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Commercial Law Notes

1. INSIDER TRADING
Section 27.1. It shall be unlawful for
an insider to sell or buy a security of
the issuer, while in possession of
material information with respect to
the issuer or the security that is not
generally available to the public,
unless:
(a) The insider proves that the
information was not gained from
such relationship; or
(b) If the other party selling to or
buying from the insider (or his agent)
is identified, the insider proves:
(i) that he disclosed the information to
the other party, or
(ii) that he had reason to believe that
the other party otherwise is also in
possession of the information.
A purchase or sale of a security of the
issuer made by an insider defined in
Subsection 3.8, or such insiders
spouse or relatives by affinity or
consanguinity within the second
degree, legitimate or common-law,
shall be presumed to have been
effected while in possession of
material nonpublic information if
transacted after such information
came into existence but prior to
dissemination of such information to
the public and the lapse of a
reasonable time for market to absorb
such information: Provided, however,
That this presumption shall be
rebutted upon a showing by the
purchaser or seller that he was aware
of the material nonpublic information
at the time of the purchase or sale.
SEC vs Interport Resources Corp.,
G.R. No. 135808, October 6, 2008
Facts: In 1994, the Board of Directors
of IRC approved a Memorandum of

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Agreement with Ganda Holdings


Berhad
(GHB).
Under
the
Memorandum of Agreement, IRC
acquired 100% or the entire capital
stock of Ganda Energy Holdings, Inc.
(GEHI), which would own and operate
a 102 megawatt (MW) gas turbine
power-generating
barge.
The
agreement also stipulates that GEHI
would assume a five-year power
purchase contract with National Power
Corporation. In exchange, IRC will
issue to GHB 55% of the expanded
capital stock of IRC amounting to
40.88 billion shares which had a total
par value of P488.44 million.
IRC alleged that a press release
announcing the approval of the
agreement was sent through facsimile
transmission to the Philippine Stock
Exchange and the SEC, but that the
facsimile machine of the SEC could not
receive it. Upon the advice of the SEC,
the IRC sent the press release the
following morning.
The SEC averred that it received
reports that IRC failed to make timely
public disclosures of its negotiations
with GHB and that some of its
directors, respondents herein, heavily
traded IRC shares utilizing this
material insider information.
While this case was pending in Court,
Republic Act No. 8799, otherwise
known as the Securities Regulation
Code, took effect on 8 August 2000.
Section 8 of Presidential Decree No.
902-A, as amended, which created the
PED, was already repealed as provided
for in Section 76 of the Securities
Regulation Code:
SEC. 76. Repealing Clause. - The
Revised
Securities
Act
(Batas
Pambansa Blg. 178), as amended,
in its entirety, and Sections 2, 4 and

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8 of Presidential Decree 902-A, as
amended, are hereby repealed. All
other laws, orders, rules and
regulations,
or
parts
thereof,
inconsistent with any provision of
this Code are hereby repealed or
modified accordingly.
Thus, under the new law, the PED has
been abolished, and the Securities
Regulation Code has taken the place
of the Revised Securities Act.
Held:
I.Sections 8, 30 and 36 of the
Revised Securities Act do not
require
the
enactment
of
implementing rules to make them
binding and effective.
In the absence of any constitutional or
statutory infirmity, which may concern
Sections 30 and 36 of the Revised
Securities Act, this Court upholds
these provisions as legal and binding.
It is well settled that every law has in
its favor the presumption of validity.
Unless and until a specific provision of
the law is declared invalid and
unconstitutional, the same is valid and
binding
for
all
intents
and
purposes. The
mere
absence
of
implementing rules cannot effectively
invalidate provisions of law, where a
reasonable construction that will
support the law may be given.
II. The right to cross-examination
is not absolute and cannot be
demanded during investigative
proceedings before the PED.
III. The Securities Regulations
Code did not repeal Sections 8, 30
and 36 of the Revised Securities
Act since said provisions were
reenacted in the new law.
In the present case, a criminal case
may still be filed against the
respondents despite the repeal, since

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Sections 8, 12, 26, 27 and 23 of the


Securities Regulations Code impose
duties that are substantially similar to
Sections 8, 30 and 36 of the repealed
Revised Securities Act.
IV.
The
SEC
retained
the
jurisdiction
to
investigate
violations
of
the
Revised
Securities Act, reenacted in the
Securities
Regulations
Code,
despite the abolition of the PED.
Section
53
of
the
Securities
Regulations Code clearly provides that
criminal complaints for violations of
rules and regulations enforced or
administered by the SEC shall be
referred to the Department of Justice
(DOJ) for preliminary investigation,
while the SEC nevertheless retains
limited
investigatory
powers. Additionally, the SEC may still
impose the appropriate administrative
sanctions under Section 54 of the
aforementioned law. As in Morato v.
Court of Appeals, the repeal cannot
deprive SEC of its jurisdiction to
continue investigating the case; or the
regional trial court, to hear any case
which may later be filed against the
respondents.
V. The instant case has not yet
prescribed.
The prescription period is interrupted
by commencing the proceedings for
the prosecution of the accused. In
criminal cases, this is accomplished by
initiating the preliminary investigation.
The
prosecution
of
offenses
punishable
under
the
Revised
Securities Act and the Securities
Regulations Code is initiated by the
filing of a complaint with the SEC or by
an investigation conducted by the
SEC motu proprio. Only after a finding
of probable cause is made by the SEC
can the DOJ instigate a preliminary
investigation. Thus, the investigation

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that was commenced by the SEC in
1995, soon after it discovered the
questionable acts of the respondents,
effectively interrupted the prescription
period. Given the nature and purpose
of the investigation conducted by the
SEC, which is equivalent to the
preliminary investigation conducted by
the DOJ in criminal cases, such
investigation would surely interrupt
the prescription period.
DISSENTING
OPINION:
JUSTICE
CARPIO
This ruling of the majority violates
Section 2 of Act No. 3326 entitled An
Act to Establish Periods of Prescription
for Violations Penalized by Special
Acts and Municipal Ordinances and To
Provide When Prescription Shall Begin
To Run. Section 2 provides:
Section 2. Prescription shall begin to
run from the day of the commission
of the violation of the law, and if the
same be not known at the time,
from the discovery thereof and the
institution of judicial proceedings for
its investigation and punishment.
In Zaldivia v. Reyes, Jr., the Court ruled
that the proceedings referred to in
Section 2 of Act No. 3326 are judicial
proceedings and not administrative
proceedings.
Indeed, Section 2 of Act No. 3326
expressly refers to the "institution of
judicial proceedings." Contrary to
the majority opinion's claim that "a
preliminary investigation interrupts
the prescriptive period," only the
institution of judicial proceedings
can interrupt the running of the
prescriptive period. Thus, in the
present case, since no criminal case
was filed in any court against
respondents since 1994 for violation of
the Code, the prescriptive period of

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twelve years under Section 1 of Act


No. 3326 has now expired.
2. VIOLATIONS OF THE SECURITIES
REGULATION CODE (RA 8799)
Baviera vs Paglinawin, G.R. No.
168380, February 8, 2007
FACTS: SCB is a foreign banking
corporation duly licensed to engage in
banking, trust, and other fiduciary
business in the Philippines.
It acted as a stock broker, soliciting
from local residents foreign securities
called "GLOBAL THIRD PARTY MUTUAL
FUNDS" (GTPMF), denominated in US
dollars. These securities were not
registered with the Securities and
Exchange Commission (SEC). These
were then remitted outwardly to SCBHong Kong and SCB-Singapore.
SCBs counsel advised the bank to
proceed with the selling of the foreign
securities although unregistered with
the SEC, under the guise of a
"custodianship
agreement;"
and
should it be questioned, it shall invoke
Section 72 of the General Banking Act
(Republic Act No.337). In sum, SCB
was able to sell GTPMF securities
worth around P6 billion to some 645
investors.
The Investment Capital Association of
the Philippines (ICAP) filed with the
SEC a complaint alleging that SCB
violated the Revised Securities Act,
particularly the provision prohibiting
the selling of securities without prior
registration with the SEC; and that its
actions are potentially damaging to
the local mutual fund industry.

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Petitioner filed with the DOJ a
complaint for violation of Section
8.1 of the Securities Regulation Code
against private respondents. The DOJ
dismissed
petitioners
complaint
holding that it should have been filed
with the SEC.
ISSUE: Did the DOJ commit grave
abuse of discretion in dismissing
petitioners complaint?
RULING: NO.
SEC. 53. Investigations, Injunctions
and Prosecution of Offenses.
53. 1. The Commission may, in its
discretion, make such investigation as
it deems necessary to determine
whether any person has violated or is
about to violate any provision of this
Code, any rule, regulation or order
thereunder, or any rule of an
Exchange,
registered
securities
association, clearing agency, other
self-regulatory organization, and may
require or permit any person to file
with it a statement in writing, under
oath or otherwise, as the Commission
shall determine, as to all facts and
circumstances concerning the matter
to be investigated. The Commission
may publish information concerning
any such violations and to investigate
any fact, condition, practice or matter
which it may deem necessary or
proper to aid in the enforcement of the
provisions of this Code, in the
prescribing of rules and regulations
thereunder, or in securing information
to serve as a basis for recommending
further legislation concerning the
matters
to
which
this
Code
relates: Provided, however, That any
person requested or subpoenaed to
produce documents or testify in any
investigation shall simultaneously be
notified in writing of the purpose of
such
investigation: Provided,

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further, That
all
criminal
complaints for violations of this
Code and the implementing rules
and
regulations
enforced
or
administered by the Commission
shall
be
referred
to
the
Department
of
Justice
for
preliminary
investigation
and
prosecution before the proper
court: Provided, furthermore, That in
instances where the law allows
independent
civil
or
criminal
proceedings of violations arising from
the act, the Commission shall take
appropriate action to implement the
same: Provided, finally; That the
investigation, prosecution, and trial of
such cases shall be given priority.
Under the above provision, a criminal
complaint for violation of any law or
rule administered by the SEC must
first be filed with the latter. If the
Commission finds that there is
probable cause, then it should refer
the case to the DOJ. The petitioner
failed to comply with the foregoing
procedural requirement.
A criminal charge for violation of the
Securities Regulation Code is a
specialized dispute. Hence, it must
first be referred to an administrative
agency of special competence, i.e.,
the SEC. Under the doctrine of
primary jurisdiction, courts will not
determine a controversy involving a
question within the jurisdiction of the
administrative tribunal, where the
question demands the exercise of
sound
administrative
discretion
requiring the specialized knowledge
and expertise of said administrative
tribunal to determine technical and
intricate matters of fact. The Securities
Regulation Code is a special law. Its
enforcement is particularly vested in
the SEC. Hence, all complaints for any
violation of the Code and its
implementing rules and regulations

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should be filed with the SEC. Where
the complaint is criminal in nature, the
SEC shall indorse the complaint to the
DOJ for preliminary investigation and
prosecution as provided in Section
53.1 earlier quoted.
SEC vs. Prosperity.Com, Inc.
G.R. No. 164197, Jan. 25, 2012
FACTS:
Prosperity.Com, Inc. (PCI)
sold computer software and hosted
websites without providing internet
service. To make a profit, PCI devised
a scheme in which, for the price of
US$234.00 (subsequently increased to
US$294), a buyer could acquire from it
an internet website of a 15-Mega Byte
(MB) capacity. At the same time, by
referring to PCI his own down-line
buyers, a first-time buyer could earn
commissions, interest in real estate in
the Philippines and in the United
States, and insurance coverage worth
P50,000.00.
To benefit from this
scheme, a PCI buyer must enlist and
sponsor at least two other buyers as
his own down-lines. These second tier
of buyers could in turn build up their
own down-lines.
For each pair of
down-lines,
the
buyer-sponsor
received a US$92.00 commission. But
referrals in a day by the buyer-sponsor
should not exceed 16 since the
commissions due from excess referrals
inure to PCI, not to the buyer-sponsor.
Apparently, PCI patterned its scheme
from that of Golconda Ventures, Inc.
(GVI),
which
company
stopped
operations after the Securities and
Exchange Commission (SEC) issued a
cease and desist order (CDO) against
it. As it later on turned out, the same
persons who ran the affairs of GVI
directed PCIs actual operations.
In 2001, disgruntled elements of GVI
filed a complaint with the SEC against

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PCI, alleging that the latter had taken


over GVIs operations. After hearing,
the SEC, through its Compliance and
Enforcement unit, issued a CDO
against PCI. The SEC ruled that PCIs
scheme constitutes an Investment
contract and, following the Securities
Regulations Code, it should have first
registered such contract or securities
with the SEC.
Instead of asking the SEC to lift its
CDO in accordance with Section 64.3
of Republic Act (R.A.) 8799, PCI filed
with the Court of Appeals (CA) a
petition for certiorari against the SEC.
The CA ruled that, following the
Howey test, PCIs scheme did not
constitute an investment contract that
needs registration pursuant to R.A.
8799, hence, this petition.
ISSUE:
WON
PCIs
scheme
constitutes an investment contract
that requires registration under R.A.
8799.
HELD: No. The Securities Regulation
Code treats investment contracts as
securities that have to be registered
with the SEC before they can be
distributed and sold. An investment
contract is a contract, transaction, or
scheme where a person invests his
money in a common enterprise and is
led to expect profits primarily from the
efforts of others.
Of course, the United States Supreme
Court, grappling with the problem, has
on several occasions discussed the
nature of investment contracts. That
courts rulings, while not binding in the
Philippines, enjoy some degree of
persuasiveness insofar as they are
logical and consistent with the
countrys best interests. The United
States
Supreme
Court
held
in
Securities and Exchange Commission

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Commercial Law Notes


v. W.J. Howey Co. that, for an
investment contract to exist, the
following elements, referred to as the
Howey test must concur: (1) a
contract, transaction, or scheme; (2)
an
investment
of
money;
(3)
investment is made in a common
enterprise; (4) expectation of profits;
and (5) profits arising primarily from
the efforts of others. Thus, to sustain
the SEC position in this case, PCIs
scheme or contract with its buyers
must have all these elements.

adopted.
Evidently, it is PCI that
expects profit from the network
marketing of its products.
PCI is
correct in saying that the US$234 it
gets from its clients is merely a
consideration for the sale of the
websites that it provides.

Here, PCIs clients do not make such


investments. They buy a product of
some value to them: an Internet
website of a 15-MB capacity.
The
client can use this website to enable
people to have internet access to what
he has to offer to them, say, some skin
cream. The buyers of the website do
not invest money in PCI that it could
use for running some business that
would generate profits for the
investors. The price of US$234.00 is
what the buyer pays for the use of the
website, a tangible asset that PCI
creates, using its computer facilities
and technical skills.

G.R. No. 170290 April 11, 2012

Actually, PCI appears to be engaged in


network marketing, a scheme adopted
by companies for getting people to
buy their products outside the usual
retail system where products are
bought from the stores shelf.
The commissions, interest in real
estate, and insurance coverage worth
P50,000.00 are incentives to down-line
sellers to bring in other customers.
These can hardly be regarded as
profits from investment of money
under the Howey test.
The CA is right in ruling that the last
requisite in the Howey test is lacking
in the marketing scheme that PCI has

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3. GENERAL BANKING ACT - ENTRY


OF FOREIGN BANKS
PDIC vs
America

Citibank

and

Bank

of

FACTS: In 1977, PDIC conducted an


examination of the books of account of
Citibank. It discovered that Citibank, in
the course of its banking business,
received from its head office and other
foreign
branches
a
total
of P11,923,163,908.00
in
dollars,
covered by Certificates of Dollar Time
Deposit that were interest-bearing
with corresponding maturity dates.
These funds were not reported to PDIC
as deposit liabilities that were subject
to assessment for insurance. As such,
PDIC assessed Citibank for deficiency
in the sum of P1,595,081.96.

Similarly, sometime in 1979, PDIC


examined the books of accounts of
Bank of America which revealed that
BA received from its head office and
its other foreign branches a total
of P629,311,869.10 in dollars, covered
by Certificates of Dollar Time Deposit
that
were
interest-bearing
with
corresponding maturity dates and

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Commercial Law Notes


lodged in their books under the
account
"Due
to
Head
Office/Branches." Because
BA also
excluded these from its deposit
liabilities, PDIC wrote to BA, seeking
the
remittance
of P109,264.83
representing
deficiency
premium
assessments for dollar deposits.

In their petitions for declaratory relief,


Citibank and BA sought a declaratory
judgment stating that the money
placements they received from their
head office and other foreign branches
were not deposits and did not give rise
to insurable deposit liabilities under
Sections 3 and 4 of R.A. No. 3591 (the
PDIC Charter) and, as a consequence,
the deficiency assessments made by
PDIC
were
improper
and
erroneous. The
cases
were
then
consolidated.

ISSUE: Are the funds placed in the


Philippine branch by the head office
and foreign branches of Citibank and
BA insurable deposits under the PDIC
Charter and, as such, are subject to
assessment for insurance premiums?

funds placed in the Philippine branch


belong to one and the same bank. A
bank cannot have a deposit with itself.

The head office of a bank and its


branches are considered as one under
the eyes of the law. While branches
are treated as separate business units
for commercial and financial reporting
purposes, in the end, the head office
remains responsible and answerable
for the liabilities of its branches which
are under its supervision and control.
As such, it is unreasonable for PDIC to
require the respondents, Citibank and
BA, to insure the money placements
made by their home office and other
branches.
Deposit
insurance
is
superfluous and entirely unnecessary
when, as in this case, the institution
holding the funds and the one which
made the placements are one and the
same legal entity.

Funds not a deposit under the


definition of the PDIC Charter;
Excluded from assessment

RULING: No.
A branch has no separate legal
personality;
For a deposit to exist, there must be at
least two parties a depositor and a
depository each with a legal
personality distinct from the other.
Because the respondents respective
head offices and their branches form
only a single legal entity, there is no
creditor-debtor relationship and the

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Section 3(f) of the PDIC Charter


excludes from the definition of the
term "deposit" any obligation of a
bank payable at the office of the bank
located outside the Philippines:
any obligation of a bank
which is payable at the office of
the bank located outside of the
Philippines shall not be a deposit

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for any of the purposes of this Act
or included as part of the total
deposits
or
of
the
insured
deposits.

CITIBANK, N.A. and INVESTORS


FINANCE
CORPORATION,
doing
business under the name and
style
of
FNCB
Finance
vs.
MODESTA R. SABENIANO
G.R. No. 156132
February
6, 2007
FACTS: Respondent was a client of
petitioners. She had several deposits
and
market
placements
with
petitioners. At the same time,
respondent had outstanding loans with
petitioner
Citibank,
incurred
at
Citibank-Manila, all of which had
become due and demandable. Despite
repeated demands by petitioner
Citibank, respondent failed to pay her
outstanding loans. Thus, petitioner
Citibank used respondents deposits
and money market placements to offset and liquidate her outstanding
obligations.
Respondent, however, denied having
any outstanding loans with petitioner
Citibank. Respondent instituted a
complaint for "Accounting, Sum of
Money
and
Damages"
against
petitioners.
Petitioner now contends that the term
"Citibank, N.A." used therein should be
deemed to refer to all branches of
petitioner Citibank in the Philippines
and abroad; thus, giving petitioner
Citibank the authority to apply as
payment
for
the
PNs
even
respondents dollar accounts with
Citibank-Geneva.
ISSUE: Is petitioner correct?

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RULING: No.
Pertinent provisions of Republic Act
No. 8791, otherwise known as the
General Banking Law of 2000,
governing
bank
branches
are
reproduced below
SEC. 72. Transacting Business in
the Philippines. The entry of
foreign banks in the Philippines
through
the
establishment
of
branches shall be governed by the
provisions of the Foreign Banks
Liberalization Act.
The conduct of offshore banking
business in the Philippines shall be
governed by the provisions of
Presidential Decree No. 1034,
otherwise known as the "Offshore
Banking System Decree."
SEC. 74. Local Branches of Foreign
Banks. In case of a foreign bank
which has more than one (1)
branch in the Philippines, all such
branches shall be treated as one (1)
unit for the purpose of this Act, and
all references to the Philippine
branches of foreign banks shall be
held to refer to such units.
SEC. 75. Head Office Guarantee.
In order to provide effective
protection of the interests of the
depositors and other creditors of
Philippine branches of a foreign
bank, the head office of such
branches shall fully guarantee the
prompt payment of all liabilities of
its Philippine branch.
Residents and citizens of the
Philippines who are creditors of a
branch in the Philippines of a
foreign bank shall have preferential

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rights to the assets of such branch
in accordance with existing laws.
Republic Act No. 7721, otherwise
known
as
the
Foreign
Banks
Liberalization Law, lays down the
policies and regulations specifically
concerning the establishment and
operation of local branches of foreign
banks. Relevant provisions of the said
statute read
Sec. 2. Modes of Entry. - The
Monetary Board may authorize
foreign banks to operate in the
Philippine banking system through
any of the following modes of entry:
(i) by acquiring, purchasing or
owning up to sixty percent (60%) of
the voting stock of an existing
bank; (ii) by investing in up to sixty
percent (60%) of the voting stock of
a
new
banking
subsidiary
incorporated under the laws of the
Philippines; or (iii) by establishing
branches
with
full
banking
authority: Provided, That a foreign
bank may avail itself of only one (1)
mode of entry: Provided, further,
That a foreign bank or a Philippine
corporation may own up to a sixty
percent (60%) of the voting stock of
only one (1) domestic bank or new
banking subsidiary.
It is true that the afore-quoted Section
20 of the General Banking Law of 2000
expressly states that the bank and its
branches shall be treated as one unit.
It should be pointed out, however, that
the said provision applies to a
universal or commercial bank, duly
established and organized as a
Philippine corporation in accordance
with
Section
8
of
the
same
statute, and authorized to establish
branches within or outside the
Philippines.

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The General Banking Law of 2000,


however, does not make the same
categorical statement as regards to
foreign banks and their branches in
the Philippines. What Section 74 of the
said law provides is that in case of a
foreign bank with several branches in
the country, all such branches shall be
treated as one unit. As to the relations
between the local branches of a
foreign bank and its head office,
Section 75 of the General Banking Law
of 2000 and Section 5 of the Foreign
Banks Liberalization Law provide for a
"Home Office Guarantee," in which the
head office of the foreign bank shall
guarantee prompt payment of all
liabilities of its Philippine branches.
While the Home Office Guarantee is in
accord with the principle that these
local branches, together with its head
office, constitute but one legal entity,
it does not necessarily support the
view that said principle is true and
applicable in all circumstances.
The Home Office Guarantee is
included in Philippine statutes clearly
for the protection of the interests of
the depositors and other creditors of
the local branches of a foreign
bank. Since the head office of the
bank is located in another country or
state, such a guarantee is necessary
so as to bring the head office within
Philippine jurisdiction, and to hold the
same answerable for the liabilities of
its Philippine branches. Hence, the
principle of the singular identity of
that the local branches and the head
office of a foreign bank are more often
invoked by the clients in order to
establish the accountability of the
head office for the liabilities of its local
branches.
Now the question that remains to be
answered is whether the foreign
bank can use the principle for a

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reverse purpose, in order to
extend the liability of a client to
the foreign banks Philippine
branch to its head office, as well
as to its branches in other
countries. Thus, if a client obtains
a loan from the foreign banks
Philippine
branch,
does
it
absolutely
and
automatically
make the client a debtor, not just
of the Philippine branch, but also
of the head office and all other
branches of the foreign bank
around the world? This Court rules
in the negative.
Unlike
Philippine
statutes,
the
American legislation explicitly defines
the relations among foreign branches
of an American bank. Section 25 of the
United
States
Federal
Reserve
Act states that
Every national banking association
operating foreign branches shall
conduct the accounts of each foreign
branch independently of the accounts
of other foreign branches established
by it and of its home office, and shall
at the end of each fiscal period
transfer to its general ledger the profit
or loss accrued at each branch as a
separate item.
Contrary to petitioners assertion that
the accounts of Citibank-Manila and
Citibank-Geneva should be deemed as
a single account under its head office,
the foregoing provision mandates that
the accounts of foreign branches of an
American bank shall be conducted
independently of each other. Since the
head office of petitioner Citibank is in
the U.S.A., then it is bound to treat its
foreign branches in accordance with
the said provision. It is only at the end
of its fiscal period that the bank is
required to transfer to its general
ledger the profit or loss accrued at
each branch, but still reporting it as a

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separate item. It is by virtue of this


provision that the Circuit Court of
Appeals of New York declared in PanAmerican Bank and Trust Co. v.
National City Bank of New York that a
branch is not merely a tellers window;
it is a separate business entity.
4. ANTI-MONEY LAUNDERING ACT
Republic
of
the
Philippines
represented by the AMLC v Tinga
and Hon. Antonio Eugenio Jr
Following the promulgation of Agan, a
series of investigations concerning the
award of the NAIA 3 contracts to
PIATCO were undertaken by the
Ombudsman and the Compliance and
Investigation Staff (CIS) of petitioner
AMLC.
AMLC filed an application to inquire
into or examine the deposits or
investments of Alvarez and the others.
The trial court being satisfied that
there existed to believe that the
deposits in various bank accounts,
details of which appear in paragraph 1
of the application, are related to the
offense of violation of Anti-Graft and
Corrupt Practices Act now the subject
of criminal prosecution before the
Sandiganbayan as attested in the
submitted
information.
The
CIS
proceeded to inquire and examine the
said deposits.
Issue: Whether or not the subject
bank inquiry orders are valid
Held: The petition is dismissed. In
order for this Court to rule on the
petition at bar which insists on the
enforceability of the said bank inquiry
orders, it is necessary for us to
consider and rule on the same

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question which after all is a pure
question of law.
SECTION 2. 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, except
upon written permission of the
depositor,
or
in
cases
of
impeachment, or upon order of a
competent court in cases of bribery
or dereliction of duty of public
officials, or in cases where the
money deposited or invested is the
subject matter of the litigation.
(Emphasis supplied)
Nowhere in the legislative record cited
by Lilia Cheng does it appear that
there was an unequivocal intent to
exempt from the bank inquiry order all
bank accounts opened prior to the
passage of the AMLA. There is a cited
exchange between Representatives
Zamora and Lopez where the latter
confirmed to the former that deposits
are supposed to be exempted from
scrutiny or monitoring if they are
already in place as of the time the law
is enacted. That statement does
indicate that transactions already in
place when the AMLA was passed are
indeed exempt from scrutiny through
a bank inquiry order, but it cannot
yield any interpretation that records of
transactions undertaken after the
enactment of the AMLA are similarly
exempt. Due to the absence of cited
authority from the legislative record

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that unqualifiedly supports respondent


Lilia Cheng thesis, there is no cause
for us to sustain her interpretation of
the AMLA, fatal as it is to the anima of
that law.
Prior to the enactment of the AMLA,
the fact that bank accounts or
deposits were involved in activities
later on enumerated in Section 3 of
the law did not, by itself, remove such
accounts from the shelter of absolute
confidentiality. Prior to the AMLA, in
order that bank accounts could be
examined, there was need to secure
either the written permission of the
depositor or a court order authorizing
such examination, assuming that they
were involved in cases of bribery or
dereliction of duty of public officials, or
in a case where the money deposited
or invested was itself the subject
matter of the litigation. The passage of
the AMLA stripped another layer off
the rule on absolute confidentiality
that provided a measure of lawful
protection to the account holder. For
that reason, the application of the
bank inquiry order as a means of
inquiring into records of transactions
entered into prior to the passage of
the AMLA would be constitutionally
infirm, offensive as it is to the ex post
facto clause.
We can hardly presume that Congress
intended to enact a self-defeating law
in the first place, and the courts are
inhibited from such a construction by
the cardinal rule that a law should be
interpreted with a view to upholding
rather than destroying it.
Republic vs Cabrini,
154522, May 5, 2006

G.R.

No.

AMLC issued freeze orders against


various bank accounts of respondents.
The frozen accounts were previously

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Commercial Law Notes


found prima facie to be related to the
unlawful activities of the respondents.
The AMLC filed with the CA various
petitions. It invoked the jurisdiction of
the CA in the belief that the power
given to the CA to issue a TRO or writ
of injunction against any freeze order
issued by the AMLC carried with it the
power to extend the effectivity of a
freeze order. The CA disagreed and
dismissed the petitions.
ISSUE: which court has jurisdiction to
extend the effectivity of a freeze
order?
RULING:
During
the
pendency of
these
petitions, or on March 3, 2003,
Congress enacted RA 9194 (An Act
Amending Republic Act No. 9160,
Otherwise Known as the "Anti-Money
Laundering Act of 2001"). It amended
Section 10 of RA 9160 as follows:
SEC. 7. Section 10 of [RA 9160] is
hereby amended to read as follows:
SEC. 10. Freezing of Monetary
Instrument or Property. The Court
of Appeals, upon application ex
parte by the AMLC and after
determination that probable cause
exists
that
any
monetary
instrument or property is in any way
related to an unlawful activity as
defined in Sec. 3(i) hereof, may
issue a freeze order which shall be
effective immediately. The freeze
order shall be for a period of twenty
(20) days unless extended by the
court.
Section 12 of RA 9194 further
provides:
SEC 12. Transitory Provision.
Existing freeze orders issued by the
AMLC shall remain in force for a
period of thirty (30) days after the

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effectivity of this Act, unless


extended by the Court of Appeals.
The amendment by RA 9194 of RA
9160 erased any doubt on the
jurisdiction of the CA over the
extension of freeze orders. As the law
now stands, it is solely the CA which
has the authority to issue a freeze
order as well as to extend its
effectivity. It also has the exclusive
jurisdiction to extend existing freeze
orders previously issued by the
AMLC vis--vis accounts and deposits
related to money-laundering activities.
CORPORATION CODE
1. PIERCING THE VEIL OF
CORPORATE ENTITY
Piercing the veil of corporate
fiction
means
that
while
the
corporation cannot be generally held
liable for acts or liabilities of its
stockholders or members, and vice
versa because a corporation has a
personality separate and distinct from
its members or stockholders, however,
the corporate existence is disregarded
under
this
doctrine
when
the
corporation is formed or used for
illegitimate purposes, particularly, as a
shield to perpetuate fraud, defeat
public convenience, justify wrong,
evade a just and valid obligation or
defend a crime.
CLAPAROLS VS. CIR
G.R. No. L-30822 July 31, 1975
Facts: A complaint for unfair labor
practice was filed by herein private
respondent
Allied
Workers'
Association,
respondent
Demetrio
Garlitos and ten (10) respondent
workers against herein petitioners on

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account of the dismissal of respondent
workers from petitioner Claparols Steel
and Nail Plant.
The Court rendered its decision finding
"Mr. Claparols guilty of union busting
and" of having "dismissed said
complainants because of their union
activities," and ordering respondents
"(1) To cease and desist from
committing unfair labor practices
against their employees and laborers;
(2) To reinstate said complainants to
their former or equivalent jobs, as
soon as possible, with back wages
from the date of their dismissal up to
their actual reinstatement" (p. 12,
Decision; p. 27, rec.).
The Claparols Steel and Nail Plant,
which ceased operation of June 30,
1957, was succeeded by the Claparols
Steel Corporation effective the next
day, July 1, 1957 up to December 7,
1962, when the latter finally ceased to
operate.
Workers alleged that Claparols Steel
and Nail Plant and Claparols Steel and
Nail Corporation are one and the same
corporation controlled by petitioner
Claparols, with the latter corporation
succeeding the former.
Issue: Is the Claparols Steel and Nail
Plant and Claparols Steel and Nail
Corporation are one and the same
corporation?
Ruling: YES. Respondent Court's
findings that indeed the Claparols
Steel and Nail Plant, which ceased
operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel
Corporation effective the next day,
July 1, 1957 up to December 7, 1962,

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when the latter finally ceased to


operate, were not disputed by
petitioners. It is very clear that the
latter corporation was a continuation
and successor of the first entity, and
its emergence was skillfully timed to
avoid the financial liability that already
attached to its predecessor, the
Claparols Steel and Nail Plant. Both
predecessors and successor were
owned and controlled by the petitioner
Eduardo Claparols and there was no
break in the succession and continuity
of the same business. This "avoidingthe-liability" scheme is very patent,
considering
that
90%
of
the
subscribed shares of stocks of the
Claparols
Steel
Corporation
(the
second corporation) was owned by
respondent
(herein
petitioner)
Claparols himself, and all the assets of
the dissolved Claparols Steel and Nail
Plant were turned over to the
emerging Claparols Steel Corporation.
It is very obvious that the second
corporation seeks the protective shield
of a corporate fiction whose veil in the
present case could, and should, be
pierced as it was deliberately and
maliciously designed to evade its
financial obligation to its employees.
It is well remembering that in Yutivo &
Sons Hardware Company vs. Court of
Tax Appeals (L-13203, Jan. 28, 1961, 1
SCRA 160), We held that when the
notion of legal entity is used to defeat
public convenience, justify wrong,
protect fraud, or defend crime, the law
will regard the corporation as an
association or persons, or, in the case

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Commercial Law Notes


of two corporations, will merge them
into one.
In Liddel & Company, Inc. vs. Collector
of Internal Revenue (L-9687, June 30,
1961, 2 SCRA 632), this Court likewise
held that where a corporation is a
dummy and serves no business
purpose and is intended only as a
blind, the corporate fiction may be
ignored.
In Commissioner of Internal Revenue
vs. Norton and Harrison Company (L17618, Aug. 31, 1964, 11 SCRA 714),
We ruled that where a corporation is
merely an adjunct, business conduit or
alter ego of another corporation, the
fiction of separate and distinct
corporate
entities
should
be
disregarded.
2. COLLATERAL ATTACK; DE
FACTO CORPORATION
HALL et al. vs PICCIO,
G.R. No. L-2598

June 29, 195

FACTS: (1) on May 28, 1947, the


petitioners C. Arnold Hall and Bradley
P. Hall, and the respondents Fred
Brown, Emma Brown, Hipolita D.
Chapman and Ceferino S. Abella,
signed and acknowledged in Leyte, the
article of incorporation of the Far
Eastern Lumber and Commercial Co.,
Inc., organized to engage in a general
lumber business to carry on as general
contractors, operators and managers,
etc. Attached to the article was an
affidavit of the treasurer stating that
23,428 shares of stock had been

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subscribed and fully paid with certain


properties
transferred
to
the
corporation
described
in a list
appended thereto.
(2) Immediately after the execution of
said articles of incorporation, the
corporation proceeded to do business
with the adoption of by-laws and the
election of its officers.
(3) On December 2, 1947, the said
articles of incorporation were filed in
the office of the Securities and
Exchange Commissioner, for the
issuance
of
the
corresponding
certificate of incorporation.
(4) On March 22, 1948, pending action
on the articles of incorporation by the
aforesaid governmental office, the
respondents
Fred
Brown,
Emma
Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the
Court of First Instance of Leyte the civil
case numbered 381, entitled "Fred
Brown et al. vs. Arnold C. Hall et al.",
alleging among other things that the
Far Eastern Lumber and Commercial
Co. was an unregistered partnership;
that they wished to have it dissolved
because of bitter dissension among
the members, mismanagement and
fraud by the managers and heavy
financial losses.
(5) The defendants in the suit, namely,
C. Arnold Hall and Bradley P. Hall, filed
a motion to dismiss, contesting the
court's jurisdiction and the sufficiently
of the cause of action.

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(6) After hearing the parties, the Hon.
Edmund
S.
Piccio
ordered
the
dissolution of the company; and at the
request of plaintiffs, appointed of the
properties thereof, upon the filing of a
P20,000 bond.
ISSUES:
1. WON the respondents Fred Brown and
Emma Brown had signed the article of
incorporation but only a partnership.
2. WON The court had no jurisdiction in
civil case No. 381 to decree the
dissolution of the company, because it
being
a
de
facto corporation,
dissolution thereof may only be
ordered in a quo warranto proceeding
instituted in accordance with section
19 of the Corporation Law.
RULING:
All
the
parties
are
informed that the Securities and
Exchange Commission has not, so far,
issued the corresponding certificate of
incorporation. All of them know, or
sought to know, that the personality of
a corporation begins to exist only from
the moment such certificate is issued
not before (sec. 11, Corporation
Law). The complaining associates
have not represented to the others
that they were incorporated any more
than the latter had made similar
representations to them. And as
nobody was led to believe anything to
his prejudice and damage, the
principle of estoppel does not apply.
Obviously this is not an instance
requiring
the
enforcement
of
contracts with the corporation through
the rule of estoppel.

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The second issue above stated


is premised on the theory that,
inasmuch as the Far Eastern Lumber
and
Commercial
Co.,
is
a de
facto corporation, section 19 of the
Corporation Law applies, and therefore
the court had not jurisdiction to take
cognizance of said civil case number
381. Section 19 reads as follows:
The due incorporation of any
corporations claiming in good faith
to be a corporation under this Act
and its right to exercise corporate
powers shall not be inquired into
collaterally in any private suit to
which the corporation may be a
party, but such inquiry may be had
at
the
suit
of
the
Insular
Government on information of the
Attorney-General.
There are least two reasons why this
section does not govern the situation.
Not having obtained the certificate of
incorporation, the Far Eastern Lumber
and Commercial Co. even its
stockholders may not probably
claim "in good faith" to be a
corporation.
Under our statue it is to be noted
(Corporation Law, sec. 11) that it is
the issuance of a certificate of
incorporation by the Director of the
Bureau of Commerce and Industry
which calls a corporation into being.
The immunity if collateral attack is
granted to corporations "claiming in
good faith to be a corporation under
this act." Such a claim is compatible
with the existence of errors and
irregularities; but not with a total or

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substantial disregard of the law.
Unless there has been an evident
attempt to comply with the law the
claim to be a corporation "under
this act" could not be made "in
good faith." (Fisher on the Philippine
Law of Stock Corporations, p.
75. See also Humphreys vs. Drew,
59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the
corporation is a party. This is a
litigation between stockholders of the
alleged corporation, for the purpose of
obtaining its dissolution. Even the
existence of a de jure corporation may
be terminated in a private suit for its
dissolution
between
stockholders,
without the intervention of the state.
There might be room for argument on
the right of minority stockholders to
sue for dissolution;1 but that question
does not affect the court's jurisdiction,
and is a matter for decision by the
judge, subject to review on appeal.
Whkch brings us to one principal
reason why this petition may not
prosper, namely: the petitioners have
their remedy by appealing the order of
dissolution at the proper time.

3. CORPORATION BY ESTOPPEL

ALBERT VS. UNIVERSITY


PUBLISHING CO., INC.
G.R. No. L-19118

January 30, 1965

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Facts:
Mariano Albert entered
into a contract with University
Publishing Co., Inc. through Jose M.
Aruego,
its
President,
whereby
University would pay plaintiff for the
exclusive right to publish his revised
Commentaries on the Revised Penal
Code. The contract stipulated that
failure to pay one installment would
render the rest of the payments due.
When University failed to pay the
second installment, Albert sued for
collection and won. However, upon
execution, it was found that University
was not registered with the SEC.
Albert petitioned for a writ of
execution against Jose M. Aruego as
the
real
defendant.
University
opposed, on the ground that Aruego
was not a party to the case.

Issue:
Whether the judgment
may be executed against Jose M.
Aruego,
supposed
President
of
University Publishing Co., Inc., as the
real defendant.

Ruling:
The Supreme Court found
that Aruego represented a nonexistent entity and induced not only
Albert but the court to believe in such
representation. Aruego, acting as
representative of such non-existent
principal, was the real party to the
contract sued upon, and thus assumed
such privileges and obligations and
became personally liable for the

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Commercial Law Notes


contract entered into or for other acts
performed as such agent.

The Supreme Court likewise held that


the doctrine of corporation by estoppel
cannot be set up against Albert since
it was Aruego who had induced him to
act
upon
his
(Aruego's)
willful
representation that University had
been duly organized and was existing
under the law.

a document called a voting trust


agreement (VTA).
A voting trust, which is specifically
required as a condition in a loan
agreement, may be for a period
exceeding five (5) years but shall
automatically
expire
upon
full
payment of the loan.
The essence of a VTA is the separation
of real ownership and voting rights.
Requirements of a VTA

4. BOARD RESPONSIBILITY ON
ISSUANCE OF WATERED STOCK
Liability of directors for watered stocks
(Sec. 65)
Any director or officer of a corporation
shall be solidarily liable with the
stockholder
concerned
to
the
corporation and its creditors for the
difference between the fair value
received at the time of issuance of the
stock and the par or issued value of
the same, who consented to:
a. The issuance of stocks for a
consideration less than its par
or issued value
b. The issuance of stocks for a
consideration in any form other
than cash
c. The issuance of stocks valued in
excess of its fair value
d. Or having knowledge of such
issuance, does not forthwith
express his objection in writing
and file the same with the
corporate secretary.
5. VOTING TRUST AGREEMENTS
An arrangement created by one or
more stockholders for the purpose of
conferring upon a trustee or trustees
the right to vote and other rights
pertaining to the shares for a period
not exceeding five (5) years at any
time. The arrangement is embodied in

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-In writing
-Notarized
-Shall specify the terms and conditions
thereof
-Certified copy of such agreement
shall be filed with the corporation and
with the SEC
If these requirements are not satisfied,
the
VTA
is
ineffective
and
unenforceable.
Procedure
a. The certificate or certificates of
stock covered by the voting trust
agreement shall be cancelled and new
ones shall be issued in the name of
the trustee or trustees stating that
they are issued pursuant to said
agreement.
b. In the books of the corporation, it
shall be noted that the transfer in the
name of the trustee or trustees is
made pursuant to said voting trust
agreement.
c. The trustee or trustees shall execute
and deliver to the transferors voting
trust certificates, which shall be
transferable in the same manner and
with the same effect as certificates of
stock.
Right to inspect VTA

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Commercial Law Notes


The voting trust agreement filed with
the corporation shall be subject to
examination by any stockholder in the
same manner as any other corporate
book or record. The transferor and the
trustee or trustees may exercise the
right of inspection of all corporate
books and records in accordance with
the provisions of this Code.
Any other stockholder may transfer his
shares to the same trustee or trustees
upon the terms and conditions stated
in the voting trust agreement, and
thereupon shall be bound by all the
provisions of said agreement.
Restriction
No VTA shall be entered into for the
purpose of circumventing the law
against
monopolies
and
illegal
combinations in restraint of trade or
used for purposes of fraud.
Automatic expiration of rights
under the VTA
Unless expressly renewed, all rights
granted in a voting trust agreement
shall automatically expire at the end
of the agreed period. The voting trust
certificates as well as the certificates
of stock in the name of the trustee or
trustees shall thereby be deemed
cancelled and new certificates of stock
shall be reissued in the name of the
transferors.
The voting trustee or trustees may
vote by proxy unless the agreement
provides otherwise.
Purpose
-to make possible a unified control of
the affairs of the corporation and
consistent policy

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-to make possible for a majority group


of shareholders to dispose of a
beneficial interest in a large proportion
of their shares and still retain control
of the corporation through the voting
trustee
Under the prevailing view, a voting
trust should have a legitimate
business purpose to promote the best
interests of the corporation, or even to
protect the legitimate interests of
others in the corporation.
Voting trust certificates
These certificates are issued by the
trustees. These confirm:
1. that a trustee has been
constituted;
2. the extent of shares; and
3. the
participation
of
the
shareholder in the VTA.
Status of transferee and
transferor
a. Voting trustee is only a share owner
vested with apparent legal title for the
sole purpose of voting upon stocks
that he does not own.
b. Transferring stockholder retains the
right of inspection of corporate books
which he can exercise concurrently
with the voting trustee.
Powers and Rights of voting
trustees
a. Right to vote and other rights
pertaining to the shares in their names
subject to terms and conditions of and
for the period specified in the
agreement
b. Vote in person or by proxy unless
agreement provides otherwise
c. Rights of inspection of corporate
books and records
d. Legal title holder - qualified to be a
director

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The clear intent is that in order to be
eligible as director, what is material is
the legal title to, not the beneficial
ownership of, the stock as appearing
on the books of a corporation.
Therefore, a director
who
executes
a
voting
trust
agreement over all his shares, remains
only a beneficial owner, and therefore
is automatically disqualified from his
directorship.
Limitations on VTAs
a. should not exceed 5 years except if
a condition in a loan agreement, shall
automatically
expire
upon
full
payment of the loan
b. must not be for purposes of
circumventing
the
law
against
monopolies and illegal combinations in
restraint of trade
c. must not be used for purposes of
fraud
d. must be in writing, notarized,
specify the terms and conditions
thereof
e. certified copy must be filed with
corporation
and
SEC
otherwise
unenforceable
f. agreement is subject to examination
by stockholder
g. shall automatically expire at the
end of the agreed period
h. vote in person or by proxy unless
agreement provides otherwise
i. rights of inspection of corporate
books and records
LEE vs. CA [G.R. No. 93695,
February 4, 1992]
By its very nature, a voting trust
agreement results in the separation of
the voting rights of a stockholder from
his other rights such as the right to
receive dividends, the right to inspect
the books of the corporation, the right
to sell certain interests in the assets of
the corporation and other rights to
which a stockholder may be entitled

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until the liquidation of the corporation.


However, in order to distinguish a
voting trust agreement from proxies
and
other
voting
pools
and
agreements, it must pass three criteria
or tests, namely: (1) that the voting
rights of the stock are separated from
the other attributes of ownership; (2)
that the voting rights granted are
intended to be irrevocable for a
definite period of time; and (3) that
the principal purpose of the grant of
voting rights is to acquire voting
control of the corporation.
Under section 59 of the Corporation
Code a voting trust agreement may
confer upon a trustee not only the
stockholder's voting rights but also
other rights pertaining to his shares as
long as the voting trust agreement is
not entered "for the purpose of
circumventing
the
law
against
monopolies and illegal combinations in
restraint of trade or used for purposes
of fraud." (section 59, 5th paragraph
of the Corporation Code) Thus, the
traditional concept of a voting trust
agreement primarily intended to single
out a stockholder's right to vote from
his other rights as such and made
irrevocable for a limited duration may
in practice become a legal device
whereby
a
transfer
of
the
stockholder's
shares
is
effected
subject to the specific provision of the
voting trust agreement.
The execution of a voting trust
agreement, therefore, may create a
dichotomy between the equitable or
beneficial ownership of the corporate
shares of a stockholders, on the one
hand, and the legal title thereto on the
other hand.
The law simply provides that a voting
trust agreement is an agreement in
writing
whereby
one
or
more
stockholders of a corporation consent

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Commercial Law Notes


to transfer his or their shares to a
trustee in order to vest in the latter
voting or other rights pertaining to
said shares for a period not exceeding
five years upon the fulfillment of
statutory conditions and such other
terms and conditions specified in the
agreement. The five year-period may
be extended in cases where the voting
trust is executed pursuant to a loan
agreement whereby the period is
made contingent upon full payment of
the loan.
6. SELF-DEALING AND
INTERLOCKING DIRECTORS
Self-dealings (Sec. 32 )
A contract of the corporation with one
or more of its directors or trustees or
officers is
A. Voidable, at the option of such
corporation, unless all the following
conditions are present:
1. That the presence of such director
or trustee in the board meeting in
which the contract was approved was
not necessary to constitute a quorum
for such meeting;
2. That the vote of such director or
trustee was not necessary for the
approval of the contract;
3. That the contract is fair and
reasonable under the circumstances;
and
4. That in case of an officer, the
contract
has
been
previously
authorized by the board of directors.
B. May be ratified by the vote of the
stockholders representing at least twothirds (2/3) of the outstanding capital
stock or of at least two-thirds (2/3) of
the members in a meeting called for
the purpose:
1. Where any of the first two
conditions set forth in the preceding
paragraph is absent, in the case of a
contract with a director or trustee,

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2. Full disclosure of the adverse


interest of the directors or trustees
involved is made at such meeting:
Provided, however, That the contract
is fair and reasonable under the
circumstances. (Sec. 32.)
Interlocking Directors (Sec. 33)
An interlocking director is one who
occupies a position in 2 companies
dealing with each other.
A contract between 2 or more
corporations
having
interlocking
directors shall not be invalidated on
that ground alone except:
1. In cases of fraud, and
2. Provided the contract is fair and
reasonable
under
the
circumstances
Sec. 32 applies to interlocking
directors insofar as the corporations
where he has nominal interest are
concerned.
1. if the interest of the interlocking
director in one corporation is
substantial
(stockholdings
exceeds 20% of the outstanding
capital stock) and
2. his interest in the other
corporation or corporations is
merely nominal.
7. VIOLATION OF VOTING
REQUIREMENTS (2/3) ESPECIALLY
ON THE EXERCISE OF APPRAISAL
RIGHTS
Appraisal right (Sec. 81.)
I. Any stockholder of a corporation
shall have the right to dissent and
demand payment of the fair value of
his shares in the following instances:
a.) In case any amendment to the
articles of incorporation has the effect
of changing or restricting the rights of
any stockholder or class of shares, or
of authorizing preferences in any

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Commercial Law Notes


respect
superior
to
those
of
outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
b.) In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all of
the corporate property and assets as
provided in the Code; and
d.) In case of merger or consolidation.
(A.) How right is exercised.( Sec.
82.)
The appraisal right may be exercised
by:
A.) Who: Any stockholder who shall
have voted against the proposed
corporate action
B.) How: By making a written demand
on the corporation
C.) When: Within thirty (30) days after
the date on which the vote was taken
for payment of the fair value of his
shares: Provided, That failure to make
the demand within such period shall
be deemed a waiver of the appraisal
right. If the proposed corporate action
is implemented or affected, the
corporation
shall
pay
to
such
stockholder, upon surrender of the
certificate or certificates of stock
representing his shares, the fair value
thereof as of the day prior to the date
on which the vote was taken,
excluding
any
appreciation
or
depreciation in anticipation of such
corporate action.
IN CASE OF DISAGREEMENT: If within a
period of sixty (60) days from the date
the corporate action was approved by
the stockholders, the withdrawing
stockholder
and
the
corporation
cannot agree on the fair value of the
shares:
A.)
it shall be determined and
appraised by three (3) disinterested
persons, one of whom shall be named
by the stockholder, another by the

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corporation, and the third by the two


thus chosen.
B.)
The findings of the majority of
the appraisers shall be final, and their
award shall be paid by the corporation
within thirty (30) days after such
award is made: Provided, That no
payment shall be made to any
dissenting stockholder unless the
corporation has unrestricted retained
earnings in its books to cover such
payment: and Provided, further, That
upon payment by the corporation of
the agreed or awarded price, the
stockholder shall forthwith transfer his
shares to the corporation.
(B.)
Effect
of
demand
and
termination of right (Sec. 83.)
RULE: From the time of demand for
payment of the fair value of a
stockholder's shares until either the
abandonment of the corporate action
involved or the purchase of the said
shares by the corporation, all rights
accruing to such shares, including
voting and dividend rights, shall be
suspended in accordance with the
provisions of this Code, EXCEPTION:
except the right of such stockholder to
receive payment of the fair value
thereof:
Provided,
That
if
the
dissenting stockholder is not paid the
value of his shares within 30 days
after the award, his voting and
dividend rights shall immediately be
restored.
(C.) When right to payment
ceases. (Sec. 84)
RULE: No demand for payment under
this Title may be withdrawn
EXCEPTION: unless the corporation
consents thereto.
CASE OF BREACH: If, however, such
demand for payment is withdrawn
with the consent of the corporation, or
if the proposed corporate action is

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Commercial Law Notes


abandoned or rescinded by the
corporation or disapproved by the
Securities and Exchange Commission
where such approval is necessary, or if
the
Securities
and
Exchange
Commission determines that such
stockholder is not entitled to the
appraisal right, then the right of said
stockholder to be paid the fair value of
his shares shall cease, his status as a
stockholder
shall
thereupon
be
restored, and all dividend distributions
which would have accrued on his
shares shall be paid to him.
(D.) Who bears costs of appraisal
(85.)
RULE: The costs and expenses of
appraisal shall be borne by the
corporation
EXCEPTION:
If the fair value
ascertained by the appraisers is
approximately the same as the price
which the corporation may have
offered to pay the stockholder, in
which case they shall be borne by the
latter. In the case of an action to
recover such fair value, all costs and
expenses shall be assessed against
the corporation, unless the refusal of
the stockholder to receive payment
was unjustified.
(E.)Notation on certificates; rights
of transferee. (Sec. 86.)
When: Within ten (10) days after
demanding payment for his shares, a
dissenting stockholder shall submit
the certificates of stock representing
his shares to the corporation for
notation thereon that such shares are
dissenting shares.
Consequence: His failure to do so
shall, at the option of the corporation,
terminate his rights under this Title. ii.)
If
shares
represented
by
the
certificates bearing such notation are
transferred,
and
the
certificates

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consequently canceled, the rights of


the
transferor
as
a
dissenting
stockholder under this Title shall cease
and the transferee shall have all the
rights of a regular stockholder; and all
dividend distributions which would
have accrued on such shares shall be
paid to the transferee.
8. POWER OF DIRECTORS TO
DECLARE DIVIDENDS AND ENTER
INTO MANAGEMENT CONTRACTS
Power to declare dividends.
The board of directors of a stock
corporation may declare dividends out
of the unrestricted retained earnings
which shall be payable in cash, in
property, or in stock to all stockholders
on the basis of outstanding stock held
by them:
Provided,
cash dividends due on delinquent
stock shall first be applied to the
unpaid balance on the subscription
plus costs and expenses,
stock dividends shall be withheld
from the delinquent stockholder
until his unpaid subscription is fully
paid:
o

Provided
,
That
no
stock
dividend
shall
be
issued without the
approval
of
stockholders
representing not less
than two-thirds (2/3)
of the outstanding
capital stock at a
regular
or
special
meeting duly called
for the purpose.

Stock corporations are prohibited from


retaining surplus profits in excess of
one hundred (100%) percent of their
paid-in capital stock,

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Commercial Law Notes


except:
(1) when justified by definite
corporate
expansion
projects
or
programs approved by the board of
directors; or
(2) when the corporation is prohibited
under any loan agreement with any
financial
institution
or
creditor,
whether
local
or
foreign, from
declaring dividends without its/his
consent, and such consent has not yet
been secured; or
(3) when it can be clearly shown that
such retention is necessary under
special circumstances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies.
Steinberg v Velasco
Facts: The board of the corporation
authorized the purchase of 330 shares
of capital stock of the corporation and
the declaration of dividends at a time
when the corporation was indebted
and in such a bad financial condition.
The directors relied on the face value
on the books of its A/R, which had little
or no value. Furthermore it appears
that two of the directors were
permitted to resign so that they could
sell their stock to the corporation. The
corporation became insolvent, and the
receiver Steinberg sues the directors.
Held: The corporation did not have a
bona fide surplus with which dividends
could be declared and paid out. The
directors did not act in GF and were
grossly ignorant of their duties.
Directors were held personally liable
for causing
the
corporation
to
purchase their own shares and
declaring dividends, which because of
such failure to take into consideration
of worthless receivables, worked to

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the detriment of the creditors. The


directors did not act with diligence in
taking the word of their chairman and
not making an informed decision
based on the facts then available to
them and on not relying on other
documents available to them.
Creditors have the right to assume
that so long as there are outstanding
debts and liabilities, the board will not
use the corporate assets to purchase
its own stock, and that it will not
declare dividends to SHs when the
corporation is insolvent
Power to enter into management
contract (Sec.44)
A corporation shall conclude a
management contract with another
corporation only when such contract
shall have been approved:
a. by the board of directors, and
b. by stockholders owning at least the
majority of the outstanding capital
stock, or
c. by at least a majority of the
members in the case of a non-stock
corporation, of both the managing
and the managed corporation,
provided that:
1. where
a
stockholder
or
stockholders representing the
same interest of both the
managing and the managed
corporations own or control
more than one-third (1/3) of the
total outstanding capital stock
entitled to vote of the managing
corporation; or
2. where a majority of the
members of the board of
directors of the managing
corporation also constitute a
majority of the members of the
board of directors of the
managed corporation, then the

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management contract must be
approved by the stockholders of
the
managed
corporation
owning at least two-thirds (2/3)
of the total outstanding capital
stock entitled to vote, or by at
least two-thirds (2/3) of the
members in the case of a nonstock
corporation.
No
management contract shall be
entered into for a period longer
than five years for any one
term.

found that the corporation was not


able to get the best price for the sale
and that other options were not
explored, that negotiations were only
with one investment house and were
at arms-length dealing, and that it
was possible to have greater savings.
Issue: W/N the directors are liable for
failing to exercise ordinary care and
judgment in the issuance and sale of
$28M in bonds, which resulted in
alleged losses suffered by the
corporation.

The provisions of the next preceding


paragraph shall apply to any contract
whereby a corporation undertakes to
manage or operate all or substantially
all of the business of another
corporation, whether such contracts
are called service contracts, operating
agreements or otherwise: Provided,
however, That such service contracts
or operating agreements which relate
to the exploration, development,
exploitation or utilization of natural
resources may be entered into for
such periods as may be provided by
the pertinent laws or regulations.

Held: Business judgment rule: courts


will not interfere in matters of
business judgment, in which it is
presumed that judgmentreasonable
diligencehas in fact been exercised.
A director cannot close his eyes to
what is going on about him in the
conduct of business judgment. Courts
have given directors wide latitude in
the management of the affairs of the
corporation
provided
that
the
judgment is unbiased, honest and
reasonably
exercised.
Negligence
must be determined as of the time of
transaction. Mistakes or errors in the
exercise of honest business judgment
do not subject the officers and
directors to liability for negligence in
the discharge of their appointed
duties. Directors are entrusted with
the management of the affairs of the
corporation. If in the course of
management they arrive at a decision
for which there is a reasonable basis,
and they acted in GF as the result of
their independent judgment, and
uninfluenced
by
any
other
consideration than what they honestly
felt was in the best interests of the
corporation. In the present case, the
SC found that the officers and
directors of the corporations acted
honestly in GF and sought to exercise
their best judgment for the best
interests of their corporation. No fraud

Otis & Co. v Pennsylvania Railroad


Co.
Facts: Otis & Co is a SH in and among
the wholly-owned subsidiaries of the
Pennsylvania Railroad Co (PRR), which
included Pennsylvania Ohio 7 Detroit
Railroads (POD). One of its subsidiaries
had an outstanding bond issuance of
$28.4M. The parent then negotiated
with a third party, Kuhn, Loeb and Co,
to refinance the bonds. The directors
of
POD
approved
a
resolution
authorizing the sale of the new Series
D bonds at a best obtainable price.
Bonds were then sold to Kuhn and
Loeb. Another buyer was willing to
purchase the bonds at a better price
but the directors declined.
The
Interstate
Commerce
Commission

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Commercial Law Notes


was present, but only a faint
suggestion of BF. The directors had the
right to negotiate privately with Kuhn
and Loeb. In contracting with the
latter,
the
directors
were
not
contracting with another firm in which
they were interested, nor did the
directorship or officership positions
interlock. There is no contention that
fraud existed and fraudulent acts will
not be presumed.
9.
CASES
ON
ACTION
FOR
MANDAMUS
TO
COMPEL
A
CORPORATION TO REGISTER IN ITS
BOOKS A SALE MADE BY A
SUBSCRIBER
Ponce
vs
Alsons
Cement
Corporation
G.R. NO. 139802. December 10,
2002
Facts:
On 25 January 1996, Vicente C. Ponce,
filed a complaint with the SEC
for mandamus and damages against
Alsons Cement Corporation and its
corporate secretary Francisco M.
Giron, Jr. In his complaint, Ponce
alleged, among others, that "the late
Fausto G. Gaid was an incorporator of
Victory Cement Corporation (VCC),
having subscribed to and fully paid
239,500 shares of said corporation;
that on 8 February 1968,Ponce and
Fausto Gaid executed a "Deed of
Undertaking"
and
"Indorsement"
whereby the latter acknowledges that
the former is the owner of said shares
and
he
was
therefore
assigning/endorsing the same to
Ponce; that on 10 April 1968, VCC was
renamed Floro Cement Corporation
(FCC); that on 22 October 1990, FCC
was
renamed
Alsons
Cement
Corporation (ACC); that from the time
of incorporation of VCC up to the
present, no certificates of stock
corresponding
to
the
239,500

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subscribed and fully paid shares


of Gaid were issued in the name of
Fausto G. Gaid and/or Ponce; and that
despite repeated demands, ACC and
Giron refused and continue to refuse
without any justifiable reason to issue
to Ponce the certificates of stocks
corresponding to the 239,500 shares
of Gaid, in violation of Ponce's right to
secure the corresponding certificate of
stock in his name. ACC and Giron
moved to dismiss. SEC Hearing Officer
Enrique L. Flores, Jr. granted the
motion to dismiss in an Order dated 29
February 1996. Ponce appealed the
Order of dismissal. On 6 January 1997,
the Commission En Banc reversed the
appealed Order and directed the
Hearing Officer to proceed with the
case. In ruling that a transfer
or assignment of stocks need not be
registered first before it can take
cognizance of the case to enforce
Ponce's rights as a stockholder, the
Commission En Banc cited the
Supreme Court's ruling in Abejo vs. De
la Cruz, 149 SCRA 654 (1987). Their
motion
for reconsideration
having
been denied, ACC and Giron appealed
the decision of the SEC En Banc and
the resolution denying their motion for
reconsideration to the Court of
Appeals. In its decision, the Court of
Appeals held that in the absence of
any allegation that the transfer of the
shares between Gaid and Ponce was
registered
in
the
stock
and
transfer book of ACC, Ponce failed to
state a cause of action. Thus, said the
appellate court, "the complaint for
mandamus should be dismissed for
failure to state a cause of action."
Ponce's motion for reconsideration
was denied in a resolution dated 10
August 1999.Ponce filed the petition
for review on certiorari.

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Commercial Law Notes


Issue: Whether Ponce can require the
corporate secretary, Giron, to register
Gaids shares in his name.
A mandamus should not issue to
compel the secretary of a corporation
to make a transfer of the stock on the
books of the company, unless it
affirmatively appears that he has
failed or refused so to do, upon the
demand either of the person in whose
name the stock is registered, or of
some person holding a power of
attorney for that purpose from the
registered owner of the stock. There
is no allegation in the petition that the
petitioner or anyone else holds a
power of attorney from the BryanLandon
Company
authorizing
a
demand for the transfer of the stock,
or that the Bryan-Landon Company
has ever itself made such demand
upon the Visayan Electric Company,
and in the absence of such allegation
we are not able to say that there was
such a clear indisputable duty, such a
clear legal obligation upon the
respondent, as to justify the issuance
of the writ to compel him to perform it.
Under the provisions of our statute
touching the transfer of stock (secs.
35 and 36 of Act No. 1459), the mere
indorsement of stock certificates does
not in itself give to the indorsee such a
right to have a transfer of the shares
of stock on the books of the company
as will entitle him to the writ of
mandamus to compel the company
and its officers to make such transfer
at his demand, because, under such
circumstances the duty, the legal
obligation, is not so clear and
indisputable as to justify the issuance
of the writ. As a general rule and
especially under the above-cited
statute, as between the corporation on
the one hand, and its shareholders
and third persons on the other, the

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corporation looks only to its books for


the purpose of determining who its
shareholders are, so that a mere
indorsee of a stock certificate,
claiming to be the owner, will not
necessarily be recognized as such by
the corporation and its officers, in the
absence of express instructions of the
registered owner to make such
transfer to the indorsee, or a power of
attorney authorizing such transfer.
Tay vs CA, G.R. No.
126891. August 5, 1998
The duty of a corporate secretary to
record
transfers
of
stocks
is
ministerial. However, he cannot be
compelled to do so when the
transferees title to said shares has
no prima facie validity or is uncertain.
More specifically, a pledgee, prior to
foreclosure and sale, does not acquire
ownership rights over the pledged
shares and thus cannot compel the
corporate secretary to record his
alleged ownership of such shares on
the basis merely of the contract of
pledge. Similarly, the SEC does not
acquire jurisdiction over a dispute
when a partys claim to being a
shareholder is, on the face of the
complaint, invalid or inadequate or is
otherwise negated by the very
allegations
of
such
complaint. Mandamus will not issue to
establish a right, but only to enforce
one that is already established.
Rural Bank of Salinas vs CA, G.R.
No. 96674 June 26, 1992
The basic controversy in this case is
whether or not the respondent court
erred in sustaining the Securities and
Exchange
Commission
when
it
compelled by Mandamus the Rural
Bank of Salinas to register in its stock
and transfer book the transfer of 473
shares of stock to private respondents.
Petitioners maintain that the Petition

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for Mandamus should have been
denied upon the following grounds.
(1) Mandamus cannot be a remedy
cognizable by the Securities and
Exchange Commission when the
purpose is to register certificates of
stock in the names of claimants who
are not yet stockholders of a
corporation:
(2) There exist valid reasons for
refusing to register the transfer of the
subject of stock, namely:
(a) a pending controversy over the
ownership of the certificates of stock
with the Regional Trial Court;
(b) claims that the Deeds of
Assignment covering the subject
certificates of stock were fictitious and
antedated; and
(c) claims on a resultant possible
deprivation of inheritance share in
relation with a conflicting claim over
the subject certificates of stock.
10. LIABILITY OF CORPORATION
SOLE
Section 110. For the purpose of
administering and managing, as
trustee, the affairs, property and
temporalities
of
any
religious
denomination, sect or church, a
corporation sole may be formed by the
chief
archbishop,
bishop,
priest,
minister, rabbi or other presiding elder
of such religious denomination, sect or
church. (154a)
Corporation sole a special form of
corporation usually associated with
the clergy designed to facilitate the
exercise of the functions of ownership
of the church which was registered as
property owner. It is created not only
to administer the temporalities of the
church or religious society where the
corporate belongs, but also to hold

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and transmit the same to his


successor
in
said
officer.
The
incumbent administrator is not the
actual owner of the land but the
constituents or those that make up the
church, thus it is their nationality that
has to be taken into consideration. The
corporation sole only holds the
property in trust for the benefit of the
Roman Catholic faithful.
~ Director of Land v. IAC, 146
SCRA 509 (1986), held that a
corporation sole has no nationality,
overturned the previous doctrine
(Republic v. Villanueva, 114 SCRA 875
(1982) and Republic v. Iglesia Ni
Cristo, 127 SCRA 687 [1984]) that a
corporation sole is disqualified to
acquire or hold alienable lands of the
public domain, because of the
constitutional prohibition qualifying
only individuals to acquire land of the
public domain and the provision under
the Public Land Act which applied only
to Filipino citizens or natural persons.
Republic v. Iglesia ni Cristo, 127 SCRA
687 (1984); Republic v. IAC, 168 SCRA
165 (1988).
11. CANCELLATION OF STOCKS
CERTIFICATE
Tan v SEC (1992)
Alfonso Tan is owner of 400 shares in
Visayan Educational Supply Corp
evidenced by certificate No. 2.
Alfonso transferred 50 shares to Angel.
Certificate No. 2 was cancelled and
Certificate No. 6 was issued to Angel
and Certificate No. 8 was issued to
Alfonso.
However, Alfonso did not
make the proper endorsement and did
not make delivery of certificate no. 2.
Later on, Alfonso Tan elected to
withdraw from the corporation.
In
exchange for his shares, he received
stocks in trade. Certificate No. 8 was

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Commercial Law Notes


later on cancelled due to above. After
several years, Alfonso Tan filed a case
with Cebu SEC questioning the
cancellation of his stock certificates
despite non-endorsement and lack of
delivery
HELD:
Delivery and endorsement
under Section 63 of the corporation
code is not mandatory because of the
use of the word may. Delivery is not
essential where it appears that the
persons sought to be held as
stockholders are officers of the
corporation and have custody of the
stock book as in this case. To hold
that cancellation of certificate of stock
of Alfonso is null and void because of
lack of delivery and endorsement of
mother certificate of stock no. 2 which
was deliberately withheld is to
prescribe restrictions on the transfer
of stock in violation of corporation law
12. INVOLUNTARY DISSOLUTION
A corporation may be dissolved by the
Securities and Exchange Commission
upon filing of a verified complaint and
after proper notice and hearing on the
grounds provided by existing laws,
rules and regulations (Sec. 121)
13. DEADLOCKS IN CLOSE
CORPORATION
SEC has the power to arbitrate
disputes in case of deadlocks, upon
written petition by any stockholder.
(Sec. 104) This includes the power to
appoint a provisional director, as well
as to dissolve the corporation.
Procedure:
1. SEC upon a stockholders written
petition is allowed to intervene in
order to arbitrate a dispute or
deadlock in a corporation.

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2. There is a dispute or deadlock as


described by this provision when the
directors or stockholders are so
divided respecting the management of
the corporation that the required votes
for any corporate action cannot be
obtained, with the consequence that
its business can no longer be
conducted to the advantage of the
stockholders generally.
3. The SEC in exercising arbitration
powers may:
a. Cancel or alter any provision in the
articles,
by laws or stockholders agreement;
b. Cancel, alter or enjoin any
resolution or other act of the
corporation or its directors, officers or
stockholders;
c. Direct or prohibit any act of the
corporation,
directors,
officers,
stockholders and even third persons
who are parties to the corporation
action.
d. Require purchase of shares of any
stockholders either by corporation
regardless whether availability of
unrestricted retained earnings, or by
any other stockholders.
e. Appoint a provisional director
f. Dissolve the corporation
g. Grant other reliefs as the
circumstances may warrant.
14. LIABILITY OF RECEIVER
GEORGE , O FARRELL & CIE., INC.,
CHINA BANKING CORPORATION
AND LEOPOLDO KAHN vs. M.
MICHELIN & CIE.
G.R. 36930 (June 30, 1933)
The appointment of a receiver by the
court to wind up the affairs of the
corporation upon petition of voluntary
dissolution does not empower the
court to hear and pass on the claims
of the creditors of the corporation at
first hand. The rulings of the receiver

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on the validity of claims submitted are
subject to review by the court
appointing such receiver though no
appeal is taken to the latters ruling (8
Thompson on Corp., 718), and during
the winding up proceedings after
dissolution, no creditor will be
permitted
by
legal
process
or
otherwise to acquire priority, or to
enforce his claim against the property
held for distribution as against the
rights of other creditors. (5 Thompson
on Corp. [2nd ed.], pages 1389, 1391,
1402, and 1403.)
MIGUEL VELASCO, assignee of The
Philippine Chemical Product Co.
(Ltd.),
vs. JEAN M. POIZAT
(Receivers
Rights,
not
his
liabilities)
Facts:
Poizat subscribed for 20
shares (w/ a par value of P100/share)
for P2,000 of w/c he was only able to
pay P500 (25%). BOD issued a call to
Poizat. Notice of the resolution was
given to Poizat. Poizat replied that he
was willing to lose the 25% he
invested because of the unreliable
position of the C.
Indeed the
prediction of Poizat became true. The
C
became
insolvent.Velasco,
as
assignee of the C, sued Poizat for the
balance of his subscription.
Issue: Is Poizat
proscription?

liable

for

his

Ruling:
Poizat
is
LB
on
his
subscription.
When
insolvency
supervenes, allunpaid subscriptions
become at once due and enforceable.
Also But there is another reason why
the present plaintiff must prevail in
this case, even supposing that the
failure of the directors to comply with
the requirements of the provisions of
sections 38 to 48, inclusive, of Act No.

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1459 might have been an obstacle to


a recovery by the corporation itself.
That reason is this: When insolvency
supervenes upon a corporation and
the court assumes jurisdiction to wind
up, all unpaid stock subscriptions
become payable on demand, and are
at once recoverable in an action
instituted by the assignee or receiver
appointed by the court. This rule
apparently had origin in a recognition
of the principle that a court of equity,
having jurisdiction of the insolvency
proceedings, could, if necessary, make
the call itself, in its capacity as
successor to the powers exercised by
the board of directors of the defunct
company. Later a further rule gained
recognition to the effect that the
receiver or assignee, in an action
instituted by proper authority, could
himself
proceed
to collect
the
subscription without the necessity of
any prior call whatever.
INTERNATIONAL
BANKING
CORPORATION
vs.
PILAR
CORRALES,
ET
AL.,
CIPRIANA GARGANTA
Fatcs: The original complaint filed in
this action sets up a claim of
indebtedness amounting to nearly
P450,000. On the 10th of May, 1904,
on petition of the plaintiff corporation,
W. H. Anderson was appointed a
receiver to take possession of all the
property of one of the defendants (the
Casa
Comisin,
a
mercantile
association
organized
under
the
provisions of the Code of Commerce)
upon which plaintiff claimed to hold a
mortgage for the security of its debt.
On the same day Anderson qualified
and entered upon the discharge of his
duties.
On the 18th of April, 1907, while the
original action was still pending in the
court below, Cipriana Garganta filed a

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Commercial Law Notes


so-called complaint in interventions
section 121 of the Code of Civil
Procedure, were she is alleged that the
above-mentioned receiver had used
and occupied a certain house and lot,
the property of the intervener, from
the date of his appointment, May 10,
1904, until the 30th of September,
1904, of which the rental value during
that period was not less than P470,
and prayed that the receiver be
ordered to show cause why he should
not be directed to pay that amount to
the intervener out of any funds in his
hands as receiver.
The ground upon which counsel for the
intervener appears to have rested the
prayer of her complaint in intervention
was that the receiver in the
performance of his duties as receiver,
made use of the house and lot of the
intervener in storing, guarding and
preserving the property entrusted to
his hands, and that she was, therefore,
entitled to payment from any funds in
the hands of the receiver of a
reasonable sum for the use and
occupation of the house and lot, such
sum being properly chargeable to
expenses incurred by the receiver in
the performance of the duties of his
office; and there can be no doubt that
had she established the use and
occupancy by the receiver for this
purpose, she would be entitled to
recover from him a reasonable
compensation therefor. But the trial
court found that the house and lot
were occupied by the Casa Comisin
itself during the period for which
compensation is demanded of the
receiver;
Issue: Was the expense incident to
the alleged use and occupation by the
receiver an expense incurred by him in
the performance of his duty to guard

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and preserve property entrusted to


him, which was stored therein.
Ruling: Since all the property of the
Casa Comisin was in the hands of the
receiver, the intervener should have
an order upon the receiver for the
payment of the proven indebtedness
of the Casa Comisin out of any funds
in his hands as receiver. In this the
trial court erred. We do not question
the right of the intervener in a proper
action to reduce to judgment her claim
of indebtedness against the Casa
Comisin,
and
to
enforce
that
judgment against its property in a
proper proceeding, but she had no
right, and indeed she does not appear
to have attempted to intervene in this
action for the purpose of securing an
adjudication of her claim against her
debtor, the Casa Comisin, and
thereafter to have an order directing
the payment of the claim thus
adjudicated, out of the funds in the
hands of the receiver, without regard
to the priorities of other claimants
upon the same funds; the effect of the
order is to give a general unsecured
creditor a preference in the payment
of his claim over other creditors with
specific lien on the property out of
which the unsecured creditor is to be
paid.
15. CANCELLATION OF LICENSE OF
FOREIGN CORPORATION
Grounds
for
revocation
or
suspension of license, without
prejudice
to
other
grounds
provided by special laws (sec.
134):
1. Failure to file its annual report or
pay any fees as required by this Code;
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by this Title;

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Commercial Law Notes


3. Failure, after change of its resident
agent or of his address, to submit to
the
Securities
and
Exchange
Commission a statement of such
change as required by this Title;
4. Failure to submit to the Securities
and
Exchange
Commission
an
authenticated copy of any amendment
to its articles of incorporation or bylaws or of any articles of merger or
consolidation
within
the
time
prescribed by this Title;
5. A misrepresentation of any material
matter in any application, report,
affidavit or other document submitted
by such corporation pursuant to this
Title;
6. Failure to pay any and all taxes,
imposts, assessments or penalties, if
any, lawfully due to the Philippine
Government or any of its agencies or
political subdivisions;
7.
Transacting
business
in
the
Philippines outside of the purpose or
purposes for which such corporation is
authorized under its license;
8.
Transacting
business
in
the
Philippines as agent of or acting for
and in behalf of any foreign
corporation or entity not duly licensed
to do business in the Philippines; or
9. Any other ground as would render it
unfit to transact business in the
Philippines.
16. WHAT CONSTITUTES DOING
BUSINESS IN THE PHILIPPINES

STEELCASE,
INC.
vs.
DESIGN
INTERNATIONAL SELECTIONS, INC.
G.R. No. 171995
2012

April 18,

FACTS: Petitioner Steelcase, Inc. is a


foreign corporation existing under the

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laws of Michigan, United States of


America and
engaged
in
the
manufacture of office furniture with
dealers worldwide. Respondent Design
International Selections, Inc. is a
corporation existing under Philippine
Laws and engaged in the furniture
business, including the distribution of
furniture.
Steelcase and DISI orally entered into
a dealership agreement whereby
Steelcase granted DISI the right to
market, sell, distribute, install, and
service its products to end-user
customers within the Philippines. The
business
relationship
continued
smoothly until it was terminated after
the agreement was breached with
neither party admitting any fault.
Steelcase filed a complaint for sum of
money against DISI alleging, among
others, that DISI had an unpaid
account of US$600,000.00.
DISI alleged that the complaint failed
to state a cause of action and to
contain the required allegations on
Steelcases capacity to sue in the
Philippines despite the fact that it
(Steelcase) was doing business in the
Philippines
without
the
required
license to do so.
ISSUES: Whether or not Steelcase is
doing business in the Philippines
without a license
HELD: No. Steelcase is an unlicensed
foreign
corporation
NOT
doing
business in the Philippines.

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Commercial Law Notes


The rule that an unlicensed foreign
corporations doing business in the
Philippine do not have the capacity to
sue before the local courts is wellestablished. Section 133 of the
Corporation Code of the Philippines
explicitly states:
Sec. 133.Doing business without a
license. - No foreign corporation
transacting business in the Philippines
without a license, or its successors or
assigns, shall be permitted to maintain
or intervene in any action, suit or
proceeding
in
any
court
or
administrative
agency
of
the
Philippines; but such corporation may
be sued or proceeded against before
Philippine courts or administrative
tribunals on any valid cause of action
recognized under Philippine laws.
The phrase "doing business" is clearly
defined in Section 3(d) of R.A. No.
7042 (Foreign Investments Act of
1991), to wit:
d) The phrase "doing business" shall
include soliciting orders, service
contracts, opening offices, whether
called "liaison" offices or branches;
appointing
representatives
or
distributors
domiciled
in
the
Philippines or who in any calendar
year stay in the country for a period or
periods totalling one hundred eighty
(180) days or more; participating in
the management, supervision or
control of any domestic business, firm,
entity or corporation in the Philippines;
and any other act or acts that imply a
continuity of commercial dealings or
arrangements, and contemplate to

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that extent the performance of acts or


works, or the exercise of some of the
functions normally incident to, and in
progressive
prosecution
of,
commercial gain or of the purpose and
object of the business organization:
Provided, however, That the phrase
"doing business" shall not be deemed
to include mere investment as a
shareholder by a foreign entity in
domestic corporations duly registered
to do business, and/or the exercise of
rights as such investor; nor having a
nominee
director
or
officer
to
represent
its
interests
in
such
corporation;
nor
appointing
a
representative or distributor domiciled
in the Philippines which transacts
business in its own name and for its
own account;
This definition is supplemented by its
Implementing Rules and Regulations,
Rule I, Section 1(f) which elaborates
on the meaning of the same phrase:
f. "Doing business" shall include
soliciting orders, service contracts,
opening offices, whether liaison offices
or
branches;
appointing
representatives or distributors,
operating under full control of the
foreign corporation, domiciled in the
Philippines or who in any calendar
year stay in the country for a period
totalling one hundred eighty [180]
days or more; participating in the
management, supervision or control of
any domestic business, firm, entity or
corporation in the Philippines; and any
other act or acts that imply a
continuity of commercial dealings or
arrangements, and contemplate to

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Commercial Law Notes


that extent the performance of acts or
works, or the exercise of some of the
functions normally incident to and in
progressive prosecution of commercial
gain or of the purpose and object of
the business organization.
The following acts shall not be
deemed "doing business" in the
Philippines:
1.
Mere
investment
as
a
shareholder by a foreign entity in
domestic
corporations
duly
registered to do business, and/or
the exercise of rights as such
investor;
2. Having a nominee director or
officer to represent its interest in
such corporation;
3. Appointing a representative
or distributor domiciled in the
Philippines
which
transacts
business in the representative's
or distributor's own name and
account;
4. The publication of a general
advertisement through any print or
broadcast media;
5. Maintaining a stock of goods in
the Philippines solely for the
purpose of having the same
processed by another entity in the
Philippines;
6. Consignment by a foreign entity
of equipment with a local company
to be used in the processing of
products for export;

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7. Collecting information
Philippines; and

in

the

8. Performing services auxiliary to


an existing isolated contract of sale
which are not on a continuing basis,
such as installing in the Philippines
machinery it has manufactured or
exported
to
the
Philippines,
servicing
the
same,
training
domestic workers to operate it, and
similar incidental services.
From the preceding citations, the
appointment of a distributor in the
Philippines
is
not
sufficient
to
constitute "doing business" unless it is
under the full control of the foreign
corporation. On the other hand, if the
distributor is an independent entity
which buys and distributes products,
other than those of the foreign
corporation, for its own name and its
own account, the latter cannot be
considered to be doing business in the
Philippines. It should be kept in mind
that the determination of whether a
foreign corporation is doing business
in the Philippines must be judged in
light of the attendant circumstances.
In the case at bench, it is undisputed
that DISI is independently owned and
managed by the spouses Leandro and
Josephine
Bantug. In
addition
to
Steelcase
products,
DISI
also
distributed
products
of
other
companies including carpet tiles,
relocatable
walls
and
theater
settings.This clearly belies DISIs
assertion that it was a mere conduit
through which Steelcase conducted its
business in the country. From the

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Commercial Law Notes


preceding facts, the only reasonable
conclusion that can be reached is that
DISI was an independent contractor,
distributing
various
products
of
Steelcase and of other companies,
acting in its own name and for its own
account.As a result, Steelcase cannot
be considered to be doing business in

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the Philippines by its act of appointing


a distributor as it falls under one of the
exceptions under R.A. No. 7042.

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34

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