COMMERCIAL LAW

CORPORATIONS
1.) A corporation is an artificial being created by operation of law that has
rights and powers.
2.) A corporation has separate personality distinct from its agents.
Nationality of Corporations
1.) Incorporation test – looking at the law that created the corporation.
2.) Domiciliary test – Used to determine the nationality of a corporation in a
country with different tests.
3.) Control Test – Nationality is determined by the nationality of the
controlling stockholders or members.
4.) Grandfather Rule – Nationality is attributed to the percentage of equity in
the corporation used in nationalized or partly nationalized area. i.e.,
mining. (Nara Nickel Case). The combined totals in the investing corp., and
the investee corporation must be traced to determine the total percentage
of Filipino ownership.
Doctrine of Separate Personality
General Rule - A corporation has a separate and distinct personality apart
from its directors, officers, or owners.

1.) A corporation, as a juridical entity, may act only through its directors,
officers and employees. A separate personality shields directors and
corporate officers from personal liability acting in good faith and within
their scope of authority except for situation enumerated by law.

If there is no proof that the corporation’s separate juridical personality

was abused or used for nefarious purposes, then apply the general
rule.

2.) Stockholders are not involved in management. A stockholder can only

be held criminally liable he had a direct hand in the crime.
 Piercing the Veil of Corporate Fiction

1.) Piercing the Veil applies when the corporate’s separate personality is
abused or used for wrongful purposes.
Trust Fund Doctrine
1.) The capital stock, property, and other assets of the corporation are
regarded as equity in trust for the payment of corporate creditors,
who are preferred in the distribution of corporate assets.

A corporation cannot declare dividends without unrestricted

retained earnings (profits).
2.) All the assets are reserved for the payment of corporate debts.
Stockholders of a corporation are liable for its debts up to the extent
of their unpaid subscriptions. They cannot invoke veil of corporate
identity as a shield.

Exception – The trust fund doctrine is only applicable to INSOLVENT

corporations.

3.) Legal implications – The board cannot use the assets of the
corporation to purchase its own stock for as long as the corporation
has outstanding debts.

Types of Corporations
1.) Stock Corporations are those which have capital stock divided into shares
and are authorized to distribute to the holders of such shares, dividends of
the surplus profits on the basis of the shares held. (Sec. 3, RA 11232)

a.) An incorporator of a stock corporation must own or be subscribed

to at least 1 share of the capital stock.
b.) A corporation shall have perpetual existence unless its AOI
provides otherwise.
 c.) Types of Shares-
Preferred Shares: Shares of stock that are issued by a
corporation that are given preference in the distribution of
dividends and in the distribution of corporate assets in case of
liquidation.

Founder’s Shares: These shares may be given certain rights

and privileges not available to owners of other stocks.
Founder’s shares are not perpetual, it must for a limited time,
5 years from the date of incorporation.

Redeemable Shares: are those shares which may be bought

back by the corporation from the holders of such shares upon
expiration a fixed period.

Treasury Shares: are shares that have been issued and paid
for, but subsequently reacquired by the corporation through,
purchase, redemption, donation or some other lawful means.

2.) Non-Stock Corporation is one where no part of its income is distributable

as dividends to its members.

3.) Liability of One Person Corporation the single stockholder is solidarily

liable with the corporation, except when the single stock holder proves that
his personal properties are separate from the corporation.

4.) Articles of Incorporation: The name of the corporation, the purpose for
which the corporation is being formed, the place of the principal office,
term of the corporation’s existence, names, nationalities, and addresses of
the incorporators, number of directors (not more than 15), names and
nationalities of the directors.

5.) Adoption of by-laws: May be adopted before incorporation or post

incorporation.
6.) Amendment of by-laws: Approval by a majority of the directors or trustees.
Approval by the owners of at least a majority of the OCS at a regular
meeting duly called for the purpose. File to the SEC and get approval by the
SEC.

2/3 of the OCS is needed to delegate to the board of directors or trustees

the power to amend or repeal the by-laws.

7.) Corporate Officers: a.) President who must be a director, b.) Treasurer who
must be a resident, c.) secretary who must be a citizen and a resident, d.)
other officers.

8.) De Facto Corporation: is one that is organized with colorable compliance

with the requirements of incorporation and allowed to exist until it’s
assailed by the state.

Requisites: it exists under a valid law, a bona fide attempt to organize under
such law, actual use or exercise in good faith of corporate powers.

The SOLGEN must question the de facto corporation in a qou warranto

proceeding.

9.) Corporation by estoppel: When a person assumes to act as corporation,

knowing it to be without authority to do so cannot put up the defense of
the corporation’s non-existence.

All persons who assume to act as a corporation knowing it to be without

authority to do so shall be liable as general partners for all debts, liabilities,
and damages incurred arising as a result thereof.

Reverse Application: A person who has an obligation from a non-existent

corporation, is prevented from denying the corporation’s existence to avoid
enforcement. (Missionary Sisters v. Alzona)
Board of Directors

1.) The BOD or BOT shall exercise corporate powers, conducts all business,
and control all properties of the corporation.

2.) Qualifications: A director must own at least 1 share of stock. The

moment that a person loses his share, he ceases to be a director. Note
that a President needs to be a director as well.

3.) Disqualifications: Within a period of 5 years prior to election or appoint

he is found to be.

A.) CONVICTED of an offense punishable by imprisonment

exceeding 6 years,
B.) CONVICTED Violating the RCC and SRC,
C.) ADMINISTRATIVELY LIABLE for any offense of fraud,
D.) Convicted by a foreign court for acts enumerated in a and b,
E.) Administratively held liable by a foreign agency equivalent to
the SEC of fraud.

Election

1.) Registration in the books of corporation as a stockholder is needed to

be able to vote or be voted for.

2.) A stockholder may vote such number of shares for as many persons
as there are directors to be elected. Cumulate said shares or
distribute them.

3.) Voting by remote communication is allowed as long as it is

authorized by the bylaws or by a majority of the BOD. The right to
vote remotely may be exercised in corporations vested with public
interest regardless if there is no provision in the bylaws. A
 stockholder is deemed present if he participates through remote
communication for the purposes of quorum.

4.) Election can be by ballot if requested.

5.) The elected BOD or trustees shall perform their duties prescribed by
law.

6.) Independent Director: A person who is independent of management

and free from any business which reasonably interfere with exercise
of independent judgement in carrying out duties as a director.

Corporations VESTED WITH PUBLIC INTEREST are required to have

independent directors constituting at least 20% of such board.

7.) Term of Office: Directors, 1 year, while trustees not exceeding 3

years.

8.) Removal: A director may be removed by a vote of the stockholders

holding 2/3 of the OCS or 2/3 of the members entitled to vote in
nonstock corporations.

Exception: Removal without cause may not be used to

deprived stockholders or members of the right of
representation to which they may be entitled under the law.
Removal by the SEC: The SEC can motu propio, upon valid complaint,
and due notice and hearing, remove a director or trustee despite the
disqualification or when such disqualification arose or discovered
subsequent to an election.
9.) Compensation: In absence of any provision in the bylaws fixing
compensation, the directors or trustees cannot receive
compensation in their capacity except for reasonable per diems.
Vacancies

1.) Any vancy in the BOD or trustee other than removal or expiration may be
filled by at least a majority of the REMAINING DIRECTORS IF THEY FORM A
QOUROM otherwise it may be filled by stockholders in a regular or special
meeting.

In case the board cannot fill the vacancies, an emergency board can be
constituted. When an action is required to prevent grave, substantial, and
irreparable loss to the corporation. The vacancy can me filled from among
the officers via vote of the remaining directors.

2.) Limitations on Emergency Board:

a.) The action by the designated director shall be limited to the emergency
action.
b.) The term shall cease within a reasonable time from the termination of
the emergency or upon election of a director.
c.) The corporation must notify the SEC within 3 days stating the reason.

Duties & Liabilities of Directors

Knowingly vote or assent to illegal acts of the corporation. Guilty of gross
negligence or bad faith in directing the affairs. Acquires personal or pecuniary
interest in conflict with their duty. Will be held jointly and severally liable for all
damages suffered by the corporation, stockholders and other persons.
1.) Doctrine of Corporate Opportunity: A director or trustee shall not attempt
to acquire interest adverse to the corporation. Any director or trustee who
does, will be liable as a trustee for the corporation and must account for
the profits and refund the same, unless his acts are ratified by a vote of 2/3
of the OCS. It is applicable even if the director used his own funds.
 2.) A director can be held liable solidarily with the corporation when he acts
in bad faith or gross negligence. When made liable by a provision of law.
When the director agrees to be bound with the corporation’s
transactions.

3.) Doctrine of Centralized Management: The BOD has the authority and
power to control the corporation.

4.) Business Judgement Rule: The BOD has the sole authority to determine
polices, enter into contracts, and conduct business of the corporation
within their charter. If the decisions of the board are made in good faith, it
is not reviewable by the courts.

5.) Doctrine of Apparent Authority: When a corporation willfully or negligently

gives its officer apparent authority to act on its behalf, it is estopped from
denying its officer’s authority as to innocent third persons who dealt with
the officer in good faith.

Corporate Powers
1.) To sue and be sued it is corporate name, to have perpetual existence, to
adopt corporate seal, to adopt bylaws, to issue or sell stocks, to purchase
or sell their property, and to enter into a partnership, JVA, merger, with
natural or juridical persons.

2.) Specific Powers – Power to extend or shorten term by a vote of majority of

the BOD and at least 2/3 of the OCS.

Power to increase or decrease capital stock needs a majority vote of BOD

and 2/3 of the OCS.
Also applies to non-stock corporations when it comes to bonded
indebtedness.
 Follow the 25%/25% rule whereby the SEC needs a sworn statement from
the treasurer that 25% of the increase capital is paid for and 25% has been
paid in cash.
3.) Pre-emptive Right: Exclusive to stockholders.

4.) Power to sell or dispose all or substantially all of the assets: Requires a
majority vote of the BOD and 2/3 of the OCS.

5.) Power to invest funds in another corporation: requires a majority vote of

the BOD and 2/3 of the OCS.

6.) Power to declare dividends from the UNRESTRICTED RETAINED

EARNINGS.

7.) Management Contract: Needs a majority of the BOD and majority of the
OCS.

Ultra Vires Acts:

No corporation shall exercise powers other than those in the RCC and the AOI and
other incidental powers.
The test to determine if an act is ultra vires is to look if the act is in direct
furtherance of the corporation’s business, incidental and reasonably needed to
exercise.
a.) Illegal ultra vires: Patently void act, cannot serve as basis of court action,
cannot be ratified, and cannot acquire validity by estoppel or performance.
b.) Mere ultra vires: Merely outside the powers of the corporation, is voidable,
can be ratified.
Stock Holders and Members
1.) Doctrine of Equality of Shares: Shares are presumed equal with the same
privileges and liabilities if the AOI is silent on such differences.
2.) Right to vote: A stockholder has the right to vote for an act, control and
management of the corporation. This can be done in person or remotely or
by proxy.

Vote by proxy: should be in writing, signed and filed by the stockholder,

only valid for the specific meeting, only valid for 5 years.

3.) Right to Dividends out of the unrestricted retained earnings.

4.) Right to inspect corporate records. Must be made by a stockholder,

director. Exceptions- cannot be exercise when the person improperly used
the information, when he was not acting in good faith for a legitimate
purpose, or represents the interest of a competitor.

To exercise the right, a demand in writing must be made by the

stockholder, director, trustee. An officer refuses.

Can an injunction be filed by the corporation to prevent inspection?

No. the stockholder’s right to inspect cannot be prevented by injunction.
Nor can a defense that the stockholder holds minimal shares be used to
prevent a stockholder from inspecting the books.

5.) Pre-emptive right: Right of the stockholder to subscribe to all issues of

share of any class, in proportion to their respective shareholdings. May be
restricted under the AOI; the stockholder must be given reasonable time to
exercise the right.

6.) Appraisal Right: Only available to stockholders. Any stockholder shall have
the right to dissent and demand payment for the fair value of his shares.

May be exercised when:

a.) amendment to the AOI has the effect of restricting rights of the
stockholder, or extending the corporate term;
b.) Disposition of all or substantially all of the corporation’s assets;
c.) In case of merger;
 d.) In case of investment of funds for any purpose other than the primary
purpose of the corporation.

Procedure: a.) must dissent; b.) make a written demand; c.) surrender
his certificate of stock before the day the vote was taken; d.) valuation
of the shares; e.) payment by the corporation.

A stockholder cannot withdraw his demand for payment. All rights

accruing to the stockholder shall be suspended from the time of
demand for payment.

7.) Remedial Rights: it may be

a.) individual suit,
b.) representative suit, and
c.) derivative suit (IMPORTANT) – 1.) An action brought by a stockholder or
member on behalf of the corporation to enforce corporate rights against
the directors, officers and other insiders. The real party is the corporation
and the stockholder is a nominal party.

It is design for the minority.

Requisites:
a.) He must be a stockholder or member at the time the acts subject of the
action occurred and at the time the action was filed;
b.) He has exerted all efforts and has exhausted all available remedies in the
AOI;
c.) The suit is not a nuisance or harassment suit.
d.) No appraisal right available;
e.) If the suit is a nuisance, then the court will dismiss the case.

Shares of Stocks
Equity ownership in a business. Regarded as property, and can the owner can
dispose of it as he sees fit. Actual ownership in the corporation.
A certificate of stock is a written instrument or prima facie evidence that the
holder is a shareholder of a corporation. Evidence of ownership not equivalent of
ownership.
1.) Transferability of Shares: Signing of the certificate or indorsement and
actual physical delivery of the certificate.

2.) No transfer of stocks shall be valid, except between the parties, until it is
recorded in the books showing the names of the parties, number of shares,
date, and number of certificates.

The transfer is binding on the corporation and third persons only when the
transfer was recorded in the books.

3.) Indivisibility of shares: No certificate of stock shall be issued to a subscriber

until the full amount has been paid. Ex. 80% paid for; therefore, the
certificate cannot be issued until the 20% is paid for.

4.) Delinquent Shares: The BOD will pass a resolution for the sale of such
shares, the sale shall not be less than 30 days nor more than 60 days from
the date such stocks become delinquent.

Merger and Consolidation

Merger – 2 or more entities will join together and the surviving corporation will
absorb the latter.
Consolidation – 2 or more corporations will join together to create a new
corporation.
Constituent – A corporation proposing to consolidate.
Rules: Approval by a majority of the BOD of each corporation and 2/3 of the OCS
of each corporation. Approval by the SEC. When the SEC approves of the merger
or consolidation, the merger and consolidation will be effective.
Merger can be disallowed pursuant to the PCC when the merger substantially
restricts, prevents, or lessens competition.
Effects:
The surviving or consolidated corporation shall possess all the rights, immunities,
and franchises of each constituent and all real or personal properties, all debts
and liabilities.
Transfers and Acquisitions
1.) Business-Enterprise Transfer – The transferee is liable for the debts and
liabilities of his transferor arising from the business enterprise.

A Corp was acquired by B Corp by business-enterprise. If A had debts

before the acquisition, then B will acquire those debts by acquiring A
through business-enterprise.

2.) Nell Doctrine - The transfer of all assets of a corporation to another shall
not render the latter liable for the debts of the former.

3.) Asset-Only Transfer – Wherein a corporation sells or transfer all of its assets
to another corporation, the latter is not liable for the debts of the
transferor.

Exceptions: a.) when the purchasers expressly or impliedly assume such

debts; b.) when the transaction is basically a merger or consolidation; c.)
when the purchasing corporation is merely a continuation of the selling
corporation and; d.) When the transaction is entered into fraudulently to
escape liability.

Dissolution and Liquidation

Modes:
1.) Voluntary
2.) Shortening of corporate term
 3.) Involuntary

Where there are no creditors affected:

Approval by a majority of the BOD and majority of the OCS. A dissolution request
will be filed to the SEC and approval by the SEC with the issuance of a certificate
of dissolution.
Corporations vested with public interest cannot be dissolved without the
recommendation of the appropriate government agency.
Dissolution is deemed effective when the SEC issues the certificate.
Where creditors are affected:
A resolution approved by majority of the BOD and 2/3 of the OCS. A verified
petition shall be filed to the SEC. The SEC will publish the petition and conduct
hearings for all of the objections raised by creditors.
Shortening of Corporate Term:
Amend the AOI and submit the amended thing to the SEC.
Involuntary Dissolution:
The SEC may dissolve corporation:
1.) Motu propio or;
2.) Upon filing of a verified complaint by an interested party.
Grounds
a.) Non-use of corporate charter (corporation must commence operation
within 5 years) ;

b.) Continuous inactivity (5 years from the date of inactivity, it will be placed
under delinquency. It has 2 years to resume operation or be automatically
dissolved)
 c.) Upon receipt of a lawful court order for dissolution;

d.) Upon finding by final judgment that the corporation procured its
incorporation through fraud;

e.) Upon finding by final judgment that the corporation was created to aid
illegal activities.

Liquidation:
A corporation, upon effectivity of its dissolution, shall convey its properties to a
trustee for the benefit of stockholders, creditors and other interested parties.
Foreign Corporation:
A foreign corporation is one formed, organized or existing under laws other than
those of the Philippines’ and whose laws allow Filipino citizens and corporations
to do business in its own country or State.
Capacity to sue and be sued:
A foreign corporation needs a license to business in the country in order to
sue before Philippine courts.
A foreign corporation doing business in the country without a license cannot use
the courts to protect is interests.
By virtue of estoppel. A party cannot take advantage of the foreign corporation’s
inability to sue when the former acknowledges it and has entered into a contract
with the latter and got benefits therefrom.
Banking:
1. Nature of Bank Funds and Bank Deposits All deposits of whatever nature with
banks or banking institutions in the Philippines including investments in bonds
issued by the Government of the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an absolutely confidential nature
and may not be examined, inquired or looked into by any person, government
official, bureau or office.
2. Required Diligence of Banks; Liability as Drawee Bank Since their business and
industry are imbued with public interest, banks are required to exercise
extraordinary diligence, which is more than that of a Roman pater familias or a
good father of a family, in handling their transactions. Banks are also expected to
exercise the highest degree of diligence in the selection and supervision of their
employees. By the very nature of their work in handling millions of pesos in daily
transactions, the degree of responsibility, care and trustworthiness expected of
bank employees and officials is far greater than those of ordinary clerks and
employees.191 Banks are expected to act with extraordinary diligence. The
highest degree of diligence required of banks likewise contemplates such
diligence in the selection and supervision of its employees. The very nature of
their work which involves handling millions of pesos in daily transactions requires
a degree of responsibility, care and trustworthiness that is far greater than those
expected from ordinary clerks and employees. The banks must not only exercise
"high standards of integrity and performance," it must also ensure that its
employees do likewise because this is the only way to ensure that the bank will
comply with its fiduciary duty.
3. Prohibited Transactions by Bank Directors and Officers No director, officer,
employee, or agent of any bank shall –
(a) Make false entries in any bank report or statement or participate in any
fraudulent transaction, thereby affecting the financial interest of, or causing
damage to, the bank or any person;
(b) Without order of a court of competent jurisdiction, disclose to any
unauthorized person any information relative to the funds or properties in the
custody of the bank belonging to private individuals, corporations, or any other
entity: Provided, That with respect to bank deposits, the provisions of existing
laws shall prevail;
(c) Accept gifts, fees, or commissions or any other form of remuneration in
connection with the approval of a loan or other credit accommodation from said
bank;
(d) Overvalue or aid in overvaluing any security for the purpose of influencing in
any way the actions of the bank or any bank; or
(e) Outsource inherent banking functions.
U. Secrecy of Bank Deposits (R.A. No. 1405, as amended, and R.A. No. 6426, as
amended)
1. Purpose
• To give encouragement to the people to deposit their money in banking
institutions;
• To discourage private hoarding so that the same may be properly utilized by
banks in authorized loans to assist in the economic development of the country.
2. Prohibited Acts All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in bonds issued by the
Government of the Philippines, its political subdivisions and its instrumentalities,
are hereby considered as of an absolutely confidential nature and may not be
examined, inquired or looked into by any person, government official, bureau or
office. It shall be unlawful for any official or employee of a banking institution to
disclose to any person other than those mentioned in Section 2 of RA 1405 hereof
any information concerning said deposits.
3. Deposits Covered
• All deposits of whatever nature with banks or banking institutions in the
Philippines
• Investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities.
• All foreign currency deposits as well as foreign currency deposits authorized
under P.D 1034 4. Exceptions from Coverage a. When there is written permission
of the depositor or investor;
b. In cases of impeachment;
c. Upon order of a competent court in cases of bribery or dereliction of duty of
public officials;
d. When the money deposit or invested is the subject matter of litigation;
e. Upon inquiry by the Commissioner of Internal Revenue for the purpose of
determining the net estate of a deceased depositor for tax purposes;
f. Report of banks to Anti-Money Laundering Council of covered and/or suspicious
transactions;
g. Upon order of the competent court or tribunal in cases involving unexplained
wealth under the Anti-Graft and Corrupt Practices Act or Republic Act No. 3019;
and
h. In cases of terrorism under the Human Security Act of 2007 or Republic Act No.
9372. 5. Garnishment of Deposits, including Foreign Deposits The foreign currency
deposits shall be exempt from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any administrative
body whatsoever
AMLA
- Money laundering: A crime where proceeds of an unlawful activity are
transacted, thereby making them appear to have originated from legitimate
sources. (Sec. 4, RA 9160)
- Money laundering needs a predicate crime i.e., kidnaping for ransom,
bribery.
- Elements a.) There must be an unlawful activity b.) there must be proceeds,
c.) there must be a transaction using the proceeds from the unlawful
activity, and d.) actual knowledge that the money come from illegal means.
 - Covered institutions are a.) regulated by BSP, b.) insurance companies, and
c.) regulated by SEC.
- AMLC cannot inquire into bank accounts without an order from a
competent court upon presenting probable cause.

Insurance:
An agreement whereby one undertakes for a consideration to indemnify another
against loss damage or liability arising from an unknown or contingent event.

Object and Purpose

Assumption of risk and indemnity of loss must be the focal point of the
agreement.
Perfection occurs upon the offeror knowing that the offeree has accepted the
contract.
The person who makes the offer is the INSURED.
Insurable interest:
Every person has insurable interest in the life and health of:
1. Himself, of his spouse and of his children;
2.
Beneficiaries
Need not have insurable interest in the life of the insured, if the insured got the
insurance for his own life.
Concealment
The neglect to communicate material information to the insurer. The matter
concealed need not be the cause of the loss. Concealment can be intentional or
unintentional. The matter concealed need not be the cause of the loss.
Incontestability Clause
The incontestability clause applies if the following are present: a.) The policy must
be life insurance, b.) it must be in force for 2 years from the issuance.
Suicide:
The insurer is liable for suicide if the policy has been in force for 2 years from
issuance or last reinstatement.

Intellectual Property Code

Patent: Covers inventions, filed at the IPO and lasts for 20 years with no renewal.
1.) Any technical solution of a problem in any field of human activity which is
novel, has an inventive step, and can be applied industrially.

Elements:
a.) Novelty – New and not part of prior art.
b.) Involve an inventive step – Not obvious to a person skilled in the art.
c.) Industrially applicable
Trademarks: Attached to the goods or services, filed with the IPO and lasts for 10
years, can be renewed.
Look at Kolin v Kolin case.
A trademark registered through bad faith may be cancelled.
Infringement vs. Unfair Competition
 Infringement:
Unauthorized use of a registered trademark. Fraudulent intent is not
necessary. Registration is a prerequisite.
Unfair Competition:
Passing off of one’s goods as those of another. Fraudulent intent is
necessary. Registration is not a prerequisite.
It is intended to deceive the public.
Remedies for Infringement:
Injunction, Damages, disposal.

Prior use in good faith

Zuneca v Natrapharm:
Ownership of trademark is acquired through registration. Actual use is still
needed. However, a prior user in good faith will not be liable for infringement.

Copyright:
Literary, artistic and scholarly works. Is created upon creation. Lasts during the
lifetime plus 50 years after death of the author. With a perpetual right of
attribution.
Copyrightable Works:
A.) Original works
1.) Books, pamphlets and etc.
2.) Periodicals
3.) Lectures, sermons, dissertations.
4.) Letters
 5.) Dramatic compositions
B.)