2022 PRE-WEEK Handout No.

COMMERCIAL LAW

PRIVATE CORPORATIONS

Kinds of Corporations

As to the existence of stocks:

a. Stock Corporation: A corporation which has capital stock divided into shares and is
authorized to distribute to holders of such shares, dividends, or allotments of the surplus
profits on the basis of the shares held. (Sec. 3, RCC)
b. Non-Stock Corporation: One where no part of its income is distributable as dividends to
its members, trustees, or officers. (Sec. 86, RCC)

As to the manner of creation:

a. Corporation Created by Special Law: A corporation directly created by Congress through
a special law. Such corporation must be a government-owned or controlled corporation.
(Art. XII, Sec. 16, Constitution)
b. Corporation Created Under a General Law: A corporation created under the Revised
Corporation Code of the Philippines, the Corporation Code of the Philippines or the Old
Corporation Law.
c. Corporations by Prescription: A corporation that was not formally organized as such but
has been duly recognized by immemorial usage as a corporation, with rights and duties
enforceable under the law.

As to corporate existence:
a. De jure Corporation: A corporation created in strict or substantial compliance with the
mandatory requirements for incorporation, and the right of which to exist as a
corporation cannot be successfully attacked or questioned by any party (including the
State) even in a direct proceeding for that purpose by the State.
b. De facto Corporation: An association of persons existing under a valid law under which it
may be incorporated after having attempted in good faith to incorporate, and assuming
corporate powers. (Seventh Day Adventist Conference Church of Southern Philippines, Inc.
v. Northeastern Mindanao Mission of Seventh Day Adventists, Inc., G.R. No. 150416, July
21, 2006)

As to place of incorporation:
a. Domestic Corporation: A corporation formed, organized or existing under Philippine
laws. (Sec. 3, Foreign Investments Act).
b. Foreign Corporation: A corporation formed, organized or existing under laws other than
those of the Philippines and whose laws allow Filipino citizens and corporations to do
business in its own country or state (Sec. 14, RCC).

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As to relationship and control:

a. Holding Corporation (Parent Corporation) – a corporation which owns or is organized to
own a substantial portion of another company's voting shares of stock enough to
control or influence the latter's management, policies or affairs thru election of the
latter's board of directors.In other words, a "holding company" is organized and is
basically conducting its business by investing substantially in the equity securities of
another company for the purposes of controlling their policies (as opposed to directly
engaging in operating activities) and "holding" them in a conglomerate or umbrella
structure along with other subsidiaries. (Maricalum Mining vs. Florentino, G.R. No.
221813, July 23, 2018)
b. Affiliate Corporation – It is one related to another by owning or being owned by common
management or by a long-term lease of its properties or other control device. It may be
the controlled or controlling corporation, or under common control.
c. Subsidiary Corporation – It is one which is so related to another corporation that the
majority of its directors can be elected either directly or indirectly by such other
corporation.

As to the number of corporators:

a. Corporation Aggregate: A corporation consisting of more than one person or member. It
has been defined as an artificial body of men, composed of diverse individuals, the
ligaments of which body, the franchises and liberties bestowed upon it, bind and unite all
into one, and consists the whole frame and essence of the corporation.
b. Corporation Sole: A corporation consisting of only one person or member, 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 (Sec. 108, RCC).
c. One Person Corporation: A corporation with a single stockholder, who may be a natural
person, trust, or an estate (Sec. 116, RCC)

As to functions:
a. Public Corporation: A corporation organized for the government of a portion of State for
the purpose of serving general good and welfare.
b. Private Corporation: A corporation formed for some private purpose, benefit, aim or end.

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Other types:
a. Close Corporation: One whose AOI provides that:

All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held
of record by not more than a specified number of persons, not exceeding 20;

All the issued stock of all classes shall be subject to one (1) or more specified restrictions
on transfer permitted by Title XII; and

The corporation shall not list in any stock exchange or make any public offering of any of
its stock of any class (Sec. 95, RCC).

b. Ecclesiastical Corporation: Corporations composing entirely of spiritual persons and are

established for the furtherance of religion and for perpetuating the rights of a church.
c. Lay Corporation: All corporations other than ecclesiastical.
d. Eleemosynary Corporation or Charitable Corporation: A corporation created not for
private gain or profit but for charitable purposes for the administration of charitable trust.

Government-owner or-controlled corporation

A government-owned or -controlled corporation is one that is: (i) established by original charter
or through the general corporation law; (ii) vested with functions relating to public need whether
governmental or proprietary in nature; and (iii) directly owned by the government or by its
instrumentality, or where the government owns a majority of the outstanding capital stock.
Possessing all three (3) attributes is necessary to be classified as a government-owned or -
controlled corporation.

There is no doubt that GSIS Family Bank is a government-owned or -controlled corporation since
99.55% of its outstanding capital stock is owned and controlled by the Government Service
Insurance System. (GSIS Family Bank Employees Union vs. Villanueva, 891 SCRA 206, G.R. No.
210773 January 23, 2019)

SEC registration is needed for de facto existence

Jurisprudence settled that "the filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a de facto corporation." In fine, it is
the act of registration with SEC through the issuance of a certificate of incorporation that marks
the beginning of an entity's corporate existence. (The Missionary Sisters of Our Lady of Fatima et
al. vs Amando V. Alzona, et al., August 6, 2018, G.R. No. 224307)

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Ms. X donated, via a handwritten letter, a parcel of land supposedly to P Missionary in

consideration of all the help and assistance she received from the P Missionary when she was
ill. At that the time, P Missionary was not yet incorporated with the SEC. But the mother
superior of P Missionary accepted the donation. A year later, P Missionary was formally
registered with the SEC. Ms. X then executed a deed of donation to convey the same property
to P Missionary. When P Missionary was already in the process of transferring the title of the
donated property to it, it found out that the brother of Ms. X had his claim on the property
annotated on its title. The brother wants the property reconveyed to their family insisting that
the donation to P Missionary is void due to lack of legal personality when it was initially done.
Decide.

The donation must be upheld under the rule on corporation by estoppel. The doctrine of
corporation by estoppel is founded on principles of equity and is designed to prevent injustice
and unfairness. It applies when a non-existent corporation enters into contracts or dealings with
third persons.

The person who has contracted or otherwise dealt with the non-existent corporation is estopped
to deny the latter's legal existence in any action leading out of or involving such contract or
dealing.

Here, Ms. X dealt with P Missionary as if it were a corporation. This is evident from the fact that
Ms. X executed two (2) documents conveying her property in favor of P Missionary – first,
via handwritten letter, and second, through a Deed; the latter having been executed the day
after P Missionary filed its application for registration with the SEC.

Precisely, the existence of P Missionary as a corporate entity is upheld in this case for the purpose
of validating the Deed to ensure that the primary objective for which the donation was intended
is achieved, that is, to convey the property for the purpose of aiding P Missionary in the pursuit
of its charitable objectives. Further, apart from the foregoing, the subsequent act by Ms. X of re-
conveying the property in favor of P Missionary is a ratification by conduct of the otherwise
defective donation. (The Missionary Sisters of Our Lady of Fatima et al. vs Amando V. Alzona, et
al., August 6, 2018, G.R. No. 224307 )

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COMMERCIAL LAW

ARTICLES OF INCORPORATION AND BY-LAWS

Nature and Function of the Articles of Incorporation

Deemed as the constitution of the corporation, contents of the articles of Incorporation are
binding not only on the corporation but also on its shareholders. (Lanuza vs. Court of Appeals,
G.R. No. 131394, March 28, 2005) Jurisprudence provides for the articles’ three (3)-fold nature:
1. A contract between the State and the corporation;
2. A contract between the corporation and its stockholders; and
3. A contract between the stockholders inter se. (Government of Philippine Islands vs.
Manila Railroad Company, G.R. No. L-30646, January 30, 1929)

Contents of the Articles of Incorporation

All corporations shall substantially contain the following matters, except as otherwise prescribed
by laws:

1. Name of the corporation;

2. Specific purpose/s;
3. Principal office of the corporation;
4. Corporate term, if the corporation has not elected perpetual existence;
5. Incorporators’ personal details;
6. Number of directors or trustees and their personal details;
7. For stock corporations, the pertinent details on the authorized capital stock;
8. For nonstock corporations, the pertinent details on its capital and contributors; and
9. Such other matters consistent with law.

An arbitration agreement may be provided in the articles for the resolution of any intra-corporate
controversies, including the implementation of the articles and by-laws. (Secs. 13 & 181, RCC)

Commencement of Juridical Existence

A private corporation organized under the Code commences its corporate existence and juridical
personality from the date the SEC issues the certificate of incorporation under its official seal and
thereupon the incorporators, stockholders/members and their successor shall constitute a body
corporate under the name stated in the Articles for the period of time mentioned therein, unless
said period is extended or the corporation is sooner dissolved in accordance with law. (Sec. 18,
RCC)

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Corporate Term

Under B.P. Blg. 68, the corporation’s existence, as stated in its articles of incorporation, should
not exceed fifty (50) years. However, under the Revised Corporation Code, a corporation shall
have perpetual existence unless its articles of incorporation provide otherwise.

Corporations with certificates of incorporation issued prior to the effectivity of the Revised
Corporation Code, and which continue to exist, shall have perpetual existence, unless the
corporation, upon a vote of its stockholders representing a majority of its outstanding capital
stock, notifies the SEC that it elects to retain its specific corporate term pursuant to its articles.
Note, however, that any change in the corporate term under Section 11 of the Revised
Corporation Code is without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of the Code.

A corporate term for a specific period may be extended or shortened by amending its articles.
No extension may, however, be made earlier than 3 years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined
by the SEC. The extension of the corporate term shall take effect only on the day following the
original or subsequent expiry date(s).

A corporation whose term has expired may apply for a revival of its corporate existence, together
with all the rights and privileges under its certificate of incorporation and subject to all of its
duties, debts, and liabilities existing prior to its revival. Upon approval by the SEC, the corporation
shall be deemed revived and a certificate of revival of corporate existence shall be issued, giving
it perpetual existence, unless its application for revival provides otherwise. (Sec. 11, RCC)

Nature and Functions of By-Laws

By-laws are the relatively permanent and continuing rules of action adopted by the corporation
for its own government and that of the individuals composing it and having the direction,
management and control of its affairs, in whole or in part, in the management and control of its
affairs and activities. (China Banking Corporation vs. Court of Appeals, G.R. No. 117604, March
26, 1997)

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Requisites of Valid By-Laws

For the by-laws to be valid, the following requisites must concur:

1. Required votes for its adoption or amendment is mustered;
2. Signed by all of the incorporators or the stockholders or members voting for them, as the
case may be;
3. Favorable recommendation of the appropriate government agency, if necessary;
4. SEC Certification that the by-laws are in accordance with the Code; and
5. In consonance with the Revised Corporation Code, the articles of incorporation, other
laws, rules and regulation. (Secs. 45 & 47, RCC)

Binding Effect

The rule is that generally third parties are not affected by the by-laws. Nonetheless, in order to
be bound, a third party must have acquired knowledge of the pertinent by-laws at the time the
transaction or agreement between said third person and the shareholder was entered into.
(China Banking Corporation vs. Court of Appeals, G.R. No. 117604, March 26, 1997)

Distinguished from Articles of Incorporation

ARTICLES OF INCORPORATION BY-LAWS

As to Corporate Existence
Condition precedent in the acquisition of Not essential to corporate existence. But its
corporate existence. absence serves as a ground for the revocation of
the franchise.
As to Purpose
Constitutes the charter or fundamental Rules and regulations adopted by the corporation
law of the corporation. for its internal governance.
As to Amendment
Amended by May by amended by a majority of the Board and at
1. Majority of the Board; and least majority of outstanding capital stock or
2. Written Assent of stockholders majority of members.
representing 2/3 of outstanding
capital stock or 2/3 of members

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ARTICLES OF INCORPORATION BY-LAWS

(REVISED CORPORATION CODE, Sec. When duly delegated, may be amended by a
15). majority vote of the Board (REVISED CORPORATION
CODE, Sec. 47).

As to Delegation of Power to Amend

Cannot be delegated Can be delegated to the Board by a vote of 2/3 of
the outstanding capital stock or 2/3 of members in
a meeting called for such purpose (Sec. 47, RCC).

The delegation may be revoked by a vote of the

majority of the outstanding capital stock or
majority of members in a meeting called for such
purpose.

CORPORATE POWERS, HOW EXERCISED

A. By the Shareholders

One of the rights of a stockholder is the right to participate in the control or management of the
corporation. This is exercised through his vote in the election of directors because it is the board
of directors that controls or manages the corporation. In the absence of provisions in the articles
of incorporation denying voting rights to preferred shares, preferred shares have the same voting
rights as common shares. However, preferred shareholders are often excluded from any control,
that is, deprived of the right to vote in the election of directors and on other matters, on the
theory that the preferred shareholders are merely investors in the corporation for income in the
same manner as bondholders. (Roy III vs. Herbosa, G.R. No. 207246, November 22, 2016; Gamboa
vs. Teves, G.R. No. 176579, June 28, 2011)

B. By the Board of Directors

The Board is the collegial body, which has control over the business and affairs of a company. It
is empowered to exercise the powers of a corporation. Unless otherwise provided in the Code,
the Board shall exercise the corporate powers, conduct all business, and control all properties of
the corporation. (Sec. 22, RCC)

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Thus, in a case, the Court held that being a stock corporation, its powers are vested in its duly
elected Board of Directors, the body that (1) exercises all powers provided for under the
Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all
property of the corporation. Thus, a MOA that allows a third party to control and manage a
company, without the board’s imprimatur is contrary to law. (Tom vs. Rodriguez, G.R. No.
215764, July 6, 2015)

C. By the Officers

Immediately after their election, the directors of a corporation must formally organize and elect:
(a) a president, who must be a director; (b) a treasurer, who must be a resident; (c) a secretary,
who must be a citizen and resident of the Philippines; and (d) such other officers as may be
provided in the by-laws. If the corporation is vested with public interest, the Board shall also elect
a compliance officer. The same person may hold two (2) or more positions concurrently, except
that no one shall act as president and secretary or as president and treasurer at the same time,
unless otherwise allowed in the Code. The officers shall manage the corporation and perform
such duties as may be provided in the by-laws and/ or as resolved by the Board. (Sec. 24, RCC)

It may be clearly gleaned from the explicit provisions of the Code that a president must
necessarily be a director; otherwise, he cannot be elected for such position. Thus, in a case,
Jaminola, being a non-member, could not be elected as a director. Consequently, his election as
president was null and void. (Lim vs. Moldex Land, Inc., G.R. No. 206038, January 25, 2017)

BOARD OF DIRECTORS

Board Composition

Under Section 13 of the Revised Corporation Code, the number of directors shall not be more
than fifteen (15), hence under the Revised Corporation Code, an ordinary stock corporation may
now have only two (2) board members.

For One Person and Religious Sole corporations, which do not have a board, the sole
stockholder/trustee performs the duties of the board.

Term of Board Members

Directors shall be elected for a term of one (1) year from among the holders of stocks registered
in the corporation's book. Each director shall hold office until the successor is elected and

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qualified. A director who ceases to own at least one (1) share of stock or a trustee who ceases to
be a member of the corporation shall cease to be such (Sec. 22, RCC).

Board Disqualifications

A person shall be disqualified from being a director, trustee, or officer of any corporation if, within
five (5) years prior to the election or appointment as such, the person was:
(a) Convicted by final judgment:
1. Of an offense punishable by imprisonment for a period exceeding six (6) years;
2. For violating the Code; and
3. For violating Republic Act No. 8799, otherwise known as “The Securities Regulation
Code”;
(b) Found administratively liable for any offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in paragraphs (a) and (b) above. (Par. 1, Sec.
26, RCC)

Independent Directors

Under the Revised Corporation Code, corporations vested with public interest shall have
independent directors or trustees constituting at least twenty percent (20%) of such board. Such
corporations are listed under Section 22 thereof, to wit:

a. Corporations covered by Section 17.2 of the Securities Regulation Code;

i. Those whose securities are registered with the SEC; and
ii. Those listed with an exchange or with assets of at least P 50 million and having
two hundred (200) or more holders of shares, each holding at least one hundred
(100) shares of a class of its equity shares;
b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service
business, preneed, trust, and insurance companies, and other financial intermediaries;
and
c. Other corporation engaged in business vested with public interest similar to the above,
as may be determined by the SEC, after taking into account relevant factors which are
germane to the objective and purpose of requiring the election of an independent
director, such as the extent of minority ownership, type of financial products or securities
issues or offered to investors, public interest involved in the nature of business
operations, and other analogous factors. (Sec. 22, RCC)

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Who is an independent director?

An independent director or trustee is a person, who apart from shareholdings and fees received
from the corporation, is independent of management and free from any business or other
relationship which could or could reasonably be perceived to materially interfere with the
exercise of independent judgment in carrying out the responsibilities as a director or trustee.
(Sec. 22, RCC)

What is the rule on board compensation?

In the absence of any provision in the by-laws fixing their compensation, directors or trustees
shall not receive any compensation in their capacity as such, except for reasonable per diems.
The stockholders representing at least a majority of the outstanding capital stock or majority of
the members may grant them with compensation and approve the amount thereof at a regular
or special meeting. (Par. 1, Sec. 29, RCC)

In no case shall the yearly compensation of directors exceed ten percent (10%) of the net income
before income tax of the corporation during the preceding year. (Par. 2, Sec. 29, RCC)

Directors or trustees shall not participate in the determination of their own per diems or
compensation. (Par. 3, Sec. 29, RCC)

For corporations vested with public interest, an annual report of the total compensation of each
of their directors or trustees shall be submitted to the stockholders or members and the SEC.
(Par. 4, Sec. 29, RCC)

Doctrine of Centralized Management

Under the Doctrine, all business of the corporation shall be conducted and all its properties shall
be controlled and held by the Board. A corporation can act only through its trustees and officers.
Acts of management pertain to the board and those of ownership to the members. (Tan v. Sycip,
G.R. No. 153468, August 17, 2006)

Exceptions:
1. In case an executive or special committees is duly authorized in the by-laws (Sec. 34, RCC);
2. In case of a contracted manager which may be an individual, a partnership or another
corporation; and
3. In case of close corporations, the stockholders may directly manage the business of the
corporation if the articles of incorporation so provide.

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Business Judgment Rule

Questions of policy or of management are left solely to the honest decisions of officers and
directors of a corporation, and so long as they act in good faith, their orders are not reviewable
by the courts. (Saber vs. Court of Appeals, G.R. No. 132981, August 31, 2004)

BOARD MEETINGS

Regular or Special

Regular meetings of the Board of every corporation shall be held monthly, unless the by-laws
provide otherwise. Special meetings of the Board may be held at any time upon the call of the
president or as provided in the by-laws.

Meetings of the directors or trustees of corporations may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating
the date, time and place of the meeting must be sent to every director or trustee at least two (2)
days prior to the scheduled meeting, unless a longer time is provided in the by-laws. A director
or trustee may waive this requirement, either expressly or impliedly.

Electronic Meetings

Directors or trustees who cannot physically attend or vote at board meetings can participate and
vote through remote communication such as videoconferencing, teleconferencing, or other
alternate modes of communication that allow them reasonable opportunities to participate.
They cannot attend or vote by proxy at board meetings.

A director or trustee who has a potential interest in any related party transaction must recuse
from voting on the approval of the related party transaction without prejudice to compliance
with the requirements of Section 31 of the Code. (Sec. 52, RCC)

Quorum

Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of
the directors or trustees as stated in the articles shall constitute a quorum to transact corporate
business, and every decision reached by at least a majority of the directors or trustees
constituting a quorum, except for the election of officers shall require the vote of a majority of
all the members of the board, shall be valid as a corporate act. (Sec. 52, RCC)

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The board of directors may validly delegate its functions and powers to its officers or agents.

As a corporation, Ricarcen exercises its powers and conducts its business through its board of
directors, as provided for by Section 23 of the Corporation Code: Section 23. The board of
directors or trustees. Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property
of such corporations controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors are elected and qualified.

However, the board of directors may validly delegate its functions and powers to its officers or
agents. The authority to bind the corporation is derived from law, its corporate bylaws, or directly
from the board of directors, “either expressly or impliedly by habit, custom or acquiescence in
the general course of business.” (Calubad vs. Ricarcen Development Corporation, 838 SCRA 303,
G.R. No. 202364 August 30, 2017)

Executive and Special Committees

The Board of Directors or Trustees may create an executive committee and such other special
committees of temporary or permanent nature, if the by-laws so provide.

An executive committee shall be composed of at least three (3) members who may act by
majority vote of all its members, on such specific matter within the competence of the board, as
may be delegated to it in the by-laws or by majority vote of the Board.

The following, however, are outside the competence of executive committees:

a. approval of any action for which stockholders’ approval is also required;
b. filling of vacancies in the board;
c. amendment or repeal of by-laws or the adoptions of new by-laws;
d. amendment or repeal of any resolution of the Board which by its express terms is not
amendable or repealable; and
e. distribution of cash dividends to the stockholders. (Sec. 34, RCC)

Emergency Board

When the vacancy prevents the remaining directors from constituting a quorum and emergency
action is required to prevent grave, substantial, and irreparable loss or damage to the
corporation, the vacancy may be filled from among the officers of the corporation by unanimous
vote of the remaining directors or trustees. The action by the designated director or trustee shall

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be limited to the emergency action necessary, and the term shall cease within a reasonable time
from the termination of the emergency or upon election of the replacement director or trustee,
whichever comes earlier. (Sec. 28, RCC)

Board Liability

A director, trustee or officer of a corporation can be made solidarily liable in the following
instances:
1. He willfully or knowingly voted for or assented to a patently unlawful corporate act;
2. He was guilty of gross negligence or bad faith in directing corporate affairs;
3. He acquired personal or pecuniary interest in conflict with his duties as director or trustee;
4. He consented to the issuance of a watered stock or failed to file a written objection
despite knowledge thereof;
5. He agrees to hold himself personally and solidarily liable with the corporation; and
6. He is made, by specific provision of law, to personally answer for his corporate action.
(Lanuza v. BF Corporation, G.R. No. 174938, October 1, 2014; Solidbank Corporation vs.
Mindanao Ferroalloy Corporation, G.R. No. 153535, July 28, 2005; Republic vs. Institute
for Social Concern, G.R. No. 156306, January 28, 2005)

A member of the Board of Directors of a corporation, cannot, by mere reason of such

membership, be held liable for the corporation’s probable violation of B.P. Blg. 33.

As clearly enunciated in Ty vs. NBI Supervising Agent De Jemil, 638 SCRA 671 (2010), a member
of the Board of Directors of a corporation, cannot, by mere reason of such membership, be held
liable for the corporation’s probable violation of B.P. Blg. 33. If one is not the President, General
Manager or Managing Partner, it is imperative that it first be shown that he/she falls under the
catch-all “such other officer charged with the management of the business affairs,” before he/
she can be prosecuted. (Federated LPG Dealers Association vs. Del Rosario, G.R. No. 202639,
November 9, 2016)

Mere membership in the Board or being the President per se does not mean knowledge,
approval, and participation in the act alleged as criminal. There must be a showing of active
participation, not simply a constructive one. (ABS-CBN Corporation vs. Gozon, G.R. No. 195956,
March 11, 2015)

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Patently Unlawful Act

For a wrongdoing to make a director personally liable for debts of the corporation, the
wrongdoing approved or assented to by the director must be a patently unlawful act. Mere
failure to comply with the notice requirement of labor laws on company closure or dismissal of
employees does not amount to a patently unlawful act. Patently unlawful acts are those declared
unlawful by law which imposes penalties for commission of such unlawful acts. There must be a
law declaring the act unlawful and penalizing the act. (Carag vs. National Labor Relations
Commission, G.R. No. 147590, April 2, 2007)

Self-Dealing Contracts

A contract of the corporation with one (1) or more of its directors, trustees or officers or their
spouses and relatives within the fourth civil degree of consanguinity or affinity is voidable, at the
option of such corporation, unless all the following conditions are present:
a. 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;
b. The vote of such director or trustee was not necessary for the approval of the contract;
c. The contract is fair and reasonable under the circumstances.
d. In case of corporations vested with public interest, material contracts are approved by at
least two-thirds (2/3) of the entire membership of the board, with at least a majority of
the independent directors voting to approve the material contract; and
e. In case of an officer, the contract has been previously authorized by the board of
directors.

Where any of the first three (3) conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least
2/3 of the members in a meeting called for the purpose. Full disclosure of the adverse interest of
the directors or trustees involved shall be made at such meeting and the contract is fair and
reasonable under the circumstances. (Sec. 31, RCC)

Interlocking Directors

Except in cases of fraud, and provided that the contract is fair and reasonable under the
circumstances, a contract between two (2) or more corporations having interlocking directors
shall not be invalidated on that ground alone. If the interest of the interlocking director in one
(1) corporation is substantial and the interest in the other corporation or corporations is merely

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nominal, the contract shall be subject to the provisions on self-dealing contracts insofar as the
latter corporation or corporations are concerned.

Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors. (Sec. 32, RCC)

The Court, in Malixi vs. Mexical Philippines, G.R. No. 205061, June 8, 2016, held that the existence
of interlocking directors, corporate officers, and shareholders is not enough justification to
disregard the separate corporate personalities. To pierce the veil of corporate fiction, there
should be clear and convincing proof that fraud, illegality or inequity has been committed against
third persons. For while respondents’ act of not issuing employment contract and ID may be an
indication of the proof required, however, this, by itself, is not sufficient evidence to pierce the
corporate veil between Mexicali and Calexico.

Doctrine of Corporate Opportunity

Where a director, by virtue of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must
account to the latter for all such profits by refunding the same, unless his act has been ratified by
a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding
capital stock. This provision shall be applicable, notwithstanding the fact that the director risked
his own funds in the venture. (Sec. 33, RCC)

POWERS/PREROGATIVES OF SHAREHOLDERS/MEMBERS

Doctrine of Equality of Shares

Each share shall be equal in all respects to every other share, except as otherwise provided in the
articles and in the certificate of stock. (Sec. 6, RCC)

Participation in Management

Stockholders are the holders of shares in a corporation with interest over the management,
income, and assets of the corporation. They participate in controlling the affairs of the
corporation as they elect the directors who will actually govern the corporation and vote on
important matters that are reserved on them by the Revised Corporation Code.

One of the rights of a stockholder is the right to participate in the control or management of the
corporation. This is exercised through his vote in the election of directors because it is the board

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of directors that controls or manages the corporation. In the absence of provisions in the articles
of incorporation denying voting rights to preferred shares, preferred shares have the same voting
rights as common shares. However, preferred shareholders are often excluded from any control,
that is, deprived of the right to vote in the election of directors and on other matters, on the
theory that the preferred shareholders are merely investors in the corporation for income in the
same manner as bondholders. (Roy III vs. Herbosa, G.R. No. 207246, November 22, 2016; Gamboa
vs. Teves, G.R. No. 176579, June 28, 2011)

Elections

At all elections of directors or trustees, there must be present, either in person or through a
representative authorized to act by written proxy, the owners of majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote. Under
the Revised Corporation Code, the stockholders or members may so vote through remote
communication or in absentia, when authorized in the by-laws or by a majority of the Board. For
corporations vested with public interest, however, the enabling provision in the by-laws or the
Board authorization is not required by express provision of law. (Sec. 23, RCC)

A stockholder or member who participates through remote communication or in absentia, shall

be deemed present for purposes of quorum.

The election must be by ballot if requested by any voting stockholder or member.

In stock corporations, stockholders entitled to vote shall have the right to vote the number of
shares of stock standing in their own names in the stock books of the corporation at the time
fixed in the by-laws or where the by-laws are silent, at the time of the election. The said
stockholder may: (a) vote such number of shares for as many persons as there are directors to
be elected; (b) cumulate said shares and give one (1) candidate as many votes as the number of
directors to be elected multiplies by the number of shares owned; or (c) distribute them on the
same principle among as many candidates as may be seen fit. The total number of votes cast,
however, shall not exceed the number of shares owned by the stockholder as shown in the books
of the corporation multiplied by the whole number of directors to be elected. No delinquent
stock shall be voted.

In non-stock corporations, members may cast as many votes as there trustees to be elected but
may not cast more than one (1) vote for one (1) candidate, unless the articles of incorporation or
the by-laws otherwise provides.

Nominees for directors or trustees receiving the highest number of votes shall be declared
elected.

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Removal of Board Members

A director or trustee may be removed by a vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock, or in a non-stock corporation, by a vote of at least
two-thirds (2/3) of its members entitled to vote in a meeting called for such purpose.

Under the new law, the SEC shall, motu proprio or upon verified complaint, and after due notice
and hearing, order the removal of a director or trustee elected despite the disqualification, or
whose disqualification arose or is discovered subsequent to an election. The removal of a
disqualified director or trustee shall be without prejudice to other sanction that the SEC may
impose on the Board who, with knowledge of the disqualification, failed to remove such director
or trustee. (Sec. 27, RCC)

Filing of Vacancies

Vacancies in the Board of Directors or Trustees may be brought by various causes. If caused by:
(1) Term expiration, the election therefor shall be held no later than the day of such
expiration at a meeting called for that purpose.
(2) Removal, by the stockholders or members, the election may be held on the same day of
the meeting authorizing the removal and such fact must be so stated in the agenda and
notice of said meeting.

In all other cases, the vacancy may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said vacancy must be filled by the
stockholders or members. The election therefor must be held in a regular or special meeting
called for that purpose no later than forty-five (45) days from the time the vacancy arose. The
director or trustee so elected shall be referred to as a replacement director or trustee and shall
serve only for the unexpired term of the predecessor in office.

Proxy, Remote Communication, and In Absentia

Stockholders and members may vote in person or by proxy in all meetings of stockholders or
members.

A stockholder or member who participates through remote communication or in absentia shall

be deemed present for purposes of quorum. When so authorized in the by-laws or by a majority
of the Board, the stockholders or members of corporations may also vote through remote
communication or in absentia. Their votes must, however, be received before the corporation
finishes the tally of votes. Note that for corporations vested with public interest, stockholders or

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members may vote through remote communication or in absentia at all elections of directors or
trustees despite the absence of provisions therefor in the by-laws. (Secs. 23 & 57, RCC)

Proxies shall be in writing, signed and filed, by the stockholder or member, in any form authorized
in the by-laws and received by the corporate secretary within a reasonable time before the
scheduled meeting. Unless otherwise provided in the proxy form, 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. (Sec. 57, RCC)

Note that executors, administrators, receivers, and other legal representatives duly appointed by
the court may attend and vote in behalf of the stockholders or members without need of any
written proxy. (Sec. 54, RCC)

Voting Trust

One or more stockholders of a stock corporation may create a voting trust for the purpose of
conferring upon a trustee/s the right to vote and other rights pertaining to the shares for a period
not exceeding five (5) years at any time. However, for a voting trust specifically required as a
condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but
shall automatically expire upon fully payment of the loan. A voting trust agreement must be in
writing and notarized, and shall specify the terms and conditions thereof.

No voting trust agreement shall be entered into for purposes of circumventing the laws against
anti-competitive agreements, abuse of dominant position, anti-competitive mergers and
acquisitions, violation of nationality, and capital requirements, or for the perpetration of fraud.
(Sec. 58, RCC)

Cases When Stockholders’ Action is Required

i. By Majority Vote
a.Approval of management contract, if any of the instances under Section 43 is absent
b.Adoption, amendment or repeal of by-laws
c.Fixing the issued value of price of shares
d.Revocation of the power of the board to amend the by-laws, which was previously
delegated by the stockholders
e. Grant of compensation to Board members

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ii. By Two-Thirds Vote

a. Amendment of the Articles of Incorporation (includes extension or shortening of the
corporate term and increase or decrease of capital stock and incurrence, creation or
increase bonded indebtedness) (Secs. 15, 36-37, RCC)
b. Denial of pre-emptive right (Sec. 38, RCC);
c. Sale, disposition, lease, encumbrance of all or substantially all of corporate assets (Sec.
39, RCC);
d. Investment in another corporation, business other than primary purpose (Sec. 41, RCC);
e. Declaration of stock dividends (Sec. 42, RCC);
f. Delegation of the power to the Board to amend the By-laws;
g. Merger or consolidation of the corporation with another corporation (Sec. 76, RCC);

iii. Acts that only the stockholders can decide

a. Election of board members
b. Removal of board members
c. Grant of board compensation
d. Ratification of self-dealing contracts and those emanating from corporate opportunity
cases
e. Delegation of the power to amend By-laws to the Board (and revocation of such power)

General Rule: Only voting shares can vote; Exceptions

The vote required under the Code to approve a particular corporate act shall be deemed to refer
only to stocks with voting rights, except in the following instances where holders of non-voting
shares shall, nevertheless, be entitled to vote:

a. Amendment of the articles of incorporation;

b. Adoption and amendment of by-laws;
c. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of
the corporate property;
d. Incurring, creating or increasing bonded indebtedness;
e. Increase or decrease of authorized capital stock;
f. Merger or consolidation of the corporation with another corporation or other
corporations;
g. Investment of corporate funds in another corporation or business in accordance with the
Code and
h. Dissolution of the corporation (Sec. 6, RCC)

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In the following instances, voting rights may not be available:

a. Where the articles of incorporation provides for classification of shares, non-voting shares
are not entitled to vote except as provided for in Section 6 (Sec. 6, RCC);
b. Preferred or redeemable shares may be deprived of the right to vote unless otherwise
provided in the Code (Sec. 6, RCC);
c. Fractional shares of stock cannot vote as they do not constitute at least one full share;
d. Treasury shares have no voting rights as long as they remain in the treasury (Sec. 56, RCC);
e. Holders of stock declared delinquent by the Board for unpaid subscription are not entitled
to vote or a representation at any stockholder’s meeting (Secs. 25 & 70, RCC);
f. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer
book of the corporation (Sec. 60, RCC);
g. A stockholder is still entitled to vote even if the shares are mortgaged or pledged unless
he authorizes the creditor in writing to vote the shares (Sec. 54, RCC); and
h. Holders of escrow shares or sequestered shares are not entitled vote, as a rule. (Republic
vs. COCOFED, G.R. No. 147062, December 14, 2001)

Other Proprietary Rights of Stockholders

a. Right to 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, That any cash dividends due on delinquent
stock shall first be applied to the unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid: Provided, further, 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.

Prohibition against retention of surplus earnings

Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent
(100%) of their paid-in capital stock except:

1. When justified by definite corporate expansion projects or programs approved by the

Board;
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; and

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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. (Sec. 42, RCC)

b. Right of Appraisal

The right of appraisal refers to the right of a stockholder who dissents from certain corporate
actions to demand payment of the fair value of his or her shares.

The right of appraisal may be exercised when there is a fundamental change in the charter or
articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest
unless objectionable corporate action is taken. It serves the purpose of enabling the dissenting
stockholder to have his interests purchased and to retire from the corporation. (Turner vs.
Lorenzo Shipping Corporation, G.R. No. 157479, November 24, 2010)

Stockholders may exercise their right of appraisal in the following instances:

1. In case any amendment to the articles of incorporation has the effect of

a. changing or restricting the rights of any stockholder or class of shares;
b. authorizing preferences in any respect superior to those of outstanding shares of
any class; or
c. extending or shortening the term of corporate existence;
2. 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;
3. In case of merger or consolidation;
4. In case of investment of corporate funds for any purpose other than the primary purpose
of the corporation (Sec. 80, RCC); and
5. For any reason, in case of close corporations. (Sec. 104, RCC).

Appraisal right requires unrestricted retained earnings.

No payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earnings. Thus, for an action to prosper, the corporation must have unrestricted
retained earnings at the time of the filing of the complaint. (Turner vs. Lorenzo Shipping
Corporation, G.R. No. 157479, November 24, 2010)

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c. Right to Inspect

In an earlier case, the Court has emphasized that all stockholders have the right to inspect the
corporate books and records. The Code has not required any specific amount of interest for the
exercise of the right to inspect. (Terelay Investment and Development Corporation, G.R. No.
160924, August 5, 2015)

Changes under the RCC

Under the RCC, corporate records, regardless of the form in which they are stored, shall be open
to inspection by any director, trustee, stockholder or member of the corporation in person or by
a representative at reasonable hours on business days, and a demand in writing may be made by
such director, trustee, stockholder at their expense, for copies of such records or excerpts from
said records. The inspecting or reproducing party shall remain bound by confidentiality rules
under prevailing laws, such as the rules on trade secrets or processes under Intellectual Property
Code (Republic Act No. 8293, as amended), Data Privacy Act of 2012 (Republic Act No. 10173),
Securities and Regulation Code (Republic Act No. 8799), and the Rules of Court.

A requesting party who is not a stockholder or member of record, or is a competitor, director,

officer, controlling stockholder or otherwise represents the interests of a competitor shall have
no right to inspect or demand reproduction of corporate records.

Any stockholder who shall abuse the rights granted under this section shall be penalized under
Section 158 of the Code, without prejudice to the provisions of the Intellectual Property Code
and the Data Privacy Act of 2012.

Any officer or agent of the corporation who shall refuse to allow the inspection and/or
reproduction of records in accordance with the provisions of the Code shall be liable to such
director, trustee, stockholder or member for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 161 of the Code: Provided, That if such refusal
is made pursuant to a resolution or order of the Board, the liability under this section for such
action shall be imposed upon the director or trustee who voted for such refusal: Provided,
further, That it shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation’s records and minutes has improperly used any
information secured through any prior examination of the records or minutes of such corporation
or of any other corporation, or was not acting in good faith or for a legitimate purpose in making
the demand to examine or reproduce corporate records, or is a competitor, director, officer,
controlling stockholder or otherwise represents the interests of a competitor.

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If the corporation denies or does not act on a demand for inspection and/or reproduction, the
aggrieved party may report such denial or inaction to the SEC. Within five (5) days from receipt
of such report, the SEC shall conduct a summary investigation and issue an order directing the
inspection or reproduction of the requested records. (Sec. 73, RCC)

Curiosity

The Court held that in the absence of evidence, the corporation cannot unilaterally deny a
stockholder from exercising his statutory right of inspection based on an unsupported and naked
assertion that requesting party’s motive is improper or merely for curiosity or on the ground that
he is not in friendly terms with the corporation’s officers. (Philippine Associated Smelting and
Refining Corporation vs. Lim, G.R. No. 172948, October 5, 2016)

The confidentiality of business transactions is not a magical incantation that will defeat the
request of a stockholder to inspect the records.

Although it is true that the business is entitled to the protection of its trade secrets and other
intellectual property rights, facts must be pleaded to convince the court that a specific
stockholder’s request for inspection, under certain conditions, would violate the corporation’s
own legal right. (Philippine Associated Smelting and Refining Corporation vs. Lim, G.R. No.
172948, October 5, 2016)

d. Pre-Emptive Right

Pre-emptive right is the right of stockholders to subscribe to all issues or disposition of shares of
any class in proportion to their shareholdings. (Sec. 38, RCC)

Its purpose is to maintain the relative and proportionate voting strength and control of existing
stockholders. It is aimed to maintain the existing ratio of the stockholder’s interest and voting
power in the corporation.

A stockholder who neither desires nor intends to buy any of the stocks being offered may waive
such right; in such case, his shares may be offered to any interested persons acceptable to the
corporation.

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When pre-emptive right is not available

Pre-emptive right is not available in the following instances, even if there is an issuance or
disposition of shares:

1. When the pre-emptive right is denied in the articles of incorporation;

2. When shares are issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public; and
3. When shares issued in good faith with the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in exchange for property needed for
corporate purposes or in payment of a previously contracted debt. (Sec. 38, RCC)

Legal Representatives

Under Section 54 of the RCC, executors, administrators, receivers and other legal representatives
duly appointed by the court may attend and vote in behalf of the stockholders or members
without need of any written proxy. On the death of a shareholder, the executor or administrator
duly appointed by the court is vested with the legal title to the stock and entitled to vote it. Until
a settlement and division of the estate is effected, the stocks of the decedent are held by the
administrator or executor. (Lopez Realty, Inc. vs. Sps. Tanjangco, G.R. No. 154291, November 12,
2014)

Remedial Rights of Stockholders

a. Individual Suit

Individual suits are filed when the cause of action belongs to the individual stockholder
personally, and not to the stockholders as a group or to the corporation, e.g., denial of right to
inspection and denial of dividends to a stockholder.

If the cause of action belongs to a group of stockholders, such as when the rights violated belong
to preferred stockholders, a class or representative suit may be filed to protect the stockholders
in the group. (Villamor, Jr. vs. Umale, 736 SCRA 325, G.R. No. 172881 September 24, 2014)

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Could any stockholder, at his pleasure, pull-out the machines and equipment, which he used to
pay for his shares in a corporation?

No. The property of a corporation is not the property of its stockholders or members. Under the
Trust Fund Doctrine, the capital stock, property, and other assets of a corporation are regarded
as equity in trust for the payment of corporate creditors, which are preferred over the
stockholders in the distribution of corporate assets. The distribution of corporate assets and
property cannot be made to depend on the whims and caprices of the stockholders, officers, or
directors of the corporation unless the indispensable conditions and procedures for the
protection of corporate creditors are followed. (Yamamoto vs. Nishino Leather Industries, G.R.
No. 150283, April 16, 2008)

A stockholder suing on account of wrongful or fraudulent corporate actions (undertaken

through directors, associates, officers, or other persons) may sue in any of three (3) capacities:
as an individual; as part of a group or specific class of stockholders; or as a representative of
the corporation.

Individual suits are filed when the cause of action belongs to the individual stockholder
personally, and not to the stockholders as a group or to the corporation, e.g., denial of right to
inspection and denial of dividends to a stockholder. If the cause of action belongs to a group of
stockholders, such as when the rights violated belong to preferred stockholders, a class or
representative suit may be filed to protect the stockholders in the group. Villamor, Jr. further
explained that a derivative suit “is an action filed by stockholders to enforce a corporate action.”
A derivative suit, therefore, concerns “a wrong to the corporation itself.” (Florete, Jr. vs. Florete,
Sr., 781 SCRA 255, G.R. No. 174909, G.R. No. 177275 January 20, 2016)

An individual suit is brought by the stockholder in his own name against the corporation, when
a wrong is directly inflicted against him. The cause of action pertains to him and the action is
meant directly to protect his interest.

Thus, individual suits are filed when the cause of action belongs to the individual stockholder
personally, and not to the stockholders as a group or to the corporation, e.g., denial of right to
inspection and denial of dividends to a stockholder. If the cause of action belongs to a group of
stockholders, such as when the rights violated belong to preferred stockholders, a class or
representative suit may be filed to protect the stockholders in the group. (Agdao Landless
Residents Association, Inc. vs. Maramion, G.R. No. 188642, October 17, 2016; Villamor vs. Umale,
G.R. No. 172843, September 24, 2014; Cua, Jr. vs. Tan, G.R. No. 181455, December 4, 2009)

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b. Representative Suit

A representative suit is brought by the stockholder for and on behalf of himself and all other
stockholders similarly situated, when a wrong is committed against a group of stockholders.

c. Derivative Suit

A derivative suit is an action brought by minority stockholders in the name of the corporation to
redress wrongs committed against it, for which the directors refuse to sue. It is a remedy
designed by equity and has been the principal defense of the minority stockholders against
abuses by the majority. (Western Institute of Technology, Inc. vs. Salas, G.R. No. 113032, August
21, 1997)

A stockholder’s right to institute a derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and
its stockholders for violation of their fiduciary duties. In effect, the suit is an action for specific
performance of an obligation, owed by the corporation to the stockholders, to assists its rights
of action when the corporation has been put in default by the wrongful refusal of the directors
or management to adopt suitable measures for its protection. (Villamor vs. Umale, G.R. No.
172843, September 24, 2014)

Requisites of Derivative Suit

The requisites for filing a derivative suit are:

1. The party bringing suit should be a stockholder as of the time of the act or transaction
complained of, the number of his shares not being material;
2. The party has tried to exhaust intra-corporate remedies, i.e., he has made a demand on
the Board of Directors for the appropriate relief but the latter has failed or refused to
heed his plea;
3. The cause of action actually devolved on the corporation, the wrongdoing ot harm having
been, or being caused to the corporation and not to the particular stockholder bringing
the suit (Filipinas Port Services, Inc. vs. Go, G.R. No. 161886, March 16, 2007);
4. No appraisal rights are available for the act/s complained of; and
5. The suit is not a nuisance or harassment suits. (Sec. 1, Rule 8, Interim Rules of Procedure
for Intra-Corporate Controversies; Ching vs. Subic Bay Gold and Country Club, Inc., G.R.
No. 174353, September 10, 2014)

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An action was filed by a member of the association, ALRAI, seeking to nullify the sale of
corporate property and to preserve the same as the sale was allegedly in violation of the
donor’s restrictions. Can this be regarded as a derivative suit or is it a personal/individual suit?

The action does not entail the premature distribution of corporate assets. On the contrary, the
reliefs seek to preserve them for the corporate interest of ALRAI. Clearly then, any benefit that
may be recovered is accounted for, not in favor of respondents, but for the corporation, who is
the real party-in-interest. This is therefore more of a derivative action. (Agdao Landless Residents
Association, Inc. vs. Maramion, G.R. No. 188642, October 17, 2016)

For a derivative suit to prosper, it is required that the minority stockholder suing for and on
behalf of the corporation must allege in his complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other stockholders similarly situated who may wish
to join him in the suit.

It is also required that the stockholder “should have exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires [and that such fact is alleged] with
particularity in the complaint.” The purpose for this rule is “to make the derivative suit the final
recourse of the stockholder, after all other remedies to obtain the relief sought had failed.”
Finally, the stockholder is also required “to allege, explicitly or otherwise, the fact that there were
no appraisal rights available for the acts complained of, as well as a categorical statement that
the suit is not a nuisance or a harassment suit.” (Forest Hills Golf and Country Club, Inc. vs. Fil-
Estate Properties, Inc., G.R. No. 206649, July 20, 2016)

While it is true that the complaining stockholder must satisfactorily show that he has exhausted
all means to redress his grievances within the corporation; such remedy is no longer necessary
where the corporation itself is under the complete control of the person against whom the suit
is being filed. The reason is obvious: a demand upon the board to institute an action and
prosecute the same effectively would have been useless and an exercise in futility. (Hi-Yield
Realty, Inc. vs. Court of Appeals, G.R. No. 168863, June 23, 2009)

Note, though, that in Yu vs. Yukayguan, G.R. No. 177549, June 18, 2009, the Supreme Court held
that exhaustion of intra-corporate remedies cannot be dispensed with even if the company is a
family corporation. There is nothing in the pertinent laws or rules supporting the distinction
between, and the difference in the requirements for, family corporations vis-à-vis other types of
corporations, in the institution by a stockholder of a derivative suit.

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The real party-in-interest is the corporation, not the stockholders filing the suit. The
stockholders are technically nominal parties but are nonetheless the active persons who pursue
the action for and on behalf of the corporation.

Remedies through derivative suits are not expressly provided for in our statutes — more
specifically, in the Corporation Code and the Securities Regulation Code — but they are “impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered
by the corporation and its stockholders for violation of their fiduciary duties.” They are intended
to afford reliefs to stockholders in instances where those responsible for running the affairs of a
corporation would not otherwise act. (Florete, Jr. vs. Florete, Sr., 781 SCRA 255, G.R. No. 174909,
G.R. No. 177275 January 20, 2016)

The fact that stockholders suffer from a wrong done to or involving a corporation does not vest
in them a sweeping license to sue in their own capacity.

The recognition of derivative suits as a vehicle for redress distinct from individual and
representative suits is an acknowledgment that certain wrongs may be addressed only through
acts brought for the corporation: Although in most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of his interest therein would be impaired,
this fact of itself is not sufficient to give him an individual cause of action since the corporation is
a person distinct and separate from him, and can and should itself sue the wrongdoer. (Florete,
Jr. vs. Florete, Sr., 781 SCRA 255, G.R. No. 174909, G.R. No. 177275 January 20, 2016)

A violation of Sections 23 and 25 of the Corporation Code — on how decision-making is vested

in the board of directors and on the board’s quorum requirement — implies that a decision was
wrongly made for the entire corporation, not just with respect to a handful of stockholders.

Section 65 specifically mentions that a director’s or officer’s liability for the issuance of watered
stocks in violation of Section 62 is solidary “to the corporation and its creditors,” not to any
specific stockholder. Transfers of shares made in violation of the registration requirement in
Section 63 are invalid and, thus, enable the corporation to impugn the transfer. Notably, those
in the Marcelino, Jr. Group have not shown any specific interest in, or unique entitlement or right
to, the shares supposedly transferred in violation of Section 63. (Florete, Jr. vs. Florete, Sr., 781
SCRA 255, G.R. No. 174909, G.R. No. 177275 January 20, 2016)

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INTRA-CORPORATE CONTROVERSIES

Intra-corporate case

To be considered as an intra-corporate dispute, the case: (a) must arise out of intra-corporate or
partnership relations, and (b) the nature of the question subject of the controversy must be such
that it is intrinsically connected with the regulation of the corporation or the enforcement of the
parties’ rights and obligations under the Corporation Code and the internal regulatory rules of
the corporation. So long as these two criteria are satisfied, the dispute is intra-corporate and the
RTC, acting as a special commercial court, has jurisdiction over it. (Aguirre II vs. FQB+7, Inc., 688
SCRA 242, G.R. No. 170770, 9 January 2013)

For a dispute to be “intra-corporate,” it must satisfy the relationship and nature of controversy
tests.

The relationship test requires that the dispute be between a

corporation/partnership/association and the public; a corporation/partnership/association and
the state regarding the entity’s franchise, permit, or license to operate; a
corporation/partnership/association and its stockholders, partners, members, or officers; and
among stockholders, partners, or associates of the entity.

The nature of the controversy test requires that the action involves the enforcement of
corporate rights and obligations. Courts and tribunals must consider both the parties’
relationship and the nature of the controversy to determine whether they should assume
jurisdiction over a case. (Securities and Exchange Commission vs. Subic Bay Golf and Country Club,
Inc., 752 SCRA 481, G.R. No. 179047 March 11, 2015)

Villareal and Filart’s right to a refund of the value of their shares was based on SBGCCI and
UIGDC’s alleged failure to abide by their representations in their prospectus. Specifically,
Villareal and Filart alleged in their letter-complaint that the world-class golf course that was
promised to them when they purchased shares did not materialize.

This is an intra­corporate matter that is under the designated Regional Trial Court’s jurisdiction.
It involves the determination of a shareholder’s rights under the Corporation Code or other intra-
corporate rules when the corporation or association fails to fulfill its obligations. (Securities and
Exchange Commission vs. Subic Bay Golf and Country Club, Inc., 752 SCRA 481, G.R. No. 179047
March 11, 2015)

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Mariam sued the Petitioners who are employees/contractors of the company, BIRI for forcible
entry on a property registered in the name of BIRI. Mariam appears to be a shareholder also of
BIRI. Petitioners’ defense was that BIRI, as owner of the spring property, merely exercised its
legal right to prevent unauthorized persons from entering its property; deployment of licensed
security guards was intended to secure its property. BIRI insists that this is an intra-corporate
case hence, the MCTC where it was lodge had no jurisdiction over the case.

While the case purports to be one for forcible entry filed by Mariam against BIRI's employees and
contractors in their individual capacities, the true nature of the controversy is an intra-corporate
dispute between BIRI and Mariam, a shareholder, regarding the management of, and access to,
the corporate property subject of the MOA.

While Mariam insists that the case is one for forcible entry where the only issue is the physical
possession and not ownership of the property, her prior physical possession has not been
established in the courts below. In fact, the MCTC found that prior to the events of May 28, 2007,
both petitioners and Mariam were in actual possession of the property: petitioners, on behalf of
BIRI as the owner of the property, and r Mariam, by virtue of the accommodation granted to her
by BIRI under the MOA allowing her to continue her water reloading business on the property
even after the transfer of its ownership to BIRI.

In sum, what appears on record as the true nature of the controversy is that of a shareholder
seeking relief from the court to contest the management's decision to: (1) post guards to secure
the premises of the corporate property; (2) padlock the premises; and (3) deny her access to the
same on May 28, 2007 due to her alleged default on the provisions of the MOA.

Thus, we agree with Petitioners that while the case purports to be one for forcible entry filed by
Mariam against BIRI's employees and contractors in their individual capacities, the true nature of
the controversy is an intra-corporate dispute between BIRI and its shareholder, Mariam,
regarding the management of, and access to, the corporate property subject of the MOA. We
therefore find that the MCTC never acquired jurisdiction over the ejectment case filed by
Mariam. (Tumangan vs. Mariam Kairuz, G.R. No. 198124, Sept. 12, 2018)

Wise Holdings is the parent company of Wise Choice Foods. Wise Holdings allegedly organized
Sunrich and transferred to it the assets of Wise Choice via a share swap agreement. Wise Choice
should have issued all shares of Sunrich to Wise Holdings (being the sole stockholder of Wise
Choice) but it was allegedly arranged that these Sunrich shares be held on record by trusted
individuals first. Eventually, these trusted individuals sold the Sunrich shares to third parties.
This led Wise Holdings to sue these trusted individuals to reconvey the Sunrich shares. Is this an
intra-corporate case?

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No.

First, there is no corporate relationship between Wise Holdings and Sunrich, whose shares of
stock are the subject of the controversy. While Wise Holdings is asserting real ownership of the
shares of stock in Sunrich, Wise Holdings acknowledges that such ownership is not registered in
Sunrich's books.

Second, the nature of the controversy in the present case does not refer to an intra-corporate
dispute. Here, the allegations of the complaint show on their face that the action is for
reconveyance of property in recognition of trust. Petitioners seekthe return of all the shares of
stock of Sunrich, of which they are the real and beneficial owners. The allegations assert the
existence of a trust relationship, which Wise Holdings allege was created between the parties
under the provisions of the Civil Code on implied trust, xxx. (Wise Holdings vs. Garcia, G.R.
199174, June 10, 2019)

Applying the relationship test, the Supreme Court notes that both Belo and Santos are named
shareholders in Belo Medical Group’s Articles of Incorporation and General Information Sheet
for 2007. The conflict is clearly intra-corporate as it involves two (2) shareholders, although the
ownership of stocks of one (1) stockholder is questioned.

Unless Santos is adjudged as a stranger to the corporation because he holds his shares only in
trust for Belo, then both he and Belo, based on official records, are stockholders of the
corporation. Belo Medical Group argues that the case should not have been characterized as
intra-corporate because it is not between two shareholders as only Santos or Belo can be the
rightful stockholder of the 25 shares of stock. This may be true. But this finding can only be made
after trial where ownership of the shares of stock is decided.

The trial court cannot classify the case based on potentialities. The two defendants in that case
are both stockholders on record. They continue to be stockholders until a decision is rendered
on the true ownership of the 25 shares of stock in Santos’ name. If Santos’ subscription is
declared fictitious and he still insists on inspecting corporate books and exercising rights
incidental to being a stockholder, then, and only then, shall the case cease to be intra-corporate.
(Belo Medical Group, Inc. vs. Santos, 838 SCRA 142, G.R. No. 185894 August 30, 2017)

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Applying the nature of the controversy test, this is still an intra-corporate dispute. The
Complaint for interpleader seeks a determination of the true owner of the shares of stock
registered in Santos’ name.

Ultimately, however, the goal is to stop Santos from inspecting corporate books. This goal is so
apparent that, even if Santos is declared the true owner of the shares of stock upon completion
of the interpleader case, Belo Medical Group still seeks his disqualification from inspecting the
corporate books based on bad faith. Therefore, the controversy shifts from a mere question of
ownership over movable property to the exercise of a registered stockholder’s proprietary right
to inspect corporate books. (Belo Medical Group, Inc. vs. Santos, 838 SCRA 142, G.R. No. 185894
August 30, 2017)

INSURANCE

What may be insured

Any contingent or unknown event, whether past or future, which may damnify a person having
an insurable interest, or create a liability against him may be insured (Sec. 3, IC).

Hence, under Section 3 of the Insurance Code, the risk must be:
a. A contingent or unknown event, whether past or future; and
b. It must damnify the insured or create a liability against him.

As a rule, only future events may be covered by an insurance contract because of the requirement
that it be “contingent or unknown.” A past event that may be insured against is peculiar to Marine
Insurance in case the loss of the vessel in the past could not have been known by ordinary means
of communication.

However, no insurance can be taken for or against the drawing of any lottery, or for or against
any chance or ticket in a lottery drawing a prize (Sec. 4, IC).

Basis of insurable interest in life and health insurance

Every person has an insurable interest in the life and health:

1. of himself, of his spouse and of his children;
2. of any person on whom he depends wholly or in part for education or support, or in whom
he has a pecuniary interest;

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3. of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance;
and
4. of any person upon whose life any estate or interest vested in him depends. (Sec. 10, IC)

Insurable interest in property

Every interest in property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured, is an
insurable interest (Sec. 13, IC).

An insurable interest in property may consist in:

(a) An existing interest;
(b) An inchoate interest founded on an existing interest; or
c) An expectancy, coupled with an existing interest in that out of which the expectancy
arises (Sec. 14, IC)

The Court disagrees with the finding of the RTC that Milestone lacked insurable interest over
the machine and equipment both at the time the Policy took effect on August 1, 2009 and at
the time of the loss in July 2010. Asgard cannot take an inconsistent position that Milestone
had no more insurable interest under the Policy when in the Appellant's Brief, it admitted that
both Asgard and Milestone took out the insurance policy on August 1, 2009 effective until
August 1, 2010. Under the condition We cited above, it is very clear that Milestone has insurable
interest on the property at the time of the loss and damage on July 15, 2010.

Section 13 of the Insurance Code defines insurable interest as "every interest in property, whether
real or personal, or any relation thereto, or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the
same Code, an insurable interest in property may consist in: (a) an existing interest, like that of
an owner or lienholder; (b) an inchoate interest founded on existing interest, like that of a
stockholder in corporate property; or (c) an expectancy, coupled with an existing interest in that
out of which the expectancy arises, like that of a shipper of goods in the profits he expects to
make from the sale thereof. (UCPB General Insurance Co., Inc. v. Asgard Corrugated Box
Manufacturing Corp., G.R. No. 244407, January 26, 2021)

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An insurable interest in property does not necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an interest.

It is sufficient that the insured is so situated with reference to the property that he would be
liable to loss should it be injured or destroyed by the peril against which it is insured. Anyone has
an insurable interest in property who derives a benefit from its existence or would suffer loss
from its destruction. (UCPB General Insurance Co., Inc. v. Asgard Corrugated Box Manufacturing
Corp., G.R. No. 244407, January 26, 2021)

Insurable interest in property is not limited to property ownership in the subject matter of the
insurance.

Where the interest of the insured in, or his relation to, the property is such that he will be
benefitted by its continued existence, or will suffer a direct pecuniary loss by its destruction, his
contract of insurance will be upheld, although he has no legal or equitable title. A husband would
thus have an insurable interest in the paraphernal property of his wife since the fruits thereof
belong the conjugal partnership and may be used for the support of the family. (UCPB General
Insurance Co., Inc. v. Asgard Corrugated Box Manufacturing Corp., G.R. No. 244407, January 26,
2021)

As in this case, when Milestone removed its parts and machines, Milestone still had an actual and
real interest in the preservation of the corrugating machines while the TMA is not effectively
terminated and non-preservation will render Milestone liable for breach of contract as no
corrugated carton boxes would be manufactured under the TMA (Toll Manufacturing
Agreement). (Id)

Indeed, a vendor or seller retains an insurable interest in the property sold so long as he has
any interest therein, in other words, so long as he would suffer by its destruction, as where he
has a vendor’s lien.

In this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts appearing in
their Books of Account 45 days after the time of the loss covered by the policies (Gaisano
Cagayan, Inc. vs. Insurance Company of North America, 490 SCRA 286, G.R. No. 147839, 8 June
2006

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Section 89 of the Insurance Code (Republic Act No. 10607) is clear - an insurer is not liable for a
loss caused by the willful act of the insured.

Section 89. An insurer is not liable for a loss caused by the willful act or through the connivance
of the insured; but he is not exonerated by the negligence of the insured, or of the insurance
agents or others.

The insurer is not liable for a loss caused by the intentional act of the insured or through his
connivance. Such damage/loss is not an insurable risk because the occurrence of the loss was
subject to the control of one of the parties and not merely caused by the negligence of the
insured.

However, the insurer is not relieved from liability by the mere fact that the loss was caused by
the negligence of the insured, or of his agents or others. Accordingly, it is no defense to an action
on the policy that the negligence of the insured caused or contributed to the injury. However,
when the insured's negligence is so gross that it is tantamount to misconduct, or willful or
wrongful act, the insurer is not liable. (UCPB General Insurance Co., Inc. v. Asgard Corrugated Box
Manufacturing Corp., G.R. No. 244407, January 26, 2021)

Claims involving life insurance; Period to settle

For policies maturing upon the expiration of the term set forth therein: the proceeds of a life
insurance policy shall be paid immediately upon maturity of the policy, unless such proceeds are
made payable in installments or as an annuity, in which case the installments, or annuities shall
be paid as they become due.

For policies maturing at the death of the insured occurring prior to the expiration of the term
stipulated: the proceeds thereof shall be paid within sixty (60) days after presentation of the
claim and filing of the proof of death of the insured.

Refusal or failure to pay the claim within the time prescribed will entitle the beneficiary to collect
interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling
prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground
that the claim is fraudulent.

The proceeds of the policy maturing by the death of the insured payable to the beneficiary shall
include the discounted value of all premiums paid in advance of their due dates but are not due
and payable at maturity (Sec. 248, IC).

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Insured dies within 2 years without the policy being rescinded

Under the provision, an insurer is given two years — from the effectivity of a life insurance
contract and while the insured is alive — to discover or prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his
agent.

After the two-year period lapses, or when the insured dies within the period, the insurer must
make good on the policy, even though the policy was obtained by fraud, concealment, or
misrepresentation.

This is not to say that insurance fraud must be rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business must be penalized, for such recklessness and lack of
discrimination ultimately work to the detriment of bona fide takers of insurance and the public
in general (Manila Bankers Life Insurance Corporation vs. Aban, 702 SCRA 417, G.R. No. 175666,
29 July 2013; Sun Life of Canada [Philippines], Inc. vs. Sibya, 793 SCRA 45, G.R. No. 211212, 8 June
2016).

Defenses not barred by incontestability

The following defenses may still be interposed by the insurer notwithstanding incontestable
status of the policy:
1. The person taking the insurance lacked insurable interest as required by law.
2. The cause of the death of the insured is an excepted risk.
3. The premiums have not been paid.
4. The conditions of the policy relating to military or naval service have been violated.
5. The fraud is of a particularly vicious type.
6. The beneficiary failed to furnish proof of death or to comply with any condition
imposed by the policy after the loss has happened.
7. The action was not brought within the time specified.

Beneficiary

The insurance proceeds shall be applied exclusively to the proper interest of the person in whose
name or for whose benefit it is made unless otherwise specified in the policy (Sec. 53, IC).

The insured may designate a beneficiary in a policy unless disqualified to be so. In general, the
designation is presumed to be revocable, thus: The insured shall have the right to change the

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beneficiary he designated in the policy, unless he has expressly waived this right in said policy.
Notwithstanding the foregoing, in the event the insured does not change the beneficiary during
his lifetime, the designation shall be deemed irrevocable (Sec. 11, IC).

The insured in a life insurance may designate any person as beneficiary unless disqualified to
be so under the provisions of the Civil Code.

And, in the absence of any beneficiary named in the life insurance policy, the proceeds of the
insurance will go to the estate of the insured (Vda. de Consuegra vs. Government Service
Insurance System, 37 SCRA 315, G.R. No. L-28093, 30 January 1971).

When beneficiary’s interest is forfeited

It is worthy to point out, however, that the interest of a beneficiary in a life insurance policy shall
be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing
about the death of the insured. In such a case, the share forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the proceeds
shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds
shall be paid to the estate of the insured (Sec. 12, IC).

It is not absolutely necessary to identify the beneficiary. The Insurance Code states: A policy may
be so framed that it will inure to the benefit of whomsoever, during the continuance of the risk,
may become the owner of the interest insured (Sec. 57, IC). Also, when the description of the
insured in a policy is so general that it may comprehend any person or any class of persons, only
he who can show that it was intended to include him can claim the benefit of the policy (Sec. 56,
IC).

Limitations on the designation of beneficiary

Any person who is forbidden from receiving any donation under Article 739 cannot be named
beneficiary of a life insurance policy by the person who cannot make any donation to him,
according to said article (Art. 2012, NCC).

Note that the prohibition applies only to life insurance policy. Article 739 of the New Civil Code
states: Under Article 739 of the New Civil Code, the following donations shall be void:
(1) Those made between persons who were guilty of adultery or concubinage at the time
of the donation;

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(2) Those made between persons found guilty of the same criminal offense, in
consideration thereof;
(3) Those made to a public officer or his wife, descendants and ascendants, by reason of
his office.

Hence, common-law spouses are definitely barred from receiving donations from each other. The
Court expounded that in essence, a life insurance policy is no different from a civil donation
insofar as the beneficiary is concerned. Both are founded upon the same consideration: liberality.
A beneficiary is like a donee, because from the premiums of the policy which the insured pays
out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of the new Civil Code should equally operate in life
insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot
receive a donation cannot be named as beneficiary in the life insurance policy of the person who
cannot make the donation. Under American law, a policy of life insurance is considered as a
testament and in construing it, the courts will, so far as possible treat it as a will and determine
the effect of a clause designating the beneficiary by rules under which wills are interpreted (The
Insular Life Assurance Company, Ltd. vs. Ebrado, 80 SCRA 181, G.R. No. L-44059, 28 October
1977).

Nature of Life Insurance

Life insurance is an insurance on human lives and insurance appertaining thereto or connected
therewith. Every contract or undertaking for the payment of annuities including contracts for the
payment of lump sums under a retirement program where a life insurance company manages or
acts as a trustee for such retirement program shall be considered a life insurance contract for
purposes of this Code (Sec. 181, IC). An insurance upon life may be made payable on the death
of the person, or on his surviving a specified period, or otherwise contingently on the continuance
or cessation of life (Sec. 182, IC).

Every contract or pledge for the payment of endowments or annuities shall be considered a life
insurance contract for purpose of this Code.

In the absence of a judicial guardian, the father, or in the latter’s absence or incapacity, the
mother, or any minor, who is an insured or a beneficiary under a contract of life, health or
accident insurance, may exercise, in behalf of said minor, any right under the policy, without
necessity of court authority or the giving of a bond, where the interest of the minor in the
particular act involved does not exceed Five Hundred Thousand Pesos (P500,000.00) or in such
reasonable amount as may be determined by the Commissioner. Such right may include, but shall
not be limited to, obtaining a policy loan, surrendering the policy, receiving the proceeds of the
policy, and giving the minor’s consent to any transaction on the policy (Id.).

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In the absence or in case of the incapacity of the father or mother, the grandparent, the eldest
brother or sister at least eighteen (18) years of age, or any relative who has actual custody of the
minor insured or beneficiary, shall act as a guardian without need of a court order or judicial
appointment as such guardian, as long as such person is not otherwise disqualified or
incapacitated. Payment made by the insurer pursuant to this section shall relieve such insurer of
any liability under the contract (Id.).

Kinds of Life Insurance

1. Ordinary Life or General Life Policy — the insured pays a fixed premium every year
until he dies. There is a surrender value after three (3) years.
2. Group Life — is essentially a single insurance contract that provides coverage for many
individuals.
3. Limited Payment Policy — the insured pays premium for a limited period. If he dies
within the period, his beneficiary is paid; if he outlives the period, he does not get
anything.
4. Endowment Policy — the insured pays premium for a specified period. If he outlives
the period, the face value of the policy is paid to him; if not, his beneficiaries receive
the benefit.
5. Term Insurance — the insured pays only once, and he is insured for a specified period.
If he dies within the period, his beneficiaries benefits get the benefits. If he outlives
the period, no person benefits from the insurance.
6. Industrial Life — entitles the insured to pay premiums weekly, or where premiums are
payable monthly or oftener.

Liability of insurer in case of suicide

The insurer in a life insurance contract shall be liable in case of suicide only when it is committed
after the policy has been in force for a period of two (2) years from the date of its issue or of its
last reinstatement, unless the policy provides a shorter period: Provided, however, That suicide
committed in the state of insanity shall be compensable regardless of the date of commission
(Sec. 183, IC).

Assignment of life insurance policy

A policy of insurance upon life or health may pass by transfer, will or succession to any person,
whether he has an insurable interest or not, and such person may recover upon it whatever the
insured might have recovered (Sec. 184, IC). Notice to an insurer of a transfer or bequest thereof

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is not necessary to preserve the validity of a policy of insurance upon life or health, unless thereby
expressly required (Sec. 185, IC).

Measure of indemnity

Unless the interest of a person insured is susceptible of exact pecuniary measurement, the
measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy
(Sec. 186, IC).

Hence, when the creditor insures the life of his debtor, the amount of insurance is limited by the
value of the obligation due.

Non-default options

In the case of individual life or endowment insurance, the policy shall contain in substance the
following conditions, among other things:

A provision specifying the options to which the policyholder is entitled to in the event of default
in a premium payment after three (3) full annual premiums shall have been paid. Such option
shall consist of:
(1) A cash surrender value payable upon surrender of the policy which shall not be less than
the reserve on the policy, the basis of which shall be indicated, for the then current policy
year and any dividend additions thereto, reduced by a surrender charge which shall not be
more than one-fifth (1/5) of the entire reserve or two and one-half percent (2½%) of the
amount insured and any dividend additions thereto; and
(2) One or more paid-up benefits on a plan or plans specified in the policy of such value as
may be purchased by the cash surrender value (Sec. 233[f], IC).

The Insurance Code dispenses with proof of fraudulent intent in cases of rescission due to
concealment, but not so in cases of rescission due to false representations.

When an abundance of available documentary evidence can be referenced to demonstrate a

design to defraud, presenting a singular document with an erroneous entry does not qualify as
clear and convincing proof of fraudulent intent. Neither does belatedly invoking just one other
document, which was not even authored by the alleged miscreant. (The Insular Assurance Co.,
Ltd., vs. Heirs of Alvarez, G.R. No. 207526 October 3, 2018; Union Bank of the Philippines vs. Heirs
of Alvarez, G.R. No. 210156 October 3, 2018)

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Proof of fraudulent intent is unnecessary for the rescission of an insurance contract on account
of concealment.

This is neither because intent to defraud is intrinsically irrelevant in concealment, nor because
concealment has nothing to do with fraud. To the contrary, it is because in insurance contracts,
concealing material facts is inherently fraudulent: "if a material fact is actually known to the
[insured], its concealment must of itself necessarily be a fraud." When one knows a material fact
and conceals it, "it is difficult to see how the inference of a fraudulent intent or intentional
concealment can be avoided." Thus, a concealment, regardless of actual intent to defraud, "is
equivalent to a false representation." (The Insular Assurance Co., Ltd., vs. Heirs of Alvarez, G.R.
No. 207526 October 3, 2018; Union Bank of the Philippines vs. Heirs of Alvarez, G.R. No. 210156,
October 3, 2018)

A single piece of evidence hardly qualifies as clear and convincing. Its contents could just as
easily have been an isolated mistake.

Alvarez must have accomplished and submitted many other documents when he applied for the
housing loan and executed supporting instruments like the promissory note, real estate
mortgage, and Group Mortgage Redemption Insurance. A design to defraud would have
demanded his consistency. He needed to maintain appearances across all documents. Otherwise,
he would doom his own ruse.

He needed to have been consistent, not only before Insular Life, but even before Union Bank.
Even as it was only Insular Life's approval that was at stake with the Group Mortgage Redemption
Insurance, Alvarez must have realized that as it was an accessory agreement to his housing loan
with Union Bank. Insular Life was well in a position to verify information, whether through simple
cross referencing or through concerted queries with Union Bank.

Despite these circumstances, the best that Insular Life could come up with before the Regional
Trial Court and the Court of Appeals was a single document. The Court of Appeals was
straightforward, i.e., the most basic document that Alvarez accomplished in relation to Insular
Life must have been an insurance application form. Strangely, Insular Life failed to adduce even
this document—a piece of evidence that was not only commonsensical, but also one which has
always been in its possession and disposal. (The Insular Assurance Co., Ltd., vs. Heirs of Alvarez,
G.R. No. 207526 October 3, 2018; Union Bank of the Philippines vs. Heirs of Alvarez, G.R. No.
210156, October 3, 2018)

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INTELLECTUAL PROPERTY

What does Copyright mean?

Copyright is the right over literary and artistic works which are original intellectual creations in
the literary and artistic domain protected from the moment of creation (Kho v. Court of Appeals,
G.R. No. 115758, March 19, 2002). In copyright, works are protected by the sole fact of their
creation, irrespective of their mode or form of expression, as well as their content, quality, or
purpose (IPC, Sec. 172.2).

Copyright shall consist in the exclusive right, among other things, to print, reprint, publish, copy,
distribute, multiply, sell, and make photographs, photo-engravings, and pictorial illustrations of
the works. Jurisprudence teaches us that while the word “and” denotes joinder or union of
words, literal construction thereof to copyright would lead to absurdity as the acts enumerated
cannot be carried out on all of the classes of works enumerated. (Microsoft Corporation vs.
Manansala, G.R. No. 166391, October 21, 2015)

Protection is from creation

Works are protected by the sole fact of their creation, irrespective of their mode or form of
expression, as well as of their content, quality and purpose. (Sec. 172.2, IPC) Registration is not
required to acquire copyright protection on artistic and literary works.

Distinct from the material object

The copyright is distinct from the property in the material object subject to it. Consequently, the
transfer, assignment or licensing of the copyright shall not itself constitute a transfer of the
material object. Nor shall a transfer or assignment of the sole copy or of one or several copies of
the work imply transfer, assignment or licensing of the copyright. (Sec. 181, IPC)

What is the coverage of Copyright?

Literary and artistic works, hereinafter referred to as “works”, are original intellectual creations
in the literary and artistic domain protected from the moment of their creation and shall include
in particular:
(a) Books, pamphlets, articles and other writings;
(b) Periodicals and newspapers;

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(c) Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not
reduced in writing or other material form;
(d) Letters;
(e) Dramatic or dramatico-musical compositions; choreographic works or entertainment
in dumb shows;
(f) Musical compositions, with or without words;
(g) Works of drawing, painting, architecture, sculpture, engraving, lithography or other
works of art; models or designs for works of art;
(h) Original ornamental designs or models for articles of manufacture, whether or not
registrable as an industrial design, and other works of applied art;
(i) Illustrations, maps, plans, sketches, charts and three (3)-dimensional works relative to
geography, topography, architecture or science;
(j) Drawings or plastic works of a scientific or technical character;
(k) Photographic works including works produced by a process analogous to photography;
lantern slides;
(l) Audiovisual works and cinematographic works and works produced by a process
analogous to cinematography or any process for making audio-visual recordings;
(m) Pictorial illustrations and advertisements;
(n) Computer programs; and
(o) Other literary, scholarly, scientific and artistic works. (Sec. 172.1, IPC)

Derivative Works

The following derivative works shall also be protected by copyright:

(a) Dramatizations, translations, adaptations, abridgments, arrangements, and other
alterations of literary or artistic works; and
(b) Collections of literary, scholarly or artistic works, and compilations of data and other
materials which are original by reason of the selection or coordination or arrangement
of their contents. (Sec. 173, IPC)

The works referred to in paragraphs (a) and (b) of Subsection 173.1 shall be protected as new
works: Provided however, That such new work shall not affect the force of any subsisting
copyright upon the original works employed or any part thereof, or be construed to imply any
right to such use of the original works, or to secure or extend copyright in such original works.
(Sec. 173.2, IPC)

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Non-Copyrightable Works

Notwithstanding the provisions of Sections 172 and 173, no protection shall extend, under this
law, to:
(1) any idea, procedure, system, method or operation, concept, principle, discovery or
mere data as such, even if they are expressed, explained, illustrated or embodied in a
work;
(2) news of the day and other miscellaneous facts having the character of mere items of
press information; or
(3) any official text of a legislative, administrative or legal nature, as well as any official
translation thereof. (Sec. 175, IPC)

Game show format

The Court held that copyright does not extend to the general concept or format of its dating game
show. (Joaquin, Jr. vs. Drilon, G.R. No. 108946, January 28, 1999)

Rights of Copyright Owner

Economic Rights

Copyright or economic rights shall consist of the exclusive right to carry out, authorize or prevent
the following acts:
(1) Reproduction of the work or substantial portion of the work;
(2) Dramatization, translation, adaptation, abridgment, arrangement or other
transformation of the work;
(3) The first public distribution of the original and each copy of the work by sale or other
forms of transfer of ownership;
(4) Rental of the original or a copy of an audiovisual or cinematographic work, a work
embodied in a sound recording, a computer program, a compilation of data and other
materials or a musical work in graphic form, irrespective of the ownership of the
original or the copy which is the subject of the rental;
(5) Public display of the original or a copy of the work;
(6) Public performance of the work; and
(7) Other communication to the public of the work. (Sec. 177, IPC)

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Moral Rights

The author of a work shall, independently of the economic rights in Section 177 or the grant of
an assignment or license with respect to such right, have the right:
(1) To require that the authorship of the works be attributed to him, in particular, the right
that his name, as far as practicable, be indicated in a prominent way on the copies, and
in connection with the public use of his work (Sec. 193. 1, IPC);
(2) To make any alterations of his work prior to, or to withhold it from publication (Sec.
193. 2, IPC);
(3) To object to any distortion, mutilation or other modification of, or other derogatory
action in relation to, his work which would be prejudicial to his honor or reputation
(Sec. 193.3, IPC); and
(4) To restrain the use of his name with respect to any work not of his own creation or in
a distorted version of his work. (Sec. 193.4, IPC)

Rules on Ownership of Copyright

Copyright ownership shall be governed by the following rules:

In General
Subject to the provisions of this section, in the case of original literary and artistic works,
copyright shall belong to the author of the work. (Sec. 178.1, IPC)

Joint Authorship
In the case of works of joint authorship, the co-authors shall be the original owners of the
copyright and in the absence of agreement, their rights shall be governed by the rules on co-
ownership. If, however, a work of joint authorship consists of parts that can be used separately
and the author of each part can be identified, the author of each part shall be the original owner
of the copyright in the part that he has created. (Sec. 178.2, IPC)

Work Created in the Course of Employment

In the case of work created by an author during and in the course of his employment, the
copyright shall belong to:
(a) The employee, if the creation of the object of copyright is not a part of his regular duties
even if the employee uses the time, facilities and materials of the employer;
(b) The employer, if the work is the result of the performance of his regularly-assigned
duties, unless there is an agreement, express or implied, to the contrary. (Sec. 178.3,
IPC)

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Commissioned Work
In the case of a work commissioned by a person other than an employer of the author and who
pays for it and the work is made in pursuance of the commission, the person who so
commissioned the work shall have ownership of the work, but the copyright thereto shall remain
with the creator, unless there is a written stipulation to the contrary. (Sec. 178.4, IPC)

Audiovisual Work
In the case of audiovisual work, the copyright shall belong to the producer, the author of the
scenario, the composer of the music, the film director, and the author of the work so adapted.
However, subject to contrary or other stipulations among the creators, the producer shall
exercise the copyright to an extent required for the exhibition of the work in any manner, except
for the right to collect performing license fees for the performance of musical compositions, with
or without words, which are incorporated into the work. (Sec. 178.5, IPC)

Letters
In respect of letters, the copyright shall belong to the writer subject to the provisions of Article
723 of the Civil Code. (Sec. 178.6, IPC)

Anonymous and Pseudonymous Works

The publishers shall be deemed to represent the authors of articles and other writings published
without the names of the authors or under pseudonyms, unless the contrary appears, or the
pseudonyms or adopted name leaves no doubt as to the author’s identity, or if the author of the
anonymous works discloses his identity. (Sec. 179, IPC)

A person to be entitled to a copyright must be the original creator of the work. He must have
created it by his own skill, labor, and judgment without directly copying or evasively imitating the
work of another. (Ong Ching Kian Chuan vs. Court of Appeals, G.R. No. 130360, August 15, 2001)

Term of Protection

1) Original and derivative literary/artistic works – during the life of the author and for fifty
(50) years after his death. This rule also applies to posthumous works. (Sec. 213.1, IPC)
2) Works of joint authorship - during the life of the last surviving author and for fifty (50)
years after his death. (Sec. 213.2, IPC)
3) Anonymous or pseudonymous works - for fifty (50) years from the date on which the work
was first lawfully published: Provided, That where, before the expiration of the said
period, the author's identity is revealed or is no longer in doubt, the provisions of
Subsections 213.1 and 213.2 shall apply, as the case may be: Provided, further, That such
works if not published before shall be protected for fifty (50) years counted from the
making of the work. (Sec. 213.3, IPC)

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4) Works of applied art - twenty-five (25) years from the date of making. (Sec. 213.4, IPC)
5) Photographic works - fifty (50) years from publication of the work and, if unpublished,
fifty (50) years from the making. (Sec. 213.5, IPC)
6) Audio-visual works - fifty (50) years from date of publication and, if unpublished, from the
date of making. (Sec. 213.6, IPC)
7) Performances not incorporated in recordings - fifty (50) years from the end of the year in
which the performance took place; (Sec. 215.1, IPC)
8) Sound or image and sound recordings and for performances incorporated therein - fifty
(50) years from the end of the year in which the recording took place. (Sec. 215.1, IPC)
9) Broadcasts - twenty (20) years from the date the broadcast took place. The extended term
shall be applied only to old works with subsisting protection under the prior law. (Sec.
215.2, IPC)

Term of Moral Right; Perpetual

The right of an author under Section 193.1 (Attribution Right) shall last during the lifetime of the
author and in perpetuity after his death while the rights under Sections 193.2, 193.3, and 193.4
shall be coterminous with the economic rights, the moral rights shall not be assignable or subject
to license. The person or persons to be charged with the posthumous enforcement of these rights
shall be named in a written instrument which shall be filed with the National Library. In default
of such person or persons, such enforcement shall devolve upon either the author’s heirs, and in
default of the heirs, the Director of the National Library. (Sec. 198.1, IPC)

The only instance when a useful article may be the subject of copyright protection is when it
incorporates a design element that is physically or conceptually separable from the underlying
product. This means that the utilitarian article can function without the design element.

In such an instance, the design element is eligible for copyright protection. The design of a useful
article shall be considered a pictorial, graphic, or sculptural work only if, and only to the extent
that, such design incorporates pictorial, graphic, or sculptural features that can be identified
separately from, and are capable of existing independently of, the utilitarian aspects of the
article. (Olaño vs. Lim Eng Co, 787 SCRA 272, G.R. No. 195835 March 14, 2016)

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Since the hatch doors cannot be considered as either illustrations, maps, plans, sketches, charts
and three-dimensional works relative to geography, topography, architecture or science, to be
properly classified as a copyrightable class “I” work, what was copyrighted were their
sketches/drawings only, and not the actual hatch doors themselves.

To constitute infringement, the usurper must have copied or appropriated the original work of
an author or copyright proprietor, absent copying, there can be no infringement of copyright.
“Unlike a patent, a copyright gives no exclusive right to the art disclosed; protection is given only
to the expression of the idea — not the idea itself.” (Olaño vs. Lim Eng Co, 787 SCRA 272, G.R.
No. 195835 March 14, 2016)

The RTC’s basis or source, an article appearing in a website, in ruling that the song entitled
“Lavandera Ko” is protected by a copyright, cannot be considered a subject of judicial notice
that does not need further authentication or verification.

The article in the website cited by the RTC patently lacks a requisite for it to be of judicial notice
to the court because such article is not well and authoritatively settled and is doubtful or
uncertain. It must be remembered that some articles appearing in the internet or on websites
are easily edited and their sources are unverifiable, thus, sole reliance on those articles is greatly
discouraged. (Juan vs. Juan, 837 SCRA 613, G.R. No. 221732 August 23, 2017)

Copyright vs. Trademark

Uni-Line's opposition to Kensonic's ownership of the SAKURA mark insists that the: SAKURA mark
is not copyrightable for being generic. Such insistence is unacceptable.

To be noted is that the controversy revolves around the SAKURA mark which is not a copyright.
The distinction is significant. A mark is any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an enterprise, and includes a stamped or marked
container of goods. In contrast, a copyright is the right to literary property as recognized and
sanctioned by positive law; it is an intangible, incorporeal right granted by statute to the author
or originator of certain literary or artistic productions, whereby he or she is invested, for a specific
period, with the sole and exclusive privilege of multiplying copies of the same and publishing and
selling them. Obviously, the SAKURA mark is not an artistic or literary work but a sign used to
distinguish the goods or services of one enterprise from those of another. (Kensonic, Inc. vs. Uni-
Line Multi-Resources, Inc., (Phil.), G.R. Nos. 211820-21, June 06, 2018)

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Under the Intellectual Property Code (IPC), “works are protected by the sole fact of their
creation, irrespective of their mode or form of expression, as well as of their content, quality
and purpose.” These include “audiovisual works and cinematographic works and works
produced by a process analogous to cinematography or any process for making audiovisual
recordings.”

Contrary to the old copyright law, the Intellectual Property Code does not require registration of
the work to fully recover in an infringement suit. Nevertheless, both copyright laws provide that
copyright for a work is acquired by an intellectual creator from the moment of creation. It is true
that under Section 175 of the Intellectual Property Code, “news of the day and other
miscellaneous facts. (ABS-CBN Corporation vs. Gozon, G.R. No. 195956, March 11, 2015)

News or the event itself is not copyrightable. However, an event can be captured and presented
in a specific medium.

As recognized by this court in Joaquin, television "involves a whole spectrum of visuals and
effects, video and audio." News coverage in television involves framing shots, using images,
graphics, and sound effects. It involves creative process and originality. Television news footage
is an expression of the news. (ABS-CBN Corporation vs. Gozon, G.R. No. 195956, March 11, 2015)

News as expressed in a video footage is entitled to copyright protection. Broadcasting

organizations have not only copyright on but also neighboring rights over their broadcasts.
Copyrightability of a work is different from fair use of a work for purposes of news reporting.

Broadcasting organizations are entitled to several rights and to the protection of these rights
under the Intellectual Property Code. Respondents’ argument that the subject news footage is
not copyrightable is erroneous. The Court of Appeals, in its assailed Decision, correctly recognized
the existence of ABS-CBN’s copyright over the news footage: Surely, private respondent has a
copyright of its news coverage. Seemingly, for airing said video feed, petitioner GMA is liable
under the provisions of the Intellectual Property Code, which was enacted purposely to protect
copyright owners from infringement. (ABS-CBN Corporation vs. Gozon, 753 SCRA 1, G.R. No.
195956 March 11, 2015)

Broadcasting vs. Rebroadcasting

With regard to the neighboring rights of a broadcasting organization in this jurisdiction, this court
has discussed the difference between broadcasting and rebroadcasting:

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Section 202.7 of the IP Code defines broadcasting as "the transmission by wireless means for the
public reception of sounds or of images or of representations thereof; such transmission by
satellite is also ‘broadcasting’ where the means for decrypting are provided to the public by the
broadcasting organization or with its consent."

On the other hand, rebroadcasting as defined in Article 3(g) of the International Convention for
the Protection of Performers, Producers of Phonograms and Broadcasting Organizations,
otherwise known as the 1961 Rome Convention, of which the Republic of the Philippines is a
signatory, is "the simultaneous broadcasting by one broadcasting organization of the broadcast
of another broadcasting organization." (ABS-CBN Corporation vs. Gozon, 753 SCRA 1, G.R. No.
195956 March 11, 2015)

Broadcasting organizations are entitled to several rights and to the protection of these rights
under the Intellectual Property Code. Respondents’ argument that the subject news footage is
not copyrightable is erroneous. The Court of Appeals, in its assailed Decision, correctly
recognized the existence of ABS-CBN’s copyright over the news footage.

Surely, private respondent has a copyright of its news coverage. Seemingly, for airing said video
feed, petitioner GMA is liable under the provisions of the Intellectual Property Code, which was
enacted purposely to protect copyright owners from infringement. (ABS-CBN Corporation vs.
Gozon, 753 SCRA 1, G.R. No. 195956 March 11, 2015)

Fair use

Fair use is defined as “a privilege to use the copyrighted material in a reasonable manner without
the consent of the copyright owner or as copying the theme or ideas rather than their expression.”
Fair use is an exception to the copyright owner’s monopoly of the use of the work to avoid stifling
“the very creativity which that law is designed to foster.” (ABS-CBN Corporation vs. Gozon, 753
SCRA 1, G.R. No. 195956 March 11, 2015)

Four (4) factors to determine if there was fair use of a copyrighted work

Determining fair use requires application of the four-factor test. Section 185 of the Intellectual
Property Code lists four (4) factors to determine if there was fair use of a copyrighted work:

a. The purpose and character of the use, including whether such use is of a commercial
nature or is for nonprofit educational purposes;
b. The nature of the copyrighted work;

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c. The amount and substantiality of the portion used in relation to the copyrighted work as
a whole; and
d. The effect of the use upon the potential market for or value of the copyrighted work.
(ABS-CBN Corporation vs. Gozon, 753 SCRA 1, G.R. No. 195956 March 11, 2015)

First, the purpose and character of the use of the copyrighted material must fall under those
listed in Section 185, thus: "criticism, comment, news reporting, teaching including multiple
copies for classroom use, scholarship, research, and similar purposes."

The purpose and character requirement is important in view of copyright’s goal to promote
creativity and encourage creation of works. Hence, commercial use of the copyrighted work can
be weighed against fair use.

The "transformative test" is generally used in reviewing the purpose and character of the usage
of the copyrighted work. This court must look into whether the copy of the work adds "new
expression, meaning or message" to transform it into something else. "Meta-use" can also occur
without necessarily transforming the copyrighted work used.

Second, the nature of the copyrighted work is significant in deciding whether its use was fair.

If the nature of the work is more factual than creative, then fair use will be weighed in favor of
the user.

Third, the amount and substantiality of the portion used is important to determine whether
usage falls under fair use.

An exact reproduction of a copyrighted work, compared to a small portion of it, can result in the
conclusion that its use is not fair. There may also be cases where, though the entirety of the
copyrighted work is used without consent, its purpose determines that the usage is still fair. For
example, a parody using a substantial amount of copyrighted work may be permissible as fair use
as opposed to a copy of a work produced purely for economic gain.

Lastly, the effect of the use on the copyrighted work’s market is also weighed for or against the
user.

If this court finds that the use had or will have a negative impact on the copyrighted work’s
market, then the use is deemed unfair. (ABS-CBN Corporation vs. Gozon, 753 SCRA 1, G.R. No.
195956 March 11, 2015)

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Copyright conditions for debates

The copyright conditions for the debates are: (1) the reproduction or communication to the
public by mass media of the debates is for information purposes; (2) the debates have not been
expressly reserved by the Lead Networks (copyright holders); and (3) the source is clearly
indicated (Rappler, Inc. vs. Bautista, 788 SCRA 442, G.R. No. 222702, April 5, 2016).

Infringement under the Intellectual Property Code (IPC) is malum prohibitum. The Intellectual
Property Code is a special law.

Copyright is a statutory creation: Copyright, in the strict sense of the term, is purely a statutory
right. It is a new or independent right granted by the statute, and not simply a preexisting right
regulated by the statute. Being a statutory grant, the rights are only such as the statute confers,
and may be obtained and enjoyed only with respect to the subjects and by the persons, and on
terms and conditions specified in the statute. The general rule is that acts punished under a
special law are malum prohibitum. “An act which is declared malum prohibitum, malice or
criminal intent is completely immaterial.” (ABS-CBN Corporation vs. Gozon, 753 SCRA 1, G.R. No.
195956 March 11, 2015)

Lack of knowledge of infringement is not a valid defense.

Infringement of a copyright is a trespass on a private domain owned and occupied by the owner
of the copyright, and, therefore, protected by law, and infringement of copyright, or piracy, which
is a synonymous term in this connection, consists in the doing by any person, without the consent
of the owner of the copyright, of anything the sole right to do which is conferred by statute on
the owner of the copyright.” (ABS-CBN Corporation vs. Gozon, 753 SCRA 1, G.R. No. 195956
March 11, 2015)

In case of a software program, is it necessary to prove that the one who sold the program was
also the person who copied or reproduced it so as to establish probable cause for infringement
of copyright?

No. Under the law, copyright shall consist in the exclusive right, among other things, to print,
reprint, publish, copy, distribute, multiply, sell, and make photographs, photo-engravings, and
pictorial illustrations of the works. Jurisprudence teaches us that while the word “and” denotes
joinder or union of words, literal construction thereof to copyright would lead to absurdity as the
acts enumerated cannot be carried out on all of the classes of works enumerated.

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The mere sale of the illicit copies of the software programs was enough by itself to show the
existence of probable cause for copyright infringement. There was no need for the petitioner to
still prove who copied, replicated or reproduced the software programs. (Microsoft Corporation
vs. Manansala, G.R. No. 166391, October 21, 2015)

Limitations on Copyright

Notwithstanding the provisions of Chapter V, the following acts shall not constitute infringement
of copyright:
(1) The recitation or performance of a work, once it has been lawfully made accessible to
the public, if done privately and free of charge or if made strictly for a charitable or
religious institution or society (Sec. 184.1, IPC);
(2) The making of quotations from a published work if they are compatible with fair use
and only to the extent justified for the purpose, including quotations from newspaper
articles and periodicals in the form of press summaries: Provided, That the source and
the name of the author, if appearing on the work, are mentioned (Sec. 184.2, IPC);
(3) The reproduction or communication to the public by mass media of articles on current
political, social, economic, scientific or religious topic, lectures, addresses and other
works of the same nature, which are delivered in public if such use is for information
purposes and has not been expressly reserved: Provided, That the source is clearly
indicated (Sec. 184.3, IPC);
(4) The reproduction and communication to the public of literary, scientific or artistic
works as part of reports of current events by means of photography, cinematography
or broadcasting to the extent necessary for the purpose (Sec. 184.4, IPC);
(5) The inclusion of a work in a publication, broadcast, or other communication to the
public, sound recording or film, if such inclusion is made by way of illustration for
teaching purposes and is compatible with fair use: Provided, That the source and of the
name of the author, if appearing in the work, are mentioned (Sec. 184.5, IPC);
(6) The recording made in schools, universities, or educational institutions of a work
included in a broadcast for the use of such schools, universities or educational
institutions: Provided, That such recording must be deleted within a reasonable period
after they were first broadcast: Provided, further, That such recording may not be made
from audiovisual works which are part of the general cinema repertoire of feature films
except for brief excerpts of the work (Sec. 184.6, IPC);
(7) The making of ephemeral recordings by a broadcasting organization by means of its
own facilities and for use in its own broadcast (Sec. 184.7, IPC);
(8) The use made of a work by or under the direction or control of the Government, by the
National Library or by educational, scientific or professional institutions where such use
is in the public interest and is compatible with fair use (Sec. 184.8, IPC);

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(9) The public performance or the communication to the public of a work, in a place where
no admission fee is charged in respect of such public performance or communication,
by a club or institution for charitable or educational purpose only, whose aim is not
profit making, subject to such other limitations as may be provided in the Regulations
(Sec. 184.9, IPC);
(10) Public display of the original or a copy of the work not made by means of a film, slide,
television image or otherwise on screen or by means of any other device or process:
Provided, That either the work has been published, or, that the original or the copy
displayed has been sold, given away or otherwise transferred to another person by the
author or his successor in title (Sec. 184.10, IPC); and
(11) Any use made of a work for the purpose of any judicial proceedings or for the giving of
professional advice by a legal practitioner. (Sec. 184.11, IPC)

Materials for the blind, etc.

Under the IPC, as amended, the following shall not likewise constitute infringement of copyright:
the reproduction or distribution of published articles or materials in a specialized format
exclusively for the use of the blind, visually- and reading-impaired persons: Provided, That such
copies and distribution shall be made on a nonprofit basis and shall indicate the copyright owner
and the date of the original publication. (Sec. 184.1, IPC)

DATA PRIVACY ACT

Data subject

“Data subject” refers to an individual whose personal information is processed. (Sec. 3[c], DPA) The
IRR of the DPA is more specific when it declares that the term refers to “an individual whose
personal, sensitive personal, or privileged information is processed.” (IRR of DPA, §3[d])

Personal Information

“Personal information” refers to any information whether recorded in a material form or not, from
which the identity of an individual is apparent or can be reasonably and directly ascertained by the
entity holding the information, or when put together with other information would directly and
certainly identify an individual. (Sec. 3[g], DPA)
CCTV

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A CCTV is a camera surveillance system that captures images of individuals or information relating
to individuals. If the camera surveillance footage is of sufficient quality, a person with the
necessary knowledge will be able to reasonably ascertain the identity of an individual from the
footage. Thus, the footage and images are considered personal information and the provisions
of the DPA will apply. (NPC Advisory Opinion No. 2018-080, November 26, 2018)

Birth Certificate

A birth certificate contains the following information of an individual, among others: name, sex,
date of birth, place of birth, type of birth, birth order, weight at birth, parents’ details (name,
citizenship, religion and occupation), among others. Most of the information contained in a birth
certificate are considered sensitive personal information under Section 3(l) of the DPA. (NPC
Advisory Opinion No. 2020-011, February 11, 2020)

Professional information such as name, position, bank or company, office telephone number,
mobile number and company address available in a company’s website are considered as
personal information pursuant to the Data Privacy Act.

The abovementioned data, taken together, would all be considered as personal information
within the purview of the DPA. The fact that these personal information are available in a website
of a company or belongs to a government employee or official does not change the nature of the
personal information. (NPC Advisory Opinion No. 2017- 60, October 3, 2017)

Personal Information Controller and Personal Information Processor

“Personal information controller” (PIC) refers to a person or organization who controls the
collection, holding, processing or use of personal information, including a person or organization
who instructs another person or organization to collect, hold, process, use, transfer or disclose
personal information on his or her behalf. The term excludes:
(1) A person or organization who performs such functions as instructed by another
person or organization; and
(2) An individual who collects, holds, processes or uses personal information in
connection with the individual’s personal, family or household affairs. (Sec. 3[h], DPA)

“Personal information processor” (PIP), on the other hand, refers to any natural or juridical person
qualified to act as such under this Act to whom a personal information controller may outsource
the processing of personal data pertaining to a data subject. (Sec. 3[i], DPA)

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Processing of Personal Information

“Processing” refers to any operation or any set of operations performed upon personal information
including, but not limited to, the collection, recording, organization, storage, updating or
modification, retrieval, consultation, use, consolidation, blocking, erasure or destruction of data.
(Sec. 3[j], DPA)

DPA coverage
DPA covers:
1) The processing of all types of personal information;
2) By any natural and juridical person involved in personal information processing

General Data Privacy Principles

The processing of personal information shall be allowed, subject to compliance with the
requirements of this Act and other laws allowing disclosure of information to the public and
adherence to the principles of transparency, legitimate purpose and proportionality. (Par.1, Sec.
11, DPA)

Transparency

The data subject must be aware of the nature, purpose, and extent of processing of his personal
information, including the risks and safeguards involved, the identity of the personal information
controller, his rights as a data subject, and how he can exercise these rights.
Any information and communication relating to the processing of personal data should be easy to
access and understand, using clear and plain language. (IRR of the DPA, § 18 [a])

Legitimate purpose

The processing of personal information shall be compatible with the declared purpose which
must not be contrary to law, morals or public policy.

In order to use legitimate interest as basis for lawful processing, PICs must consider the following:
1. Purpose test – The existence of a legitimate interest must be clearly established,
including a determination of what the particular processing operation seeks to achieve;

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2. Necessity test – The processing of personal information must be necessary for the
purposes of the legitimate interest pursued by the PIC or third party to whom personal
information is disclosed, where such purpose could not be reasonably fulfilled by other
means; and
3. Balancing test – The fundamental rights and freedoms of data subjects should not be
overridden by the legitimate interests of the PICs, considering the likely impact of the
processing on the data subjects. (NPC Advisory Opinion No. 2020-003, February 3, 2020)

Proportionality
This principle requires that “the processing of information shall be adequate, relevant, suitable,
necessary, and not excessive in relation to a declared and specified purpose. Personal data shall
be processed only if purpose of the processing could not reasonably be fulfilled by other means.”
(IRR of the DPA, § 18 [c] [2016]).

Contact Tracing

The DPA recognizes that the government can perform its functions in this pandemic while still
guaranteeing the data privacy rights of our citizens. The law requires that all government
agencies involved in the COVID-19 response, i.e. the DOH, agencies authorized by the DOH, and
other agencies or entities authorized by law, specifically on contact tracing, shall adhere to the
general data privacy principles, implement safeguards to protect personal data they process, and
uphold data subjects’ rights at all times. (NPC Advisory Opinion No. 2020-022, June 8, 2020)

Criteria for Lawful Processing of Personal Information

The processing of personal information shall be permitted only if not otherwise prohibited by law,
and when at least one of the following conditions exists:
(a) The data subject has given his or her consent;
(b) The processing of personal information is necessary and is related to the fulfillment
of a contract with the data subject or in order to take steps at the request of the data
subject prior to entering into a contract;
(c) The processing is necessary for compliance with a legal obligation to which the
personal information controller is subject;
(d) The processing is necessary to protect vitally important interests of the data subject,
including life and health;
(e) The processing is necessary in order to respond to national emergency, to comply
with the requirements of public order and safety, or to fulfill functions of public authority

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which necessarily includes the processing of personal data for the fulfillment of its
mandate; or
(f) The processing is necessary for the purposes of the legitimate interests pursued by
the personal information controller or by a third party or parties to whom the data is
disclosed, except where such interests are overridden by fundamental rights and
freedoms of the data subject which require protection under the Philippine Constitution.
(Sec. 12, DPA)

Sensitive Personal Information and Privileged Information; Justifications for processing

(a) The data subject has given his or her consent, specific to the purpose prior to the
processing, or in the case of privileged information, all parties to the exchange have given
their consent prior to processing;
(b) The processing of the same is provided for by existing laws and regulations: xxx
(c) The processing is necessary to protect the life and health of the data subject or
another person, and the data subject is not legally or physically able to express his or her
consent prior to the processing;
(d) The processing is necessary to achieve the lawful and noncommercial objectives of
public organizations and their associations: xxx
(e) The processing is necessary for purposes of medical treatment, is carried out by a
medical practitioner or a medical treatment institution, and an adequate level of
protection of personal information is ensured; or
(f) The processing concerns such personal information as is necessary for the protection
of lawful rights and interests of natural or legal persons in court proceedings, or the
establishment, exercise or defense of legal claims, or when provided to government or
public authority. (Sec. 13, DPA)

Consent of data subject

Consent of the data subject refers to any freely given, specific, informed indication of will,
whereby the data subject agrees to the collection and processing of personal information about
and/or relating to him or her. Consent shall be evidenced by written, electronic or recorded
means. (NPC Advisory Opinion No. 2020-005, February 4, 2020)

Collection of health information by the DOH

The DPA is not meant to prevent government institutions from processing personal data when
necessary to fulfill their mandates. Rather, it aims to protect the right to information privacy

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while ensuring free flow of information. What the DPA does is to promote fair, secure, and lawful
processing of such information. In this case, the DPA does not prohibit the DOH from collecting
and processing personal data for purposes necessary to its mandate, with the concomitant
responsibility of complying with the requirements of the DPA, its Implementing Rules and
Regulations (IRR), and other issuances of the National Privacy Commission (NPC). (NPC Advisory
Opinion No. 2018-083, November 26, 2018)

Request to access birth certificate of certificate of siblings

The NPC advised that the request for said birth certificates in order to apply for the tax
identification numbers (TINs) of the siblings for the payment of estate taxes and the transfer of the
respective allotted portions of the estate of their deceased parents to and each of the siblings as
heirs, pursuant to the compromise agreement approved by the court is justifiable as this is
necessary for the protection of lawful rights and interests of natural or legal persons in court
proceedings, or the establishment, exercise or defense of legal claims, or when provided to
government or public authority. (NPC Advisory Opinion No. 2020-011, February 11, 2020)

A certain company doing business as an online gaming hub for players sent you and others an
email advisory for a “clan masters” meeting. However, the advisory was sent using the carbon
copy (cc) feature in sending emails and thereby compromising the personal information of the
recipients.

The company, as a personal information controller(PIC), should have acted with prudence and
considered sending the email advisory through blind carbon copy (bcc) instead. When processing
personal information, PICs are required to implement reasonable and appropriate organizational,
physical, and technical security measures to protect personal data and maintain its
confidentiality, integrity, and availability.

This would include having the appropriate policies in place to govern the processing of personal
and sensitive personal information of customers and ensuring that employees are adequately
trained on proper email usage to protect the data subjects from unauthorized access to or
disclosure of their personal information. (NPC Advisory Opinion dated 30 September 2020)

Rights of the Data Subject

The data subject is entitled to:

(a) Be informed whether personal information pertaining to him or her shall be, are being or
have been processed;

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(b) Be furnished the information indicated hereunder before the entry of his or her personal
information into the processing system of the personal information controller, or at the next
practical opportunity:
(1) Description of the personal information to be entered into the system;
(2) Purposes for which they are being or are to be processed;
(3) Scope and method of the personal information processing;
(4) The recipients or classes of recipients to whom they are or may be disclosed;
(5) Methods utilized for automated access, if the same is allowed by the data subject,
and the extent to which such access is authorized;
(6) The identity and contact details of the personal information controller or its
representative;
(7) The period for which the information will be stored; and
(8) The existence of their rights, i.e., to access, correction, as well as the right to lodge a
complaint before the Commission.
xxx xxx xxx

(c) Reasonable access to, upon demand, the following:

(1) Contents of his or her personal information that were processed;
(2) Sources from which personal information were obtained;
(3) Names and addresses of recipients of the personal information;
(4) Manner by which such data were processed;
(5) Reasons for the disclosure of the personal information to recipients;
(6) Information on automated processes where the data will or likely to be made as the
sole basis for any decision significantly affecting or will affect the data subject;
(7) Date when his or her personal information concerning the data subject were last
accessed and modified; and
(8) The designation, or name or identity and address of the personal information
controller;

(d) Dispute the inaccuracy or error in the personal information and have the personal
information controller correct it immediately and accordingly, unless the request is vexatious
or otherwise unreasonable. If the personal information have been corrected, the personal
information controller shall ensure the accessibility of both the new and the retracted
information and the simultaneous receipt of the new and the retracted information by
recipients thereof: Provided, That the third parties who have previously received such
processed personal information shall he informed of its inaccuracy and its rectification upon
reasonable request of the data subject;

(e) Suspend, withdraw or order the blocking, removal or destruction of his or her personal
information from the personal information controller’s filing system upon discovery and
substantial proof that the personal information are incomplete, outdated, false, unlawfully

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obtained, used for unauthorized purposes or are no longer necessary for the purposes for
which they were collected. In this case, the personal information controller may notify third
parties who have previously received such processed personal information; and

(f) Be indemnified for any damages sustained due to such inaccurate, incomplete, outdated,
false, unlawfully obtained or unauthorized use of personal information. (Sec. 16, DPA)

Transmissibility of Rights of the Data Subject

The lawful heirs and assigns of the data subject may invoke the rights of the data subject for, which
he or she is an heir or assignee at any time after the death of the data subject or when the data
subject is incapacitated or incapable of exercising the rights as enumerated in the immediately
preceding section. (Sec. 17, DPA)

Right to Data Portability

The data subject shall have the right, where personal information is processed by electronic means
and in a structured and commonly used format, to obtain from the personal information controller
a copy of data undergoing processing in an electronic or structured format, which is commonly
used and allows for further use by the data subject. The Commission may specify the electronic
format referred to above, as well as the technical standards, modalities and procedures for their
transfer. (Sec. 18, DPA)

Right to Erasure or Blocking

The data subject shall have the right to suspend, withdraw or order the blocking, removal or
destruction of his or her personal data from the personal information controller’s filing system.
(Section 34 (e) of the DPA IRR)

The data subject also has the right to “suspend, withdraw, or order the blocking, removal or
destruction of his or her personal information from the personal information controller’s filing
system upon discovery and substantial proof that the personal information are incomplete,
outdated, false, unlawfully obtained, used for unauthorized purposes or are no longer necessary
for the purposes for which they were collected.” (NPC Advisory Opinion No. 2017-55, September
13, 2017)

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MetroDeal may save credit card details of its customers for as long as necessary for the
fulfillment of the purposes for which data was obtained.

The Data Privacy Act provides that:

Personal information must be retained only for as long as necessary for the fulfillment of the
purposes for which the data was obtained or for the establishment, exercise or defense of legal
claims, or for legitimate business purposes, or as provided by law.

This would mean that the credit details should be saved primarily for purpose of completing the
particular transaction for which they were given. As a general rule, consent of the client is
required where the purpose of processing, including retention, is no longer directly related and
compatible with the primary purpose of collection. Storing these details longer, such as for
instance, for purpose of facilitating future transactions or for convenience of clients, requires
consent. Without consent, the company should be able to demonstrate the basis for its retention
periods, particularly whether the same would be related to the fulfillment of a contract with the
data subject or for legitimate business purpose. (NPC Advisory Opinion No. 2017-55, September
13, 2017)

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