finals commercial law

7/30/2019 Finals Commercial Law

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An insurance contract is an agreement where one person, for consideration, agrees toindemnify another against loss, damage or liability due to an unknown or contingentevent. A contract of suretyship becomes an insurance contract if the surety is engaged inthe insurance business.

It is a "risk-distributing device" because the insurer distributes the risk to a large number of insured who will all pay their contributions/premiums. The premiums will be used to pay forthe losses.

It becomes a "risk-shifting device" if the insurer obliges himself to assume the risk of losswhich the insured, who has an insurable interest, is subject to. The insurer, therefore,agrees to bear the burden of having to suffer the loss.

The Insurance Code classifies insurance contracts as either life, non-life or surety.

Life Insurance Policy

Insurance upon life is made payable on the death of the person, his surviving a specifiedperiod or otherwise contingently on the continuance or end of life.

1.) Ordinary

Premiums are regularly paid, usually on a yearly basis, throughout the insured's life. Thebeneficiary will be paid only when the insured dies. The policy may provide for a "cashsurrender value," which is paid if the policy is cancelled, or a "loan value" that the insuredcan borrow.

2.) Limited

Premiums are paid only for an agreed period (ex. 5 years, etc.) The beneficiary is paid onlywhen the insured dies. The premium payment is relatively higher than in an ordinary lifepolicy.

3.) Term Insurance

Covers only an agreed limited term (ex. 20 years, etc.) The beneficiary will be paid only if the insured dies within the covered term; if he survives beyond the covered term, thecontract is terminated. The premium is relatively higher than in 1 and 2.

4.) Endowment

Insurer will pay the insured if he survives an agreed period. If the insured dies within theperiod, the insurer will pay the beneficiary. This is usually availed of for retirementpurposes.The premium payment is also relatively higher.

Non-life Insurance Policy

Also termed "property insurance." The insured is indemnified for loss due to damageto/destruction of his property or for damages he may be held legally liable as a result of injuries to other persons or damage to their property.

1.) Marine/transportationCovers perils that may be encountered while the property is in transit and may includeocean marine insurance involving sea perils and inland marineinsurance involving land transportation perils.

2.) Fire

The owner is indemnified for loss or damage to his property due to fire, earthquake,lightning windstorm and other allied risks.
http://philcritic.clickbankphilippines.com/2012/07/characteristics-of-insurance-contract.htmlhttp://philcritic.clickbankphilippines.com/2012/07/characteristics-of-insurance-contract.html


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3.) Casualty

Covers loss or liability due to accident or mishap but excludes those that fall under the othertypes of insurance contracts.

Surety

The surety guarantees the obligee the performance of the obligation/undertaking of theprincipal/obligor; this is because it's a collateral contract in relation to the principal onebetween the obligor and obligee. It includes official recognizances, bonds, undertakings orstipulations issued by any company.

The surety bond is the evidence of a contract of surety and the surety's liability is insolidum . The obligor is to execute an indemnity agreement to indemnify the surety againstloss.

If an insurance company isn't authorized to issue surety bonds but it does so, it is estoppedfrom claiming its lack of authority (Pryce vs. CA, 230 SCRA 164.)

NEGOTIABLE INSTRUMENTS LAW

NEGOTIABLE INSTRUMENTWritten contract for the payment of money, by its form intended as substitute for money and intended to

pass from hand to hand to give the holder in due course the right to hold the same and collect the sum due

PROMISSORY NOTE unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand, or at a fixed or determinable future time a sum certain in money to order or to

bearer where a note is drawn to the makers own order, it is not complete until indorsed by him

BILL OF EXCHANGE unconditional order in writing addressed by one person to another signed by the person giving it requiring the person to whom its addressed to pay on demand or at a fixed or determinable future time

a sum certain in money to order or to bearer

Check: bill of exchange drawn on a bank payable on demand.

Kinds of checks:

1. personal check2. managers/cashiers check drawn by a bank on itself. Issuance has the effect of acceptance3. memorandum check memo is written across its face, signifying that drawer will pay holder

absolutely without need of presentment4. crossed check

Effects:a. check may not be encashed but only deposited in bankb. may be negotiated only once, to one who has an acct. with a bankc. warning to holder that check has been issued for a definite purpose so that he must inquire if he

received check pursuant to such purpose, otherwise not HDCKinds:

a. general (no word between lines, or co between lines)

b. special (name of bank appearing between parallel lines)

BEARERPerson in possession of a bill/note payable to bearer

HOLDERPayee or indorsee of a bill or note who is in possession of it, or the bearer thereof.

THE LIFE OF A NEGOTIABLE INSTRUMENT:1. issue2. negotiation


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3. presentment for acceptance in certain bills4. acceptance5. dishonor by on acceptance6. presentment for payment7. dishonor by nonpayment8. notice of dishonor 9. protest in certain cases10. discharge

NEGOTIABILITY

REQUISITES1. in writing and signed by maker or drawer

no person liable on the instrument whose signature does not appear thereon ( subject to exceptions) one who signs in a trade or assumed name liable to the same extent as if he had signed in his own

name signature of any party may be made by a duly authorized agent, no particular form of appt. necessary

2. unconditional promise or order to pay unqualified order or promise to pay is unconditional though coupled with

a. an indication of a particular fund out of which reimbursement to be made, or a particular accountto be debited with amount, or b. a statement of the transaction which gives rise to the instrument

an order or promise to pay out of a particular fund is not unconditional

a sum certain in money even if stipulated to be paid---

a. with interest, or b. by stated installments, or c. by stated installments with a provision that upon default in payment of any installment/interest,

the whole shall become due, or d. with exchange, whether at a fixed rate or at the current rate, or e. with costs of collection or an attorneys fee, in case payment not made at maturity

3. payable on demand, when expressed to be payable on demand, or at sight, or on presentation; when no time for payment expressed, or where an instrument is issued, accepted or indorsed when overdue, it is, as regards the person so

issuing, accepting, or indorsing it, payable on demand

or at a fixed or determinable future time when its expressed to be payable at a fixed period after date or sight, or on or before a fixed or determinable future time fixed therein, or

on or at a fixed period after the occurrence of a specified event which is certain to happen, though thetime of happening be uncertain an instrument payable upon a contingency not negotiable, and happening of event doesnt cure it

* relate to sec. 11 ( presumption as to date) and sec. 17 (construction where instrument ambiguous)* note effect of acceleration provisions, p. 30 Campos* note effect of provisions extending time of payment, p. 40 Campos

4. payable to order where it is drawn payable to the order of a specified person or to him or his order. May be drawn

payable to order of ---a. a payee not the maker/drawer/drawee, or b. drawer or maker, or c. drawee, or d. two or more payees jointly, or e. holder of an office for time being

when the instrument is payable to order the payee must be named or otherwise indicated therein withreasonable certainty

or bearer, when expressed to be so payable when payable to person named therein or bearer


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when payable to order or fictitious/non-existent person, and such fact known to the person making it sopayable, or

when name of payee doesnt purport to be the name of any person, or when the only/last indorsement is in blank

5. where addressed to drawee: such drawee named/ indicated therein with reasonable certainty bill may be addressed to two or more drawees jointly, whether partners or not, but not to two or more

drawees in the alternative or in succession bill may be treated as a PN, at option of holder, where

a. drawer and drawee are same personb. drawee is fictitious/incapacitated

EFFECT OF ADDITIONAL PROVISIONSGen. Rule: order/promise to do any act in addition to the payment of money renders instrument non-negotiable.Exception: negotiability not affected by provisions w/c1. authorize sale of collateral security if instrument not paid at maturity2. authorize confession of judgment3. waives benefit of any law intended for advantage/protection of obligor 4. give holder election to require something to be done in lieu of money

CONTINUATION OF NEGOTIABLE CHARACTERUntil1. restrictively indorsed2. discharged by payment or otherwise

TRANSFER

DELIVERY NI incomplete and revocable until delivery for the purpose of giving effect thereto as between

a. immediate partiesb. a remote party other than holder in due course

delivery, to be effectual, must be made by or under the authority of the partymaking/drawing/accepting/indorsing in such case delivery may be shown to have been conditional, or for a special purpose only, and not for

the purpose of transferring the property in the instrument

PRESUMPTION OF DELIVERYWhere the instrument is no longer in the possession of a party whose signature appears thereon, a valid andintentional delivery by him is presumed until the contrary is proved (*if in the hands of a HDC, presumptionconclusive)

NEGOTIATION When an instrument is transferred from one person to another as to constitute the transferee the holder

thereof. If payable to BEARER, negotiated by delivery; if payable to ORDER, negotiated by indorsement of

holder + delivery

INDORSEMENT Indorser generally enters into two contracts:

1. sale or assignment of instrument2. to pay instrument in case of default of maker

Sec. 31 (how indorsement made)

Sec. 41 (where payable to two or more) Sec. 43 (indorsement where name misspelled) Sec. 48 (cancellation of indorsement) Sec. 45, 46 (presumptions) Indorsement must be of entire instrument. (cant be indorsement of only part of amount payable, nor

can it be to two or more indorsees severally. But okay to indorse residue of partially paid instrument) Sec. 67 (liability of indorser where paper negotiable by delivery) Sec. 63 (when person deemed indorser)

KINDS OF INDORSEMENT


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A. As to manner of future method of negotiation1. Special specifies the person to whom/to whose order the instrument is to be payable;

indorsement of such indorsee is necessary to further negotiation.2. Blank specifies no indorsee, instrument so indorsed is payable to bearer, and may be negotiated

by delivery

The holder may convert a blank indorsement into a special indorsement by writing over the signatureof the indorser in blank any contract consistent with the character of the indorsement

B. as to kind of title transferred

1. restrictive prohibits further negotiation of instrument, constitutes indorsee as agent of indorser, or vests title in indorsee in trust for another rights of indorsee in restrictive ind.:

Receive payment of inst. Bring any action thereon that indorser could bring Transfer his rights as such indorsee, but all subsequent indorsees acquire only title of first indorsee

under restrictive indorsement

2. non-restrictive

C. as to kind of liability assumed by indorser 1. Qualified-constitutes indorser as mere assignor of title (e.g. without recourse)2. unqualified

D. as to presence/absence of express limitations put by indorser upon primary obligors privileges of payingthe holder

1. Conditional additional condition annexed to indorsers liability. Where an indorsement is conditional, a party required to pay the instrument may disregard the

condition, and make payment to the indorsee or his transferee, whether condition has been fulfilled or not

Any person to whom an instrument so indorsed is negotiated will hold the same/proceeds subject torights of person indorsing conditionally2. unconditional

INDORSEMENT OF BEARER INSTRUMENT Where an instrument payable to bearer is indorsed specially, it may nevertheless be further negotiated

by delivery Person indorsing specially liable as indorser to only such holders as make title through his indorsement

UNINDORSED INSTRUMENTS

Where holder of instrument payable to his order transfers it for value without indorsing, transfer vests intransferee1. such title as transferor had therein2. right of transferee to have indorsement of transferor

for purposes of determining HDC negotiation effective upon actual indorsement

HOLDER IN DUE COURSE

HOLDERSec. 191

RIGHTS OF HOLDER

1. sue thereon in his own name2. payment to him in due course discharges instrument

HOLDER IN DUE COURSE: REQUISITIES1. complete and regular upon its face

sec. 124 (effect of alteration) sec. 125 (what constitute material alterations)

2. holder became such before it was overdue, without notice of any previous dishonor sec. 53 (demand inst. nego after unreasonable length of time: not HDC) sec. 12 (effect antedating/postdating)


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3. taken in good faith and for value sec. 24 (presumption of consideration) sec 25 (definition. of value) sec. 26 (definition. holder for value) sec. 27 (lien as value)

4. at time negotiated to him, he had no notice (sec. 56-def; 54-notice before full amt. paid) of ---a. infirmity in instrumentb. defect in title of person negotiating

(1) instrument/signature obtained through fraud, etc., illegal consideration/means, or (2) instrument negotiated in breach of faith, or fraudulent circumstances

RIGHTS OF HOLDER IN DUE COURSE1. holds instrument free of any defect of title of prior parties2. free from defenses available to prior parties among themselves3. may enforce payment of instrument for full amount, against all parties liable

* If in the hand of any holder (note definition of holder) other than a HDC, vulnerable to same defenses as if non-negotiable

RIGHTS OF PURCHASER FROM HOLDER IN DUE COURSE

General Rule : in the hands of any holder other than a HDC, NI is subject to same defenses as if it were non-negotiable.Exception : holder who derives title through HDC and who is not himself a party to any fraud or illegality has allrights of such former holder in respect to all parties prior to the latter.

WHO DEEMED HDC prima facie presumption in favor of holder but when shown that title of any person who has negotiated instrument was defective (sec. 55when

title defective): burden reversed (now with holder) but no reversal if party being made liable became bound prior to acquisition of defective title (i.e., where

defense is not his own)

DEFENSES AND EQUITIES

KINDS OF DEFENSES1. real defense attaches to instrument; on the principle that the right sought to be enforced never

existed/there was no contract at all2. personal defense growing out of agreement; renders it inequitable to be enforced vs. defendant

DEFENSES1. INCAPACITY : real; indorsement/assign by corp/infant: passes property but corp/infant no liability 2. ILLEGALITY : personal, even if no K because void under CC 1409

3. FORGERY : real (lack of consent):a. forgedb. made without authority of person whose signature it purports to be

General Rule:a. wholly inoperativeb. no right to retain instrument, or give discharge, or enforce payment vs. any party, can be acquired

through or under such signature (unless forged signature unnecessary to holders title)Exception:

Unless the party against whom it is sought to enforce such right is precluded from setting upforgery/want of authority

Precluded:a. parties who make certain warranties, like a general indorser or acceptor b. estopped/negligent parties

* Note rules on Acceptance/Payment under Mistake as applied to:1. overdraft 2. stop payment order 3. forged indorsements

4. MATERIAL ALTERATION Where NI materially altered w/o assent of all parties liable thereon, avoided, except as vs. a


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1. party who has himself made, authorized or assented to alteration2. and subsequent indorsers.

But when an instrument has been materially altered and is in the hands of a HDC not a party to thealteration, HDC may enforce payment thereof according to orig. tenor

Material Alteration

1. change date2. sum payable, either for principal or interest

3. time of payment4. number/relations of parties5. medium/currency of payment, adds place of payment where none specified, other

change/addition altering effect of instrument in any respect

*material alteration a personal defense when used to deny liability according to org. tenor of instrument, but real defense when relied on to deny liability according to altered terms.

5. FRAUDa. fraud in execution: real defense (didnt know it was NI)b. fraud in inducement: personal defense (knows its NI but deceived as to value/terms)

6. DURESS Personal, unless so serious as to give rise to a real defense for lack of contractual intent

7. COMPLETE, UNDELIVERED INSTRUMENT Personal defense (sec. 16) If instrument not in poss. Of party who signed, delivery prima facie presumed If holder is HDC, delivery conclusively presumed

8. INCOMPLETE, UNDELIVERED INSTRUMENT Real defense (sec. 15) Instrument will not, if completed and negotiated without authority, be a valid contract in the hands of

any holder, as against any person whose signature was placed thereon before delivery

9. INCOMPLETE, DELIVERED Personal defense (sec. 14) 2 Kinds of Writings:

1. Where instrument is wanting in any material particular: person in possession has prima facieauthority to complete it by filing up blanks therein

2. Signature on blank paper delivered by person making the signature in order that the paper may beconverted into a NI: prima facie authority to fill up as such for any amount

In order that any such instrument, when completed, ma be enforced vs. any person who became aparty thereto prior to its completion:

1. must be filled up strictly in accordance w/ authority given2. within a reasonable time but if any such instrument after completion is negotiated to HDC, it's valid for all purposes in his hands,

he may enforce it as if it had been filled up properly

LIABILITIES OF PARTIES

A. PRIMARY PARTIES Person primarily liable: person who by the terms of the instrument is absolutely required to pay the

same. Sec. 70 (effect of want of demand on principal debtor)

1. Liability of Maker a. Promises to pay it according to its tenor b. admits existence of payee and his then capacity to indorse

2. Status of drawee prior to acceptance or payment sec. 127 (bill not an assignment of funds in hands of drawee) sec. 189 (when check operates as assignment)

3. Liability of Acceptor Promises to pay inst according to its tenor


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Admits the following:a. existence of drawer b. genuineness of his signaturec. his capacity and authority to draw the instrumentd. existence of payee and his then capacity to endorse

sec. 191, 132, 133, 138 --- formal requisites of acceptance sec. 136, 137, 150 --- constructive acceptance sec. 134, 135 --- acceptance on a separate instrument

Kinds of Acceptance:1. general2. qualified

a. conditionalb. partialc. locald. qualified as to timee. not all drawees

* sec. 142 (rights of parties as to qualified acceptance)

Certification: Principles1. when check certified by bank on which its drawn, equivalent to acceptance2. where holder of check procures it to be accepted/certified, drawer and all indorsers

discharged from al liability3. check not operate as assignment of any part of funds to credit of drawer with bank, and

bank is not liable to holder, unless and until it accepts or certifies check4. certification obtained at request of drawer: secondary parties not released5. bank which certifies liable as an acceptor 6. checks cannot be certified before payable

B. SECONDARY PARTIES1. Liability of Drawer

a. Admits existence of payee and his then capacity to endorseb. Engages that on due presentment instrument will be accepted, or paid, or both, according to itstenor and that

c. If it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay theamount thereof to the holder or to an subsequent indorser who may be compelled to pay it

drawer may insert in the instrument an express stipulation negativing / limiting his own liability to holder

2. Liability of Indorsers:

Qualified Indorser and one Negotiating by Deliverya. Instrument genuine, in all respects what it purports to beb. good titlec. all prior parties had capacity to contractd. he had no knowledge of any fact w/c would impair validity of instrument or render it valueless

in case of negotiation by delivery only, warranty only extends in favor of immediate transferee

Liability of a General or Unqualified Indorser a. instrument genuine, good title, capacity of prior partiesb. instrument is at time of indorsement valid and subsistingc. on due presentment, it shall be accepted or paid, or both, according to tenor d. if it be dishonored, and necessary proceedings on dishonor be duly taken, he will pay the amt. To

holder, or to any subsequent indorser who may be compelled to pay it

Order of Liability among Indorsers1. among themselves: liable prima facie in the order they indorse, but proof of another agreement

admissible2. but holder may sue any of the indorsers, regardless of order of indorsement3. joint payees/indorsees deemed to indorse jointly and severally

3. Liability of Accomodation Party Definition: one who signed instrument as maker/drawer/acceptor/ indorser w/o receiving value thereof,

for the purpose of lending his name to some other person


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AP liable on the instrument to holder for value even if holder, at time of taking instrument, knew hewas only an AP

Liability of Irregular Indorser Where a person not otherwise a party to an instrument, places thereon his signature in blank before

delivery, hes liable as an indorser, in accordance w/ these rules:1. Instrument payable to order of 3 rd person: liable to payee and to all subsequent parties2. Instrument payable to the order of maker/drawer, or payable to bearer: liable to all parties

subsequent to maker/drawer

3. Signs for accommodation of payee, liable to all parties subsequent to payee Sadaya v Sevilla Rules:1. a joint and several accommodation maker of a negotiable promissory note may demand from the principal

debtor reimbursement for the amt. That he paid to the payee2. a joint and several accommodation maker who pays on the said promissory note may directly demand

reimbursement from his co-accommodation maker without first directing his action vs. the principal debtor provided:a. he made the payment by virtue of a judicial demandb. or the principal debtor is insolvent

4. Liability of an Agent

Signature of any party may be made by duly authorized agent, establish as in ordinary agency Where instrument contains or a person adds to his signature words indicating that he signs for or on

behalf of a principal, he is not liable on the instrument if he was duly authorized, but the mere additionof words describing him as an agent without disclosing his principal, does not exempt from personalliability.

Signature per procuration operates as notice that the agent has but a limited authority to sign, and theprincipal is bound on ly in case the agent in so signing acted within the actual limits of his authority

Where a broker or agent negotiates an instrument without indorsement, he incurs all liabilities in Sec.65, unless he discloses name of principal and fact that hes only acting as agent

I. Presentment For Acceptance

When presentment for acceptance must be made1. bill payable after sight, or in other cases where presentment for acceptance necessary to fix maturity2. where bill expressly stipulates that it shall be presented for acceptance3. where bill is drawn payable elsewhere than at residence / place of business of drawee

When failure to present releases drawer/indorser Failure to present for acceptance of negotiate bill of exchange within reasonable time

Reasonable TimeMust consider 1. nature of instrument2. usage of trade or business with respect to instrument3. facts of each case

How and When Made Sec. 145, 146, 147When Excused Sec. 148

Dishonor and Effects sec. 149 (when dishonored by non-acceptance) sec. 150 (duty of holder where bill not accepted) sec. 151 (rights of holder where bill not accepted) sec. 89 (to whom notice of dishonor must be given) sec. 117 (effect of omission to give notice of non-acceptance)

II. For Payment

Where necessary Sec. 70Where not necessary Sec. 79, 80, 82, 151, 111Date and time of presentment of instrument bearing fixed maturity Sec. 71, 85, 86, 194

Date of presentment Where instrument not payable on demand: presentment must be made on date it falls due Where payable on demand: presentment must be made within reasonable time after issue, except that

in case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable


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time after last negotiation ( but note: though reasonable time from last negotiation, it may beunreasonable time from issuance thus holder may not be HDC under sec. 71 )

Check must be presented for payment within reasonable time after its issue or drawer will bedischarged from liability thereon to extent of loss caused by delay

Delay excused Sec. 81Manner Sec. 74, 72, 75Place Sec. 73To Whom Sec. 72, 76, 77, 78Dishonor by nonpayment Sec. 83, 84

Notice of Dishonor General rule: to drawer and to each indorser, and any drawer or indorser to whom such notice is not given isdischarged

Form, Contents, Time Sec. 95, 96, 102, 103, 104, 105, 106, 108, 113

By Whom Given By or on behalf of the holder or any party to the instrument who may be compelled to pay it to the

holder, and who, upon taking it up, would have a right to reimbursement from the party to whom thenotice is given

Notice of dishonor may be given by an agent either in his own name or in the name of any party entitledto give notice, whether that party be his principal or not

Where instrument has been dishonored in hands of agent, he may either himself give notice to theparties liable thereon, or he may give notice to his principal (as if agent an independent holder)

In whose favor notice operates1. when given by/on behalf of holder: insures to benefit of

a. all subsequent holders andb. all prior parties who have a right of recourse vs. the party to whom its given

2. Where notice given by/on behalf of a party entitled to give notice: insures for benefit of a. holder , andb. all parties subsequent to party to whom notice given

Waiver Sec. 109, 110

Where not necessary to charge drawer 1. drawer/drawee same person2. drawee fictitious, incapacitated3. drawer is person to whom instrument is presented for payment4. drawer has no right to expect/require that drawee/acceptor will honor instrument5. drawer countermanded payment

Where not necessary to charge indorser 1. drawee fictitious, incapacitated, and indorser aware of the fact at time of indorsement

2. indorser is person to whom instrument presented for payment3. instrument made/accepted for his accommodation

ProtestDefinition : testimony of some proper person that the regular legal steps to fix the liability of drawer andindorsers have been taken

When necessary: sec. 152,Form and contents: sec. 153By whom made: sec. 154Time and Place: sec. 155, 156For better security: sec. 158Excused: sec. 159Waiver: sec. 111

Acceptance for Honor Sec. 161, 131, 171

Bills in Set: 178-183

DISCHARGEA. Of the Instrument1. payment in due course by or on behalf of principal debtor


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Payment in due course:1. made at or after maturity2. to the holder thereof 3. in good faith and without notice that his title is defective

2. payment in due course by party accommodated where party is made/ accepted for accommodation3. intentional cancellation by holder

If unintentional or under mistake or without authority of holder, inoperative. Burden of proof on party

which alleges it was unintentional, etc.4. any other act which discharges a simple contract5. principal debtor becomes holder of instrument at or after maturity in his own right6. renunciation of holder:

holder may expressly renounce his rights vs. any party to the instrument, before or after its maturity absolute and unconditional renunciation of his rights vs. principal debtor made at or after maturity

discharges the instrument Renunciation does not affect rights of HDC w/o notice. Renunciation must be in writing unless instrument delivered up to person primarily liable thereon

7. material alteration (sec. 124: material alteration w/o assent of all parties liable avoids instrument except asagainst party to alteration and subsequent indorsers)

B. Of secondary parties1. any act which discharges the instrument2. intentional cancellation of signature by holder 3. discharge of prior party4. valid tender of payment made by prior party5. release of principal debtor, unless holders right of recourse vs. 2ndary party reserved6. any agreement binding upon holder to extend time of payment, or to postpone holders right to enforce

instrument, unless made with assent of party secondarily liable, or unless right of recourse reserved.8. Failure to make due presentment (sec. 70, 144)9. failure to give notice of dishonor 10. certification of check at instance of holder 11. reacquisition by prior party

where instrument negotiated back to a prior party, such party may reissue and further negotiate, but notentitled to enforce payment vs. any intervening party to whom he was personally liable

where instrument is paid by party secondarily liable, its not discharged, buta. the party so paying it is remitted to his former rights as regard to all prior partiesb. and he may strike out his own and all subsequent indorsements, and again negotiate instrument,

except where its payable to order of 3 rd party and has been paid by drawer where its made/accepted for accommodation and has been paid by party accommodated

Negotiable Instruments - General Principles

PURPOSE OF CODIFICATION Chief purpose was to produce uniformity in the laws of the different states upon this important

subject, so that the citizens of each state might know the rules which would be applied to their notes,checks, and other negotiable paper in every other state in which the law wasenacted, since it is an absolute impossibility for the commercial purchaser Second purpose was to preserve the law as nearly as possible as it then existed

COMMON FORMS OF NEGOTIABLE INSTRUMENTS 1. Promissory notes

2. Bills of exchange3. Checks, which are also bills of exchange, but of a special kind

PROMISSORY NOTE, SECTION 184 A negotiable promissory note, within the meaning of this act, is an unconditional promise in writing

by one person to another, signed by the maker

(1), engaging to pay on demand or at a fixed or determinable future time

(2), a sum certain in money

(3) to order or to bearer

(4). Where a note is drawn to the makers own order, it is not complete until indorsed by them.


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Essentially a promise in writing to pay a sum certain in money The promise is to pay on demand or on a fixed or determinable future time General characteristics: amount; place where contract to pay is executed; due date; absolutepromise to pay something; payable to order/bearer; payee; maker of the note

BILL OF EXCHANGE, SECTION 126 A bill of exchange is an unconditional order in writing addressed by one person to another signed by

the person giving it

(1), requiring the person to whom it is addressed to pay on demand or at a fixed or determinable futuretime

(2) a sum certain in money

(3) to order or to bearer

General characteristics: the order or command to pay; drawer/maker; drawee

CHECK A bill of exchange drawn on a bank payable on demand

TO WHOM INSTRUMENTS MAY BE PAYABLE 1. Bearer

2. Order 3. To a specified person

WHEN IS IT PAYABLE TO BEARER? 1. When it is expressed to be so payable

2. When it is payable to a person named therein or bearer

WHEN IS IT PAYABLE TO ORDER? 1. When it is expressed to be payable to the order of a specified person

2. To a specified person or his order

WHEN IS IT PAYABLE TO A SPECIFIED PERSON? When the instrument is payable to a specified person named in the

instrument and no other

PARTIES TO A PROMISSORY NOTE 1. Makerthe person who executes the written promise to pay

2. Payee, if the instrument is payable to orderthe person in whose favor the promissory note is madepayable3. Bearer, if the instrument is payable to bearer

PARTIES TO A BILL OF EXCHANGE 1. Drawerthe person who executes the written order to pay

2. Payee, if the instrument is payable to orderthe person in whose favor a bill of exchange is drawnpayable3. Bearer, if the instrument is payable to bearer 4. Acceptorthe drawee who signifies his assent to the order of the drawer. It is only when he acceptsthe bill that he becomes a party thereto and liable thereon.

OTHER PARTIES TO NEGOTIATED INSTRUMENTS 1. Indorser and

2. Indorsee, in the case of instruments payable to order

3. Persons negotiating by mere delivery4. Persons to whom the instrument is negotiated by delivery

INDORSER AND INDORSEE When the negotiation is by indorsement completed by delivery, the parties added are the indorser and

indorsee Indorserthe one who negotiates the instrument Indorseethe one to whom the instrument is negotiated by indorsement

WHERE INSTRUMENT IS PAYABLE TO BEARER


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Where the instrument is payable to bearer, it can be negotiated by mere delivery without necessity of indorsement

HOLDER The payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof

If the instrument is payable to order, he who is the payee or indorsee and who is in possession thereof If the instrument is payable to bearer, he who is in possession thereof

ISSUE First delivery of the instrument, complete in form to a person who takes it as a holder

DELIVERY Consists principally of placing the transferee in possession of the instrument, but it must be

accompanied by the intent to transfer title every contract on a negotiable instrument is incomplete and revocable until delivery of theinstrument for the purpose of giving effect thereto

NEGOTIATION Transfer of an instrument from one person to another as to constitute the transferee the holder of the

instrument Mode of transferring an instrument Effect is to make the transferee the holder of the instrument

HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED May be negotiated by mere delivery

HOW INSTRUMENT PAYABLE TO ORDER IS NEGOTIATED Must be negotiated by indorsement completed by delivery

Indorsement is necessary to make the transferee the indorsee and delivery is necessary to placethe transferee in possession of the instrument

INDORSEMENT Legal transaction, effected by the writing of ones own name on the back of the instrument or

upon a paper attached thereto, with or without additional words specifying the person to whom or towhose order the instrument is to be payable whereby one not only transfersones full legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will beduly paid

SPECIAL INDORSEMENT Specifies the person to whom or to whose order the instrument is to be payable

BLANK INDORSEMENT One that doesnt specify the person to whom or to whose order the instrument is to be payable

NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED. 1. Indorsement is merely the first step in the process of negotiating an instrument which is payable to order

2. Where the instrument is payable to order, neither is delivery equivalent to negotiation3. But where the instrument is payable to bearer, delivery is equivalent to negotiation

PRESENTMENT FOR ACCEPTANCE Exhibiting the bill to the drawee and demanding that he accept it, that is, signify his assent to the order or

command of the drawer

ACCEPTANCE Signification of the drawee of his assent to the order of the drawer

DISHONOR BY ACCEPTANCE Where the bill is presented for acceptance, and acceptance is refused by the drawee, or cannot be

obtained, or where presentment for acceptance is excused, and the bill is not accepted

PRESENTMENT FOR PAYMENT


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Consists of exhibiting the instrument to the person primarily liable thereon and demanding paymentform him on the date of maturity

DISHONOR BY NON-PAYMENT Where the instrument is presented for payment and payment is refused or cannot be obtained, or

where presentment for payment is excused and the instrument is overdue and unpaid

NOTICE OF DISHONOR When an instrument has been dishonored by non-payment or non-acceptance

DISCHARGE An instrument is discharged by payment in due course by or on behalf of the principal debtor

PARTIES PRIMARILY AND SECONDARILY LIABLE Under the Negotiable Instruments Law, the person primarily liable on an instrument is the person

who by the terms of the instrument is absolutely required to pay the same All other parties are secondarily liable

IN BILLS OF EXCHANGE The acceptor is the one primarily liable

He is absolutely required to pay the instrument as he engages that he will pay it according to the tenor of hisacceptance

SECONDARY LIABILITY OF DRAWER By the mere drawing of the instrument, the drawer assumes the liability stated in Section 61

The general tenor of the liability of the drawer is that he will pay the bill if the drawee doesnt accept or paythe bill. In other words, he is not absolutely required to pay the billif the drawee pays, then he is notrequired to pay. It is only when the drawee doesnt pay that he will be required to pay.

SECONDARY LIABILITY OF INDORSER He will pay the instrument if the person primarily liable will not pay.

SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY By merely delivering an instrument payable to bearer, without saying anything more, the person negotiating

by mere delivery assumes the liability mentioned in Section 65. Under said section, the general tenor of liability is similar to that of an indorser

IN PROMISSORY NOTES The maker is primarily liable

Agreement of the maker is that he will pay the instrument according to the tenor

FUNCTION OF NEGOTIABLE INSTRUMENTS 1. Substitute for money

2. Increase the purchasing medium in circulation

PAYMENT BY NEGOTIABLE INSTRUMENTS W/N the giving and taking of a promissory note or bill of exchange is prima facie absolute payment as in

the case of money or merely a prima facie conditional payment? The delivery of the promissory notes payable to order, or bills of exchange or other mercantiledocuments shall produce the effect of payment only when they have been cashed, or when, through the fault

of the creditor, they have been impaired

PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS 1. Negotiability

2. Accumulation of secondary contracts as they are transferred from one person to another

NEGOTIABILITY Attribute or property whereby a bill, note or check passes or may pass from hand to hand similar to money,

so as to give the holder in due course the right to hold the instrument and collect the sums payable for himself


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free from defense.

PRIMARY PURPOSE OF NEGOTIABILITY To allow bills and notes the effect which money, in the form of government bills or notes, supplies in

the commercial world

ACCUMULATION OF SECONDARY CONTRACTS Most important characteristic of negotiable instruments is the accumulation of secondary contracts

which they pick up and carry with them as they are negotiated from one person to another Advantage: they improve as they pass from hand to hand, as more debtors are added

A corporation is an artificial being created by operation of law, having the right of succession and the powers,attributes and properties expressly authorized by law or incident to its existence.

A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "acreature without any existence until it has received the imprimatur of the state acting according to law." A corporation willhave no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience toacts of its state organs. ( Tanyag v. Benguet Corporation )

A corporation has four (4) attributes:

(1) It is an artificial being;(2) Created by operation of law;(3) With right of succession;(4) Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.

CLASSIFICATION OF PRIVATE CORPORATIONS

Stock Non-Stock Definition

Corporations which have capital stockdivided into shares andare authorized to distribute to the

holders of shares dividends or allotments of the surplus profits on thebasis of the shares (3)

All other private corporations (3) One where no part of its income is

distributable as dividends to itsmembers, trustees or officers. (87)

Purpose

Primarily to make profits for itsshareholders

May be formed or organized for charitable, religious, educational,professional, cultural, fraternal, literary,scientific, social, civic service, or similar purposes like trade, industry,agricultural and like chambers, or anycombination thereof. (88)

Distribution of Profits Profit is distributed to shareholders Whatever incidental profit made is notdistributed among its members but isused for furtherance of its purpose.

AOI or by-laws may provide for thedistribution of its assets among itsmembers upon its dissolution. Beforethen, no profit may be made bymembers.

Composition

Stockholders

Members

Definition and attributes of a corporation

Stock v. Non-StockCorporations


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Scope of right to vote Each stockholder votes according tothe proportion of his shares in thecorporation. No shares may bedeprived of voting rights except thoseclassified and issued as "preferred" or "redeemable" shares, and asotherwise provided by the Code.(Sec. 6)

Each member, regardless of class, isentitled to one (1) vote UNLESS suchright to vote has been limited,broadened, or denied in the AOI or by-laws. (Sec. 89)

Voting by proxy

May be denied by the AOI or the by-laws. (Sec. 89)

Cannot be denied. (Sec. 58) Voting by mail

May be authorized by the by-laws,with the approval of and under theconditions prescribed by the SEC.(Sec. 89)

Not possible.

Who exercises CorporatePowers 23

Board of Directors or Trustees

Members of the corporation

Governing Board

Board of Directors or Trustees,consisting of 5-15 directors / trustees.

Board of Trustees, which may consistof more than 15 trustees unlessotherwise provided by the AOI or by-laws. ( Sec, 92)

Term of directors or trustees

Directors / trustees shall hold office for 1 year and until their successors areelected and qualified (Sec. 23).

Board classified in such a way that theterm of office of 1/3 of their number shall expire every year. Subsequentelections of trustees comprising 1/3 of the board shall be held annually, andtrustees so elected shall have a termof 3 years. ( Sec. 92)

Election of officers

Officers are elected by the Board of Directors (Sec. 25), except in closecorporations where the stockholdersthemselves may elect the officers.(Sec. 97)

Officers may directly elected by themembers UNLESS the AOI or by-lawsprovide otherwise. (Sec. 92)

Place of meetings

Any place within the Philippines, if provided for by the by-laws (Sec. 93)

Generally, the meetings must be heldat the principal office of thecorporation, if practicable. If not, thenanyplace in the city or municipalitywhere the principal office of thecorporation is located. (Sec. 51)

Transferability of interestor membership

Transferable.

Generally non-transferable sincemembership and all rights arisingtherefrom are personal. However, the

AOI or by-laws can provide otherwise.(Sec. 90)

Distribution of assets incase of dissolution

See Sec. 94.

FORMATION AND ORGANIZATION OF CORPORATION

Who may form a corporation (See SEC. 10)

INCORPORATORS REQUIREMENTS COMMENTS Definition

stockholders or members mentioned in

the articles of incorporation asoriginally forming and composingthe corporation and who aresignatories thereof stockholders or members mentioned in the articles

compare with Corporators whichinclude all stockholders or members,whether incorporators or joining thecorporation after its incorporation.

Requirements in the formation of acorporation


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of incorporation as originally formingand composing the corporation andwho are signatories thereof

Characteristic

natural persons

excludes corporations and

partnerships Number

not less than 5; not more than 15

may be more than 15 for non-stock

corp. except educational corp.

does not prevent the one-man

(person) corporation wherein theother incorporators may have onlynominal ownership of only one shareof stock; not necessarily illegal

Age

of legal age

Residence majority should be residents of the

Philippines

residence a requirement; citizenship

requirement only in certain areassuch as public utilities, retail tradebanks, investment houses, savingsand loan associations, schools

Mutual Agreement to perform certain acts required for organizing a corporation

1- Organize and establish a corporation2- Comply with requirements of corporation code3- Contribute capital/resources

4- Mode of use of capital/resource and control/management of capital/resource5- distribution/disposition of capital/resource (embodied in constitutive documents)

STEPS COMMENTS a. Promotional Stage (See SEC. 2.Definitions)

Promoter brings together persons who become interested

in the enterprise aids in procuring subscriptions and sets in

motion the machinery which leads to theformation of the corporation itself

formulates the necessary initial business and

financial plans and, if necessary, buys the rightsand property which the business may need, withthe understanding that the corporation whenformed, shall take over the same.

b. Drafting articles of incorporation (See SEC. 14)

(see chart below)

c. Filing of articles; payment of fees.

AOI & the treasurers affidavit duly signed &acknowledged

must be filed w/ the SEC & the corresponding fees paid failure to file the AOI will prevent due incorporation of the

proposed corporation & will not give rise to its juridicalpersonality. It will not even be a de facto corp.

Under present SEC rules, the AOI once filed , will bepublished in the SEC Weekly Bulletin at the expense of the corp. (SEC Circular # 4, 1982).

d. Examination of articles; approval or rejection by SEC.

Process :a) SEC shall examine them in order to determine

whether they are in conformity w/ law.

Steps in the formation of acorporation


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b) If not, the SEC must give the incorporators areasonable time w/in w/c to correct or modify theobjectionable portions. Grounds for rejection or disapproval of AOI:

a) AOI /amendment not substantially in accordancew/ the form prescribed

b) purpose/s are patently unconstitutional, illegal,immoral, or contrary to government rules & regulations;

c) Treasurers Affidavit is false;

d) required percentage of ownership has not beencomplied with (Sec. 17)

e) corp.s establishment, organization or operationwill not be consistent w/ the declared national economicpolicies (to be determined by the SEC, after consultation w/BOI, NEDA or any appropriate government agency -- PD902-A as amended by PD 1758, Sec. 6 (k)) Decisions of the SEC disapproving or rejecting AOI may

be appealed to the CA by petition for review inaccordance w/ the ROC.

e. Issuance of certificate of incorporation.

Certificate of Incorporation will be issued if:

a) SEC is satisfied that all legal requirements havebeen complied with; and

b) there are no reasons for rejecting or disapprovingthe AOI. It is only upon such issuance that the corporation

acquires juridical personality.(See Sec. 19. Commencement of corporate existence) Should it be subsequently found that the incorporators

were guilty of fraud in procuring the certificate of incorporation, the same may be revoked by the SEC,after proper notice & hearing.

c. Drafting articles of incorporation (See SEC. 14)

CONTENTS OF AOI COMMENTS

Corporate Name

Essential to its existence since it is through it that the corporationcan sue and be sued and perform all legal acts

A corporate name shall be disallowed by the SEC if the proposed

name is either:

(1) identical or deceptively or confusingly similar to that of any existing corporation or to any other name alreadyprotected by law; or

(2) patently deceptive, confusing or contrary to existinglaws. (Sec. 18) LYCEUM OF THE PHILS. VS. CA (219 SCRA 610) The policy underlying the prohibition against the registration of acorporate name which is identical or deceptively or confusingly similarto that of any existing corporation or which is patently deceptive or patently confusing or contrary to existing laws is:

1. the avoidance of fraud upon the public which would haveoccasion to deal with the entity concerned;


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2. the prevention of evasion of legal obligations and duties,and

3. the reduction of difficulties of administration andsupervision over corporations.

Purpose Clause A corporation can only have one (1) primary purpose. However, it

can have several secondary purposes.

A corporation has only such powers as are expressly granted to itby law & by its articles of incorporation, those which may beincidental to such conferred powers , those reasonably necessaryto accomplish its purposes & those which may be incident to itsexistence.

Corporation may not be formed for the purpose of practicing a

profession like law, medicine or accountancy

Principal Office must be within the Philippines specify city or province street/number not necessary important in determining venue in an action by or against the corp.,

or on determining the province where a chattel mortgage of sharesshould be registered

Term of Existence

cannot specify term which is longer than 50 years at a time may be renewed for another 50 years, but not earlier than 5 years

prior to the original or subsequent expiry date UNLESS there are justifiable reasons for an earlier extension.

Incorporators and Directors names, nationalities & residences of the incorporators; names, nationalities & residences of the directors or trustees who

will act as such until the first regular directors or trustees are

elected; treasurer who has been chosen by the pre-incorporationsubscribers/members to receive on behalf of the corporation, allsubscriptions /contributions paid by them.

Capital Stock

amount of its authorized capital stock in lawful money of the

Philippines number of shares into which it is divided in case the shares are par value shares, the par value of each, names, nationalities and residences of the original subscribers,

and the amount subscribed and paid by each on his subscription,and if some or all of the shares are without par value, such factmust be stated

for a non-stock corporation, the amount of its capital, the names,nationalities and residences of the contributors and the amountcontributed by each

25% of 25% rule to be certified by Treasurer paid up capital should not be less than P5,000

Other matters

Classes of shares into w/c the shares of stock have been

divided; preferences of & restrictions on any such class;and any denial or restriction of the pre-emptive right of stockholders should also be expressly stated in said articles.

If the corporation is engaged in a wholly or partially

nationalized business or activity, the AOI must contain aprohibition against a transfer of stock which would reducethe Filipino ownership of its stock to less than the requiredminimum.

Any corporation may be incorporated as a close corporation, except:

a) mining or oil companies;b) stock exchanges;c) banks;d) insurance companies;e) public utilities;


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f) educational institutions; &g) corporations declared to be vested w/ public interest

User of Corporate Powers

What is a de facto corporation?

A de facto corporation is a defectively organized corporation, which has all the powers and liabilities of ade jure corporation and, except as to the State, has a juridical personality distinct and separate from itsshareholders, provided that the following requisites are concurrently present:

(1) That there is an apparently valid statute under which the corporation with its purposes may beformed;

(2) That there has been colorable compliance with the legal requirements in good faith; and,

(3) That there has been use of corporate powers, i.e., the transaction of business in some way as if

it were a corporation.

Formation under apparently valid statute.

Colorable compliance with the legal requirements in good faith.

(Sec. 21)

Distinguish a de facto corporation from a corporation by estoppel.

The de facto doctrine differs from the estoppel doctrine in that where all the requisites of a defacto corporation are present, then the defectively organized corporation will have the status of a de jurecorporation in all cases brought by and against it, except only as to the State in a direct proceeding. Onthe other hand, if any of the requisites are absent, then the estoppel doctrine can apply only if under thecircumstances of the particular case then before the court, either the defendant association is estoppedfrom defending on the ground of lack of capacity to be sued, or the defendant third party had dealt withthe plaintiff as a corporation and is deemed to have admitted its existence.

(De facto has status of de jure corpo, except separate personality against State, provided all requisites arepresent)

What are the effects of a Corporation by Estoppel in suits brought:

(1) against the Corporation? Considered a corporation in suits brought against it if it held itself out as such and denies capacity to be sued;

(2) against third party? Third party cannot deny existence of corporation if it

dealt with it as such.

When adopted:

(a) No later than one (1) month after receipt from SEC of officialnotice of issuance of Cert. of incorporation.

Requirement: Affirmative vote of stockholders representing at leastmajority of outstanding capital stock (Stock Corp.) or members (Non-Stock)

Must be signed by stockholders or members voting for them

De Facto Corporations:Requisites

CORPORATION BY ESTOPPEL

BY-LAWS (Sec. 46 &47)


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(b) Prior to incorporation

Requirement: Approval of all incorporators; must be signed by all of them

Where kept: (1) In the principal office of the corporation ; and(2) Securities and Exchange Commission

When effective: Only upon the SECs issuance of a certification that the by-lawsare not inconsistent with the Corporation Code.

Special corporations: By-laws and/or amendments thereto must be accompanied bya certificate of the appropriate government agency to theeffect that such by-laws / amendments are in accordance withlaw.

banks or banking institutions building and loan associations trust companies insurance companies public utilities educational institutions other special corporations governed by special laws

Contents of By-laws - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for:

1) the time, place and manner of calling and conducting regular or special meetings of the directors or trustees;

2) the time and manner of calling and conducting regular and special meetings of the stockholders or

members;

3) the required quorum in meetings of stockholders or members and the manner of voting herein; 4) the form for proxies of stockholders and members and the manner of voting them;

5) the qualifications, duties and compensation of directors or trustees, officers and employees;

6) the time for holding the annual election of directors or trustees and the mode or manner of giving notice

thereof; 7) the manner of election or appointment and the term of office of all officers other than directors or

trustees;

8) the penalties for violation of the by-laws; 9) in the case of stock corporations, the manner of issuing certificates; and 10) such other matters as may be necessary for the proper or convenient transaction of its corporate

business and affairs.

THE CORPORATE ENTITY

When does the corporations existence as a legal entity commence? Upon issuance by the SEC of the certificate of incorporation (Sec. 19)

What rights does the corporation acquire? The right to:

1) sue and be sued;2) hold property in its own name;3) enter into contracts with third persons; &

The Theory of Corporate Entity


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4) perform all other legal acts. Since corporate property is owned by the corporation as a juridical person, the stockholders have noclaim on it as owners, but have merely an expectancy or inchoate right to the same should any of itremain upon the dissolution of the corporation after all corporate creditors have been paid. Conversely, acorporation has no interest in the individual property of its stockholders, unless transferred to thecorporation. Remember that the liability of the stockholders is limited to the amount of shares.

Q: What is the theory of corporate entity?

A: That a corporation has a personality distinct from its stockholders, and is not affected by the personalrights, obligations and transactions of the latter. Q: When Can the Veil of Corporate Entity be Pierced?

A: The veil of corporate fiction may be pierced when it is used as a shield to further an endsubversive of justice, or for purposes that could not have been intended by law that created it or to defeatpublic convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuselegitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or businessconduit for the sole benefit of the stockholders.

Q: What are the effects of disregarding the corporate veil? (1) Stockholders would be personally liable for the acts and contracts of the corporation whose existenceat least for the purpose of the particular situation involved is ignored. (3) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation

to use the corporate privilege for the particular purpose involved.

Contrary to law / public policy; evasion of liability to government Evasion of liability to creditorsEvasion of liability / obligation to employees

Evasion of liability on contract

Q: What is the general rule governing parent-subsidiary relationship?

A: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is notalone sufficient to justify their being treated as one entity.

Q: When may it be disregarded by the courts?

(1) if the subsidiary was formed for the payment of evading the payment of higher taxes (2) where it was controlled by the parent that its separate identity was hardly discernible (3) parent corporations may be held responsible for the contracts as well as the torts of the

subsidiary

Q: What are the criteria by which the subsidiary can be considered a mereinstrumentality of the parent company?

1. the parent corp. owns all or most of the capital stock of the subsidiary.2. the parent and subsidiary have common directors and officers3. the parent finances the subsidiary4. the parent subscribes to all the capital stock of the subsidiary or otherwise causes its

incorporation5. the subsidiary has grossly inadequate capital6. the parent pays the salaries and other expenses or losses of the subsidiary7. the subsidiary has substantially no business except with the parent corp. or no assets except

those conveyed to or by the parent corp.

PIERCING THE CORPORATE VEIL

Parent-SubsidiaryRelationship


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8. in the papers of the parent corp. or in the statements of its officers, the subsidiary is described asa department or division of the parent corp. or its business or financial responsibility is referred asthe parents own

9. the parent uses the property of the subsidiary as its own10. the directors or the executives of the subsidiary do not act independently in the interest of the

subsidiary but take their orders from the parent corp. in the latters interest11. the formal legal requirements of the subsidiary are not observed

PROMOTERS CONTRACTS PRIOR TO INCORPORATION

While a corporation could not have been a party to a promoter's contract since it did yetexist at the time the contract was entered into and thus could not possibly have had an agent whocould legally bind it, the corporation may make the contracts its own and become bound thereonif, after incorporation, it:

(1) Adopts or ratifies the contract; or (2) Accepts its benefits with knowledge of the terms thereof.

It must be noted, however, that the contract must be adopted in its entirety; the corporationcannot adopt only the part that is beneficial to it and discard that which is burdensome.Moreover, the contract must be one which is within the powers of the corporation to enter, andone which the usual agents of the company have express or implied authority to enter.

Should the other contracting party fail to perform its part of the bargain, the corporationwhich has adopted or ratified the contract may either sue for:

(1) Specific performance; or (2) Damages resulting from breach of contract.

The fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the corporation a cause of action.

GENERAL RULE: Promoters are personally liable on their contracts made on behalf of a corporation to be formed.

EXCEPTION: If there is an express or implied agreement to the contrary. It must be noted that the fact

that the corporation when formed has adopted or ratified the contract does not releasethe promoter from responsibility unless a novation was intended.

CORPORATE POWERS

To sue and be sued in its corporate name; Of succession by its corporate name for the period of time stated in the articles of incorporation and

the certificate of incorporation; To adopt and use a corporate seal; To amend its articles of incorporation in accordance with the provisions of this Code;

Liability of Corporation for PromotersContracts

Corporate Rights under PromotersContracts

Personal Liability of Promoter on Pre-IncorporationContracts

General Powers of Corporation (Sec.

36)


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To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in

accordance with this Code; In case of stock corporations, to issue of sell stocks to subscribers and to sell treasury stocks in

accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;

To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal

with such real and personal property, including securities and bonds of other corporations, as thetransaction of the lawful business of the corporation may reasonably and necessarily require, subjectto the limitations prescribed by law and the Constitution;

( NOTE : There are two (2) general restrictions on the power of the corp. to acquire and hold

properties:

(1) that the property must be reasonable and necessarily required by the transaction of its lawful business, and

(2) that the power shall be subject to the limitations prescribed

by other special laws and the Constitution.)

To adopt any plan of merger or consolidation as provided in this Code; To make reasonable donations, including those for the public welfare of for hospital, charitable,

cultural, scientific, civic, or similar purposes:

Provided that: no corporation, domestic or foreign, shall give donations inaid of any political party or candidate or for purposes of partisan political activity;

To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and

employees; and To exercise such other powers as may be essential or necessary to carry out its purpose or purposes

as stated in its articles of incorporation.

Extension or shortening of the corporate term (Sec. 37) Increase or decrease of the capital stock (Sec. 38)

Incur, create or increase bonded indebtedness (Sec. 38)

Denial of the pre-emptive right (Sec. 39)

Sale or other disposition of substantially all its assets. (Sec. 40)

A sale is deemed to substantially cover all the corporate property and assets if such salerenders the corporation incapable of continuing the business or accomplishing the purposefor which it was incorporated.

Acquisition of its own shares. (Sec. 41) Investment in another corporation or business. (Sec. 42) Declaration of dividends. (Sec. 43)

Entering into management contracts. (Sec. 44)

Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range of implied powers, that itwould not be at all difficult to defend a corporate act versus an allegation that it is ultra vires.

Specific Powers of Corporation

Implied Powers


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A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond itsauthority; it will, in the absence of proof to the contrary, be presumed valid.

Blacks Law Dictionary Definition: Ultra vires acts are those acts beyond the scope of the powers of the corporation, as defined by its charter or laws

of state of incorporation. The term has a broad application and includes not only acts prohibited by the charter, but actswhich are in excess of powers granted and not prohibited, and generally applied either when a corporation has no power whatever to do an act, or when the corporation has the power but exercises it irregularly.

Q: What are the consequences of ultra vires acts? The corporation may be dissolved under a quo warrranto proceeding.

The Certificate of Registration may be suspended or revoked by the SEC.

Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on

both sides. Neither party can ask for specific performance, if the contract is executory on both sides.The contract, provided that it is not illegal, will be enforced, where one party has performed his part,and the other has not with the latter having benefited from the formers performance.

Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or

contract. If the act or contract has already been performed, a derivative suit for damages against thedirectors maybe filed, but their liability will depend on whether they acted in good faith and withreasonable diligence in entering into the contracts. When the suit against the injured party who hadno knowledge that the corporation was engaging in an act not included expressly or impliedly in itspurposes clause.

Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties are

prejudiced thereby, or unless the acts are illegal.

CONTROL AND MANAGEMENT

Q: What are the three levels of corporate control/power?

Board of directors or trustees- responsible for corporate policies and the general management of thebusiness and affairs of the corporation. Officers- execute the policies laid down by the board. Stockholders or members- have residual power over fundamental corporate changes like amendments of articles of incorporation.

Board of directors or trustees Q: What are the powers of the BOD? The BOD is responsible for corporate policies and the general management of the business affairs of thecorporation. (See Citibank v Chua)

(a) Authority ( Sec. 24) (b) Requirements

(i) Qualifying share ( Sec. 24)

The Ultra ViresDoctrine

Allocation of Power andControl

Who Exercises CorporatePowers


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(ii) Residence ( Sec. 24)

(iii) Nationality (iv) Disqualifications ( Sec. 27)

- conviction by final judgment of offense punishable > 6 yrs. prison- violation of Corporation code within 5 years prior to date of election or appointment

(c) How elected ( Sec. 24)

The formula for determining the number of shares needed to elect a given number of directors is as follows:

X = Y x N1 + 1N + 1

X = being the number of shares needed to elect a given number of directorsY = being the total number of shares present or represented at the meetingN1 = being the number of directors desired to be electedN = being the total number of directors to be elected

(d) How removed ( Sec. 28)

By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock, or by a vote of atleast 2/3 of the members entitled to vote, provided that such removal takes place at either a regular meeting of thecorporation or at a special meeting called for the purpose. In both cases, there must be previous notice to theSHs / members of the intention to propose such removal at the meeting.

Removal may be with or without cause. However, removal without cause may not be used to deprive minoritySHs or members of the right of representation to which they may be entitled under Sec. 24 of the Code.

(e) How vacancy filled ( Sec. 29)

If vacancy due to removal Must be filled by the SHs in a regular or special meetingor expiration of term: called for that purpose.

If "vacancy" due to increase Only by means of an election at a regular or special SHsin number of directors meeting duly called for the purpose, or in the same or trustees: meeting authorizing the increase of directors or trustees

if so stated in the notice of the meeting.

All other vacancies: May be filled by the vote of at least a majority of theremaining directors or trustees, if still constituting aquorum.

Note: Directors or trustees so elected to fill vacancies shall be elected only for the unexpired

term of their predecessors in office.

(f) How compensated ( Sec. 30)

If provided in by-laws: That compensation stated in the by-laws.

If not provided in by-laws: Directors shall not receive any compensation other thanreasonable per diems, as directors. However, compensation other than per diems may be granted to directors by a majority vote of the SHs at a regular or special stockholders' meeting.

Note: In no case shall the total yearly compensation of directors, as such directors, exceed 10%

of the net income before income tax of the corporation during the preceding year.

(g) Matters requiring Board of Directors' action (h) Liability ( See subsequent discussion under Duties of Directors and Controlling Stockholders.)

(i) In general (Sec. 31) (ii) Business judgment rule (iii) Dealings with the corporation (Sec. 32) (iv) Contracts between corporations with interlocking directors (Sec. 33) (v) Disloyalty (Sec. 34)


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(vi) Watered stocks (Sec. 65)

(i) Executive Committee ( Sec. 35)

See subsequent discussion under Board Committees.

Corporate officers and agents

(a) Minimum set of officers and their qualifications ( Sec. 25)

The minimum set of officers are:

(1) president (who shall be a director);(2) secretary (who shall be a resident and Filipino citizen); and(3) treasurer (who may or may not be a director)

The by-laws, however, may provide for other officers.

Any 2 or more positions may be held concurrently by the same person, except that no one shall act as (a)president and secretary, or (b) president and treasurer at the same time.

(b) Disqualifications ( Sec. 27)

- Conviction by final judgment of an offense punishable by imprisonment > 6 yrs.

- Violation of Corporation Code committed within 6 yrs. prior to the date of election or appointment

(c) Liability in general ( Sec. 31)

See discussion under Duties of Directors and Controlling Stockholders. .

(d) Dealings with the corporation ( Sec. 32)

- Generally voidable ( See discussion under Duties of Directors and Controlling Stockholders)

What is the doctrine of apparent authority?

The doctrine of apparent authority provides that a corporation will be liable to innocent

third persons for the acts of its agent where the representation was made by the agent in thecourse of business and acting within his/her general scope of authority even though, in theparticular case, the agent is secretly abusing his authority and attempting to perpetrate a fraudupon his/her principal or some other person for his/her own ultimate benefit.

Board Committees

The By-laws of the corporation may create an executive committee, composed of not less than 3members of the Board, to be appointed by the Board. The executive committee may act, by majority voteof all its members, on such specific matters within the competence of the board, as may be delegated to itin either (1) the By-laws, or (2) on a majority vote of the board. However, the following acts may never be delegated to an executive committee:

(1) approval of any action for which shareholders' approval is also required;(2) the filling of vacancies in the board ( refer to Sec. 29);(3) the amendment or repeal of by-laws or the adoption of new by-laws;(4) the amendment or repeal of any resolution of the board which by its

express terms is not so amendable or repealable; and(5) a distribution of cash dividends to the shareholders.

Stockholders or Members

In the following basic changes in the corporation, although action is usually initiated by the board of directors or trustees, their decision is not final, and approval of the stockholders or members would be necessary:

(1) Amendment of articles of incorporation;(2) Increase and decrease of capital stock;(3) Incurring, creating or increasing bonded indebtedness;(4) Sale, lease, mortgage or other disposition of substantially all corporate assets;(5) Investment of funds in another business or corporation or for a purpose other than the primary

purpose for which the corporation was organized;(6) Adoption, amendment and repeal of by-laws;


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(7) Merger and consolidation;(8) Dissolution of corporation

In all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be entitled to vote.

(Sec. 6)

Pledgors, mortgagors, executors, receivers, and administrators ( Sec. 55)

- Pledgors or mortgagors have the right to attend and vote at stockholders' meetings.

Exception: If the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporatebooks.

- Executors, administrators, receivers and other legal representatives duly appointedby the court may attend and vote in behalf of the stockholders or members without need of any writtenproxy.

Joint owners of stock (Sec. 56)

- Generally, consent of all co-owners shall be necessary.

Treasury shares (Sec. 57)

- Treasury shares have no voting right for as long as such shares remain in the Treasury.

Proxies (Sec. 58)

- Proxies must be in writing, signed by the stockholder/member, filed before the scheduled meetingwith the corporate secretary.

- Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended.No proxy shall be valid and effective for a period longer than five (5) years at any one time.

- Voting trusts may be voted by proxy unless the agreement provides otherwise. ( Sec. 59)

- It must be noted however that directors or trustees cannot vote by proxy at board meetings. ( Sec.25)

- Note that in Sec. 89, non-stock corporations are permitted to waive the right to use proxies via their

AOI or by-laws.

Voting trust (Sec. 59)

- Voting trusts must be in writing, notarized, specifying the terms and conditions thereof, certifiedcopy filed with SEC. Failure to comply with this requirement renders the agreement ineffective andunenforceable.

- As a general rule, voting trusts are valid for a period not exceeding 5 years at any one time, andautomatically expire at the end of the agreed period unless expressly renewed.

However , in the case of a voting trust specifically required as a condition in a loan agreement,said voting trust may exceed 5 years but shall automatically expire upon payment of the loan.

- Voting trusts may be voted by proxy unless the agreement provides otherwise. ( Sec. 59)

Pooling agreement

- Pooling agreements refer to agreements between 2 or more SHs to vote their shares the sameway. They are different from voting trust agreements in that they do not involve a transfer of stocksbut are merely private agreements between 2 or more SHs to vote in the same way.

- Sec. 100, par. 2 of the Corporation Code provides for pooling and voting agreements in closecorporations. Although there is no equivalent provision for widely-held corporations, Justice and Prof.Campos are of the opinion that SHs of widely-held corporations should not be precluded fromentering into voting agreements if these are otherwise valid and are not intended to commit anywrong or fraud on the other SHs that are not parties to the agreement.

VOTING


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Non-voting shares (Sec. 6)

- Preferred or redeemable shares.

ITF shares

And/or shares (Sec. 56)

- Any one of the joint owners can vote said shares or appoint a proxy thereof.

Proxy Device Sec 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders

or members. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduledmeeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for themeeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years atany one time. Character: agency relationship; revocable at will (by express revocation, by attending the meeting) and bydeath, except when coupled with interest or is a security.

Voting Trust

A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is separated from thevoting rights, the usual aim being to insure the retention of incumbent directors and remove from the stockholders the

power to change the management for the duration of the trust. Advantages

Accumulates power. Small shareholders are given the chance to have a representation in the BOD or at least aspokesperson during stockholders meetings.

Continuity of management. More effective than proxies because it is irrevocable. Ensures that the required number of stockholders is met thereby facilitating smooth corporate operations.

Disadvantages

Stockholders give up rights (voting and naked title) Susceptible to abuse Not used in widely held corporations

Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of the trustee:

Voting rights Proprietary rights/naked title/legal ownership Incidental rights such as to attend meetings, to be elected, to receive dividends)

Rights retained by the shareholder

Beneficial or equitable ownership Right to revoke VTA in case of breach by trustee Regain full ownership after the lapse of the period Right to an accounting by the trustee after the period of the VTA

How is a voting trust created?

(1) A VTA is prepared in writing, notarized, and filed with the corporation and SEC.

Devices AffectingControl


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(2) The certificates of stock covered by the VTA are cancelled and new ones (voting trust certificates) are issuedin the name of the trustee/s stating that they are issued pursuant to the VTA.

(3) The transfer is noted in the books of the corporation.

(4) The trustee/s execute and deliver to transferors the voting trust certificates. ( Note that these certificates shall

be transferable in the same manner and with the same effect as certificates of stock.)

(5) At the end of the period of the VTA ( or the full payment of the loan to which the VTA is made a condition, asthe case may be ), in the absence of any express renewal, the voting trust certificates as well as thecertificates of stock in the name of the trustee/s shall be deemed cancelled and new certificates of stock shallbe reissued in the name of the transferors.

Pooling and voting agreements

What are the advantages/disadvantages of a pooling agreement?

Advantages:

1. there is a commitment to agree to a certain manner of voting2. minority stockholders are able to control the corpo

Disadvantages: 1. possibility of disagreement thus the need for an arbitration clause2. there is no compelling reason for stockholders to act together

What rights does a shareholder give up/ retain with a pooling agreement? Shareholders retain their right to vote because the parties are not constituted as agents. However, the willof the parties may not be carried out due to non-compliance with the pooling agreement.

Cumulative voting (see sec. 24) Methods of Voting

1. Straight voting: If A has 100 shares and there are 5 directors to be elected, he shallmultiply 100 by five (equals 500) and distribute equally among the five candidates withoutpreference

2. Cumulative voting : If A has 100 shares and there are 5 directors to be elected, he shall(one candidate) multiply 100 by five (equals 500) and he can vote the 500 for only one

candidate.

3. Cumulative voting: If A has 100 shares, there are 5 directors to be elected, and he only(multiple candidates) wants to vote for two nominees, he can divide 500 votes between the

two, giving each one 250 votes.

How to compute votes needed to get a director elected by cumulative voting: 1. Freys formula (minimum no. of votes to elect one director)

X= # of shares requiredY= # of outstanding votesZ= # of directors to be elected

X = _ Y__ + 1

Z + 1 2. Baker & Carys formula (minimum no. of votes needed to elect multiple directors)

X= # of shares requiredY= # of shares represented at meetingD= # of directors the minority wants to electD= total # of directors to be elected

X = Y x D + 1

D' + 1 NOTES


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Levels playing field or at least ensures that the minority can elect at least one representative to the board of directors (BOD)

Cannot of itself give the minority control of corporate affairs, but may affect and limit the extent of the

majoritys control By-laws cannot provide against cumulative voting since this right is mandated by law in Section 24.

Classification of shares (see sec. 6) Type of shares

1. Common : share with right to vote 2. Preferred : share has preference over dividends and distribution of assets upon liquidation;

right to vote may be restricted (Sec. 6)

3. Redeemable : share is purchased or taken up by the corporation upon the expiration of a fixedperiod (Sec. 8); right to vote may be restricted (Sec. 6)

NOTES

Stock can also be both preferred and redeemable. Even though the right to vote of preferred and redeemable shares may be restricted, owners of these shares

can still vote on certain matter provided for in Sec. 6.

SEC requires that where no dividends are declared for three consecutive years, in spite of available profits,preferred stocks will be given the right to vote until dividends are declared.

Restriction on transfer of shares

Peculiar to close corporations. Most common

finals commercial law

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