LIBERTAS ET IUSTICIA

MERCANTILE LAW
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LETTER OF CREDIT

A Letter of Credit is any arrangement, however named or described, whereby a bank,

acting on the
request of his client or on his own behalf, undertakes to pay another, against stipulated
documents, provided that the terms of the letter of credit are complied with.

DOCTRINE OF INDEPENDENCE

The relationship of the buyer and the bank is separate and distinct from the relationship of the buyer and seller in
the main contract; the bank is not required to investigate if the contract underlying the L/C has been fulfilled or
not because in transactions involving L/C, banks deal only with documents and not goods. In effect, the buyer has
no course of action against the issuing bank. As the principle's nomenclature clearly suggests, the obligation under
the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate
and distinct from the underlying transaction.

DOCTRINE OF STRICT COMPLIANCE

The documents tendered by the seller/beneficiary must strictly conform to the terms of the L/C. The tender of
documents must include all documents required by the letter. It is not a question of whether or not it is fair or
equitable to require submission of documents but whether or not the documents were agreed upon. Thus, a
correspondent bank which departs from what has been stipulated under the L/C acts on its own risk and may not
thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the
beneficiary.

TRUST RECEIPT TRANSACTION

It is any transaction between the entruster and entrustee:
1. Whereby the entruster who owns or holds title or security interests over certain
specified goods, documents or instrument (GDI), releases the same to the possession
of entrustee upon the latter’s execution of a TR agreement.
2. Wherein the entrustee binds himself to hold the GDI in trust for the entruster and, in
case of default:
a. to sell or otherwise dispose such GDI with the obligation to turn over to the
entruster the proceeds to the extent of the amount owing to it; or
b. to turn over the GDI itself if not sold or otherwise disposed of in accordance
with the terms and conditions specified in the TR.

TRUST RECEIPT
A Trust Receipt is a written or printed document signed by the entrustee in favor of the entruster containing the
terms and conditions complying with the provisions of the Trust Receipts Law, whereby the bank as enstruster
releases the goods to the possession of the entrustee but retains ownership thereof while the entrustee may sell
the goods and apply the proceeds for the full payment of his liability to the bank.

REMEDIES OF ENTRUSTER
The entruster may cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom at any time upon
default or
failure of the entrustee to comply with any of the terms and conditions of the trust
receipt or any
other agreement between the entruster and the entrustee, and the entruster in
possession of the
goods, documents or instruments may, on or after default, give notice to the entrustee
of the
intention to sell, and may, not less than five days after serving or sending of such notice,
sell the

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goods, documents or instruments at public or private sale, and the entruster may, at a
public sale,
become a purchaser.

If the entruster cancels the trust and takes back the goods, the criminal liability of the
entrustee is extinguished but the civil liability subsists.

CORRELATION BETWEEN LETTERS OF CREDIT AND TRUST RECEIPT

The bank extends a loan covered by the letter of credit, with the trust receipt as security for the
loan. The transaction involves a loan feature represented by the letter of credit, and a security
feature covered by the trust receipt.

WAREHOUSEMAN’S LIEN
A warehouseman's lien consists of the storage charge as well as other fees and charges as may be stipulated in the
warehouse receipt. The following are the charges covered by a warehouseman’s lien:

1. Charges for storage and Preservation of the goods (insurance and others may be included as long as it is
stipulated);
2. Money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses
in relation to such goods;
3. Charges and expenses for notice, and
4. Advertisements of sale, and for sale of the goods where default had been made in satisfying the
warehouseman’s lien

CONSERVATOR VS. RECEIVER

1. A conservator is appointed when a bank is in a continuing state of illiquidity or if it refuses to maintain its liquidity,
while a receiver is appointed if the bank is in a state of insolvency;
2. A conservator is appointed to restore the bank into a state of liquidity, while a receiver is appointed to rehabilitate
the bank;
3. A conservator holds the assets of the bank in order to manage it, while a receiver holds the assets of the bank for
the benefit of its creditors;
4. A bank placed under conservatorship can do business, while a bank placed under receivership is forbidden to do
business.
5. A conservator has 1 year to restore the bank to a state of liquidity, while a receiver has 90 days to rehabilitate the
bank.
Note: If both fail to meet their objective within the period required by law, they can recommend the liquidation or
closure of the bank.

SINGLE BORROWER’S LIMIT

The total amount of loans, credit accommodations and guarantees that the bank could grant should at no time
exceed 25% of the bank’s net worth (GBL, Sec 35.1)
XPN:
a. As the Monetary Board may otherwise
prescribe for reasons of national interest
b. Deposits of rural banks with GOCC
financial institutions like LBP, DBP, and
PNB.

DISTINCTION BETWEEN PESO DEPOSIT FROM FOREIGN DEPPOSIT INSOFAR AS SECRECY OF BANK
DEPOSITS IS CONCERNED (Dimaampao. 2018)
PESO DEPOSIT FOREIGN CURRENCY
(R.A. 1405) (R.A. 6426)
May be garnished because the amountis actually May not be garnished, attached, or be subject to any
disclosed. court process

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SAFE HARBOR CLAUSE

No administrative, criminal, or civil proceedings shall lie against any person for having made a covered
transaction report in the regular performance of his duties and in good faith, whether or not such reporting results
in any criminal prosecution under the AMLA or any other Philippine law.

Doctrine of Separate Juridical Personality

The doctrine of corporate juridical personality states that a corporation is a juridical entity with legal personality
separate and distinct from those acting for and in its behalf and, in general, from the people comprising it.

Doctrine of Apparent Authority

This doctrine imposes liability, not as the result of the reality of a contractual relationship, but rather because of
the actions of a principal or an employer in somehow misleading the public into believing that the relationship or
the authority exists. (Irving v. Doctors Hospital of Lake Worth, Inc., 415 So. 2d 55 (1982), quoting Arthur v. St.
Peters Hospital, 169 N.J. 575, 405 A 2d 443 (1979)). The concept is essentially one of estoppel.
Under the rule, the principal is bound by the acts of his agent with the apparent authority which he knowingly
permits the agent to assume, or which he holds to the agent out to the public as possessing. The question in every
case is whether the principal has by his voluntary act placed the agent with business usages and the nature of the
particular business, is justified in presuming that such agent has authority to perform the particular act in question.
(Hudson C., Loan Assn., Inc. v. Horowytz, 116 N.J.L. 605, 608 A 437 (Supp. Ct. 1936).

Ultra Vires Act

An ultra vires act refers to an act outside or beyond express, implied and incidental corporate powers. The concept
also includes those acts that may ostensibly be within such powers but are, by general or special laws, either
proscribed or declared illegal.
It is one committed outside the object for which a corporation is created as defined by the law of its organization
and therefore beyond the power conferred upon it by law.
Unlike illegal acts which contemplate the doing of an act that is contrary to law, morals, or public policy or public
duty, and are void, ultra vires acts are not illegal but not merely within the scope of the articles of incorporation
and the by-laws. They are merely voidable and may become binding and enforceable when ratified by the
stockholders

Tests in determining the nationality of

Corporations

Place of Incorporation test

In using the Place of Incorporation test, the
nationality of a corporation is determined by the
state of incorporation, regardless of the nationality
of the stockholders.

Control test
In determining the nationality of a corporation, the
control test uses the nationality of the controlling
stockholders or members of the corporation.
A corporation organized/incorporated abroad and
registered as doing business in the Philippines under the Corporation Code, of which 100% of the
capital stock outstanding and entitled to vote is
wholly owned by Filipinos, may be considered a
Philippine National under the Foreign Investments
Act of 1991. This is the only exception to the place of
incorporation test (SEC Opinion No. 04-14, March 3,
2004; De Leon, 2010). This test was adopted by the
said law as a general guideline in determining the
nationality of corporations engaged in a
nationalized activity (Sec Opinion No. 07-20,
November 20, 2007).

Grandfather rule
To ensure compliance with the constitutional

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limitation(s) of corporations engaging in

nationalized activities, the nationality of a
corporation must be determined by ascertaining if
60% of the investing corporation’s outstanding
capital stock is owned by “Filipino citizens”, or as
interpreted, by natural or individual Filipino
citizens. If such investing corporation is in turn
owned to some extent by another investing
corporation, the same process must be observed.
Reason: One must not stop until the citizenships of
the individual or natural stockholders of layer after
layer of investing corporations have been
established, for this is the very essence of the
Grandfather Rule

Rules governing the application of the

Grandfather Rule
1. The grandfather rule should be used in
determining the nationality of a corporation
engaged in a partly nationalized activity. This
applies in cases where the stocks of a
corporation are owned by another corporation
with foreign stockholders exceeding 40% of
the capital stock of the corporation (SEC-OGC
Opinion No. 10-31, December 9, 2010).
2. The Grandfather Rule will not apply in cases
where the 60-40 Filipino-alien equity
ownership in a particular natural resource
corporation is not in doubt.If the stockholder
corporation is 60% or more owned by
Filipinos, all the stock held by the stockholder
corporation is deemed to be held by Filipinos
(DOJ Opinion No. 19, s. 1989).
3. When there is doubt as to the actual extent of
Filipino equity in the investee corporation, the
SEC is not precluded from using the
Grandfather Rule (SEC-OGC Opinion No. 22-07
dated December 7, 2007).

Trust Fund Doctrine

The subscribed capital stock of the corporation is a
trust fund for the payment of debts of the
corporation which the creditors have the right to
look up to satisfy their credits, and which the
corporation may not dissipate. The creditors may
sue the stockholders directly for the latter’s unpaid
subscription.
Effects of the trust fund doctrine
1. Dividends must never impair the subscribed
capital stock and must only be declared out of
unrestricted retained earnings (URE).
2. Subscription commitments cannot be
condoned or remitted
3. GR: The corporation cannot buy its own shares
using the subscribed capital as the consideration therefore (NTC v. CA, G.R. No.
127937. July 28, 1999).
XPN: (RDC)
a. Redeemable shares may be acquired even
without surplus profit for as long as it will
not result to the insolvency of the
Corporation;

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b. In cases that the corporation conveys its

stocks in payment of a Debt; or
c. In a Close corporation, a stockholder may
demand the payment of the fair value of
shares regardless of existence of retained
earnings for as long as it will not result to
the insolvency of the corporation
4. Rescission of a subscription agreement is not
allowed since it will effectively result in the
unauthorized distribution of the capital assets
and property of the corporation (Ong v Tiu,
ibid)

Remedial Rights

Actions that the stockholders or members can bring

Derivative Suit - 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.

Requisites for the existence of a derivative suit

1. Corporate cause of action: the cause of action must devolve upon the corporation itself; the wrongdoing or
harm having been caused to the corporation and not to the particular stockholder brining the suit (Reyes v.
Hon. RTC of Makati Br. 142, G.R. No. 165744, August 11, 2008).
2. Stockholder: the party bringing the suit must be a stockholder:
a) At the time the acts or transactions subject of the action occurred; and
b) at the time the action was filed

NOTE: if the cause of action is continuing in nature, the only requisite is that the party is a stockholder at the time
the action was filed (Dean Divina’s Lecture, April 29, 2015).
3. Exhaustion of all intra-corporate remedies available under the AOI, By-Laws, laws or rules governing the
corporation or partnership to obtain the relief he desires.
4. Not a Nuisance or Harassment suit.
5. Appraisal right is not available (Rule 8 of the Interim Rules of Procedure Governing Intra- Corporate
Controversies, cited in Yu, et al., v. Yukayguan, et al., G.R. No. 177549, June 18,
2009)
Individual Suit – When the injury is suffered directly by an individual shareholder as to affect his proprietary
rights, as when his right to vote is unlawfully withheld or his right to inspect corporate books arbitrarily denied, an
action may be brought by the injured stockholder in his own name and for his own benefit against the corporation
(Salonga, 1968).

NOTE: Authorization from the board of directors is

not necessary. Since the wrong is done to him
personally and not to the other stockholder or the
corporation, the cause of action belongs to him
alone.

Representative Suit – A representative suit is one filed by the shareholder individually, or on behalf of a class of
shareholders to which he or she belongs, for injury to his or her interest as a shareholder (Cua v. Tan, GR 182008,
December 4, 2009).

It is proper where the wrong is done to a group of stockholders, as where preferred stockholders’ rights are violated,
a class or representative suit will be proper for the protection of all stockholders belonging to the same group (Ibid).

NOTE: Right of pre-emption is personal to each stockholder. While a stockholder may maintain a suit to compel
the issuance of his proportionate share of stock, it has been ruled, nevertheless, that he may not maintain a
representative action on behalf of other stockholders who are similarly situated.

Remedies of representative suit and derivative suit are mutually exclusive

The two actions are mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders
(direct action) or the corporation (derivative action) (Ibid.).

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2007 BAR EXAM QUESTION:

In a stockholder's meeting, S dissented from the corporate act converting preferred voting shares to non-voting
shares. Thereafter, S submitted his certificates of stock for notation that his shares are dissenting. The next day, S
transferred his shares to T to whom new certificates were issued. Now, T demands from the corporation the payment
of the value of his shares.
a) What is the meaning of a stockholder's appraisal right?
b) Can T exercise the right of appraisal? Reason briefly.

SUGGESTED ANSWER:

a) It is the right of a stockholder to withdraw from the corporation and demand in writing, payment of the fair
value of his shares after registering his dissent from certain specified corporate acts involving fundamental
changes in corporate structures provided that the corporation has sufficient unrestricted retained earnings.
(Section 81, Commercial Code of the Philippines)

b) No. If shares represented by the certificates bearing such notation are transferred, and the certificates
consequently cancelled, the rights of the transferor as a dissenting stockholder shall cease and the transferee
shall have all the rights of a regular stockholder. (Section 86, Corporation Code). T cannot exercise the
right of appraisal because the certificates containing the notation of S’s dissent have been canceled. Upon
such cancellation, S’s rights as a dissenting stockholder have ceased. In such a case, a new certificate
without notation will be issued to T, who will be treated as a regular stockholder.

Intra-corporate Disputes
Concept
Intra-corporate dispute has been defined as a dispute which arises between the stockholder and the corporation. To
determine whether or not a case involves an intra-corporate dispute, two tests are applied - the relationship test and
the nature of the controversy test.

Under the relationship test, there is an intra-corporate controversy when the conflict is (1) between the corporation,
partnership, or association and the public; (2) between the corporation, partnership, or association and the State
insofar as its franchise, permit, or license to operate is concerned; (3) between the corporation, partnership, or
association and its stockholders, partners, members, or officers; and (4) among the stockholders, partners, or
associates themselves.

On the other hand, in accordance with the nature of controversy test, an intra-corporate controversy arises when the
cor:1troversy is not only rooted in the existence of an intra-corporate relationship, but also in the enforcement of the
parties' correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory
rules of the corporation

What constitutes “doing business”

Under the Foreign Investment Act (R.A. No. 7402),a foreign corporation is “deemed doing business in the
Philippines” if it is continuing the body or substance of the business or enterprise for which it was organized. It is
the intention of an entity to continue the body of its business in the country. The grant and extension of 90-day credit
terms of a foreign corporation to a domestic corporation for every purchase shows an intention to continue
transacting with the latter.

Jurisdictional tests of “doing or transacting

business” in the Philippines for foreign
corporations
1. Twin Characterization Test
a. Continuity Test –implies a continuity of
commercial dealings and arrangements,
and contemplates to some extent the
performance of acts or works or the
exercise of some functions normally
incident to and in progressive prosecution
of, the purpose and object of its
organization.
b. Subsequent Test – a foreign corporation is
doing business in the country if it is
continuing the body or substance of the
enterprise of business for which it was
organized (Sundiang Sr. & Aquino, 2009).

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2. Contract Test - Whether the contracts entered

into by the foreign corporation, or by an agent
acting under the control and direction of the
foreign corporation, are consummated in the
Philippines.

Requirements for valid transfer of stocks

The following are the requirements for valid
transfer of stocks:
1. If represented by a certificate, the following
must be strictly complied with:
a. Indorsement by the owner and his agent
b. Delivery of the certificate c. To be valid to third parties and to the
corporation, the transfer must be recorded
in the books of the corporation (Rural
Bank of Lipa v. CA, G.R. No. 124535,
Sepember 28, 2001).
2. If NOT represented by a certificate (such as
when the certificate has not yet been issued
or where for some reason is not in the
possession of the stockholder):
a. By means of deed of assignment; and
b. Such is duly recorded in the books of the
corporation. (Sundiang Sr. & Aquino,
2009)
Effect of the non-payment of Documentary
Stamp Tax
No sale, exchange, transfer or similar transaction
intended to convey ownership of, or title to any
share of stock shall be registered in the books of
the corporation unless the receipts of payment of
the tax herein imposed is filed with and recorded
by the stock transfer agent or secretary of the
corporation (Revenue Regulations No. 6-2008, Sec.
11).
Stockholder may bring suit to compel the
corporate secretary to register valid transfer of
stocks
It is the corporate secretary’s ministerial duty and
obligation to register transfers of stocks provided
all the requirements for a valid transfer had been
complied with.
Remedies where corporation refuses to
transfer certificate of stocks
1. Petition for mandamus
In case of wrongful refusal of the corporate
secretary to record the transfer, specific
performance and mandamus are the common
remedies. Remedy of mandamus is available if
the following requisites are present:
a. Due application therefor has been made;
b. Said application has been denied;
c. There are no unpaid claims against the
stock by the corporation;
d. An ordinary action for damages against
the corporation would be inadequate;
and
e. An action in the nature of a suit in equity
to secure a decree ordering the transfer
would also be inadequate [Hager v.
Bryan, 19 Phil. 138 (1912)].

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NOTE: However, by the weight of authority, it

is held that mandamus will not lie in ordinary
cases to compel a corporation or its officers to
transfer stock on its books and issue new
certificates to the transferee.
2. Suit for specific performance of an express or
implied contract
3. May sue for damages where specific
performance cannot be granted
NOTE: There must be a special power of attorney
executed by the registered owner of the share
authorizing transferor to demand transfer in the
stock and transfer book (Ponce v. Alsons Cement,
G.R. No. 139802, December 10, 2002).
The law does not prescribe a period within which
the registration of the transfer of shares should be
effected. Hence, the action to enforce the right does
not accrue until there has been a demand and a
refusal concerning the transfer.
Valid refusal by the corporation to register the
transfer of shares
The corporation may refuse to register the transfer
of shares if it has an existing unpaid claim over the
shares to be transferred. The “unpaid claim” refers
to the unpaid subscription on the shares
transferred and not to any other indebtedness that
the transferor may have to the corporation (CC, Sec.
63).

Securities (1996 Bar)

Securities are shares, participation or interests in a
corporation or in a commercial enterprise or
profit-making venture and evidenced by a
certificate, contract, instrument, whether written
or electronic in character.

Short Swing Profit Rule

Provides that any profit realized by insiders of an issuer from the purchase and sale, or any sale and purchase, of
any equity security of the issuer within any period of less than six months, unless such security was acquired in
good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer (Section
23.2, Securities Regulation Code).

TRIPLE PENALTY RULE

Treble damage concept where a violator of the law
is liable to a private party for triple the amount of
damages that he suffers as a result of the violation.
The Act adopts the triple penalty rule with respect
to the applicable administrative and/or criminal
fine, if the violation involves the trade or
movement of basic necessities and prime
commodities as defined by Republic Act No. 7581,
as amended (Sec. 41, RA 10667).
NOTE: The triple penalty clause does not apply to
the penalty of imprisonment.
Q: Will the Commission retain the fines and
penalties?
A: NO. All fees. fines, penalties collected by the
Commission shall not be retained by the
Commission, but will be remitted to the National

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Treasury and shall accrue to the general funds.

However, the funds necessary for the continuous
and effective operation of the Commission shall be
included in the annual General Appropriations Act
(Sec. 51, RA 10667).

Trademark Infringement from Unfair Competition

INFRINGEMENT OF TRADEMARK
Unauthorized use of a trademark.
Fraudulent intent is unnecessary.
GR: Prior registration of the trademark is a
prerequisite to the action.
XPN: Well-known marks
UNFAIR COMPETITION
The passing off of one’s goods as those of another.
Fraudulent intent is essential.
Registration is not necessary (Del Monte Corp. v. CA,
G.R. No. 78325, January 23, 1990).

Shang Properties vs St. Francis Devt Corp.

The "true test" of unfair competition has thus been "whether the acts of the defendant have the intent of
deceiving or are calculated to deceive the ordinary buyer making his purchases under the ordinary conditions of
the particular trade to which the controversy relates." It is therefore essential to prove the existence of fraud, or
the intent to deceive, actual or probable, determined through a judicious scrutiny of the factual circumstances
attendant to a particular case (Shang Properties Realty Corporation (formerly The Shang Grand Tower Corporation)
and Shang Properties, Inc. (formerly EDSA Properties Holdings, Inc.) v. St. Francis Development Corporation, G.R.
No. 190706, July 21, 2014).
W Land vs Starwood Hotels
There must be a bona fide use of the mark, not token use. This may be characterized as use which results or tends
to result, in one way or another, in a commercial interaction or transaction in the ordinary course of business. The
mere exhibition of goods or services over the internet is NOT ENOUGH to constitute actual use. It must be shown
that the trademark owner has actually transacted or intentionally targeted customers of a particular jurisdiction.
Showing an actual commercial link to the country is therefore imperative. (W land holdings, inc., petitioner, v.
Starwood hotels and resorts worldwide, inc., G.R.. no. 222366, December 4, 2017 )

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