargo performed by aircraft for
Certain Rules for International Carriage by Air (May 28, reward. It applies equally to gratuitous carriage by
1999-MC99). This had the effect of, among others, aircraft performed by an air transport undertaking.
superseding rules on jurisdiction and the the applicable
compensation in case of death or injury to passengers For the purposes of this Convention, the expression
and loss, damages or delay of baggages. This is referred "international carriage" means any carriage in which,
to as Montreal Convention (MC99). It must be noted according to the agreement between the parties, the
that while MC 99 is suppose to have superseded the place of departure and the place of destination,
Warsaw Convention, this change has not been reflected whether or not there be a break in the carriage or a
in the bar outline. For purposes of this outline, both transhipment, are situated either within the territories
conventions will be covered with emphasis on the of two States Parties, or within the territory of a single
similarities and substantial differences. State Party if there is an agreed stopping place within
the territory of another State, even if that State is not a
3. It applies to international air carriage or State Party. Carriage between two points within the
transportation. territory of a single State Party without an agreed
stopping place within the territory of another State is
3.1 Under the Warsaw Convention there are two not international carriage for the purposes of this
categories: Convention.
a) That where the place of departure and place of Further, Carriage to be performed by several successive
destination are situated within the territories of two carriers is deemed, for the purposes of this Convention,
High Contracting Parties regardless of whether or to be one undivided carriage if it has been regarded by
not there be a break in transportation or the parties as a single operation, whether it had been
transhipment, and agreed upon under the form of a single contract or of a
b) That where the place of departure and the place of series of contracts, and it does not lose its international
destination are within the territory of a single High character merely because one contract or a series of
Contracting Party if there is an agreed stopping contracts is to be performed entirely within the territory
place within the territory subject to the sovereignty, of the same State.
mandate or authority of another power, even
though the power is not party to the Convention. 3.4 An action for a violation of a contract of
international transportation by air must be brought, at
3.2 To illustrate: Plaintiffs purchased from TWA two the option of the plaintiff, in the territory of one of the
tickets in Bangkok, Thailand for LA-NY-Boston-St. Louis-

– COMMERCIAL LAW REVIEW –

 146

High Contracting Parties, either before the court of As regards baggage or cargo, the passenger or consignor
domicile of the carrier or of his principal place of will have a right of action against the first carrier, and
business or where he has a place of business through the passenger or consignee who is entitled to delivery
which the contract has been made, or before the court will have a right of action against the last carrier, and
at the place of destination. further, each may take action against the carrier which
performed the carriage during which the destruction,
In addition, under Article 33 , Jurisdiction of MC 99 In loss, damage or delay took place. These carriers will be
respect of damage resulting from the death or injury of jointly and severally liable to the passenger or to the
a passenger, an action may be brought before one of consignor or consignee.
the courts mentioned in paragraph 1 of this Article, or in
the territory of a State Party in which at the time of the 3.7 To illustrate: Northwest is a foreign corporation
accident the passenger has his or her principal and with principal office in Minnesota, USA and licensed to
permanent residence and to or from which the carrier do business in the Philippines. A Filipino resident
operates services for the carriage of passengers by air, purchased a ticket in San Francisco for his flight from
either on its own aircraft or on another carrier's aircraft San Francisco to Manila via Tokyo and back. Due to the
pursuant to a commercial agreement, and in which that cancellation of his confirmed reservation for the Tokyo
carrier conducts its business of carriage of passengers to Manila leg, he was waitlisted. He brings suit against
by air from premises leased or owned by the carrier Northwest in the Manila. The court upon motion
itself or by another carrier with which it has a dismissed the action as it should have been brought in
commercial agreement. either the USA, the carrier’s domicile, in Minnesota,
USA, its principal place of business, San Francisco, the
For this purposes: (a) "commercial agreement" means place of business through which the contract was made
an agreement, other than an agency agreement, made or the place destination.
between carriers and relating to the provision of their
joint services for carriage of passengers by air; (b) AIR WAYBILL
"principal and permanent residence" means the one
fixed and permanent abode of the passenger at the 1. An air waybill is a document serving as the
time of the accident. The nationality of the passenger prima facie evidence of the contract of transportation
shall not be the determining factor in this regard. and as the receipt of the goods carried by air carriers.

Questions of procedure shall be governed by the law of 2. It has three (3) parts intended for the carrier,
the court seized of the case. the consignor and the consignee of the goods.

3.5 Under Article 35, Limitation of Actions, MC 99 LIABILITY OF AN INTERNATIONAL AIR CARRIER
the right to damages shall be extinguished if an action is
not brought within a period of two years, reckoned 1. The carrier shall be liable for damages sustained
from the date of arrival at the destination, or from the in the event of death or bodily injury suffered by a
date on which the aircraft ought to have arrived, or passenger on board the aircraft or in the course of
from the date on which the carriage stopped. The embarkation or disembarkation thereof, and of damage
method of calculating that period shall be determined or loss of any checked baggage or any goods during the
by the law of the court seized of the case. transportation by air.

3.6 Successive Carriages under Article 36, MC 99 In 1.1 The liabilities are determined and defined as
the case of carriage to be performed by various follows under Article 17, MC 99:
successive carriers and falling within the definition set a) The carrier is liable for damage sustained in case of
out in paragraph 3 of Article 1, each carrier which death or bodily injury of a passenger upon condition
accepts passengers, baggage or cargo is subject to the only that the accident which caused the death or
rules set out in this Convention and is deemed to be one injury took place on board the aircraft or in the
of the parties to the contract of carriage in so far as the course of any of the operations of embarking or
contract deals with that part of the carriage which is disembarking.
performed under its supervision. b) The carrier liable for damage sustained in case of
In the case of carriage of this nature, the passenger or destruction or loss of, or of damage to, checked
any person entitled to compensation in respect of him baggage upon condition only that the event which
or her can take action only against the carrier which caused the destruction, loss or damage took place
performed the carriage during which the accident or the on board the aircraft or during any period within
delay occurred, save in the case where, by express which the checked baggage was in the charge of the
agreement, the first carrier has assumed liability for the carrier. However, the carrier is not liable if and to
whole journey. the extent that the damage resulted from the
inherent defect, quality or vice of the baggage. In
the case of unchecked baggage, including personal

– COMMERCIAL LAW REVIEW –

 147

items, the carrier is liable if the damage resulted wrongful act or omission of the person claiming
from its fault or that of its servants or agents. compensation, or the person from whom he or she
c) If the carrier admits the loss of the checked derives his or her rights, the carrier shall be wholly or
baggage, or if the checked baggage has not arrived partly exonerated from its liability to the claimant to the
at the expiration of twenty-one days after the date extent that such negligence or wrongful act or omission
on which it ought to have arrived, the passenger is caused or contributed to the damage.
entitled to enforce against the carrier the rights
which flow from the contract of carriage. When by reason of death or injury of a passenger
d) Unless otherwise specified, in this Convention the compensation is claimed by a person other than the
term "baggage" means both checked baggage and passenger, the carrier shall likewise be wholly or partly
unchecked baggage. exonerated from its liability to the extent that it proves
that the damage was caused or contributed to by the
2. The following are the limited liability of the negligence or other wrongful act or omission of that
carrier under the convention: passenger.

a) For each passenger – up to SDR 113,100 and for This Article applies to all the liability provisions in this
b) For baggage – SDR 19 per kilogram. SDR means Convention, including paragraph 1 of Article 21.
Special Drawing Rights as determined by the IMF,
which as of April 2019 has a value of US$ 1.39 or 5. The limits prescribed in Article 21 and in this
Philippine Peso 71.92 Article shall not prevent the court from awarding, in
accordance with its own law, in addition, the whole or
2.1 The liabiity to a passenger for death or injury part of the court costs and of the other expenses of the
cannot exceed the limit if the carrier can prove that: litigation incurred by the plaintiff, including interest.
The foregoing provision shall not apply if the amount of
a) such damage was not due to the negligence or the damages awarded, excluding court costs and other
other wrongful act or omission of the carrier or its expenses of the litigation, does not exceed the sum
servants or agents; or which the carrier has offered in writing to the plaintiff
b) such damage was solely due to the negligence or within a period of six months from the date of the
other wrongful act or omission of a third party. occurrence causing the damage, or before the
commencement of the action, if that is later.
2.2 The limits are to be reviewed by the
International Civil Aviation Organization (ICAO) every 5.1 A carrier may stipulate that the contract of
five years. above limitations may be increased by carriage shall be subject to higher limits of liability than
agreement, but any provision tending to relieve the those provided for in this Convention or to no limits of
carrier of its liability or to fix a lower limit shall be null liability whatsoever.
and void.
5.2 Any provision tending to relieve the carrier of
3. Under Article 19, MC 99, the carrier is liable for liability or to fix a lower limit than that which is laid
damage occasioned by delay in the carriage by air of down in this Convention shall be null and void, but the
passengers, baggage or cargo. Nevertheless, the carrier nullity of any such provision does not involve the nullity
shall not be liable for damage occasioned by delay if it of the whole contract, which shall remain subject to the
proves that it and its servants and agents took all provisions of this Convention.13
measures that could reasonably be required to avoid
the damage or that it was impossible for it or them to 5.3 Provided, that the limitations shall not apply if
take such measures. the damage is caused by the willful misconduct of the
carrier or his agents.
3.1 The liability for delay as specified in Article 19 in
the carriage of persons, for each passenger is limited to
SDR 1,000 for each passenger unless the passenger has
made, at the time when the checked baggage was
handed over to the carrier, a special declaration of
interest in delivery at destination and has paid a
supplementary sum if the case so requires. In that case
the carrier will be liable to pay a sum not exceeding the
declared sum, unless it proves that the sum is greater
than the passenger's actual interest in delivery at
destination.

4. A carrier can be exonerated from liability under

Article 20, Exoneration if it proves that the damage was
caused or contributed to by the negligence or other
13
Article 26, Montreal Convention

– COMMERCIAL LAW REVIEW –

 148

6. Illustrations of wilful misconduct that would

hold an airline liable for compensatory, moral, and
exemplary damages and attorney’s fees:

a) Flight attendant rudely placed a passenger with first

class ticket in the economy section of the airplane.14
b) Flight attendant ousted an asian passenger from the
plane and substituted a caucasian passenger on his
seat. 15
c) Airline personnel subjected a passenger to rude and
barbaric treatment, calling him a monkey.16
d) Spouses and child, all with confirmed and
reconfirmed reservations, were placed on wait-list,
with only one making it on the scheduled flight and
the two others were compelled to buy again tickets
from a different airline.17
e) Loss of baggage due to carrier’s negligence and
tainted with bad faith by faking a retrieval receipt to
bail itself out of having to pay the passenger.18
f) Where the passengers are upgraded from business
class to first class without their consent and would
not be allowed to board unless they give in to the
upgrade.19

14
Northwest Airlines, Inc. v. Cuenca, 14 SCRA 1063
15
Air France v. Carrascoso, 18 SCRA 155
16
Zulueta v. Pan-Am, 43 SCRA 397
17
Zalamea v. Court of Appeals, 228 SCRA 23
18
PAL v. Court of Appeals, 207 SCRA 100
19
Cathay Pacific Airways, Ltd v. Vasquez, 399 SCRA 207

– COMMERCIAL LAW REVIEW –

 149

PUBLIC SERVICE ACT

MODULE 40

PURPOSE OF THE LAW DEFINING A PUBLIC UTILITY

1. The primary purpose of the law is to secure 1. Simply, a public utility is a business or service
adequate, sustained service for the public at least cost, engaged in regularly supplying the public with some
and to protect and conserve investments which have commodity or service of public consequence. 21 The
already been made for that purpose. term implies public use and service. Examples are
electricity, gas, water, transportation, telephone or
1.1 Hence, interested or qualified parties intending telegraph service.
to operate as a public utility or provide public service
must: (a) must apply for, and obtain, a license or permit 1.1 They are enterprises which specially cater to the
from the Public Service Commission, and comply with needs of the public and are conducive to their comfort
certain defined terms and conditions, and (b) Upon and convenience.
grant of the license, the operator must conform to, and 1.2 The “business and operations of a public utility
comply with, all reasonable rules and regulations of the are imbued with public interest. In a very real sense, a
Public Service Commission. public utility is engaged in public service- providing basic
1.2 The law was enacted not only to protect the commodities and services indispensable to the interest
public against unreasonable charges and poor, of the general public. For this reason, it submits to
inefficient service, but also to prevent ruinous regulation of government authorities and surrenders
competition.20 certain business prerogatives, including the amount of
rates that may be charged by it. It is the imperative duty
2. The object and purpose of such a commission, of the State to interpose its protective power whenever
among other things, is to look out for, and protect, the too much profits become the priority of public
interests of the public, and, in the instant case, to utilities.”22
provide it with safe and suitable means of travel over
the highways in question, in like manner that a railroad 1.3 When, therefore, one devotes his property to a
would be operated under the same terms and use in which the public has an interest, he, in effect
conditions. grants to the public an interest in that use, and must
submit to the control by the public for the common
3. Note that the Public Service Commission has good, to the extent of the interest he has thus
been replaced by the following regulatory agencies: created.23

a) Land Transportation Franchising Regulatory Board 2. A distinction must be made between the terms
(LTFRB) for land transportation public service and public utility as they do not have the
b) Maritime Industry Authority (MARINA) for water same legal meaning, although are related:
transportation
c) National Telecommunications Commission (NTC) for 2.1 The definition of “public service” in the Public
communication utilities and services, radio Service Act, as last amended by Republic Act No. 2677,
communications systems, wire or wireless includes every person who owns, operates, manages or
telephone and telegraph systems, radio and controls, for hire or compensation, and done for general
television broadcasting systems and other similar business purposes, any common carrier railroad, street
public utilities railway, traction railway, subway motor vehicle, either
d) Energy Regulatory Board (ERB) for electric or power for freight or passenger, or both with or without fixed
companies route and whatever may be its classification, freight or
e) National Water Resources Council (NWRC) for water carrier service of any class, express service, steamboat,
resources
f) Civil Aeronautics Board (CAB) for air transportation

21
Albano vs. Reyes, 175 SCRA 264
22
Republic of the Philippines vs. Manila Electric
Company, G.R. No. 141314, April 9, 2003
23
Kilusang Mayo Uno Labor Center vs. Hon. Jesus
20
Batangas Transportation Co. Vs. Orlanes, 52 Phil 455 Garcia, LTFRB, GR No. 115381, December 23, 1994

– COMMERCIAL LAW REVIEW –

 150

or steamship line, pontines, ferries, and water craft sovereign power, while the latter is a form of
engaged in the transportation of passengers or freight regulations through an administrative agency.26
or both, shipyard, marine railway, marine repair shop,
wharf or dock, ice plant, ice refrigeration plant, canal, 1.3 A legislative franchise is necessary before a
irrigation system gas, electric light, heat and power, public utility can be allowed to secure a certificate of
water supply and power, petroleum, sewerage system, public convenience if there is a statute requiring it,
wire or wireless communication systems, broadcasting otherwise, it would not be required.
stations and other similar public services.
2. A certificate of public convenience is a mere
2.2 A “public utility,” on the other hand, is a license or a privilege and being neither a franchise nor a
business or service engaged in regularly supplying in the contract, it confers no vested or property right or
public with some commodity or service of public interest on the holder. However, in its purely private
consequence such as electricity, gas, water, aspect, it has value and may be considered property
transportation, telephone or telegraph service. that can be levied upon.

2.3 Simply stated, a public utility provides a service 3. The grant of a certificate of public convenience
or facility needed for present day living which cannot be or a certificate of public convenience and necessity
denied to anyone who is willing to pay for it.24 requires the concurrence of the following:

2.4 Another dissimilarity is that a public utility a) the applicant must be a citizen of the Philippines, or
requires a franchise, aside from a certificate of public a corporation, partnership, or joint stock company
necessity and convenience, for its operation, while a constituted and organized under the laws of the
public service which is not a public utility requires only a Philippines, at least sixty percent (60%) of its stock
certificate of public convenience. or paid-up capital belongs entirely to Filipino
citizens
2.5 However, laws may provide that an activity is b) the applicant must be financially capable of
not a public utility. An example is Section 29 of the undertaking the proposed service and meeting the
Electric Power Reform Act of 2001 (EPIRA) 25 which responsibilities incident to its operation, and
states “any law to the contrary notwithstanding, supply c) the applicant must prove that the operation of the
of electricity to the contestable market shall not be business will promote the public interest in a proper
considered a public utility operation.” This means that and suitable manner.
independent power producers/power generators are
not considered public utilities that may be subject to RULES OBSERVED IN THE GRANT OF
regulatory policy. CERTIFICATES OF PUBLIC
CONVENIENCE/CERTIFICATES OF PUBLIC
CERTIFICATE OF PUBLIC CONVENIENCE AND
CONVENIENCE AND NECESSITY
CERTIFICATE OF CONVENIENCE AND NECESSITY
DEFINED AND DISTINGUISHED 1. The Prior Operator Rule contemplates that the
first licensee will be protected in his investment and will
1. A certificate of public convenience is any not be subjected to ruinous competition.
authorization to operate public service issued by the
Public Service Commission for which no franchise, 1.1 It is not therefore, the policy of the law for the
either municipal or legislative, is required by law. Public Service Commission to issue a certificate of public
convenience to a second operator when a prior
1.1 The certificate of public convenience and operator is rendering sufficient, adequate and
necessity requires a franchise issued by the legislative satisfactory service, and who in all things and respects is
department. complying with the rules and regulations of the
Commission.
1.2 Legislative franchise distinguished from a
certificate of public convenience -A franchise is 1.2 The rule will not apply if the public interest is
distinguished from a certificate of public convenience in served better by a new operator where:
that the former is a grant or privilege from the

24
JG Summit Holdings, Inc. vs. Court of Appeals, 412
SCRA 10 26
Associated Communications & Wireless Service-UBN
25
RA 9136 v. NTC, 397 SCRA 574

– COMMERCIAL LAW REVIEW –

 151

a) the old operator failed to make an offer to meet the the applicant to furnish the same. But where other
increase in traffic conditions are equal, priority in the filing of the
b) where the Certificate of Public Convenience is application for a certificate of public convenience
granted to a new operator is a maiden Certificate of becomes an important factor in the granting or refusal
Public Convenience of a certificate.31
c) where the application of the rule is conducive to a
monopoly 3. Protection of Investment Rule is likewise
considered as one of the primary purposes of the law is
1.3 Another form of the rule is the Old Operator to protect and conserve investments which have
Rule which mandates that before permitting a new already been made for that purpose by public service
operator to invade the territory of another already operators.32
established with a certificate of public convenience,
thereby entering into competition with it, the prior 4. The grounds for a revocation of a certificate are:
operator must be given an opportunity to extend its (a) The holder violates or contumaciously refuses to
service in order to meet the public.27 comply with any order, rule or regulations of the
commission (b) The holder is a mere dummy (c) The
1.4 Note that this rule only applies when the old holder ceases operations or abandons the service.
operator offers to meet the increase in the demand the
moment it arises and not after another operator had REGULATION OF PUBLIC UTILITIES
offered to render the additional service as was done in
the present case.The rule protects those who are 1. The regulation of public utilities is founded
vigilant in meeting the needs of the travelling public.28 upon the police powers of the State and statues
prescribing rules for the control and regulation of public
2. The Prior Applicant Rule presupposes a utilities are considered valid exercise thereof. When
situation where two or more interested persons apply private property is used for a public purpose and is
for a Certificate of Public Convenience in the same affected with public interest, it ceases to be juris privati
locality over which no person has of yet been granted a only and becomes subject to regulation.
Certificate of Public Convenience, the applications being
equal, the one who first applied will be preferred.29 1.1 The regulation is to promote the common good.
Submission to regulation may be withdrawn by the
2.1 In relation to this rule, there is the Third owner by discontinuing use; but as long as use of the
Operator Rule which provides that where two property is continued, the same is subject to public
operators are more than serving the public, there is no regulation.33
reason to permit a third operator to engage in
competition with them. Thus, the fact that it is only one 2. In regulating rates charged by public utilities,
trip and of little consequence, is not sufficient reason to the State seeks to protect the public against arbitrary
grant the application. However, if later on and excessive rates while maintaining the efficiency and
circumstances would change requiring the operation of quality of services rendered.
new units or extending existing facilities, the third
2.1 However, the power to regulate rates does not
operator rule would be subject to the prior applicant
give the State the right to prescribe rates which are so
rule and also as to who may best subserve the public
low as to deprive the public utility of a reasonable
interests.30
return on investment. Thus, the rates prescribed by the
2.2 The rule where there are various applicants for State must be one that yields a fair return on the public
a public utility over the same territory, is that priority of utility upon the value of the property performing the
application, while an element to be considered, does service and one that is reasonable to the public for the
not necessarily control the granting of a certificate of services rendered. The fixing of just and reasonable
public convenience. The question to be considered in rates involves a balancing of the investor and the
such cases is which applicant can render the best consumer interests.
service, considering the conditions and qualifications of

27
Javier vs. Orlanes, 53 Phil 468
28
Angat-Manila Transportation Company vs. Victoria 31
Cruz vs. Marcelo, L-15301, March 30, 1962
vda. De Tengco, 95 Phil 58 32
Batangas Transportation Company vs. Orlanes, 52 Phil
29
Batangas Transportation Company vs. Orlanes, 52 Phil 455
455 33
Republic of the Philippines vs. Meralco, GR No.
30
Yangco vs. Esteban, 58 Phil 346 141314, November 15, 2002

– COMMERCIAL LAW REVIEW –

 152

2.2 The standard that should be used when an

administrative body fixes the rates of public utilities is
that the rate be reasonable and just. It has been held
that even in the absence of an express requirement as
to reasonableness, this standard may be implied.

2.3 What a just and reasonable rate is a question of

fact calling for the exercise of discretion, good sense,
and a fair, enlightened and independent judgment. The
requirement of reasonableness comprehends such rates
which must not be so low as to be confiscatory, or too
high as to be oppressive. In determining whether a rate
is confiscatory, it is essential also to consider the given
situation, requirements and opportunities of the utility.

2.4 Determinative factors that should be

considered in determining just and reasonable rates
are:

a) rate of return;
b) rate base; and
c) the return itself or the computed revenue to be
earned by the public utility based on the rate of
return and rate base. The rate of return is a
judgment percentage which, if multiplied with the
rate base, provides a fair return on the public utility
for the use of its property for service to the public.
The rate of return of a public utility is not prescribed
by statute but by administrative and judicial
pronouncements.

2.5 The Supreme Court has consistently adopted a

12% rate of return for public utilities. The rate base, on
the other hand, is an evaluation of the property
devoted by the utility to the public service or the value
of invested capital or property which the utility is
entitled to a return.

3. The Supreme Court ruled in a number of cases

that an administrative agency may be empowered by
law to approve provisionally, when demanded by
urgent public need, rates of public utilities without a
hearing. The reason is easily discerned from the fact
that provisional rates are by their nature temporary and
subject to adjustment in conformity with the definitive
rates approved after final hearing. Thus, the Supreme
Court sustained the provisional approval of increase
rates by the Energy Regulatory Board, Land Franchising
and Regulatory Board and Toll Regulatory Board34

34
Padua v. Ranada, GR No. 141949, October 14, 2002

– COMMERCIAL LAW REVIEW –

 153

FOREIGN INVESTMENT ACT

MODULE 41

Salient Features Of The Foreign Investment Act Of 1991 d) And/or transferring relevant technologies in
agriculture, industry and support devices.
Republic Act 7042, as amended by Republic Act 8179
2.3 Foreign investments shall be welcome as a
PRELIMINARIES: supplement to Filipino capital and technology in those
enterprises serving mainly the domestic market.
1. This is the law that allows foreigners to do
business in the Philippines or for foreign investments to 2.4 There are no restrictions on extent of foreign
be made in the Philippines, when it is not covered or ownership of export enterprises. In domestic market
does not seek incentives under the Omnibus Investment enterprises, foreigners can invest as much as 100%
Code.35 equity, except in areas included in the negative list.
1.1 Those covered by EO 266 are those foreign 2.5 Foreign-owned firms catering mainly to the
investments which pertain to: domestic market shall be encouraged to undertake
measures that will gradually increase Filipino
a) Preferred Pioneer (up to 100% equity) or Non-
participation in their businesses by
Preferred Pioneer (up to 40% equity) Economic Ares
of Investment as determined in the Investment a) Taking in Filipino partners
Priorities Plan (IPP) issued on a yearly basis by the b) (b)Electing Filipinos to the board of directors
Board of Investments (BOI) c) Implementing transfer of technology to Filipinos
b) Regional or Area Headquarters (RHQ) Investments d) Generating more employment for the economy,
c) Multinational Companies establishing warehouses e) Enhancing skills of Filipino workers.
d) Special Investor’s Resident Visa for foreigners
investing at least $ 75,000.00, and DEFINITION OF TERMS:
e) Establishments in Export Processing Zones
1. A foreign investment is an equity investment
1.2 Note that EO 226 provisions have been made by non-Philippine national in the form of foreign
supplanted by the Special Economic Zone Act of 1995 or exchange and/or other assets actually transferred to the
RA 7196. Philippines and duly registered with the Central Bank
which shall assess and appraise the value of such assets
2. The policies of the law are: other than foreign exchange.
2.1 It is the policy of the State to attract, promote 2. An export enterprise is an enterprise wherein a
and welcome productive investments in activities which manufacturer, processor or service (including tourism)
significantly contribute to national industrialization and enterprise exports sixty percent (60%) or more of its
socio-economic development to the extent that foreign output, or wherein a trader purchase products
investment is allowed in such activity by the domestically and exports sixty percent (60%) or more of
Constitution and relevant laws from (a)Foreign such purchases. (Sec 3(e), R.A. 7042)
individuals (b)Partnerships (c) Corporations, and (d)
Governments, including their political subdivisions 3. A domestic market enterprise is an enterprise
which produces goods for sale, or renders services to
2.2 Foreign investments shall be encouraged in the the domestic market entirely or if exporting a portion of
enterprises that significantly expand livelihood and its output fails to consistency export at least 60%
employment opportunities for Filipinos by: thereof. (Sec 3 (e), R.A. 7042)
a) Enhancing economic value of farm products 4. Philippine nationals are:
b) Promoting the welfare of Filipino consumers
c) Expanding the scope, quality and volume of exports a) A citizen of the Philippines
and their access to foreign markets b) A domestic partnership or association wholly owned
by citizens of the Philippines
c) Corporations organized under Philippine laws of
which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino
citizens
d) Corporations organized abroad and registered as
35
Executive Order 226 doing business in the Philippines under the

– COMMERCIAL LAW REVIEW –

 154

Corporation Code of which 100% of the capital 6.8 Performing services auxiliary to an existing
stock entitled to vote belong to Filipinos. isolated contract of sale which are not on a continuing
basis.
4.1 However, it provides that where a corporation
and its non-Filipino stockholders own stocks in a SEC- 7. The Negative List is the list containing areas of
registered enterprise, at least 60% of the capital stock investment that foreigners cannot invest in or requires
outstanding and entitled to vote of both corporations the listing of foreign ownership. The list is not
and at least 60% of the members of the board of permanent as it is subject to amendment every two
directors of both corporations must be Filipino citizens. years.
This is the double 60% rule.
7.1 List A enumerates the areas of economic
4.2 A non-Philippine national is one who does not activities reserved for Philippine nationals by mandate
belong to the definition of a Philippine national. of the constitution and specific laws. These include
exploitation of natural resources, operation of public
5. “Doing or transacting business” in the utilities, educational institutions, mass media, labor
Philippines for foreign corporations is constituted by: recruitment and the retail trade.
5.1 Soliciting orders, service contracts, and opening 7.2 List B enumerates those activities where foreign
offices ownership is listed for reasons of security, defense, risk
to health and morals and protection of small and
5.2 Appointing representatives, distributors
medium scale enterprise. These include defense-
domiciled in the Philippines or who stay for a period or
related activities such as the manufacture and
periods totaling 180 days or more
distribution of firearms and explosives including the
5.3 Participating in the management, supervision or manufacture and distribution of dangerous drugs,
control of any domestic business, firm, entity, or gambling, nightclubs, bathhouse, massage parlors and
corporation in the Philippines other similar activities.

5.4 Any act or acts that imply a continuity of List B also restricts the entry of foreign investment in
commercial dealings or arrangements, and contemplate small and medium sized domestic market enterprises
to some extent the performance of acts or works or the (i.e., those with paid in equity of less than the
exercise of some functions normally incident to and in equivalent of US$200,000 unless they involve advanced
progressive prosecution of, the purpose and object of technology as determined by the Department of Science
its organization (Sec 3(c), R.A. 7042) and Technology and they employ 50 direct employees
with a minimum paid-in capital of US$100,000.00); and
6. A foreign corporation is considered as “not export enterprises which utilize raw materials from
doing or transacting business” in the Philippines for depleting natural resources, with paid-in equity of less
foreign corporations when: than the equivalent of US$200,000.

6.1 Mere investment as shareholder and exercise of 7.3 Under the Second RFINL, cooperatives, private
rights as investor security agencies, small-scale mining have been
reclassified from Negative List A to Negative List B,
6.2 Having a nominee director or officer to which allows up to 40% foreign ownership.
represent its interest in the corporation
What remains in Negative List A, which expressly
6.3 Appointing a representative or distributor which prohibits any foreign equity or investment, are
transacts business in its own name and for its own industries reserved solely for Filipino citizens and
account corporations, namely, mass media and services
involving the practice of licensed professions.
6.4 Publication of a general advertisement through
any print or broadcast media
MANNER OF APPLICATION:
6.5 Maintaining a stock of goods in the Philippines 1. A foreign investor has to make a determination
solely for the purpose of having the same processed by of the kind of enterprise that it wants to enter into,
another entity in the Philippines which may be a Domestic Market Enterprise or an
6.6 Consignment by the foreign corporation of Export Enterprise.
equipment with a local company to be used in the 2. If it decides to invest in a domestic market
processing of products for export enterprise, foreigners can invest as much as 100%
6.7 Collecting information in the Philippines equity except in areas included in Negative Lists.

2.1 If the activity is in the Negative Lists, foreign

ownership in the enterprise is generally limited to a

– COMMERCIAL LAW REVIEW –

 155

maximum 40% unless the Constitution or other laws Department of Trade and Industry in the case of single
provide a lower limit. proprietorship.

2.2 The domestic market enterprise can later 5.1 As a general rule, the SEC or BTRCP, as the case
change its status to an export enterprise if over a 3 year may be, shall not impose any limitations on the extent
period it has consistently exported 60% or more of its of foreign ownership in an enterprise additional to
output. those provided in R.A. 7042.

2.3 This ownership limitation for activities in the 5.2 The exceptions are:
Negative List can be waived should the foreign investor a) That any enterprise seeking to avail of incentives
decide to invest in an enterprise that exports at least under the Omnibus Investment Code of 1987 must
60% or more of its output. In this case, foreign apply for registration with the Board of Investments
ownership may reach 100%. However, the waiver on (BOI), which shall process such application for
limitation of foreign ownership will not apply where the registration in accordance with the criteria for
economic activity is one for which the Constitution or evaluation prescribed in said Code
other laws provide for an absolute and definite limit on b) That a non-Philippine national intending to engage
foreign ownership. in the same line of business as an existing joint
2.4 Note also the entry into small and medium venture, in which he or his majority shareholder is a
domestic market enterprises (e.g. those with paid-in substantial partner, must disclose the fact and the
equity capital of less than US$200,000.00) are restricted names and addresses of the partners in the existing
by Negative List B, unless a certification is obtained joint venture in his application for registration with
from DOST that the enterprise involves advanced the SEC.
technology. (Reduced further to US$100,000.00 under 6. When they enter an export enterprise, non-
conditions set in Rep. Act 8179) Philippine nationals shall register with BOI and submit
3. If it decides to enter an Export Enterprise: As a the reports that may be required to ensure continuing
general rule, there are no restrictions on the extent of compliance of the export enterprise with its export
foreign ownership (up to 100%) in export enterprises, requirement.
unless the products and services fall within Negative 6.1 BOI shall advise SEC or BTRCP, as the case may
Lists A and B or utilize raw materials from depleting be, of any export enterprise that fails to meet the
natural resources. export ratio requirement.
4. Aside from direct investment participation 6.2 The SEC or BTRCP shall thereupon order the
discussed above, foreigners may “do business” in the non-complying export enterprise to reduce its sales to
Philippines. the domestic market to not more than 40% of its total
4.1 This mode of investment is not available for production; failure to comply with such SEC or BTRCP
incentives and is, therefore, governed by the FIA ’91 and order, without justifiable reason, shall subject the
the Corporation Code. enterprise to cancellation of SEC or BTRCP registration,
and/or the penalties provided in this law. (Sec 6, R.A.
4.2 Any non-Philippine national or entity may do 7042)
business in the Philippines up to 100% of its capital
provided: 7. The penalties provided under R.A. 7042 are:

a) It is doing business as a domestic market enterprise 7.1 A person who violates any provision of R.A.
outside the Negative List 7042 or of the terms and conditions of registration or of
b) It is doing business as an export enterprise whose the rules and regulations issued pursuant thereto, or
products or services do not fall within Lists A and B, aids or abets in any manner any violation shall be
except for defense-related activities which may be subject to a fine not exceeding P100,000.
approved or authorized, of the Negative List, and 7.2 If the offense is committed by a juridical entity,
c) Provided further that, as required by existing laws, it shall be subject to a fine in an amount not exceeding
the country or state of the applicant must allow 1/2 of 1% of total paid-in capital but not more than
Filipino citizens and corporations to do business P5,000,000.00 The president and/or officials
therein. responsible thereof shall also be subject to a fine not
5. When it is investing in a domestic enterprise up exceeding P200,000.00
to 100% of its capital without need of prior approval, it 7.3 In addition to the foregoing, any person, firm or
must register with the Securities and Exchange juridical entity involved shall be subject to forfeiture of
Commission (SEC) or with the Bureau of Trade all benefits granted under R.A. 7042. (Sec. 14)
Regulation and Consumer Protection (BTRCP) of the

– COMMERCIAL LAW REVIEW –

 156

PHILIPPINE COMPETITION ACT

MODULE 42

PHILIPPINE COMPETITION ACT ANTI-COMPETITIVE AGREEMENTS

RA 10667 (April 2018) 1. The anti-competitive agreements are
enumerated under Section 14:
TITLE OF THE LAW
a. The following agreements, between or among
The title of the law is: “An act providing for a national competitors, are per se prohibited: (1) Restricting
competition policy prohibiting ant-competitive competition as to price, or components thereof, or
agreements, abuse of dominant position and anti- other terms of trade; (2) Fixing price at an auction or in
competitive mergers and acquisitions, establishing the any form of bidding including cover bidding, bid
Philippine Competition Commission and appropriating suppression, bid rotation and market allocation and
funds therefor.” other analogous practices of bid manipulation;

EFFECTIVE DATE OF THE LAW b. The following agreements, between or among

competitors which have the object or effect of
The effective date of the law is August 8, 2015. The substantially preventing, restricting or lessening
subsequent implementing rules and regulations went competition shall be prohibited: (1) Setting, limiting or
into effect on June 18, 2016 after its publication on June controlling production, markets, technical development,
13, 2016. or investment; (2) Dividing or sharing the market,
whether by volume of sales or purchases, territory, type
PROHIBITED ACTS UNDER THE LAW of goods or services, buyers or sellers or any other
means;
1. The prohibited acts under the law are; (a) Anti-
Competitive Agreements under Section 14, and (b) c. Agreement other than those specified in (a) and
Abuse of Dominant Position under Section 15. (b) of this section which have the object or effect of
substantially preventing, restricting or lessening
2. In addition to the prohibited acts, the PCC shall
competition shall also be prohibited: Provided, Those
have the power to review Mergers and Acquisitions that
which contribute to improving the production or
substantially prevent, restrict or lessen competition in
distribution of goods and services or to promoting
the relevant market or in the market for goods or
technical or economic progress, while allowing
services.
consumers a fair share of the resulting benefits, may
3. The ultimate aim of the law is to protect the not necessarily be deemed a violation of this Act.
competitive process. When competition is eliminated,
An entity that controls, is controlled by, or is under
the competitive process is brought to an end as
common control with another entity or entities, have
competitors are excluded from the market (exclusionary
common economic interests, and are not otherwise
effect) and consumers are exploited (exploitative
able to decide or act independently of each other, shall
effect).
not be considered competitors for purposes of this
4. On the other hand, the law will permit an section.
agreement or an act if it has: (a) efficiency gains, and (b)
1.1 Anti-competitive acts are those agreements
consumer benefits. The agreement or act in this case
undertaken with the object or effect of substantially
has the object or effect of “improving production or
preventing, restricting or lessening competition. This
distribution of goods and services within the relevant
means that competitors are inhibited from competing,
market, or promoting technical and economic progress,
or from growing, or staying in the market. When these
while allowing consumers a fair share of the economic
occur, the agreement is said to have a foreclosure
benefit. This is the rule of reason or efficiency gains with
object or effect on competition.
consumer benefits justification.
1.2 Foreclosure can be in the horizontal market,
where the entity and its competitors operate, or in the
vertical market, the upstream or vertical market. In this
case there is vertical integration. However, there is no
necessity for the entity to have market dominance in
both markets.

– COMMERCIAL LAW REVIEW –

 157

1.3 There is no need for actual foreclosure to occur 3.3 Under Rule 4, Section 2, Par. (b) of the IRR for
as the law allows intervention even before the act of purposes of merger control, the reorganization of
the entity can have an effect on the market. several legal entities belonging to a single economic
entity will not be covered since there can be no
2. Section 14 has three subsections. Subsections “acquiring and acquired pre-acquisition ultimate parent
(a) and (b) prohibit anti-competitive agreements entities.” Consequently, they are not subject to the
between or among competitors, while Subsection (c) notification requirement.
prohibits agreements other than those specified under
(a) or (b). 3.4 For purposes of applying Section 15, the single
economic entity shall be considered collectively in
2.1 The distinction is material as a violation of relation to the definition of dominant position, referring
Subsections (a) and (b) are criminal in nature, while that to “a position of economic strength that an entity or
of Subsection (c) is not. entities hold which makes it capable of controlling the
relevant market independently from any combination of
3. To resolve the issue as to whether a: (a) parent
the following: competitors, customers, suppliers or
company and a subsidiary, or (b) parent company and
consumers.” Since a competitor is defined as an entity
an affiliate company, or (c) subsidiaries or affiliates will
outside of a single economic entity. Consequently, a
be considered as competitors, the law adopted the
parent company cannot be accused of impermissible
single economic entity doctrine which is defined under
conduct towards its subsidiaries and affiliates.
the last paragraph of Section 14. In essence, the entities
that are part of the single economic entity are under the 4. The penal sanction is imprisonment from 2 to 7
control of the ultimate parent entity. years, and a fine of no less than PHP 50,000,000.00 but
not more than PHP 250,000,000.00.
3.1 The control required being the ability to
substantially influence or direct the actions or decisions 4.1 Administrative penalties will range from PHP
of an entity, whether by contract, agency or otherwise.” 50,000.00 to 2,000,000.00 per violation.
This is known as “decisive influence.”
ABUSE OF A DOMINANT POSITION
Section 25 mandates that the PCC to presume control
when: “the parent owns directly or indirectly, through 1. Abuse of Dominant Position is provided for
subsidiaries, more than one half (1/2) of the voting under Section 15:
power of an entity, unless in exceptional circumstances,
it can clearly be demonstrated that such ownership It shall prohibited for one or more entities to abuse
does not constitute control.” their dominant position by engaging in conduct that
would substantially prevent, restrict or lessen
It can also be presumed even if the entity owns one half competition:
(1/2) or less of the voting power of another entity
when: (a) There is power over more than one half (1/2) (a) Selling goods or services below cost with the object
of the voting rights by virtue of an agreement with of driving competition our of the relevant market:
investors; (b) There is power to direct or govern the Provided, that in the Commission’s evaluation of this
financial and operating policies of the entity under a fact, it shall consider whether the entity or entities have
statute or agreement; (c) There is power to appoint or no such object and the price established was in good
remove the majority of the members of the board of faith to meet or compete with the lower price of a
directors or equivalent governing body; (d) There is competitor in the same market selling the same or
power to cast the majority votes at meetings of the comparable product or service of like quality;
board of directors or equivalent governing body; (e)
There exists ownership over or the right to use all or a (b) Imposing barriers to entry or committing acts that
significant part of the assets of the entity; (f) There exist prevent competitors from growing within the market in
rights or contracts which confer decisive influence on an anti-competitive manner except those that develop
the decision of the entity. in the market as a result of or arising from a superior
product or process, business acumen, or legal rights or
3.2 As a consequence, it must be realized that while laws;
affiliated companies may be shielded from the
consequences of their agreements as they are not (c) Making a transaction subject to acceptance by the
competitors, the parent company and related other parties of other obligations which, by their nature
companies may be bound by the act of a subsidiary or or according to commercial usage, have no connection
an affiliate if it enters into a prohibited agreement with with the transaction;
a competitor.
(d) Setting prices or other terms or conditions that
discriminate unreasonably between customers or
sellers of the same goods or services, where such
customers or sellers are contemporaneously trading on

– COMMERCIAL LAW REVIEW –

 158

similar terms and conditions, where the effect may be (i) Limiting production, markets or technical
to lessen competition substantially: Provided, that the development to the prejudice of consumers, provided
following shall be considered permissible differentials: that limitations that develop in the market as a result of
or due to a superior product or process, business
1. Socialized pricing for the less fortunate sector of acumen or legal rights or laws shall not be a violation of
the economy; this Act:
2. Price differential which reasonably or Provided, that nothing in this Act shall be construed or
approximately reflect differences in the cost of interpreted as a prohibition on having a dominant
manufacture, sale or delivery resulting from differing position in a relevant market or on acquiring,
methods, technical conditions, or quantities in which maintaining and increasing market share through
the goods or services are sold or delivered to the buyers legitimate means that do not substantially prevent,
or sellers; restrict or lessen competition.
3. Price differential or terms of sale offered in Provided, further, that any conduct which contributes
response to the competitive price of payments, services to improving production or distribution of goods or
or changes in the facilities furnished by a competitor; services within the relevant market, or promoting
and technical and economic progress while allowing
consumers a fair share of the resulting benefit may not
4. Price changes in response to changing market
necessarily be considered an abuse of dominant
conditions, marketability of goods or services, or
position.
volume:
Provided, finally, that the foregoing shall not constrain
(e) Imposing restrictions on the lease or contract for
the Commission or the relevant regulator from pursuing
sale or trade of goods or services concerning where, to
measures that would promote fair competition or more
whom, or in what forms goods or services may be sold
competition as provided in this Act.
or traded, such as fixing prices, giving preferential
discounts or rebate upon such price, or imposing 2. What Section 15 forbids is abusive conduct by a
conditions not to deal with competing entities, where coercive monopolist. These has the following elements:
the object or effect of the restrictions is to prevent, (a) The entity must have market power or market
restrict or lessen competition substantially. Provided, dominance. This refers to a situation where the entity
that nothing contained in this Act shall prohibit or has the capacity to control the market or stop
render unlawful: competitors from entering the market. Under Section
27, this can be presumed if the market share of the
1. Permissible franchising, licensing, exclusive
entity is at least 50% unless a new market threshold is
merchandising or exclusive distributorship agreements
determined by the PCC. (b) The entity commits abusive
such as those which give each party the right to
conduct. (c) The conduct must have substantial
unilaterally terminate the agreement; or
foreclosure effect on the relevant market. (d) There is
2. Agreements protecting intellectual property no objective justification for the conduct.
rights, confidential information, or trade secrets;
2.1 Dominant position need not be enjoyed by a
(f) Making supply of particular goods or services single entity. The law will also be called to apply under
dependent upon the purchase of other goods or the concept of collective dominance. This is a situation
services from the supplier which have no direct where several entities demonstrate a collective
connection with the main goods or services to be behavior towards the accomplishment of a particular
supplied; object that is prohibited. If they possess the ability to
control the relevant market, the entities will have
(g) Directly or indirectly imposing unfairly low purchase collective dominance. It must be noted though that the
prices for the goods or services of, among others, IRR does not specifically address the matter.
marginalized agricultural producers, fisherfolk, micro-,
small-, medium-scale enterprises, and other 2.2 In an oligopoly, a market dominated by a few
marginalized service providers and producers; entities, there is diminished competition and it may be
normal for oligopolists to have parallel behavior. This
(h) Directly of indirectly imposing unfair purchase or does not translate to ant-competitive behavior by those
selling price on their competitors, customers, suppliers enjoying collective dominance unless the behavior is the
or consumers, provided that prices that develop in the only reason for parallel behavior.
market as a result of or due to a superior product or
process, business acumen or legal rights or laws shall 2.3 Section 15 does not forbid a monopoly. What it
not be considered unfair prices; and seeks to address is the abuse of a monopoly as per the
qualifying statements in the quoted section that allows
it to maintain and increase market share through

– COMMERCIAL LAW REVIEW –

 159

legitimate means that do not substantially prevent, 2.1 The size of the person test refers to the
restrict or lessen competition. acquiring or target entity, at least one of which must
have gross annual revenues in, into or from or assets in
3. Potential abusive conduct as provided by the Philippines worth PHP 1,000,000,000.00. This has
Section 15 are: been increased to PHP 5,000,000,000.00 under PCC
Policy Statement 18-01 effective March 20, 2018.
(a) Predatory Pricing, which refers to the selling of
goods or services below cost with the object of driving 2.2 The size of the transaction test refers to object
competition out of the relevant market. of transaction and must be worth PHP 2,000,000,000.00
as likewise revised under PVV Policy Statement 18-01.
(b) Imposing Barriers to Competition, which refers to
barriers to entry or committing acts that prevent These threshold amounts are temporarily increased
competitors from growing within the market in an anti- under the Section 4 (eee) of Bayanihan to Recover as
competitive manner. One Act to PHP 50,000,000,000.00 for two years and
suspends the motu propio exercise of the power of
(c) Bundling or Tying, which refers to a situation where
review by the PCC for one year, both counted from the
the consumer is offered two or more products with
effectivity of the law.
inducements to take both, rather than separately or
where the sale of the second product is used as a 2.3 In case of acquisitions, to include de facto
condition for the sale of the first product. mergers or consolidations, compliance with the size of
the transaction test will require an inquiry as to the
(d) Discriminatory Pricing, which refers to setting prices
place of the subject assets, as:
or other terms and conditions that discriminate
unreasonably between customers or sellers of the same (a) where all the subject assets are in the Philippines,
goods or services, the gross annual revenues or value of assets must meet
the threshold,
(e) Restrictive Vertical Agreements, which refers to
distribution and supply agreements providing prima (b) where all the subject assets are outside of the
facie restrictive clauses, such as exclusive dealing, Philippines, the gross annual revenues of such assets
minimum quantity obligations, resale price generated in or into the Philippines and the value of
maintenance, formal or de facto restriction on parallel assets in the Philippines of the acquiring entity must
trade, and online sales bans. Resale Price Maintenance, meet the threshold, and
refers to restrictions on the contract of sale concerning
where, to whom or in what forms goods and services (c) where some of the subject assets are inside and
may be sold or traded such as fixing prices or the giving some are outside the Philippines, the gross annual
of preferential rebates or discounts. revenues generated in or into the Philippines by assets
acquired in the Philippines and assets acquired outside
(f) Imposing Unfair Price, which refers to a price that is of the Philippines must collectively meet the threshold
higher or lower than what could objectively be justified and the value of assets in the Philippines of the
insofar as its contract with a marginalized supplier, who acquiring entity must similarly meet the threshold.
is one engaged in a subsistence activity (i.e farmer) and
whose annual net income does not exceed the NEDA 2.4 In statutory mergers or consolidations, the size
poverty line for his region. of the transaction test requires that the enterprise value
test and the control test be hurdled. In the enterprise
(g) Limiting production, markets or technical value test, the gross annual revenues from sales in, into
development which results in prejudice to consumers, or from the Philippines or the value of the assets in the
and is not the result of “ a superior product or process, Philippines must meet the threshold. In the control test,
business acumen, or legal rights or laws.” the acquiring entity must directly or indirectly gain
control or further control of the subject enterprise. Both
REVIEW OF MERGERS AND ACQUISITIONS are subject to separate notifications.
1. Section 16 gives the PCC the power to review 2.5 In case of a joint venture, the contributing
mergers and acquisitions based on factors which they entities are deemed acquiring entities and the joint
deem to be relevant. venture the acquired entity. Under Rule 4, Section 3,
Par. (d), the acquiring entity in the transaction will be
2. Section 17 provides for compulsory notification
subject to notification if either: (a) the aggregate value
if the transaction has met the set threshold of PHP
of assets combined in the Philippines or contributed
1,000,000,000.00 under the size of the person test and
into the joint venture exceeds the threshold, or (b) the
the size of the transaction test.
gross revenues generated in the Philippines by assets
combined in the Philippines of contributed into the
proposed joint venture exceeds the threshold.

– COMMERCIAL LAW REVIEW –

 160

3. Section 17 requires compulsory notification at 4. If there is a failure to give notification, the law
least 30 days prior to the consummation of the will impose an administrative fine ranging from 1% to
transaction. This will have the effect of prohibiting the 5% of the transaction value. This may also result in gun-
parties from consummating the transaction until 30 jumping or premature consummation of the transaction
days after the PCC was provided notification. This gives without the requisite clearance from the PCC.
the PCC the opportunity to issue a decision, or if
necessary, to request additional information. In the 5. The PCC can permit an otherwise prohibited
latter case, the transaction cannot be consummated for merger or acquisition under a rule of reason and/or
an additional 60 days, beginning on the day the request white knight justification. The former holds that the M
for additional information is received. Provided, that in & A has brought about or is likely to bring about gains in
no case shall the total period of review exceed 90 days efficiencies that are greater than the effects of any
from initial notification. limitation on competition, while the latter is a situation
where a party is faced with actual or imminent financial
3.1 For creeping transactions, referring to merger failure and the agreement is represents the least
or acquisitions consisting of successive transactions or competitive arrangement among known alternative
acquisition of parts of one or more entities wich shall uses for the failing entity’s assets.
take place with a 1 year period, it shall be treated as
one transaction. Notification must be on the basis of the 6. A favorable ruling acquires a no-look back
preliminary binding agreement, or if none, when the protection as the PCC ruling cannot be challenged or
parties execute the agreement relating to the last reversed by the PCC except when it is obtained through
transaction which, when taken together with the fraud or false material information.
preceding transactions, satisfies the threshold.

– COMMERCIAL LAW REVIEW –