Bar Q and A #34 – Mercantile Law Bar Question and Answer

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1.) A foreign firm is engaged in the business of manufacturing and selling rubber products to dealers who in turn sell them to others. It also sells directly to agricultural enterprises, automotive assembly plants, public utilities which buy them in large bulk, and to its officers and employees. a. Is there a violation of the Retail Trade Law? Explain. b. May said firm operate a canteen inside the premises of its plant exclusive for its officials and employees without violating the Retail Trade Act? Explain.

a. On the assumption that the foreign firm is doing business in the Philippines, the sale to the dealers of agricultural enterprises, automotive assembly plants, and public utilities is wholesale and, therefore, not in violation of the Retail Trade Act.

b. YES. The operation of the canteen inside the premises exclusively for its officers and employees, would amount to an input in the manufacturing process and, therefore, does not violate the Retail Trade Act.

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2.) A Cooperative purchased from “Y” Corporation on installments a rice mill and made a down payment therefor. As security for the payment of the balance, the Cooperative executed a chattel mortgage in favor of Y Corporation. Y Corporation, in turn, assigned its rights to the chattel mortgage to Z, Inc., a 5% foreign-owned company doing business in the Philippines. The cooperative thereafter made installment payment to Z, Inc. Because the Cooperative was unable to meet its obligations in full, Z, Inc. filed against it a court suit for collection. The Cooperative resisted contending that Z, Inc. was illegally engaged in the retail trade business for having sold a consumer good as opposed to a producer item. The Cooperative also alleged that Z, Inc had violated the Anti-Dummy Law. Is Z, Inc. guilty of violating the Retail Trade Law and the Anti-Dummy Law? Why?

Z, Inc. is not guilty of violating the Retail Trade Law and the Anti-Dummy Law. The term “retail” under the Retail Trade Act requires that the seller must be habitually engaged in selling to the general public consumption goods. By consumption goods are meant “personal, family and household” purposes. A Rice Mill does not fall under that category. Neither does it appear that Z, Inc, is habitually engaged in selling to the general public that commodity. Since there is no violation of the Retail Trade Law, there would likewise be no violation of the Anti-Dummy Law.

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3.) A softdrinks company uses big quantities of gasoline and diesel fuel, buying the same from an American oil company in big container or drums. a. May the American company sell the gasoline and diesel fuel directly to the softdrinks company for the latter’s use in its delivery trucks? b. May the American company sell the gasoline and diesel fuel directly to the softdrinks company for use by the latter in the manufacture of softdrinks which are sold by the softdrinks company to the public?

The law excludes from the coverage of the “Retail Trade Act” the sale to manufacturers or processors selling to industrial and commercial user or consumers who use the product to render service to the general public and/or to produce or manufacture goods which are, in turn, sold by them. Accordingly:

a. The American company cannot directly sell gasoline and fuel oil to the softdrinks company for the latter’s use in its delivery trucks since this service is to serve the requirements of the user (softdrinks company) itself and not to serve the general public (such as that rendered by common carriers).

b. The answer is also in the negative under the end-user test. The fuel is consumed by the softdrinks company. Hence, the sale of the fuel by the American company to the softdrinks company is retail business. The fact that the softdrinks company uses or consumes the fuel in the manufacturer of softdrinks which are sold by the softdrinks company to the public is of no moment. What is prohibited is the sale of the fuel by the American company to the softdrinks company.

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4.) Pictures Inc., a movie production company based in California, USA, entered into a contract with Yehey Movies Inc., a Filipino movie production and distribution company which is registered in the Philippines under the Securities Regulation Code (SRC) and listed in the Philippine Stock Exchange Inc. (PSE), for the exclusive distribution in the Philippines of movies produced in the USA by Yelp Pictures Inc. Yehey Movies is currently owned 85% by Yavic Yamson, and the balance, by the public in the Philippines. For purposes of entering into the contract, suing for breach of such contract, and prosecuting unauthorized showing of movies produced by Yelp Pictures, it appointed Atty. Yson, a local lawyer, as its attorney-in-fact. Simultaneously with the execution of the film distribution agreement, Yehey Movies also granted Yelp Pictures an option to acquire up to 40% of the total outstanding capital stock in Yehey Movies post-exercise of the option, at the option price of PhP .01 per number of shares covered by the option, exercisable within a period of one year from the date of the grant, at the exercise price of PhP 100 per share. Once exercised, Yelp Pictures was granted the right to nominate two (2) directors to the Board of Yehey Movies, and Yavic Yamson agreed to vote all his shares for the election of directors to be nominated by Yelp Pictures. a. May the acts of entering into the film distribution contract, the subsequent execution and performance of the terms of the contract in the Philippines, and the appointment of Atty. Yson, be considered as act of “doing business” in the Philippines that will require Yelp Pictures to register as a foreign corporation and obtain a license to do business in the Philippines? b. Will your answer in (a) be the same if Yelp Picture exercises the option, becomes a substantial shareholder, and is able to elect two (2) directors in the Board of Directors of Yehey Movies? c. While options are securities, the option was granted only to Yelp Pictures and not to the public. As a consequence, the option need not be registered with the SEC.

a. A foreign Corporation which owns the Copyright to foreign films and exclusive distribution rights in the Philippines and appointed an attorney in-fact to file criminal cases on behalf of the corporation is not doing business in the Philippines, because the contract was executed abroad and the hiring of the attorney-infact is merely for the protection of its property rights. (Columbia Pictures vs Court of Appeals, 261 SCRA 144, 1996)

b. It will be the same. Mere passive investment in equity and voting the equity shares of the corporation to elect its director in the board of a domestic corporation is not tantamount to doing business.

c. While options are securities, the option was granted only to Yelp Pictures and not to the public. As a consequence, the option need not be registered with the SEC.

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5.) Two corporations agreed to merge. They then executed an agreement specifying the surviving corporation and the absorbed corporation. Under the agreement of merger dated November 5, 1998, the surviving corporation acquired all the rights, properties and liabilities of the absorbed corporation. a. What would happen to the absorbed corporation? Must the absorbed corporation undertake dissolution and the winding up procedures? Explain your answer. b. Pending the approval of the merger by the SEC, may the surviving corporation already institute suits to collect all receivables due to the absorbed corporation from its customers? Explain your answer. c. A case was filed against a customer to collect on the promissory note issued by him after the date of the merger agreement. The customer raised the defense that while the receivables as of the date of the merger agreement were transferred to the surviving corporation, those receivables which were created after the merger agreement remained to be owned by the absorbed corporation. These receivables would be distributed to the stockholders conformably with the dissolution and liquidation procedures under the New Corporation Code? Discuss the merits of this argument.

a. NO. There is no need for the absorbed corporation to undertake dissolution and winding up procedure. As a result of the merger, the absorbed corporation is automatically dissolved and its assets and liabilities are acquired and assumed by the surviving corporation.

b. NO. The merger does not become effective until and unless approved by the SEC. before the approval by the SEC of the merger, the surviving corporation has no legal personality with respect to receivables due to the absorbed corporation.

c. Whether the receivable was incurred by the absorbed corporation before or after the merger agreement, or before or after the approval thereof by the SEC, the said receivable would still belong to the surviving corporation under Section 80 of the Corporation Code which does not make any distinction as to the assets and liabilities of the absorbed corporation that the surviving corporation would inherit.

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6.) Under the Nell Doctrine, so called because it was first pronounced by the Supreme Court in the 1965 ruling in Nell v. Pacific Farms, Inc. (15 SCRA 415), the general rule is that where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. State the exceptions to the Nell Doctrine.

The exceptions to the Nell doctrine are as follows:

1. When the buyer expressly or impliedly assumes the liabilities of the seller.
2. If the sale amounts to a merger or consolidation.
3. If the sale is entered into fraudulently or made in bad faith.
4. If the buyer is merely a continuation of the personality of the seller or the so-called business - enterprise transfer rule.

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7.) Mr. Y filed a case captioned as "Injunction with Prayer for Status Quo Order, Temporary Restraining Order and Damages" against Z Company to prohibit the latter from selling shares which Mr. Y purportedly bought from Z Company. Mr. Y alleged that the subscription for the said shares was already partly paid by him, but the subject shares were nonetheless being offered for sale by Z Company to the corporation's other stockholders. a. Is the case filed by Mr. Y against Z Company considered an intra-corporate dispute? Explain. b. Assuming that it was Z Company which instead filed a case against Mr. Y in order to collect the unpaid balance of his stock subscriptions, is the case considered an intra-corporate dispute? Explain.

a. The case is not considered an intra-corporate dispute. To determine if a case involves an intra-corporate controversy, the Supreme Court has consistently applied two tests: the relationship test and the nature of the controversy test. Under the relationship test, an intra-corporate controversy arises when the conflict is "between the corporation, partnership or association and its stockholders, partners, members or officers". The nature of the controversy test examines the controversy in relation to the "enforcement of the parties' correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation”. It is not yet certain that Mr. Y is a stockholder of Z Company. Thus, the first test is not present. Even assuming that the parties are stockholders of the corporation and as such, satisfy the relationship test, the dispute is not rooted in the existence of intra-corporate relationship. The action for injunction to stop the sale of shares does not pertain to the enforcement of the parties’ rights and obligations under the Corporation Code.

b. YES, both relationship and nature of the controversy tests are present. The dispute is between the stockholder and the corporation. The issue of unpaid subscription pertains to the enforcement of their rights and obligations under the Corporation Code.

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8.) Define securities

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. Evidence of obligations to pay money or rights to participate in earnings and distribution of corporate assets. Instruments giving to their legal holder’s 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.

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9.) Why is the Securities Regulation Code called a “truth in securities law”?

The Securities Regulation Code is called a “truth in securities law” because it requires the issuer to make full and fair disclosure of information about securities being sold or offered to be sold within the Philippines and penalizes manipulative and fraudulent acts, devices and schemes.

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10.) 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 P2M worth of common stocks to either (a) it 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?

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.

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