XXX Atty. de Jesus - SCL (For Legal Edge 7july2018) PDF

SPECIAL COMMERCIAL
LAWS
ATTY. DARREN M. DE JESUS
OUTLINE
1. Letters of Credit
2. Trust Receipts
3. Securities Regulation Code
4. Foreign Investments Act
5. E-Commerce Act
LETTERS OF CREDIT
Letters of Credit
Definition:
Letter of Credit (LC) is an engagement by a bank or other person

made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance wit the
conditions specified in the credit. (Prudential v IAC, GR No. 74886,
8 December 1992)
Primary Purpose:
To substitute for and support the agreement of the buyer-importer
to pay money under a contract or other arrangement, but it does
not necessarily constitute as a condition of the perfection of such
arrangement.
Letters of Credit
LC
- A financial device
- Developed by Merchants
- Dealing with Sale of Goods
- Seller – refuses to part from goods until he is paid
- Buyer – wants to control goods before paying
- Buyer contracts a Bank to issue a LC in favor of Seller
- Buyer and Seller on documents to be presented
- Bank pays Seller upon presentment of documents
- Buyer reimburses Bank
Letters of Credit
Governing Laws
1. Code of Commerce
Article 568 – LC issued in favor of a
definite person, not order
2. Customs – Uniform Customs and Practice
for Documentary Credits (UCP) adopted by
the International Chamber of Commerce
Letters of Credit
Bar Exam Question (2015)
 Is the Uniform Customs and Practice for Documentary Credits
of the International Chamber of Commerce applicable to
commercial letters of credit issued by a domestic bank even
if not expressly mentioned in such letters of credit? What is
the basis for your answer?
Answer:
 Yes, the Supreme Court held that the observance of the
Uniform Customs and Practice in the Philippines is justified by
Article 2 of the Code of Commerce which enunciates that in the
absence of any particular provision in the Code of Commerce,
commercial transaction shall be governed by usage and customs
generally observed (Bank of the Philippine Islands v. De Reny
Fabric Industries, Inc. 35 SCRA 253).
Letters of Credit
Parties to LC
 Buyer – procures LC and obliges himself to reimburse the issuing
bank upon receipt of documents
 Seller – the beneficiary who ships goods to buyer and delivers
documents of title to issuing bank
 Issuing Bank – bank that issues LC and undertakes to pay seller
upon receipt of documents
Other parties..
 Notifying (or Advising) Bank – informs seller of existence of LC
 Negotiating Bank – bank that buys or discounts draft under LC
 Confirming Bank – bank that lends credence to the LC issued by a
lesser known bank; directly liable to the seller
Letters of Credit
The 3 distinct but intertwined contract relationships that are
indispensable in a letter of credit transaction are:
1. Between the Buyer and the Seller - Their relationship is governed by

the contract of sale.
2. Between the Issuing Bank and the Seller—The issuing bank is the one
that issues the letter of credit and undertakes to pay the seller upon
receipt of the draft and proper documents of title and to surrender
the documents to the buyer upon reimbursement. Their relationship is
governed by the terms of the letter of credit issued by the bank.
3. Between the Issuing Bank and the Buyer —Their relationship is
governed by the terms of the application and agreement for the
issuance of the letter of credit by the bank.
(Bar Exam Question 2002)

Letters of Credit
Doctrine of Independence
Under the doctrine of independence in a letter of credit, the obligation of the

issuing bank to pay the beneficiary is distinct and independent from the main and
originating contract underlying the letter of credit. Such obligation to pay does
not depend on the fulfillment or non-fulfillment of the originating contract. It
arises upon tender of the stipulated documents under the letter of credit.
In the present case, the tender of the certificate of default entitles Y to payment
under the standby letter of credit notwithstanding the fact that X Company was
not in default. This is without prejudice to the right of X Company to proceed
against Y Company under the law on contracts and damages (Insular Bank of Asia
and America v. IAC, 167 SCRA 450).
Letters of Credit
The “independence principle” posits that the obligations of the parties to a
letter of credit are independent of the obligations of the parties to the
underlying transaction. Thus, the beneficiary of the letter of credit, which is
able to comply with the documentary requirements under the letter of credit,
must be paid by the issuing or confirming bank, notwithstanding the existence of
a dispute between the parties to the underlying transaction, say a contract of
sale of goods where the buyer is not satisfied with the quality of the goods
delivered by the seller.
The Supreme Court in Transfield Philippines, Inc. v. Luzon Hydro Corporation,

443 SCRA 307 (2004) for the first time declared that fraud is an exception to the
independence principle. For instance, if the beneficiary fraudulently presents
to the issuing or confirming bank documents that contain material facts that, to
his knowledge, are untrue, then payment under the letter of credit may be
prevented through court injunction.
Letters of Credit
Doctrine of Strict Compliance
The rule of strict compliance in commercial transactions involving letters of

credit, requiring documents set as conditions for the release of the fund has to
be strictly complied with or else funds will not be released.
Issuing bank or confirming bank must determine the tender documents and make
sure that the terms and conditions of the letters of credit are strictly compliaed
with. The bank has no discretion to waive the requirement. Tender documents
must not only be complete but they must on their faces be in compliance with
the terms of the credit. Documents that are not stipulated as tender documents
will not be examined. (Feati Bank v. CA, G.R. No. 94209, 30 April 1991.)
Letters of Credit
Irrevocable LC – definite undertaking of issuing bank, will
not be revoked without the consent of buyer and seller
The standby LC’s are, “in effect an absolute undertaking

to pay the money advanced or the amount for which
credit is given on the faith of the instrument. They are
primary obligations and not accessory contracts. (Insular
Bank of America (Now International Bank) v Intermediate
Appelate Court and Philippine American General Life
Insurance G.R. No. 74834 November 17, 1988.)
Letters of Credit

 Is a letter of credit a commercial transaction? Explain
your answer. Is it governed by the NIL? Reason.
Answer:
 Yes, it is a commercial transaction because it is covered
by the Code of Commerce, and accompanies a commercial
transaction. It is not a negotiable instrument because it is
not for a sum certain in money and is not payable to order
or to bearer but is issued in the name of a specified
person.
Letters of Credit
ABC Company filed a Petition for Rehabilitation with the Court. An Order was
issued by the Court, (1) staying enforcement of all claims, whether money or
otherwise against ABC Company, its guarantors and sureties not solidarily
liable with the company; and (2) prohibiting ABC Company from making
payments of its liabilities, outstanding as of the date of the filing of the
petition. XYC Company is a holder of an irrevocable Standby Letter of Credit
which was previously procured by ABC Company in favor of XYZ Company to
secure performance of certain obligations. In the light of the Order issued by
the Court,
a. Can XYZ Company still be able to draw on their irrevocable Standby Letter
of Credit when due? Explain your answer.
b. Explain the nature of Letters of Credit as a financial devise.
Letters of Credit
Answer:
a. Yes, as an exception to a Stay or Suspension Order included in a
Commencement Order issued pursuant to Section 16(q) of the FRIA, Section
18(c) of the said law provides that a Stay or Suspension Order shall not apply
“to the enforcement of claims against sureties and other persons solidarily
liable with the debtor, and third party or accommodation mortgagors as well
as issuers of letters of credit x x x” This was the basis of the decision in the
case of Metropolitan Waterworks and Sewerage System v. Hon. Reynaldo B.
Daway, et al., G.R. No. 160732, June 21, 2004
b. A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sale of goods to satisfy
the seemingly irreconcilable interest of the seller, who refuses to part with
his goods before he is paid, and a buyer, who wants to have control of the
goods before paying. To break the impasse, the buyer may be required to
contract a bank to issue a letter of credit in favor of the seller so that, by
virtue of the letter of credit, the issuing bank can authorize the seller to draw
drafts and engage to pay them upon their presentment simultaneously with
the tender of documents required by the letter of credit.
Letters of Credit
In letters of credit in banking transactions, distinguish the liability of a
confirming bank from a notifying bank.
 Answer:
In case anything wrong happens to the letter of credit, a confirming bank incurs
liability for the amount of the letter of credit, while a notifying bank does not
incur any liability. (BAR 1994)
Letters of Credit
Explain the 3 distinct but intertwined contract relationships that are indispensable in a letter
of credit transaction.
Answer:
The 3 distinct but intertwined contract relationships that are indispensable in a letter of credit
transaction are:
a. Between the applicant/buyer/importer and the beneficiary/seller/exporter—The
applicant/buyer/importer is the one who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipt of the documents of title, while the
beneficiary/seller/exporter is the one who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and draft to the issuing bank to recover
payment for the goods. Their relationship is governed by the contract of sale.
b. Between the issuing bank and the beneficiary/seller/exporter—The issuing bank is the one that
issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper
documents of title and to surrender the documents to the buyer upon reimbursement. Their
relationship is governed by the terms of the letter of credit issued by the bank.
c. Between the issuing bank and the applicant/buyer/importer—Their relationship is governed by
the terms of the application and agreement for the issuance of the letter of credit by the bank.
Letters of Credit
A standby letter of credit was issued by ABC Bank to secure the obligation of X
Company to Y Company. Under the standby letter of credit, if there is failure on the
part of X Company to perform its obligation, then Y Company will submit to ABC Bank a
certificate of default (in the form prescribed under the standby letter of credit) and
ABC Bank will have to pay Y Company the defaulted amount. Subsequently, Y Company
submitted to ABC Bank a certificate of default notwithstanding the fact that X Company
was not in default. Can ABC Bank refuse to honor the certificate of default? Explain.
(2015)
Answer:
No. Under the doctrine of independence in a letter of credit, the obligation of the issuing
bank to pay the beneficiary is distinct and independent from the main and originating
contract underlying the letter of credit. Such obligation to pay does not depend on the
fulfillment or non-fulfillment of the originating contract. It arises upon tender of the
stipulated documents under the letter of credit. In the present case, the tender of the
certificate of default entitles Y to payment under the standby letter of credit
notwithstanding the fact that X Company was not in default. This is without prejudice to
the right of X Company to proceed against Y Company under the law on contracts and
damages (Insular Bank of Asia and America v. IAC, 167 SCRA 450).
ALTERNATIVE ANSWER:
Under the fraud exception principle, the beneficiary may be enjoined from collecting on
the letter of credit in case of fraudulent abuse of credit. The issuance of a certificate of
default despite the fact that X Company is not in default constitutes fraudulent abuse of
credit (Transfield Philippines v. Luzon Hydro Corporation, 443 SCRA 307).
Letters of Credit
“A” applies with Prime Bank for a letter of credit in the amount of P50,000 in
favor of Melmart Trading of California, to cover “A’s” importation of 500 bales of
cotton.
After shipment, Melmart Trading presented all the pertinent documents to Prime
Bank’s correspondent Bank in San Francisco, California, and obtained payment
under the letter of credit. Prime Bank now seeks payment from “A” who refuses
to pay on the ground that Melmart Trading violated certain conditions in their
Contract of Sale and, therefore, should not have been paid under the letter of
credit. Can the bank recover from “A”? Reasons.
Answer:
Yes, Prime bank can recover from “A”. Banks in providing financing in international
business transactions (such as that entered into by “A” with Prime Bank) do not deal
with the property to be exported or shipped to the importer (by Melmart Trading), but
deal only with documents. The custom in international banking negates any duty on
the part of the banks to verify whether what has been described in the letters of
credit or drafts or shipping documents actually tallies with what is loaded aboard
ship. (Bank of Phil. Islands v. De Reny Fabric Industries, Inc., Oct. 16, 1970; 35 SCRA
256)
Letters of Credit
X Corporation entered into a contract with PT Construction Corp. for the
latter to construct and build a sugar mill within 6 months. They agreed that in
case of delay, PT Construction Corp. will pay X Corporation P100,000 for
every day of delay. To ensure payment of the agreed amount of damages, PT
secured from Atlantic Bank a confirmed and irrevocable letter of credit which
was accepted by X Corporation in due time. 1 week before the expiration of
the 6 month period, PT requested for an extension of time to deliver claiming
that the delay was due to the fault of X Corporation. A controversy as to the
cause of the delay which involved the workmanship of the building ensued.
The controversy remained unresolved. Despite the controversy, X Corporation
presented a claim against Atlantic Bank by executing a draft against the letter
of credit.
A. Can Atlantic Bank refuse payment due to the unresolved controversy?
Explain.
B. Can X Corporation claim directly from PT Construction Company?
Letters of Credit
Answer:
A. Atlantic Bank cannot refuse to pay because in a letter of credit, where the
credit is stipulated as irrevocable, there is a definite undertaking by the issuing
bank to pay the beneficiary, provided that the stipulated documents are
presented and the conditions of the credit are complied with. Under the
“independence principle”, the issuing bank is not obligated to ascertain
compliance by the parties in the main contract. In other words, where the legal
relation arises from a letter of credit, such letter of credit contains the entire
contract of the parties and the resulting obligations should be measured by its
provisions. It is unaffected by any breach of contract on the part of one of the
parties or by any controversy which may arise between them.
B. Yes, X Corp. can claim directly from PT. the call upon the letter of credit is not
exclusive; it is merely an alternative remedy in case of delay due to the fault of
PT.
Letters of Credit
The Supreme Court has held that fraud is an exception to the “independence
principle” governing letters of credit. Explain this principle and give an example
of how fraud can be an exception.
 Answer:
The “independence principle” posits that the obligations of the parties to a letter of
credit are independent of the obligations of the parties to the underlying transaction.
Thus, the beneficiary of the letter of credit, which is able to comply with the
documentary requirements under the letter of credit, must be paid by the issuing or
confirming bank, notwithstanding the existence of a dispute between the parties to
the underlying transaction, say a contract of sale of goods where the buyer is not
satisfied with the quality of the goods delivered by the seller. The Supreme Court in
Transfield Philippines, Inc. v. Luzon Hydro Corporation, 443 SCRA 307 (2004) for the
first time declared that fraud is an exception to the independence principle. For
instance, if the beneficiary fraudulently presents to the issuing or confirming bank
documents that contain material facts that, to his knowledge, are untrue, then
payment under the letter of credit may be prevented through court injunction. (BAR
2010)
Letters of Credit
BV agreed to sell to AC, a Ship and Merchandise Broker, 2,500 cubic meters of logs
at $27 per cubic meter FOB. After inspecting the logs, CD issued a purchase order.
On the arrangements made upon instruction of the consignee, H&T Corporation of
Los Angeles, California, the SP Bank of Los Angeles issued an irrevocable letter of
credit available at sight in favor of BV for the total purchase price of the logs. The
letter of credit provided that the draft to be drawn is on SP Bank and that it be
accompanied by, among other things, a certification from AC, stating that the logs
have been approved prior to shipment in accordance with the terms and
conditions of the purchase order.
Before loading on the vessel chartered by AC, the logs were inspected by custom
inspectors and representatives of the Bureau of Forestry, who certified to the
good condition and exportability of the logs. After the loading was completed, the
Chief Mate of the vessel issued a mate receipt of the cargo which stated that the
logs are in good condition. However, AC refused to issue the required certification
in the letter of credit. Because of the absence of the certification, FE Bank
refused to advance payment on the letter of credit.
A. May FE Bank be held liable under the letter of credit? Explain.
B. Under the facts stated above, the seller, BV, argued that FE Bank, by accepting
the obligation to notify him that the irrevocable letter of credit. Consequently, FE
Bank is liable under the letter of credit. Is the argument tenable? Explain.
Letters of Credit
Answer:
A. No. The letter of credit provide as a condition a certification from AC.
Without such certification, there is no obligation on the part of FE Bank to
advance payment of the letter of credit.
B. No. FE Bank may have confirmed the letter of credit when it notified BV, that
an irrevocable letter of credit has been transmitted to it on its behalf. But
the conditions in the letter of credit must first be complied with, namely,
that the draft be accompanied by a certification from AC. Further,
confirmation of a letter of credit must be expressed. (Doctrine of Strict
Compliance)
TRUST RECEIPTS LAW
P.D. No. 115
Trust Receipts Law
A Trust Receipt is a written or printed document

signed by the entrustee in favor of the entrustor
containing terms and conditions substantially
complying with the provisions of the Trust
Receipts law, whereby the bank as entruster
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.
Trust Receipts Law
 Entruster– entity (usually bank) holding title

over the goods subject of the trust receipt
 Entrustee– person or company having or
taking possession of the goods
 Goods– chattels and personal property other
than money
 SecurityInterest – property interest in goods
to secure performance of the entrustee
Trust Receipts Law
Entruster-bank has a “security interest” over the goods.
Ownership vested in the person who advanced payment
until he has been paid in full or if the merchandise has
been sold, the proceeds thereof shall be turned over to
him.
Being a mere “security interest”, entruster not
responsible as a vendor under any sale or contract to
sell. Entrustee bears the loss after delivery to him
 Entrustee, being not the owner, cannot mortgage the
property. He does not have free disposal of the
property. (DBP v. Prudential Bank, G.R. No. 143772,
November 22, 2005.)
Trust Receipts Law
An innocent purchaser for value (from an

entrustee with a right to sell) acquires the
goods, documents or instrument free from
entruster’s security interest (Sec. 11, PD No.
115).
The security interest of the entruster prevails

against all creditors of the entrustee for the
duration of the TRA (Sec. 12, PD No. 115).
Trust Receipts Law
Two Obligations in a Trust Receipt Transaction:

(1)To
return the money over to the owner of the
merchandise sold (entregarla); and
(2)Toreturn the merchandise received under the
obligation that are unsold (devolvera).
Trust Receipts Law
Section 7. Rights of the entruster. The entruster shall be entitled to the proceeds
from the sale of the goods, documents or instruments released under a trust receipt
to the entrustee to the extent of the amount owing to the entruster or as appears in
the trust receipt, or to the return of the goods, documents or instruments in case of
non-sale, and to the enforcement of all other rights conferred on him in the trust
receipt provided such are not contrary to the provisions of this Decree.
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 goods,
documents or instruments at public or private sale, and the entruster may, at a public
sale, become a purchaser. The proceeds of any such sale, whether public or private,
shall be applied (a) to the payment of the expenses thereof; (b) to the payment of
the expenses of re-taking, keeping and storing the goods, documents or instruments;
(c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee
shall receive any surplus but shall be liable to the entruster for any deficiency. Notice
of sale shall be deemed sufficiently given if in writing, and either personally served on
the entrustee or sent by post-paid ordinary mail to the entrustee's last known business
address.
Trust Receipts Law
Section 9. Obligations of the entrustee. The entrustee shall
(1) hold the goods, documents or instruments in trust for the entruster and shall
dispose of them strictly in accordance with the terms and conditions of the
trust receipt;
(2) receive the proceeds in trust for the entruster and turn over the same to the
entruster to the extent of the amount owing to the entruster or as appears on
the trust receipt;
(3) insure the goods for their total value against loss from fire, theft, pilferage or
other casualties;
(4) keep said goods or proceeds thereof whether in money or whatever form,
separate and capable of identification as property of the entruster;
(5) return the goods, documents or instruments in the event of non-sale or upon
demand of the entruster; and
(6) observe all other terms and conditions of the trust receipt not contrary to the
provisions of this Decree.
Trust Receipts Law
Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the
entrustee. Loss of goods, documents or instruments which are the subject of a
trust receipt, pending their disposition, irrespective of whether or not it was due
to the fault or negligence of the entrustee, shall not extinguish his obligation to
the entruster for the value thereof.
Section 11. Rights of purchaser for value and in good faith. Any purchaser of
goods from an entrustee with right to sell, or of documents or instruments
through their customary form of transfer, who buys the goods, documents, or
instruments for value and in good faith from the entrustee, acquires said goods,
documents or instruments free from the entruster's security interest.
Section 12. Validity of entruster's security interest as against creditors. The
entruster's security interest in goods, documents, or instruments pursuant to the
written terms of a trust receipt shall be valid as against all creditors of the
entrustee for the duration of the trust receipt agreement.
Trust Receipts Law
 Section 13. Penalty clause. The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the entruster or as appears
in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the provisions of
Article Three hundred and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as amended, otherwise known as
the Revised Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense.
Trust Receipts Law
Definition/Concept of a Trust Receipt Transaction
C contracted D to renovate his commercial building. D ordered construction
materials from E and received delivery thereof. The following day, C went to
F Bank to apply for loan to pay for the construction materials. As security for
the loan, C was made to execute a trust receipt. One year later, after C failed
to pay the balance of the loan, F Bank charged him with violation of the Trust
Receipts Law.
a. What is a Trust Receipt?
b. Will the case against C prosper? Reason briefly.
Trust Receipts Law
Answer:
A. A Trust Receipt is a written or printed document signed by the entrustee in
favor of the entrustor containing terms and conditions substantially complying
with the provisions of the Trust Receipts law, whereby the bank as entruster
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.
B. No, the case against C will not prosper. Since C received the construction
materials from E before the trust receipt transaction was entered into, the
transaction was a simple loan, with the trust receipt merely as a collateral or
security for the loan. This is inconsistent with a trust receipt transaction
where the title to the goods remains with the bank and the goods are
released to the entrustee before the loan is granted.
Trust Receipts Law
Delano Cruz is in default in the payment of his existing loan from BDP Bank.
To extend and restructure this loan, Delano agreed to execute a trust receipt
in the bank’s favor covering the iron pellets Delano imported from China one
year earlier. Delano subsequently succeeded in selling the iron pellets to a
smelting plant, but the proceeds went to the payment of the separation
benefits of his employees who were laid off as he reduced his operations.
When the extended loan period expired without any significant payment from
Delano (not even to the extent of the proceeds of the sale of the iron
pellets), BDP Bank consulted you to on how to proceed against Delano. The
bank is contemplating the filing of estafa pursuant to the provisions of PD 115
(Trust Receipts Law) to force Delano to turn in at least the proceeds of the
sale of the iron pellets.
Would you, as bank counsel and as officer of the court, advise the bank to
proceed with its contemplated action?
Trust Receipts Law
I will not advise BDP Bank to file a criminal case for estafa against Delano.
Delano received the iron pellets he imported one year before the trust receipt
was executed. As held by the Supreme Court, where the execution of a trust
receipt agreement was made after the goods covered by it had been purchased
by and delivered to the entrustee and the latter as a consequence acquired
ownership to the goods, the transaction does not involve a trust receipt but a
simple loan even though the parties denominated the transaction as one of trust
receipt.
Trust Receipts Law
X & Co., obtained a loan from a local bank in the amount of P500,000,
mortgaging as security therefore its real property. Subsequently, the company
applied with the same bank for a Letter of Credit (L/C) for $200,000 in favor
of a foreign bank to cover the importation of machinery. To guarantee
payment of the obligation under the L/C, the company and its President and
Treasurer executed a Surety Agreement in the local bank’s favor.
The machinery arrived and was received to the company under a trust
receipt agreement. As the company defaulted in the payment of its
obligations, the bank took possession of the imported machinery. At the same
time, it sought to foreclose the mortgaged property and to hold the company,
as well as its President and Treasurer, liable under the Surety Agreement.
Did the taking of possession of the machinery by the bank result in the (1) full
payment of the obligations of the company, and (2) foreclosure of the
mortgage? Why?
Trust Receipts Law
Answer:
The taking of possession of the machinery by the bank did not result in full
payment of the obligations owing from the company and its officers. The taking
of such possession must be considered merely as a measure in order to protect or
further safeguard the bank’s security interest. Dacion en pago can only be
considered as having taken place when a creditor accepts and appropriates the
ownership of goods in payment of a due obligation.
The mere taking of possession of mortgaged assets does not amount to
foreclosure. Foreclosure requires a sale at public auction. The foreclosure,
therefore, has not yet been effected.
Trust Receipts Law
A. Maine Den, Inc. opened an irrevocable letter of credit with Fair / Bank, in
connection with Maine Den, Inc.’s importation of spare parts for its textile
mills. The imported parts were released to Maine Den, Inc. after it executed a
trust receipt in favor of Fair Bank. When Maine Den, Inc. was unable to pay its
obligation under the trust receipt, Fair Bank sued Maine Den, Inc. for estafa
under the Trust Receipts Law. The court, how dismissed the suit. Was the
dismissal justified? Why or why not?
Answer:
The dismissal of the complaint for estafa is justified. Under recent
jurisprudence, the Supreme Court held that transactions referred to in relation
to trust receipts mainly involved sales and if the entruster knew even before the
execution of the alleged trust receipt agreement that the goods subject of the
trust receipt were never intended by the entrustee for resale or for the
manufacture of items to be sold, the agreement is not a trust receipt transaction
but a simple loan, notwithstanding the label. In this case, the object of the trust
receipt, spare parts for textile mills, was for the use of the entrustee and never
intended for sale. As such, the transaction is a simple loan (Ng v. People, GR No.
173905, April 23, 2010; Land Bank v. Perez, GR No. 166884, June 13, 2012 and
Hur Ting Yang v. People, GR No. 195117, Aug. 14, 2013).
Trust Receipts Law
Will the principle of res perit domino apply in trust receipt transaction?
Answer:
No. This is because the loss of the goods, documents or instruments which are
the subject of a trust receipt pending their disposition, irrespective of whether
or not it was due to the fault or negligence of the entrustee, shall not extinguish
the entrustee’s obligation to the entruster for the value thereof. Also, while the
entruster is made to appear as owner of the goods covered by the trust receipt,
such ownership is only a legal fiction to enhance the entruster’s security interest
over the goods. (Section 10 of PD 115; Rosario Textile Mills Corp v. Home Bankers
Savings and Trust Company, 462 SCRA 88)
Trust Receipts Law
”H” opens a letter of credit with ABC Banking Corporation for the importation of 500 cases of
Black Label Whisky with an invoice value of US$50,000.00. the goods and the covering
documents arrive and “H” would like to take the possession of the 500 cases of whisky under
a trust receipt. The bank agrees to release the goods to him under the trust receipt, subject
to the condition that “H” holds the 500 cases in trust for the bank, and for him to turn over
the proceeds of the sale of said whisky, or to return the goods in the event of their non-sale
within 90 days from date thereof.
“H” sells the 500 cases to various customers but fails to turn over the proceeds within the
period stipulated, despite repeated demands from ABC Banking Corporation.
The bank files an estafa case against “H” with the City Fiscal of Manila. In his defense, “H”
contends that he should not be held liable because the transaction emanates from a letter of
credit, which he claims, is civil in nature. He invokes the constitutional provision that no one
should be imprisoned for nonpayment of indebtedness.
If you were the City Fiscal, would you file the case?
Answer:
Yes, I would file the estafa case against H, if I were the City Fiscal. The failure of H, entrustee, to
turn over the proceeds of 500 cases of Black Label Whisky, covered by a trust receipt, to the
extent of the amount of owing to the entruster, within the period stipulated, to ABC Banking
Corporation, entruster, shall constitute the crime of estafa, by express statutory provision. The
defense of H, therefore, is untenable.
Trust Receipts Law
Mr. Noble, as the President of ABC Trading, Inc., executed a trust receipt in
favor of BPI Bank to secure the importation by his company of certain goods.
After release and sale of the imported goods, the proceeds from the sale
were not turned over to BPI. Would BPI be justified in filing a case for estafa
against Noble?
Answer:
BPI would be justified in filing a case for estafa under PD 115 against Noble. The
fact that the trust receipt issued in favor of a bank, instead of a seller, to secure
the importation of the goods did not preclude the application of the Trust
Receipts Law (PD 115). Under the law, any officer or employee of a corporation
responsible for the violation of a trust receipt is subject to the personal liability
thereunder.
Trust Receipts Law
A buys goods from a foreign supplier using his credit line with a bank to pay
for the goods. Upon arrival of the goods at the pier, the bank requires A to
sign a trust receipt before A is allowed to take delivery of the goods. The
trust receipt contains the usual language. A disposes of the goods and
receives payment but does not pay the bank. The bank files a criminal action
against A for violation of the Trust Receipts Law. A asserts that the trust
receipt is only to secure his debt and that a criminal action cannot lie against
him because that would be violative of his constitutional right against
“imprisonment for non-payment of a debt.” Is he correct?
Answer:
No. Violation of a trust receipt is criminal as it is punished as estafa under Art.
315 of the RPC. There is a public policy involved which is to assure the entruster
with the reimbursement of the amount advanced or the balance thereof for the
goods subject of the trust receipt. The execution of the trust receipt or the use
thereof promotes the smooth flow of commerce as it helps the importer or buyer
of the goods covered thereby.
Trust Receipts Law
CCC Car, Inc. obtained a loan from BBB Bank, which fund was used to import
10 units of Mercedes Benz S Class vehicles. Upon arrival of the vehicles and
before the release of said vehicles to CCC Car, Inc, X and Y, the president and
treasurer, respectively, of CCC signed the Trust Receipt to cover the value of
the 10 units of Mercedes Benz S class vehicles, after which, the vehicles were
all delivered to the car display room of CCC. Sales of the vehicles were slow,
and it took a month to dispose the 10 units. CCC wanted to be in business and
to save on various documentations requires by the bank, decided that instead
of turning over the proceeds of the sales, CCC used the proceeds to buy
another 10 units of BMW 3 series.
Is the action of CCC legally justified?
Answer:
No. It is the obligation of CCC, as entrustee, to receive the proceed of the sale of
the Mercedes Benz S class vehicles in trust for BBB Bank, as entruster, and turn
over the same to BBB Bank to the extent of the amount owing to the latter or as
appears in the trust receipt.
Trust Receipts Law
Tom Cruz obtained a loan of P1M from XYZ Bank to finance his purchase of
5,000 bags of fertilizer. He executed a trust receipt in favor of XYZ Bank over
the 5,000 bags of fertilizer. Tom withdrew the 5,000 bags from the warehouse
to be transported to Lucena City where his store was located. On the way,
armed robbers took from Tom the 5,000 bags of fertilizer. Tom now claims
that his obligation to pay the loan to XYZ Bank is extinguished because the
loss was not due to his fault. Is Tom correct? Explain.
Answer:
Being the entrustee, the obligation of Tom Cruz to pay XYZ Bank is not
extinguished by the loss of goods. Section 10 of the Trust Receipts Law provides:
“Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the
entrustee. Loss of goods, documents or instruments which are the subject of a
trust receipt, pending their disposition, irrespective of whether or not it was due
to the fault or negligence of the entrustee, shall not extinguish his obligation to
the entruster for the value thereof.”
Trust Receipts Law
Is lack of intent to defraud a bar to the prosecution of these acts or
omissions?
Answer:
No. there is no requirement to prove intent to defraud. The mere failure to
account for or return the goods, documents or instruments in question gives rise
to the crime, which is malum prohibitum.
Warehouse Receipts Law
PD No. 115
Warehouse Receipts (PD No. 115, Jan 29 1973)
Document of title issued by a warehouseman or a person lawfully engaged in the
business of storing goods for profit
Under Section 1 of the Warehouse Receipts Act, the issuance of a warehouse
receipt in the form provided by it is merely permissive and directory and not
obligatory. . "Receipt", under this section, can be construed as any receipt issued
by a warehouseman for commodity delivered to him (Gonzalez vs Go Tiong)
Negotiability
May be delivered to (a) the bearer, or (b) the order of any person named in such
receipt (Sec. 5, WRL).
Negotiation of the document has the effect of manual delivery so as to constitute
the transferee as the owner of the goods. Negotiation carries with it both the
title and possession of the property (Philippine Trust Co. v. National Bank, 42
Phil. 413 [1922]).
What claims are included in the warehouseman’s lien?
1. All lawful charges for storage and preservation of the goods;
2. All lawful claims for money advanced, interest, insurance, transportation,
labor, weighing, coopering, and other charges and expenses in relation to such
goods;
3. All reasonable charges and expenses for notice and advertisements of sale,
and for sale of the goods where default had been made in satisfying the lien
(Sec. 27, WRL)
Under the subject Warehouse Receipts provision, storage fees are chargeable.
PNB is legally bound to stand by the express terms and conditions on the face of
the Warehouse Receipts as to the payment of storage fees. Even in the absence
of such a provision, law and equity dictate the payment of the warehouseman’s
lien pursuant to Sections 27 and 31 of the Warehouse Receipts Law (R.A. 2137)
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. PRES. JUDGE BENITO C. SE,
JR. G.R. No. 119231. April 18, 1996
Loss of Lien
By surrendering possession thereof; or
By refusing delivery when demand is made with which he is bound to comply
(Sec. 29, WRL)

TRUE or FALSE. Under the Warehouse Receipts Law, a warehouseman loses
his lien upon the goods when he surrenders possession thereof.
Answer:
True. A lien is dependent on possession. When a warehouseman surrenders
possession, he thereby loses his lien on the goods over which he no longer has
possession.
SECURITIES REGULATION
CODE
RA 8799
Securities Regulation Code
SEC. 2. Declaration of State Policy. –
The State shall establish a socially conscious,
free market that regulates itself, encourage the
widest participation of ownership in enterprises,
enhance the democratization of wealth,
promote the development of the capital market,
protect investors, ensure full and fair disclosure
about securities, minimize if not totally
eliminate insider trading and other fraudulent or
manipulative devices and practices which create
distortions in the free market.
Securities and Exchange Commission
- Chairman and 4 Commissioners, with 7 year terms
- Power to issued CDOs, contempt, issue subpoena and summon witnsses
- Jurisdiction over cases under PD 902-A transferred to RTCs constituted as
Special Commercial Courts (SCCs)
- Civil Claims filed before the SCCs
- Intra-corporate disputes – SCCs
(1) Between corporation, partnership or association (CPAs) and Public
(2) Between CPAs and the State insofar as franchise, permit or license is concerned
(3) Between CPAs and its stockholders, partners, members or officers
- SEC may impose administrative penalties and conduct investigations for

referral to the DOJ
3.1. “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.
(a) Shares of stock, bonds, debentures, notes,
evidences of indebtedness, asset-backed
securities;
(b) Investment contracts, certificates of interest
or participation in a profit sharing agreement,
certificates of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or
other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
(f) Proprietary or non proprietary membership
certificates incorporations; and
(g) Other instruments as may in the future be
determined by the Commission.
An investment contract is defined in the Amended
Implementing Rules and Regulations of R.A. No. 8799 as
a contract, transaction or scheme (collectively
contract) whereby a person invests his money in a
common enterprise and is led to expect profits
primarily from the efforts of others.
Known as the Howey Test to determine whether the

offerings are of investment contract or not, it requires a
transaction, contract, or scheme whereby a person (1)
makes an investment of money, (2) in a common
enterprise, (3) with the expectation of profits, (4) to be
derived solely from the efforts of others.
The Howey test was clarified in the 1973 case of Secretary vs.Turner.
In this case, the 9th Circuit of the US Court of Appeals ruled that the
element that profits must come solely from the efforts of others
should not be given a strict interpretation.
Our R.A. No. 8799 appears to follow this flexible concept for it
defines an investment contract as a contract, transaction or scheme
(collectively contract) whereby a person invests his money in a
common enterprise and is led to expect profits not solely but
primarily from the efforts of others. Thus, to be a security subject to
regulation by the SEC, an investment contract in our jurisdiction
must be proved to be: (1) an investment of money, (2) in a common
enterprise, (3) with expectation of profits, (4) primarily from efforts
of others. (POWER HOMES UNLIMITED, CORP. VS. SEC G.R. NO.
164812, February 26, 2008)
SEC. 8. Requirement of Registration of Securities. –
8.1. Securities shall not be sold or offered for sale or
distribution within the Philippines, without a
registration statement duly filed with and approved
by the Commission. Prior to such sale, information
on the securities, in such form and with such
substance as the Commission may prescribe, shall
be made available to each prospective purchaser.
SEC. 9. Exempt Securities. -
9.1. The requirement of registration under Subsection 8.1
shall not as a general rule apply to any of the following
classes of securities:
(a) Any security issued or guaranteed by the Government of
the Philippines, or by any political subdivision or agency
thereof, or by any person controlled or supervised by, and
acting as an instrumentality of said Government.
(b) Any security issued or guaranteed by the government of
any country with which the Philippines maintains diplomatic
relations, or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided, That the
Commission may require compliance with the form and
content of disclosures the Commission may prescribe.
(c) Certificates issued by a receiver or by a trustee
in bankruptcy duly approved by the proper
adjudicatory body.
(d) Any security or its derivatives the sale or
transfer of which, by law, is under the supervision
and regulation of the Office of the Insurance
Commission, Housing and Land Use Regulatory
Board, or the Bureau of Internal Revenue.
(e) Any security issued by a bank except its own
shares of stock.
SEC. 10. Exempt Transactions. - 10.1. The requirement
of registration under Subsection 8.1. shall not apply to
the sale of any security in any of the following
transactions:
(a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder selling or
offering for sale or delivery in the ordinary course of
business and not for the purpose of avoiding the
provisions of this Code, to liquidate a bona fide debt, a
security pledged in good faith as security for such debt.
(c) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner thereof, or by his representative
for the owner’s account, such sale or offer for sale, subscription or
delivery not being made in the course of repeated and successive
transactions of a like character by such owner, or on his account by such
representative and such owner or representative not being the
underwriter of such security.
(d) The distribution by a corporation, actively engaged in the business
authorized by its articles of incorporation, of securities to its
stockholders or other security holders as a stock dividend or other
distribution out of surplus.
(e) The sale of capital stock of a corporation to its own stockholders
exclusively, where no commission or other remuneration is paid or given
directly or indirectly in connection with the sale of such capital stock.
(f) The issuance of bonds or notes secured by mortgage upon real
estate or tangible personal property, where the entire mortgage
together with all the bonds or notes secured thereby are sold to a
single purchaser at a single sale.
(g) The issue and delivery of any security in exchange for any
other security of the same issuer pursuant to a right of conversion
entitling the holder of the security surrendered in exchange to
make such conversion: Provided, That the security so surrendered
has been registered under this Code or was, when sold, exempt
from the provisions of this Code, and that the security issued and
delivered in exchange, if sold at the conversion price, would at
the time of such conversion fall within the class of securities
entitled to registration under this Code. Upon such conversion the
par value of the security surrendered in such exchange shall be
deemed the price at which the securities issued and delivered in
such exchange are sold.
(h) Broker’s transactions, executed upon customer’s orders, on any
registered Exchange or other trading market.
(i) Subscriptions for shares of the capital stock of a corporation
prior to the incorporation thereof or in pursuance of an increase in
its authorized capital stock under the Corporation Code, when no
expense is incurred, or no commission, compensation or
remuneration is paid or given in connection with the sale or
disposition of such securities, and only when the purpose for
soliciting, giving or taking of such subscriptions is to comply with
the requirements of such law as to the percentage of the capital
stock of a corporation which should be subscribed before it can be
registered and duly incorporated, or its authorized capital
increased.
(j) The exchange of securities by the issuer with its existing security holders
exclusively, where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.
(k) The sale of securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period.
(l) The sale of securities to any number of the following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of the Philippines
or any political subdivision thereof or managed by a bank or other persons
authorized by the Bangko Sentral to engage in trust functions;
(v) Investment company; or
(vi) Such other person as the Commission may by rule determine as qualified buyers,
on the basis of such factors as financial sophistication, net worth, knowledge, and
experience in financial and business matters, or amount of assets under
management.
Registration of Securities (Sec. 12)
All securities required to be registered under Subsection 8.1 shall be registered
through the filing of a sworn registration statement with respect to such securities
 The information on on ownership, on the mix of ownership, especially foreign and
local ownership
The registration statement shall be signed by the issuer’s executive officer, its
principal operating officer, its principal financial officer, its comptroller, principal
accounting officer, its corporate secretary or persons performing similar functions
accompanied by a duly verified resolution of the board of directors of the issuer
corporation.
Pay fee of not more than one-tenth (1/10) of one per centum (1%) of the maximum
aggregate price at which such securities are proposed to be offered
Notice to be published by the issuer, at its own expense, in two (2) newspapers of
general circulation in the Philippines, once a week for two (2) consecutive weeks
Within forty-five (45) days after the date of filing of the registration statement, or by
such later date to which the issuer has consented, the Commission shall declare the
registration statement effective or rejected, unless the applicant is allowed to amend
the registration statement.
SEC. 24. Manipulation of Security Prices; Devices and Practices. - 24.1 It shall be
unlawful for any person acting for himself or through a dealer or broker, directly
or indirectly:
(a) To create a false or misleading appearance of active trading in any listed
security traded in an Exchange or any other trading market (hereafter referred
to purposes of this Chapter as “Exchange”):
(i) By effecting any transaction in such security which involves no change in the
beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such security with
the knowledge that a simultaneous order or orders of substantially the same
size, time and price, for the sale or purchase of any such security, has or will
be entered by or for the same or different parties; or
(iii) By performing similar act where there is no change in beneficial ownership.
(b) To effect, alone or with others, a series of transactions in securities that:

(i) Raises their price to induce the purchase of a security, whether of the same
or a different class of the same issuer or of a controlling, controlled, or
commonly controlled company by others;
(ii) Depresses their price to induce the sale of a security, whether of the same or
a different class, of the same issuer or of a controlling, controlled, or
commonly controlled company by others; or
(iii) Creates active trading to induce such a purchase or sale through
manipulative devices such as marking the close, painting the tape, squeezing
the float, hype and dump, boiler room operations and such other similar
devices.
(c) To circulate or disseminate information that the price of any security listed in
an Exchange will or is likely to rise or fall because of manipulative market
operations of any one or more persons conducted for the purpose of raising or
depressing the price of the security for the purpose of inducing the purchase or
sale of such security.
(d) To make false or misleading statement with respect to any material fact,
which he knew or had reasonable ground to believe was so false or misleading,
for the purpose of inducing the purchase or sale of any security listed or traded
in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase
and/or sale of any security traded in an Exchange for the purpose of pegging,
fixing or stabilizing the price of such security, unless otherwise allowed by this
Code or by rules of the Commission.
24.2. No person shall use or employ, in connection with the purchase or sale of
any security any manipulative or deceptive device or contrivance. Neither shall
any short sale be effected nor any stop-loss order be executed in connection with
the purchase or sale of any security except in accordance with such rules and
regulations as the Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors.
24.3. The foregoing provisions notwithstanding, the Commission, having due

regard to the public interest and the protection of investors, may, by rules and
regulations, allow certain acts or transactions that may otherwise be prohibited
under this Section.
SEC. 25. Regulation of Option Trading. – No member of an Exchange shall,
directly or indirectly endorse or guarantee the performance of any put, call,
straddle, option or privilege in relation to any security registered on a securities
exchange.
The terms “put”, “call”, “straddle”, “option”, or “privilege” shall not include
any registered warrant, right or convertible security.
SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person, directly
or indirectly, in connection with the purchase or sale of any securities to:
26.1. Employ any device, scheme, or artifice to defraud;
26.2. Obtain money or property by means of any untrue statement of a material

fact of any omission to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading; or
26.3. Engage in any act, transaction, practice or course of business which

operates or would operate as a fraud or deceit upon any person.
Fraudulent and Manipulative Activities
1. Wash Sale – effect a series of transaction to raise price to induce sale or
purchase
2. Marking the Close – buying and selling at close of market to alter closing price
of shares
3. Hype and Dump – engaging in heavy buying at high prices then selling at
higher prices
4. Boiler Room Operations – well-organized operation where salesmen operate
over several phones using high pressured sales talk
5. Squeezing the float – taking advantage of shortage of securities by controlling
demand side and exploiting market congestion to create artificial prices
6. Short Sale – sale of security borrowed by seller; share is sold and re-bought as
the share price is going down, thereby making a profit for each purchase
7. Option – Derivatives, granting holder option to buy (call option) or put (sell
option)
What is insider trading?
Answer:
 Insider trading is the buying or selling by
securities by an insider while in the possession
of a material non-public information.
3.8. “Insider” means:
(a) the issuer;
(b) a director or officer (or person performing similar functions) of, or a person
controlling the issuer;
(c) a person whose relationship or former relationship to the issuer gives or gave
him access to material information about the issuer or the security that is not
generally available to the public;
(d) a government employee, or director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access to material
information about an issuer or a security that is not generally available to the
public; or
(e) a person who learns such information by a communication from any of the
foregoing insiders.
Exception to the prohibition on insider trading:
(1) When the insider proves that the information was not
gained from such relationship; or
(2) If
the other party selling to or buying from the insider (his
agent) is identified, the insider proves:
(1)That he disclosed the information to the party; or
(2)That he had reason to believe that the other party
otherwise is also in possession of the information. (Sec.
27, SRC)
Material Non-Public Information (MNPI)
(1) Onethat has not been generally disclosed to the public
and would likely affect the market price of the security
and the lapse of a reasonable time for the market to
absorb the information; or
(2) Onewhich would be considered by a reasonable person
important under the circumstances in determining his
course of action whether to buy, sell or hold a security.
(Sec. 27.2, SRC)
Tender Offer
- Publicly announced intention to acquire equity securities of a public company
- Filing with SEC of a declaration with payment of filing fee
- Furnishing issuer statement with information required by SEC
- Publishing all requests or invitations for tender
- An offer to stockholder of a public company for them to tender their shares to
the offeror.
- This is to protect minority shareholders from dilution and gives them the chance to
leave the company under reasonable terms (CEMCO Holdings v. National Life, G.R.
No. 171815, August 7, 2007)
- Public Company
- Any corporation listed on an exchange or with assets in excess of P50 Million and
have 200 or more shareholders, 200 of which must be holders of at least 100 shares
of a class of its equity securities.
When Tender is Mandatory:
1) Filing of Declaration with SEC is necessary
 If acquisition of 15% of equity securities in a public company within 12 months
2) Required to Disclose Intention and to Make Tender Offer for the Percentage
Sought of all Holders of Such Securities
 If acquisition is 35% or more of outstanding voting shares or such number of
outstanding shares that are sufficient to gain control of the board in a public
company within 12 months
3) Required to Make Tender Offer for Outstanding Voting Shares
 If acquisition is 35% or more of the outstanding voting shares or such number of
outstanding shares that are sufficient to gain control of the board in a public
company DIRECTLYfrom one or more shareholders, shall be required to make a
tender offer for all the Outstanding Voting Shares.
4) Required to Make Tender Offer for All Outstanding Equity Shares
 If acquisition of even less than 35% but would result in ownership of over 51%,
acquirer must make a tender offer for all Outstanding Equity Securities
SEC’s interpretation that tender offer rule covers direct acquisition but also indirect
acquisition (or any type of acquisition) is given weight.
The rules apply even if one will acquire shares in the corporation that owns the shares of a
public company.
CEMCO HOLDINGS v NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC. G.R.
NO. 171815/ AUGUST 7 2007
SEC. 20. Proxy Solicitations. – 20.1. Proxies must be issued and proxy solicitation
must be made in accordance with rules and regulations to be issued by the
Commission;
20.2. Proxies must be in writing, signed by the stockholder or his duly authorized
representative and filed before the scheduled meeting with the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for
which it is intended. No proxy shall be valid and effective for a period longer than
five (5) years at one time.
20.4. No broker or dealer shall give any proxy, consent or authorization, in respect of
any security carried for the account of a customer, to a person other than the
customer, without the express written authorization of such customer.
20.5. A broker or dealer who holds or acquires the proxy for at least ten per centum
(10%) or such percentage as the Commission may prescribe of the outstanding share of
the issuer, shall submit a report identifying the beneficial owner within ten (10) days
after such acquisition, for its own account or customer, to the issuer of the security,
to the Exchange where the security is traded and to the Commission.
Define securities.
Answer:
 Stocks, bonds, notes, convertible debentures, warrants or other documents
that represent a share in a company or debt owed by a company or
government entity. Evidences of obligations to pay money or rights to
participate in earnings and distribution of corporate assets. Instruments giving
to their legal holders rights to money or other property; they are therefore
instruments which have intrinsic value and are recognized and used as such in
the regular channels of commerce.
Civil Liability
SEC. 56. Civil Liabilities on Account of False Registration Statement.
SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications
and Reports.
SEC. 58. Civil Liability For Fraud in Connection With Securities Transactions.
SEC. 59. Civil Liability For Manipulation of Security Prices.
SEC. 60. Civil Liability With Respect to Commodity Futures Contracts and Pre-
need Plans.
SEC. 61. Civil Liability on Account of Insider Trading.
SEC. 62. Limitation of Actions. –
No action shall be maintained to enforce any liability created under any other
provision of this Code unless brought within two (2) years after the discovery of the
facts constituting the cause of action and within five (5) years after such cause of
action accrued.
SEC. 63. Amount of Damages to be Awarded. - 63.1. All suits to recover damages
pursuant to Sections 56, 57, 58, 59, 60 and 61 shall be brought before the Regional
Trial Court, which shall have exclusive jurisdiction to hear and decide such suits. The
Court is hereby authorized to award damages in an amount not exceeding triple the
amount of the transaction plus actual damages.
63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof shall be
jointly and severally liable for the payment of damages. However, any person who
becomes liable for the payment of such damages may recover contribution from any
other person who, if sued separately, would have been liable to make the same
payment, unless the former was guilty of fraudulent representation and the latter was
not.
1) What is meant by “Over-the-Counter Markets” as provided in the Revised
Securities Act?
2) X has the following plans:
A. Organized the Tagaytay Country Club, Incorporated.
B. Let the club buy a 10 hectare land for P10 M which will be developed into a
sports and health club complete with an Olympic size swimming pool, tennis and
pelota courts, bowling lanes, poo rooms, etc.
C. Five of the P10 M needed to develop the club will be raised thru the sale of
certificates of membership.
D. The certificate of membership shall give the purchaser the right to use all club
facilities, and shall be transferable. It shall not, however, give the purchaser any
right in the income or assets of the club. The purchaser must also pay monthly
dues.
X wants to know whether the certificate of membership is an investment contract
and hence, a security within the meaning of the Revised Securities Act. What is
your opinion?
Answer:
1. The term “Over-the-Counter Markets” refers to markets made or created for
the purchase and sale of securities other than on a security exchange. The SEC
may provide rules and regulations of transactions therein, a violation of which
renders the same or the trading therein unlawful.
2. The certificate of membership, although not providing for a right of income or
right over club assets, gives, however, to the holder thereof privileges on the use
of club facilities, that are of value and transferable. The certificate is thus a
security within the meaning of the Revised Securities Act. (BAR 1982)
What are the so-called exempt securities under the SRC?
Answer:
Under Sec. 9 of the SRC, the so-called exempt securities are:
a. Those issued or guaranteed by the government of the Philippines or any of its
political subdivisions or agencies;
b. Those issued or guaranteed by the government of any foreign country with
which the Philippines has diplomatic relations, or any other state on the basis of
reciprocity, although the SEC may require compliance with the form and content
of disclosures;
c. Those issued by the receiver or by the trustee in a bankruptcy duly approved
by the proper adjudicatory board;
d. Those involving the sale or transfer which is by law, under the regulation of
the OIC, HLURB, BIR; and
e. Those issued by banks, except its own shares.
Assume that Greater Manila Telephone and Telegraph Company, Incorporated
has 10,000 employees. It has a policy of encouraging stock ownership among
its employees. Its Board of Directors, intends to sell P2 M worth of common
stocks to either (a) its managerial employees only numbering about 1,000 or
(b) indiscriminately to all its 10,000 employees. In case it decides to sell to its
managerial employees only, does it have to register its securities? How about
if the intended sale is to all employees?
Answer:
Exempt transactions are those that do not require registration either because the
law itself exempts them therefrom or the SEC finds that the enforcement of the
registration requirement is not necessary in the public interest and for the
protection of investors by reason of the amount involved or the limited character
of the public offering. The proposed sales stated in the problem do not strictly
fall under any of the exempt transactions in the law itself. Accordingly, if the
corporation would want to exempt the sale from registration, it must file an
application with the SEC for such exemption which may then act in accordance
with the rule above-stated.
Able Corporation sold securities to 21 non-qualified buyers during a 15-month
period, without registering the securities with the Securities and Exchange
Commission. Did Able Corporation violate the Securities Regulation Code?
Explain.
Answer:
Yes because under the SRC securities shall not be sold or offered to be sold to the
public within the Philippines unless the securities are registered with and
approved by the Securities and Exchange Commission. Public means 20 or more
inventors. The fact that the securities were sold during a 15 month period is
immaterial. However, the sale of securities to less than 20 investors if done
during a 12 month period is an exempt transaction under the Securities
Regulation Code.
Securities issued by the Philippine government are “exempt securities” and,
therefore, need not be registered with the Securities and Exchange
Commission prior to their sale or offering to the public in the Philippines.
What is the rationale behind this exemption?
Answer:
The rationale for the exemption is that the public is amply protected even
without the registration of the securities to be issued by the government since
the government is presumed to be always solvent.
Under the SRC, what is the Margin Trading Rule?
Answer:
Under the Margin Trading Rule, no registered broker or dealer, or member of an
exchange shall extend credit on any security an amount greater than whichever
is higher of:
a. 65% of the current market price of the security;
b. 100% of the lowest market price of the security during the preceding 36
calendar months, but not more than 75% of the current market price.
The purpose of the Margin Trading Rule is to prevent excessive use of credit for
the purchase of securities it is a counter to broker’s desire to generate more
sales by encouraging clients to buy securities on credit.
Suppose “A” is the owner of several inactive securities. To create an
appearance of active trading for such securities, “A” connives with “B” by
which “A” will offer for sale some of his securities and “B” will buy them at
certain fixed price, with the understanding that although there would be an
apparent sale, “A” will retain the beneficial ownership thereof.
A. Is the arrangement lawful?
B. If the sale materializes, what is it called?
Answer:
A. No. the arrangement is not lawful. It is an artificial manipulation of the price
of securities. This is prohibited by the Securities Regulation Code.
B. If the sale materializes, it is called a wash sale or simulated sale.
A, B and C are directors of XYZ Mining Corporation whose shares of stock are listed
in the Manila Stock Exchange. On February 1, 1984, A, B and C each purchased
thru a stockbroker 1,000 shares of XYZ Mining Corporation at the then market
price of P4 a share. On May 1, 1984, B left for abroad for a medical check-up and
a vacation.
At the board meeting held on May 15, 1984, at which B was absent but which A
and C attended, the directors were apprised of an important discovery in an area
covered by one XYZ Mining Corporation’s mining leases. After the discovery was
duly publicized in the morning dailies, the market price of XYZ Mining Co. started
to rise. When it hit P8 per share on May 28, 1984, A sold all his 1,000 shares.
Upon his return to Manila in the middle of June, 1984, B sold 500 shares at P8 per
share, just enough to cover the cost of the 1,000 shares he acquired in February,
believing that the stock would continue to rise. The price, however, started to
drop.
On August 15, 1984, when the price was P5 a share, C sold 1,000 shares of XYZ
Mining Co.
What are the rights of XYZ Mining Co. against A, B and C? Explain your answer.
Answer:
For the purpose of preventing the unfair use of information which may have been
obtained by a director by reason of his relationship to the issuer, any profit realized
by him from any purchase, of any equity security of such issuer within any period of
less than 6 months shall inure to and be recoverable by the issuer, irrespective of any
intention of holding the security purchased or of not repurchasing the security sold for
a period exceeding 6 months. Suit to recover such profit may be instituted in any
court of competent jurisdiction of the issuer in the name and in behalf of the issuer.
As the issuer, XYZ Mining Corporation can recover from B, a director, the amount of
P2,000, the profit realized by B from the purchase and sale of the shares of the issuer
within the period of February 1 to the middle of June.
XYZ Mining Co. cannot recover from C, a director, since C sold his shares after the
lapse of 6 months from February 1, 1984, when he acquired the shares.
In the case of A and B it is immaterial whether or not they actually used inside
information in buying and selling the stock. Any profit they made during the 6 month
period from a purchase and sale within such period inures to the benefit of the issuer,
XYZ Mining Corporation.
A. Give a case where a person who is not an issuing corporation, director or
officer thereof, or a person controlling, controlled by or under common
control with the issuing corporation, is also considered an “insider”.
B. In Securities Law, what is a “shortswing” transaction.
C. In “insider trading”, what is a “fact of special significance”?
Answer:
A. It may be a case where a person, whose relationship or former relationship to
the issuer gives or gave him access to a fact of special significance about the
issuer or the security that is not generally availavble, or a person, who learns
such a fact from any of the insiders, with knowledge that the person from
whom he learns the fact, is such an insider.
B. A “shortswing” is a transaction where a person buys securities and sells or
disposes of the same within a period of 6 months.
C. In “insider trading”, a “fact of special significance” is, in addition to being
material, such fact as would likely, on being made generally available, to
affect the market price of a security to a significant extent, or which a
reasonable person would consider as especially important under the
circumstances in determining his course of action in the light of such factors
as the degree of its specificity, the extent of its difference from information
generally available previously, and its nature and reliability.
Under the Revised Securities Act, it is unlawful for an insider to sell or buy a
security of the issuer if he knows a fact or special significance with respect to
the issuer or the security that is not generally available, without disclosing
such fact to the other party.
What does the term “insider” mean as used in the Revised Securities Act?
When is a fact considered to be “of special significance” under the same Act?
What are the liabilities of a person who violates the pertinent provisions of
the Revised Securities Act regarding the unfair use of inside information?
Answer:
A. “Insider” means (1) the issuer, (2) a director or officer of or a person controlling,
controlled by, or under common control with, the issuer, (3) a person whose
relationship or former relationship to the issuer gives or gave him access to a fact of
special significance about the issuer or the security that is not generally available, or
(4) a person who learns such a fact from any of the foregoing insiders with knowledge
that the person from whom he learns the facts is such an insider.
B. It is one which, in addition to being material, would be likely to affect the market
price of a security to a significant extent on being made generally available, or one
which a reasonable person would consider especially important under the
circumstances in determining his course of action in the light of such factors as the
degree of its specificity, the extent of its difference from information generally
available previously, and its nature and reliability.
C. The person may be liable to (1) a fine of not less than P5,000 nor more than
P500,000, or (2) imprisonment of not less than 7 years nor more than 21 years, (3) or
both such fine and imprisonment in the discretion of the court.
If the offender is a corporation, partnership, association or other juridical entity, the
penalty shall be imposed upon the officers of the corporation, etc. responsible for the
violation. And if such an officer is an alien, he shall, in addition to the penalties
prescribed, be deported without further proceedings after service of sentence.
Ms. OB was employed in MAS Investment Bank. WIC, a medical drug company,
retained the Bank to assess whether it is desirable to make a tender offer for
DOP company, a drug manufacturer. OB overheard in the course of her work
the plans of WIC. By herself and thru associates, she purchased DOP stocks
available at the stock exchange price at P20 per share. When WIC’s tender
offer was announced, DOP stocks jumped to P30 per share. Thus OB earned a
sizable profit.
Is OB liable for breach and misuse of confidential or insider information
gained from her employment? Is she also liable for damages to sellers or
buyers with whom she traded? If so, what is the measure of such damages?
Explain briefly.
Answer:
OB is an insider (as defined in Subsection 3.8(3) of the SRC) since she is an
employee of the Bank, the financial adviser of DOP, and this relationship gives
her access to material information about the issuer (DOP) and the latter’s
securities (shares), which information is not generally available to the public.
Accordingly, OB is guilty of insider trading under Section 27 of the SRC, which
requires disclosure when trading in securities.
OB is also liable for damages to sellers or buyers with whom she traded. Under
Subsection 63.1 of the SRC, the damages awarded could be an amount not
exceeding triple the amount of the transaction plus actual damages. Exemplary
damages may also be awarded in case of bad faith, fraud, malevolence or
wantonness in the violation of the SRC or its implementing rules. The court is
also authorized to award attorney’s fees not exceeding 30% of the award.
Grand Gas Corporation, a publicly listed company, discovered after extensive
drilling a rich deposit of natural gas along the coast of Antique. For 5 months,
the company did not disclose the discovery so that it could quietly and
cheaply acquire neighboring land and secure mining rights to the land.
Between the discovery and its disclosure of the information to the SEC, all the
directors and key officers of the company bought shares in the company at
very low prices. After the disclosure, the price of the shares went up. The
directors and officers sold their shares at huge profits.
A. What provision of the SRC did they violate, if any? Explain.
B. Assuming that the employees of the establishment handling the printing
work of Grand Gas Corporation saw the exploration reports which were
mistakenly sent to their establishment together with other materials to be
printed. They too brought shares in the company at low prices and later sold
them at huge profits. Will they be liable for violation of the SRC? Why?
Answer:
A. They violated Sec. 27 of the SRC, on insider’s duty to disclose when trading, to wit:
“It shall be unlawful for an insider to sell or buy securities of the insurer, while in
possession of material information with respect to the issuer or the security that is
not generally available to the public, unless:
1. The insider proves that the information was not gained from such relationship; or
2. If the other party selling to or buying from the insider (or his agent) is identified,
the insider proves:
a. That he disclosed the information to the other party, or
b. That he has reason to believe that the other party otherwise is also in possession of
the information.”
B. Yes, the employees of the establishment handling the printing job of the
corporation are also liable for violation of the prohibition against insider trading.
These employees fall within the classification of an “insider” under subsection 3.8 (c)
of the SRC, to wit: “a person whose relationship or former relationship to the issuer
gives or gave him access to material information about the issuer or the security that
is not generally available to the public.”
You are a member of the legal staff of a law firm doing corporate and securities
work for Coco Products Inc., a company with unique products derived from
coconuts and whose shares are traded in the Philippine Stock Exchange. A partner
in the law firm, Atty. Buenexito, to whom you report, is the Corporate Secretary
of Coco Products. You have long been investing in Coco Products stocks even
before you became a lawyer.
While working with Atty. Buenixito on another file, he accidentally gave you the
Coco products file containing the company’s planned corporate financial
rehabilitation. While you knew you had the wrong file, your curiosity prevailed
and you browsed through the file before returning it. Thus, you learned that a
petition for financial rehabilitation is imminent, as the company could no longer
meet its obligations as they fell due.
Soon after, your mother is rushed to the hospital for an emergency operation, and
you have to raise money for her hospital bills. An immediate option for you is to
sell your Coco Products shares. The sale would be very timely because the price of
the company’s stocks are still high.
Would you sell the shares to raise the needed funds for your mother’s
hospitalization? Take into account legal and ethical considerations.
Answer:
The sale of the shares does not constitute insider trading. Although Atty.
Buenixto, as corporate secretary of Coco products, Inc. was an insider, I did not
obtain the information regarding the planned corporate rehabilitation by a
communication from him. He just accidentally gave the wrong file.
It would be unethical to sell the shares. Rule 1.01 of the Code of Professional
Responsibility provides, “A lawyer shall not engage in unlawful, dishonest,
immoral or deceitful conduct.”
A lawyer should not only refrain from performing unlawful acts. He should also
desist from engaging in unfair deceitful conduct to conceal from the buyer of the
shares the planned corporate rehabilitation.
A. What is a tender offer?
B. In what instances is a tender offer required to be made?
Answer:
A. Tender offer is a publicly announced intention of a person acting alone or in
concert with other persons to acquire equity securities of a public company. It
may also be defined as a method of taking over a company by asking
stockholders to sell their shares at a price higher that the current market
price and on a particular date.
B. Instances where tender offer is required to be made:
The person intends to acquire 15% or more of the equity share of a public
company pursuant to an agreement made between or among the person and one
or more sellers. The person intends to acquire 30% or more of the equity shares
of a public company within a period of 12 months.
The person intends to acquire equity shares of a public company that would
result in ownership of more than 50% of the said shares.
NB Under SEC regulations, the threshold number for mandatory tender offer is
35% of the equity share of a public company.
Union Mines, Inc. has a total asset of P60 M with 210 stockholders holding at
least 100 shares each. The company has two principal stockholders, ABC
which owns 60% of the shares of stock, and XYZ which owns 17%.
ABC in turn is owned to the extent of 21.31% by Acme, Inc.; 29.69% by
Golden Boy, Inc; 9%by XYZ; and the rest by individual stockholders.
None of the parties is a publicly-listed company.
XYZ now proposes to buy Acme’s and Golden Boy’s shares in ABC, which
would give it direct control of ABC and indirect control of Union Mines.
Is the proposed acquisition by XYZ subject to the mandatory tender offer and
when is it mandatory?
Answer:
Yes, the proposed acquisition is subject to mandatory tender offer rule. A tender offer is a
publicly announced intention by a person (acting alone or in concert with other persons) to
acquire shares of a public company. A tender offer is meant to protect minor stockholders against
any scheme that dilutes the share value of their investments. It gives them the chance to exit the
company under the same terms offered to the majority stockholders.
Under the SRC and its implementing rules, a mandatory tender offer is required:
When at least 35% of the outstanding shares of a public company is to be acquired in one
transaction or a series of transaction during a 12-month period, or
Even if any acquisition is less than 35% threshold but the result thereof is the ownership of more
than 51% of the total outstanding shares of a public company. The mandatory offer rule also
applies to share acquisition meeting the threshold, which is done at the level of the holding or
parent corporation controlling a public company
In this case, Union Mines is clearly a public company, since it has a total asset of P60 M with 210
stockholders holding at least 100 shares each. A public company is defined as a corporation listed
on the stock exchange, or a corporation with assets exceeding P50 M and with 200 or more
stockholders at least 200 of them holding not less than 100 share of such corporation.
XYZ’s acquisition of shares of Acme, Inc. and Golden Boy, Inc., taken separately, does not reach
35% threshold. If taken collectively, the two acquisitions total only 50%. However, when the
acquisitions are added to XYZ’s existing shares in Union Mines, they meet the more-than-51%
threshold for mandatory tender offer.
Mr. and Mrs. Reyes invested their hard-earned savings in securities issued by
LEAD Bank. After discovering that the securities sold to them were not
registered with the SEC in violation of the Securities Regulation Code, the
spouses Reyes filed a complaint for nullity of contract and for recovery of a
sum of money with the RTC. LEAD Bank moved to dismiss the case on the
ground that it is the SEC that has primary jurisdiction over actions involving
violations of the Securities Regulation Code. If you were the judge, how
would you rule on the motion to dismiss?
Answer:
The motion should be denied. Civil suits falling under the SRC (like liability for
selling unregistered securities) are under the exclusive original jurisdiction of the
RTC and hence, need not be first filed before the SEC unlike criminal cases,
wherein the latter body exercises primary jurisdiction (Pua vs Citibank, GR no.
180064, September 16, 2013).
What is the original and exclusive jurisdiction of the SEC?
Answer:
The SEC has original and exclusive jurisdiction over case involving:
a. Devices or schemes amounting to fraud and misrepresentation;
b. Controversies arising out of intra-corporate or partnership relations;
c. Controversies in the election or appointment of directors, officers, etc.;
d. Petitions to be declared in the state of suspension of payment.
NB The jurisdiction of the SEC on these items has been transferred to the RTC
designated as special commercial courts by the SC. The SEC retains
administrative and regulatory jurisdiction over corporations and and
partnerships registered with it.
FOREIGN INVESTMENTS
ACT
RA 7042
Foreign Investments Act
Section 2. Declaration of Policy. - It is the policy of the State to attract,
promote and welcome productive investments from foreign individuals,
partnerships, corporations, and governments, including their political
subdivisions, in activities which significantly contribute to national
industrialization and socioeconomic development to the extent that foreign
investment is allowed in such activity by the Constitution and relevant laws.
Foreign investments shall be encouraged in enterprises that significantly expand
livelihood and employment opportunities for Filipinos; enhance economic value
of farm products; promote the welfare of Filipino consumers; expand the scope,
quality and volume of exports and their access to foreign markets; and/or
transfer relevant technologies in agriculture, industry and support services.
Foreign investments shall be welcome as a supplement to Filipino capital and
technology in those enterprises serving mainly the domestic market.
As a general rule, there are no restrictions on extent of foreign ownership of

export enterprises. In domestic market enterprises, foreigners can invest as
much as one hundred percent (100%) equity except in areas included in the
negative list. Foreign owned firms catering mainly to the domestic market shall
be encouraged to undertake measures that will gradually increase Filipino
participation in their businesses by taking in Filipino partners, electing Filipinos
to the board of directors, implementing transfer of technology to Filipinos,
generating more employment for the economy and enhancing skills of Filipino
workers.
Foreign Investment
- Equity investment made by a non-Philippine national in the form of foreign
exchange and/or other assets actually transferred to the Philippines and duly
registered with the Central Bank which shall assess and appraise the value of
such assets other than foreign exchange;
Doing Business
- includes soliciting orders, service contracts, opening offices, whether called "liaison"
offices or branches;
- appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totalling one hundred eighty
(180) days or more;
- participating in the management, supervision or control of any domestic business,
firm, entity or corporation in the Philippines; and
- any other act or acts that imply a continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization:
Provided, however, That the phrase "doing business: shall not be deemed to include
mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests in such corporation; nor
appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account;
Export Enterprise
- An enterprise wherein a manufacturer, processor, or service enterprise exports
60% or more of its output, or wherein a trader purchases products domestically
and exports 60% or more of such purchases.
Domestic Market Enterprise

- An enterprise that produces goods for sale, or renders services to the domestic
market entirely or if exporting a portion of its output fails to consistently export
at least sixty percent (60%) thereof.
Registration of Investments of Non-Philippine Nationals
- Register with the SEC or with the Bureau of Trade Regulation and Consumer
Protection of DTI, in the case of single proprietorship
Foreign Investment Negative List

List A: Foreign Ownership is limited by the Constitution and Special Law
List B: Foreign Ownership is limited for reasons of security, defense, risk to
health, and morals and protection of small and medium-scale enterprises
A foreign company has a distributor in the Philippines. The latter acts in his
own name and account. Will this distributorship be considered as doing
business by the foreign company in the Philippines?
Answer:
The appointment of a distributor in the Philippines is not sufficient to constitute
doing business unless it is under the full control of the foreign corporation. If the
distributor is an independent entity doing business for its own name and account,
the latter cannot be considered as doing business (Steel Case v. Design
International Selection, GR No 171995, April 18, 2012).
E-COMMERCE ACT
RA 8792
E-Commerce Act
ELECTRONIC COMMERCE ACT OF 2000 (R.A. No. 8792) and
A.M. No. 01-7-01-SC or the Rules on Electronic Evidence
 Gives legal recognition to Electronic Documents, Signatures and Messages
(g) “Electronic data message” refers to information generated, sent, received or
stored by electronic, optical or similar means.
(h) “Electronic document” refers to information or the representation of
information, data, figures, symbols or other modes of written expression,
described or however represented, by which a right is established or an
obligation extinguished, or by which a fact may be proved and affirmed, which is
received, recorded, transmitted, stored processed, retrieved or produced
electronically. It includes digitally signed documents and any print-out or output,
readable by sight or other means, which accurately reflects the electronic data
message or electronic document. For purposes of these Rules, the term
“electronic document” may be used interchangeably with electronic data
message”.
E-Commerce Act
(j) “Electronic signature" refers to any distinctive mark, characteristics and/or
sound in electronic form. Representing the identity of a person and attached to
or logically associated with the electronic data message or electronic document
or any methodology or procedure employed or adopted by a person and executed
or adopted by such person with the intention of authenticating, signing or
approving an electronic data message or electronic document. For purposes of
these Rules, an electronic signature includes digital signatures.
(e) “Digital Signature” refers to an electronic signature consisting of a
transformation of an electronic document or an electronic data message using an
asymmetric or public cryptosystem such that a person having the initial
untransformed electronic document and the signer’s public key can accurately
determine:
E-Commerce Act
Section 6. Legal Recognition of Electronic Data Messages - Information shall not
be denied legal effect, validity or enforceability solely on the grounds that it is in
the data message purporting to give rise to such legal effect, or that it is merely
referred to in that electronic data message.
Section 7. Legal Recognition of Electronic Documents - Electronic documents
shall have the legal effect, validity or enforceability as any other document or
legal writing…
SECTION 1. Electronic documents as functional equivalent of paper-based

documents. – Whenever a rule of evidence refers to the term of writing,
document, record, instrument, memorandum or any other form of writing, such
term shall be deemed to include an electronic document as defined in these
Rules.
E-Commerce Act
Section 8. Legal Recognition of Electronic Signatures. - An electronic signature
on the electronic document shall be equivalent to the signature of a person on a
written document if that signature is proved by showing that a prescribed
procedure, not alterable by the parties interested in the electronic document…
SECTION 1. Electronic signature. – An electronic signature or a digital signature

authenticate din the manner prescribed hereunder is admissible in evidence as
the functional equivalent of the signature of a person on a written document
E-Commerce Act
Section 16. Formation of Validity of Electronic Contracts.
(1) Except as otherwise agreed by the parties, an offer, the acceptance of an
offer and such other elements required under existing laws for the formation of
contracts may be expressed in, demonstrated and proved by means of electronic
data messages or electronic documents and no contract shall be denied validity
or enforceability on the sole ground that it is in the form of an electronic data
message or electronic document, or that any or all of the elements required
under existing laws for the formation of contracts is expressed, demonstrated
and proved by means of electronic data messages or electronic documents.
E-Commerce Act
(2) Electronic transactions made through networking among banks, or linkages
thereof with other entities or networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or the debit of one account and
the corresponding credit to another, whether such transaction is initiated by the
depositor or by an authorized collecting party: Provided, that the obligation of
one bank, entity, or person similarly situated to another arising therefrom shall
be considered absolute and shall not be subjected to the process of preference
of credits.
E-Commerce Act
Section 33. Penalties. - The following Acts, shall be penalized by fine and/or
imprisonment, as follows:
(a) Hacking or crackling with refers to unauthorized access into or interference in
a computer system/server or information and communication system; or any
access in order to corrupt, alter, steal, or destroy using a computer or other
similar information and communication devices, without the knowledge and
consent of the owner of the computer or information and communications
system, including the introduction of computer viruses and the like, resulting in
the corruption, destruction, alteration, theft or loss of electronic data messages
or electronic documents shall be punished by a minimum fine of One Hundred
Thousand pesos (P 100,000.00) and a maximum commensurate to the damage
incurred and a mandatory imprisonment of six (6) months to three (3) years;
E-Commerce Act
(b) Piracy or the unauthorized copying, reproduction, dissemination, or
distribution, importation, use, removal, alteration, substitution, modification,
storage, uploading, downloading, communication, making available to the public,
or broadcasting of protected material, electronic signature or copyrighted works
including legally protected sound recordings or phonograms or information
material on protected works, through the use of telecommunication networks,
such as, but not limited to, the internet, in a manner that infringes intellectual
property rights shall be punished by a minimum fine of one hundred thousand
pesos (P 100,000.00) and a maximum commensurate to the damage incurred and
a mandatory imprisonment of six (6) months to three (3) years;
(c) Violations of the Consumer Act of Republic Act No. 7394 and other relevant to
pertinent laws through transaction covered by or using electronic data messages
or electronic documents, shall be penalized with the same penalties as provided
in those laws;
(d) Other violations of the provisions of this Act, shall be penalized with a
maximum penalty of one million pesos (P 1,000,000.00) or six (6) years
imprisonment.
Thank you!
For questions:
Message me on facebook.com/dejesuslegal
Email at darrendejesus@yahoo.com

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