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G.R. No.

L-18216

October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,


vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.
Ramon
C.
Fernando
for
petitioners-appellants.
Office of the Solicitor General for respondent-appellee.
BAUTISTA ANGELO, J.:
On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc.
executed a certificate of liquidation of the assets of the corporation reciting, among
other things, that by virtue of a resolution of the stockholders adopted on
September 17, 1960, dissolving the corporation, they have distributed among
themselves in proportion to their shareholdings, as liquidating dividends, the
assets of said corporation, including real properties located in Manila.
The certificate of liquidation, when presented to the Register of Deeds of Manila,
was denied registration on seven grounds, of which the following were disputed by
the stockholders:
3. The number of parcels not certified to in the acknowledgment;
5. P430.50 Reg. fees need be paid;
6. P940.45 documentary stamps need be attached to the document;
7. The judgment of the Court approving the dissolution and directing the disposition
of the assets of the corporation need be presented (Rules of Court, Rule 104, Sec.
3).
Deciding the consulta elevated by the stockholders, the Commissioner of Land
Registration overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6.
The stockholders interposed the present appeal.
As correctly stated by the Commissioner of Land Registration, the propriety or
impropriety of the three grounds on which the denial of the registration of the
certificate of liquidation was predicated hinges on whether or not that certificate
merely involves a distribution of the corporation's assets or should be considered
a transfer or conveyance.
Appellants contend that the certificate of liquidation is not a conveyance or transfer
but merely a distribution of the assets of the corporation which has ceased to exist
for having been dissolved. This is apparent in the minutes for dissolution attached

to the document. Not being a conveyance the certificate need not contain a
statement of the number of parcel of land involved in the distribution in the
acknowledgment appearing therein. Hence the amount of documentary stamps to
be affixed thereon should only be P0.30 and not P940.45, as required by the
register of deeds. Neither is it correct to require appellants to pay the amount of
P430.50 as registration fee.
The Commissioner of Land Registration, however, entertained a different opinion.
He concurred in the view expressed by the register of deed to the effect that the
certificate of liquidation in question, though it involves a distribution of the
corporation's assets, in the last analysis represents a transfer of said assets from
the corporation to the stockholders. Hence, in substance it is a transfer or
conveyance.
We agree with the opinion of these two officials. A corporation is a juridical person
distinct from the members composing it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members.
While shares of stock constitute personal property they do not represent property
of the corporation. The corporation has property of its own which consists chiefly
of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145
Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its proceeds to that extent when
distributed according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala
398, 56 So., 235), but its holder is not the owner of any part of the capital of the
corporation (Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled to the possession
of any definite portion of its property or assets (Gottfried v. Miller, 104 U.S., 521;
Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-owner or tenant in
common of the corporate property (Halton v. Hohnston, 166 Ala 317, 51 So 992).
On the basis of the foregoing authorities, it is clear that the act of liquidation made
by the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not
and cannot be considered a partition of community property, but rather a transfer
or conveyance of the title of its assets to the individual stockholders. Indeed, since
the purpose of the liquidation, as well as the distribution of the assets of the
corporation, is to transfer their title from the corporation to the stockholders in
proportion to their shareholdings, and this is in effect the purpose which they
seek to obtain from the Register of Deeds of Manila, that transfer cannot be
effected without the corresponding deed of conveyance from the corporation to the
stockholders. It is, therefore, fair and logical to consider the certificate of liquidation
as one in the nature of a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with costs against


appellants.
MAJORITY STOCKHOLDERS OF RUBY
INDUSTRIAL CORPORATION,

G.R. No. 165887

Petitioners,

- versus -

MIGUEL LIM, in his personal capacity as


Stockholder
of
Ruby
Industrial
Corporation
and
representing
the
MINORITY STOCKHOLDERS OF RUBY
INDUSTRIAL CORPORATION and the
MANAGEMENT COMMITTEE OF RUBY
INDUSTRIAL CORPORATION,
Respondents.

x- - - - - - - - - - - - - - - - - - - - - - - - - -x

CHINA BANKING CORPORATION,

G.R. No. 165929

Petitioner,
Present:

CARPIO MORALES, J.,


- versus -

Chairperson,
BRION,
BERSAMIN,

ABAD,* and
MIGUEL LIM, in his personal capacity as
a stockholder of Ruby Industrial
Corporation
and
representing
the
MINORITY STOCKHOLDERS OF RUBY
INDUSTRIAL CORPORATION,
Respondents.

VILLARAMA, JR., JJ.

Promulgated:

June 6, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:


This case is brought to us on appeal for the fourth time, involving the same
parties and interests litigating on issues arising from rehabilitation proceedings
initiated by Ruby Industrial Corporation wayback in 1983.
Following is the factual backdrop of the present controversy, as culled from
the records and facts set forth in the ponencia of Chief Justice Reynato S. Puno
inRuby Industrial Corporation v. Court of Appeals.[1]
The Antecedents
Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in
glass manufacturing. Reeling from severe liquidity problems beginning in 1980,
RUBY filed on December 13, 1983 a petition for suspension of payments with the
Securities and Exchange Commission (SEC) docketed as SEC Case No.
2556. On December 20, 1983, the SEC issued an order declaring RUBY under
suspension of payments and enjoining the disposition of its properties pending
hearing of the petition, except insofar as necessary in its ordinary operations, and
making payments outside of the necessary or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel created the management
committee (MANCOM) for RUBY, composed of representatives from Allied
Leasing and Finance Corporation (ALFC), Philippine Bank of Communications
(PBCOM), China Banking Corporation (China Bank), Pilipinas Shell Petroleum
Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu Kim Giang. The

MANCOM was tasked to perform the following functions: (1) undertake the
management of RUBY; (2) take custody and control over all existing assets and
liabilities of RUBY; (3) evaluate RUBYs existing assets and liabilities, earnings
and operations; (4) determine the best way to salvage and protect the interest of
its investors and creditors; and (5) study, review and evaluate the proposed
rehabilitation plan for RUBY.
Subsequently, two (2) rehabilitation plans were submitted to the SEC: the
BENHAR/RUBY Rehabilitation Plan of the majority stockholders led by Yu Kim
Giang, and the Alternative Plan of the minority stockholders represented by Miguel
Lim (Lim).
Under the BENHAR/RUBY Plan, Benhar International, Inc. (BENHAR) -- a
domestic corporation engaged in the importation and sale of vehicle spare parts
which is wholly owned by the Yu family and headed by Henry Yu, who is also a
director and majority stockholder of RUBY -- shall lend its P60 million credit line in
China Bank to RUBY, payable within ten (10) years. Moreover, BENHAR shall
purchase the credits of RUBYs creditors and mortgage RUBYs properties to
obtain credit facilities for RUBY. Upon approval of the rehabilitation plan, BENHAR
shall control and manage RUBYs operations. For its service, BENHAR shall
receive a management fee equivalent to 7.5% of RUBYs net sales.
The BENHAR/RUBY Plan was opposed by 40% of the stockholders, including Lim,
a minority shareholder of RUBY. ALFC, the biggest unsecured creditor of RUBY
and chairman of the management committee, also objected to the plan as it would
transfer RUBYs assets beyond the reach and to the prejudice of its unsecured
creditors.
On the other hand, the Alternative Plan of RUBYs minority stockholders
proposed to: (1) pay all RUBYs creditors without securing any bank loan; (2) run
and operate RUBY without charging management fees; (3) buy-out the majority
shares or sell their shares to the majority stockholders; (4) rehabilitate RUBYs two
plants; and (5) secure a loan at 25% interest, as against the 28% interest charged
in the loan under the BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the MANCOM for evaluation.
On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY
Plan. The minority stockholders thru Lim appealed to the SEC En Banc which, in
its November 15, 1988 Order, enjoined the implementation of the BENHAR/RUBY
Plan. On December 20, 1988 after the expiration of the temporary restraining
order (TRO), the SEC En Banc granted the writ of preliminary injunction against
the enforcement of the BENHAR/RUBY Plan. BENHAR, Henry Yu, RUBY and Yu

Kim Giang questioned the issuance of the writ in their petition filed in the Court of
Appeals (CA), docketed as CA-G.R. SP No. 16798. The CA denied their
appeal.[2] Upon elevation to this Court (G.R. No. L-88311), we issued a minute
resolution dated February 28, 1990 denying the petition and upholding the
injunction against the implementation of the BENHAR/RUBY Plan.
Meanwhile, BENHAR paid off Far East Bank & Trust Company (FEBTC), one of
RUBYs secured creditors. By May 30, 1988, FEBTC had already executed a deed
of assignment of credit and mortgage rights in favor of BENHAR. BENHAR
likewise paid the other secured creditors who, in turn, assigned their rights in favor
of BENHAR. These acts were done by BENHAR despite the SECs TRO and
injunction and even before the SEC Hearing Panel approved the BENHAR/RUBY
Plan on October 28, 1988.
ALFC and Miguel Lim moved to nullify the deeds of assignment executed in favor
of BENHAR and cite the parties thereto in contempt for willful violation of
the December 20, 1983 SEC order enjoining RUBY from disposing its properties
and making payments pending the hearing of its petition for suspension of
payments. They also charged that in paying off FEBTCs credits, FEBTC was
given undue preference over the other creditors of RUBY. Acting on the motions,
the SEC Hearing Panel nullified the deeds of assignment executed by RUBYs
creditors in favor of BENHAR and declared the parties thereto guilty of indirect
contempt. BENHAR and RUBY appealed to the SEC En Banc which denied their
appeal. BENHAR and RUBY joined by Henry Yu and Yu Kim Giang appealed to
the CA (CA-G.R. SP No. 18310). By Decision[3] dated August 29, 1990, the CA
affirmed the SEC ruling nullifying the deeds of assignment. The CA also declared
its decision final and executory as to RUBY and Yu Kim Giang for their failure to
file their pleadings within the reglementary period. By Resolution dated August 26,
1991 in G.R. No. 96675,[4] this Court affirmed the CAs decision.
Earlier, on May 29, 1990, after the SEC En Banc enjoined the implementation of
BENHAR/RUBY Plan, RUBY filed with the SEC En Banc an ex parte petition to
create a new management committee and to approve its revised rehabilitation plan
(Revised BENHAR/RUBY Plan). Under the revised plan, BENHAR shall
receiveP34.068 million of the P60.437 Million credit facility to be extended to
RUBY, as reimbursement for BENHARs payment to some of RUBYs
creditors. The SEC En Banc directed RUBY to submit its revised rehabilitation
plan to its creditors for comment and approval while the petition for the creation of
a new management committee was remanded for further proceedings to the SEC
Hearing Panel. The Alternative Plan of RUBYs minority stockholders was also
forwarded to the hearing panel for evaluation.

On April 26, 1991, over ninety percent (90%) of RUBYs creditors objected to the
Revised BENHAR/RUBY Plan and the creation of a new management
committee. Instead, they endorsed the minority stockholders Alternative Plan. At
the hearing of the petition for the creation of a new management committee, three
(3) members of the original management committee (Lim, ALFC and Pilipinas
Shell) opposed the Revised BENHAR/RUBY Plan on grounds that: (1) it would
legitimize the entry of BENHAR, a total stranger, to RUBY as BENHAR would
become the biggest creditor of RUBY; (2) it would put RUBYs assets beyond the
reach of the unsecured creditors and the minority stockholders; and (3) it was not
approved by RUBYs stockholders in a meeting called for the purpose.
Notwithstanding the objections of 90% of RUBYs creditors and three members of
the MANCOM, the SEC Hearing Panel approved on September 18, 1991 the
Revised BENHAR/RUBY Plan and dissolved the existing management
committee. It also created a new management committee and appointed BENHAR
as one of its members. In addition to the powers originally conferred to the
management committee under Presidential Decree (P.D.) No. 902-A, the new
management committee was tasked to oversee the implementation by the Board
of Directors of the revised rehabilitation plan for RUBY.
The original management committee (MANCOM), Lim and ALFC appealed
to the SEC En Banc which affirmed the approval of the Revised BENHAR/RUBY
Plan and the creation of a new management committee on July 30, 1993. To
ensure that the management of RUBY will not be controlled by any group, the SEC
appointed SEC lawyers Ruben C. Ladia and Teresita R. Siao as additional
members of the new management committee. Further, it declared that BENHARs
membership in the new management committee is subject to the condition that
BENHAR will extend its credit facilities to RUBY without using the latters assets
as security or collateral.
Lim, ALFC and MANCOM moved for reconsideration while RUBY and
BENHAR asked the SEC to reconsider the portion of its Order prohibiting BENHAR
from utilizing RUBYs assets as collateral. On October 15, 1993, the SEC denied
the motion of Lim, ALFC and the original management committee but granted
RUBY and BENHARs motion and allowed BENHAR to use RUBYs assets as
collateral for loans, subject to the approval of the majority of all the members of the
new management committee. Lim, ALFC and MANCOM appealed to the CA (CAG.R. SP Nos. 32404, 32469 & 32483) which by Decision[5] datedMarch 31,
1995 set aside the SECs approval of the Revised BENHAR/RUBY Plan and
remanded the case to the SEC for further proceedings. The CA ruled that the
revised plan circumvented its earlier decision (CA-G.R. SP No. 18310) nullifying

the deeds of assignment executed by RUBYs creditors in favor of


BENHAR. Since under the revised plan, BENHAR was to receive P34.068 Million
of the P60.437 Million credit facility to be extended to RUBY, as settlement for its
advance payment to RUBYs seven (7) secured creditors, such payments made
by BENHAR under the void Deeds of Assignment, in effect were recognized as
payable to BENHAR under the revised plan. The motion for reconsideration filed
by BENHAR and RUBY was likewise denied by the CA.[6]
Undaunted, RUBY and BENHAR filed a petition for review in this Court (G.R.
Nos. 124185-87 entitled Ruby Industrial Corporation v. Court of Appeals) alleging
that the CA gravely abused its discretion in substituting its judgment for that of the
SEC, and in allowing Lim, ALFC and MANCOM to file separate petitions prepared
by lawyers representing themselves as belonging to different firms.
By
Decision[7] dated January 20, 1998, we sustained the CAs ruling that the Revised
BENHAR/RUBY Plan contained provisions which circumvented its final decision in
CA-G.R. SP No. 18310, nullifying the deeds of assignment of credits and
mortgages executed by RUBYs creditors in favor of BENHAR, as well as this
Courts Resolution in G.R. No. 96675, affirming the said CAs decision. We thus
held:
Specifically, the Revised BENHAR/RUBY Plan considered as valid the advance
payments made by BENHAR in favor of some of RUBYs creditors. The nullity of
BENHARs unauthorized dealings with RUBYs creditors is settled. The deeds of
assignment between BENHAR and RUBYs creditors had been categorically
declared void by the SEC Hearing Panel in two (2) orders issued onJanuary 12,
1989 and March 15, 1989. x x x
xxxx
These orders were upheld by the SEC en banc and the Court of Appeals. In CAG.R. SP No. 18310, the Court of Appeals ruled as follows:
x x x

xxx

xxx

1) x x x when the Deed of Assignment was executed on May 30, 1988 by and
between Ruby Industrial Corp., Benhar International, Inc., and FEBTC, the
Rehabilitation Plan proposed by petitioner Ruby Industrial Corp. for Benhar
International, Inc. to assume all petitioners obligation has not been approved by
the SEC. The Rehabilitation Plan was not approved until October 28, 1988. There
was a willful and blatant violation of the SEC order dated December 20, 1983 on
the part of petitioner Ruby Industrial Corp., represented by Yu Kim Giang, by
Benhar International, Inc., represented by Henry Yu and by FEBTC.

2) The magnitude and coverage of the transactions involved were such that Yu
Kim Giang and the other signatories cannot feign ignorance or pretend lack of
knowledge thereto in view of the fact that they were all signatories to the
transaction and privy to all the negotiations leading to the questioned
transactions. In executing the Deeds of Assignment, the petitioners totally
disregarded the mandate contained in the SEC order not to dispose the properties
of Ruby Industrial Corp. in any manner whatsoever pending the approval of the
Rehabilitation Plan and rendered illusory the SEC efforts to rehabilitate the
petitioner corporation to the best interests of all the creditors.
3) The assignments were made without prior approval of the Management
Committee created by the SEC in an Order datedAugust 10, 1984. Under Sec. 6,
par. d, sub. par. (2) of P.D. 902-A as amended by P.D. 1799, the Management
Committee, rehabilitation receiver, board or body shall have the power to take
custody and control over all existing assets of such entities under management
notwithstanding any provision of law, articles of incorporation or by-law to the
contrary. The SEC therefore has the power and authority, through a Management
Committee composed of petitioners creditors or through itself directly, to declare
all assignment of assets of the petitioner Corporation declared under suspension
of payments, null and void, and to conserve the same in order to effect a fair,
equitable and meaningful rehabilitation of the insolvent corporation.
4) x x x. The acts for which petitioners were held in indirect contempt by the SEC
arose from the failure or willful refusal by petitioners to obey the lawful order of the
SEC not to dispose of any of its properties in any manner whatsoever without
authority or approval of the SEC. The execution of the Deeds of Assignment tend
to defeat or obstruct the administration of justice. Such acts are offenses against
the SEC because they are calculated to embarrass, hinder and obstruct the
tribunal in the administration of justice or lessen its authority.
x

Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the
Revised BENHAR/RUBY Plan, has acknowledged the invalidity of the subject
deeds of assignment. However, to justify its approval of the plan and the
appointment of BENHAR to the new management committee, it gave the lame
excuse that BENHAR became RUBYs creditor for having paid RUBYs debts. x x
x
xxxx
For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY
Plan gave undue preference to BENHAR. The records, indeed, show that

BENHARs offer to lend its credit facility in favor of RUBY is conditioned upon the
payment of the amount it advanced to RUBYs creditors, x x x
xxxx
In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit
facility to be extended to RUBY for the latters rehabilitation.
Rehabilitation contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former position of successful
operation and solvency.
When a distressed company is placed under
rehabilitation, the appointment of a management committee follows to avoid
collusion between the previous management and creditors it might favor, to the
prejudice of the other creditors. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over another by the expediency of
attachment, execution or otherwise. As between the creditors, the key phrase is
equality in equity. Once the corporation threatened by bankruptcy is taken over by
a receiver, all the creditors ought to stand on equal footing. Not any one of them
should be paid ahead of the others. This is precisely the reason for suspending
all pending claims against the corporation under receivership.[8] (Additional
emphasis supplied.)
Aside from the undue preference that would have been given to BENHAR
under the Revised BENHAR/RUBY Plan, we also found RUBYs dealing with
BENHAR highly irregular and its proposed financing scheme more costly and
ultimately prejudicial to RUBY. Thus:
Parenthetically, BENHAR is a domestic corporation engaged in importing and
selling vehicle spare parts with an authorized capital stock of thirty million pesos.
Yet, it offered to lend its credit facility in the amount of sixty to eighty million pesos
to RUBY. It is to be noted that BENHAR is not a lending or financing corporation
and lending its credit facilities, worth more than double its authorized capitalization,
is not one of the powers granted to it under its Articles of
Incorporation. Significantly, Henry Yu, a director and a majority stockholder of
RUBY is, at the same time, a stockholder of BENHAR, a corporation owned and
controlled by his family. These circumstances render the deals between BENHAR
and RUBY highly irregular.
xxxx
Moreover, when RUBY initiated its petition for suspension of payments with the
SEC, BENHAR was not listed as one of RUBYs creditors. BENHAR is a total

stranger to RUBY. If at all, BENHAR only served as a conduit of RUBY. As aptly


stated in the challenged Court of Appeals decision:
Benhars role in the Revised Benhar/Ruby Plan, as envisioned by the majority
stockholders, is to contract the loan for Ruby and, serving the role of a financier,
relend the same to Ruby. Benhar is merely extending its credit line facility with
China Bank, under which the bank agrees to advance funds to the company should
the need arise. This is unlikely a loan in which the entire amount is made available
to the borrower so that it can be used and programmed for the benefit of the
companys financial and operational needs. Thus, it is actually China Bank which
will be the source of the funds to be relent to Ruby. Benhar will not shell out a
single centavo of its own funds. It is the assets of Ruby which will be mortgaged
in favor of Benhar. Benhars participation will only make the rehabilitation plan
more costly and, because of the mortgage of its (Rubys) assets to a new creditor,
will create a situation which is worse than the present. x x x
We need not say more.[9] (Additional emphasis supplied.)
After the finality of the above decision, the SEC set the case for further
proceedings.[10] On March 14, 2000, Bank of the Philippine Islands (BPI), one of
RUBYs secured creditors, filed a Motion to Vacate Suspension Order[11] on
grounds that there is no existing management committee and that no decision has
been rendered in the case for more than 16 years already, which is beyond the
period mandated by Sec. 3-8 of the Rules of Procedure on Corporate
Recovery. RUBY filed its opposition,[12] asserting that the MANCOM never
relinquished its status as the duly appointed management committee as it resisted
the orders of the second and third management committees subsequently created,
which have been nullified by the CA and later this Court. As to the applicability of
the cited rule under the Rules on Corporate Recovery, RUBY pointed out that this
case was filed long before the effectivity of said rules. It also pointed out that the
undue delay in the approval of the rehabilitation plan being due to the numerous
appeals taken by the minority stockholders and MANCOM to the CA and this
Court, from the SEC approval of the BENHAR/RUBY Plan. Since there have
already been steps taken to finally settle RUBYs obligations with its creditors, it
was contended that the application of the mandatory period under the cited
provision would cause prejudice and injustice to RUBY.
It appears that even earlier during the pendency of the appeals in the CA,
BENHAR and RUBY have performed other acts in pursuance of the
BENHAR/RUBY Plan approved by the SEC.

On September 1, 1996, Lim received a Notice of Stockholders Meeting


scheduled on September 3, 1996 signed by a certain Mr. Edgardo M. Magtalas,
the Designated Secretary of RUBY and stating the matters to be taken up in said
meeting, which include the extension of RUBYs corporate term for another twentyfive (25) years and election of Directors.[13] At the scheduled stockholders
meeting of September 3, 1996, Lim together with other minority stockholders,
appeared in order to put on record their objections on the validity of holding thereof
and the matters to be taken therein. Specifically, they questioned the percentage
of stockholders present in the meeting which the majority claimed stood at 74.75%
of the outstanding capital stock of RUBY.
The aforesaid stockholders meeting was the subject of the Motion to Cite
For Contempt[14] and Supplement to Motion to Cite For Contempt[15] filed by Lim
before the CA where their petitions for review (CA-G.R. Nos. 32404, 32469 and
32483) were then pending. Lim argued that the majority stockholders claimed to
have increased their shares to 74.75% by subscribing to the unissued shares of
the authorized capital stock (ACS). Lim pointed out that such move of the majority
was in implementation of the BENHAR/RUBY Plan which calls for capital infusion
ofP11.814 Million representing the unissued and unsubscribed portion of the
present ACS of P23.7 Million, and the Revised BENHAR/RUBY Plan which
proposed an additional subscription of P30 Million. Since the implementation of
both majority plans have been enjoined by the SEC and CA, the calling of the
special stockholders meeting by the majority stockholders clearly violated the said
injunction orders. This circumstance certainly affects the determination of quorum,
the voting requirements for corporate term extension, as well as the election of
Directors pursuant to the July 30, 1993 Order and October 15, 1993 Resolution of
the SEC enjoining not only the implementation of the revised plan but also the
doing of any act that may render the appeal from the approval of the said plan
moot and academic.
The aforementioned capital infusion was taken up by RUBYs board of
directors in a special meeting[16] held on October 2, 1991 following the issuance
by the SEC of its Order dated September 18, 1991[17] approving the Revised
BENHAR/RUBY Plan and creating a new management committee to oversee its
implementation. During the said meeting, the board asserted its authority and
resolved to take over the management of RUBYs funds, properties and records
and to demand an accounting from the MANCOM which was ordered dissolved by
the SEC. The board thus resolved that:
The corporation be authorized to issue out of the unissued portion of the authorized
capital stocks of the corporation in the form of common stocks 11.8134.00 [Million]

after comparing this with the audited financial statement prepared by SGV as of
December 31, 1982, to be subscribed and paid in full by the present stockholders
in proportion to their present stockholding in the corporation on staggered basis
starting October 28, December 27 then February 28 and April 28 as the last
installment date at 25% for each period. It was also moved and seconded that
should any of the stockholders fail to exercise their rights to buy the number of
shares they are qualified to buy by making the first installment payment of 25% on
or before October 13, 1991, then the other stockholders may buy the same and
that only when none of the present stockholders are interested in the shares may
there be a resort to selling them by public auction.[18]
As reflected in the Minutes of the special board meeting, a representative of
the absent directors (Tan Chai, Tomas Lim, Miguel Lim and Yok Lim) came to
submit their letter addressed to the Chairman suggesting that said meeting be
deferred until the September 18, 1991 SEC Order becomes final and
executory. The directors present nevertheless proceeded with the meeting upon
their belief that neither appeal nor motion for reconsideration can stay the SEC
order.[19]
The resolution to extend RUBYs corporate term, which was to expire on
January 2, 1997, was approved during the September 3, 1996 stockholders
meeting, as recommended by the board of directors composed of Henry Yu
(Chairman), James Yu, David Yukimteng, Harry L. Yu, Yu Kim Giang, Mary L. Yu
and Vivian L. Yu. The board certified that said resolution was approved by
stockholders representing two-thirds (2/3) of RUBYs outstanding capital
stock.[20] Per Certification[21] dated August 31, 1995 issued by Yu Kim Giang as
Executive Vice-President of RUBY, the majority stockholders own 74.75% of
RUBYs outstanding capital stock as of October 27, 1991. The Amended Articles
of Incorporation was filed with the SEC on September 24, 1996.[22]
On March 17, 2000, Lim filed a Motion[23] informing the SEC of acts being
performed by BENHAR and RUBY through directors who were illegally elected,
despite the pendency of the appeal before this Court questioning the SEC approval
of the BENHAR/RUBY Plan and creation of a new management committee, and
after this Court had denied their motion for reconsideration of the January 20,
1998decision in G.R. Nos. 124185-87. Lim reiterated that before the matter of
extension of corporate life can be passed upon by the stockholders, it is necessary
to determine the percentage ownership of the outstanding shares of the
corporation. The majority stockholders claimed that they have increased their
shareholdings from 59.828% to 74.75% as a result of the illegal and invalid
stockholders meeting on September 3, 1996. The additional subscription of

shares cannot be done as it implements the BENHAR/RUBY Plan against which


an existing injunction is still effective based on the SEC Order dated January 6,
1989, and which was struck down under the final decision of this Court in G.R.
Nos. 124185-87. Hence, the implementation of the new percentage stockholdings
of the majority stockholders and the calling of stockholders meeting and the
subsequent resolution approving the extension of corporate life of RUBY for
another twenty-five (25) years, were all done in violation of the decisions of the CA
and this Court, and without compliance with the legal requirements under
the Corporation Code. There being no valid extension of corporate term, RUBYs
corporate life had legally ceased. Consequently, Lim moved that the SEC: (1)
declare as null and void the infusion of additional capital made by the majority
stockholders and restore the capital structure of RUBY to its original structure prior
to the time injunction was issued; and (2) declare as null and void the resolution of
the majority stockholders extending the corporate life of RUBY for another twentyfive (25) years.
The MANCOM concurred with Lim and made a similar
manifestation/comment[24] regarding the irregular and invalid capital infusion and
extension of RUBYs corporate term approved by stockholders representing only
60% of RUBYs outstanding capital stock. It further stated that the foregoing acts
were perpetrated by the majority stockholders without even consulting the
MANCOM, which technically stepped into the shoes of RUBYs board of
directors. Since RUBY was still under a state of suspension of payment at the time
the special stockholders meeting was called, all corporate acts should have been
made in consultation and close coordination with the MANCOM.
Lim likewise filed an Opposition[25] to BPIs Motion to Vacate Suspension
Order, asserting that the management committee originally created by the SEC
continues to control the corporate affairs and properties of RUBY. He also
contended that the SEC Rules of Procedure on Corporate Recovery cannot apply
in this case which was filed long before the effectivity of said rules.
On the other hand, RUBY filed its Opposition[26] to the Motion filed by Lim
denying the allegation of Lim that RUBYs corporate existence had ceased. RUBY
claimed that due notice were given to all stockholders of the October 2,
1991 special meeting in which the infusion of additional capital was discussed. It
further contended that the CA decision setting aside the SEC orders approving the
Revised BENHAR/RUBY Plan, which was subsequently affirmed by this Court
on January 20, 1998, did not nullify the resolution of RUBYs board of directors to
issue the previously unissued shares. The amendment of its articles of

incorporation on the extension of RUBYs corporate term was duly submitted with
and approved by the SEC as per the Certification dated September 24, 1996.
The MANCOM also filed its Opposition[27] to BPIs Motion to Vacate Suspension
Order, stating that it has continuously performed its primary function of preserving
the assets of RUBY and undertaken the management of RUBYs day-to-day
affairs. It expressed belief that between chaotic foreclosure proceedings and
collection suits that would be triggered by the vacation of the suspension order and
an orderly settlement of creditors claims before the SEC, the latter path is the
more prudent and logical course of action. On April 28, 2000, it submitted to the
court copies of the minutes of meetings held from January 18, 1999 to December
1, 1999in pursuance of its mandate to preserve the assets and administer the
business affairs of RUBY.[28]
On August 23, 2000, China Bank filed a Manifestation[29] echoing the contentions
of BPI that as there is no existing management committee and no rehabilitation
plan approved even after the 240-day period, warrants the application of Sec. 4-9
of the SEC Rules of Procedure on Corporate Recovery such that the petition is
deemed ipso facto denied and dismissed. China Bank lamented that the length
of time that has lapsed, as well as the parties actuations, completely betrays a
genuine attempt to rehabilitate RUBYs moribund operations all to the dismay,
damage and prejudice of RUBYs creditors. It stressed that the proceedings
cannot be prolonged nor used as a ploy to defer indefinitely the payment of long
overdue obligations of RUBY to its creditors. With the case having been ipso
factodismissed, there is no need of further action from the parties or an order from
the SEC. Consequently, RUBYs creditors may now take whatever legal action
they may deem appropriate to protect their rights including, but not limited to
extrajudicial foreclosure.
On September 11, 2000, the SEC granted Lims request for the issuance of
subpoena duces tecum/ad testificandum to Ms. Jocelyn Sta. Ana of BPI for the
latter to testify and bring all documents and records pertaining to
RUBY.[30] Earlier, Lim moved for a hearing to verify the information that China
Bank and BPI had separately executed deeds of assignment in favor of Greener
Investment Corporation, a company owned by Yu Kim Giang, one of RUBYs
majority stockholders.[31] Said hearing, however, did not push through in view of
RUBYs proposal for a compromise agreement.[32] Lim submitted his comments
on the Proposed Compromise Agreement, but there was no response from RUBY
and the majority stockholders.[33] The minority stockholders likewise served a
copy of the revised Compromise Agreement to the majority stockholders.[34] Lim
moved that the case be assigned to a new Panel of Hearing Officers and the

majority stockholders be made to declare in a hearing whether they accept the


counterproposals of the minority in their draft Amicable Settlement in order that the
case can proceed immediately to liquidation.[35]
On January 25, 2001, the MANCOM filed with the SEC its Resolution unanimously
adopted on January 19, 2001 affirming that: (1) MANCOM was never informed nor
advised of the supposed capital infusion by the majority stockholders in October
1991 and it never actually received any such additional subscription nor signed
any document attesting to or authorizing the said increase of RUBYs capital stock
or the extension of its corporate life; (2) MANCOM continuously recognizes the
60%-40% ratio of shareholding profile between the majority and minority
stockholders, with the majority having 59.828% while the minority holds 40.172%
shareholding; (3) as there was no valid increase in the shareholding of the majority
and consequently no valid extension of corporate term, the liquidation of RUBY is
thus in order; (4) to date, the majority stockholders or Yu Kim Giang have not
complied with the December 22, 1989 SEC order for them to turn over the cash
including bank deposits, all other financial records and documents of RUBY
including transfer certificates of title over its real properties, and render an
accounting of all the money received by RUBY; and (5) pursuant to this Courts
ruling in G.R. No. 96675 dated August 26, 1991, the previous deeds of assignment
made in favor of BENHAR by Florence Damon, Philippine Bank of
Communications, Philippine Commercial International Bank, Philippine Trust
Company, PCI Leasing and Finance, Inc. and FEBTC, having been earlier
declared void by the SEC Hearing Panel, and the CA decision in CA-G.R. SP No.
18310 affirmed by this Court have no legal effect and are deemed void.[36]
On the other hand, Lim filed a Supplement (to Manifestation and Motion dated
January 18, 2001)[37] reiterating his pending motion filed on March 15, 2000 for
the SEC to implement this Courts January 20, 1998 Decision in G.R. Nos. 12418587 which states in part that [t]he SEC therefore has the power and authority,
directly to declare all assignment of assets of the petitioner Corporation declared
under suspension of payments, null and void, and to conserve the same in order
to effect a fair, equitable and meaningful rehabilitation of the insolvent
corporation. Lim contended that the SEC retains jurisdiction over pending
suspension of payment/rehabilitation cases filed as of June 30, 2000 until these
are finally disposed, pursuant to Sec. 5.2 of the Securities Regulation Code
(Republic Act [R.A.] No. 8799). Considering that the Management Committee is
intact, the majority stockholders cannot act in an illegal manner with regard to
RUBYs assets. He thus concluded that the continued disobedience of the majority
stockholders to the orders and decisions of the SEC and CA, as affirmed by this
Court, have certainly rendered any additional assignments, such as the Deeds of

Assignment executed by BPI and China Bank with BENHAR, Henry Yu or conduits
of the majority stockholders, null and void.
The MANCOM manifested that it is adopting in toto the Manifestation and Motion
dated January 18, 2001 filed by Lim. It also moved for the SEC to conduct further
proceedings as directed by this Court. Considering that there is no chance at all
for the proposed rehabilitation of RUBY in light of strict implementation by
government authorities of environmental laws particularly on pollution control, and
MANCOMs assent to effect a liquidation, the MANCOM asserted that a hearing
should focus on the eventual liquidation of RUBY. It added that a dismissal under
the circumstances would be tantamount to a perceived shirking by the SEC of its
mandate to afford all creditors ample opportunity to recover on their respective
financial exposure with RUBY.[38]
On May 15, 2001, the MANCOM submitted copies of minutes of meetings held
from April 13, 2000 to December 29, 2000.[39]
On September 20, 2001, the SEC issued an Order directing the Management
Committee to submit a detailed report not mere minutes of meetings -- on the
status of the rehabilitation process and financial condition of RUBY, which should
contain a statement on the feasibility of the rehabilitation plan.[40] The MANCOM
complied with the said order on February 15, 2002.[41] The majority stockholders
and RUBY moved to dismiss the petition and strike from the records the
Compliance/Report.
MANCOM filed its omnibus opposition to the said
motions. There was further exchange of pleadings by the parties on the matter of
whether the SEC should already dismiss the petition of RUBY as prayed for by the
majority stockholders and RUBY, or proceed with supervised liquidation of RUBY
as proposed by the MANCOM and minority stockholders.
The SECs Ruling
On September 18, 2002, the SEC issued its Order[42] denying the petition for
suspension of payments, as follows:
WHEREFORE, in view of the foregoing, the Commission hereby resolves to
terminate the proceedings and DENY the instant petition.
Accordingly, pursuant to Sec. 5-5 of the SECs Rules of Procedure on Corporate
Recovery, which provides:
Discharge of the Management Committee -- The Management Committee shall
be discharged and dissolved under the following circumstances:

a. Whenever the Commission, on motion or motu prop[r]io, has determined that


the necessity for the Management Committee no longer exists;
b. Upon the appointment of a liquidator under these Rules;
c. By agreement of the parties;
d. Upon termination of the proceedings.
Upon its discharge and dissolution, the Management Committee shall submit its
final report and render an accounting of its management within such reasonable
time as the Commission may allow.
the Management Committee is hereby DISSOLVED. It is likewise ordered to:
(1) Make an inventory of the assets, funds and properties of the petitioner;
(2) Turn-over the aforementioned assets, funds and properties to the proper
party(ies);
(3) Render an accounting of its management; and
(4) Submit its Final Report to the Commission.
The MANCOM is ordered to comply with the foregoing within a non-extendible
period of thirty (30) days from receipt of this Order. Relative to any compensation
owing to the MANCOM, it is left to the determination of the parties concerned.
No pronouncement as to costs.
SO ORDERED.[43]
The SEC declared that since its order declaring RUBY under a state of
suspension of payments was issued on December 20, 1983, the 180-day period
provided in Sec. 4-9 of the Rules of Procedure on Corporate Recovery had long
lapsed. Being a remedial rule, said provision can be applied retroactively in this
case. The SEC also overruled the objections raised by the minority stockholders
regarding the questionable issuance of shares of stock by the majority
stockholders and extension of RUBYs corporate term, citing the presumption of
regularity in the act of a government entity which obtains upon the SECs approval
of RUBYs amendment of articles of incorporation. It pointed out that Lim raised
the issue only in the year 2000. Moreover, the SEC found that notwithstanding his
allegations of fraud, Lim never proved the illegality of the additional infusion of the
capitalization by RUBY so as to warrant a finding that there was indeed an unlawful
act.[44]

Lim, in his personal capacity and in representation of the minority


stockholders of RUBY, filed a petition for review with prayer for a temporary
restraining order and/or writ of preliminary injunction before the CA (CA-G.R. SP
No. 73195) assailing the SEC order dismissing the petition and dissolving the
MANCOM.
Ruling of the CA
On May 26, 2004, the CA rendered its Decision,[45] the dispositive portion
of which states:
WHEREFORE, the Questioned Order dated 18 September 2002 issued by the
Securities and Exchange Commission in SEC Case No. 2556 entitled In the
Matter of the Petition for Suspension of Payments, Ruby Industrial Corporation,
Petitioner, is hereby SET ASIDE, and consequently:
(1) the infusion of additional capital made by the majority stockholders be declared
null and void and restoring the capital structure of Ruby to its original structure prior
to the time the injunction was issued, that is, majority stockholders 59.828% and
the minority stockholders 40.172% of the authorized capital stock of Ruby
Industrial Corporation.
(2) the resolution of the majority stockholders, who represents only 59.828% of
the outstanding capital stock of Ruby, extending the corporate life of Ruby for
another twenty-five (25) years which was made during the supposed stockholders
meeting held on 03 September 1996 be declared null and void;
(3)
implementing the invalidation of any and all illegal assignments of
credit/purchase of credits and the cancellation of mortgages connected therewith
made by the creditors of Ruby Industrial Corporation during the effectivity of the
suspension of payments order including that of China Bank and BPI and to deliver
to MANCOM or the Liquidator all the original of the Deeds of Assignments and the
registered titles thereto and any other documents related thereto; and order their
unwinding and requiring the majority stockholders to account for all illegal
assignments (amounts, dates, interests, etc. and present the original documents
supporting the same); and
(4) ordering the Securities and Exchange Commission to supervise the liquidation
of Ruby Industrial Corporation after the foregoing steps shall have been
undertaken.
SO ORDERED.[46]

According to the CA, the SEC erred in not finding that the October 2,
1991meeting held by RUBYs board of directors was illegal because the MANCOM
was neither involved nor consulted in the resolution approving the issuance of
additional shares of RUBY.
The CA further noted that the October 2, 1991 board meeting was conducted
on the basis of the September 18, 1991 order of the SEC Hearing Panel approving
the Revised BENHAR/RUBY Plan, which plan was set aside under this Courts
January 20, 1998 Decision in G.R. Nos. 124185-87. The CA pointed out that
records confirmed the proposed infusion of additional capital for RUBYs
rehabilitation, approved during said meeting, as implementing the Revised
BENHAR/RUBY Plan. Necessarily then, such capital infusion is covered by the
final injunction against the implementation of the revised plan. It must be recalled
that this Court affirmed the CAs ruling that the revised plan not only recognized
the void deeds of assignments entered into with some of RUBYs creditors in
violation of the CAs decision in CA-G.R. SP No. 18310, but also maintained a
financing scheme which will just make the rehabilitation plan more costly and
create a worse situation for RUBY.
On the supposed delay of the minority stockholders in raising the issue of
the validity of the infusion of additional capital effected by the board of directors,
the CA held that laches is inapplicable in this case. It noted that Lim sought relief
while the case is still pending before the SEC. If ever there was delay, the same
is not fatal to the cause of the minority stockholders.
The CA likewise faulted the SEC in relying on the presumption of regularity
on the matter of the extension of RUBYs corporate term through the filing of
amended articles of incorporation. In doing so, the CA totally disregarded the
evidence which rebutted said presumption, as demonstrated by Lim: (1) it was the
board of directors and not the stockholders which conducted the meeting without
the approval of the MANCOM; (2) there was no written waivers of the minority
stockholders pre-emptive rights and thus it was irregular to merely notify them of
the board of directors meeting and ask them to exercise their option; (3) there was
an existing permanent injunction against any additional capital infusion on the
BENHAR/RUBY Plan, while the CA and this Court both rejected the Revised
BENHAR/RUBY Plan; (4) there was no General Information Sheet reports made
to the SEC on the alleged capital infusion, as per certification by the SEC; (5) the
Certification stating the present percentage of majority shareholding, dated
December 21, 1993 and signed by Yu Kim Giang -- which was not sworn to before
a Notary Public -- was supposedly filed in 1996 with the SEC but it does not bear
a stamped date of receipt, and was only attached in a 2000 motion long after the

October 1991 board meeting; (6) said Certification was contradicted by the SEC
list of all stockholders of RUBY, in which the majority remained at 59.828% and
the minority shareholding at 40.172% as of October 27, 1991; (7) certain receipts
for the amount of P1.7 million was presented by the majority stockholders only in
the year 2000, long after Lim questioned the inclusion of extension of corporate
term in the Notice of Meeting when Lim filed before the CA a motion to cite for
contempt (CA-G.R. Nos. 32404, 32469 and 32483); and (8) this Courts decisions
in the cases elevated to it had recognized the 40% stockholding of the
minority. Upon the foregoing grounds, the CA said that the SEC should have
invalidated the resolution extending the corporate term of RUBY for another
twenty-five (25) years.
With the expiration of the RUBYs corporate term, the CA ruled that it was
error for the SEC in not commencing liquidation proceedings. As to the dismissal
of RUBYs petition for suspension of payments, the CA held that the SEC erred
when it retroactively applied Sec. 4-9 of the Rules of Procedure on Corporate
Recovery. Such retroactive application of procedural rules admits of exceptions,
as when it would impair vested rights or cause injustice. In this case, the CA
emphasized that the two decisions of this Court still have to be implemented by
the SEC, but to date the SEC has failed to unwound the illegal assignments and
order the assignees to surrender the Deeds of Assignment to the MANCOM.
On the issue of violation of the rule against forum shopping, the CA held that
this is not applicable because the parties in CA-G.R. SP No. 73169 (filed by
MANCOM) and CA-G.R. SP No. 73195 (filed by Lim) are not the same and they
do not have the same interest. This issue was in fact already resolved in G.R.
Nos. 124185-87
wherein this Court, citing Ramos, Sr. v. Court of
Appeals[47] declared that private respondents Lim, the unsecured creditors
(ALFC) and MANCOM cannot be considered to have engaged in forum shopping
in filing separate petitions with the CA as each have distinct rights to protect.
The CA also found that the belated submission of the special power of
attorney executed by the other minority stockholders representing 40.172% of
RUBYs ownership has no bearing to the continuation of the petition filed with the
appellate court. Moreover, since the petition is in the nature of a derivative suit,
Lim clearly can file the same not only in representation of the minority stockholders
but also in behalf of the corporation itself which is the real party in interest. Thus,
notwithstanding that Lims ownership in RUBY comprises only 1.4% of the
outstanding capital stock, as claimed by the majority stockholders, his petition may
not be dismissed on this ground.
The Consolidated Petitions

From the Decision of the CA, China Bank and the Majority Stockholder joined
by RUBY, filed separate petitions before this Court.
In G.R. No. 165887, petitioners Majority Stockholders and RUBY raised the
following grounds for the reversal of the assailed decision and the reinstatement
of the SECs September 18, 2002 Order:
First Reason
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT ACTED
CONTRARY TO LAW AND PRECEDENTS WHEN IT GAVE DUE COURSE TO,
AND, THEREAFTER, SUSTAINED, A FORMALLY AND SUBSTANTIALLY
DEFECTIVE PETITION FOR REVIEW.
Second Reason
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT ACTED IN A
MANNER AT WAR WITH ORDERLY PROCEDURE AND APPLICABLE
JURISPRUDENCE WHEN IT REVERSED THE ORDER OF DISMISSAL OF
THE SECURITIES AND EXCHANGE COMMISSION AND SUBSTITUTED ITS
JUDGMENT FOR THAT OF THE LATTER IN THE DETERMINATION OF ISSUES
WELL WITHIN THE EXPERTISE OF THE COMMISSION.
Third Reason
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT ACTED IN GRAVE
ABUSE OF ITS DISCRETION AND, IN FACT, IN EXCESS OR LACK OF
JURISDICTION -- WHEN IT SUSTAINED COLLATERAL ATTACKS OF FINAL
ADJUDICATIONS OF THE SECURITIES AND EXCHANGE COMMISSION.[48]
On the other hand, petitioner China Bank in G.R. No. 165929 puts forth the
argument that the principle of stare decisis cannot be given effect in this case
considering the prevailing factual circumstances, as to do so would result in
manifest injustice. It contends that the reason for the declaration of nullity of the
Deed of Assignment pronounced more than a decade ago, has become legally
inefficacious by its obsolescence. The creditors of RUBY have the right to recover
their credit. But when the CA ordered the nullification of China Banks Deed of
Assignment in favor of Greener Investment Corporation, it practically dashed its
last hope for ever recovering its credit.
China Bank is of the view that the CA overstretched the import of this
CourtsJanuary 20, 1998 decision in G.R. Nos. 124185-87 when the SEC was
ordered to conduct further proceedings, as to include the unwinding of the alleged
illegal assignment of credits. The rehabilitation of RUBY, if it still may be capable

of, is not made dependent on the unwinding by the SEC of the illegal assignments,
as the same concerns only the issue of who shall now become the creditors of
RUBY, and does not alter the fact that RUBY has hefty loan obligations and it has
not enough cash flow to pay for the same.
Deploring the principal parties penchant for prolonged litigation resulting
considerably in irreversible losses to RUBY, China Bank maintains that from the
report submitted by the MANCOM to the SEC, it can be clearly seen that no
attempt at rehabilitation whatsoever had been pursued.
Given the current
situation, China Bank prays that the CA Decision be reversed and its Deed of
Assignment in favor of Greener Investment Corporation be recognized and given
full legal effect.
In fine, main issues to be resolved are: (1) whether private respondents
MANCOM and Lim engaged in forum shopping when they filed separate petitions
before the CA assailing the September 18, 2002 SEC Order; (2) whether the
defects in the certification of non-forum shopping submitted by Lim warrant the
dismissal of his petition before the CA; (3) whether the CA was correct in reversing
the SECs order dismissing the petition for suspension of payment.
Our Ruling
The petitions have no merit.
On the charge of forum shopping, we have already ruled on the matter in
G.R. Nos. 124185-87. Thus:
We hold that private respondents are not guilty of forum-shopping. InRamos, Sr.
v. Court of Appeals, we ruled:
The private respondents can be considered to have engaged in forum shopping
if all of them, acting as one group, filed identical special civil actions in the Court
of Appeals and in this Court. There must be identity of parties or interests
represented, rights asserted and relief sought in different tribunals. In the case at
bar, two groups of private respondents appear to have acted independently of each
other when they sought relief from the appellate court. Both groups sought relief
from the same tribunal.
It would not matter even if there are several divisions in the Court of Appeals. The
adverse party can always ask for the consolidation of the two cases. x x x
In the case at bar, private respondents represent different groups with different
interests the minority stockholders group, represented by private respondent
Lim; the unsecured creditors group, Allied Leasing & Finance Corporation; and the

old management group. Each group has distinct rights to protect. In line with our
ruling in Ramos, the cases filed by private respondents should be consolidated. In
fact, BENHAR and RUBY did just that in their urgent motions filed on December
1, 1993 and December 6, 1993, respectively, they prayed for the consolidation of
the cases before the Court of Appeals.[49]
In the present case, no consolidation of CA-G.R. SP Nos. 73169 (filed by
MANCOM) which was earlier assigned to the Thirteenth Division and CA-G.R. SP
No. 73195 (filed by Lim) decided by the Second Division, took place. In their
Comment filed before CA-G.R. SP No. 73169, the Majority Stockholders and
RUBY (private respondents therein) prayed for the dismissal of said case arguing
that MANCOM, of which Lim is a member, circumvented the proscription against
forum shopping. The CAs Thirteenth Division, however, disagreed with private
respondents and granted the motion to withdraw petition filed by MANCOM which
manifested that the Second Division in CA-G.R. SP No. 73195 by Decision dated
May 26, 2004 had granted the reliefs similar to those prayed for in their petition,
said decision being binding on MANCOM which was also impleaded in said case
(CA-G.R. SP No. 73195). The Thirteenth Division also cited our pronouncement in
G.R. Nos. 124185-87 to the effect that there was no violation on the rule on forum
shopping because MANCOM and Lim or the minority shareholders of RUBY
represent different interests.[50]
As to the alleged defects in the certificate of non-forum shopping submitted
by Lim, we find no error committed by the CA in holding that the belated submission
of a special power of attorney executed in Lims favor by the minority stockholders
has no bearing to the continuation of the case as supported by ample
jurisprudence. To appreciate the liberal stance adopted by the CA, one must take
into account the previous history of the petitions for review before the CA involving
the SEC September 18, 2002 Order. It was actually the third time that Lim and/or
MANCOM have challenged certain acts perpetrated by the majority stockholders
which are prejudicial to RUBY, such as the execution of deeds of assignment
during the effectivity of the suspension order in pursuit of two rehabilitation plans
submitted by them together with BENHAR. The assignment of RUBYs credits to
BENHAR gave the secured creditors undue advantage over RUBYs prime
properties and put these assets beyond the reach of the unsecured
creditors. Each time they go to court, Lim and MANCOM essentially advance the
interest of the corporation itself. They have consistently taken the position that
RUBYs assets should be preserved for the equal benefit of all its creditors, and
vigorously resisted any attempt of the controlling stockholders to favor any or some
of its creditors by entering into questionable deals or financing schemes under two
BENHAR/RUBY Plans. Viewed in this light, the CA was therefore correct in

recognizing Lims right to institute a stockholders action in which the real party in
interest is the corporation itself.
A derivative action is a suit by a shareholder to enforce a corporate cause
of action.[51] It is a remedy designed by equity and has been the principal defense
of the minority shareholders against abuses by the majority.[52] For this purpose,
it is enough that a member or a minority of stockholders file a derivative suit for
and in behalf of a corporation.[53] An individual stockholder is permitted to institute
a derivative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the corporation refuse
to sue or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as the nominal party, with the
corporation as the party in interest.[54]
Now, on the third and substantive issue concerning the SECs dismissal of
RUBYs petition for suspension of payment.
The SEC based its action on Sec. 4-9 of the Rules of Procedure on Corporate
Recovery,[55] which provides:
SEC. 4-9. Period of Suspension Order. The suspension order shall be effective
for a period of sixty (60) days from the date of its issuance. The order shall be
automatically vacated upon the lapse of the sixty-day period unless extended by
the Commission. Upon motion, the Commission may grant an extension thereof
for a period of not more than sixty (60) days in each application if the Commission
is satisfied that the debtor and its officers have been acting in good faith and with
due diligence, and that the debtor would likely be able to make a viable
rehabilitation plan. After the lapse of one hundred and eighty (180) days from the
issuance of the suspension order, no extension of the said order shall be granted
by the Commission if opposed in writing by a majority of any class of creditors. The
Commission may grant an extension beyond one hundred eighty (180) days only
if it appears by convincing evidence that there is a good chance for the successful
rehabilitation of the debtor and the opposition thereto by the creditor appears
manifestly unreasonable.
In any event, the petition is deemed ipso facto denied and dismissed if no
Rehabilitation Plan was approved by the Commission upon the lapse of the order
or the last extension thereof. In such case, the debtor shall come under the
dissolution and liquidation proceedings of Rule V of these Rules. (Emphasis
supplied.)
According to the SEC, even if the 180 days maximum period of suspension
order is counted from the finality of this Courts decision in G.R. Nos. 124185-87

in December 1998, still this case had gone beyond the period mandated in the
Rules for a corporation under suspension of payment to have a rehabilitation plan
approved by the Commission.
While it is true that the Rules of Procedure on Corporate Recovery authorizes
the dismissal of a petition for suspension of payment where there is no
rehabilitation plan approved within the maximum period of the suspension order, it
must be recalled that there was in fact not one, but two rehabilitation
plans(BENHAR/RUBY Plan and Revised BENHAR/RUBY Plan) submitted by the
majority stockholders which were approved by the SEC. The implementation of the
first plan was enjoined when it was seriously challenged in the courts by the
minority stockholders through Lim. The second revised plan superseded the first
plan, but eventually nullified by the CA and the CA decision declaring it void was
affirmed by this Court in G.R. Nos. 124185-87. Given this factual milieu, the
automatic application of the lifting of the suspension order as interpreted by the
SEC in its September 18, 2002 Order would be unfair and highly prejudicial to the
financially distressed corporation.
Moreover, records reveal that the delay in the proceedings after the case was set
for hearing following this Courts final judgment in G.R. Nos. 124185-87, was not
due to any fault or neglect on the part of MANCOM or the minority stockholders.
The idea propounded by the petitioners majority stockholders that this case is
about a minority in a corporation holding hostage the majority indefinitely by simple
assertion that the formers rights have been transgressed by the latter is, downright
misleading.
First, the SEC did not even mention in its September 18, 2002 Order that when
this Court remanded to it the case for further proceedings, there remained only the
Alternative Plan of RUBYs minority stockholders which had earlier been forwarded
to the SEC Hearing Panel. With the CA Decision setting aside the SEC approval
of the Revised BENHAR/RUBY Plan, as affirmed by this Court, it behooves on the
SEC to recognize the fact that the Alternative Plan was endorsed by 90% of the
RUBYs creditors who had objected to the Revised BENHAR/RUBY Plan. Yet, not
a single step was taken by the SEC to address those findings and conclusions
made by the CA and this Court on the highly disadvantageous and onerous
provisions of the Revised BENHAR/RUBY Plan.
Moreover, the SEC failed to act on motions filed by Lim and MANCOM to
implement this Courts January 20, 1998 Decision in G.R. Nos. 124185-87, by
declaring all deeds of assignment with BENHAR and/or the conduits of Henry Yu
of no force and legal effect, which of course necessitates the surrender by the
concerned creditors of those void deeds of assignment. Petitioner China Bank

dismisses it as unnecessary and immaterial to the continued inability of RUBY to


settle its long overdue debts. However, the CA said that the foregoing acts should
have been done by the SEC for proper documentation and orderly settlement after
proper accounting of the assignment transactions. The appellate court then
concluded that dismissal of the petition under Sec. 4-9 of the Rules of Procedure
on Corporate Recovery would impair the vested rights of the minority stockholders
under this Courts decision invalidating the aforesaid deeds of assignment, thus:
We agree with the observations of the petition that if the illegal assignments not
having been unwound and the mortgages not canceled, the majority, their alter
ego, and/or cohorts will claim to be secured creditors and freely collect extrajudicially the obligations covered by the illegal assignments. Ruby has very little
money compared to the P200 Million probable liability to the illegal assignees as
unilaterally stated by Ruby without audit (previously merely totaled to P34 Million
in 1998 as stated in the revised rehabilitation plan). Foreclosure of the mortgages
by the illegal assignees will follow; Ruby will lose all its prime properties; there will
be no assets left for unsecured creditors; and there will be no residual P600 Million
assets to divide.[56]
Evidently, the minority stockholders and MANCOM had already foreseen the
impossibility of implementing a viable rehabilitation plan if the illegal assignments
made by its creditors with BENHAR and the majority stockholders, and
subsequently, with conduits of RUBY or Henry Yu, are not properly unwound and
those directors responsible for the void transactions not required to make a full
accounting. Contrary to petitioner China Banks insinuation that the minority
stockholders merely want to prolong the litigation to the great prejudice and
damage to RUBYs creditors, MANCOM and Lim had determined and moved for
SEC-supervised liquidation proceedings as the more prudent course of action for
an orderly and equitable settlement of RUBYs liabilities.
Records likewise revealed that the SEC chose to keep silent and failed to
assist the MANCOM and minority stockholders in their efforts to demand
compliance from the majority stockholders or Yu Kim Giang (who headed the first
MANCOM) with the December 22, 1989 Order directing them to turn over the cash,
financial records and documents of RUBY, including certificates of title over
RUBYs real properties, and render an accounting of all moneys received and
payments made by RUBY. On January 18, 2002, the MANCOM even filed a
Motion[57] to require Yu Kim Giang to render report/accounting of RUBY from
1983 to the 1st quarter of 1990, stating that despite a commitment from Mr. Giang,
he has seemingly delayed his compliance, hence frustrating the desire of
MANCOM to submit a comprehensive and complete report for the whole period of

1983 up to the present. To underscore the importance of making the said records
available for scrutiny of the SEC and MANCOM, Lim manifested before the SEC
that-Indeed, the majority is actually unwilling (and not merely unable) to submit such
records because these will show, among others:
(1) The majority to minority ratio in the corporate ownership is 59.828% :40.172%;
(2) The actual amounts of the bank loans paid off by Benhar International[,] Inc.
and/or Henry Yu would be very low;
(3)
The illegal payment of the bank loans and illegal assignments of the
mortgages to Benhar/Henry Yu are contrary to the Honorable Commissions Order
of 20 December 1983 for suspension of payments;
(4) The earnings of the corporation from 1983 to 1989 amounted to millions and
cannot be accounted for by the majority and the first Mancom;
(5) The money may have been spent to pay off some of the loans to the bank but
Benhar and Henry Yu fraudulently claim credit therefor.[58]
It must be noted that MANCOM had rejected the two rehabilitation plans proposed
by BENHAR and the majority stockholders. In shifting the blame to the MANCOM
and minority stockholders for the delay in the approval of a viable rehabilitation
plan, the SEC apparently overlooked that from the time the SEC approved the
Revised BENHAR/RUBY Plan and dissolved the MANCOM, the majority
stockholders has denied MANCOM access to corporate papers, documents
evidencing the amounts actually paid to creditor banks/assignors, financial
statements and titles over RUBYs real properties.
Although the SEC granted MANCOM and Lims request for a hearing and
direct a representative from BPI to bring all documents relative to the assignment
of RUBYs credit, said hearing did not materialize after the majority stockholders
proposed a compromise agreement with the minority stockholders. But as it turned
out, this development only caused further delay because the majority stockholders
were unwilling to turn over documents, funds and properties in their possession,
and would neither make a full accounting or disclosure of RUBYs transactions,
especially the actual amounts paid and rates of interest on the loan assignments.
In this state of things, the MANCOM and minority stockholders resolved that the
more reasonable and practical option is to move for a SEC-supervised liquidation
proceedings.

The other ground invoked by Lim and MANCOM for the propriety of liquidation
is the expiration of RUBYs corporate term. The SEC, however, held that the filing
of the amendment of articles of incorporation by RUBY in 1996 complied with all
the legal requisites and hence the presumption of regularity stands. Records show
that the validity of the infusion of additional capital which resulted in the alleged
increase in the shareholdings of petitioners majority stockholders in October 1991
was questioned by MANCOM and Lim even before the majority stockholders filed
their motion to dismiss in the year 2000.
A stock corporation is expressly granted the power to issue or sell
stocks.[59] The power to issue shares of stock in a corporation is lodged in the
board of directors and no stockholders meeting is required to consider it because
additional issuances of shares of stock does not need approval of the
stockholders.[60] What is only required is the board resolution approving the
additional issuance of shares. The corporation shall also file the necessary
application with the SEC to exempt these from the registration requirements under
the Revised Securities Act (now the Securities Regulation Code).
The new management committee created pursuant to SEC Order
datedSeptember 18, 1991 apparently had no participation in the October 2,
1991 board resolution approving the issuance of additional shares. The move was
part of the boards assertion of control over the management in RUBY following
the approval of the Revised BENHAR/RUBY Plan. The minority stockholders
registered their objection during the said meeting by asking the board to defer
action as the SEC September 18, 1991 Order was still on appeal with the SEC En
Banc. When the SEC En Banc denied their appeal and motion for reconsideration
under its July 30, 1993 and October 15, 1993 orders, Lim, MANCOM and ALFC
filed petitions for review with the CA which set aside the said orders. As already
mentioned, this Court affirmed the CA ruling in G.R. Nos. 124185-87.
Contrary to the assertion of petitioners majority stockholders, our decision
in G.R. Nos. 124185-87 nullified the deeds of assignment not solely on the ground
of violation of the injunction orders issued by the SEC and CA. As earlier
mentioned, we affirmed the CAs finding that the re-lending scheme under the
Revised BENHAR/RUBY Plan will not only make rehabilitation more costly for
RUBY, but also worsen its financial condition because of the mortgage of its assets
to a new creditor. To better illumine this point, we quote from the CA decision in
CA-G.R. SP Nos. 32404, 32469 and 32483 comparing the provisions of the
rehabilitation proposals submitted by the majority stockholders (Revised
BENHAR/RUBY Plan) and the minority stockholders (Alternative Plan):

there is no need for Benhar to act as financier, as Ruby itself can very well
secure such credit accommodation using its assets as collateral. Verily, Benhars
pretext at magnanimity is deception of the highest order considering that: (1) as
embodied in the heading Sources and Uses of Funds in the Revised Benhar/Ruby
Plan, the P80-Million loan/credit facility to be extended by Benhar will be used to
pay P60.437-Million loans of Ruby. Of the P60.437-Million,P34.068-Million will be
paid to Benhar as payment for the amounts it paid in consideration of the nullified
assignments; (2) The Deed of Assignment of Credit Facility will be executed by
Benhar in favor of Ruby only upon payment of Ruby of such amount already
advanced by Benhar, i.e. the P34.068-Million credit assigned to Benhar by the
seven (7) secured creditors.
The Revised Benhar/Ruby Plan, in fact, gives Benhar undue preference on the
matter of repayment. Under the said plan, the creditors of Ruby will be paid in
accordance with the following schedules:
Secured Creditors

P17.022M

To be paid in cash
with 12% interest
p.a.

Unsecured Creditors P 9.347M


Allied Leasing

To be paid in cash
interest-f[r]ee

China Banking Corp.


BPI
Philippine Orient

Filcor Finance
Benhar
For having paid

P34.068M

Ruby obligations

with
charge

to 7 creditors
Trade/Other
Creditors

To be paid in cash
interest

P2.871M

Totalling P8.614M
to be paid in 3(p.a. for 3 years)
year installment,
interest-free

(Rollo, CA-G.R. SP No. 32404, p. 727)


Needless to state, the foregoing payment schedules as embodied in the said plan
which gives Benhar undue advantage over the other creditors goes against the
very essence of rehabilitation, which requires that no creditor should be preferred

over the other. Indeed, a comparison of the salient features of the Revised
Benhar/Ruby Plan and the Alternative Plan will readily show just how stacked in
favor of Benhar are the provisions of the former plan:
Benhar/Ruby Plan

Alternative Plan

1. Benhar plays a major role. It


will be paid P34.068M out
ofP60.437 M total amount due to
creditors but not explained as to
how arrived at.

1. The original creditors


are the ones recognized.
The amount payable is
lower because interests
are not capitalized.

2.
Benhar will not assign the
credit facility of P80M unless
the P34.068M above stated is
paid.

2. Direct credit of P80M


loan
and
will
be
borrowed from the bank(s)
like
Allied,
UCPB,
Metrobank or Equitable
Bank or even China Bank.

3.
The main assets are to 3.
Mortgaged
be
mortgaged to the to bank(s)directly.
creditorassignor of Benhar
and if the illegal assignments are
recognized, then Benhar shall
have to be recognized as
mortgagee even when it is a
disqualified creditor
and/or
mortgagee.
4.
Start up cost P16,880 and 4. Plant B = P25,640
based on 1988 figures and
Year IV estimatedP40.
projections.
M
Plant A = 22.40
Year V estimated P30.
M
5.
B.

Rehabilitation only of Plant 5. Rehabilitation of both


plants.

6.
Recognition of Benhar re- 6.
lender/financier.

None

7. Because of the SEC Order 7.


Pilipinas Shell
he got an MC seat and and the representative
be
Pilipinas Shell representative of retained.
trade creditors was retained.
8.
Credit facility is being 8. Credit facility directly
assigned or re-lent by Benhar.
to Ruby.
9.
Authorized Benhar to 9.
None going to the
mortgage assets of Ruby itself. minority but to actual
Only remaining unencumbered lenders.
asset
is
one
(1)
real
property.
Two (2) prime
properties already encumbered
to Assignor of Benhar.
10. Capacity of only one (1) plant 10. Capacity of two (2)
stated at 72% (overrated)
plants progressive to 75%
or 80% with purchase of
new machines.
11. Projection figures based on 11. Minority RP can be
May, 1990 forex exchange updated at current foreign
rate. Cost of importation and exchange rate.
other local supplier currently
cannot be met.
12. Market and economic slow 12.
Taken
into
down
not
taken
into consideration
so
will
consideration.
upgrade
to
meet
competition.
13. Discriminatory to creditors 13. Not discriminatory.
Benhar-capitalized
with
undisclosed rates of interest.
14. Original Figures of illegally 14. Original figures will be
assigned loans from FEBTC, used original figures plans
PCIB, PTC which totaled 12% interest only.
toP11,419,036.87
but
now
entered as P21,378,002.71. The
interest is undisclosed and may
have been capitalized. Figures

for the other four (4) secured


lenders
not
available
individually. Total of seven (7)
secured
lenders
given
as P34.068 M.
15. Interest is 28% with Benhar 15. Interest is 25%
as conduit.
payable to the bank. This
is still subject to current
market rates to be
negotiated by the minority.
16. Call on unissued shares
forP11.814 M and if minority will
take up their pre-emptive rights
and
dilute
minority
shareholdings.

15. Additional subscription


of P16M within 6 months
by
the
minority
stockholders.

x x x x[61]
Prior to the September 18, 1991 Order approving the Revised
BENHAR/RUBY Plan and dissolving the MANCOM, majority of RUBYs creditors
(90%) have already withdrawn their support to the revised plan and manifested
that they were only lately informed about another plan submitted by the minority
stockholders. Hence, these creditors wrote individual letters to the SEC Hearing
Panel expressing their agreement with and endorsement of the Alternative Plan of
the minority stockholders.[62]
The Revised BENHAR/RUBY Plan had proposed the calling for subscription of
unissued shares through a Board Resolution from the P11.814 million of theP23.7
million ACS in order to allow the long overdue program of the REHAB Program.
RUBY will offer for subscription 118,140 shares of stocks at par value ofP100 each
to all stockholders on record, payable within 15 days, or within a reasonable period
from SEC approval of the revised plan.[63] This was implemented by the October
2, 1991 meeting of the Board of Directors led by Yu Kim Giang. The minority
directors claimed they were not notified of said board meeting. At any rate, the CA
decision nullifying the Revised BENHAR/RUBY Plan was affirmed by this Court
on January 20, 1998. Hence, the legitimate concerns of the minority stockholders
and MANCOM who objected to the capital infusion which resulted in the dilution of
their shareholdings, the expiration of RUBYs corporate term and the pending
incidents on the void deeds of assignment of credit all these should have been

duly considered and acted upon by the SEC when the case was remanded to it for
further proceedings. With the final rejection of the courts of the Revised
BENHAR/RUBY Plan, it was grave error for the SEC not to act decisively on the
motions filed by the minority stockholders who have maintained that the issuance
of additional shares did not help improve the situation of RUBY except to stifle the
opposition coming from the MANCOM and minority stockholders by diluting the
latters shareholdings. Worse, the SEC ignored the evidence adduced by the
minority stockholders indicating that the correct amount of subscription of
additional shares was not paid by the majority stockholders and that SEC official
records still reflect the 60%-40% percentage of ownership of RUBY.
The SEC remained indifferent to the reliefs sought by the minority stockholders,
saying that the issue of the validity of the additional capital infusion was belatedly
raised. Even assuming the October 2, 1991 board meeting indeed took place, the
SEC did nothing to ascertain whether indeed, as the minority claimed: (1) the
minority stockholders were not given notice as required and reasonable time to
exercise their pre-emptive rights; and (2) the capital infusion was not for the
purpose of rehabilitation but a mere ploy to divest the minority stockholders of their
40.172% shareholding and reduce it to a mere 25.25%.
The foregoing matters, along with the persistent refusal of the majority
stockholders, led by Yu Kim Giang, to give a full accounting of their transactions
involving RUBYs credits and properties, were extensively argued by the minority
stockholders in their opposition to the motions to dismiss/vacate suspension order
filed by the majority stockholders and BPI, as follows:
Their receipts only show supposed payment by the majority of a total of
P1,759,150.00 out of the correct amount of P7,068,079.92.00 (sic) (59.828% of
P11.814 million required capital infusion under the MRP and RRP) which should
have been the amount paid by them under the RRP which requires full
payment.Thus, they sought to attain a 74.75% equity from a 59.828% original
equity by playing more tricks and stating that, under the general rule, they are
supposedly allowed to pay-up only 25% of their subscription. Unfortunately for
them, in a rehabilitation supervised by the SEC and with an existing Mancom, the
general rule does not apply. What is stated in the rehabilitation plan must be strictly
followed provided the rehabilitation plan has been finally approved.
It must be remembered that in October 2 to 17, 1991, the amounts owed by Ruby
to the banks who illegally assigned their loans/credit was stated at P34
Million. Operations needed another P20 Million plus. A capital infusion of
P1,759,150.00 was so miniscule and clearly not for rehabilitation but was intended
to deprive the minority of its blocking position and property rights since distribution

after liquidation is based on the percentage of stockholdings. It is not only unfair,


inequitable and not meaningful it is clearly dishonest.
xxxx
Assuming arguendo that the Board of Directors could act independently and this
did not violate any injunction, if the capital infusion was actually made, the Board
of Directors had the duty to report this to the Mancom because they would then fall
under existing assets and would be part of the evaluation of the proposed RRP,
necessary for management and in the overall plan of rehabilitation. Nothing of this
kind happened and the belated proof cannot correct this situation.
xxxx
It is not true that there is benevolence on the part of the majority when they
maneuvered the illegal assignments and paid the banks. The loan obligations
remain as accounts payable of Ruby and have even been bloated to gigantic
proportions and yet the SEC does not even ask them to account how much these
obligations are now and the majority should have reported these to the Mancom,
but the majority has not. These anomalous situations have been made to continue
long enough and, we pray, should be addressed by the Honorable Commission.
xxxx
The SEC must understand that, being head of the first Mancom, YU KIM GIANG
had the same obligation to render a report to the SEC as the present Mancom
now. To single out the present Mancom to do this when a complete report cannot
be made without these starting records is discriminatory, unfair and violates the
rules of accountancy. For example, where is the report on the illegal assignments
and mortgages complete with details? Where did the rentals for the period from
1983 to 1989 go? This amounted to millions. There are no reports on these. By
not requiring the first Mancom to Report, the SEC is preventing the complete
picture on the liabilities and finances of Ruby from being seen and is sheltering
Ruby and the majority.[64] (Additional emphasis supplied.)
Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a
stockholder of a stock corporation to subscribe to all issues or disposition of shares
of any class, in proportion to their respective shareholdings. The right may be
restricted or denied under the articles of incorporation, and subject to certain
exceptions and limitations. The stockholder must be given a reasonable time
within which to exercise their preemptive rights. Upon the expiration of said period,
any stockholder who has not exercised such right will be deemed to have waived
it.[65]

The validity of issuance of additional shares may be questioned if done in breach


of trust by the controlling stockholders. Thus, even if the pre-emptive right does
not exist, either because the issue comes within the exceptions in Section 39 or
because it is denied or limited in the articles of incorporation, an issue of shares
may still be objectionable if the directors acted in breach of trust and their primary
purpose is to perpetuate or shift control of the corporation, or to freeze out the
minority interest.[66] In this case, the following relevant observations should have
signaled greater circumspection on the part of the SEC -- upon the third and last
remand to it pursuant to our January 20, 1998 decision -- to demand transparency
and accountability from the majority stockholders, in view of the illegal assignments
and objectionable features of the Revised BENHAR/RUBY Plan, as found by the
CA and as affirmed by this Court:
There can be no gainsaying the well-established rule in corporate practice and
procedure that the will of the majority shall govern in all matters within the limits of
the act of incorporation and lawfully enacted by-laws not proscribed by law. It is,
however, equally true that other stockholders are afforded the right to intervene
especially during critical periods in the life of a corporation like reorganization, or
in this case, suspension of payments, more so, when the majority seek to impose
their will and through fraudulent means, attempt to siphon off Rubys valuable
assets to the great prejudice of Ruby itself, as well as the minority stockholders
and the unsecured creditors.
Certainly, the minority stockholders and the unsecured creditors are given some
measure of protection by the law from the abuses and impositions of the majority,
more so in this case, considering the give-away signs of private respondents
perfidy strewn all over the factual landscape. Indeed, equity cannot deprive the
minority of a remedy against the abuses of the majority, and the present action has
been instituted precisely for the purpose of protecting the true and legitimate
interests of Ruby against the Majority Stockholders. On this score, the Supreme
Court, has ruled that:
Generally speaking, the voice of the majority of the stockholders is the law of the
corporation, but there are exceptions to this rule. There must necessarily be a limit
upon the power of the majority. Without such a limit the will of the majority will be
absolute and irresistible and might easily degenerate into absolute tyranny. x x
x[67] (Additional emphasis supplied.)
Lamentably, the SEC refused to heed the plea of the minority stockholders and
MANCOM for the SEC to order RUBY to commence liquidation proceedings, which
is allowed under Sec. 4-9 of the Rules on Corporate Recovery. Under the
circumstances, liquidation was the only hope of the minority stockholders for

effecting an orderly and equitable settlement of RUBYs obligations, and


compelling the majority stockholders to account for all funds, properties and
documents in their possession, and make full disclosure on the nullified credit
assignments. Oblivious to these pending incidents so crucial to the protection of
the interest of the majority of creditors and minority shareholders, the SEC simply
stated that in the interim, RUBYs corporate term was validly extended, as if such
extension would provide the solution to RUBYs myriad problems.
Extension of corporate term requires the vote of 2/3 of the outstanding capital stock
in a stockholders meeting called for the purpose.[68] The actual percentage of
shareholdings in RUBY as of September 3, 1996 -- when the majority stockholders
allegedly ratified the board resolution approving the extension of RUBYs corporate
life to another 25 years was seriously disputed by the minority stockholders, and
we find the evidence of compliance with the notice and quorum requirements
submitted by the majority stockholders insufficient and doubtful. Consequently, the
SEC had no basis for its ruling denying the motion of the minority stockholders to
declare as without force and effect the extension of RUBYs corporate existence.
Liquidation, or the settlement of the affairs of the corporation, consists of adjusting
the debts and claims, that is, of collecting all that is due the corporation, the
settlement and adjustment of claims against it and the payment of its just
debts.[69] It involves the winding up of the affairs of the corporation, which means
the collection of all assets, the payment of all its creditors, and the distribution of
the remaining assets, if any, among the stockholders thereof in accordance with
their contracts, or if there be no special contract, on the basis of their respective
interests.[70]
Section 122 of the Corporation Code, which is applicable to the present case,
provides:
SEC. 122. Corporate liquidation. -- Every corporation whose charter expires by
its own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of and convey its
property and to distribute its assets, but not for the purpose of continuing the
business for which it was established.
At any time during said three (3) years, said corporation is authorized and
empowered to convey all of its property to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. From and after any such

conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interests which the
corporation had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other persons
in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to
the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
Since the corporate life of RUBY as stated in its articles of incorporation
expired, without a valid extension having been effected, it was deemed dissolved
by such expiration without need of further action on the part of the corporation or
the State.[71] With greater reason then should liquidation ensue considering that
the last paragraph of Sec. 4-9 of the Rules of Procedure on Corporate
Recoverymandates the SEC to order the dissolution and liquidation proceedings
under Rule VI. Sec. 6-1, Rule VI likewise authorizes the SEC on motion or motu
proprio, or upon recommendation of the management committee, to order
dissolution of the debtor corporation and the liquidation of its remaining assets,
appointing a Liquidator for the purpose, if the continuance in business of the
debtor is no longer feasible or profitable or no longer works to the best interest of
the stockholders, parties-litigants, creditors, or the general public.
It cannot be denied that with the current divisiveness, distrust and antagonism
between the majority and minority stockholders, the long agony and extreme
prejudice caused by numerous litigations to the creditors, and the bleak prospects
for business recovery in the light of problems with the local government which are
implementing more restrictions and anti-pollution measures that practically banned
the operation of RUBYs glass plant liquidation becomes the only viable course
for RUBY to stave off any further losses and dissipation of its assets. Liquidation
would also ensure an orderly and equitable settlement of all creditors of RUBY,
both secured and unsecured.
The SECs utter disregard of the rights of the minority in applying the
provisions of the Rules of Procedure on Corporate Recovery is inconsistent with
the policy of liberal construction of the said rules to assist the parties in obtaining
ajust, expeditious and inexpensive settlement of cases.[72] Petitioners majority
stockholders, however, assert that the findings and conclusions of the SEC on the

matter of the dismissal of RUBYs petition are binding and conclusive upon the CA
and this Court. They contend that reviewing courts are not supposed to substitute
their judgment for those made by administrative bodies specifically clothed with
authority to pass upon matters over which they have acquired expertise.[73] Given
our foregoing findings clearly showing that the SEC acted arbitrarily and committed
patent errors and grave abuse of discretion, this case falls under the exception to
the general rule.
As we held in Ruby Industrial Corporation v. Court of Appeals:
The settled doctrine is that factual findings of an administrative agency are
accorded respect and, at times, finality for they have acquired the expertise
inasmuch as their jurisdiction is confined to specific matters. Nonetheless, these
doctrines do not apply when the board or official has gone beyond his statutory
authority, exercised unconstitutional powers or clearly acted arbitrarily and without
regard to his duty or with grave abuse of discretion. In Leongson vs. Court of
Appeals, we held: once the actuation of the administrative official or administrative
board or agency is tainted by a failure to abide by the command of the law, then it
is incumbent on the courts of justice to set matters right, with this Tribunal having
the last say on the matter.[74]
Petitioners majority stockholders further insist that the minority stockholders
were mistaken when they contended that the rehabilitation of RUBY is dependent
on the unwinding by the SEC of the illegal assignments and mortgages. They
assert that aside from the fact that the SEC had nothing to unwind because the
alleged illegal assignments and mortgages were already declared null and void,
the said assignments and mortgages will not affect the rehabilitation of Ruby; the
sameaffecting only the issue of how, as to who will be its creditors.
Such contention is untenable and contrary to our previous ruling in G.R. Nos.
124185-87. With the nullification of the deeds of assignments of credit executed
by some of Rubys secured creditors in favor of BENHAR, it logically follows that
the assignors or the original bank creditors remain as the creditors on record of
RUBY. We have noted that BENHAR, which is controlled by the family of Henry
Yu who is also a director and stockholder of RUBY, was not listed as one of
RUBYs creditors at the time RUBY filed the petition for suspension of
payment. Petitioners majority stockholders insinuation that RUBYs credits may
have been assigned to third parties, if not referring to BENHAR or its conduits,
implies two things: either the assignments declared void by this Courts January
20, 1998 decision continues to be recognized by the majority stockholders, in
violation of the said decision, or other third parties in connivance with BENHAR
and/or the controlling stockholders had subsequently entered the picture, without

approval of the SEC and while the SEC December 20, 1983 Order enjoining the
disposition of RUBYs properties was in force.
The majority stockholders eagerness to have the suspension order lifted or
vacated by the SEC without any order for its liquidation evinces a total disregard
of the mandate of Sec. 4-9 of the Rules of Procedure on Corporate Recovery, and
their obvious lack of any intent to render an accounting of all funds, properties and
details of the unlawful assignment transactions to the prejudice of RUBY, minority
stockholders and the majority of RUBYs creditors. The majority stockholders and
BENHARs conduits must not be allowed to evade the duty to make such full
disclosure and account any money due to RUBY to enable the latter to effect a
fair, orderly and equitable settlement of all its obligations, as well as distribution of
any remaining assets after paying all its debtors.
In fine, no error was committed by the CA when it set aside the September
18, 2002 Order of the SEC and declared the nullity of the acts of majority
stockholders in implementing capital infusion through issuance of additional
shares in October 1991, the board resolution approving the extension of RUBYs
corporate term for another 25 years, and any illegal assignment of credit executed
by RUBYs creditors in favor of third parties and/or conduits of the controlling
stockholders. The CA likewise correctly ordered the delivery of all documents
relative to the said assignment of credits to the MANCOM or the Liquidator, the
unwinding of these void deeds of assignment, and their full accounting by the
majority stockholders.
The petitioners majority stockholders and China Bank cannot be permitted
to raise any issue again regarding the validity of any assignment of credit made
during the effectivity of the suspension order and before the finality of the
September 18, 2002 Order lifting the same. While China Bank is not precluded
from questioning the validity of the December 20, 1983 suspension order on the
basis of res judicata,it is, however, barred from doing so by the principle of law of
the case. We have held that when the validity of an interlocutory order has already
been passed upon on appeal, the Decision of the Court on appeal becomes the law
of the case between the same parties. Law of the case has been defined as the
opinion delivered on a former appeal. More specifically, it means that whatever is
once irrevocably established as the controlling legal rule of decision between the
same parties in the same case continues to be the law of the case, whether correct
on general principles or not, so long as the facts on which such decision was
predicated continue to be the facts of the case before the court.[75]
The unwinding process of all such illegal assignment of RUBYs credits is critical
and necessary, in keeping with good faith and as a matter of fairness and justice

to all parties affected, particularly the unsecured creditors who stands to suffer
most if left with nothing of the assets of RUBY, and the minority stockholders who
waged legal battles to defend the interest of RUBY and protect the rights of the
minority from the abuses of the controlling stockholders. As correctly stated by the
CA:
Liquidation is imperative because the unsecured creditor must negotiate the
amount of the imputable interest rate on its long unpaid credit, the decision on
which assets are to be sold to liquidate the illegally assigned credits must be made,
the other secured credits and the trade credits must be determined, and most
importantly, the restoration of the 40.172% minority percentage of ownership must
be done.[76]
However, we do not agree that it is the SEC which has the authority to
supervise RUBYs liquidation.
In the case of Union Bank of the Philippines v. Concepcion,[77] the Court is
presented with the issue of whether the SEC had jurisdiction to proceed with
insolvency proceedings after it was shown that the debtor corporation can no
longer be rehabilitated. We held that although jurisdiction over a petition to declare
a corporation in a state of insolvency strictly lies with regular courts, the SEC
possessed ample power under P.D. No. 902-A, as amended, to declare a
corporation insolvent as an incident of and in continuation of its already acquired
jurisdiction over the petition to be declared in a state of suspension of payments in
the two instances provided in Sec. 5 (d)[78] thereof.
Subsequently, in Consuelo Metal Corporation v. Planters Development
Bank[79] the Court was again confronted with the same issue. The original petition
filed by the debtor corporation was for suspension of payment, rehabilitation and
appointment of a rehabilitation receiver or management committee. Finding the
petition sufficient in form and substance, the SEC issued an order suspending
immediately all actions for claims against the petitioner pending before any court,
tribunal or body until further orders from the court. It also created a management
committee to undertake petitioners rehabilitation. Four years later, upon the
management committees recommendation, the SEC issued an omnibus order
directing the dissolution and liquidation of the petitioner, and that the proceedings
on and implementation of the order of liquidation be commenced at the Regional
Trial Court to which the case was transferred. However, the trial court refused to
act on the motion filed by the petitioner who requested for the issuance of a TRO
against the extrajudicial foreclosure initiated by one of its creditors. The trial court
ruled that since the SEC had already terminated and decided on the merits the
petition for suspension of payment, the trial court no longer had legal basis to act

on petitioners motion. It likewise denied the motion for reconsideration stating that
petition for suspension of payment could not be converted into a petition for
dissolution and liquidation because they covered different subject matters and
were governed by different rules. Petitioners remedy thus was to file a new
petition for dissolution and liquidation either with the SEC or the trial court.
When the case was elevated to the CA, the petition was dismissed affirming
that under Sec. 121 of the Corporation Code, the SEC had jurisdiction to hear the
petition for dissolution and liquidation. On motion for reconsideration, the CA
remanded the case to the SEC for proceedings under Sec. 121 of the Corporation
Code. The CA denied the motion for reconsideration filed by the respondent
creditor, who then filed a petition for review with this Court.
We ruled that the SEC observed the correct procedure under the present
law, in cases where it merely retained jurisdiction over pending cases for
suspension of payments/rehabilitation, thus:
Republic Act No. 8799 (RA 8799) transferred to the appropriate regional trial courts
the SECs jurisdiction defined under Section 5(d) of Presidential Decree No. 902A. Section 5.2 of RA 8799 provides:

The Commissions jurisdiction over all cases enumerated under Sec. 5 of


Presidential Decree No. 902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme
Court in the exercise of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over these cases. The Commission shall
retain jurisdiction over pending cases involving intra-corporate disputes submitted
for final resolution which should be resolved within one (1) year from the enactment
of this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally
disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMCs petition for suspension of payment and
issued a suspension order on 2 April 1996 after it found CMCs petition to be
sufficient in form and substance. While CMCs petition was still pending with the
SEC as of 30 June 2000, it was finally disposed of on 29 November 2000 when
the SEC issued its Omnibus Order directing the dissolution of CMC and the
transfer of the liquidation proceedings before the appropriate trial court. The SEC
finally disposed of CMCs petition for suspension of payment when it determined
that CMC could no longer be successfully rehabilitated.

However, the SECs jurisdiction does not extend to the liquidation of a


corporation. While the SEC has jurisdiction to order the dissolution of a
corporation, jurisdiction over the liquidation of the corporation now pertains to the
appropriate regional trial courts. This is the reason why the SEC, in its 29
November 2000 Omnibus Order, directed that the proceedings on and
implementation of the order of liquidation be commenced at the Regional Trial
Court to which this case shall be transferred. This is the correct procedure
because the liquidation of a corporation requires the settlement of claims for and
against the corporation, which clearly falls under the jurisdiction of the regular
courts. The trial court is in the best position to convene all the creditors of the
corporation,
ascertain
their
claims,
and
determine
their
preferences.[80] (Additional emphasis supplied.)
In view of the foregoing, the SEC should now be directed to transfer this
case to the proper RTC which shall supervise the liquidation proceedings under
Sec. 122 of the Corporation Code. Under Sec. 6 (d) of P.D. 902-A, the SEC is
empowered, on the basis of the findings and recommendations of the management
committee or rehabilitation receiver, or on its own findings, to determine that the
continuance in business of a debtor corporation under suspension of payment or
rehabilitation would not be feasible or profitable nor work to the best interest of the
stockholders, parties-litigants, creditors, or the general public, order the dissolution
of such corporation and its remaining assets liquidated accordingly. As mentioned
earlier, the procedure is governed by Rule VI of the SEC Rules of Procedure on
Corporate Recovery.
However, R.A. No. 10142[81] otherwise known as the Financial Rehabilitation
and Insolvency Act (FRIA) of 2010, now provides for court proceedings in the
rehabilitation or liquidation of debtors, both juridical and natural persons, in a
manner that will ensure or maintain certainty and predictability in commercial
affairs, preserve and maximize the value of the assets of these debtors, recognize
creditor rights and respect priority of claims, and ensure equitable treatment of
creditors who are similarly situated. Considering that this case was still pending
when the new law took effect last year, the RTC to which this case will be
transferred shall be guided by Sec. 146 of said law, which states:
SEC. 146. Application to Pending Insolvency, Suspension of Payments and
Rehabilitation Cases. This Act shall govern all petitions filed after it has taken
effect. All further proceedings in insolvency, suspension of payments and
rehabilitation cases then pending, except to the extent that in opinion of the court
their application would not be feasible or would work injustice, in which event the
procedures set forth in prior laws and regulations shall apply.

WHEREFORE, the petitions for review on certiorari are DENIED. The


Decision dated May 26, 2004 and Resolution dated November 4, 2004 of the Court
of
Appeals
in
CA-G.R.
SP
No.
73195
are
hereby AFFIRMED with MODIFICATIONin that the Securities and Exchange
Commission is hereby ordered to TRANSFERSEC Case No. 2556 to the
appropriate Regional Trial Court which is herebyDIRECTED to supervise the
liquidation of Ruby Industrial Corporation under the provisions of R.A. No. 10142.
With costs against the petitioners.
SO ORDERED.
FOREST
HILLS
GOLF
&
COUNTRY
vs.
VERTEX SALES AND TRADING, INC., Respondent.

CLUB,

Petitioner,

DECISION
BRION, J.:
Before the Court is a petition for review on certiorari,1 filed under Rule 45 of the
Rules of Court, assailing the decision2 dated February 22, 2012 and the
resolution3dated May 31, 2012 of the Court of Appeals (CA) in CA-G.R. CV No.
89296.
The Facts
Petitioner Forest Hills Golf & Country Club (Forest Hills) is a domestic non-profit
stock corporation that operates and maintains a golf and country club facility in
Antipolo City. Forest Hills was created as a result of a joint venture agreement
between Kings Properties Corporation (Kings) and Fil-Estate Golf and
Development, Inc. (FEGDI). Accordingly, Kings and FEGDI owned the shares of
stock of Forest Hills, holding 40% and 60% of the shares, respectively.
In August 1997, FEGDI sold to RS Asuncion Construction Corporation (RSACC)
one (1) Class "C" common share of Forest Hills for P1.1 million. Prior to the full
payment of the purchase price, RSACC transferred its interests over FEGDI's
Class "C" common share to respondent Vertex Sales and Trading, Inc.
(Vertex).4 RSACC advised FEGDI of the transfer and FEGDI, in turn, requested
Forest Hills to recognize Vertex as a shareholder. Forest Hills acceded to the
request, and Vertex was able to enjoy membership privileges in the golf and
country club.
Despite the sale of FEGDI's Class "C" common share to Vertex, the share
remained in the name of FEGDI, prompting Vertex to demand for the issuance of

a stock certificate in its name.5 As its demand went unheeded, Vertex filed a
complaint6 for rescission with damages against defendants Forest Hills, FEGDI,
and Fil-Estate Land, Inc. (FELI) the developer of the Forest Hills golf course.
Vertex averred that the defendants defaulted in their obligation as sellers when
they failed and refused to issue the stock certificate covering the Class "C"
common share. It prayed for the rescission of the sale and the return of the sums
it paid; it also claimed payment of actual damages for the defendants unjustified
refusal to issue the stock certificate.
Forest Hills denied transacting business with Vertex and claimed that it was not a
party to the sale of the share; FELI claimed the same defense. While admitting that
no stock certificate was issued, FEGDI alleged that Vertex nonetheless was
recognized as a stockholder of Forest Hills and, as such, it exercised rights and
privileges of one. FEGDI added that during the pendency of Vertex's action for
rescission, a stock certificate was issued in Vertex's name,7 but Vertex refused to
accept it.
The RTC Ruling
In its March 1, 2007 decision,8 the Regional Trial Court (RTC) dismissed Vertex's
complaint after finding that the failure to issue a stock certificate did not constitute
a violation of the essential terms of the contract of sale that would warrant its
rescission. The RTC noted that the sale was already consummated
notwithstanding the non-issuance of the stock certificate. The issuance of a stock
certificate is a collateral matter in the consummated sale of the share; the stock
certificate is not essential to the creation of the relation of a shareholder. Hence,
the RTC ruled that the non-issuance of the stock certificate is a mere casual breach
that would not entitle Vertex to rescind the sale.9
The CA Ruling
Vertex appealed the RTC's dismissal of its complaint. In its February 22, 2012
decision,10 the CA reversed the RTC. It declared that "in the sale of shares of
stock, physical delivery of a stock certificate is one of the essential requisites for
the transfer of ownership of the stocks purchased."11 It based its ruling on Section
63 of the Corporation Code,12 which requires for a valid transfer of stock
(1) the delivery of the stock certificate;
(2) the endorsement of the stock certificate by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and
(3) to be valid against third parties, the transfer must be recorded in the books of
the corporation.

Without the issuance of the stock certificate and despite Vertexs full payment of
the purchase price, the share cannot be considered as having been validly
transferred. Hence, the CA rescinded the sale of the share and ordered the
defendants to return the amount paid by Vertex by reason of the sale. The
dispositive portion reads:
WHEREFORE, in view of the foregoing premises, the appeal is hereby GRANTED
and the March 1, 2007 Decision of the Regional Trial Court, Branch 161, Pasig
City in Civil Case No. 68791 is hereby REVERSED AND SET ASIDE. Accordingly,
the sale of x x x one (1) Class "C" Common Share of Forest Hills Golf and Country
Club is hereby rescinded and defendants-appellees are hereby ordered to return
to Vertex Sales and Trading, Inc. the amount it paid by reason of the said
sale.13 (emphasis ours)
The CA denied Forest Hills' motion for reconsideration in its resolution of May 31,
2012.14
The Parties Arguments
Forest Hills filed the present petition for review on certiorari to assail the CA rulings.
It argues that rescission should be allowed only for substantial breaches that would
defeat the very object of the parties making the agreement.
The delay in the issuance of the stock certificate could not be considered as a
substantial breach, considering that Vertex was recognized as, and enjoyed the
privileges of, a stockholder.
Forest Hills also objects to the CA ruling that required it to return the amount paid
by Vertex for the share of stock. It claims that it was not a party to the contract of
sale; hence, it did not receive any amount from Vertex which it would be obliged
to return on account of the rescission of the contract.
In its comment to the petition,15 Vertex disagrees and claims that its compliance
with its obligation to pay the price and the other fees called into action the
defendants compliance with their reciprocal obligation to deliver the stock
certificate, but the defendants failed to discharge this obligation. The defendants
three (3)-year delay in issuing the stock certificate justified the rescission of the
sale of the share of stock. On account of the rescission, Vertex claims that mutual
restitution should take place. It argues that Forest Hills should be held solidarily
liable with FEGDI and FELI, since the delay was caused by Forest Hills refusal to
issue the share of FEGDI, from whom Vertex acquired its share.
The Courts Ruling

The assailed CA rulings (a) declared the rescission of the sale of one (1) Class "C"
common share of Forest Hills to Vertex and (b) ordered the return by Forest Hills,
FEGDI, and FELI to Vertex of the amount the latter paid by reason of the sale.
While Forest Hills argues that the ruling rescinding the sale of the share is
erroneous, its ultimate prayer was for the reversal and setting aside of the ruling
holding it liable to return the amount paid by Vertex for the sale.16
The Court finds Forest Hills prayer justified.
Ruling
on
settled matter

rescission

of

sale

is

At the outset, we declare that the question of rescission of the sale of the share is
a settled matter that the Court can no longer review in this petition. While Forest
Hills questioned and presented its arguments against the CA ruling rescinding the
sale of the share in its petition, it is not the proper party to appeal this ruling.
As correctly pointed out by Forest Hills, it was not a party to the sale even though
the subject of the sale was its share of stock. The corporation whose shares of
stock are the subject of a transfer transaction (through sale, assignment, donation,
or any other mode of conveyance) need not be a party to the transaction, as may
be inferred from the terms of Section 63 of the Corporation Code. However, to bind
the corporation as well as third parties, it is necessary that the transfer is recorded
in the books of the corporation. In the present case, the parties to the sale of the
share were FEGDI as the seller and Vertex as the buyer (after it succeeded
RSACC). As party to the sale, FEGDI is the one who may appeal the ruling
rescinding the sale. The remedy of appeal is available to a party who has "a
present interest in the subject matter of the litigation and is aggrieved or prejudiced
by the judgment. A party, in turn, is deemed aggrieved or prejudiced when his
interest, recognized by law in the subject matter of the lawsuit, is injuriously
affected by the judgment, order or decree."17 The rescission of the sale does not
in any way prejudice Forest Hills in such a manner that its interest in the subject
matter the share of stock is injuriously affected. Thus, Forest Hills is in no
position to appeal the ruling rescinding the sale of the share. Since FEGDI, as
party to the sale, filed no appeal against its rescission, we consider as final the
CAs ruling on this matter.
Ruling
on
return
reason of the sale modified

of

amounts

paid

by

The CAs ruling ordering the "return to [Vertex] the amount it paid by reason of the
sale"18 did not specify in detail what the amount to be returned consists of and it
did not also state the extent of Forest Hills, FEGDI, and FELIs liability with regard

to the amount to be returned. The records, however, show that the following
amounts were paid by Vertex to Forest Hills, FEGDI, and FELI by reason of the
sale:
Payee

Date of Payment

Purpose

Amount Paid

FEGDI

February 9, 1999

Purchase price for P780,000.0019


one (1) Class "C"
common share

FEGDI

February 9, 1999

Transfer fee

Forest Hills

February 23, 1999 Membership fee

P 150,000.0021

FELI

September
2000

25, Documentary
Stamps

P 6,300.0022

FEGDI

September
2000

25, Notarial fees

P 200.0023

P 60,000.0020

A necessary consequence of rescission is restitution: the parties to a rescinded


contract must be brought back to their original situation prior to the inception of the
contract; hence, they must return what they received pursuant to the contract.24
Not being a party to the rescinded contract, however, Forest Hills is under no
obligation to return the amount paid by Vertex by reason of the sale. Indeed, Vertex
failed to present sufficient evidence showing that Forest Hills received the
purchase price for the share or any other fee paid on account of the sale (other
than the membership fee which we will deal with after) to make Forest Hills jointly
or solidarily liable with FEGDI for restitution.
Although Forest Hills received P150,000.00 from Vertex as membership fee, it
should be allowed to retain this amount. For three years prior to the rescission of
the sale, the nominees of Vertex enjoyed membership privileges and used the golf
course and the amenities of Forest Hills.25 We consider the amount paid as
sufficient consideration for the privileges enjoyed by Vertex's nominees as
members of Forest Hills.
WHEREFORE, in view of the foregoing, the Court PARTIALLY GRANTS the
petition for review on certiorari. The decision dated February 22, 2012 and the
resolution dated May 31, 2012 of the Court of Appeals in CA-G.R. CV No. 89296
are hereby MODIFIED. Petitioner Forest Hills Golf & Country Club is ABSOLVED

from liability for any amount paid by Vertex Sales and Trading, Inc. by reason of
the rescinded sale of one (1) Class "C" common share of Forest Hills Golf &
Country Club.
SO ORDERED.
LEON
J.
vs.
T. J. FOX, defendant-appellee.
O'Brien
and
DeWitt
J. C. Hixon, for appellee.

LAMBERT,

and

C.

W.

plaintiff-appellant,

Ney,

for

appellant.

MORELAND, J.:
This is an action brought to recover a penalty prescribed on a contract as
punishment for the breach thereof.
Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book
and stationery business, found itself in such condition financially that its creditors,
including the plaintiff and the defendant, together with many others, agreed to take
over the business, incorporate it and accept stock therein in payment of their
respective credits. This was done, the plaintiff and the defendant becoming the two
largest stockholders in the new corporation called John R. Edgar & Co.,
Incorporated. A few days after the incorporation was completed plaintiff and
defendant entered into the following agreement:
Whereas the undersigned are, respectively, owners of large amounts of stock in
John R. Edgar and Co, Inc; and,
Whereas it is recognized that the success of said corporation depends, now and
for at least one year next following, in the larger stockholders retaining their
respective interests in the business of said corporation:
Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or
otherwise dispose of any part of their present holdings of stock in said John R.
Edgar & Co. Inc., till after one year from the date hereof.
Either party violating this agreement shall pay to the other the sum of one thousand
(P1,000) pesos as liquidated damages, unless previous consent in writing to such
sale, transfer, or other disposition be obtained.
Notwithstanding this contract the defendant Fox on October 19, 1911, sold his
stock in the said corporation to E. C. McCullough of the firm of E. C. McCullough
& Co. of Manila, a strong competitor of the said John R. Edgar & Co., Inc.

This sale was made by the defendant against the protest of the plaintiff and with
the warning that he would be held liable under the contract hereinabove set forth
and in accordance with its terms. In fact, the defendant Foz offered to sell his
shares of stock to the plaintiff for the same sum that McCullough was paying them
less P1,000, the penalty specified in the contract.
The learned trial court decided the case in favor of the defendant upon the ground
that the intention of the parties as it appeared from the contract in question was to
the effect that the agreement should be good and continue only until the
corporation reached a sound financial basis, and that that event having occurred
some time before the expiration of the year mentioned in the contract, the purpose
for which the contract was made and had been fulfilled and the defendant
accordingly discharged of his obligation thereunder. The complaint was dismissed
upon the merits.
It is argued here that the court erred in its construction of the contract. We are of
the opinion that the contention is sound. The intention of parties to a contract must
be determined, in the first instance, from the words of the contract itself. It is to be
presumed that persons mean what they say when they speak plain English.
Interpretation and construction should by the instruments last resorted to by a court
in determining what the parties agreed to. Where the language used by the parties
is plain, then construction and interpretation are unnecessary and, if used, result
in making a contract for the parties. (Lizarraga Hermanos vs. Yap Tico, 24 Phil.
Rep., 504.)
In the case cited the court said with reference to the construction and interpretation
of statutes: "As for us, we do not construe or interpret this law. It does not need it.
We apply it. By applying the law, we conserve both provisions for the benefit of
litigants. The first and fundamental duty of courts, in our judgment, is to apply the
law. Construction and interpretation come only after it has been demonstrated that
application is impossible or inadequate without them. They are the very last
functions which a court should exercise. The majority of the law need no
interpretation or construction. They require only application, and if there were more
application and less construction, there would be more stability in the law, and
more people would know what the law is."
What we said in that case is equally applicable to contracts between persons. In
the case at bar the parties expressly stipulated that the contract should last one
year. No reason is shown for saying that it shall last only nine months. Whatever
the object was in specifying the year, it was their agreement that the contract
should last a year and it was their judgment and conviction that their purposes

would not be subversed in any less time. What reason can give for refusing to
follow the plain words of the men who made the contract? We see none.
The appellee urges that the plaintiff cannot recover for the reason that he did not
prove damages, and cites numerous American authorities to the effect that
because stipulations for liquidated damages are generally in excess of actual
damages and so work a hardship upon the party in default, courts are strongly
inclined to treat all such agreements as imposing a penalty and to allow a recovery
for actual damages only. He also cites authorities holding that a penalty, as such,
will not be enforced and that the party suing, in spite of the penalty assigned, will
be put to his proof to demonstrate the damages actually suffered by reason of
defendants wrongful act or omission.
In this jurisdiction penalties provided in contracts of this character are enforced . It
is the rule that parties who are competent to contract may make such agreements
within the limitations of the law and public policy as they desire, and that the courts
will enforce them according to their terms. (Civil Code, articles 1152, 1153, 1154,
and 1155; Fornow vs. Hoffmeister, 6 Phil. Rep., 33; Palacios vs. Municipality of
Cavite, 12 Phil. Rep., 140; Gsell vs. Koch, 16 Phil. Rep., 1.) The only case
recognized by the Civil Code in which the court is authorized to intervene for the
purpose of reducing a penalty stipulated in the contract is when the principal
obligation has been partly or irregularly fulfilled and the court can see that the
person demanding the penalty has received the benefit of such or irregular
performance. In such case the court is authorized to reduce the penalty to the
extent of the benefits received by the party enforcing the penalty.
In this jurisdiction, there is no difference between a penalty and liquidated
damages, so far as legal results are concerned. Whatever differences exists
between them as a matter of language, they are treated the same legally. In either
case the party to whom payment is to be made is entitled to recover the sum
stipulated without the necessity of proving damages. Indeed one of the primary
purposes in fixing a penalty or in liquidating damages, is to avoid such necessity.
It is also urged by the appelle in this case that the stipulation in the contract
suspending the power to sell the stock referred to therein is an illegal stipulation,
is in restraint of trade and, therefore, offends public policy. We do not so regard it.
The suspension of the power to sell has a beneficial purpose, results in the
protection of the corporation as well as of the individual parties to the contract, and
is reasonable as to the length of time of the suspension. We do not here undertake
to discuss the limitations to the power to suspend the right of alienation of stock,
limiting ourselves to the statement that the suspension in this particular case is
legal and valid.

The judgment is reversed, the case remanded with instructions to enter a judgment
in favor of the plaintiff and against the defendant for P1,000, with interest; without
costs in this instance.
Arellano, C.J., Trent and Araullo, JJ., concur.

Separate Opinions
CARSON, J., dissenting:
I concur.
I think it proper to observe, however that the doctrine touching the construction
and interpretation of penalties prescribed in ordinary civil contracts as set forth in
the opinion is carried to is extreme limits and that its statement in this form is not
necessary to sustain the decision upon the facts in this case.
Without entering upon an extended discussion of the authorities, it is sufficient for
my purposes to cite the opinion of the supreme court of Spain, dated June 13,
1906, construing the provisions of article 6 of Book 4, Title 1 of the Civil Code which
treats of "contracts with a penal clause." In that case the court held:
The rules and prescriptions governing penal matters are fundamentally applicable
to the penal sanctions of civil character.
This as well as other cases which might be cited from American as well as Spanish
authorities indicate that special rules of interpretations are and should be made
use of by the courts in construing penal clauses in civil contracts, and that case
may well arise wherein the broad doctrine laid down in the opinion of the court may
not be applicable.
HENRY
FLEISCHER,
vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
Antonio
Gonzalez
Emilio M. Javier for appellee.

for

plaintiff-appellee,

appellant.

JOHNSON, J.:
This action was commenced in the Court of First Instance of the Province of
Oriental Negros on the 14th day of August, 1923, against the board of directors of
the Botica Nolasco, Inc., a corporation duly organized and existing under the laws
of the Philippine Islands. The plaintiff prayed that said board of directors be ordered

to register in the books of the corporation five shares of its stock in the name of
Henry Fleischer, the plaintiff, and to pay him the sum of P500 for damages
sustained by him resulting from the refusal of said body to register the shares of
stock in question. The defendant filed a demurrer on the ground that the facts
alleged in the complaint did not constitute sufficient cause of action, and that the
action was not brought against the proper party, which was the Botica Nolasco,
Inc. The demurrer was sustained, and the plaintiff was granted five days to amend
his complaint.
On November 15, 1923, the plaintiff filed an amended complaint against the Botica
Nolasco, Inc., alleging that he became the owner of five shares of stock of said
corporation, by purchase from their original owner, one Manuel Gonzalez; that the
said shares were fully paid; and that the defendant refused to register said shares
in his name in the books of the corporation in spite of repeated demands to that
effect made by him upon said corporation, which refusal caused him damages
amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco,
Inc. to register in his name in the books of the corporation the five shares of stock
recorded in said books in the name of Manuel Gonzalez, and to indemnify him in
the sum of P500 as damages, and to pay the costs. The defendant again filed a
demurrer on the ground that the amended complaint did not state facts sufficient
to constitute a cause of action, and that said amended complaint was ambiguous,
unintelligible, uncertain, which demurrer was overruled by the court.
The defendant answered the amended complaint denying generally and
specifically each and every one of the material allegations thereof, and, as a
special defense, alleged that the defendant, pursuant to article 12 of its by-laws,
had preferential right to buy from the plaintiff said shares at the par value of P100
a share, plus P90 as dividends corresponding to the year 1922, and that said offer
was refused by the plaintiff. The defendant prayed for a judgment absolving it from
all liability under the complaint and directing the plaintiff to deliver to the defendant
the five shares of stock in question, and to pay damages in the sum of P500, and
the costs.
Upon the issue presented by the pleadings above stated, the cause was brought
on for trial, at the conclusion of which, and on August 21, 1924, the Honorable N.
Capistrano, judge, held that, in his opinion, article 12 of the by-laws of the
corporation which gives it preferential right to buy its shares from retiring
stockholders, is in conflict with Act No. 1459 (Corporation Law), especially with
section 35 thereof; and rendered a judgment ordering the defendant corporation,
through its board of directors, to register in the books of said corporation the said
five shares of stock in the name of the plaintiff, Henry Fleischer, as the shareholder

or owner thereof, instead of the original owner, Manuel Gonzalez, with costs
against the defendant.
The defendant appealed from said judgment, and now makes several assignment
of error, all of which, in substance, raise the question whether or not article 12 of
the by-laws of the corporation is in conflict with the provisions of the Corporation
Law (Act No. 1459).
There is no controversy as to the facts of the present case. They are simple and
may be stated as follows:
That Manuel Gonzalez was the original owner of the five shares of stock in
question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11,
1923, he assigned and delivered said five shares to the plaintiff, Henry Fleischer,
by accomplishing the form of endorsement provided on the back thereof, together
with other credits, in consideration of a large sum of money owed by Gonzalez to
Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13, 1923, Dr. Eduardo
Miciano, who was the secretary-treasurer of said corporation, offered to buy from
Henry Fleischer, on behalf of the corporation, said shares of stock, at their par
value of P100 a share, for P500; that by virtue of article 12 of the by-laws of Botica
Nolasco, Inc., said corporation had the preferential right to buy from Manuel
Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell them to the
defendant; that the plaintiff requested Doctor Miciano to register said shares in his
name; that Doctor Miciano refused to do so, saying that it would be in contravention
of the by-laws of the corporation.
It also appears from the record that on the 13th day of March, 1923, two days after
the assignment of the shares to the plaintiff, Manuel Gonzales made a written
statement to the Botica Nolasco, Inc., requesting that the five shares of stock sold
by him to Henry Fleischer be noted transferred to Fleischer's name. He also
acknowledged in said written statement the preferential right of the corporation to
buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a letter to the
Botica Nolasco, withdrawing and cancelling his written statement of March 13,
1923 (Exhibit C), to which letter the Botica Nolasco on June 15, 1923, replied,
declaring that his written statement was in conformity with the by-laws of the
corporation; that his letter of June 14th was of no effect, and that the shares in
question had been registered in the name of the Botica Nolasco, Inc., (Exhibit X).
As indicated above, the important question raised in this appeal is whether or not
article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions
of the Corporation Law (Act No. 1459). Appellant invoked said article as its ground
for denying the request of the plaintiff that the shares in question be registered in

his (plaintiff's) name, and for claiming that it (Botica Nolasco, Inc.) had the
preferential right to buy said shares from Gonzalez. Appellant now contends that
article 12 of the said by-laws is in conformity with the provisions of Act No. 1459.
Said article is as follows:
ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona,
pero para que estas transferencias tengan validez legal, deben constar en los
registros de la Corporacion con el debido endoso del accionista a cuyo nombre se
ha expedido la accion o acciones que se transfieran, o un documento de
transferencia. Entendiendose que, ningun accionista transferira accion alguna a
otra persona sin participar antes por escrito al Secretario-Tesorero. En igualdad
de condiciones, la sociedad tendra el derecho de adquirir para si la accion o
acciones que se traten de transferir. (Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the Botica
Nolasco, Inc., governing the transfer of shares of stock of said corporation. The
latter part of said article creates in favor of the Botica Nolasco, Inc., a preferential
right to buy, under the same conditions, the share or shares of stock of a retiring
shareholder. Has said corporation any power, under the Corporation Law (Act. No.
1459), to adopt such by-law?
The particular provisions of the Corporation Law referring to transfer of shares of
stock are as follows:
SEC. 13. Every corporation has the power:
xxx

xxx

xxx

(7) To make by-laws, not inconsistent with any existing law, for the fixing or
changing of the number of its officers and directors within the limits prescribed by
law, and for the transferring of its stock, the administration of its corporate affairs,
etc.
xxx

xxx

xxx

SEC. 35. The capital stock of stock corporations shall de divided into shares for
which certificates signed by the president or the vice-president, countersigned by
the secretary or clerk and sealed with the seal of the corporation, shall be issued
in accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate indorsed by the owner or his
attorney in fact or other person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation so as to show the names of the parties

to the transaction, that date of the transfer, the number of the certificate, and the
number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall be
transferable on the books of the corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws,
not inconsistent with any existing law, for the transferring of its stock. It follows from
said provision, that a by-law adopted by a corporation relating to transfer of stock
should be in harmony with the law on the subject of transfer of stock. The law on
this subject is found in section 35 of Act No. 1459 above quoted. Said section
specifically provides that the shares of stock "are personal property and may be
transferred by delivery of the certificate indorsed by the owner, etc." Said section
35 defines the nature, character and transferability of shares of stock. Under said
section they are personal property and may be transferred as therein provided.
Said section contemplates no restriction as to whom they may be transferred or
sold. It does not suggest that any discrimination may be created by the corporation
in favor or against a certain purchaser. The holder of shares, as owner of personal
property, is at liberty, under said section, to dispose of them in favor of
whomsoever he pleases, without any other limitation in this respect, than the
general provisions of law. Therefore, a stock corporation in adopting a by-law
governing transfer of shares of stock should take into consideration the specific
provisions of section 35 of Act No. 1459, and said by-law should be made to
harmonize with said provisions. It should not be inconsistent therewith.
The by-law now in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7, above quoted; but in adopting said by-law
the corporation has transcended the limits fixed by law in the same section, and
has not taken into consideration the provisions of section 35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation, and are not
contradictory to the general policy of the laws of the land. (Supreme Commandery
of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation must be
reasonable and for a corporate purpose, and always within the charter limits. They
must always be strictly subordinate to the constitution and the general laws of the
land. They must not infringe the policy of the state, nor be hostile to public welfare.
(46 Am. Rep., 332.) They must not disturb vested rights or impair the obligation of
a contract, take away or abridge the substantial rights of stockholder or member,
affect rights of property or create obligations unknown to the law. (People's Home

Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs.
Globe Milling Co., 79 Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of law. (South Florida
Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of stock must be found
in the governing statute or the charter. Restrictions upon the traffic in stock must
have their source in legislative enactment, as the corporation itself cannot create
such impediments. By-law are intended merely for the protection of the
corporation, and prescribe regulation and not restriction; they are always subject
to the charter of the corporation. The corporation, in the absence of such a power,
cannot ordinarily inquire into or pass upon the legality of the transaction by which
its stock passes from one person to another, nor can it question the consideration
upon which a sale is based. A by-law cannot take away or abridge the substantial
rights of stockholder. Under a statute authorizing by- laws for the transfer of stock,
a corporation can do no more than prescribe a general mode of transfer on the
corporate books and cannot justify an unreasonable restriction upon the right of
sale. (4 Thompson on Corporations, sec. 4137, p. 674.
The right of unrestrained transfer of shares inheres in the very nature of a
corporation, and courts will carefully scrutinize any attempt to impose restrictions
or limitations upon the right of stockholders to sell and assign their stock. The right
to impose any restraint in this respect must be conferred upon the corporation
either by the governing statute or by the articles of the corporation. It cannot be
done by a by-law without statutory or charter authority. (4 Thompson on
Corporations, sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership of property, the general
rule (subject to exceptions hereafter pointed out and discussed) is that every owner
of corporate shares has the same uncontrollable right to alien them which attaches
to the ownership of any other species of property. A shareholder is under no
obligation to refrain from selling his shares at the sacrifice of his personal interest,
in order to secure the welfare of the corporation, or to enable another shareholder
to make gains and profits. (10 Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to prevent or to
restrain transfers of its shares, unless such power is expressly conferred in its
charter or governing statute. This conclusion follows from the further consideration
that by-laws or other regulations restraining such transfers, unless derived from
authority expressly granted by the legislature, would be regarded as impositions in
restraint of trade. (10 Cyc., p. 578.)

The foregoing authorities go farther than the stand we are taking on this question.
They hold that the power of a corporation to enact by-laws restraining the sale and
transfer of shares, should not only be in harmony with the law or charter of the
corporation, but such power should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is found
in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however,
shall be valid, except as between the parties, until the transfer is entered and noted
upon the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and the number
of shares transferred." This restriction is necessary in order that the officers of the
corporation may know who are the stockholders, which is essential in conducting
elections of officers, in calling meeting of stockholders, and for other purposes. but
any restriction of the nature of that imposed in the by-law now in question, is ultra
vires, violative of the property rights of shareholders, and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect on the appellee.
He had no knowledge of such by-law when the shares were assigned to him. He
obtained them in good faith and for a valuable consideration. He was not a privy
to the contract created by said by-law between the shareholder Manuel Gonzalez
and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a
purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first
offering them to the corporation for a period of thirty days is not binding upon an
assignee of the stock as a personal contract, although his assignor knew of the bylaw and took part in its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21
R.I., 9.)
When no restriction is placed by public law on the transfer of corporate stock, a
purchaser is not affected by any contractual restriction of which he had no notice.
(Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has assented to
an unauthorized by-law has only the effect of a contract by, and enforceable
against, the assignor; the assignee is not bound by such by-law by virtue of the
assignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock shall not be valid
unless approved by the board of directors, while it may be enforced as a
reasonable regulation for the protection of the corporation against worthless
stockholders, cannot be made available to defeat the rights of third persons.
(Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the plaintiff does not
have any right of action against the defendant corporation, but against the
president and secretary thereof, inasmuch as the signing and registration of shares
is incumbent upon said officers pursuant to section 35 of the Corporation Law. This
contention cannot be sustained now. The question should have been raised in the
lower court. It is too late to raise it now in this appeal. Besides, as stated above,
the corporation was made defendant in this action upon the demurrer of the
attorney of the original defendant in the lower court, who contended that the Botica
Nolasco, Inc., should be made the party defendant in this action. Accordingly, upon
order of the court, the complaint was amended and the said corporation was made
the party defendant.
Whenever a corporation refuses to transfer and register stock in cases like the
present, mandamus will lie to compel the officers of the corporation to transfer said
stock upon the books of the corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil.,
138.)
In view of all the foregoing, we are of the opinion, and so hold, that the decision of
the lower court is in accordance with law and should be and is hereby affirmed,
with costs. So ordered.
CYRUS PADGETT, Plaintiff-Appellee, v. BABCOCK & TEMPLETON, INC., and
W. R. BABCOCK,Defendants-Appellants.
By resolution approved on November 25, 1933, this court set aside its decision in
this case, which was promulgated on October 13th of the same year, and thereby
granted a rehearing before the second division. The defendant W. R. Babcock and
his counsel J. F. Boomer, both of whom were present during the said rehearing
again argued the merits of the case. Nobody appeared for the plaintiff.
The facts of the case have not suffered any change. They remain the same as
those which we stated in the original decision as follows: "The appellee was an
employee of the appellant corporation and rendered services as such from January
1, 1923, to April 15, 1929. During that period he bought 35 shares thereof at P100
a share at the suggestion of the president of said corporation. He was also the
recipient of 9 shares by way of bonus during Christmas seasons. In this way the
said appellee became the owner of 44 shares for which the 12 certificates, Exhibits
F to F-11, were issued in his favor. The word nontransferable appears on each
and every one of these certificates. Before severing his connections with the said
corporation, the appellee proposed to the president that the said corporation buy
his 44 shares at par value plus the interest thereon, or that he be authorized to sell
them to other persons. The corporation bought similar shares belonging to other

employees, at par value. Sometime later, the said president offered to buy the
appellees shares first at P85 each and then at P80. The appellee did not agree
thereto."cralaw
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library
The defendants admit that the 44 shares in question have become the property of
the plaintiff. They likewise grant that under the law the said appellee has the right
to have the restriction" nontransferable" appearing on the 12 certificates eliminated
therefrom. However, they vigorously contend that there is no existing law nor
authority in support of the proposition that they are bound to redeem or buy said
shares at par value. Their admission is only limited to the proposition that after the
restriction appearing thereon is eliminated, the plaintiff may sell the said shares to
anybody, at their market value or at any price he sees fit.
We have not had the opportunity of hearing the opinion of the counsel for the
plaintiff. We have again studied the laws applicable thereto and have searched for
more authorities on the subject under discussion, but we have not found anything
that bears directly on the question whether or not the defendants may be
compelled, in this case, to buy the shares in question at par value. However, the
opinion seems to be unanimous that a restriction imposed upon a certificate of
shares, similar to the ones under consideration, is null and void on the ground that
it constitutes an unreasonable limitation of the right of ownership and is in restraint
of
trade.
"Shares of corporate stock being regarded as property, the owner of such shares
may, as a general rule, dispose of them as he sees fit, unless the corporation has
been dissolved, or unless the right to do so is properly restricted, or the owners
privilege of disposing of his shares has been hampered by his own action." (14
C.
J.,
sec.
1033,
pp.
663,
664.)
"Any restriction on a stockholders right to dispose of his shares must be construed
strictly; and any attempt to restrain a transfer of shares is regarded as being in
restraint of trade, in the absence of a valid lien upon its shares, and except to the
extent that valid restrictive regulations and agreements exist and are applicable.
Subject only to such restrictions, a stockholder cannot be controlled in or restrained
from exercising his right to transfer by the corporation or its officers or by other
stockholders, even though the sale is to a competitor of the company, or to an
insolvent person, or even though a controlling interest is sold to one purchaser."
(Ibid.,
sec.
1035,
pp.
665,
666.)
In the case of Fleischer v. Botica Nolasco Co. (47 Phil., 583), we have discussed

the validity of a clause in the by-laws of the defendant corporation, which provided
that, under the same conditions, the owner of a share of stock could not sell it to
another person except to the defendant corporation. In deciding the legality and
validity
of
said
restriction,
we
held:jgc:chanrobles.com.ph
"The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: No transfer,
however, shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation so as to show the names of the parties
to the transaction, the date of the transfer, the number of the certificate, and the
number of shares transferred. This restriction is necessary in order that the officers
of the corporation may know who are the stockholders, which is essential in
conducting elections of officers, in calling meetings of stockholders, and for other
purposes. But any restriction of the nature of that imposed in the by-law now in
question, is ultra vires, violative of the property rights of shareholders, and in
restraint
of
trade."
(Id.,
p.
592.)
It is obvious, therefore, that the restriction consisting in the word "nontransferable,"
appearing on the 12 certificates, Exhibits F to F-11, is illegal and should be
eliminated.
As we have hereinbefore stated, there is no existing law nor authority in support of
the plaintiffs claim to the effect that the defendants are obliged to buy his shares
of stock at par value, plus the interest demanded thereon. In this respect, we hold
that there has been no such contract, either express or implied, between the
plaintiff and the defendants. In the absence of a similar contractual obligation and
of a legal provision applicable thereto, it is logical to conclude that it would be unjust
and unreasonable to compel the said defendants to comply with a non-existent or
imaginary obligation. Whereupon, we are likewise compelled to conclude that the
judgment originally rendered to that effect is untenable and should be set aside.
Wherefore, the judgment appealed from is hereby reversed, and the restriction
consisting in the word "non-transferable" appearing on the 12 certificates of shares
of stock, is declared null and void. The defendants herein are hereby ordered to
cancel the certificates in question and to issue in lieu thereof new ones without any
restriction whatsoever, with the costs of both instances against the said
defendants-appellants. So ordered.
A.R. HAGER, Petitioner, v. ALBERT J. BRYAN, Respondent.
DECISION

CARSON, J.:

This is an original action brought in this court under section 515 of the Code of Civil
Procedure to secure a writ of mandamus against the respondent, to compel him,
as secretary of the Visayan Electric Company, to transfer upon the books of the
company
certain
shares
of
stock
mentioned
in
the
petition.
The original petition and statement of the facts sufficiently definite for the purposes
of this decision will be found in the decision of this court filed January 18, 1911, 1
sustaining a demurrer to the original petition on the ground that it not state facts
constituting
a
cause
of
action.
The petitioner now submits an amended petition wherein he definitely and
specifically alleges in addition to the allegations of the original petition, "that the
Visayan Electric Company holds no unpaid claims against the shares of stock the
subject of this action, and that said petitioner, A. R. Hager, is not indebted in any
manner to said Visayan Electric Company." To this amended petition respondent
demurs, on the ground that as amended it still does not state facts which constitute
a
cause
of
action.
We are all agreed that, if the petitioner were himself the registered owner of the
stock which he seeks to have transferred to Mr. Levering, to whom he alleges he
agreed to sell it on February 25, 1910, he would be entitled to his remedy by
mandamus upon his amended petition, and that under all the circumstances of this
case the mandamus would issue from this court. So far as the petitioner is
concerned, the amended petition clearly, definitely and specifically alleges facts
which, if true, squarely meet and refute the contention that a mandamus should
not issue to compel the secretary of the company to transfer the stock because of
the possibility of the existence of unpaid claims against it, a possibility which, as
pointed out in the former opinion, might impose upon the secretary a duty to refuse
to make such transfer under the provisions of section 35 of "The Corporation Law."
(Act
No.
1495.)
Were the petitioner the registered owner or the stock, we think that the additional
allegations contained in the amended petition, taken together with the allegations
in the original petition, would undoubtedly take his case out of the class of "ordinary
cases" in which Judge Sanborn, in his article on Mandamus in the Cyclopedia of
Law and Procedure (26 Cyc., 347), says mandamus, by the weight of authority,

will not lie; because as it appears and is clearly alleged in the amended petition,
first, an ordinary action against the corporation for damages would in this case be
wholly inadequate; second, an action of the nature of a suit in equity to secure a
decree ordering the transfer would also be inadequate, in view of the delay
involved in the trial and possible appeal of such action, which under the allegations
of the amended petition would defeat the principal purpose for which this action is
brought, that is to say, to secure to the purchaser the right to vote this stock at the
regular and special meetings of the stockholders; and third, because we think that
the statute if not expressly, at least impliedly, imposes the duty upon a corporation,
organized under Act No. 1459, and the officer in charge of the books of such
corporation, to provide for the entry and noting upon the books of the corporation
of lawful transfers of stock when the entry of such transfer is lawfully demanded.
Section

52

of

Act

No.

1459

is

as

follows:jgc:chanrobles.com.ph

"Business corporations must also keep a book to be known as the "Stock and
transfer book," in which must be kept a record of all stock, the names of the
stockholders or members alphabetically arranged; the installments paid and
unpaid on all stock, for which the subscription has been made, and the date of
payment of any installment; a statement of every alienation, sale, or transfer of
stock made, the date thereof, and by and to whom made; and such other entries
as the by-laws may prescribe. The stock and transfer book shall be open to the
inspection of any director, stockholder, or member of the corporation at reasonable
hours."cralaw
virtua1aw
library
Without inserting the numerous citations with which Judge Sanborn supports the
text, we quote at length from his observations on the "Transfer of shares" contained
in his article on Mandamus (26 Cyc., 347), believing, as we do, that as appears
from his discussion of the doctrine, we are supported by both reason and authority
in
our
ruling
in
this
regard:jgc:chanrobles.com.ph
"g. Transfer of shares. By the weight of authority mandamus will not lie in
ordinary cases to compel a corporation or its officers to transfer stock on its books
and issue new certificates of the transferee, since the right is a purely private one,
and there is generally an adequate remedy by an action against the corporation
for damages or by a suit in equity to secure a decree ordering the transfer. Some
courts, however, have held that mandamus will lie, as the remedy by action for
refusal to permit a transfer is too doubtful and uncertain in its character to
supersede the specific and speedier remedy by mandamus. The writ will lie if it
authorized by statute or, it seems, if the duty to register transfers is expressly

imposed by statute, or if there are special circumstances in any case rendering the
remedy by action for damages inadequate. Mandamus will lie, where the right is
clear, to compel a transfer of stock to the purchaser of the same at a judicial sale,
as required by statute. In no case will the writ be granted if the title to the stock is
disputed and the right to the relief asked for is not clear, or where the relators claim
rests on a mere equitable right, or equitable issues are involved."cralaw virtua1aw
library
It appears, however, from the original as well as the amended petition, that this
petitioner is not the registered owner of the stock which he seeks to have
transferred, and except in so far as he alleges that he is the owner of the stock and
that it was "indorsed" to him on February 5 by the Bryan-Landon Company, in
whose name it is registered on the books of the Visayan Electric Company, there
is no allegation that the petitioner holds any power of attorney from the BryanLandon Company authorizing him to make demand on the secretary of the Visayan
Electric Company to make the transfer which petitioner seeks to have made
through
the
medium
of
the
mandamus
of
this
court.
Without discussing or deciding the respective rights of the parties which might be
properly asserted in an ordinary action or an action in the nature of an equitable
suit, we are all agreed that in a case such as that at bar, a mandamus should not
issue to compel the secretary of a corporation to make a transfer of the stock on
the books of the company, unless it affirmatively appears that he has failed or
refused so to do, upon the demand either of the person in whose name the stock
is registered, or of some person holding a power of attorney for that purpose from
the registered owner of the stock. There is no allegation in the petition that the
petitioner or anyone else holds a power of attorney from the Bryan-Landon
Company authorizing a demand for the transfer of the stock, or that the BryanLandon Company has ever itself made such demand upon the Visayan Electric
Company, and in the absence of such allegation we are not able to say that there
was such a clear indisputable duty, such a clear legal obligation upon the
respondent, as to justify the issuance of the writ to compel him to perform it.
Under the provisions of our statute touching the transfer of stock (secs. 35 and 36
of Act No. 1459), the mere indorsement of stock certificates does not in itself give
to the indorsee such a right to have a transfer of the shares of stock on the books
of the company as will entitle him to the writ of mandamus to compel the company
and its officers to make such transfer at his demand, because, under such
circumstances the duty, the legal obligation, is not so clear and indisputable as to
justify the issuance of the writ. As a general rule and especially under the above-

cited statute, as between the corporation on the one hand, and its shareholders
are, so that a mere indorsee of a stock certificate, claiming to be the owner, will
not necessarily be recognized as such by the corporation and its officers, in the
absence of express instructions of the registered owner to make such transfer to
the indorsee, or a power of attorney authorizing such transfer.
The usual practice in the United States in effecting transfers by indorsement and
delivery of certificate with power of attorney in blank is thus stated in 10 Cyc., 594,
595:jgc:chanrobles.com.ph
"The usual share certificate contains on its back a printed assignment or
indorsement and also a power of attorney in blank, like the following: "For value
received I hereby assign the within named shares to . . . . . . . . . . . . ., and appoint
my, . . . . . . . . . . . . . . . attorney to make the transfer on the books of the company."
This is signed by the person to whom the shares are issued. In this manner, by the
usages of business, of which the courts take judicial notice, the certificate may be
passed from hand to hand indefinitely by the person to whom the certificate is
issued simply signing this indorsement and delivering the certificate with the blanks
unfilled to his assignee. When it reaches the hands of some one who desires to
assume the legal rights of a shareholder, so as to be entitled to vote at corporate
elections and to receive dividends, he fills up the blanks by inserting his own name
as transferee, just as the holder of a promissory note indorsed in blank is entitled
by the law merchant to insert any name he pleases above the indorsement as the
payee. He also inserts in the second blank the name of the attorney in fact whom
he wishes to make the transfer for him on the books of the corporation. This person
is usually the secretary or some other officer of the company, although he may
insert the name of whomsoever he pleases. The attorney so appointed does
exactly what the original shareholder would have done had he gone to the
companys office to make the transfer of the shares to his vendee. He makes an
entry on the book kept by the company for that purpose, usually the stock ledger,
to the effect that the shares have been transferred to the new purchaser. Then the
certificate is surrendered, as hereafter indicated, and a new certificate is issued to
the
transferee."cralaw
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library
It may be that such method as this was adopted in making the transfer in the case
at bar, and that this is what is meant by the allegation of the petition that the stock
certificates were "indorsed" to the petitioner, but the point having been raised, and
there being no express allegation to this effect in the petition, we think the demurrer
must be sustained and the petition dismissed with costs, unless within ten days
from the receipt of notice of this decision petitioner files an amended complaint.

It may be proper to add, in conclusion, that the specific point on which the demurrer
to the amended petition is sustained was not directly brought to the attention of the
court in the discussion of the demurrer on the original petition, and for this reason,
apparently, was not discussed in the former opinion, that demurrer being sustained
on a different ground.
G.R. No. L-45048 January 7, 1987
BATONG
BUHAY
GOLD
MINES,
INC.,
petitioner,
vs.
THE COURT OF APPEALS and INC. MINING CORPORATION, respondents.
Taada, Sanchez, Taada & Taada Law Office for petitioner.
Quisumbing, Caparas, Ilagan Alcantara & Mosqueda Law Office for private
respondent.

PARAS, J.:
This is a petition to review the decision dated August 27, 1976 of the Court of
Appeals (CA) in CA-G.R. No. 51313-R which modified the decision of the then
Court of First Instance (CFI) of Manila, Branch 11 in Civil Case No. 79183 Also
sought for review are the resolutions of the aforenamed court dated October 21,
1976 and November 12, 1976 which denied petitioner's motion for reconsideration
of the subject decision and petition and/or motion for new trial, respectively.
The dispositive portion of the CFI judgment reads:
WHEREFORE, the Court renders judgment enjoining the defendants to effect the
transfer of the shares covered by Stock Certificate No. 16807 to and in the name
of plaintiff INCORPORATED Mining Corporation, and the writ of preliminary
mandatory injunction issued on March 16, 1970 is hereby declared permanent.
SO ORDERED.
Upon the other hand, the decretal portion of the CA decision states:
WHEREFORE, the judgment appealed from is hereby modified by adding the
following to the dispositive portion thereof:
Ordering defendant Batong Buhay Gold Mines, Inc. to pay to the plaintiff the sum
of P5,625.55, with interest at the legal rate from March 5, 1970 until full payment;

and dismissing the complaint with respect to defendant Del Rosario and Company.
Defendant Batong Buhay shall pay the costs.
IT IS SO ORDERED.
(pp. 67-68, Rollo)
The antecedent facts, as found by the Court of Appeals, are as follows:
The defendant Batong Buhay Gold Mines, Inc. issued Stock Certificate No. 16807
covering 62,495 shares with a par value of P0.01 per share to Francisco Aguac
who was then legally married to Paula G. Aguac, but the said spouses had lived
separately for more than fourteen (14) years prior to the said date. On December
16, 1969, Francisco Aguac sold his 62,495 shares covered by Stock Certificate
No. 16807 for the sum of P9,374.70 in favor of the plaintiff, the said transaction
being evidenced by a deed of sale (Exhibit D). The said sale was made by
Francisco Aguac without the knowledge or consent of his wife Paula G. Aguac.
On the same date of the sale, December 16, 1969, Paula G. Aguac wrote a letter
to the president of defendant Batong Buhay Gold Mines, Inc. asking that the
transfer of the shares sold by her husband be withheld, inasmuch as the same
constituted conjugal property and her share of proceeds of the sale was not given
to her (Exhibit 1).
On January 5, 1970, under a covering letter dated December 26, 1969, plaintiff's
counsel presented Stock Certificate No. 16807 duly endorsed by Francisco Aguac
for registration and transfer of the said stock certificate in the name of the plaintiff
(Exhibit F). The said letter was addressed to defendant Del Rosario and Company
which was the transfer agent of Batong Buhay at that time. In a letter dated
February 24, 1970 also addressed to Del Rosario and Company, plaintiff's counsel
requested information as to the action taken on the transfer of Stock Certificate
No. 16807 in favor of the plaintiff, nothing about which having heard despite the
lapse of over a month (Exhibit H). In a reply letter dated February 28, 1970, Del
Rosario and Company informed plaintiff's counsel that Batong Buhay has referred
the matter to their attorneys, inasmuch as there was a "technical problem that has
developed in the transfer of stock," and further advised that the plaintiff
communicate directly with Batong Buhay for further details (Exhibit 1).lwphl@it
It developed that when Batong Buhay was about to effect the cancellation of Stock
Certificate No. 16807 and transfer the 62,495 shares covered thereby to the
plaintiff and had, in fact, prepared new Stock Certificate No. 27650 dated January
5, 1970, it received the letter of Paula G. Aguac advising it to withhold the transfer
of the subject shares of stock on the ground that the same are conjugal property.

On March 2, 1970 Francisco Aguac was charged in a criminal complaint Pasil


Kalinga-Apayao, docketed as Criminal Case No. 10, entitled "People vs. Francisco
Aguac, et al."
The defendants justify their refusal to transfer the shares of stock of Francisco
Aguac in the name of the plaintiff in view of their apprehension that they might he
held liable for damages under Article 173 of the Civil Code and the ruling of the
Supreme Court in Bucoy vs. Paulino, 23 SCRA 248.
On March 5, 1970, in view of the defendant's inaction on the request for the transfer
of the stock certificate in its name, the plaintiff commenced this action before the
Court of First Instance of Manila, praying that the defendants be ordered to issue
and release the transfer stock certificate covering 62,495 shares of defendant
Batong Buhay, formerly registered in the name of Francisco Aguac, in favor of the
plaintiff, and for the recovery of compensatory, exemplary and corrective damages
and attorney's fees. A writ of preliminary mandatory injunction was prayed for to
order the defendants to issue immediately the transfer certificate covering the
aforesaid shares of stock of defendant Batong Buhay in the name of the plaintiff.
The trial court granted the prayer for the issuance of the writ of preliminary
mandatory injunction in its order of March 16, 1970. In compliance therewith, Stock
Certificate No. 16807 was cancelled and new Stock Certificate No. 27650 dated
January 5, 1970 was issued to and received by the plaintiff on July 20, 1970."
On October 28, 1971, the trial court handed down its judgment ordering the
defendant (herein petitioner) to effect the transfer of the shares covered by Stock
Certificate No. 16807 in the name of herein respondent Incoporated Mining
Corporation and declaring permanent the writ of preliminary mandatory injunction
issued on March 16, 1970.
Private respondent seasonably appealed the aforesaid decision to the Court of
Appeals anchored on the lower court's alleged failure to award damages for the
wrongful refusal of petitioner to transfer the subject shares of stock and alleged
failure to award attorney's fees, cost of injunction bond and expenses of litigation.
On August 27, 1986, respondent appellate court rendered the subject decision the
dispositive portion of which has already been quoted hereinabove.
Hence, this petition.
In assailing the decision of the Court of Appeals, petitioner poses the following
issues:

1. May the Court of Appeals award damages by way of unrealized profits despite
the absence of supporting evidence, or merely on the basis of pure assumption,
speculation or conjecture; or can the respondent recover damages by way of
unrealized profits when it has not shown that it was damaged in any manner by
the act of petitioner?
2. May the appellate court deny the petitioner the chance to present evidence
discovered after judgment which were not only very material to its case, but would
also show the untenability and illegality of private respondent's position?
We answer the first issue in the negative.
The petitioner alleges that the appellate court gravely and categorically erred in
awarding damages by way of unrealized profit (or lucro cesante) to private
respondent. Petitioner company also alleges that the claim for unrealized profit
must be duly and sufficiently established, that is, that the claimant must submit
proof that it was in fact damaged because of petitioner's act or omission.
The stipulation of facts of the parties does not at all show that private respondent
intended to sell, or would sell or would have sold the stocks in question on specified
dates. While it is true that shares of stock may go up or down in value (as in fact
the concerned shares here really rose from fifteen (15) centavos to twenty three or
twenty four (23/24) centavos per share and then fell to about two (2) centavos per
share, still whatever profits could have been made are purely SPECULATIVE, for
it was difficult to predict with any decree of certainty the rise and fall in the value of
the shares. Thus this Court has ruled that speculative damages cannot be
recovered.
It is easy to say now that had private respondent gained legal title to the shares, it
could have sold the same and reaped a profit of P5,624.95 but it could not do so
because of petitioner's refusal to transfer the stocks in the former's name at the
time demand was made, but then it is also true that human nature, being what it
is, private respondent's officials could also have refused to sell and instead wait
for expected further increases in value.
In view of what has been said, We find no necessity to discuss the second issue.
WHEREFORE, the assailed decision and resolutions of the Court of Appeals are
hereby SET ASIDE, and a new one is hereby rendered REINSTATING the
decision of the trial court. No costs.
SO ORDERED.
G.R. No. 93695 February 4, 1992

RAMON
C.
LEE
and
ANTONIO
DM.
LACDAO,
petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
PABLO GONZALES, JR. and THOMAS GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:


What is the nature of the voting trust agreement executed between two parties in
this case? Who owns the stocks of the corporation under the terms of the voting
trust agreement? How long can a voting trust agreement remain valid and
effective? Did a director of the corporation cease to be such upon the creation of
the voting trust agreement? These are the questions the answers to which are
necessary in resolving the principal issue in this petition for certiorari whether
or not there was proper service of summons on Alfa Integrated Textile Mills (ALFA,
for short) through the petitioners as president and vice-president, allegedly, of the
subject corporation after the execution of a voting trust agreement between ALFA
and the Development Bank of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the
International Corporate Bank, Inc. against the private respondents who, in turn,
filed a third party complaint against ALFA and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party
complaint which the Regional Trial Court of Makati, Branch 58 denied in an Order
dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance
of an alias summons upon ALFA through the DBP as a consequence of the
petitioner's letter informing the court that the summons for ALFA was erroneously
served upon them considering that the management of ALFA had been transferred
to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized
to receive summons on behalf of ALFA since the DBP had not taken over the
company which has a separate and distinct corporate personality and existence.

On August 4, 1988, the trial court issued an order advising the private respondents
to take the appropriate steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for
the Declaration of Proper Service of Summons which the trial court granted on
August 17, 1988.
On September 12, 1988, the petitioners filed a motion for reconsideration
submitting that Rule 14, section 13 of the Revised Rules of Court is not applicable
since they were no longer officers of ALFA and that the private respondents should
have availed of another mode of service under Rule 14, Section 16 of the said
Rules, i.e.,through publication to effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988,
the private respondents argued that the voting trust agreement dated March 11,
1981 did not divest the petitioners of their positions as president and executive
vice-president of ALFA so that service of summons upon ALFA through the
petitioners as corporate officers was proper.
On January 2, 1989, the trial court upheld the validity of the service of summons
on ALFA through the petitioners, thus, denying the latter's motion for
reconsideration and requiring ALFA to filed its answer through the petitioners as
its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the
petitioners reiterating their stand that by virtue of the voting trust agreement they
ceased to be officers and directors of ALFA, hence, they could no longer receive
summons or any court processes for or on behalf of ALFA. In support of their
second motion for reconsideration, the petitioners attached thereto a copy of the
voting trust agreement between all the stockholders of ALFA (the petitioners
included), on the one hand, and the DBP, on the other hand, whereby the
management and control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous Order
dated January 2, 1989 and declared that service upon the petitioners who were no
longer corporate officers of ALFA cannot be considered as proper service of
summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the
above Order which was affirmed by the court in its Order dated August 14, 1989
denying the private respondent's motion for reconsideration.

On September 18, 1989, a petition for certiorari was belatedly submitted by the
private respondent before the public respondent which, nonetheless, resolved to
give due course thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending petition
for certiorari with public respondent issued an Order declaring as final the Order
dated April 25, 1989. The private respondents in the said Order were required to
take positive steps in prosecuting the third party complaint in order that the court
would not be constrained to dismiss the same for failure to prosecute.
Subsequently, on October 25, 1989 the private respondents filed a motion for
reconsideration on which the trial court took no further action.
On March 19, 1990, after the petitioners filed their answer to the private
respondents' petition for certiorari, the public respondent rendered its decision, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent judge dated April
25, 1989 and August 14, 1989 are hereby SET ASIDE and respondent corporation
is ordered to file its answer within the reglementary period. (CA Decision, p.
8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of
the public respondent which resolved to deny the same on May 10, 1990. Hence,
the petitioners filed this certiorari petition imputing grave abuse of discretion
amounting to lack of jurisdiction on the part of the public respondent in reversing
the questioned Orders dated April 25, 1989 and August 14, 1989 of the court a
quo, thus, holding that there was proper service of summons on ALFA through the
petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment
on July 16, 1990 erroneously applying the rule that the period during which a
motion for reconsideration has been pending must be deducted from the 15-day
period to appeal. However, in its Resolution dated January 3, 1991, the public
respondent set aside the aforestated entry of judgment after further considering
that the rule it relied on applies to appeals from decisions of the Regional Trial
Courts to the Court of Appeals, not to appeals from its decision to us pursuant to
our ruling in the case of Refractories Corporation of the Philippines v. Intermediate
Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments, to wit:
(1) that the execution of the voting trust agreement by a stockholders whereby all
his shares to the corporation have been transferred to the trustee deprives the

stockholders of his position as director of the corporation; to rule otherwise, as the


respondent Court of Appeals did, would be violative of section 23 of the
Corporation Code ( Rollo, pp. 270-3273); and
(2) that the petitioners were no longer acting or holding any of the positions
provided under Rule 14, Section 13 of the Rules of Court authorized to receive
service of summons for and in behalf of the private domestic corporation so that
the service of summons on ALFA effected through the petitioners is not valid and
ineffective; to maintain the respondent Court of Appeals' position that ALFA was
properly served its summons through the petitioners would be contrary to the
general principle that a corporation can only be bound by such acts which are
within the scope of its officers' or agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant case,
we dwell first on the nature of a voting trust agreement and the consequent effects
upon its creation in the light of the provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders of a
corporation and the trustee or by a group of identical agreements between
individual stockholders and a common trustee, whereby it is provided that for a
term of years, or for a period contingent upon a certain event, or until the
agreement is terminated, control over the stock owned by such stockholders, either
for certain purposes or for all purposes, is to be lodged in the trustee, either with
or without a reservation to the owners, or persons designated by them, of the
power to direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am
J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly recognizes voting
trust agreements, a more definitive meaning may be gathered. The said provision
partly reads:
Sec. 59. Voting Trusts One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the share for a period rights pertaining
to the shares for a period not exceeding five (5) years at any one time: Provided,
that in the case of a voting trust specifically required as a condition in a loan
agreement, said voting trust may be for a period exceeding (5) years but shall
automatically expire upon full payment of the loan. A voting trust agreement must
be in writing and notarized, and shall specify the terms and conditions thereof. A
certified copy of such agreement shall be filed with the corporation and with the
Securities and Exchange Commission; otherwise, said agreement is ineffective

and unenforceable. The certificate or certificates of stock covered by the voting


trust agreement shall be cancelled and new ones shall be issued in the name of
the trustee or trustees stating that they are issued pursuant to said agreement. In
the books of the corporation, it shall be noted that the transfer in the name of the
trustee or trustees is made pursuant to said voting trust agreement.
By its very nature, a voting trust agreement results in the separation of the voting
rights of a stockholder from his other rights such as the right to receive dividends,
the right to inspect the books of the corporation, the right to sell certain interests in
the assets of the corporation and other rights to which a stockholder may be
entitled until the liquidation of the corporation. However, in order to distinguish a
voting trust agreement from proxies and other voting pools and agreements, it
must pass three criteria or tests, namely: (1) that the voting rights of the stock are
separated from the other attributes of ownership; (2) that the voting rights granted
are intended to be irrevocable for a definite period of time; and (3) that the principal
purpose of the grant of voting rights is to acquire voting control of the corporation.
(5 Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p.
331 citingTankersly v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may
confer upon a trustee not only the stockholder's voting rights but also other rights
pertaining to his shares as long as the voting trust agreement is not entered "for
the purpose of circumventing the law against monopolies and illegal combinations
in restraint of trade or used for purposes of fraud." (section 59, 5th paragraph of
the Corporation Code) Thus, the traditional concept of a voting trust agreement
primarily intended to single out a stockholder's right to vote from his other rights as
such and made irrevocable for a limited duration may in practice become a legal
device whereby a transfer of the stockholder's shares is effected subject to the
specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy
between the equitable or beneficial ownership of the corporate shares of a
stockholders, on the one hand, and the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing
whereby one or more stockholders of a corporation consent to transfer his or their
shares to a trustee in order to vest in the latter voting or other rights pertaining to
said shares for a period not exceeding five years upon the fulfillment of statutory
conditions and such other terms and conditions specified in the agreement. The
five year-period may be extended in cases where the voting trust is executed
pursuant to a loan agreement whereby the period is made contingent upon full
payment of the loan.

In the instant case, the point of controversy arises from the effects of the creation
of the voting trust agreement. The petitioners maintain that with the execution of
the voting trust agreement between them and the other stockholders of ALFA, as
one party, and the DBP, as the other party, the former assigned and transferred
all their shares in ALFA to DBP, as trustee. They argue that by virtue to of the
voting trust agreement the petitioners can no longer be considered directors of
ALFA. In support of their contention, the petitioners invoke section 23 of the
Corporation Code which provides, in part, that:
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director which share shall stand in his name on the
books of the corporation. Any director who ceases to be the owner of at least one
(1) share of the capital stock of the corporation of which he is a director shall
thereby cease to be director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement
between ALFA and the DBP had all the more safeguarded the petitioners'
continuance as officers and directors of ALFA inasmuch as the general object of
voting trust is to insure permanency of the tenure of the directors of a corporation.
They cited the commentaries by Prof. Aguedo Agbayani on the right and status of
the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing stockholder", is
equitable owner for the stocks represented by the voting trust certificates and the
stock reversible on termination of the trust by surrender. It is said that the voting
trust agreement does not destroy the status of the transferring stockholders as
such, and thus render them ineligible as directors. But a more accurate statement
seems to be that for some purposes the depositing stockholder holding voting trust
certificates in lieu of his stock and being the beneficial owner thereof, remains and
is treated as a stockholder. It seems to be deducible from the case that he may
sue as a stockholder if the suit is in equity or is of an equitable nature, such as, a
technical stockholders' suit in right of the corporation. [Commercial Laws of the
Philippines by Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p.
291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the
most immediate effect of a voting trust agreement on the status of a stockholder
who is a party to its execution from legal titleholder or owner of the shares
subject of the voting trust agreement, he becomes the equitable or beneficial
owner. (Salonga,Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda

and Carlos, The Law on Private Corporations and Corporate Practice, 1969 ed.,
p. 175; Campos and Lopez-Campos, The Corporation Code; Comments, Notes &
Selected Cases, 1981, ed., p. 386; Agbayani, Commentaries and Jurisprudence
on the Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The
penultimate question, therefore, is whether the change in his status deprives the
stockholder of the right to qualify as a director under section 23 of the present
Corporation Code which deletes the phrase "in his own right." Section 30 of the
old Code states that:
Every director must own in his own right at least one share of the capital stock of
the stock corporation of which he is a director, which stock shall stand in his name
on the books of the corporation. A director who ceases to be the owner of at least
one share of the capital stock of a stock corporation of which is a director shall
thereby cease to be a director . . . (Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking,
cannot be adversely affected by the simple act of such director being a party to a
voting trust agreement inasmuch as he remains owner (although beneficial or
equitable only) of the shares subject of the voting trust agreement pursuant to
which a transfer of the stockholder's shares in favor of the trustee is required
(section 36 of the old Corporation Code). No disqualification arises by virtue of the
phrase "in his own right" provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other
persons who in fact are not beneficial owners of the shares registered in their
names on the books of the corporation becomes formally legalized (see Campos
and Lopez-Campos, supra, p. 296) Hence, this is a clear indication that in order to
be eligible as a director, what is material is the legal title to, not beneficial
ownership of, the stock as appearing on the books of the corporation (2
Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92
[1969] citingPeople v. Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting trust
agreement executed in 1981 disposed of all their shares through assignment and
delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to
own at least one share standing in their names on the books of ALFA as required
under Section 23 of the new Corporation Code. They also ceased to have anything
to do with the management of the enterprise. The petitioners ceased to be
directors. Hence, the transfer of the petitioners' shares to the DBP created
vacancies in their respective positions as directors of ALFA. The transfer of shares
from the stockholder of ALFA to the DBP is the essence of the subject voting trust
agreement as evident from the following stipulations:

1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of
the shares of the stocks owned by them respectively and shall do all things
necessary for the transfer of their respective shares to the TRUSTEE on the books
of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the
number of shares transferred, which shall be transferrable in the same manner and
with the same effect as certificates of stock subject to the provisions of this
agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA,
annual or special, upon any resolution, matter or business that may be submitted
to any such meeting, and shall possess in that respect the same powers as owners
of the equitable as well as the legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one share of stock
for the purpose of qualifying such person as director of ALFA, and cause a
certificate of stock evidencing the share so transferred to be issued in the name of
such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his shares to the
same trustees without the need of revising this agreement, and this agreement
shall have the same force and effect upon that said stockholder. (CA Rollo, pp.
137-138; Emphasis supplied)
Considering that the voting trust agreement between ALFA and the DBP
transferred legal ownership of the stock covered by the agreement to the DBP as
trustee, the latter became the stockholder of record with respect to the said shares
of stocks. In the absence of a showing that the DBP had caused to be transferred
in their names one share of stock for the purpose of qualifying as directors of ALFA,
the petitioners can no longer be deemed to have retained their status as officers
of ALFA which was the case before the execution of the subject voting trust
agreement. There appears to be no dispute from the records that DBP has taken
over full control and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through
one Elsa A. Guevarra, Vice-President of its Special Accounts Department II,
Remedial Management Group, the petitioners were no longer included in the list
of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim
that the subject voting trust agreement did not deprive the petitioners of their

position as directors of ALFA, the public respondent committed a reversible error


when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao) may have
ceased to be president and vice-president, respectively, of the corporation at the
time of service of summons on them on August 21, 1987, they were at least up to
that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the express terms of
Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA and the
DBP, were aware at the time of the execution of the agreement that by virtue of
the transfer of shares of ALFA to the DBP, all the directors of ALFA were stripped
of their positions as such.
There can be no reliance on the inference that the five-year period of the voting
trust agreement in question had lapsed in 1986 so that the legal title to the stocks
covered by the said voting trust agreement ipso facto reverted to the petitioners as
beneficial owners pursuant to the 6th paragraph of section 59 of the new
Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificate
as well as the certificates of stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of stock shall be reissued in the
name of the transferors.
On the contrary, it is manifestly clear from the terms of the voting trust agreement
between ALFA and the DBP that the duration of the agreement is contingent upon
the fulfillment of certain obligations of ALFA with the DBP. This is shown by the
following portions of the agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured
by a first mortgage on the manufacturing plant of said company;
WHEREAS, ALFA is also indebted to other creditors for various financial
accomodations and because of the burden of these obligations is encountering
very serious difficulties in continuing with its operations.
WHEREAS, in consideration of additional accommodations from the TRUSTEE,
ALFA had offered and the TRUSTEE has accepted participation in the
management and control of the company and to assure the aforesaid participation
by the TRUSTEE, the TRUSTORS have agreed to execute a voting trust covering
their shareholding in ALFA in favor of the TRUSTEE;

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is renewable for as
long as the obligations of ALFA with DBP, or any portion thereof, remains
outstanding; (CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP
would not have transferred all its rights, titles and interests in ALFA "effective June
30, 1986" to the national government through the Asset Privatization Trust (APT)
as attested to in a Certification dated January 24, 1989 of the Vice President of the
DBP's Special Accounts Department II. In the same certification, it is stated that
the DBP, from 1987 until 1989, had handled APT's account which included ALFA's
assets pursuant to a management agreement by and between the DBP and APT
(CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service
of summons on ALFA through the petitioners on August 21, 1987, the voting trust
agreement in question was not yet terminated so that the legal title to the stocks
of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was proper
service of summons on ALFA through the petitioners is readily answered in the
negative.
Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
Sec. 13. Service upon private domestic corporation or partnership. If the
defendant is a corporation organized under the laws of the Philippines or a
partnership duly registered, service may be made on the president, manager,
secretary, cashier, agent or any of its directors.
It is a basic principle in Corporation Law that a corporation has a personality
separate and distinct from the officers or members who compose it. (See Sulo ng
Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v. Department
of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990). Thus,
the above rule on service of processes of a corporation enumerates the
representatives of a corporation who can validly receive court processes on its
behalf. Not every stockholder or officer can bind the corporation considering the
existence of a corporate entity separate from those who compose it.
The rationale of the aforecited rule is that service must be made on a
representative so integrated with the corporation sued as to make it a

priori supposable that he will realize his responsibilities and know what he should
do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA
197 [1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81 SCRA 303
[1978]).
The petitioners in this case do not fall under any of the enumerated officers. The
service of summons upon ALFA, through the petitioners, therefore, is not valid. To
rule otherwise, as correctly argued by the petitioners, will contravene the general
principle that a corporation can only be bound by such acts which are within the
scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210
[1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The
appealed decision dated March 19, 1990 and the Court of Appeals' resolution of
May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October
17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are
REINSTATED.
SO ORDERED.
G.R. No. L-45911 April 11, 1979
JOHN
GOKONGWEI,
JR.,
petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE
M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN
MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R.
VISAYA,respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents
Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel
Corporation.
R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for
issuance of writ of preliminary injunction, arose out of two cases filed by petitioner
with the Securities and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel
Corporation, filed with the Securities and Exchange Commission (SEC) a petition
for "declaration of nullity of amended by-laws, cancellation of certificate of filing of
amended by- laws, injunction and damages with prayer for a preliminary injunction"
against the majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr.
vs. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio
Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel
Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so
on a resolution of the stockholders adopted on March 13, 1961, when the
outstanding capital stock of respondent corporation was only P70,139.740.00,
divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the outstanding and
paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It
was contended that according to section 22 of the Corporation Law and Article VIII
of the by-laws of the corporation, the power to amend, modify, repeal or adopt new
by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital
stock of the corporation, which 2/3 should have been computed on the basis of the
capitalization at the time of the amendment. Since the amendment was based on
the 1961 authorization, petitioner contended that the Board acted without authority
and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had
already been exercised in 1962 and 1963, after which the authority of the Board
ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of
Directors had changed since the authority was given in 1961, there being six (6)
new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being
a Substantial stockholder thereof; that as a stockholder, petitioner had acquired

rights inherent in stock ownership, such as the rights to vote and to be voted upon
in the election of directors; and that in amending the by-laws, respondents
purposely provided for petitioner's disqualification and deprived him of his vested
right as afore-mentioned hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent
power to disqualify a stockholder from being elected as a director and, therefore,
the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose
M. Soriano, while representing other corporations, entered into contracts
(specifically a management contract) with respondent corporation, which was
allowed because the questioned amendment gave the Board itself the prerogative
of determining whether they or other persons are engaged in competitive or
antagonistic business; that the portion of the amended bylaws which states that in
determining whether or not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship, is unreasonable
and oppressive and, therefore, void; and that the portion of the amended by-laws
which requires that "all nominations for election of directors ... shall be submitted
in writing to the Board of Directors at least five (5) working days before the date of
the Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and
the certificate of filing thereof be cancelled, and that individual respondents be
made to pay damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the
Securities and Exchange Commission an "Urgent Motion for Production and
Inspection of Documents", alleging that the Secretary of respondent corporation
refused to allow him to inspect its records despite request made by petitioner for
production of certain documents enumerated in the request, and that respondent
corporation had been attempting to suppress information from its stockholders
despite a negative reply by the SEC to its query regarding their authority to do so.
Among the documents requested to be copied were (a) minutes of the
stockholder's meeting field on March 13, 1961, (b) copy of the management
contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR);
(c) latest balance sheet of San Miguel International, Inc.; (d) authority of the
stockholders to invest the funds of respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries, allowances, bonuses, and other
compensation, if any, received by Andres M. Soriano, Jr. and/or its successor-ininterest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by
respondents, alleging, among others that the motion has no legal basis; that the

demand is not based on good faith; that the motion is premature since the
materiality or relevance of the evidence sought cannot be determined until the
issues are joined, that it fails to show good cause and constitutes continued
harrasment, and that some of the information sought are not part of the records of
the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel
Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer
to the petition, denying the substantial allegations therein and stating, by way of
affirmative defenses that "the action taken by the Board of Directors on September
18, 1976 resulting in the ... amendments is valid and legal because the power to
"amend, modify, repeal or adopt new By-laws" delegated to said Board on March
13, 1961 and long prior thereto has never been revoked of SMC"; that contrary to
petitioner's claim, "the vote requirement for a valid delegation of the power to
amend, repeal or adopt new by-laws is determined in relation to the total
subscribed capital stock at the time the delegation of said power is made, not when
the Board opts to exercise said delegated power"; that petitioner has not availed
of his intra-corporate remedy for the nullification of the amendment, which is to
secure its repeal by vote of the stockholders representing a majority of the
subscribed capital stock at any regular or special meeting, as provided in Article
VIII, section I of the by-laws and section 22 of the Corporation law, hence the,
petition is premature; that petitioner is estopped from questioning the amendments
on the ground of lack of authority of the Board. since he failed, to object to other
amendments made on the basis of the same 1961 authorization: that the power of
the corporation to amend its by-laws is broad, subject only to the condition that the
by-laws adopted should not be respondent corporation inconsistent with any
existing law; that respondent corporation should not be precluded from adopting
protective measures to minimize or eliminate situations where its directors might
be tempted to put their personal interests over t I hat of the corporation; that the
questioned amended by-laws is a matter of internal policy and the judgment of the
board should not be interfered with: That the by-laws, as amended, are valid and
binding and are intended to prevent the possibility of violation of criminal and civil
laws prohibiting combinations in restraint of trade; and that the petition states no
cause of action. It was, therefore, prayed that the petition be dismissed and that
petitioner be ordered to pay damages and attorney's fees to respondents. The
application for writ of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to
the petition, denying the material averments thereof and stating, as part of their
affirmative defenses, that in August 1972, the Universal Robina Corporation
(Robina), a corporation engaged in business competitive to that of respondent

corporation, began acquiring shares therein. until September 1976 when its total
holding amounted to 622,987 shares: that in October 1972, the Consolidated
Foods Corporation (CFC) likewise began acquiring shares in respondent
(corporation. until its total holdings amounted to P543,959.00 in September 1976;
that on January 12, 1976, petitioner, who is president and controlling shareholder
of Robina and CFC (both closed corporations) purchased 5,000 shares of stock of
respondent corporation, and thereafter, in behalf of himself, CFC and Robina,
"conducted malevolent and malicious publicity campaign against SMC" to
generate support from the stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the Board of Directors of
SMC", that in the stockholders' meeting of March 18, 1976, petitioner was rejected
by the stockholders in his bid to secure a seat in the Board of Directors on the
basic issue that petitioner was engaged in a competitive business and his securing
a seat would have subjected respondent corporation to grave disadvantages; that
"petitioner nevertheless vowed to secure a seat in the Board of Directors at the
next annual meeting; that thereafter the Board of Directors amended the by-laws
as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages,
expenses of litigation and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for
production and inspection of documents was filed by all the respondents. This was
duly opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr.
and Eduardo R. Visaya were allowed to intervene as oppositors and they
accordingly filed their oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the
motion for production and inspection of documents by issuing Order No. 26, Series
of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and
photographing, by or on behalf of the petitioner-movant, John Gokongwei, Jr., of
the minutes of the stockholders' meeting of the respondent San Miguel Corporation
held on March 13, 1961, which are in the possession, custody and control of the
said corporation, it appearing that the same is material and relevant to the issues
involved in the main case. Accordingly, the respondents should allow petitionermovant entry in the principal office of the respondent Corporation, San Miguel
Corporation on January 14, 1977, at 9:30 o'clock in the morning for purposes of

enforcing the rights herein granted; it being understood that the inspection, copying
and photographing of the said documents shall be undertaken under the direct and
strict supervision of this Commission. Provided, however, that other documents
and/or papers not heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of
salaries, allowances, bonuses, compensation and/or remuneration received by
respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel
International, Inc. and/or its successors-in- interest, the Petition to produce and
inspect the same is hereby DENIED, as petitioner-movant is not a stockholder of
San Miguel International, Inc. and has, therefore, no inherent right to inspect said
documents;
3. In view of the Manifestation of petitioner-movant dated November 29, 1976,
withdrawing his request to copy and inspect the management contract between
San Miguel Corporation and A. Soriano Corporation and the renewal and
amendments thereof for the reason that he had already obtained the same, the
Commission takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the matter of
production and inspection of the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation in San Miguel
International, Inc., until after the hearing on the merits of the principal issues in the
above-entitled case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard,
respondent corporation issued a notice of special stockholders' meeting for the
purpose of "ratification and confirmation of the amendment to the By-laws", setting
such meeting for February 10, 1977. This prompted petitioner to ask respondent
Commission for a summary judgment insofar as the first cause of action is
concerned, for the alleged reason that by calling a special stockholders' meeting
for the aforesaid purpose, private respondents admitted the invalidity of the
amendments of September 18, 1976. The motion for summary judgment was
opposed by private respondents. Pending action on the motion, petitioner filed an
"Urgent Motion for the Issuance of a Temporary Restraining Order", praying that
pending the determination of petitioner's application for the issuance of a
preliminary injunction and/or petitioner's motion for summary judgment, a
temporary restraining order be issued, restraining respondents from holding the

special stockholder's meeting as scheduled. This motion was duly opposed by


respondents.
On February 10, 1977, respondent Commission issued an order denying the
motion for issuance of temporary restraining order. After receipt of the order of
denial, respondents conducted the special stockholders' meeting wherein the
amendments to the by-laws were ratified. On February 14, 1977, petitioner filed a
consolidated motion for contempt and for nullification of the special stockholders'
meeting.
A motion for reconsideration of the order denying petitioner's motion for summary
judgment was filed by petitioner before respondent Commission on March 10,
1977. Petitioner alleges that up to the time of the filing of the instant petition, the
said motion had not yet been scheduled for hearing. Likewise, the motion for
reconsideration of the order granting in part and denying in part petitioner's motion
for production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation
had been scheduled for May 10, 1977, petitioner filed with respondent Commission
a Manifestation stating that he intended to run for the position of director of
respondent corporation. Thereafter, respondents filed a Manifestation with
respondent Commission, submitting a Resolution of the Board of Directors of
respondent corporation disqualifying and precluding petitioner from being a
candidate for director unless he could submit evidence on May 3, 1977 that he
does not come within the disqualifications specified in the amendment to the bylaws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a
manifestation and motion to resolve pending incidents in the case and to issue a
writ of injunction, alleging that private respondents were seeking to nullify and
render ineffectual the exercise of jurisdiction by the respondent Commission, to
petitioner's irreparable damage and prejudice, Allegedly despite a subsequent
Manifestation to prod respondent Commission to act, petitioner was not heard prior
to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the
part of the SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has
been investing corporate funds in other corporations and businesses outside of the
primary purpose clause of the corporation, in violation of section 17 1/2 of the
Corporation Law, he filed with respondent Commission, on January 20, 1977, a
petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M.

Soriano, as well as the respondent corporation declared guilty of such violation,


and ordered to account for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to
which a consolidated motion to strike and to declare individual respondents in
default and an opposition ad abundantiorem cautelam were filed by petitioner.
Despite the fact that said motions were filed as early as February 4, 1977, the
commission acted thereon only on April 25, 1977, when it denied respondents'
motion to dismiss and gave them two (2) days within which to file their answer, and
set the case for hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the
Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by the stockholders
at the meeting on March 20, 1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose for which the Corporation
has been organized, and ratification of the investments thereafter made pursuant
thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an
urgent motion for the issuance of a writ of preliminary injunction to restrain private
respondents from taking up Item 6 of the Agenda at the annual stockholders'
meeting, requesting that the same be set for hearing on May 3, 1977, the date set
for the second hearing of the case on the merits. Respondent Commission,
however, cancelled the dates of hearing originally scheduled and reset the same
to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For
the purpose of urging the Commission to act, petitioner filed an urgent
manifestation on May 3, 1977, but this notwithstanding, no action has been taken
up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before
this Court that respondent Commission gravely abused its discretion when it failed
to act with deliberate dispatch on the motions of petitioner seeking to prevent illegal
and/or arbitrary impositions or limitations upon his rights as stockholder of
respondent corporation, and that respondent are acting oppressively against
petitioner, in gross derogation of petitioner's rights to property and due process.
He prayed that this Court direct respondent SEC to act on collateral incidents
pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being
voted as director of respondent corporation and from submitting for ratification or

confirmation or from causing the ratification or confirmation of Item 6 of the Agenda


of the annual stockholders' meeting on May 10, 1977, or from Making effective the
amended by-laws of respondent corporation, until further orders from this Court or
until the Securities and Ex-change Commission acts on the matters complained of
in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a
restraining order had been issued by this Court, or on May 9, 1977, the respondent
Commission served upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's
motion for reconsideration, with its supplement, of the order of the Commission
denying in part petitioner's motion for production of documents, petitioner's motion
for reconsideration of the order denying the issuance of a temporary restraining
order denying the issuance of a temporary restraining order, and petitioner's
consolidated motion to declare respondents in contempt and to nullify the
stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run
as a director of respondent corporation but stating that he should not sit as such if
elected, until such time that the Commission has decided the validity of the bylaws
in dispute, and denying deferment of Item 6 of the Agenda for the annual
stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's
motion for reconsideration of the order of respondent Commission denying
petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent
Commission acted with indecent haste and without circumspection in issuing the
aforesaid orders to petitioner's irreparable damage and injury; (2) that it acted
without jurisdiction and in violation of petitioner's right to due process when it
decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioner's request
to have the same calendared for hearing , and (3) that the respondents acted
oppressively against the petitioner in violation of his rights as a stockholder,
warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be
declared null and void and that respondent Commission be ordered to allow
petitioner to undertake discovery proceedings relative to San Miguel International.
Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano
filed their comment, alleging that the petition is without merit for the following
reasons:
(1) that the petitioner the interest he represents are engaged in business
competitive and antagonistic to that of respondent San Miguel Corporation, it
appearing that the owns and controls a greater portion of his SMC stock thru the
Universal Robina Corporation and the Consolidated Foods Corporation, which
corporations are engaged in business directly and substantially competing with the
allied businesses of respondent SMC and of corporations in which SMC has
substantial investments. Further, when CFC and Robina had accumulated
investments. Further, when CFC and Robina had accumulated shares in SMC, the
Board of Directors of SMC realized the clear and present danger that competitors
or antagonistic parties may be elected directors and thereby have easy and direct
access to SMC's business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent
SMC from the clear and present danger that business competitors, if allowed to
become directors, will illegally and unfairly utilize their direct access to its business
secrets and plans for their own private gain to the irreparable prejudice of
respondent SMC, and, ultimately, its stockholders. Further, it is asserted that
membership of a competitor in the Board of Directors is a blatant disregard of no
less that the Constitution and pertinent laws against combinations in restraint of
trade;
(3) that by laws are valid and binding since a corporation has the inherent right and
duty to preserve and protect itself by excluding competitors and antogonistic
parties, under the law of self-preservation, and it should be allowed a wide latitude
in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and
1423 was due to petitioner's own acts or omissions, since he failed to have the
petition to suspend, pendente lite the amended by-laws calendared for hearing. It
was emphasized that it was only on April 29, 1977 that petitioner calendared the
aforesaid petition for suspension (preliminary injunction) for hearing on May 3,
1977. The instant petition being dated May 4, 1977, it is apparent that respondent
Commission was not given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot
and academic because respondent Commission has acted on the pending
incidents, complained of. It was, therefore, prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment,
alleging that the petition has become moot and academic for the reason, among
others that the acts of private respondent sought to be enjoined have reference to
the annual meeting of the stockholders of respondent San Miguel Corporation,
which was held on may 10, 1977; that in said meeting, in compliance with the order
of respondent Commission, petitioner was allowed to run and be voted for as
director; and that in the same meeting, Item 6 of the Agenda was discussed, voted
upon, ratified and confirmed. Further it was averred that the questions and issues
raised by petitioner are pending in the Securities and Exchange Commission which
has acquired jurisdiction over the case, and no hearing on the merits has been
had; hence the elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against
petitioner, warranting the intervention of this Court; (2) a derivative suit, such as
the instant case, is not rendered academic by the act of a majority of stockholders,
such that the discussion, ratification and confirmation of Item 6 of the Agenda of
the annual stockholders' meeting of May 10, 1977 did not render the case moot;
that the amendment to the bylaws which specifically bars petitioner from being a
director is void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment,
alleging that after receiving a copy of the restraining order issued by this Court and
noting that the restraining order did not foreclose action by it, the Commission en
banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No.
450 which denied deferment of Item 6 of the Agenda of the annual stockholders'
meeting of respondent corporation, took into consideration an urgent manifestation
filed with the Commission by petitioner on May 3, 1977 which prayed, among
others, that the discussion of Item 6 of the Agenda be deferred. The reason given
for denial of deferment was that "such action is within the authority of the
corporation as well as falling within the sphere of stockholders' right to know,
deliberate upon and/or to express their wishes regarding disposition of corporate
funds considering that their investments are the ones directly affected." It was
alleged that the main petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer
for preliminary injunction, alleging that the actuations of respondent SEC tended
to deprive him of his right to due process, and "that all possible questions on the
facts now pending before the respondent Commission are now before this

Honorable Court which has the authority and the competence to act on them as it
may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent
corporation, disqualifying a competitor from nomination or election to the Board of
Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel International,
Inc., a fully owned subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May
10, 1977, and the ratification of the investment in a foreign corporation of the
corporate funds, allegedly in violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question which public
interest requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the case to
respondent SEC for an appropriate ruling on the intrinsic validity of the amended
by-laws in compliance with the principle of exhaustion of administrative remedies",
considering that: first: "whether or not the provisions of the amended by-laws are
intrinsically valid ... is purely a legal question. There is no factual dispute as to what
the provisions are and evidence is not necessary to determine whether such
amended by-laws are valid as framed and approved ... "; second: "it is for the
interest and guidance of the public that an immediate and final ruling on the
question be made ... "; third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice against petitioner ... ",
and "Commissioner Sulit ... approved the amended by-laws ex-parte and obviously
found the same intrinsically valid; and finally: "to remand the case to SEC would
only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this
Court resolve the legal issues raised by the parties in keeping with the "cherished
rules of procedure" that "a court should always strive to settle the entire
controversy in a single proceeding leaving no root or branch to bear the seeds of
future ligiation", citingGayong v. Gayos. 3 To the same effect is the prayer of San
Miguel Corporation that this Court resolve on the merits the validity of its amended
by laws and the rights and obligations of the parties thereunder, otherwise "the

time spent and effort exerted by the parties concerned and, more importantly, by
this Honorable Court, would have been for naught because the main question will
come back to this Honorable Court for final resolution." Respondent Eduardo R.
Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to
the SEC for hearing and decision of the issues involved, invoking the latter's
primary jurisdiction to hear and decide case involving intra-corporate
controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to
settle the entire controversy in a single proceeding, leaving nor root or branch to
bear the seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this
Court resolved to decide the case on the merits instead of remanding it to the trial
court for further proceedings since the ends of justice would not be subserved by
the remand of the case. In Republic v. Security Credit and Acceptance
Corporation, et al., 6 this Court, finding that the main issue is one of law, resolved
to decide the case on the merits "because public interest demands an early
disposition of the case", and in Republic v. Central Surety and Insurance
Company, 7 this Court denied remand of the third-party complaint to the trial court
for further proceedings, citing precedent where this Court, in similar situations
resolved to decide the cases on the merits, instead of remanding them to the trial
court where (a) the ends of justice would not be subserved by the remand of the
case; or (b) where public interest demand an early disposition of the case; or (c)
where the trial court had already received all the evidence presented by both
parties and the Supreme Court is now in a position, based upon said evidence, to
decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction
has no application where only a question of law is involved. 8a Because uniformity
may be secured through review by a single Supreme Court, questions of law may
appropriately be determined in the first instance by courts. 8b In the case at bar,
there are facts which cannot be denied, viz.: that the amended by-laws were
adopted by the Board of Directors of the San Miguel Corporation in the exercise of
the power delegated by the stockholders ostensibly pursuant to section 22 of the
Corporation Law; that in a special meeting on February 10, 1977 held specially for
that purpose, the amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the Hongkong Brewery and
Distellery, a beer manufacturing company in Hongkong, was made by the San
Miguel Corporation in 1948; and that in the stockholders' annual meeting held in
1972 and 1977, all foreign investments and operations of San Miguel Corporation
were ratified by the stockholders.

II
Whether or not the amended by-laws of SMC of disqualifying a competitor from
nomination or election to the Board of Directors of SMC are valid and reasonable

The validity or reasonableness of a by-law of a corporation in purely a question of


law. 9 Whether the by-law is in conflict with the law of the land, or with the charter
of the corporation, or is in a legal sense unreasonable and therefore unlawful is a
question of law. 10 This rule is subject, however, to the limitation that where the
reasonableness of a by-law is a mere matter of judgment, and one upon which
reasonable minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are authorized to
make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because
they were tailored to suppress the minority and prevent them from having
representation in the Board", at the same time depriving petitioner of his "vested
right" to be voted for and to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and
San Miguel Corporation content that ex. conclusion of a competitor from the Board
is legitimate corporate purpose, considering that being a competitor, petitioner
cannot devote an unselfish and undivided Loyalty to the corporation; that it is
essentially a preventive measure to assure stockholders of San Miguel
Corporation of reasonable protective from the unrestrained self-interest of those
charged with the promotion of the corporate enterprise; that access to confidential
information by a competitor may result either in the promotion of the interest of the
competitor at the expense of the San Miguel Corporation, or the promotion of both
the interests of petitioner and respondent San Miguel Corporation, which may,
therefore, result in a combination or agreement in violation of Article 186 of the
Revised Penal Code by destroying free competition to the detriment of the
consuming public. It is further argued that there is not vested right of any
stockholder under Philippine Law to be voted as director of a corporation. It is
alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two
corporations owned or controlled by him, control over the following shareholdings
in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325 shares; (b)
Universal Robina Corporation 738,647 shares; (c) CFC Corporation 658,313
shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San
Miguel Corporation, as of the present date, is represented by 33,139,749 shares
with a par value of P10.00, the total shares owned or controlled by petitioner
represents 4.2344% of the total outstanding capital stock of San Miguel

Corporation. It is also contended that petitioner is the president and substantial


stockholder of Universal Robina Corporation and CFC Corporation, both of which
are allegedly controlled by petitioner and members of his family. It is also claimed
that both the Universal Robina Corporation and the CFC Corporation are engaged
in businesses directly and substantially competing with the alleged businesses of
San Miguel Corporation, and of corporations in which SMC has substantial
investments.
ALLEGED
AREAS
OF
COMPETITION
BETWEEN
CORPORATIONS AND SAN MIGUEL CORPORATION

PETITIONER'S

According to respondent San Miguel Corporation, the areas of, competition are
enumerated in its Board the areas of competition are enumerated in its Board
Resolution dated April 28, 1978, thus:
Product
Line
1977 SMC Robina-CFC

Estimated

Market

Share

Total

Table
Eggs
0.6%
10.0%
Layer
Pullets
33.0%
24.0%
Dressed
Chicken
35.0%
14.0%
Poultry
&
Hog
Feeds
40.0%
12.0%
Ice
Cream
70.0%
13.0%
Instant
Coffee
45.0%
40.0%
Woven Fabrics 17.5% 9.1% 26.6%

10.6%
57.0%
49.0%
52.0%
83.0%
85.0%

Thus, according to respondent SMC, in 1976, the areas of competition affecting


SMC involved product sales of over P400 million or more than 20% of the P2 billion
total product sales of SMC. Significantly, the combined market shares of SMC and
CFC-Robina in layer pullets dressed chicken, poultry and hog feeds ice cream,
instant coffee and woven fabrics would result in a position of such dominance as
to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition
on product lines which, for SMC, represented sales amounting to more than ?478
million. In addition, CFC-Robina was directly competing in the sale of coffee with
Filipro, a subsidiary of SMC, which product line represented sales for SMC
amounting to more than P275 million. The CFC-Robina group (Robitex, excluding
Litton Mills recently acquired by petitioner) is purportedly also in direct competition
with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more
than P95 million. The areas of competition between SMC and CFC-Robina in 1977
represented, therefore, for SMC, product sales of more than P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March


18, 1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in
SMC, or more than 90% of the total outstanding shares of SMC, rejected
petitioner's candidacy for the Board of Directors because they "realized the grave
dangers to the corporation in the event a competitor gets a board seat in SMC."
On September 18, 1978, the Board of Directors of SMC, by "virtue of powers
delegated to it by the stockholders," approved the amendment to ' he by-laws in
question. At the meeting of February 10, 1977, these amendments were confirmed
and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80%
of the total outstanding shares. Only 12 shareholders, representing 7,005 shares,
opposed the confirmation and ratification. At the Annual Stockholders' Meeting of
May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90%
of the outstanding shares, rejected petitioner's candidacy, while 946 stockholders,
representing 1,648,801 shares voted for him. On the May 9, 1978 Annual
Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares,
or more than 90% of the total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF
DIRECTORS EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by
the Board of Directors of San Miguel Corporation a-, a measure of self-defense to
protect the corporation from the clear and present danger that the election of a
business competitor to the Board may cause upon the corporation and the other
stockholders inseparable prejudice. Submitted for resolution, therefore, is the
issue whether or not respondent San Miguel Corporation could, as a measure
of self- protection, disqualify a competitor from nomination and election to its Board
of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to
adopt by-laws 'for its internal government, and to regulate the conduct and
prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. 12 At common law, the
rule was "that the power to make and adopt by-laws was inherent in every
corporation as one of its necessary and inseparable legal incidents. And it is settled
throughout the United States that in the absence of positive legislative provisions
limiting it, every private corporation has this inherent power as one of its necessary
and inseparable legal incidents, independent of any specific enabling provision in
its charter or in general law, such power of self-government being essential to
enable the corporation to accomplish the purposes of its creation. 13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may


prescribe in its by-laws "the qualifications, duties and compensation of directors,
officers and employees ... " This must necessarily refer to a qualification in addition
to that specified by section 30 of the Corporation Law, which provides that "every
director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director ... " InGovernment v. El Hogar, 14 the Court
sustained the validity of a provision in the corporate by-law requiring that persons
elected to the Board of Directors must be holders of shares of the paid up value of
P5,000.00, which shall be held as security for their action, on the ground that
section 21 of the Corporation Law expressly gives the power to the corporation to
provide in its by-laws for the qualifications of directors and is "highly prudent and
in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its
affairs are dominated by a majorityof the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters within the limits of
the act of incorporation and lawfully enacted by-laws and not forbidden by
law." 15 To this extent, therefore, the stockholder may be considered to have
"parted with his personal right or privilege to regulate the disposition of his property
which he has invested in the capital stock of the corporation, and surrendered it to
the will of the majority of his fellow incorporators. ... It cannot therefore be justly
said that the contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is authorized by a
majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its
articles of incorporation by a vote or written assent of the stockholders representing
at least two-thirds of the subscribed capital stock of the corporation If the
amendment changes, diminishes or restricts the rights of the existing shareholders
then the disenting minority has only one right, viz.: "to object thereto in writing and
demand payment for his share." Under section 22 of the same law, the owners of
the majority of the subscribed capital stock may amend or repeal any by-law or
adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right
to be elected director, in the face of the fact that the law at the time such right as
stockholder was acquired contained the prescription that the corporate charter and
the by-law shall be subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications
of its directors, the next question that must be considered is whether the

disqualification of a competitor from being elected to the Board of Directors is a


reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION
AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a
fiduciary insofar as the corporation and the stockholders as a body are concerned.
As agents entrusted with the management of the corporation for the collective
benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust." 18 "The ordinary trust relationship of directors of a
corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter
of statutory or technical law. It springs from the fact that directors have the control
and guidance of corporate affairs and property and hence of the property interests
of the stockholders. Equity recognizes that stockholders are the proprietors of the
corporate interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of
fiduciary obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such
fiduciary position cannot serve himself first and his cestuis second. ... He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters ... He cannot utilize his
inside information and strategic position for his own preferment. He cannot violate
rules of fair play by doing indirectly through the corporation what he could not do
so directly. He cannot violate rules of fair play by doing indirectly though the
corporation what he could not do so directly. He cannot use his power for his
personal advantage and to the detriment of the stockholders and creditors no
matter how absolute in terms that power may be and no matter how meticulous he
is to satisfy technical requirements. For that power is at all times subject to the
equitable limitation that it may not be exercised for the aggrandizement, preference
or advantage of the fiduciary to the exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without detriment to one
of them. A judge cannot be impartial if personally interested in the cause. No more
can a director. Human nature is too weak -for this. Take whatever statute provision
you please giving power to stockholders to choose directors, and in none will you
find any express prohibition against a discretion to select directors having the

company's interest at heart, and it would simply be going far to deny by mere
implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a
competing company from being a director, the same reasoning would apply to
disqualify the wife and immediate member of the family of such stockholder, on
account of the supposed interest of the wife in her husband's affairs, and his
suppose influence over her. It is perhaps true that such stockholders ought not to
be condemned as selfish and dangerous to the best interest of the corporation until
tried and tested. So it is also true that we cannot condemn as selfish and
dangerous and unreasonable the action of the board in passing the by-law. The
strife over the matter of control in this corporation as in many others is perhaps
carried on not altogether in the spirit of brotherly love and affection. The only test
that we can apply is as to whether or not the action of the Board is authorized and
sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR
IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF
THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a
rival company to be ineligible for the corporation's Board of Directors. ... (A)n
amendment which renders ineligible, or if elected, subjects to removal, a director
if he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24This is based upon the principle
that where the director is so employed in the service of a rival company, he cannot
serve both, but must betray one or the other. Such an amendment "advances the
benefit of the corporation and is good." An exception exists in New Jersey, where
the Supreme Court held that the Corporation Law in New Jersey prescribed the
only qualification, and therefore the corporation was not empowered to add
additional qualifications. 25 This is the exact opposite of the situation in the
Philippines because as stated heretofore, section 21 of the Corporation Law
expressly provides that a corporation may make by-laws for the qualifications of
directors. Thus, it has been held that an officer of a corporation cannot engage in
a business in direct competition with that of the corporation where he is a director
by utilizing information he has received as such officer, under "the established law
that a director or officer of a corporation may not enter into a competing enterprise

which cripples or injures the business of the corporation of which he is an officer


or director. 26
It is also well established that corporate officers "are not permitted to use their
position of trust and confidence to further their private interests." 27 In a case
where directors of a corporation cancelled a contract of the corporation for
exclusive sale of a foreign firm's products, and after establishing a rival business,
the directors entered into a new contract themselves with the foreign firm for
exclusive sale of its products, the court held that equity would regard the new
contract as an offshoot of the old contract and, therefore, for the benefit of the
corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to
the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary was acting for
two entities with competing interests. This doctrine rests fundamentally on the
unfairness, in particular circumstances, of an officer or director taking advantage
of an opportunity for his own personal profit when the interest of the corporation
justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such as:
(a) marketing strategies and pricing structure; (b) budget for expansion and
diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of
San Miguel Corporation, who is also the officer or owner of a competing
corporation, from taking advantage of the information which he acquires as director
to promote his individual or corporate interests to the prejudice of San Miguel
Corporation and its stockholders, that the questioned amendment of the by-laws
was made. Certainly, where two corporations are competitive in a substantial
sense, it would seem improbable, if not impossible, for the director, if he were to
discharge effectively his duty, to satisfy his loyalty to both corporations and place
the performance of his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court
sustained as valid and reasonable an amendment to the by-laws of a bank,
requiring that its directors should not be directors, officers, employees, agents,
nominees or attorneys of any other banking corporation, affiliate or subsidiary
thereof. Chief Judge Parker, inMcKee, explained the reasons of the court, thus:

... A bank director has access to a great deal of information concerning the
business and plans of a bank which would likely be injurious to the bank if known
to another bank, and it was reasonable and prudent to enlarge this minimum
disqualification to include any director, officer, employee, agent, nominee, or
attorney of any other bank in California. The Ashkins case, supra, specifically
recognizes protection against rivals and others who might acquire information
which might be used against the interests of the corporation as a legitimate object
of by-law protection. With respect to attorneys or persons associated with a firm
which is attorney for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent leakage of confidential
information through casual office discussions or accessibility of files. Defendant's
directors determined that its welfare was best protected if this opportunity for
conflicting loyalties and potential misuse and leakage of confidential information
was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as
follows:
(1) A director shall not be directly or indirectly interested as a stockholder in any
other firm, company, or association which competes with the subject corporation.
(2) A director shall not be the immediate member of the family of any stockholder
in any other firm, company, or association which competes with the subject
corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in any
other firm, company, or association which compete with the subject corporation.
(4) A director shall be of good moral character as an essential qualification to
holding office.
(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a
person cannot serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent
himself from meetings at which confidential matters would be discussed, would not
detract from the validity and reasonableness of the by-laws here involved. Apart
from the impractical results that would ensue from such arrangement, it would be
inconsistent with petitioner's primary motive in running for board membership
which is to protect his investments in San Miguel Corporation. More important,

such a proposed norm of conduct would be against all accepted principles


underlying a director's duty of fidelity to the corporation, for the policy of the law is
to encourage and enforce responsible corporate management. As explained by
Oleck: 31 "The law win not tolerate the passive attitude of directors ... without
active and conscientious participation in the managerial functions of the company.
As directors, it is their duty to control and supervise the day to day business
activities of the company or to promulgate definite policies and rules of guidance
with a vigilant eye toward seeing to it that these policies are carried out. It is only
then that directors may be said to have fulfilled their duty of fealty to the
corporation."
Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require that he
disclose this information to a competitive arrival. These dangers are enhanced
considerably where the common director such as the petitioner is a controlling
stockholder of two of the competing corporations. It would seem manifest that in
such situations, the director has an economic incentive to appropriate for the
benefit of his own corporation the corporate plans and policies of the corporation
where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing
strategies and pricing policies of San Miguel Corporation would subject the latter
to a competitive disadvantage and unjustly enrich the competitor, for advance
knowledge by the competitor of the strategies for the development of existing or
new markets of existing or new products could enable said competitor to utilize
such knowledge to his advantage. 32
There is another important consideration in determining whether or not the
amended by-laws are reasonable. The Constitution and the law prohibit
combinations in restraint of trade or unfair competition. Thus, section 2 of Article
XIV of the Constitution provides: "The State shall regulate or prohibit private
monopolies when the public interest so requires. No combinations in restraint of
trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. The penalty of
prision correccional in its minimum period or a fine ranging from two hundred to six
thousand pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take part in
any conspiracy or combination in the form of a trust or otherwise, in restraint of
trade or commerce or to prevent by artificial means free competition in the market.

2. Any person who shag monopolize any merchandise or object of trade or


commerce, or shall combine with any other person or persons to monopolize said
merchandise or object in order to alter the price thereof by spreading false rumors
or making use of any other artifice to restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any
merchandise or object of commerce or an importer of any merchandise or object
of commerce from any foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with any person likewise
engaged in the manufacture, production, processing, assembling or importation of
such merchandise or object of commerce or with any other persons not so similarly
engaged for the purpose of making transactions prejudicial to lawful commerce, or
of increasing the market price in any part of the Philippines, or any such
merchandise or object of commerce manufactured, produced, processed,
assembled in or imported into the Philippines, or of any article in the manufacture
of which such manufactured, produced, processed, or imported merchandise or
object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in
restraint of trade are aimed at raising levels of competition by improving the
consumers' effectiveness as the final arbiter in free markets. These laws are
designed to preserve free and unfettered competition as the rule of trade. "It rests
on the premise that the unrestrained interaction of competitive forces will yield the
best allocation of our economic resources, the lowest prices and the highest quality
... ." 34 they operate to forestall concentration of economic power. 35 The law
against monopolies and combinations in restraint of trade is aimed at contracts
and combinations that, by reason of the inherent nature of the contemplated acts,
prejudice the public interest by unduly restraining competition or unduly obstructing
the course of trade.36
The terms "monopoly", "combination in restraint of trade" and "unfair competition"
appear to have a well defined meaning in other jurisdictions. A "monopoly"
embraces any combination the tendency of which is to prevent competition in the
broad and general sense, or to control prices to the detriment of the public. 37 In
short, it is the concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised and
competition actually excluded, but that power exists to raise prices or exclude
competition when desired. 38 Further, it must be considered that the Idea of
monopoly is now understood to include a condition produced by the mere act of

individuals. Its dominant thought is the notion of exclusiveness or unity, or the


suppression of competition by the qualification of interest or management, or it
may be thru agreement and concert of action. It is, in brief, unified tactics with
regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are
not in accord with reality. The election of petitioner to the Board of respondent
Corporation can bring about an illegal situation. This is because an express
agreement is not necessary for the existence of a combination or conspiracy in
restraint of trade. 40 It is enough that a concert of action is contemplated and that
the defendants conformed to the arrangements, 41 and what is to be considered
is what the parties actually did and not the words they used. For instance, the
Clayton Act prohibits a person from serving at the same time as a director in any
two or more corporations, if such corporations are, by virtue of their business and
location of operation, competitors so that the elimination of competition between
them would constitute violation of any provision of the anti-trust laws. 42 There is
here a statutory recognition of the anti-competitive dangers which may arise when
an individual simultaneously acts as a director of two or more competing
corporations. A common director of two or more competing corporations would
have access to confidential sales, pricing and marketing information and would be
in a position to coordinate policies or to aid one corporation at the expense of
another, thereby stifling competition. This situation has been aptly explained by
Travers, thus:
The argument for prohibiting competing corporations from sharing even one
director is that the interlock permits the coordination of policies between nominally
independent firms to an extent that competition between them may be completely
eliminated. Indeed, if a director, for example, is to be faithful to both corporations,
some accommodation must result. Suppose X is a director of both Corporation A
and Corporation B. X could hardly vote for a policy by A that would injure B without
violating his duty of loyalty to B at the same time he could hardly abstain from
voting without depriving A of his best judgment. If the firms really do compete in
the sense of vying for economic advantage at the expense of the other there
can hardly be any reason for an interlock between competitors other than the
suppression of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress
on section 9 of the Clayton Act, it was established that: "By means of the
interlocking directorates one man or group of men have been able to dominate and
control a great number of corporations ... to the detriment of the small ones
dependent upon them and to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead
to control of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of
the products of San Miguel Corporation, the essence of competition in a free
market for the purpose of serving the lowest priced goods to the consuming public
would be frustrated, The competitor could so manipulate the prices of his products
or vary its marketing strategies by region or by brand in order to get the most out
of the consumers. Where the two competing firms control a substantial segment
of the market this could lead to collusion and combination in restraint of trade.
Reason and experience point to the inevitable conclusion that the inherent
tendency of interlocking directorates between companies that are related to each
other as competitors is to blunt the edge of rivalry between the corporations, to
seek out ways of compromising opposing interests, and thus eliminate competition.
As respondent SMC aptly observes, knowledge by CFC-Robina of SMC's costs in
various industries and regions in the country win enable the former to practice price
discrimination. CFC-Robina can segment the entire consuming population by
geographical areas or income groups and change varying prices in order to
maximize profits from every market segment. CFC-Robina could determine the
most profitable volume at which it could produce for every product line in which it
competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect
destroy free competition and deprive the consuming public of opportunity to buy
goods of the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a
violation of the prohibition contained in section 13(5) of the Corporation Law. Said
section provides in part that "any stockholder of more than one corporation
organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or
attempting to bring about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent
the candidacy of petitioner for election to the Board. If the by-law were to be applied
in the case of one stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a discriminatory manner.
However, the by law, by its terms, applies to all stockholders. The equal protection
clause of the Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible to run for
director, there must be hearing and evidence must be submitted to bring his case

within the ambit of the disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which disqualifies a
competition from election to the Board of Directors of another corporation is valid
and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may
be accorded to the corporation in adopting measures to protect legitimate
corporation interests. Thus, "where the reasonableness of a by-law is a mere
matter of judgment, and upon which reasonable minds must necessarily differ, a
court would not be warranted in substituting its judgment instead of the judgment
of those who are authorized to make by-laws and who have expressed their
authority. 45
Although it is asserted that the amended by-laws confer on the present Board
powers to perpetua themselves in power such fears appear to be misplaced. This
power, but is very nature, is subject to certain well established limitations. One of
these is inherent in the very convert and definition of the terms "competition" and
"competitor". "Competition" implies a struggle for advantage between two or more
forces, each possessing, in substantially similar if not Identical degree, certain
characteristics essential to the business sought. It means an independent
endeavor of two or more persons to obtain the business patronage of a third by
offering more advantageous terms as an inducement to secure trade. 46 The test
must be whether the business does in fact compete, not whether it is capable of
an indirect and highly unsubstantial duplication of an isolated or noncharacteristics activity. 47 It is, therefore, obvious that not every person or entity
engaged in business of the same kind is a competitor. Such factors as quantum
and place of business, Identity of products and area of competition should be taken
into consideration. It is, therefore, necessary to show that petitioner's business
covers a substantial portion of the same markets for similar products to the extent
of not less than 10% of respondent corporation's market for competing products.
While We here sustain the validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso facto disqualified. Consonant with
the requirement of due process, there must be due hearing at which the petitioner
must be given the fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the stockholders, it is the
responsibility of directors to act with fairness to the stockholders. 48 Pursuant to
this obligation and to remove any suspicion that this power may be utilized by the
incumbent members of the Board to perpetuate themselves in power, any decision
of the Board to disqualify a candidate for the Board of Directors should be reviewed
by the Securities behind Exchange Commission en banc and its decision shall be
final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle

that where the action of a Board of Directors is an abuse of discretion, or forbidden


by statute, or is against public policy, or is ultra vires, or is a fraud upon minority
stockholders or creditors, or will result in waste, dissipation or misapplication of the
corporation assets, a court of equity has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel International
Inc., a fully owned subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's
claim that he was denied inspection rights as stockholder of SMC "was made in
the teeth of undisputed facts that, over a specific period, petitioner had been
furnished numerous documents and information," to wit: (1) a complete list of
stockholders and their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a
copy of the minutes of the stockholders' meeting of March 18,1976; (4) a
breakdown of SMC's P186.6 million investment in associated companies and other
companies as of December 31, 1975; (5) a listing of the salaries, allowances,
bonuses and other compensation or remunerations received by the directors and
corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan
Agreement of SMC; and (7) copies of the minutes of all meetings of the Board of
Directors from January 1975 to May 1976, with deletions of sensitive data, which
deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on
September 18, 1976; (1) that SMC's foreign investments are handled by San
Miguel International, Inc., incorporated in Bermuda and wholly owned by SMC; this
was SMC's first venture abroad, having started in 1948 with an initial outlay of
?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank
under the personal guaranty of SMC's former President, the late Col. Andres
Soriano; (2) that as of December 31, 1975, the estimated value of SMI would
amount to almost P400 million (3) that the total cash dividends received by SMC
from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975,
SMI did not declare cash or stock dividends, all earnings having been used in line
with a program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary,
enclosing photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he
record of all business transactions of the corporation and minutes of any meeting

shall be open to the inspection of any director, member or stockholder of the


corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It is,
therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial ownership,
or a ownership. 52 This right is predicated upon the necessity of self-protection. It
is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by him with
respect to his interest as a stockholder and for some purpose germane thereto or
in the interest of the corporation. 53 In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has to be proper and
lawful in character and not inimical to the interest of the corporation. 54 In Grey v.
Insular Lumber, 55 this Court held that "the right to examine the books of the
corporation must be exercised in good faith, for specific and honest purpose, and
not to gratify curiosity, or for specific and honest purpose, and not to gratify
curiosity, or for speculative or vexatious purposes. The weight of judicial opinion
appears to be, that on application for mandamus to enforce the right, it is proper
for the court to inquire into and consider the stockholder's good faith and his
purpose and motives in seeking inspection. 56 Thus, it was held that "the right
given by statute is not absolute and may be refused when the information is not
sought in good faith or is used to the detriment of the corporation." 57 But the
"impropriety of purpose such as will defeat enforcement must be set up the
corporation defensively if the Court is to take cognizance of it as a qualification. In
other words, the specific provisions take from the stockholder the burden of
showing propriety of purpose and place upon the corporation the burden of
showing impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the
corporation and the manner of expenditure of its funds, and to inspection to obtain
such information, especially where it appears that the company is being
mismanaged or that it is being managed for the personal benefit of officers or
directors or certain of the stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation
for a lawful purpose is a matter of law, the right of such stockholder to examine the
books and records of a wholly-owned subsidiary of the corporation in which he is
a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do
not. Thus, it has been held that where a corporation owns approximately no

property except the shares of stock of subsidiary corporations which are merely
agents or instrumentalities of the holding company, the legal fiction of distinct
corporate entities may be disregarded and the books, papers and documents of
all the corporations may be required to be produced for examination, 60 and that
a writ of mandamus, may be granted, as the records of the subsidiary were, to all
incontents and purposes, the records of the parent even though subsidiary was
not named as a party. 61 mandamus was likewise held proper to inspect both the
subsidiary's and the parent corporation's books upon proof of sufficient control or
dominion by the parent showing the relation of principal or agent or something
similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the
subsidiary corporation is a separate and distinct corporation domiciled and with its
books and records in another jurisdiction, and is not legally subject to the control
of the parent company, although it owned a vast majority of the stock of the
subsidiary. 63Likewise, inspection of the books of an allied corporation by
stockholder of the parent company which owns all the stock of the subsidiary has
been refused on the ground that the stockholder was not within the class of
"persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual
right of former stockholders to inspect books and records of the corporation
included the right to inspect corporation's subsidiaries' books and records which
were in corporation's possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect
the records of a controlled subsidiary corporation which used the same offices and
had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before
respondent SEC, petitioner contended that respondent corporation "had been
attempting to suppress information for the stockholders" and that petitioner, "as
stockholder of respondent corporation, is entitled to copies of some documents
which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused
thereby to the corporation." 67 There is no question that stockholders are entitled
to inspect the books and records of a corporation in order to investigate the conduct
of the management, determine the financial condition of the corporation, and
generally take an account of the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would be

more in accord with equity, good faith and fair dealing to construe the statutory
right of petitioner as stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly subsidiary which are
in respondent corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the
stockholders of respondent corporation to ratify the investment of corporate funds
in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent
corporation invested corporate funds in SMI without prior authority of the
stockholders, thus violating section 17-1/2 of the Corporation Law, and alleges that
respondent SEC should have investigated the charge, being a statutory offense,
instead of allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the
stockholders for ratification is a sound corporate practice and should not be
thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in
any other corporation or business or for any purpose other than the main purpose
for which it was organized" provided that its Board of Directors has been so
authorized by the affirmative vote of stockholders holding shares entitling them to
exercise at least two-thirds of the voting power. If the investment is made in
pursuance of the corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely for investment
and not to accomplish the purpose of its incorporation that the vote of approval of
the stockholders holding shares entitling them to exercise at least two-thirds of the
voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities
by SMC was an investment in the same business stated as its main purpose in its
Articles of Incorporation, which is to manufacture and market beer. It appears that
the original investment was made in 1947-1948, when SMC, then San Miguel
Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru the organization of
SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co.,
Inc., supra, appears relevant. In said case, one of the issues was the legality of an

investment made by Manao Sugar Central Co., Inc., without prior resolution
approved by the affirmative vote of 2/3 of the stockholders' voting power, in the
Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of
sugar bags. The lower court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is important to the investing
corporation and would aid it in its purpose, to require authority of the stockholders
would be to unduly curtail the power of the Board of Directors." This Court affirmed
the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara,
said:
"j. Power to acquire or dispose of shares or securities. A private corporation, in
order to accomplish is purpose as stated in its articles of incorporation, and subject
to the limitations imposed by the Corporation Law, has the power to acquire, hold,
mortgage, pledge or dispose of shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the approval of stockholders;
but when the purchase of shares of another corporation is done solely for
investment and not to accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case, the purchase of such
shares or securities must be subject to the limitations established by the
Corporations law; namely, (a) that no agricultural or mining corporation shall be
restricted to own not more than 15% of the voting stock of nay agricultural or mining
corporation; and (c) that such holdings shall be solely for investment and not for
the purpose of bringing about a monopoly in any line of commerce of combination
in restraint of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967
Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has the power to
invest its corporate funds "in any other corporation or business, or for any purpose
other than the main purpose for which it was organized, provide that 'its board of
directors has been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a propose at a stockholders' meeting called
for that purpose,' and provided further, that no agricultural or mining corporation
shall in anywise be interested in any other agricultural or mining corporation. When
the investment is necessary to accomplish its purpose or purposes as stated in its
articles of incorporation the approval of the stockholders is not necessary."" (Id.,
p. 108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make
the assailed investment, there is no question that a corporation, like an individual,

may ratify and thereby render binding upon it the originally unauthorized acts of its
officers or other agents. 70 This is true because the questioned investment is
neither contrary to law, morals, public order or public policy. It is a corporate
transaction or contract which is within the corporate powers, but which is defective
from a supported failure to observe in its execution the. requirement of the law that
the investment must be authorized by the affirmative vote of the stockholders
holding two-thirds of the voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the requirement was enacted
may, therefore, ratify the investment and its ratification by said stockholders
obliterates any defect which it may have had at the outset. "Mere ultra vires acts",
said this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but
are not merely within the scope of the articles of incorporation, are merely voidable
and may become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and
marketing facilities which is apparently relevant to the corporate purpose. The
mere fact that respondent corporation submitted the assailed investment to the
stockholders for ratification at the annual meeting of May 10, 1977 cannot be
construed as an admission that respondent corporation had committed an ultra
vires act, considering the common practice of corporations of periodically
submitting for the gratification of their stockholders the acts of their directors,
officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner
be allowed to examine the books and records of San Miguel International, Inc., as
specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio,
Santos, Abad Santos and De Castro, voted to sustain the validity per se of the
amended by-laws in question and to dismiss the petition without prejudice to the
question of the actual disqualification of petitioner John Gokongwei, Jr. to run and
if elected to sit as director of respondent San Miguel Corporation being decided,
after a new and proper hearing by the Board of Directors of said corporation, whose
decision shall be appealable to the respondent Securities and Exchange
Commission deliberating and acting en banc and ultimately to this Court. Unless
disqualified in the manner herein provided, the prohibition in the afore-mentioned
amended by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to
declare the issue on the validity of the foreign investment of respondent
corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended
by-laws, pending hearing by this Court on the applicability of section 13(5) of the
Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the bylaws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and
Guerrero filed a separate opinion, wherein they voted against the validity of the
questioned amended bylaws and that this question should properly be resolved
first by the SEC as the agency of primary jurisdiction. They concur in the result that
petitioner may be allowed to run for and sit as director of respondent SMC in the
scheduled May 6, 1979 election and subsequent elections until disqualified after
proper hearing by the respondent's Board of Directors and petitioner's
disqualification shall have been sustained by respondent SEC en banc and
ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered
GRANTING the petition by allowing petitioner to examine the books and records
of San Miguel International, Inc. as specified in the petition. The petition, insofar
as it assails the validity of the amended by- laws and the ratification of the foreign
investment of respondent corporation, for lack of necessary votes, is hereby
DISMISSED. No costs.
G.R. No. L-33320 May 30, 1983
RAMON
A.
GONZALES,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.

petitioner,

Ramon A. Gonzales in his own behalf.


Juan Diaz for respondent.

VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of
Manila a special civil action for mandamus against the herein respondent praying
that the latter be ordered to allow him to look into the books and records of the

respondent bank in order to satisfy himself as to the truth of the published reports
that the respondent has guaranteed the obligation of Southern Negros
Development Corporation in the purchase of a US$ 23 million sugar-mill to be
financed by Japanese suppliers and financiers; that the respondent is financing
the construction of the P 21 million Cebu-Mactan Bridge to be constructed by V.C.
Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron
Philippines, Inc., as well as to inquire into the validity of Id transactions. The
petitioner has alleged hat his written request for such examination was denied by
the respondent. The trial court having dismissed the petition for mandamus, the
instant appeal to review the said dismissal was filed.
The facts that gave rise to the subject controversy have been set forth by the trial
court in the decision herein sought to be reviewed, as follows:
Briefly stated, the following facts gathered from the stipulation of the parties served
as the backdrop of this proceeding.
Previous to the present action, the petitioner instituted several cases in this Court
questioning different transactions entered into by the Bark with other parties. First
among them is Civil Case No. 69345 filed on April 27, 1967, by petitioner as a
taxpayer versus Sec. Antonio Raquiza of Public Works and Communications, the
Commissioner of Public Highways, the Bank, Continental Ore Phil., Inc.,
Continental Ore, Huber Corporation, Allis Chalmers and General Motors
Corporation In the course of the hearing of said case on August 3, 1967, the
personality of herein petitioner to sue the bank and question the letters of credit it
has extended for the importation by the Republic of the Philippines of public works
equipment intended for the massive development program of the President was
raised. In view thereof, he expressed and made known his intention to acquire one
share of stock from Congressman Justiniano Montano which, on the following day,
August 30, 1967, was transferred in his name in the books of the Bank.
Subsequent to his aforementioned acquisition of one share of stock of the Bank,
petitioner, in his dual capacity as a taxpayer and stockholder, filed the following
cases involving the bank or the members of its Board of Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the
Bank; the National Investment and Development Corp., Marubeni Iida Co., Ltd.,
and Agro-Inc. Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other
Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar
Mill Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and
Batangas Sugar Central Inc.;

3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the
Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter to the President of
the Bank (Annex A, Pet.), requesting submission to look into the records of its
transactions covering the purchase of a sugar central by the Southern Negros
Development Corp. to be financed by Japanese suppliers and financiers; its
financing of the Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc. and
the construction of the Passi Sugar Mills in Iloilo. On January 23, 1969, the Asst.
Vice-President and Legal Counsel of the Bank answered petitioner's letter denying
his request for being not germane to his interest as a one-share stockholder and
for the cloud of doubt as to his real intention and purpose in acquiring said share.
(Annex B, Pet.) In view of the Bank's refusal the petitioner instituted this action.'
(Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in its
brief which he characterized as having been "correctly stated." (PetitionerAppellant"s Brief, pp. 57.)
The court a quo denied the prayer of the petitioner that he be allowed to examine
and inspect the books and records of the respondent bank regarding the
transactions mentioned on the grounds that the right of a stockholder to inspect
the record of the business transactions of a corporation granted under Section 51
of the former Corporation Law (Act No. 1459, as amended) is not absolute, but is
limited to purposes reasonably related to the interest of the stockholder, must be
asked for in good faith for a specific and honest purpose and not gratify curiosity
or for speculative or vicious purposes; that such examination would violate the
confidentiality of the records of the respondent bank as provided in Section 16 of
its charter, Republic Act No. 1300, as amended; and that the petitioner has not
exhausted his administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the single
error to the lower court of having ruled that his alleged improper motive in asking
for an examination of the books and records of the respondent bank disqualifies
him to exercise the right of a stockholder to such inspection under Section 51 of
Act No. 1459, as amended. Said provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the corporation and the
minutes of any meeting shall be open to the inspection of any director, member or
stockholder of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the
qualification made by the lower court that the inspection of corporate records may

be denied on the ground that it is intended for an improper motive or purpose, the
law having granted such right to a stockholder in clear and unconditional terms.
He further argues that, assuming that a proper motive or purpose for the desired
examination is necessary for its exercise, there is nothing improper in his purpose
for asking for the examination and inspection herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459,
as amended, regarding the right of a stockholder to inspect and examine the books
and records of a corporation. The former Corporation Law (Act No. 1459, as
amended) has been replaced by Batas Pambansa Blg. 68, otherwise known as
the "Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No. 1459
has been retained, but with some modifications. The second and third paragraphs
of Section 74 of Batas Pambansa Blg. 68 provide the following:
The records of all business transactions of the corporation and the minutes of any
meeting shag be open to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustee, stockholder or member of the corporation to examine and copy excerpts
from its records or minutes, in accordance with the provisions of this Code, shall
be liable to such director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable under Section 144
of this Code: Provided, That if such refusal is made pursuant to a resolution or
order of the board of directors or trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who voted for such refusal;
and Provided, further, That it shall be a defense to any action under this section
that the person demanding to examine and copy excerpts from the corporation's
records and minutes has improperly used any information secured through any
prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making
his demand.
As may be noted from the above-quoted provisions, among the changes
introduced in the new Code with respect to the right of inspection granted to a
stockholder are the following the records must be kept at the principal office of the
corporation; the inspection must be made on business days; the stockholder may
demand a copy of the excerpts of the records or minutes; and the refusal to allow

such inspection shall subject the erring officer or agent of the corporation to civil
and criminal liabilities. However, while seemingly enlarging the right of inspection,
the new Code has prescribed limitations to the same. It is now expressly required
as a condition for such examination that the one requesting it must not have been
guilty of using improperly any information through a prior examination, and that the
person asking for such examination must be "acting in good faith and for a
legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously contained in Section
51, Act No. 1459, as amended, no longer holds true under the provisions of the
present law. The argument of the petitioner that the right granted to him under
Section 51 of the former Corporation Law should not be dependent on the propriety
of his motive or purpose in asking for the inspection of the books of the respondent
bank loses whatever validity it might have had before the amendment of the law.
If there is any doubt in the correctness of the ruling of the trial court that the right
of inspection granted under Section 51 of the old Corporation Law must be
dependent on a showing of proper motive on the part of the stockholder demanding
the same, it is now dissipated by the clear language of the pertinent provision
contained in Section 74 of Batas Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in seeking the
inspection of the books of the respondent bank, he has not set forth the reasons
and the purposes for which he desires such inspection, except to satisfy himself
as to the truth of published reports regarding certain transactions entered into by
the respondent bank and to inquire into their validity. The circumstances under
which he acquired one share of stock in the respondent bank purposely to exercise
the right of inspection do not argue in favor of his good faith and proper motivation.
Admittedly he sought to be a stockholder in order to pry into transactions entered
into by the respondent bank even before he became a stockholder. His obvious
purpose was to arm himself with materials which he can use against the
respondent bank for acts done by the latter when the petitioner was a total stranger
to the same. He could have been impelled by a laudable sense of civic
consciousness, but it could not be said that his purpose is germane to his interest
as a stockholder.
We also find merit in the contention of the respondent bank that the inspection
sought to be exercised by the petitioner would be violative of the provisions of its
charter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said
charter provide respectively as follows:

Sec. 15. Inspection by Department of Supervision and Examination of the Central


Bank. The National Bank shall be subject to inspection by the Department of
Supervision and Examination of the Central Bank'
Sec. 16. Confidential information. The Superintendent of Banks and the Auditor
General, or other officers designated by law to inspect or investigate the condition
of the National Bank, shall not reveal to any person other than the President of the
Philippines, the Secretary of Finance, and the Board of Directors the details of the
inspection or investigation, nor shall they give any information relative to the funds
in its custody, its current accounts or deposits belonging to private individuals,
corporations, or any other entity, except by order of a Court of competent
jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act. Any director, officer,
employee, or agent of the Bank, who violates or permits the violation of any of the
provisions of this Act, or any person aiding or abetting the violations of any of the
provisions of this Act, shall be punished by a fine not to exceed ten thousand pesos
or by imprisonment of not more than five years, or both such fine and
imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter of its
own, it is not governed, as a rule, by the Corporation Code of the Philippines.
Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters. Corporations created
by special laws or charters shall be governed primarily by the provisions of the
special law or charter creating them or applicable to them. supplemented by the
provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation
Code with respect to the right of a stockholder to demand an inspection or
examination of the books of the corporation may not be reconciled with the
abovequoted provisions of the charter of the respondent bank. It is not correct to
claim, therefore, that the right of inspection under Section 74 of the new
Corporation Code may apply in a supplementary capacity to the charter of the
respondent bank.
G.R. No. 178511

December 4, 2008

MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS JASON A. ANG,


HANNAH ZORAYDA A. ANG, and VICENTE G. GENATO, petitioners,
vs.
EDUARDO G. ANG, respondent.

DECISION
YNARES-SANTIAGO, J.:
This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails
the March 6, 2007 Decision2 of the Court of Appeals in CA-G.R. SP No. 94708,
which nullified and set aside the July 26, 2005 and March 29, 2006 Resolutions3 of
the Secretary of Justice in I.S. No. MAL-2004-1167 directing the withdrawal of the
information filed against petitioners for violation of Section 74 of the Corporation
Code. Also assailed is the June 19, 2007 Resolution4 denying the Motion for
Reconsideration.
Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc. (Genato)
(collectively referred to as "the corporations") are family-owned corporations,
where petitioners Ma. Belen Flordeliza C. Ang-Abaya (Flordeliza), Francis Jason
A. Ang (Jason), Vincent G. Genato (Vincent), Hanna Zorayda A. Ang (Hanna) and
private respondent Eduardo G. Ang (Eduardo) are shareholders, officers and
members of the board of directors.
Prior to the instant controversy, VMC, Genato, and Oriana Manufacturing
Corporation (Oriana) filed Civil Case No. 4257-MC, which is a case for damages
with prayer for issuance of a temporary restraining order (TRO) and/or writ of
preliminary injunction against herein respondent Eduardo, together with Michael
Edward Chi Ang (Michael), and some other persons for allegedly conniving to
fraudulently wrest control/management of the corporations.5 Eduardo allegedly
borrowed substantial amounts of money from the said corporations without any
intention to repay; that he repeatedly demanded for increases in his monthly
allowance and for more cash advances contrary to existing corporate policies; that
he harassed petitioner Flordeliza to transfer and/or sell certain corporate and
personal properties in order to pay off his personal obligations; that he attempted
to forcibly evict petitioner Jason from his office and claim it as his own; that he
interfered with and disrupted the daily business operations of the corporations; that
Michael was placed on preventive suspension due to prolonged absence without
leave and commission of acts of disloyalty such as carrying out orders of Eduardo
which were detrimental to their business, using privileged information and
confidential documents/data obtained in his capacity as Vice President of the
corporations, and admitting to have sabotaged their distribution system and
operations.
During the pendency of Civil Case No. 4257-MC, particularly in July, 2004,
Eduardo sought permission to inspect the corporate books of VMC and Genato on
account of petitioners alleged failure and/or refusal to update him on the financial

and business activities of these family corporations.6 Petitioners denied the


request claiming that Eduardo would use the information obtained from said
inspection for purposes inimical to the corporations interests, considering that: "a)
he is harassing and/or bullying the Corporation[s] into writing off P165,071,586.55
worth of personal advances which he had unlawfully obtained in the past; b) he is
unjustly demanding that he be given the office currently occupied by Mr. Francis
Jason Ang, the Vice-President for Finance and Corporate Secretary; c) he is
usurping the rights belonging exclusively to the Corporation; and d) he is coercing
and/or trying to inveigle the Directors and/or Officers of the Corporation to give in
to his baseless demands involving specific corporate assets."7
Because of petitioners refusal to grant his request to inspect the corporate books
of VMC and Genato, Eduardo filed an Affidavit-Complaint8 against petitioners
Flordeliza and Jason, charging them with violation (two counts) of Section 74, in
relation to Section 144, of the Corporation Code of the Philippines.9 Ma. Belinda
G. Sandejas (Belinda), Vincent, and Hanna were subsequently impleaded for
likewise denying respondents request to inspect the corporate books.
Petitioners filed a Joint Counter-Affidavit praying for the dismissal of the complaint
for lack of factual and legal basis, or for the suspension of the same while Civil
Case No. 4257-MC is still pending resolution.10 They denied violating Section 74
of the Corporation Code and reiterated the allegations contained in their complaint
in Civil Case No. 4257-MC. Petitioners blamed Eduardos lavish lifestyle, which is
funded by personal loans and cash advances from the family corporations. They
alleged that Eduardo consistently pressured petitioner Flordeliza, his daughter, to
improperly transfer ownership of the corporations V.A.G. Building to him;11 to
disregard the company policy prohibiting advances by shareholders; to unduly
increase his corporate monthly allowance; and to sell her Wack-Wack Golf
proprietary share and use the proceeds thereof to pay his personal financial
obligations. When the proposed transfer of the V.A.G. Building did not materialize,
petitioners claim that Eduardo instituted an action to compel the donation of said
property to him.12 Furthermore, they claim that Eduardo attempted to forcibly evict
petitioner Jason from his office at VMC so he can occupy the same; that Eduardo
and his cohorts constantly created trouble by intervening in the daily operations of
the corporations without the knowledge or consent of the board of directors.
Meanwhile, in Civil Case No. 4257-MC, the trial court rendered a Decision granting
the permanent injunction applied for by the corporations.13 However, the Court of
Appeals subsequently rendered a Decision14 declaring that Eduardo, his son
Michael, and the other persons impleaded in Civil Case No. 4257-MC, were
imprudently declared in default by the trial court. The appellate court thus annulled

the permanent injunction issued by the trial court and remanded the case for
further proceedings. VMC, Genato, and Oriana corporations filed a Petition for
Review onCertiorari before this Court, but the same was denied for failure to
sufficiently show any reversible error in the Decision of the Court of
Appeals.15 The three corporations filed a Motion for Reconsideration, but the
same was denied with finality on June 25, 2008.
Meanwhile, on February 3, 2005, the City Prosecutors Office of Malabon City
issued a Resolution16 recommending that petitioners be charged with two counts
of violation of Section 74 of the Corporation Code, but dismissed the complaint
against Belinda for lack of evidence.17 Petitioners filed a Petition for
Review18 before the Department of Justice (DOJ), which reversed the
recommendation of the City Prosecutor of Malabon City.19 The dispositive portion
of the DOJ Resolution dated July 26, 2005, reads:
Wherefore, premises considered, the assailed resolution is REVERSED and SET
ASIDE. The City Prosecutor of Malabon City is hereby directed to cause the
withdrawal of the corresponding information filed against respondents [herein
petitioners] for violation of Section 74 of the Corporation Code of the Philippines
and to report the action taken thereon within ten (10) days from the receipt hereof.
SO ORDERED.20
The DOJ denied Eduardos Motion for Reconsideration21 in a Resolution22 dated
March 29, 2006. On appeal, the Court of Appeals rendered the assailed Decision,
the dispositive portion of which states:
WHEREFORE, the instant petition is partially GRANTED. The assailed
Resolutions of public respondent dated July 26, 2005 and March 29, 2006 are
hereby NULLIFIED and SET ASIDE. However, due to the present existence of a
prejudicial question, the criminal case docketed I.S. No. MAL-2004-1167 is hereby
SUSPENDED until Civil Case No. 4257-MC is decided on the merits with
finality. 23
The appellate court ruled that the Secretary of Justice committed grave abuse of
discretion amounting to lack or excess of jurisdiction in reversing the Resolutions
of the Malabon City Prosecutor and in finding that Eduardo did not act in good faith
when he demanded for the examination of VMC and Genatos corporate books. It
further held that Eduardo can demand said examination as a stockholder of both
corporations; that Eduardo raised legitimate questions that necessitated inspection
of the corporate books and records; and that petitioners refusal to allow inspection
created probable cause to believe that they have committed a violation of Section
74 of the Corporation Code.

On June 19, 2007, the Court of Appeals denied the Motions for Reconsideration
filed by petitioners and the Secretary of Justice.24 Hence, this petition raising the
following issues:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS WAS CORRECT
IN ITS FINDING THAT THE HONORABLE JUSTICE SECRETARYS REVERSAL
OF THE MALABON CITY PROSECUTORSRESOLUTION FINDING PROBABLE
CAUSE AGAINST HEREIN PETITIONERS WAS DONE CONTRARY TO THE
APPLICABLE LAW AND JURISPRUDENCE TANTAMOUNT TO GRAVE ABUSE
OF DISCRETION.
WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN REVERSING THE RESOLUTION OF THE MALABON CITY
PROSECUTOR FINDING PROBABLE CAUSE AGAINST PETITIONERS AFTER
PRELIMINARY INVESTIGATION FOR VIOLATION OF SECTION 74 OF THE
CORPORATION CODE OF THE PHILIPPINES.
WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN FINDING THAT PETITIONERS ACTED IN GOOD FAITH
WHEN THEY DENIED PRIVATE RESPONDENTS DEMAND FOR INSPECTION
OF CORPORATE BOOKS.25
We grant the petition.
Probable cause, for purposes of filing a criminal information, has been defined as
such facts as are sufficient to engender a well-founded belief that a crime has been
committed and that respondent is probably guilty thereof. It is such a state of facts
in the mind of the prosecutor as would lead a person of ordinary caution and
prudence to believe or entertain an honest or strong suspicion that a thing is so.
The term does not mean "actual or positive cause;" nor does it import absolute
certainty. It is merely based on opinion and reasonable belief. Thus, a finding of
probable cause does not require an inquiry into whether there is sufficient evidence
to procure a conviction. It is enough that it is believed that the act or omission
complained of constitutes the offense charged. Precisely, there is a trial for the
reception of prosecutions evidence in support of the charge."26
The determination of the existence of probable cause lies within the discretion of
the prosecuting officers after conducting a preliminary investigation upon
complaint of an offended party. Their decisions are reviewable by the Secretary of
Justice who may direct the filing of the corresponding information or to move for
the dismissal of the case.27

In reversing the Resolutions of the Secretary of Justice directing the withdrawal of


the information filed against petitioners for lack of probable cause, the Court of
Appeals held that it was beyond the Secretary of Justices authority to determine
the motives of Eduardo in seeking an inspection of the corporations books and
papers.
In order that probable cause to file a criminal case may be arrived at, or in order to
engender the well-founded belief that a crime has been committed, the elements
of the crime charged should be present.28 This is based on the principle that every
crime is defined by its elements, without which there should be at the most no
criminal offense.
In Gokongwei, Jr. v. Securities and Exchange Commission,29 this Court explained
the rationale behind a stockholder's right to inspect corporate books, to wit:
The stockholder's right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It is,
therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial ownership,
or a quasi-ownership. This right is predicated upon the necessity of self-protection.
It is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by him with
respect to his interest as a stockholder and for some purpose germane thereto or
in the interest of the corporation. In other words, the inspection has to be germane
to the petitioner's interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation.30
In Republic v. Sandiganbayan,31 the Court declared that the right to inspect and/or
examine the records of a corporation under Section 74 of the Corporation Code is
circumscribed by the express limitation contained in the succeeding proviso, which
states that:
[I]t shall be a defense to any action under this section that the person demanding
to examine and copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his demand. (Emphasis
supplied)
Thus, contrary to Eduardos insistence, the stockholders right to inspect corporate
books is not without limitations. While the right of inspection was enlarged under
the Corporation Code as opposed to the old Corporation Law (Act No. 1459, as
amended),

It is now expressly required as a condition for such examination that the one
requesting it must not have been guilty of using improperly any information secured
through a prior examination, or that the person asking for such examination must
be acting in good faith and for a legitimate purpose in making his
demand.32(Emphasis supplied)
In order therefore for the penal provision under Section 144 of the Corporation
Code to apply in a case of violation of a stockholder or members right to inspect
the corporate books/records as provided for under Section 74 of the Corporation
Code, the following elements must be present:
First. A director, trustee, stockholder or member has made a prior demand in
writing for a copy of excerpts from the corporations records or minutes;
Second. Any officer or agent of the concerned corporation shall refuse to allow the
said director, trustee, stockholder or member of the corporation to examine and
copy said excerpts;
Third. If such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be imposed
upon the directors or trustees who voted for such refusal; and,
Fourth. Where the officer or agent of the corporation sets up the defense that the
person demanding to examine and copy excerpts from the corporations records
and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making
his demand, the contrary must be shown or proved.
Thus, in a criminal complaint for violation of Section 74 of the Corporation Code,
the defense of improper use or motive is in the nature of a justifying circumstance
that would exonerate those who raise and are able to prove the same. Accordingly,
where the corporation denies inspection on the ground of improper motive or
purpose, the burden of proof is taken from the shareholder and placed on the
corporation.33 This being the case, it would be improper for the prosecutor, during
preliminary investigation, to refuse or fail to address the defense of improper use
or motive, given its express statutory recognition. In the past we have declared
that if justifying circumstances are claimed as a defense, they should have at least
been raised during preliminary investigation;34 which settles the view that the
consideration and determination of justifying circumstances as a defense is a
relevant subject of preliminary investigation.

A preliminary investigation is in effect a realistic judicial appraisal of the merits of


the case; sufficient proof of the guilt of the criminal respondent must be adduced
so that when the case is tried, the trial court may not be bound, as a matter of law,
to order an acquittal.35 Although a preliminary investigation is not a trial and is not
intended to usurp the function of the trial court, it is not a casual affair; the officer
conducting the same investigates or inquires into the facts concerning the
commission of the crime with the end in view of determining whether or not an
information may be prepared against the accused.36 After all, the purpose of
preliminary investigation is not only to determine whether there is sufficient ground
to engender a well-founded belief that a crime has been committed and the
respondent therein is probably guilty thereof and should be held for trial; it is just
as well for the purpose of securing the innocent against hasty, malicious and
oppressive prosecution, and to protect him from an open and public accusation of
a crime, from the trouble, expense and anxiety of a public trial.37 More importantly,
in the appraisal of the case presented to him for resolution, the duty of a prosecutor
is more to do justice and less to prosecute.38
If the prosecutor is convinced during preliminary investigation of the validity of the
respondents claim of a justifying circumstance, then he must dismiss the
complaint; if not, then he must file the requisite information. This is his discretion,
the exercise of which we grant sufficient latitude.39
In the instant case, the Court finds that the Court of Appeals erred in declaring that
the Secretary of Justice exceeded his authority when he conducted an inquiry on
the petitioners defense of improper use and motive on Eduardos part. As a
necessary element in the offense of refusal to honor a stockholder/members right
to inspect the corporate books/records, it was incumbent upon the Secretary of
Justice to determine that all the elements which constitute said offense are
present, in line with our ruling in Duterte v. Sandiganbayan.
A preliminary investigation is the crucial sieve in the criminal justice system which
spells for an individual the difference between months if not years of agonizing trial
and possibly jail term, on the one hand, and peace of mind and liberty, on the other.
Thus, we have characterized the right to a preliminary investigation as not a mere
formal or technical right but a substantive one, forming part of due process in
criminal justice.40 Due process, in the instant case, requires that an inquiry into
the motive behind Eduardos attempt at inspection should have been made even
during the preliminary investigation stage, just as soon as petitioners set up the
defense of improper use and motive.
Petitioners argue that Eduardos demand for an inspection of the corporations
books is based on the latters attempt in bad faith at having his more than P165

million advances from the corporations written off; that Eduardo is unjustly
demanding that he be given the office of Jason, or the Vice Presidency for Finance
and Corporate Secretary; that Eduardo is usurping rights belonging exclusively to
the corporations; and Eduardos attempts at coercing the corporations, their
directors and officers into giving in to his baseless demands involving specific
corporate assets. Specifically, petitioners accuse Eduardo of the following:
1. He is a spendthrift, using the family corporations resources to sustain his
extravagant lifestyle. During his incumbency as officer of VMC and Genato (from
1984 to 2000), he was able to obtain massive amounts by way of cash advances
from these corporations, amounting to more than P165 million;
2. He is exercising undue pressure upon petitioners in order to acquire ownership,
through the forced execution of a deed of donation, over the VAG Building in San
Juan, which building belongs to Genato;
3. He is putting pressure on the corporations, through their directors and officers,
for the latter to disregard their respective policies which prohibit the grant of cash
advances to stockholders.
4. At one time, he coerced Flordeliza for the latter to sell her Wack-Wack Golf
Proprietary Share;
5. In May 2003, without the requisite authority, he called a "stockholders meeting"
to demand an increase in his P140,000.00 monthly allowance from the corporation
to P250,000.00; demand a cash advance of US$10,000; and to demand that the
corporations shoulder the medical and educational expenses of his family as well
as those of the other stockholders;
6. In November 2003, he demanded that he be given an office within the
corporations premises. In December 2003, he stormed the corporations common
office, ordered the employees to vacate the premises, summoned the directors to
a meeting, and there he berated them for not acting on his requests. In January
2004, he returned to the office, demanding the transfer of the Accounting
Department and for Jason to vacate his office by the end of the month. He likewise
left a letter which contained his demands. At the end of January 2004, he returned,
ordered the employees to leave the premises and demanded that Jason surrender
his office and vacate his desk. He did this no less than four (4) times. As a result,
the respective boards of directors of the corporations resolved to ban him from the
corporate premises;
7. He has been interfering in the everyday operations of VMC and Genato,
usurping the duties, rights and authority of the directors and officers thereof. He

attempted to lease out a warehouse within the VMC premises without the
knowledge and consent of its directors and officers; during the wake of the former
President of VMC and Genato, he issued instructions for the employees to close
down operations for the whole duration of the wake, against the corporate officers
instructions to attend the wake by batch, so as not to hamper business operations;
he has caused chaos and confusion in VMC and Genato as a result;41
8. He is out to sabotage the family corporations.42
These serious allegations are supported by official and other documents, such as
board resolutions, treasurers affidavits and written communication from the
respondent Eduardo himself, who appears to have withheld his objections to these
charges. His silence virtually amounts to an acquiescence.43 Taken together, all
these serve to justify petitioners allegation that Eduardo was not acting in good
faith and for a legitimate purpose in making his demand for inspection of the
corporate books. Otherwise stated, there is lack of probable cause to support the
allegation that petitioners violated Section 74 of the Corporation Code in refusing
respondents request for examination of the corporation books.
WHEREFORE, the Petition for Review on Certiorari is GRANTED. The March 6,
2007 Decision and June 19, 2007 Resolution of the Court of Appeals in CA-G.R.
SP No. 94708 are REVERSED and SET ASIDE. The July 26, 2005 and March 29,
2006 Resolutions of the Secretary of Justice directing the withdrawal of the
information filed against petitioners for violation of Section 74 of the Corporation
Code are accordingly REINSTATED and AFFIRMED.
SO ORDERED.
A.M. No. 01-2-04-SC. March 13, 2001
Re: PROPOSED INTERIM RULES OF PROCEDURE GOVERNING INTRACORPORATE CONTROVERSIES UNDER R. A. NO. 8799
RESOLUTION

INTERIM
RULES
CONTROVERSIES

OF

RULE 1
GENERAL PROVISIONS

PROCEDURE

FOR

INTRA-CORPORATE

SECTION 1. (a) Cases covered. These Rules shall govern the procedure to be
observed in civil cases involving the following:
Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which
may be detrimental to the interest of the public and/or of the stockholders, partners,
or members of any corporation, partnership, or association;
Controversies arising out of intra-corporate, partnership, or association relations,
between and among stockholders, members, or associates; and between, any or
all of them and the corporation, partnership, or association of which they are
stockholders, members, or associates, respectively;
Controversies in the election or appointment of directors, trustees, officers, or
managers of corporations, partnerships, or associations;
Derivative suits; and
Inspection of corporate books.
(b) prohibition against nuisance and harassment suits. - Nuisance and harassment
suits are prohibited. In determining whether a suit is a nuisance or harassment suit,
the court shall consider, among others, the following:
The extent of the shareholding or interest of the initiating stockholder or member;
Subject matter of the suit;
Legal and factual basis of the complaint;
Availability of appraisal rights for the act or acts complained of; and
Prejudice or damage to the corporation, partnership, or association in relation to
the relief sought.
In case of nuisance or harassment suits, the court may, moto proprio or upon
motion, forthwith dismiss the case.
SEC. 2. Suppletory application of the Rules of Court. The Rules of Court, in so
far as they may be applicable and are not inconsistent with these Rules, are hereby
adopted to form an integral part of these Rules.
SEC. 3. Construction. These Rules shall be liberally construed in order to
promote their objective of securing a just, summary, speedy and inexpensive
determination of every action or proceeding.

SEC. 4. Executory nature of decisions and orders. All decisions and orders
issued under these Rules shall immediately be executory. No appeal or petition
taken therefrom shall stay the enforcement or implementation of the decision or
order, unless restrained by an appellate court. Interlocutory orders shall not be
subject to appeal.
SEC. 5. Venue. All actions covered by these Rules shall be commenced and
tried in the Regional Trial Court which has jurisdiction over the principal office of
the corporation, partnership, or association concerned. Where the principal office
of the corporation, partnership or association is registered in the Securities and
Exchange Commission as Metro Manila, the action must be filed in the city or
municipality where the head office is located.
SEC. 6. Service of pleadings. When so authorized by the court, any pleading
and/or document required by these Rules may be filed with the court and/or served
upon the other parties by facsimile transmission (tax) or electronic mail (e-mail. In
such cases, the date of transmission shall be deemed to be prima facie the date
of service.
SEC. 7. Signing of pleadings, motions and other papers. Every pleading, motion,
and other paper of a party represented by an attorney shall be signed by at least
one attorney of record in the attorneys individual name, whose address shall be
stated. A party who is not represented by an attorney shall sign the pleading,
motion, or other paper and state his address.
The signature of an attorney or party constitutes a certification by the signer that
he has read the pleading, motion, or other paper; that to the best of his knowledge,
information, and belief formed after reasonable inquiry, it is well grounded in fact
and is warranted by existing law or a good faith argument for the extension,
modification, or reversal of existing jurisprudence; and that it is not interposed for
any improper purpose, such as to harass or to cause unnecessary delay or
needless increase in the cost of litigation.
If a pleading, motion, or other paper is not signed, it shall be stricken off the record
unless it is promptly signed by the pleader or movant, after he is notified of the
omission.
SEC. 8. Prohibited pleadings. The following pleadings are prohibited:
Motion to dismiss;
Motion for a bill of particulars;

Motion for new trial, or for reconsideration of judgment or order, or for re-opening
of trial;
Motion for extension of time to file pleadings, affidavits or any other paper, except
those filed due to clearly compelling reasons. Such motion must be verified and
under oath; and
Motion for postponement and other motions of similar intent, except those filed due
to clearly compelling reasons. Such motion must be verified and under oath.
SEC. 9. Assignment of cases. All cases filed under these Rules shall be tried by
judges designated by the Supreme Court to hear and decide cases transferred
from the Securities and Exchange Commission to the Regional Trial Courts and
filed directly with said courts pursuant to Republic Act No. 8799, otherwise known
as the Securities and Regulation Cod

RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS
SECTION 1. Commencement of action. An action under these Rules is
commenced by the filing of a verified complaint with the proper Regional Trial
Court.
SEC. 2. Pleadings allowed. The only pleadings allowed to be filed under these
Rules are the complaint, answer, compulsory counterclaims or cross-claims
pleaded in the answer, and the answer to the counterclaims or cross-claims.
SEC. 3. Verification. The complaint and the answer shall be verified by an
affidavit stating that the affiant has read the pleading and the allegations therein
are true and correct based on his own personal knowledge or on authentic records.
SEC. 4. Complaint. The complaint shall state or contain:
the names, addresses, and other relevant personal or juridical circumstances of
the parties;
all facts material and relevant to the plaintiffs cause or causes of action, which
shall be supported by affidavits of the plaintiff or his witnesses and copies of
documentary and other evidence supportive of such cause or causes of action;
the law, rule, or regulation relied upon, violated, or sought to be enforced;
a certification that (a) the plaintiff has not theretofore commenced any action or
filed any claim involving the same issues in any court, tribunal or quasi-judicial

agency, and, to the best of his knowledge, no such other action or claim is pending
therein; (b) if there is such other action or claim, a complete statement of the
present status thereof; and (c) if he should thereafter learn that the same or similar
action or claim has been filed or is pending, he shall report that fact within five (5)
days therefrom to the court; and
the relief sought.
SEC. 5. Summons. The summons and the complaint shall be served together
not later than five (5) days from the date of filing of the complaint.
Service upon domestic private juridical entities. If the defendant is a domestic
corporation, service shall be deemed adequate if made upon any of the statutory
or corporate officers as fixed by the by-laws or their respective secretaries. If the
defendant is a partnership, service shall be deemed adequate if made upon any
of the managing or general partners or upon their respective secretaries. If the
defendant is an association, service shall be deemed adequate if made upon any
of its officers or their respective secretaries.
Service upon foreign private juridical entity. When the defendant is a foreign
private juridical entity which is transacting or has transacted business in the
Philippines, service may be made on its resident agent designated in accordance
with law for that purpose, or, if there be no such agent, on the government official
designated by law to that effect, or on any of its officers or agents within the
Philippines.
SEC. 6. Answer. The defendant shall file his answer to the complaint, serving a
copy thereof on the plaintiff, within fifteen (15) days from service of summons.
In the answer, the defendant shall:
Specify each material allegation of fact the truth of which he admits;
Specify each material allegation of fact the truth of which he does not admit. Where
the defendant desires to deny only a part of an averment, he shall specify so much
of it as true and material and shall deny only the remainder;
Specify each material allegation of fact as to which truth he has no knowledge or
information sufficient to form a belief, and this shall have the effect of a denial;
State the defenses, including grounds for a motion to dismiss under the Rules of
Court;
State the law, rule, or regulation relied upon;
Address each of the causes of action stated in the complaint;

State the facts upon which he relies for his defense, including affidavits of
witnesses and copies of documentary and other evidence supportive of such
cause or causes of action;
State any compulsory counterclaim/s and cross-claim/s; and
State the relief sought.
The answer to counterclaims or cross-claims shall be filed within ten (10) days
from service of the answer in which they are pleaded.
SEC. 7. Effect of failure to answer. If the defendant fails to answer within the
period above provided, he shall be considered in default. Upon motion or motu
proprio, the court shall render judgment either dismissing the complaint or granting
the relief prayed for as the records may warrant. In no case shall the court award
a relief beyond or different from that prayed for.
SEC. 8. Affidavits, documentary and other evidence. Affidavits shall be based on
personal knowledge, shall set forth such facts as would be admissible in evidence,
and shall show affirmatively that the affiant is competent to testify on the matters
stated therein. The affidavits shall be in question and answer form, and shall
comply with the rules on admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be
attached to the appropriate pleading; Provided, however, that affidavits,
documentary and other evidence not so submitted may be attached to the pre-trial
brief required under these Rules. Affidavits and other evidence not so submitted
shall not be admitted in evidence, except in the following cases:
Testimony of unwilling, hostile, or adverse party witnesses. A witness is
presumed prima facie hostile if he fails or refuses to execute an affidavit after a
written request therefor;
If the failure to submit the evidence is for meritorious and compelling reasons; and
Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later
than five (5) days prior to its introduction in evidence.

RULE 3
MODES OF DISCOVERY

SECTION 1. In general. A party can only avail of any of the modes of discovery
not later than fifteen (15) days from the joinder of issues.
SEC. 2. Objections. Any mode of discovery such as interrogatories, request for
admission, production or inspection of documents or things, may be objected to
within ten (10) days from receipt of the discovery device and only on the ground
that the matter requested is patently incompetent, immaterial, irrelevant or
privileged in nature.
The court shall rule on the objections not later than fifteen (15) days from the filing
thereof.
SEC. 3. Compliance. Compliance with any mode of discovery shall be made
within ten (10) days from receipt of the discovery device, or if there are objections,
from receipt of the ruling of the court.
SEC. 4. Sanctions. The sanctions prescribed in the Rules of Court for failure to
avail of, or refusal to comply with, the modes of discovery shall apply. In addition,
the court may, upon motion, declare a party non-suited or as in default, as the case
may be, if the refusal to comply with a mode of discovery is patently unjustified.

RULE 4
PRE-TRIAL
SECTION 1. Pre-trial conference; mandatory nature. Within five (5) days after
the period for availment of, and compliance with, the modes of discovery
prescribed in Rule 3 hereof, whichever comes later, the court shall issue and serve
an order immediately setting the case for pre-trial conference and directing the
parties to submit their respective pre-trial briefs. The parties shall file with the court
and furnish each other copies of their respective pre-trial brief in such manner as
to ensure its receipt by the court and the other party at least five (5) days before
the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the
following:
Brief statement of the nature of the case, which shall summarize the theory or
theories of the party in clear and concise language;
Allegations expressly admitted by either or both parties;
Allegations deemed admitted by either or both parties;

Documents not specifically denied under oath by either or both parties;


Amendments to the pleadings;
Statement of the issues, which shall separately summarize the factual and legal
issues involved in the case;
Names of witnesses to be presented and the summary of their testimony as
contained in their affidavits supporting their positions on each of the issues;
All other pieces of evidence, whether documentary or otherwise and their
respective purposes;
Specific proposals for an amicable settlement;
Possibility of referral to mediation or other alternative modes of dispute resolution;
Proposed schedule of hearings; and
Such other matters as may aid in the just and speedy disposition of the case.
SEC. 2. Nature and purpose of pre-trial conference. During the pre-trial
conference, the court shall, with its active participation, ensure that the parties
consider in detail all of the following:
The possibility of an amicable settlement;
Referral of the dispute to mediation or other forms of dispute resolution;
Facts that need not be proven, either because they are matters of judicial notice
or expressly or deemed admitted;
Amendments to the pleadings;
The possibility of obtaining stipulations and admissions of facts and documents;
Objections to the admissibility of testimonial, documentary and other evidence;
Objections to the form or substance of any affidavit, or part thereof;
Simplification of the issues;
The possibility of submitting the case for decision on the basis of position papers,
affidavits, documentary and real evidence;
A complete schedule of hearing dates; and
Such other matters as may aid in the speedy and summary disposition of the case.

SEC. 3. Termination. The preliminary conference shall be terminated not later


than ten (10) days after its commencement, whether or not the parties have agreed
to settle amicably.
SEC. 4. Judgment before pre-trial. If, after submission of the pre-trial briefs, the
court determines that, upon consideration of the pleadings, the affidavits and other
evidence submitted by the parties, a judgment may be rendered, the court may
order the parties to file simultaneously their respective memoranda within a nonextendible period of twenty (20) days from receipt of the order. Thereafter, the
court shall render judgment, either full or otherwise, not later than ninety (90) days
from the expiration of the period to file the memoranda.
SEC. 5. Pre-trial order; judgment after pre-trial. The proceedings in the pre-trial
shall be recorded. Within ten (10) days after the termination of the pre-trial, the
court shall issue an order which shall recite in detail the matters taken up in the
conference, the actions taken thereon, the amendments allowed in the pleadings,
and the agreements or admissions made by the parties as to any of the matters
considered. The court shall rule on all objections to or comments on the
admissibility of any documentary or other evidence, including any affidavit or any
part thereof. Should the action proceed to trial, the order shall explicitly define and
limit the issues to be tried and shall strictly follow the form set forth in Annex "A" of
these Rules.
The contents of the order shall control the subsequent course of the action, unless
modified before trial to prevent manifest injustice.
After the pre-trial, the court may render judgment, either full or partial, as the
evidence presented during the pre-trial may warrant.

RULE 5
TRIAL
SECTION 1. Witnesses. If the court deems necessary to hold hearings to
determine specific factual matters before rendering judgment, it shall, in the pretrial order, set the case for trial on the dates agreed upon by the parties.
Only persons whose affidavits were submitted may be presented as witnesses,
except in cases specified in section 8, Rule 2 of these Rules. The affidavits of the
witnesses shall serve as their direct testimonies, subject to cross-examination in
accordance with existing rules on evidence.

SEC. 2. Trial schedule. Unless judgment is rendered pursuant to Rule 4 of these


Rules, the initial hearing shall be held not later than thirty (30) days from the date
of the pre-trial order. The hearings shall be completed not later than sixty (60) days
from the date of the initial hearing, thirty (30) days of which shall be allotted to the
plaintiffs and thirty (30) days to the defendants in the manner prescribed in the reptrial order. The failure of a party to present a witness on a scheduled hearing date
shall be deemed a waiver of such hearing date. However, a party may present
such witness or witnesses within his remaining allotted hearing dates.
SEC. 3. Written offer of evidence. Evidence not otherwise admitted by the parties
or ruled upon by the court during the pre-trial conference shall be offered in writing
not later than five (5) days from the completion of the presentation of evidence of
the party concerned. The opposing party shall have five (5) days from receipt of
the offer to file his comments or objections. The court shall make its ruling on the
offer within five (5) days from the expiration of the period to file comments or
objections.
SEC. 4. Memoranda. Immediately after ruling on the last offer of evidence, the
court shall order the parties to simultaneously file, within thirty (30) days from
receipt of the order, their respective memoranda. The memoranda shall contain
the following:
A "Statement of the Case," which is a clear and concise statement of the nature of
the action and a summary of the proceedings;
A "Statement of the Facts," which is a clear and concise statement in narrative
form of the established facts, with reference to the testimonial, documentary or
other evidence in support thereof;
A "Statement of the issues," which is a clear and concise statement of the issues
presented to the court for resolution;
The "Arguments," which is a clear and concise presentation of the argument in
support of each issue; and
The "Relief," which is a specification of the order or judgment which the party seeks
to obtain.
No reply memorandum shall be allowed.
SEC. 5. Decision after trial. The court shall render a decision not later than (90)
days from the lapse of the period to file the memoranda, with or without said
pleading having been filed.

RULE 6
ELECTION CONTESTS
SECTION 1. Cases covered. The provisions of this rule shall apply to election
contests in stock and non-stock corporations.
SEC. 2. Definition. An election contest refers to any controversy or dispute
involving title or claim to any elective office in a stock or non-stock corporation, the
validation of proxies, the manner and validity of elections, and the qualifications of
candidates, including the proclamation of winners, to the office of director, trustee
or other officer directly elected by the stockholders in a close corporation or by
members of a non-stock corporation where the articles of incorporation or by-laws
so provide.
SEC. 3. Complaint. In addition to the requirements in section 4, Rule 2 of these
Rules, the complaint in an election contest must state the following:
The case was filed within fifteen (15) days from the date of the election if the bylaws of the corporation do not provide for a procedure for resolution of the
controversy, or within fifteen (15) days from the resolution of the controversy by
the corporation as provided in its by-laws; and
The plaintiff has exhausted all intra-corporate remedies in election cases as
provided for in the by-laws of the corporation.
SEC. 4. Duty of the court upon the filing of the complaint. Within two (2) days
from the filing of the complaint, the court, upon a consideration of the allegations
thereof, may dismiss the complaint outright if it is not sufficient in form and
substance, or, if it is sufficient, order the issuance of summons which shall be
served, together with a copy of the complaint, on the defendant within two (2) days
from its issuance.
SEC. 5. Answer. The defendant shall file his answer to the complaint, serving a
copy thereof on the plaintiff, within ten (10) days from service of summons and the
complaint. The answer shall contain the matters required in section 6, Rule 2 of
these Rules.
SEC. 6. Affidavits, documentary and other evidence. The parties shall attach to
the complaint and answer the affidavits of witnesses, documentary and other
evidence in support thereof, if any.

Acting on the Memorandum of the Committee on SEC Cases submitting for this
Courts consideration and approval the Proposed Interim Rules of Procedure for
Intra-Corporate Controversies, the Court Resolved to APPROVE the same.
The Interim Rules shall take effect on April 1, 2001 following its publication in two
(2) newspapers of general circulation.
March 13, 2001, Manila.
[G.R. No. 150793. November 19, 2004]
FRANCIS CHUA, petitioner, vs. HON. COURT OF APPEALS and LYDIA C.
HAO, respondents.
DECISION
QUISUMBING, J.:
Petitioner assails the Decision,[1] dated June 14, 2001, of the Court of Appeals in
CA-G.R. SP No. 57070, affirming the Order, dated October 5, 1999, of the
Regional Trial Court (RTC) of Manila, Branch 19. The RTC reversed the Order,
dated April 26, 1999, of the Metropolitan Trial Court (MeTC) of Manila, Branch
22. Also challenged by herein petitioner is the CA Resolution,[2] dated November
20, 2001, denying his Motion for Reconsideration.
The facts, as culled from the records, are as follows:
On February 28, 1996, private respondent Lydia Hao, treasurer of Siena Realty
Corporation, filed a complaint-affidavit with the City Prosecutor of Manila charging
Francis Chua and his wife, Elsa Chua, of four counts of falsification of public
documents pursuant to Article 172[3] in relation to Article 171[4] of the Revised
Penal Code. The charge reads:
That on or about May 13, 1994, in the City of Manila, Philippines, the said accused,
being then a private individual, did then and there willfully, unlawfully and
feloniously commit acts of falsification upon a public document, to wit: the said
accused prepared, certified, and falsified the Minutes of the Annual Stockholders
meeting of the Board of Directors of the Siena Realty Corporation, duly notarized
before a Notary Public, Atty. Juanito G. Garcia and entered in his Notarial Registry
as Doc No. 109, Page 22, Book No. IV and Series of 1994, and therefore, a public
document, by making or causing it to appear in said Minutes of the Annual
Stockholders Meeting that one LYDIA HAO CHUA was present and has
participated in said proceedings, when in truth and in fact, as the said accused fully
well knew that said Lydia C. Hao was never present during the Annual
Stockholders Meeting held on April 30, 1994 and neither has participated in the

proceedings thereof to the prejudice of public interest and in violation of public faith
and destruction of truth as therein proclaimed.
CONTRARY TO LAW.[5]
Thereafter, the City Prosecutor filed the Information docketed as Criminal Case
No. 285721[6] for falsification of public document, before the Metropolitan Trial
Court (MeTC) of Manila, Branch 22, against Francis Chua but dismissed the
accusation against Elsa Chua.
Herein petitioner, Francis Chua, was arraigned and trial ensued thereafter.
During the trial in the MeTC, private prosecutors Atty. Evelyn Sua-Kho and Atty.
Ariel Bruno Rivera appeared as private prosecutors and presented Hao as their
first witness.
After Haos testimony, Chua moved to exclude complainants counsels as private
prosecutors in the case on the ground that Hao failed to allege and prove any civil
liability in the case.
In an Order, dated April 26, 1999, the MeTC granted Chuas motion and ordered
the complainants counsels to be excluded from actively prosecuting Criminal Case
No. 285721. Hao moved for reconsideration but it was denied.
Hence, Hao filed a petition for certiorari docketed as SCA No. 9994846,[7] entitledLydia C. Hao, in her own behalf and for the benefit of Siena
Realty Corporation v. Francis Chua, and the Honorable Hipolito dela Vega,
Presiding Judge, Branch 22, Metropolitan Trial Court of Manila, before the
Regional Trial Court (RTC) of Manila, Branch 19.
The RTC gave due course to the petition and on October 5, 1999, the RTC in an
order reversed the MeTC Order. The dispositive portion reads:
WHEREFORE, the petition is GRANTED. The respondent Court is ordered to
allow the intervention of the private prosecutors in behalf of petitioner Lydia C. Hao
in the prosecution of the civil aspect of Crim. Case No. 285721, before Br. 22
[MeTC], Manila, allowing Attys. Evelyn Sua-Kho and Ariel Bruno Rivera to actively
participate in the proceedings.
SO ORDERED.[8]
Chua moved for reconsideration which was denied.
Dissatisfied, Chua filed before the Court of Appeals a petition for certiorari. The
petition alleged that the lower court acted with grave abuse of discretion in: (1)
refusing to consider material facts; (2) allowing Siena Realty Corporation to be

impleaded as co-petitioner in SCA No. 99-94846 although it was not a party to the
criminal complaint in Criminal Case No. 285721; and (3) effectively amending the
information against the accused in violation of his constitutional rights.
On June 14, 2001, the appellate court promulgated its assailed Decision denying
the petition, thus:
WHEREFORE, premises considered, the petition is hereby DENIED DUE
COURSE and DISMISSED. The Order, dated October 5, 1999 as well as the
Order, dated December 3, 1999, are hereby AFFIRMED in toto.
SO ORDERED.[9]
Petitioner had argued before the Court of Appeals that respondent had no authority
whatsoever to bring a suit in behalf of the Corporation since there was no Board
Resolution authorizing her to file the suit.
For her part, respondent Hao claimed that the suit was brought under the concept
of a derivative suit. Respondent maintained that when the directors or trustees
refused to file a suit even when there was a demand from stockholders, a derivative
suit was allowed.
The Court of Appeals held that the action was indeed a derivative suit, for it alleged
that petitioner falsified documents pertaining to projects of the corporation and
made it appear that the petitioner was a stockholder and a director of the
corporation. According to the appellate court, the corporation was a necessary
party to the petition filed with the RTC and even if private respondent filed the
criminal case, her act should not divest the Corporation of its right to be a party
and present its own claim for damages.
Petitioner moved for reconsideration but it was denied in a Resolution dated
November 20, 2001.
Hence, this petition alleging that the Court of Appeals committed reversible errors:
I. IN RULING THAT LYDIA HAOS FILING OF CRIMINAL CASE NO. 285721
WAS IN THE NATURE OF A DERIVATIVE SUIT
II. IN UPHOLDING THE RULING OF JUDGE DAGUNA THAT SIENA REALTY
WAS A PROPER PETITIONER IN SCA NO. [99-94846]
III. IN UPHOLDING JUDGE DAGUNAS DECISION ALLOWING LYDIA HAOS
COUNSEL TO CONTINUE AS PRIVATE PROSECUTORS IN CRIMINAL CASE
NO. 285721

IV. IN [OMITTING] TO CONSIDER AND RULE UPON THE ISSUE THAT


JUDGE DAGUNA ACTED IN GRAVE ABUSE OF DISCRETION IN NOT
DISMISSING THE PETITION IN SCA NO. [99-94846] FOR BEING A SHAM
PLEADING.[10]
The pertinent issues in this petition are the following: (1) Is the criminal complaint
in the nature of a derivative suit? (2) Is Siena Realty Corporation a proper petitioner
in SCA No. 99-94846? and (3) Should private prosecutors be allowed to actively
participate in the trial of Criminal Case No. 285721.
On the first issue, petitioner claims that the Court of Appeals erred when (1) it
sustained the lower court in giving due course to respondents petition in SCA No.
99-94846 despite the fact that the Corporation was not the private complainant in
Criminal Case No. 285721, and (2) when it ruled that Criminal Case No. 285721
was in the nature of a derivative suit.
Petitioner avers that a derivative suit is by nature peculiar only to intra-corporate
proceedings and cannot be made part of a criminal action. He cites the case
of Western Institute of Technology, Inc. v. Salas,[11] where the court said that an
appeal on the civil aspect of a criminal case cannot be treated as a derivative
suit. Petitioner asserts that in this case, the civil aspect of a criminal case cannot
be treated as a derivative suit, considering that Siena Realty Corporation was not
the private complainant.
Petitioner misapprehends our ruling in Western Institute. In that case, we said:
Here, however, the case is not a derivative suit but is merely an appeal on the civil
aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for
estafa and falsification of public document. Among the basic requirements for a
derivative suit to prosper is that the minority shareholder who is suing for and on
behalf of the corporation must allege in his complaint before the proper forum that
he is suing on a derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join. . . .This was not complied with by
the petitioners either in their complaint before the court a quo nor in the instant
petition which, in part, merely states that this is a petition for review on certiorari on
pure questions of law to set aside a portion of the RTC decision in Criminal Cases
Nos. 37097 and 37098 since the trial courts judgment of acquittal failed to impose
civil liability against the private respondents. By no amount of equity
considerations, if at all deserved, can a mere appeal on the civil aspect of a criminal
case be treated as a derivative suit.[12]
Moreover, in Western Institute, we said that a mere appeal in the civil aspect
cannot be treated as a derivative suit because the appeal lacked the basic

requirement that it must be alleged in the complaint that the shareholder is suing
on a derivative cause of action for and in behalf of the corporation and other
shareholders who wish to join.
Under Section 36[13] of the Corporation Code, read in relation to Section
23,[14] where a corporation is an injured party, its power to sue is lodged with its
board of directors or trustees.[15] An individual stockholder is permitted to institute
a derivative suit on behalf of the corporation wherein he holds stocks in order to
protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold the control of the corporation. In
such actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest.[16]
A derivative action is a suit by a shareholder to enforce a corporate cause of action.
The corporation is a necessary party to the suit. And the relief which is granted is
a judgment against a third person in favor of the corporation. Similarly, if a
corporation has a defense to an action against it and is not asserting it, a
stockholder may intervene and defend on behalf of the corporation.[17]
Under the Revised Penal Code, every person criminally liable for a felony is also
civilly liable.[18] When a criminal action is instituted, the civil action for the recovery
of civil liability arising from the offense charged shall be deemed instituted with the
criminal action, unless the offended party waives the civil action, reserves the right
to institute it separately or institutes the civil action prior to the criminal action.[19]
In Criminal Case No. 285721, the complaint was instituted by respondent against
petitioner for falsifying corporate documents whose subject concerns corporate
projects of Siena Realty Corporation. Clearly, Siena Realty Corporation is an
offended party. Hence, Siena Realty Corporation has a cause of action. And the
civil case for the corporate cause of action is deemed instituted in the criminal
action.
However, the board of directors of the corporation in this case did not institute the
action against petitioner. Private respondent was the one who instituted the action.
Private respondent asserts that she filed a derivative suit in behalf of the
corporation. This assertion is inaccurate. Not every suit filed in behalf of the
corporation is a derivative suit. For a derivative suit to prosper, it is required that
the minority stockholder suing for and on behalf of the corporation must allege in
his complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish to join him
in the suit.[20] It is a condition sine qua non that the corporation be impleaded as
a party because not only is the corporation an indispensable party, but it is also

the present rule that it must be served with process. The judgment must be made
binding upon the corporation in order that the corporation may get the benefit of
the suit and may not bring subsequent suit against the same defendants for the
same cause of action. In other words, the corporation must be joined as party
because it is its cause of action that is being litigated and because judgment must
be a res adjudicata against it.[21]
In the criminal complaint filed by herein respondent, nowhere is it stated that she
is filing the same in behalf and for the benefit of the corporation. Thus, the criminal
complaint including the civil aspect thereof could not be deemed in the nature of a
derivative suit.
We turn now to the second issue, is the corporation a proper party in the petition
for certiorari under Rule 65 before the RTC? Note that the case was titled Lydia
C. Hao, in her own behalf and for the benefit of Siena Realty Corporation v. Francis
Chua, and the Honorable Hipolito dela Vega, Presiding Judge, Branch 22,
Metropolitan Trial Court of Manila. Petitioner before us now claims that the
corporation is not a private complainant in Criminal Case No. 285721, and thus
cannot be included as appellant in SCA No. 99-94846.
Petitioner invokes the case of Ciudad Real & Devt. Corporation v. Court of
Appeals.[22] In Ciudad Real, it was ruled that the Court of Appeals committed
grave abuse of discretion when it upheld the standing of Magdiwang Realty
Corporation as a party to the petition for certiorari, even though it was not a partyin-interest in the civil case before the lower court.
In the present case, respondent claims that the complaint was filed by her not only
in her personal capacity, but likewise for the benefit of the corporation. Additionally,
she avers that she has exhausted all remedies available to her before she
instituted the case, not only to claim damages for herself but also to recover the
damages caused to the company.
Under Rule 65 of the Rules of Civil Procedure,[23] when a trial court commits a
grave abuse of discretion amounting to lack or excess of jurisdiction, the person
aggrieved can file a special civil action for certiorari. The aggrieved parties in such
a case are the State and the private offended party or complainant.[24]
In a string of cases, we consistently ruled that only a party-in-interest or those
aggrieved may file certiorari cases. It is settled that the offended parties in criminal
cases have sufficient interest and personality as person(s) aggrieved to file
special civil action of prohibition and certiorari.[25]

In Ciudad Real, cited by petitioner, we held that the appellate court committed
grave abuse of discretion when it sanctioned the standing of a corporation to join
said petition for certiorari, despite the finality of the trial courts denial of its Motion
for Intervention and the subsequent Motion to Substitute and/or Join as
Party/Plaintiff.
Note, however, that in Pastor, Jr. v. Court of Appeals[26] we held that if aggrieved,
even a non-party may institute a petition for certiorari. In that case, petitioner was
the holder in her own right of three mining claims and could file a petition for
certiorari, the fastest and most feasible remedy since she could not intervene in
the probate of her father-in-laws estate.[27]
In the instant case, we find that the recourse of the complainant to the respondent
Court of Appeals was proper. The petition was brought in her own name and in
behalf of the Corporation. Although, the corporation was not a complainant in the
criminal action, the subject of the falsification was the corporations project and the
falsified documents were corporate documents. Therefore, the corporation is a
proper party in the petition for certiorari because the proceedings in the criminal
case directly and adversely affected the corporation.
We turn now to the third issue. Did the Court of Appeals and the lower court err in
allowing private prosecutors to actively participate in the trial of Criminal Case No.
285721?
Petitioner cites the case of Tan, Jr. v. Gallardo,[28] holding that where from the
nature of the offense or where the law defining and punishing the offense charged
does not provide for an indemnity, the offended party may not intervene in the
prosecution of the offense.
Petitioners contention lacks merit. Generally, the basis of civil liability arising from
crime is the fundamental postulate that every man criminally liable is also civilly
liable. When a person commits a crime he offends two entities namely (1) the
society in which he lives in or the political entity called the State whose law he has
violated; and (2) the individual member of the society whose person, right, honor,
chastity or property has been actually or directly injured or damaged by the same
punishable act or omission. An act or omission is felonious because it is
punishable by law, it gives rise to civil liability not so much because it is a crime
but because it caused damage to another. Additionally, what gives rise to the civil
liability is really the obligation and the moral duty of everyone to repair or make
whole the damage caused to another by reason of his own act or omission,
whether done intentionally or negligently. The indemnity which a person is
sentenced to pay forms an integral part of the penalty imposed by law for the

commission of the crime.[29] The civil action involves the civil liability arising from
the offense charged which includes restitution, reparation of the damage caused,
and indemnification for consequential damages.[30]
Under the Rules, where the civil action for recovery of civil liability is instituted in
the criminal action pursuant to Rule 111, the offended party may intervene by
counsel in the prosecution of the offense.[31] Rule 111(a) of the Rules of Criminal
Procedure provides that, [w]hen a criminal action is instituted, the civil action
arising from the offense charged shall be deemed instituted with the criminal action
unless the offended party waives the civil action, reserves the right to institute it
separately, or institutes the civil action prior to the criminal action.
Private respondent did not waive the civil action, nor did she reserve the right to
institute it separately, nor institute the civil action for damages arising from the
offense charged. Thus, we find that the private prosecutors can intervene in the
trial of the criminal action.
Petitioner avers, however, that respondents testimony in the inferior court did not
establish nor prove any damages personally sustained by her as a result of
petitioners alleged acts of falsification. Petitioner adds that since no personal
damages were proven therein, then the participation of her counsel as private
prosecutors, who were supposed to pursue the civil aspect of a criminal case, is
not necessary and is without basis.
When the civil action is instituted with the criminal action, evidence should be taken
of the damages claimed and the court should determine who are the persons
entitled to such indemnity. The civil liability arising from the crime may be
determined in the criminal proceedings if the offended party does not waive to have
it adjudged or does not reserve the right to institute a separate civil action against
the defendant. Accordingly, if there is no waiver or reservation of civil liability,
evidence should be allowed to establish the extent of injuries suffered.[32]
In the case before us, there was neither a waiver nor a reservation made; nor did
the offended party institute a separate civil action. It follows that evidence should
be allowed in the criminal proceedings to establish the civil liability arising from the
offense committed, and the private offended party has the right to intervene
through the private prosecutors.
WHEREFORE, the instant petition is DENIED. The Decision, dated June 14, 2001,
and the Resolution, dated November 20, 2001, of the Court of Appeals in CA-G.R.
SP No. 57070, affirming the Order, dated October 5, 1999, of the Regional Trial
Court (RTC) of Manila, Branch 19, are AFFIRMED. Accordingly, the private
prosecutors are hereby allowed to intervene in behalf of private respondent Lydia

Hao in the prosecution of the civil aspect of Criminal Case No. 285721 before
Branch 22, of Metropolitan Trial Court (MeTC) of Manila. Costs against petitioner.
SO ORDERED.
G.R. No. 85339 August 11, 1989
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS
ANGELES,
petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO
ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO
SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR.,respondents.
Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner.
Roco & Bunag Law Offices for respondent Ernest Kahn.
Siguion Reyna, Montecillo and Ongsiako for other respondents.

NARVASA, J.:
On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the
San Miguel Corporation were acquired 1 by fourteen (14) other corporations, 2 and
were placed under a Voting Trust Agreement in favor of the late Andres Soriano,
Jr. When the latter died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee
on April 9, 1984 with power to delegate the trusteeship in writing to Andres Soriano
III. 3 Shortly after the Revolution of February, 1986, Cojuangco left the country
amid "persistent reports" that "huge and unusual cash disbursements from the
funds of SMC" had been irregularly made, and the resources of the firm extensively
used in support of the candidacy of Ferdinand Marcos during the snap elections in
February, 1986 . 4
On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as
"Buyer," and the 14 corporations, as "Sellers," for the purchase by Soriano, "for
himself and as agent of several persons," of the 33,133,266 shares of stock at the
price of P100.00 per share, or "an aggregate sum of Three Billion Three Hundred
Thirteen Million Three Hundred Twenty Six Thousand Six Hundred
(P3,313,326,600.00) Pesos payable in specified installments. 5 The Agreement
revoked the voting trust above mentioned, and expressed the desire of the 14
corporations to sell the shares of stock "to pay certain outstanding and unpaid
debts," and Soriano's own wish to purchase the same "in order to institutionalize
and stabilize the management of the COMPANY in .. (himself) and the professional

officer corps, mandated by the COMPANY's By- laws, and to direct the COMPANY
towards giving the highest priority to its principal products and extensive support
to agriculture programme of' the Government ... 6 Actually, according to Soriano
and the other private respondents, the buyer of the shares was a foreign company,
Neptunia Corporation Limited (of Hongkong, a wholly owned subsidiary of San
Miguel International which is, in turn, a wholly owned subsidiary of San Miguel
Corporation; 7 and it was Neptunia which on or about April 1, 1986 had made the
down payment of P500,000,000.00, "from the proceeds of certain loans".8
At this point the 33,133,266 SMC shares were sequestered by the Presidential
Commission on Good Government (PCGG), on the ground that the stock belonged
to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former
President Marcos, and the sale thereof was "in direct contravention of .. Executive
Orders Numbered 1 and 2 (.. dated February 28, 1986 and March 12, 1986,
respectively) which prohibit .. the transfer, conveyance, encumbrance,
concealment or liquidation of assets and properties acquired by former President
Ferdinand Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates. 9 The sequestration was
subsequently lifted, and the sale allowed to proceed, on representations by San
Miguel Corporation x x that the shares were 'owned by 1.3 million coconut farmers;'
the seller corporations were 'fully owned' by said farmers and Cojuangco owned
only 2 shares in one of the companies, etc. However, the sequestration was soon
re-imposed by Order of the PCGG dated May 19, 1986 .. The same order forbade
the SMC corporate Secretary to register any transfer or encumbrance of any of the
stock without the PCGG's prior written authority. 10
San Miguel promptly suspended payment of the other installments of the price to
the fourteen (14) seller corporations. The latter as promptly sued for rescission and
damages. 11
On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying
shares" in the corporation to seven (7) individuals, including Eduardo de los
Angeles, "from the sequestered shares registered as street certificates under the
control of Anscor- Hagedorn Securities, Inc.," to "be held in trust by .. (said seven
[7] persons) for the benefit of Anscor-Hagedom Securities, Inc. and/or whoever
shall finally be determined to be the owner/owners of said shares. 12
In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to
assume the loans incurred by Neptunia for the down payment ((P500M)) on the
33,133,266 shares." The Board opined that there was "nothing illegal in this
assumption (of liability for the loans)," since Neptunia was "an indirectly wholly
owned subsidiary of SMC," there "was no additional expense or exposure for the

SMC Group, and there were tax and other benefits which would redound to the
SMC group of companies. 13
However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los
Angeles, one of the PCGG representatives in the SMC board, impugned said
Resolution No. 86-12-2, denying that it was ever adopted, and stating that what in
truth was agreed upon at the meeting of December 4, 1986 was merely a "further
study" by Director Ramon del Rosario of a plan presented by him for the
assumption of the loan. De los Angeles also pointed out certain "deleterious
effects" thereof. He was however overruled by private respondents. 14 When his
efforts to obtain relief within the corporation and later the PCGG proved futile, he
repaired to the Securities and Exchange Commission (SEC).lwph1.t
He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf
of San Miguel Corporation, against ten (10) of the fifteen-member Board of
Directors who had "either voted to approve and/or refused to reconsider and
revoke Board Resolution No. 86-12-2." 15 His Amended Petition in the SEC recited
substantially the foregoing antecedents and the following additional facts, to wit:
a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia
Corporation, Ltd., had met and passed a resolution authorizing the company to
borrow up to US $26,500,000.00 from the Hongkong & Shanghai Banking
Corporation, Hongkong "to enable the Soriano family to initiate steps and sign an
agreement for the purchase of some 33,133,266 shares of San ,Miguel
Corporation. 16
b) The loan of $26,500,000.00 was obtained on the same day, the corresponding
loan agreement having been signed for Neptunia by Ralph Kahn and Carl Ottiger.
At the latter's request, the proceeds of the loan were deposited in different
banks 17 for the account of "Eduardo J. Soriano".
c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the
stockholders of San Miguel Corporation, 18 inter alia soliciting their proxies and
announcing that "the Soriano family, friends and affiliates acquired a considerable
block of San Miguel Corporation shares only a few days ago .., the transaction ..
(having been) made through the facilities of the Manila Stock Exchange, and
33,133,266 shares .. (having thereby been) purchased for the aggregate price of'
P3,313,326,600.00." The letters also stated that the purchase was "an exercise of
the Sorianos' right to buy back the same number of shares purchased in 1983 by
the .. (14 seller corporations)."
d) In implementing the assumption of the Neptunia loan and the purchase
agreement for which said loan was obtained, which assumption constituted an

improper use of corporate funds to pay personal obligations of Andres Soriano III,
enabling him; to purchase stock of the corporation using funds of' the corporation
itself, the respondents, through various subsequent machinations and
manipulations, for interior motives and in breach of fiduciary duty, compound the
damages caused San Miguel Corporation by, among other things: (1) agreeing to
pay a higher price for the shares than was originally covenanted in order to prevent
a rescission of the purchase agreement by the sellers; (2) urging UCPB to accept
San Miguel Corporation and Neptunia as buyers of the shares, thereby committing
the former to the purchase of its own shares for at least 25% higher than the price
at which they were fairly traded in the stock exchanges, and shifting to said
corporations the personal obligations of Soriano III under the purchase agreement;
and (3) causing to be applied to the part payment of P1,800,000.00 on said
purchase, various assets and receivables of San Miguel Corporation.
The complaint closed with a prayer for injunction against the execution or
consummation of any agreement causing San Miguel Corporation to purchase the
shares in question or entailing the use of its corporate funds or assets for said
purchase, and against Andres Soriano III from further using or disposing of the
funds or assets of the corporation for his obligations; for the nullification of the SMC
Board's resolution of April 2, 1987 making San Miguel Corporation a party to the
purchase agreement; and for damages.
Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to
wit:
1 De los Angeles has no legal capacity to sue because
a) having been merely imposed by the PCGG as a director on San Miguel, he has
no standing to bring a minority derivative suit;
b) he personally holds only 20 shares and hence cannotfairly and adequately
represent the minority stockholders of the corporation;
c) he has not come to court with clean hands; and
2. The Securities & Exchange Commission has no jurisdiction over the controversy
because the matters involved are exclusively within the business judgment of the
Board of Directors. 19
Kahn's motion to dismiss was subsequently adopted by his correspondents . 20
The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz,
by order dated September 4, 1987. 21 In her view

1) the fact that de los Angeles was a PCGG nominee was irrelevant because in
law, ownership of even one share only, sufficed to qualify a person to bring a
derivative suit;
2) it is indisputable that the action had been brought by de los Angeles for the
benefit of the corporation and all the other stockholders;
3) he was a stockholder at the time of the commission of the acts complained of,
the number of shares owned by him being to repeat, immaterial;
4) there is no merit in the assertion that he had come to Court with unclean hands,
it not having been shown that he participated in the act complained of or ratified
the same; and
5) where business judgment transgresses the law, the securities and Exchange
Commission always has competence to inquire thereinto.
Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking
the annulment of this adverse resolution of the SEC Hearing Officer and her
perpetual inhibition from proceeding with SEC Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-two. The
majority 22 ruled that de los Angeles had no egal capacity to institute the derivative
suit, a conclusion founded on the following propositions:
1) a party "who files a derivative suit should adequately represent the interests of
the minority stockholders;" since "De los Angeles holds 20 shares of stock out of
121,645,860 or 0.00001644% (appearing to be undisputed), (he) cannot even be
remotely said to adequately represent the interests of the minority stockholders,
(e)specially so when .. de los Angeles was put by the PCGG to vote the majority
stock," a situation generating "a genuine conflict of interest;"
2) de los Angeles has not met this conflict-of-interest argument, i.e., that his
position as PCGG-nominated director is inconsistent with his assumed role of
representative of minority stockholders; not having been elected by the minority,
his voting would expectedly consider the interest of the entity which placed him in
the board of directors;
3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a)
PCGG cannot exercise acts of dominion over sequestered property, (b) it has only
powers of administration, and (c) its voting of sequestered stock must be done only
pursuant to its power of administration; and
4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought
for the benefit of the corporation.

The dissenting Justices, 24 on the other hand, were of the opinion that the suit had
been properly brought by de los Angeles because
1) the number of shares owned by him was immaterial, he being a stockholder in
his own right;
2) he had not voted in favor of the resolution authorizing the purchase of the
shares; and
3) even if PCGG was not the owner of the sequestered shares, it had the right to
seek the protection of the interest of the corporation, it having been held that even
an unregistered shareholder or an equitable owner of shares and pledgees of
shares may be deemed a shareholder for purposes of instituting a derivative suit.
De los Angeles has appealed to this Court. He prays for reversal of the judgment
of the Court of Appeals, imputing to the latter the following errors:
1) having granted the writ of certiorari despite the fact that Kahn had not first
resorted to the plain remedy available to him, i.e., appeal to the SEC en banc and
despite the fact that no question of jurisdiction was involved;
2) having ruled on Kahn's petition on the basis merely of his factual allegations,
although he (de los Angeles) had disputed them and there had been no trial in the
SEC; and
3) having held that he (de los Angeles) could not file a derivative suit as stockholder
and/or director of the San Miguel Corporation.
For their part, and in this Court, the respondents make the following assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the ownership of
the 33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R. Nos.
74910, 5075, 75094, 76397, 79459 and 79520, promulgated on August 10,
1988; 25
2) de los Angeles was beholden to the controlling stockholder in the corporation
(PCGG), which had "imposed" him on the corporation; since the PCGG had a clear
conflict of interest with the minority, de los Angeles, as director of the former, had
no legal capacity to sue on behalf of the latter;
3) even assuming absence of conflict of interest, de los Angeles does not fairly
and adequately represent the interest of the minority stockholders;
4) the respondents had properly applied for certiorari with the Court of Appeals
because

a) that Court had, by law, exclusive appellate jurisdiction over officers and
agencies exercising quasi-judicial functions, and hence file competence to issue
the writ of certiorari;
b) the principle of exhaustion of administrative remedies does not apply since the
issue involved is one of law;
c) said respondents had no plain, speedy and adequate remedy within SEC;
d) the Order of the SEC Investigating Officer denying the motion to dismiss
was issued without or in excess of jurisdiction, hence was correctly nullified by the
Court of Appeals; and
e) de los Angeles had not raised the issue of absence of a motion for
reconsideration by respondents in the SEC case; in any event, such a motion was
unnecessary in the premises.
De los Angeles' Reply seeks to make the following points:
1) since the law lays down three (3) requisites for a derivative suit, viz:
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of,
b) he has exhausted intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to
heed his plea; and
c) c)the cause of action actually devolves on the corporation, the ,wrongdoing or
harm having been caused to the corporation and not to .the particular stockholder
bringing the suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in his own
right, having acquired those shares as early as 1977, (2) he had sought without
success to have the board of' directors remedy with wrong, and (3) that wrong was
in truth a 'wrong against the stockholders of the corporation, generally, ,and not
against him individually and it was the corporation, and not he, particularly, that
would be entitled to the appropriate' relief the propriety of his suit cannot be
gainsaid;
2) Kahn had not limited himself to questions of law in the proceedings in the Court
of Appeals and hence could not claim exclusion from the scope of the doctrine of
exhaustion of remedies; moreover, Rule 65, invoked by him, bars a resort
to certiorari. where a plain, speedy and accurate remedy was available to him in
this case, to wit, a motion for reconsideration before the Sec en banc and, contrary

to the respondent's claim, De Los Angeles had in fact asserted to this propositions
before the Appellate Tribunal; and
3) the respondent had not raised the issue of jurisdiction before the Court of
Appeals; indeed, they admit to their Comment that that
issue has not yet been resolved by the SEC," be this as it may, the derivative suit
does not fall within the BASECO doctrine since it does not involve any question of
ownership of the 33,133,266 sequestered SMC shares but rather, the validity of
the resolution of the board of directors for the assumption by the corporation, for
the benefit of certain of its officers and stockholders, of liability for loans contracted
by another corporation, which is an intra-corporate dispute within the exclusive
jurisdiction of the SEC.
1. De los Angeles is not opposed to the asserted position of the PCGG that the
sequestered SMC shares of stock belong to Ferdinand Marcos and/or his dummies
and/or cronies. His consent to sit in the board as nominee of PCGG unquestionably
indicates his advocacy of the PCGG position. He does not here seek, and his
complaint in the SEC does not pray for, the annulment of the purchase by SMC of
the stock in question, or even the subsequent purchase of the same stock by
others 26 which proposition was challenged by (1) one Evio, in SEC Case No.
3000; (2) by the 14 corporations which sold the stock to SMC, in Civil Case No.
13865 of the Manila RTC, said cases having later become subject of G.R. No.
74910 of this Court; (3) by Neptunia, SMC, and others, in G.R. No. 79520 of this
Court; and (4) by Eduardo Cojuangco and others in Civil Case No. 16371 of the
RTC, Makati, [on the theory that the sequestered stock in fact belonged to coconut
planters and oil millers], said case later having become subject of G.R. No. 79459
of this court . 27 Neither does de los Angeles impugn, obviously, the right of the
PCGG to vote the sequestered stock thru its nominee directors as was done by
United Coconut Planters Bank and the 14 seller corporations (in SEC Case No.
3005, later consolidated with SEC Case No. 3000 above mentioned, these two (2)
cases later having become subject of G.R.No. 76397) as well as by one Clifton
Ganay, a UCPB stockholder (in G.R. No. 75094 of this Court).lwph1.t 28
The subject matter of his complaint in the SEC does not therefore fall within the
ambit of this Court's Resolution of August 10, 1988 on the cases just mentioned,
to the effect that, citing PCGG v. Pena, et al 29 an cases of the Commission
regarding 'the funds, moneys, assets, and properties illegally acquired or
misappropriated by former President Ferdinand Marcos, Mrs. Imelda Romualdez
Marcos, their close relatives, Subordinates, Business Associates, Dummies,
Agents, or Nominees, whether civil or criminal, are lodged within the exclusive and
original jurisdiction of the Sandiganbayan,' and all incidents arising from, incidental

to, or related to, such cases necessarily fall likewise under the Sandiganbayan's
exclusive and original jurisdiction, subject to review on certiorari exclusively by the
Supreme Court." His complaint does not involve any property illegally acquired or
misappropriated by Marcos, et al., or "any incidents arising from, incidental to, or
related to" any case involving such property, but assets indisputably belonging to
San Miguel Corporation which were, in his (de los Angeles') view, being illicitly
committed by a majority of its board of directors to answer for loans assumed by a
sister corporation, Neptunia Co., Ltd.
De los Angeles' complaint, in fine, is confined to the issue of the validity of the
assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly
for the benefit of certain of its officers and stockholders, an issue evidently distinct
from, and not even remotely requiring inquiry into the matter of whether or not the
33,133,266 SMC shares sequestered by the PCGG belong to Marcos and his
cronies or dummies (on which- issue, as already pointed out, de los Angeles, in
common with the PCGG, had in fact espoused the affirmative). De los Angeles'
dispute, as stockholder and director of SMC, with other SMC directors, an intracorporate one, to be sure, is of no concern to the Sandiganbayan, having no
relevance whatever to the ownership- of the sequestered stock. The contention,
therefore, that in view of this Court's ruling as regards the sequestered SMC stock
above adverted to, the SEC has no jurisdiction over the de los Angeles complaint,
cannot be sustained and must be rejected. The dispute concerns acts of the board
of directors claimed to amount to fraud and misrepresentation which may be
detrimental to the interest of the stockholders, or is one arising out of intracorporate relations between and among stockholders, or between any or all of
them and the corporation of which they are stockholders . 30
2. The theory that de los Angeles has no personality to bring suit in behalf of the
corporation because his stockholding is minuscule, and there is a "conflict of
interest" between him and the PCGG cannot be sustained, either.
It is claimed that since de los Angeles 20 shares (owned by him since 1977)
represent only. 00001644% of the total number of outstanding shares (1
21,645,860), he cannot be deemed to fairly and adequately represent the interests
of the minority stockholders. The implicit argument that a stockholder, to be
considered as qualified to bring a derivative suit, must hold a substantial or
significant block of stock finds no support whatever in the law. The requisites
for a derivative suit 31 are as follows:
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material; 32

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on


the board of directors for the appropriate relief but the latter has failed or refused
to heed his plea; 33 and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular
stockholder bringing the suit. 34
The bona fide ownership by a stockholder of stock in his own right suffices to invest
him with standing to bring a derivative action for the benefit of the corporation. The
number of his shares is immaterial since he is not suing in his own behalf, or for
the protection or vindication of his own particular right, or the redress of a wrong
committed against him, individually, but in behalf and for the benefit of the
corporation.
3. Neither can the "conflict-of-interest" theory be upheld. From the conceded
premise that de los Angeles now sits in the SMC Board of Directors by the grace
of the PCGG, it does not follow that he is legally obliged to vote as the PCGG
would have him do, that he cannot legitimately take a position inconsistent with
that of the PCGG, or that, not having been elected by the minority stockholders,
his vote would necessarily never consider the latter's interests. The proposition is
not only logically indefensible, non sequitur, but also constitutes an erroneous
conception of a director's role and function, it being plainly a director's duty to vote
according to his own independent judgment and his own conscience as to what is
in the best interests of the company. Moreover, it is undisputed that apart from the
qualifying shares given to him by the PCGG, he owns 20 shares in his own right,
as regards which he cannot from any aspect be deemed to be "beholden" to the
PCGG, his ownership of these shares being precisely what he invokes as the
source of his authority to bring the derivative suit.
4. It is also theorized, on the authority of the BASECO decision, that the PCGG
has no power to vote sequestered shares of stock as an act of dominion but only
in pursuance to its power of administration. The inference is that the PCGG's
act of voting the stock to elect de los Angeles to the SMC Board of Directors was
unauthorized and void; hence, the latter could not bring suit in the corporation's
behalf. The argument is strained and obviously of no merit. As already more than
plainly indicated, it was not necessary for de los Angeles to be a director in order
to bring a derivative action; all he had to be was a stockholder, and that he was
owning in his own right 20 shares of stock, a fact not disputed by the respondents.
Nor is there anything in the Baseco decision which can be interpreted as ruling
that sequestered stock may not under any circumstances be voted by the PCGG

to elect a director in the company in which such stock is held. On the contrary, that
it held such act permissible is evident from the context of its reference to the
Presidential Memorandum of June 26, 1986 authorizing the PCGG, "pending the
outcome of proceedings to determine the ownership of .. sequestered shares of
stock,"'to vote such shares .. at all stockholders' meetings called for the election of
directors ..," the only caveat being that the stock is not to be voted simply because
the power to do so exists, whether it be to oust and replace directors or to effect
substantial changes in corporate policy, programs or practice, but only "for
demonstrably weighty and defensible grounds" or "when essential to prevent
disappearance or wastage of corporate property."
The issues raised here do not peremptorily call for a determination of whether or
not in voting petitioner de los Angeles to the San Miguel Board, the PCGG kept
within the parameters announced in Baseco; and absent any showing to the
contrary, consistently with the presumption that official duty is regularly performed,
it must be assumed to have done so.
WHEREFORE, the petition is GRANTED. The appealed decision of the Court of
Appeals in CA- G.R. SP No. 12857 setting aside the order of September 4, 1987
issued in SEC Case No. 3153 and dismissing said case is REVERSED AND
SET ASIDE. The further disposition in the appealed decision for the issuance of a
writ of preliminary injunction upon the filing and approval of a bond of P500,000.00
by respondent Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE,
and any writ of injunction issued pursuant thereto is lifted. Costs against private
respondents.
SO ORDERED.
G.R. No. 177549

June 18, 2009

ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners,


vs.
JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L.
YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf and on
behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC.,Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of
Court, which seeks to reverse and set aside the Resolutions dated 18 July
20062 and 19 April 20073 of the Court of Appeals in CA-G.R. SP No. 00185. Upon
herein respondents motion, the Court of Appeals rendered the assailed Resolution

dated 18 July 2006, reconsidering its Decision4 dated 15 February 2006; and
remanding the case to the Regional Trial Court (RTC) of Cebu City, Branch 11, for
necessary proceedings, in effect, reversing the Decision5 dated 10 November
2004 of the RTC which dismissed respondents Complaint in SRC Case No. 022CEB. Herein petitioners Motion for Reconsideration of the Resolution dated 18
July 2006 was denied by the appellate court in the other assailed Resolution dated
19 April 2007.
Herein petitioners are members of the Yu Family, particularly, the father, Anthony
S. Yu (Anthony); the wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu
(Jason).
Herein respondents composed the Yukayguan Family, namely, the father, Joseph
S. Yukayguan (Joseph); the wife, Nancy L. Yukayguan (Nancy); and their children
Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).
Petitioner Anthony is the older half-brother of respondent Joseph.
Petitioners and the respondents were all stockholders of Winchester Industrial
Supply, Inc. (Winchester, Inc.), a domestic corporation engaged in the operation
of a general hardware and industrial supply and equipment business.
On 15 October 2002, respondents filed against petitioners a verified Complaint for
Accounting, Inspection of Corporate Books and Damages through Embezzlement
and Falsification of Corporate Records and Accounts6before the RTC of Cebu.
The said Complaint was filed by respondents, in their own behalf and as a
derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No.
022-CEB. The factual background of the Complaint was stated in the attached
Affidavit executed by respondent Joseph.
According to respondents,7 Winchester, Inc. was established and incorporated on
12 September 1977, with petitioner Anthony as one of the incorporators, holding
1,000 shares of stock worth P100,000.00.8 Petitioner Anthony paid for the said
shares of stock with respondent Josephs money, thus, making the former a mere
trustee of the shares for the latter. On 14 November 1984, petitioner Anthony
ceded 800 of his 1,000 shares of stock in Winchester, Inc. to respondent Joseph,
as well as Yu Kay Guan,9 Siao So Lan, and John S. Yu.10 Petitioner Anthony
remained as trustee for respondent Joseph of the 200 shares of stock in
Winchester, Inc., still in petitioner Anthonys name.
Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its
incorporators, excluding petitioner Anthony, their accumulated 8,500 shares in the
corporation.11 Subsequently, on 7 November 1995, Winchester, Inc. sold the

same 8,500 shares to other persons, who included respondents Nancy, Jerald,
and Jill; and petitioners Rosita and Jason.12
Respondents further averred that although respondent Joseph appeared as the
Secretary and Treasurer in the corporate records of Winchester, Inc., petitioners
actually controlled and ran the said corporation as if it were their own family
business. Petitioner Rosita handled the money market placements of the
corporation to the exclusion of respondent Joseph, the designated Treasurer of
Winchester, Inc. Petitioners were also misappropriating the funds and properties
of Winchester, Inc. by understating the sales, charging their personal and family
expenses to the said corporation, and withdrawing stocks for their personal use
without paying for the same. Respondents attached to the Complaint various
receipts13 to prove the personal and family expenses charged by petitioners to
Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph be declared the owner of
the 200 shares of stock in petitioner Anthonys name. Respondents also prayed
that petitioners be ordered to: (1) deposit the corporate books and records of
Winchester, Inc. with the Branch Clerk of Court of the RTC for respondents
inspection; (2) render an accounting of all the funds of Winchester, Inc. which
petitioners misappropriated; (3) reimburse the personal and family expenses which
petitioners charged to Winchester, Inc., as well as the properties of the corporation
which petitioners withheld without payment; and (4) pay respondents attorneys
fees and litigation expenses. In the meantime, respondents sought the
appointment of a Management Committee and the freezing of all corporate funds
by the trial court.
On 13 November 2002, petitioners filed an Answer with Compulsory
Counterclaim,14
attached
to
which
was
petitioner
Anthonys
Affidavit.15 Petitioners vehemently denied the allegation that petitioner Anthony
was a mere trustee for respondent Joseph of the 1,000 shares of stock in
Winchester, Inc. in petitioner Anthonys name. For the incorporation of Winchester,
Inc., petitioner Anthony contributed P25,000.00 paid-up capital, representing 25%
of the total par value of the 1,000 shares he subscribed to, the said amount being
paid out of petitioner Anthonys personal savings and petitioners Anthony and
Rositas conjugal funds. Winchester, Inc. was being co-managed by petitioners
and respondents, and the attached receipts, allegedly evidencing petitioners use
of corporate funds for personal and family expenses, were in fact signed and
approved by respondent Joseph.
By way of special and affirmative defenses, petitioners contended in their Answer
with Compulsory Counterclaim that respondents had no cause of action against

them. Respondents Complaint was purely intended for harassment. It should be


dismissed under Section 1(j), Rule 1616 of the Rules of Court for failure to comply
with conditions precedent before its filing. First, there was no allegation in
respondents Complaint that earnest efforts were exerted to settle the dispute
between the parties. Second, since respondents Complaint purportedly
constituted a derivative suit, it noticeably failed to allege that respondents exerted
effort to exhaust all available remedies in the Articles of Incorporation and By-Laws
of Winchester, Inc., as well as in the Corporation Code. And third, given that
respondents Complaint was also for inspection of corporate books, it lacked the
allegation that respondents made a previous demand upon petitioners to inspect
the corporate books but petitioners refused. Prayed for by petitioners, in addition
to the dismissal of respondents Complaint, was payment of moral and exemplary
damages, attorneys fees, litigation expenses, and cost of suit.
On 30 October 2002, the hearing on the application for the appointment of a
Management Committee was commenced. Respondent Joseph submitted therein,
as his direct testimony, the same Affidavit that he executed, which was attached
to the respondents Complaint. On 4 November 2002, respondent Joseph was
cross-examined by the counsel for petitioners. Thereafter, the continuation of the
hearing was set for 29 November 2002, in order for petitioners to adduce evidence
in support of their opposition to the application for the appointment of a
Management Committee.17
During the hearing on 29 November 2002, the parties manifested before the RTC
that there was an ongoing mediation between them, and so the hearing on the
appointment of a Management Committee was reset to another date.
In amicable settlement of their dispute, the petitioners and respondents agreed to
a division of the stocks in trade,18the real properties, and the other assets of
Winchester, Inc. In partial implementation of the afore-mentioned amicable
settlement, the stocks in trade and real properties in the name of Winchester, Inc.
were equally distributed among petitioners and respondents. As a result, the
stockholders and members of the Board of Directors of Winchester, Inc. passed,
on 4 January 2003, a unanimous Resolution19 dissolving the corporation as of
said date.
On 22 February 2004, respondents filed their pre-trial brief.20
On 25 June 2004, petitioners filed a Manifestation21 informing the RTC of the
existence of their amicable settlement with respondents. Respondents, however,
made their own manifestation before the RTC that they were repudiating said
settlement, in view of the failure of the parties thereto to divide the remaining assets

of Winchester, Inc. Consequently, respondents moved to have SRC Case No. 022CEB set for pre-trial.
On 23 August 2004, petitioners filed their pre-trial brief.22
On 26 August 2004, instead of holding a formal pre-trial conference and resuming
the hearing on the application for the appointment of a Management Committee,
petitioners and respondents agreed that the RTC may already render a judgment
based on the pleadings. In accordance with the agreement of the parties, the RTC
issued, on even date, an Order23 which stated:
ORDER
During the pre-trial conference held on August 26, 2004, counsels of the parties
manifested, agreed and suggested that a judgment may be rendered by the Court
in this case based on the pleadings, affidavits, and other evidences on record, or
to be submitted by them, pursuant to the provision of Rule 4, Section 4 of the Rule
on Intra-Corporate Controversies. The suggestion of counsels was approved by
the Court.
Accordingly, the Court hereby orders the counsels of the parties to file
simultaneously their respective memoranda within a non-extendible period of
twenty (20) days from notice hereof. Thereafter, the instant case will be deemed
submitted for resolution.
xxxx
Cebu City, August 26, 2004.
(signed)
SILVESTRE
Acting Presiding Judge

A.

MAAMO,

JR.

Petitioners and respondents duly filed their respective Memoranda,24 discussing


the arguments already set forth in the pleadings they had previously submitted to
the RTC. Respondents, though, attached to their Memorandum a Supplemental
Affidavit25 of respondent Joseph, containing assertions that refuted the allegations
in petitioner Anthonys Affidavit, which was earlier submitted with petitioners
Answer with Compulsory Counterclaim. Respondents also appended to their
Memorandum additional documentary evidence,26 consisting of original and
duplicate cash invoices and cash disbursement receipts issued by Winchester,
Inc., to further substantiate their claim that petitioners were understating sales and
charging their personal expenses to the corporate funds.

The RTC subsequently promulgated its Decision on 10 November 2004 dismissing


SRC Case No. 022-CEB. The dispositive portion of said Decision reads:
WHEREFORE, in view of the foregoing premises and for lack of merit, this Court
hereby renders judgment in this case DISMISSING the complaint filed by the
[herein respondents].
The Court also hereby dismisses the [herein petitioners] counterclaim because it
has not been indubitably shown that the filing by the [respondents] of the latters
complaint was done in bad faith and with malice.27
The RTC declared that respondents failed to show that they had complied with the
essential requisites for filing a derivative suit as set forth in Rule 8 of the Interim
Rules of Procedure Governing Intra-Corporate Controversies:
(1) He was a stockholder or member at the time the acts or transactions subject of
the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the relief he
desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
As to respondents prayer for the inspection of corporate books and records, the
RTC adjudged that they had likewise failed to comply with the requisites entitling
them to the same. Section 2, Rule 7 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies requires that the complaint for inspection of
corporate books or records must state that:
(1) The case is for the enforcement of plaintiff's right of inspection of corporate
orders or records and/or to be furnished with financial statements under Sections
74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books and records and/or to be
furnished with financial statements made by the plaintiff upon defendant;
(3) The refusal of defendant to grant the demands of the plaintiff and the reasons
given for such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff
is unjustified and illegal, stating the law and jurisprudence in support thereof.

The RTC further noted that respondent Joseph was the corporate secretary of
Winchester, Inc. and, as such, he was supposed to be the custodian of the
corporate books and records; therefore, a court order for respondents inspection
of the same was no longer necessary. The RTC similarly denied respondents
demand for accounting as it was clear that Winchester, Inc. had been engaging
the services of an audit firm. Respondent Joseph himself described the audit firm
as competent and independent, and believed that the audited financial statements
the said audit firm prepared were true, faithful, and correct.
Finding the claims of the parties for damages against each other to be
unsubstantiated, the RTC thereby dismissed the same.
Respondents challenged the foregoing RTC Decision before the Court of Appeals
via a Petition for Review under Rule 43 of the Rules of Court, docketed as CAG.R. SP No. 00185.
On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10
December 2004 Decision of the RTC. Said the appellate court:
After a careful and judicious scrutiny of the extant records of the case, together
with the applicable laws and jurisprudence, WE see no reason or justification for
granting the present appeal.
xxxx
x x x [T]his Court sees that the instant petition would still fail taking into
consideration all the pleadings and evidence of the parties except the
supplemental affidavit of [herein respondent] Joseph and its corresponding
annexes appended in [respondents] memorandum before the Court a quo. The
Court a quo have (sic) outrightly dismissed the complaint for its failure to comply
with the mandatory provisions of the Interim Rules of Procedure for Intra-Corporate
Controversies particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and Rule 7,
Section 2 thereof, which reads as follows:
RULE
COMMENCEMENT OF ACTION AND PLEADINGS
Sec. 4. Complaint. The complaint shall state or contain:
xxxx
(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;
xxxx

RULE
DERIVATIVE SUITS

Sec. 1. Derivative action. x x x


xxxx
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the relief he
desires.
xxxx
RULE
INSPECTION OF CORPORATE BOOKS AND RECORDS

Sec. 2. Complaint In addition to the requirements in section 4, Rule 2 of these


Rules, the complaint must state the following:
(1) The case is set (sic) for the enforcement of plaintiffs right of inspection of
corporate orders or records and/or to be furnished with financial statements under
Section 74 and 75 of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books [and/or] to be furnished with
financial statements made by the plaintiffs upon defendant;
(3) The refusal of the defendant to grant the demands of the plaintiff and the
reasons given for such refusal, if any; and
(4) The reasons why the refusal of defendant to grant the demands of the plaintiff
is unjustified and illegal, stating the law and jurisprudence in support thereof.
xxxx
A perusal of the extant record shows that [herein respondents] have not complied
with the above quoted provisions. [Respondents] should be mindful that in filing
their complaint which, as admitted by them, is a derivative suit, should have first
exhausted all available remedies under its (sic) Articles of Incorporation, or its bylaws, or any laws or rules governing the corporation. The contention of [respondent
Joseph] that he had indeed made several talks to (sic) his brother [herein petitioner
Anthony] to settle their differences is not tantamount to exhaustion of remedies.
What the law requires is to bring the grievance to the Board of Directors or
Stockholders for the latter to take the opportunity to settle whatever problem in its
regular meeting or special meeting called for that purpose which [respondents]
failed to do. x x x The requirements laid down by the Interim Rules of Procedure

for Intra-Corporate Controversies are mandatory which cannot be dispensed with


by any stockholder of a corporation before filing a derivative suit.28(Emphasis
ours.)
The Court of Appeals likewise sustained the refusal by the RTC to consider
respondent Josephs Supplemental Affidavit and other additional evidence, which
respondents belatedly submitted with their Memorandum to the said trial court. The
appellate court ratiocinated that:
With regard to the claim of [herein respondents] that the supplemental affidavit of
[respondent] Joseph and its annexes appended to their memorandum should have
been taken into consideration by the Court a quo to support the reliefs prayed [for]
in their complaint. (sic) This Court rules that said supplemental affidavit and its
annexes is (sic) inadmissible.
A second hard look of (sic) the extant records show that during the pre-trial
conference conducted on August 26, 2004, the parties through their respective
counsels had come up with an agreement that the lower court would render
judgment based on the pleadings and evidence submitted. This agreement is in
accordance with Rule 4, Sec. 4 of the Interim Rules of Procedure for IntraCorporate Controversies which explicitly states:
SECTION. 4. Judgment before pre-trial. If, after submission of the pre-trial briefs,
the court determines that, upon consideration of the pleadings, the affidavits and
other evidence submitted by the parties, a judgment may be rendered, the court
may order the parties to file simultaneously their respective memoranda within a
non-extendible period of twenty (20) days from receipt of the order. Thereafter, the
court shall render judgment, either full or otherwise, not later than ninety (90) days
from the expiration of the period to file the memoranda.
xxxx
Clearly, the supplemental affidavit and its appended documents which were
submitted only upon the filing of the memorandum for the [respondents] were not
submitted in the pre-trial briefs for the stipulation of the parties during the pre-trial,
hence, it cannot be accepted pursuant to Rule 2, Sec. 8 of the same rules which
reads as follows:
SEC. 8. Affidavits, documentary and other evidence. Affidavits shall be based on
personal knowledge, shall set forth such facts as would be admissible in evidence,
and shall show affirmatively that the affiant is competent to testify on the matters
stated therein. The affidavits shall be in question and answer form, and shall
comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be


attached to the appropriate pleading; Provided, however, that affidavits,
documentary and other evidence not so submitted may be attached to the pre-trial
brief required under these Rules. Affidavits and other evidence not so submitted
shall not be admitted in evidence, except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is
presumed prima facie hostile if he fails or refuses to execute an affidavit after a
written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling reasons;
and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later
than five (5) days prior to its introduction in evidence.
There is no showing in the case at bench that the supplemental affidavit and its
annexes falls (sic) within one of the exceptions of the above quoted proviso, hence,
inadmissible.
It must be noted that in the case at bench, like any other civil cases, "the party
making an allegation in a civil case has the burden of proving it by preponderance
of evidence." Differently stated, upon the plaintiff in [a] civil case, the burden of
proof never parts. That is, appellants must adduce evidence that has greater
weight or is more convincing that (sic) which is offered to oppose it. In the case at
bar, no one should be blamed for the dismissal of the complaint but the
[respondents] themselves for their lackadaisical attitude in setting forth and
appending their defences belatedly. To admit them would be a denial of due
process for the opposite party which this Court cannot allow.29
Ultimately, the Court of Appeals decreed:
WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and
the assailed Decision of the Regional Trial Court (RTC), 7th Judicial Region,
Branch II, Cebu City, dated November 10, 2004, in SRC Case No. 022-CEB is
AFFIRMED in toto. Cost against the [herein respondents].30
Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006,
a Motion for Reconsideration and Motion to Set for Oral Arguments the Motion for
Reconsideration,31 invoking the following grounds:
(1) The [herein respondents] have sufficiently exhausted all remedies before filing
the present action; and

(2) [The] Honorable Court erred in holding that the supplemental affidavit and its
annexes is (sic) inadmissible because the rules and the lower court expressly
allowed the submission of the same in its order dated August 26, 2004 x x x.32
In a Resolution33 dated 8 March 2006, the Court of Appeals granted respondents
Motion to Set for Oral Arguments the Motion for Reconsideration.
On 4 April 2006, the Court of Appeals issued a Resolution34 setting forth the
events that transpired during the oral arguments, which took place on 30 March
2006. Counsels for the parties manifested before the appellate court that they were
submitting respondents Motion for Reconsideration for resolution. Justice
Magpale, however, still called on the parties to talk about the possible settlement
of the case considering their familial relationship. Independent of the resolution of
respondents Motion for Reconsideration, the parties were agreeable to pursue a
settlement for the dissolution of the corporation, which they had actually already
started.
In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the parties to
submit, within 10 days from notice, their intended amicable settlement, since the
same would undeniably affect the resolution of respondents pending Motion for
Reconsideration. If the said period should lapse without the parties submitting an
amicable settlement, then they were directed by the appellate court to file within
10 days thereafter their position papers instead.
On 5 May 2006, respondents submitted to the Court of Appeals their Position
Paper,36 stating that the parties did not reach an amicable settlement.
Respondents informed the appellate court that prior to the filing with the Securities
and Exchange Commission (SEC) of a petition for dissolution of Winchester, Inc.,
the parties already divided the stocks in trade and the real assets of the corporation
among themselves. Respondents posited, though, that the afore-mentioned
distribution of the assets of Winchester, Inc. among the parties was null and void,
as it violated the last paragraph of Section 122 of the Corporation Code, which
provides that, "[e]xcept by a decrease of capital stock and as otherwise allowed by
the Corporation Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and liabilities." At
the same time, however, respondents brought to the attention of the Court of
Appeals that the parties did eventually file with the SEC a petition for dissolution
of Winchester, Inc., which the SEC approved.37
Respondents no longer discussed in their Position Paper the grounds they
previously invoked in their Motion for Reconsideration of the Court of Appeals
Decision dated 15 February 2006, affirming in toto the RTC Decision dated 10

November 2004. They instead argued that the RTC Decision in question was null
and void as it did not clearly state the facts and the law on which it was based.
Respondents sought the remand of the case to the RTC for further proceedings
on their derivative suit and completion of the dissolution of Winchester, Inc.,
including the legalization of the prior partial distribution among the parties of the
assets of said corporation.
Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused
respondents of attempting to incorporate extraneous matters into the latters
Motion for Reconsideration. Petitioners pointed out that the issue before the Court
of Appeals was not the dissolution and division of assets of Winchester, Inc., thus,
a remand of the case to the RTC was not necessary.
On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting
respondents Motion for Reconsideration. The Court of Appeals reasoned in this
wise:
After a second look and appreciation of the facts of the case, vis--vis the issues
raised by the [herein respondents] motion for reconsideration and in view of the
formal dissolution of the corporation which leaves unresolved up to the present the
settlement of the properties and assets which are now in danger of dissipation due
to the unending litigation, this Court finds the need to remand the instant case to
the lower court (commercial court) as the proper forum for the adjudication,
disposition, conveyance and distribution of said properties and assets between
and amongst its stockholders as final settlement pursuant to Sec. 122 of the
Corporation Code after payment of all its debts and liabilities as provided for under
the same proviso. This is in accord with the pronouncement of the Supreme Court
in the case of Clemente et. al. vs. Court of Appeals, et. al. where the high court
ruled and which WE quote, viz:
"the corporation continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits by and against it and
for enabling it to settle and close its affairs, culminating in the disposition and
distribution of its remaining assets. It may, during the three-year term, appoint a
trustee or a receiver who may act beyond that period. The termination of the life of
a juridical entity does not by itself cause the extinction or diminution of the rights
and liabilities of such entity x x x nor those of its owners and creditors. If the threeyear extended life has expired without a trustee or receiver having been expressly
designated by the corporation within that period, the board of directors (or trustees)
xxx may be permitted to so continue as "trustees" by legal implication to complete
the corporate liquidation. Still in the absence of a board of directors or trustees,
those having any pecuniary interest in the assets, including not only the

shareholders but likewise the creditors of the corporation, acting for and in its
behalf, might make proper representation with the Securities and Exchange
Commission, which has primary and sufficiently broad jurisdiction in matters of this
nature, for working out a final settlement of the corporate concerns."
In the absence of a trustee or board of director in the case at bar for purposes
above mentioned, the lower court under Republic Act No. [8799] (otherwise known
as the Securities and Exchange Commission) as implemented by A.M. No. 00-810-SC (Transfer of Cases from the Securities and Exchange Commission to the
Regional Trial Courts) which took effect on October 1, 2001, is the proper forum
for working out the final settlement of the corporate concern.39
Hence, the Court of Appeals ruled:
WHEREFORE, premises considered, the motion for reconsideration is GRANTED.
The order dated February 15, 2006 is hereby SET ASIDE and the instant case is
REMANDED to the lower court to take the necessary proceedings in resolving with
deliberate dispatch any and all corporate concerns towards final settlement.40
Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution, but it
was denied by the Court of Appeals in its other assailed Resolution dated 19 April
2007.
In the Petition at bar, petitioners raise the following issues:
I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE
CONSTITUTION OF THE PHILIPPINES, JURISPRUDENCE AND THE LAW[,]
ARE NULL AND VOID[.]
II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED
WITHOUT JURISDICTION[.]
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY
ERRED IN REMANDING THIS CASE TO THE LOWER COURT FOR THE
REASON CITED IN THE ASSAILED RESOLUTIONS, AND WITHOUT
RESOLVING THE GROUNDS FOR THE [RESPONDENTS] MOTION FOR
RECONSIDERATION. (sic) INASMUCH AS [THE] REASON CITED WAS A NONISSUE IN THE CASE.
IV.

WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL


COURT VIOLATES THE SUMMARY PROCEDURE FOR INTRA-CORPORATE
CASES.42
The crux of petitioners contention is that the Court of Appeals committed grievous
error in reconsidering its Decision dated 15 February 2006 on the basis of
extraneous matters, which had not been previously raised in respondents
Complaint before the RTC, or in their Petition for Review and Motion for
Reconsideration before the appellate court; i.e., the adjudication, disposition,
conveyance, and distribution of the properties and assets of Winchester, Inc.
among its stockholders, allegedly pursuant to the amicable settlement of the
parties. The fact that the parties were able to agree before the Court of Appeals to
submit for resolution respondents Motion for Reconsideration of the 15 February
2006 Decision of the same court, independently of any intended settlement
between the parties as regards the dissolution of the corporation and distribution
of its assets, only proves the distinction and independence of these matters from
one another. Petitioners also contend that the assailed Resolution dated 18 July
2006 of the Court of Appeals, granting respondents Motion for Reconsideration,
failed to clearly and distinctly state the facts and the law on which it was based.
Remanding the case to the RTC, petitioners maintain, will violate the very essence
of the summary nature of the Interim Rules of Procedure Governing IntraCorporate Controversies, as this will just entail delay, protract litigation, and revert
the case to square one.
The Court finds the instant Petition meritorious.
To recapitulate, the case at bar was initiated before the RTC by respondents as a
derivative suit, on their own behalf and on behalf of Winchester, Inc., primarily in
order to compel petitioners to account for and reimburse to the said corporation
the corporate assets and funds which the latter allegedly misappropriated for their
personal benefit. During the pendency of the proceedings before the court a quo,
the parties were able to reach an amicable settlement wherein they agreed to
divide the assets of Winchester, Inc. among themselves. This amicable settlement
was already partially implemented by the parties, when respondents repudiated
the same, for which reason the RTC proceeded with the case on its merits. On 10
November 2004, the RTC promulgated its Decision dismissing respondents
Complaint for failure to comply with essential pre-requisites before they could avail
themselves of the remedies under the Interim Rules of Procedure Governing IntraCorporate Controversies; and for inadequate substantiation of respondents
allegations in said Complaint after consideration of the pleadings and evidence on
record.

In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal,
the findings of the RTC that respondents did not abide by the requirements for a
derivative suit, nor were they able to prove their case by a preponderance of
evidence. Respondents filed a Motion for Reconsideration of said judgment of the
appellate court, insisting that they were able to meet all the conditions for filing a
derivative suit. Pending resolution of respondents Motion for Reconsideration, the
Court of Appeals urged the parties to again strive to reach an amicable settlement
of their dispute, but the parties were unable to do so. The parties were not able to
submit to the appellate court, within the given period, any amicable settlement; and
filed, instead, their Position Papers. This effectively meant that the parties opted
to submit respondents Motion for Reconsideration of the 15 February 2006
Decision of the Court of Appeals, and petitioners opposition to the same, for
resolution by the appellate court on the merits.
It was at this point that the case took an unexpected turn.
In accordance with respondents allegation in their Position Paper that the parties
subsequently filed with the SEC, and the SEC already approved, a petition for
dissolution of Winchester, Inc., the Court of Appeals remanded the case to the
RTC so that all the corporate concerns between the parties regarding Winchester,
Inc. could be resolved towards final settlement.
In one stroke, with the use of sweeping language, which utterly lacked support, the
Court of Appeals converted the derivative suit between the parties into liquidation
proceedings.
The general rule is that where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. Nonetheless, an individual
stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stocks in order to protect or vindicate corporate rights, whenever
the officials of the corporation refuse to sue, or are the ones to be sued, or hold
the control of the corporation. In such actions, the suing stockholder is regarded
as a nominal party, with the corporation as the real party in interest. A derivative
action is a suit by a shareholder to enforce a corporate cause of action. The
corporation is a necessary party to the suit. And the relief which is granted is a
judgment against a third person in favor of the corporation. Similarly, if a
corporation has a defense to an action against it and is not asserting it, a
stockholder may intervene and defend on behalf of the corporation.43 By virtue of
Republic Act No. 8799, otherwise known as the Securities Regulation Code,
jurisdiction over intra-corporate disputes, including derivative suits, is now vested
in the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-1103-SC promulgated on 21 November 2000.

In contrast, liquidation is a necessary consequence of the dissolution of a


corporation. It is specifically governed by Section 122 of the Corporation Code,
which reads:
SEC. 122. Corporate liquidation. Every corporation whose charter expires by its
own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of and convey its
property and to distribute its assets, but not for the purpose of continuing the
business for which it was established.
At any time during said three (3) years, said corporation is authorized and
empowered to convey all of its property to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other persons
in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to
the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
Following the voluntary or involuntary dissolution of a corporation, liquidation is the
process of settling the affairs of said corporation, which consists of adjusting the
debts and claims, that is, of collecting all that is due the corporation, the settlement
and adjustment of claims against it and the payment of its just debts.44 More
particularly, it entails the following:
Winding up the affairs of the corporation means the collection of all assets, the
payment of all its creditors, and the distribution of the remaining assets, if any
among the stockholders thereof in accordance with their contracts, or if there be
no special contract, on the basis of their respective interests. The manner of
liquidation or winding up may be provided for in the corporate by-laws and this
would prevail unless it is inconsistent with law.45

It may be undertaken by the corporation itself, through its Board of Directors; or by


trustees to whom all corporate assets are conveyed for liquidation; or by a receiver
appointed by the SEC upon its decree dissolving the corporation.46lawphil.net
Glaringly, a derivative suit is fundamentally distinct and independent from
liquidation proceedings. They are neither part of each other nor the necessary
consequence of the other. There is totally no justification for the Court of Appeals
to convert what was supposedly a derivative suit instituted by respondents, on their
own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding
for the liquidation of Winchester, Inc.
While it may be true that the parties earlier reached an amicable settlement, in
which they agreed to already distribute the assets of Winchester, Inc., and in effect
liquidate said corporation, it must be pointed out that respondents themselves
repudiated said amicable settlement before the RTC, even after the same had
been partially implemented; and moved that their case be set for pre-trial. Attempts
to again amicably settle the dispute between the parties before the Court of
Appeals were unsuccessful.
Moreover, the decree of the Court of Appeals to remand the case to the RTC for
the "final settlement of corporate concerns" was solely grounded on respondents
allegation in its Position Paper that the parties had already filed before the SEC,
and the SEC approved, the petition to dissolve Winchester, Inc. The Court notes,
however, that there is absolute lack of evidence on record to prove said allegation.
Respondents failed to submit copies of such petition for dissolution of Winchester,
Inc. and the SEC Certification approving the same. It is a basic rule in evidence
that each party must prove his affirmative allegation. Since it was respondents who
alleged the voluntary dissolution of Winchester, Inc., respondents must, therefore,
prove it.47 This respondents failed to do.
Even assuming arguendo that the parties did submit a petition for the dissolution
of Winchester, Inc. and the same was approved by the SEC, the Court of Appeals
was still without jurisdiction to order the final settlement by the RTC of the
remaining corporate concerns. It must be remembered that the Complaint filed by
respondents before the RTC essentially prayed for the accounting and
reimbursement by petitioners of the corporate funds and assets which they
purportedly misappropriated for their personal use; surrender by the petitioners of
the corporate books for the inspection of respondents; and payment by petitioners
to respondents of damages. There was nothing in respondents Complaint which
sought the dissolution and liquidation of Winchester, Inc. Hence, the supposed
dissolution of Winchester, Inc. could not have resulted in the conversion of
respondents derivative suit to a proceeding for the liquidation of said corporation,

but only in the dismissal of the derivative suit based on either compromise
agreement or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007,
the Court of Appeals already went beyond the issues raised in respondents Motion
for Reconsideration. Instead of focusing on whether it erred in affirming, in its 15
February 2006 Decision, the dismissal by the RTC of respondents Complaint due
to respondents failure to comply with the requirements for a derivative suit and
submit evidence to support their allegations, the Court of Appeals unduly
concentrated on respondents unsubstantiated allegation that Winchester, Inc. was
already dissolved and speciously ordered the remand of the case to the RTC for
proceedings so vitally different from that originally instituted by respondents.
Despite the foregoing, the Court still deems it appropriate to already look into the
merits of respondents Motion for Reconsideration of the 15 February 2006
Decision of the Court of Appeals, for the sake of finally putting an end to the case
at bar.
In their said Motion for Reconsideration, respondents argued that: (1) they had
sufficiently exhausted all remedies before filing the derivative suit; and (2)
respondent Josephs Supplemental Affidavit and its annexes should have been
taken into consideration, since the submission thereof was allowed by the rules of
procedure, as well as by the RTC in its Order dated 26 August 2004.
As regards the first ground of sufficient exhaustion by respondents of all remedies
before filing a derivative suit, the Court subscribes to the ruling to the contrary of
the Court of Appeals in its Decision dated 16 February 2006.1avvphi1
The Court has recognized that a stockholders right to institute a derivative suit is
not based on any express provision of the Corporation Code, or even the
Securities Regulation Code, but is impliedly recognized when the said laws make
corporate directors or officers liable for damages suffered by the corporation and
its stockholders for violation of their fiduciary duties. Hence, a stockholder may sue
for mismanagement, waste or dissipation of corporate assets because of a special
injury to him for which he is otherwise without redress. In effect, the suit is an action
for specific performance of an obligation owed by the corporation to the
stockholders to assist its rights of action when the corporation has been put in
default by the wrongful refusal of the directors or management to make suitable
measures for its protection. The basis of a stockholders suit is always one in
equity. However, it cannot prosper without first complying with the legal requisites
for its institution.48

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate


Controversies lays down the following requirements which a stockholder must
comply with in filing a derivative suit:
Sec. 1. Derivative action. A stockholder or member may bring an action in the
name of a corporation or association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of
the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the relief he
desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
A perusal of respondents Complaint before the RTC would reveal that the same
did not allege with particularity that respondents exerted all reasonable efforts to
exhaust all remedies available under the articles of incorporation, by-laws, laws or
rules governing Winchester, Inc. to obtain the relief they desire.
Respondents assert that their compliance with said requirement was contained in
respondent Josephs Affidavit, which was attached to respondents Complaint.
Respondent Joseph averred in his Affidavit that he tried for a number of times to
talk to petitioner Anthony to settle their differences, but the latter would not listen.
Respondents additionally claimed that taking further remedies within the
corporation would have been idle ceremony, considering that Winchester, Inc. was
a family corporation and it was impossible to expect petitioners to take action
against themselves who were the ones accused of wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies are simple and do not leave room for statutory
construction. The second paragraph thereof requires that the stockholder filing a
derivative suit should have exerted all reasonable efforts to exhaust all remedies
available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; and to allege such fact
with particularity in the complaint. The obvious intent behind the rule is to make the
derivative suit the final recourse of the stockholder, after all other remedies to
obtain the relief sought had failed.

The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk
to petitioner Anthony regarding their dispute hardly constitutes "all reasonable
efforts to exhaust all remedies available." Respondents did not refer to or mention
at all any other remedy under the articles of incorporation or by-laws of Winchester,
Inc., available for dispute resolution among stockholders, which respondents
unsuccessfully availed themselves of. And the Court is not prepared to conclude
that the articles of incorporation and by-laws of Winchester, Inc. absolutely failed
to provide for such remedies.
Neither can this Court accept the reasons proffered by respondents to excuse
themselves from complying with the second requirement under Section 1, Rule 8
of the Interim Rules of Procedure Governing Intra-Corporate Controversies. They
are flimsy and insufficient, compared to the seriousness of respondents
accusations of fraud, misappropriation, and falsification of corporate records
against the petitioners. The fact that Winchester, Inc. is a family corporation should
not in any way exempt respondents from complying with the clear requirements
and formalities of the rules for filing a derivative suit. There is nothing in the
pertinent laws or rules supporting the distinction between, and the difference in the
requirements for, family corporations vis--vis other types of corporations, in the
institution by a stockholder of a derivative suit.
The Court further notes that, with respect to the third and fourth requirements of
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies, the respondents Complaint failed to allege, explicitly or otherwise,
the fact that there were no appraisal rights available for the acts of petitioners
complained of, as well as a categorical statement that the suit was not a nuisance
or a harassment suit.
As to respondents second ground in their Motion for Reconsideration, the Court
agrees with the ruling of the Court of Appeals, in its 15 February 2006 Decision,
that respondent Josephs Supplemental Affidavit and additional evidence were
inadmissible since they were only appended by respondents to their Memorandum
before the RTC. Section 8, Rule 2 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies is crystal clear that:
Sec. 8. Affidavits, documentary and other evidence. Affidavits shall be based on
personal knowledge, shall set forth such facts as would be admissible in evidence,
and shall show affirmatively that the affiant is competent to testify on the matters
stated therein. The affidavits shall be in question and answer form, and shall
comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be


attached to the appropriate pleading, Provided, however, that affidavits,
documentary and other evidence not so submitted may be attached to the pre-trial
brief required under these Rules. Affidavits and other evidence not so submitted
shall not be admitted in evidence, except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is
presumed prima facie hostile if he fails or refuses to execute an affidavit after a
written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling reasons;
and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not later
than five (5) days prior to its introduction in evidence. (Emphasis ours.)
According to the afore-quoted provision, the parties should attach the affidavits of
witnesses and other documentary evidence to the appropriate pleading, which
generally should mean the complaint for the plaintiff and the answer for the
respondent. Affidavits and documentary evidence not so submitted must already
be attached to the respective pre-trial briefs of the parties. That the parties should
have already identified and submitted to the trial court the affidavits of their
witnesses and documentary evidence by the time of pre-trial is strengthened by
the fact that Section 1, Rule 4 of the Interim Rules of Procedure Governing IntraCorporate Controversies require that the following matters should already be set
forth in the parties pre-trial briefs:
Section 1. Pre-trial conference, mandatory nature. Within five (5) days after the
period for availment of, and compliance with, the modes of discovery prescribed in
Rule 3 hereof, whichever comes later, the court shall issue and serve an order
immediately setting the case for pre-trial conference, and directing the parties to
submit their respective pre-trial briefs. The parties shall file with the court and
furnish each other copies of their respective pre-trial brief in such manner as to
ensure its receipt by the court and the other party at least five (5) days before the
date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the
following:
xxxx
(4) Documents not specifically denied under oath by either or both parties;

xxxx
(7) Names of witnesses to be presented and the summary of their testimony as
contained in their affidavits supporting their positions on each of the issues;
(8) All other pieces of evidence, whether documentary or otherwise and their
respective purposes.
Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies,49 it is the duty of the court to ensure during the
pre-trial conference that the parties consider in detail, among other things,
objections to the admissibility of testimonial, documentary, and other evidence, as
well as objections to the form or substance of any affidavit, or part thereof.
Obviously, affidavits of witnesses and other documentary evidence are required to
be attached to a partys pre-trial brief, at the very last instance, so that the opposite
party is given the opportunity to object to the form and substance, or the
admissibility thereof. This is, of course, to prevent unfair surprises and/or to avoid
the granting of any undue advantage to the other party to the case.
True, the parties in the present case agreed to submit the case for judgment by
the RTC, even before pre-trial, in accordance with Section 4, Rule 4 of the Interim
Rules of Procedure Governing Intra-Corporate Controversies:
Sec. 4. Judgment before pre-trial. If after submission of the pre-trial briefs, the
court determines that, upon consideration of the pleadings, the affidavits and other
evidence submitted by the parties, a judgment may be rendered, the court may
order the parties to file simultaneously their respective memoranda within a nonextendible period of twenty (20) days from receipt of the order. Thereafter, the
court shall render judgment, either full or otherwise, not later than ninety (90) days
from the expiration of the period to file the memoranda.
Even then, the afore-quoted provision still requires, before the court makes a
determination that it can render judgment before pre-trial, that the parties had
submitted their pre-trial briefs and the court took into consideration the pleadings,
affidavits and other evidence submitted by the parties. Hence, cases wherein the
court can render judgment prior to pre-trial, do not depart from or constitute an
exception to the requisite that affidavits of witnesses and documentary evidence
should be submitted, at the latest, with the parties pre-trial briefs. Taking further
into account that under Section 4, Rule 4 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies parties are required to file their
memoranda simultaneously, the same would mean that a party would no longer
have any opportunity to dispute or rebut any new affidavit or evidence attached by

the other party to its memorandum. To violate the above-quoted provision would,
thus, irrefragably run afoul the former partys constitutional right to due process.
In the instant case, therefore, respondent Josephs Supplemental Affidavit and the
additional documentary evidence, appended by respondents only to their
Memorandum submitted to the RTC, were correctly adjudged as inadmissible by
the Court of Appeals in its 15 February 2006 Decision for having been belatedly
submitted. Respondents neither alleged nor proved that the documents in question
fall under any of the three exceptions to the requirement that affidavits and
documentary evidence should be attached to the appropriate pleading or pre-trial
brief of the party, which is particularly recognized under Section 8, Rule 2 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies.
WHEREFORE, premises considered, the Petition for Review under Rule 45 of the
Rules of Court is hereby GRANTED. The assailed Resolutions dated 18 July 2006
and 19 April 2007 of the Court of Appeals in CA-G.R. SP No. 00185 are hereby
REVERSED AND SET ASIDE. The Decision dated 15 February 2006 of the Court
of Appeals is hereby AFFIRMED. No costs.
SO ORDERED.
JUANITO ANG, FOR AND IN BEHALF OF SUNRISE MARKETING (BACOLOD),
INC.,*Petitioner, v.SPOUSES ROBERTO AND RACHEL ANG, Respondents.
DECISION
CARPIO, J.:
The Case
This petition for review1 assails the Decision2 of the Court of Appeals Cebu (CACebu) dated 20 September 2011 in CA-G.R. SP No. 05546. The CA-Cebu
reversed and set aside the Order3 of the Regional Trial Court, Branch 53, Bacolod
City (RTC Bacolod) dated 27 September 2010 in Commercial Court Case No. OQ070 entitled Sunrise Marketing (Bacolod), Inc., represented by Juanito Ang v.
Spouses Roberto and Rachel Ang.cralaw lawlibrary
The Facts

Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered corporation owned


by the Ang family.4 Its current stockholders and their respective stockholdings are
as follows:5chanroblesvirtuallawlibrary

Stockholder

Number of Shares

Juanito Ang

8,750

Anecita Ang

1,250

Jeannevie Ang

2,500

Roberto Ang

8,750

Rachel Ang

3,750

Total

25,000

Juanito Ang (Juanito) and Roberto Ang (Roberto) are siblings. Anecita LimocoAng (Anecita) is Juanitos wife and Jeannevie is their daughter. Roberto was
elected President of SMBI, while Juanito was elected as its Vice President. Rachel
Lu-Ang (Rachel) and Anecita are SMBIs Corporate Secretary and Treasurer,
respectively.
On 31 July 1995, Nancy Ang (Nancy), the sister of Juanito and Roberto, and her
husband, Theodore Ang (Theodore), agreed to extend a loan to settle the
obligations of SMBI and other corporations owned by the Ang family, specifically
Bayshore Aqua Culture Corporation, Oceanside Marine Resources and JR Aqua
Venture.6 Nancy and Theodore issued a check in the amount of $1,000,000.00
payable to Juanito Ang and/or Anecita Ang and/or Roberto Ang and/or Rachel
Ang. Nancy was a former stockholder of SMBI, but she no longer appears in
SMBIs General Information Sheets as early as 1996.7 Nancy and Theodore are
now currently residing in the United States. There was no written loan agreement,
in view of the close relationship between the parties. Part of the loan was also used
to
purchase
real
properties
for
SMBI,
for
Juanito,
and
for
Roberto.8chanroblesvirtuallawlibrary
On 22 December 2005, SMBI increased its authorized capital stock to
P10,000,000.00. The Certificate of Increase of Capital Stock was signed by
Juanito, Anecita, Roberto, and Rachel as directors of SMBI.9Juanito claimed,
however, that the increase of SMBIs capital stock was done in contravention of
the Corporation Code.10 According to Juanito, when he and Anecita left for
Canada:chanroblesvirtualawlibrary

x x x Sps. Roberto and Rachel Ang took over the active management of [SMBI].
Through the employment of sugar coated words[,] they were able to successfully
manipulate the stocks sharings between themselves at 50-50 under the condition
that the procedures mandated by the Corporation Code on increase of capital
stock be strictly observed (valid Board Meeting). No such meeting of the Board to
increase capital stock materialized. It was more of an accommodation to buy peace
x x x.11
Juanito claimed that payments to Nancy and Theodore ceased sometime after
2006. On 24 November 2008, Nancy and Theodore, through their counsel here in
the Philippines, sent a demand letter to Spouses Juanito L. Ang/Anecita L. Ang
and Spouses Roberto L. Ang/Rachel L. Ang for payment of the principal
amounting to $1,000,000.00 plus interest at ten percent (10%) per annum, for a
total of $2,585,577.37 within ten days from receipt of the letter.12 Roberto and
Rachel then sent a letter to Nancy and Theodores counsel on 5 January 2009,
saying that they are not complying with the demand letter because they have not
personally
contracted
a
loan
from
Nancy
and
Theodore.
On 8 January 2009, Juanito and Anecita executed a Deed of Acknowledgment and
Settlement Agreement (Settlement Agreement) and an Extra-Judicial Real Estate
Mortgage (Mortgage). Under the foregoing instruments, Juanito and Anecita
admitted that they, together with Roberto and Rachel, obtained a loan from Nancy
and Theodore for $1,000,000.00 on 31 July 1995 and such loan shall be secured
by:chanroblesvirtualawlibrary
a) Juanito and Anecitas fifty percent share over a parcel of land registered in the
name of SMBI;
b) a parcel of land registered in the name of Juanito Ang;
c) Juanitos fifty percent share in 7 parcels of land registered in his and Robertos
name;
d) a parcel of land registered in the name of Roberto;
e) a parcel of land registered in the name of Rachel; and
f)

Roberto and Rachels fifty percent share in 2 parcels of land registered in the
name of their son, Livingstone L. Ang (Livingstone), and in another lot
registered in the name of Livingstone and Alvin Limoco Ang.13

A certain Kenneth C. Locsin (Locsin) signed on behalf of Nancy and Theodore,

under a Special Power of Attorney which was not attached as part of the
Settlement Agreement or the Mortgage, nor included in the records of this case.
Thereafter, Juanito filed a Stockholder Derivative Suit with prayer for an ex-parte
Writ of Attachment/Receivership (Complaint) before the RTC Bacolod on 29
January 2009. He alleged that the intentional and malicious refusal of defendant
Sps. Roberto and Rachel Ang to [settle] their 50% share x x x [of] the total
obligation x x x will definitely affect the financial viability of plaintiff SMBI.14Juanito
also claimed that he has been illegally excluded from the management and
participation in the business of [SMBI through] force, violence and intimidation and
that Rachel and Roberto have seized and carted away SMBIs records from its
office.15chanroblesvirtuallawlibrary
The Complaint sought the following reliefs:chanroblesvirtualawlibrary
a) Issuance of an ex-parte Writ of Attachment and/or Garnishment, with a Break
Open Order covering the assets of the spouses Roberto and Rachel Ang, or
any interest they may have against third parties;
b) Placement of SMBI under Receivership pending resolution of the case;
c) Enforcement of Juanitos right to actively participate in the management of
SMBI;
d) Issuance of an Order compelling the Spouses Roberto and Rachel Ang to:
i.

Render an accounting of the utilization of the loan amounting to


$2,585,577.37 or P120,229,347.26;

ii.

Pay fifty percent of the aforementioned loan, amounting to


P60,114,673.62;

iii. Explain why Nancy was removed as a stockholder as far as SMBIs


reportorial requirements with the SEC are concerned;
iv. Restore Juanitos right to actively manage the affairs of the
corporation; and
v.

Pay attorneys fees amounting to P20,000.00.

On 29 January 2009, the RTC Bacolod issued an Order16 granting the application
for an ex-parte writ of attachment and break open order. Atty. Jerry Basiao, who
filed an application for appointment as Receiver of SMBI, was directed by the RTC
Bacolod to furnish the required Receivership Bond.17 On the same date, Roberto

and Rachel moved to quash the writ of attachment and set aside the break open
order and appointment of receiver.18 They claimed that these were issued in
violation of their right to due process:chanroblesvirtualawlibrary
Records of this case would show that the complaint was filed before [the RTC
Bacolod]
at
2:50
p.m.
of
January
29,
2009.
x
x
x
x

[C]ounsel for the defendant-spouses went to [the RTC Bacolod] at around 3:00
p.m. on January 29, 2009 [to inquire on] the status of the case and was informed
that the last pleading on record is his entry of appearance with the conformity of
the defendant Rachel Ang. Counsel was however informed by the clerk of court
that the Honorable Judge has already issued an order directing the issuance of the
writ of preliminary attachment, receivership and break open order but said order
was not officially released yet x x x. Due to the undersigned counsels insistence,
however, said clerk of court of this Honorable Court furnished him a copy of said
order x x x. [T]he clerk of court and the clerk in charge of civil cases assured
[counsel] that no writ of preliminary attachment was prepared or issued x x x.
Despite [such] assurance x x x [and counsels advice that they shall move to quash
the order the following morning], that afternoon, the clerk of court x x x
clandestinely, hurriedly and surreptitiously, for reasons known only [to] her, x x x
prepared the writ of attachment x x x.19
In her Verified Answer Ad Cautelam which was filed on 10 February 2009, Rachel
prayed that the Complaint be dismissed as it was not a bona fide derivative suit as
defined under the Interim Rules of Procedure for Intra-Corporate
Controversies20 (Interim Rules). According to Rachel, the Complaint, although
labelled as a derivative suit, is actually a collection suit since the real party in
interest is not SMBI, but Nancy and Theodore:chanroblesvirtualawlibrary
[T]he cause of action does not devolve on the corporation as the alleged harm or
wrong pertains to the right of the Sps. Theodore and Nancy Ang, as creditors, to
collect
the
amount
allegedly
owed
to
them.
x
x
x
x

That the instant suit is for the benefit of a non-stockholder and not the corporation
is obvious when the primary relief prayed for in the Complaint which is for the
defendants to pay the amount of Php 60,114,673.62 plus interest which is 50% of

the loan obligations of plaintff [SMBI] to its creditor Sps. Theodore and Nancy Ang.
Otherwise stated, the instant suit is nothing but a complaint for sum of money
shamelessly masked as a derivative suit.21
Rachel also argued that the Complaint failed to allege that Juanito exerted all
reasonable efforts to exhaust all intra-corporate remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation to obtain
the
relief
he
desires,
as
required
by
the
Interim
Rules.
During cross-examination, Juanito admitted that there was no prior demand for
accounting or liquidation nor any written objection to SMBIs increase of capital
stock. He also conceded that the loan was extended by persons who are not
stockholders of SMBI. Thus, Rachel filed a Motion for Preliminary Hearing on
Affirmative Defenses on 27 November 2009, arguing that in view of Juanitos
admissions, the Complaint should be dismissed pursuant to Section 1 of the
Interim Rules. Juanito filed his Opposition thereto on 8 January 2010,22 arguing
that applying this Courts ruling in Hi-Yield Realty, Inc. v. Court of Appeals,23 the
requirement for exhaustion of intra-corporate remedies is no longer needed when
the corporation itself is under the complete control of the persons against whom
the suit is filed. Juanito also alleged that he and Anecita were deceived into
signing checks to pay off bogus loans purportedly extended by Rachels relatives
in favor of SMBI. Some of the checks were payable to cash, and were allegedly
deposited in Rachels personal account.24 He also claimed that Rachels Motion
is
disallowed
under
the
Interim
Rules.
On 9 February 2009, Juanito moved that Rachel and her daughter, Em Ang (Em),
as well as their counsel, Atty. Filomeno Tan, Jr. (Atty. Tan) be held in contempt.
Juanito claimed that on the date the writ of attachment and break open order were
issued, Atty. Tan, accompanied by Rachel and Em, arrogantly demanded from
the Clerk in charge of Civil Cases that he be furnished a copy of the [said orders]
x x x otherwise he will tear the records of the subject commercial case. Juanito
also accused Atty. Tan of surreptitiously photocopying the said orders prior to
service of the summons, Complaint, Writ of Attachment and Attachment Bond.
According to Juanito, the purpose of obtaning a copy of the orders was to thwart
its implementation. Thus, when the authorities proceeded to the SMBI premises to
enforce the orders, they found that the place was padlocked, and that all corporate
documents and records were missing. On 14 December 2010, the Sheriff and
other RTC Bacolod employees then filed a Verified Complaint against Atty. Tan
before this Court, which also contained the foregoing allegations.

Rachel then filed a Reply on 27 January 2010, claiming that Juanitos reliance on
the Hi-Yield case is misplaced:chanroblesvirtualawlibrary
The facts x x x of this case are strikingly different from that in Hi-Yield Realty. In
that case, the Supreme Court noted that the complaining stockholder was a
minority stockholder. However, in the case at bar, Juanito Ang is one of the biggest
stockholders of [SMBI]. x x x [H]e is a member of [SMBIs] Board of Directors and
is even the vice-president thereof. Furthermore, in Hi-Yield Realty, the Supreme
Court noted that the complaining stockholder was excluded from the affairs of the
corporation. However, the evidence thus far presented, particularly Juanito Angs
admission, show that he and his wife, Anecita, participate in the disbursement of
[SMBIs] funds x x x.26
Juanito filed his Rejoinder on 2 March 2010.cralaw lawlibrary
The Ruling of the RTC Bacolod
On 27 September 2010, the RTC Bacolod issued an Order which stated
that:chanroblesvirtualawlibrary
WHEREFORE, premises considered[,] the court hereby rules that the present
action is a DERIVATIVE SUIT and [the] Motion to Dismiss based on Affirmative
Defenses raised by defendants is DENIED for lack of merit.27
The RTC Bacolod found that the issuance of the checks to settle the purported
obligations to Rachels relatives, as well as the removal of Nancy as a stockholder
in SMBIs records as filed with the SEC, shows that Rachel and Roberto committed
fraud. The Order likewise stated that the requirement of exhaustion of intracorporate remedies is no longer necessary since Rachel and Roberto exercised
complete
control
over
SMBI.
Aggrieved, Rachel filed a Petition for Certiorari with the CA-Cebu.cralaw lawlibrary
The Ruling of the CA-Cebu
On 20 September 2011, the CA-Cebu promulgated its Decision which reversed
and set aside the Order of the RTC Bacolod dated 27 September 2010. According
to the CA-Cebu, the Complaint filed by Juanito should be dismissed because it is
a harassment suit, and not a valid derivative suit as defined under the Interim

Rules. The CA-Cebu also found that Juanito failed to exhaust intra-corporate
remedies and that the loan extended by Nancy and Theodore was not SMBIs
corporate obligation. There is nothing on record to show that non-payment of the
loan
will
result
in
any
damage
or
prejudice
to
SMBI.
Juanito then filed a Motion for Reconsideration with Prayer for Voluntary Inhibition
on 28 October 2011. In his Motion, Juanito pointed out that Rachel filed her Petition
for Certiorari without previously filing a Motion for Reconsideration, warranting the
dismissal of the said Petition. The CA-Cebu denied the Motion.
Hence, this petition.cralaw lawlibrary
The Issues
The issues raised in the instant petition are:chanroblesvirtualawlibrary
I. Whether based on the allegations of the complaint, the nature of the case is one
of
a
derivative
suit
or
not.
Corollary to the above, whether the Honorable Court of Appeals erred x x x in
ordering the dismissal of the Complaint on the ground that the case is not a
derivative
suit.
II. Whether the Honorable Court of Appeals x x x seriously erred in considering
evidence aliunde, that is, other than the four corners of the complaint, in
determining the nature of the complaint, in utter violation of the doctrine that the
jurisdiction is determined by law and allegations of the complaint alone.
III. Granting arguendo, but without necessarily admitting that the complaint is not
one of a derivative suit, but only an ordinary civil action, whether the Honorable
Court of Appeals x x x gravely erred in dismissing the petition entirely, when the
Regional Trial Court a quo has jurisdiction also over the case as an ordinary civil
action, and can just proceed to hear the same as such.28

The Ruling of this Court

The petition has no merit.

We uphold the CA-Cebus finding that the Complaint is not a derivative suit. A
derivative suit is an action brought by a stockholder on behalf of the corporation
to enforce corporate rights against the corporations directors, officers or other
insiders.29 Under Sections 2330 and 3631of the Corporation Code, the directors
or officers, as provided under the by-laws,32 have the right to decide whether or
not a corporation should sue. Since these directors or officers will never be
willing to sue themselves, or impugn their wrongful or fraudulent decisions,
stockholders are permitted by law to bring an action in the name of the
corporation to hold these directors and officers accountable.33 In derivative suits,
the real party in interest is the corporation, while the stockholder is a mere
nominal party.
This Court, in Yu v. Yukayguan,34 explained:chanroblesvirtualawlibrary
The Court has recognized that a stockholders right to institute a derivative suit is
not based on any express provision of the Corporation Code, or even the
Securities Regulation Code, but is impliedly recognized when the said laws make
corporate directors or officers liable for damages suffered by the corporation and
its stockholders for violation of their fiduciary duties. Hence, a stockholder may sue
for mismanagement, waste or dissipation of corporate assets because of a special
injury to him for which he is otherwise without redress. In effect, the suit is an action
for specific performance of an obligation owed by the corporation to the
stockholders to assist its rights of action when the corporation has been put in
default by the wrongful refusal of the directors or management to make suitable
measures for its protection. The basis of a stockholders suit is always one in
equity. However, it cannot prosper without first complying with the legal requisites
for its institution. (Emphasis in the original)
Section 1, Rule 8 of the Interim Rules imposes the following requirements for
derivative suits:chanroblesvirtualawlibrary
(1) [The person filing the suit must be] a stockholder or member at the time the
acts or transactions subject of the action occurred and the time the action was
filed;nadcralavvonlinelawlibrary
(2) [He must have] exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the articles
of incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain
the
relief
he
desires;nadcralavvonlinelawlibrary
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.

Applying the foregoing, we find that the Complaint is not a derivative suit. The
Complaint failed to show how the acts of Rachel and Roberto resulted in any
detriment to SMBI. The CA-Cebu correctly concluded that the loan was not a
corporate obligation, but a personal debt of the Ang brothers and their spouses.
The check was issued to Juanito Ang and/or Anecita Ang and/or Roberto Ang
and/or Rachel Ang and not SMBI. The proceeds of the loan were used for
payment of the obligations of the other corporations owned by the Angs as well as
the purchase of real properties for the Ang brothers. SMBI was never a party to
the Settlement Agreement or the Mortgage. It was never named as a co-debtor or
guarantor of the loan. Both instruments were executed by Juanito and Anecita in
their personal capacity, and not in their capacity as directors or officers of SMBI.
Thus, SMBI is under no legal obligation to satisfy the obligation.
The fact that Juanito and Anecita attempted to constitute a mortgage over their
share in a corporate asset cannot affect SMBI. The Civil Code provides that in
order for a mortgage to be valid, the mortgagor must be the absolute owner of the
thing x x x mortgaged.35 Corporate assets may be mortgaged by authorized
directors or officers on behalf of the corporation as owner, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require.36 However, the wording of the Mortgage reveals that it was signed by
Juanito and Anecita in their personal capacity as the owners of a pro-indiviso
share in SMBIs land and not on behalf of SMBI:chanroblesvirtualawlibrary
This [Mortgage] is made and executed by and between:chanroblesvirtualawlibrary
Spouses JUANITO and ANECITA ANG, of legal age, Filipino citizens, resident[s]
of Sunrise Marketing Building at Hilado Street, Capitol Shopping Center, Bacolod
City, hereinafter referred to as the MORTGAGOR[S];nadcralavvonlinelawlibrary
Spouses THEODORE and NANCY ANG, x x x hereinafter referred to as the
MORTGAGEE[S] represented in this instance through their attorney-in-fact, Mr.
Kenneth
Locsin;nadcralavvonlinelawlibrary
x

In order to ensure payment x x x the MORTGAGORS hereby CONVEY unto the


MORTGAGEES
by
way
of
EXTRA-JUDICIAL
REAL
ESTATE
MORTGAGE their 50% rights and interests over the following real properties to
wit:chanroblesvirtualawlibrary

a. Those registered in the name of SUNRISE MARKETING (BACOLOD), INC. x x


x
x x x x37 (Emphasis supplied)
Juanito and Anecita, as stockholders of SMBI, are not co-owners of SMBI assets.
They do not own pro-indiviso shares, and therefore, cannot mortgage the same
except
in
their
capacity
as
directors
or
officers
of
SMBI.
We also find that there is insufficient evidence to suggest that Roberto and Rachel
fraudulently and wrongfully removed Nancy as a stockholder in SMBIs reportorial
requirements. As early as 2005, when SMBI increased its capital stock, Juanito
and Anecita already knew that Nancy was not listed as a stockholder of SMBI.
However, they attempted to rectify the error only in 2009, when the Complaint was
filed. That it took four years for them to make any attempt to question Nancys
exclusion
as
stockholder
negates
their
allegation
of
fraud.
Since damage to the corporation was not sufficiently proven by Juanito, the
Complaint cannot be considered a bona fide derivative suit. A derivative suit is one
that seeks redress for injury to the corporation, and not the stockholder. No such
injury
was
proven
in
this
case.
The Complaint also failed to allege that all available corporate remedies under the
articles of incorporation, by-laws, laws or rules governing the corporation were
exhausted, as required under the Interim Rules. The CA-Cebu, applying our ruling
in the Yu case, pointed out:chanroblesvirtualawlibrary
x x x No written demand was ever made for the board of directors to address
private
respondent
Juanito
Angs
concerns.
The fact that [SMBI] is a family corporation does not exempt private respondent
Juanito Ang from complying with the [Interim] Rules. In the x x x Yu case, the
Supreme Court held that a family corporation is not exempt from complying with
the clear requirements and formalities of the rules for filing a derivative suit. There
is nothing in the pertinent laws or rules [which state that there is a] distinction
between x x x family corporations x x x [and] other types of corporations in the
institution [by] a stockholder of a derivative suit.38

Furthermore, there was no allegation that there was an attempt to remove Rachel
or Roberto as director or officer of SMBI, as permitted under the Corporation Code
and the by-laws of the corporation. Thus, the Complaint failed to satisfy the
requirements
for
a
derivative
suit
under
the
Interim
Rules.
The CA-Cebu correctly ruled that the Complaint should be dismissed since it is a
nuisance or harassment suit under Section 1(b) of the Interim Rules. Section 1(b)
thereof provides:chanroblesvirtualawlibrary
b) Prohibition against nuisance and harassment suits. - Nuisance and harassment
suits are prohibited. In determining whether a suit is a nuisance or harassment suit,
the court shall consider, among others, the following:chanroblesvirtualawlibrary
(1) The extent of the shareholding or interest of the initiating stockholder or
member;nadcralavvonlinelawlibrary
(2)
Subject
matter
of
the
suit;nadcralavvonlinelawlibrary
(3) Legal and factual basis of the complaint;nadcralavvonlinelawlibrary
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in relation
to the relief sought.
In case of nuisance or harassment suits, the court may, motu proprio or upon
motion, forthwith dismiss the case.
Records show that Juanito, apart from being Vice President, owns the highest
number of shares, equal to those owned by Roberto. Also, as explained earlier,
there appears to be no damage to SMBI if the loan extended by Nancy and
Theodore remains unpaid. The CA-Cebu correctly concluded that a plain reading
of the allegations in the Complaint would readily show that the case x x x was
mainly filed [to collect] a debt allegedly extended by the spouses Theodore and
Nancy Ang to [SMBI]. Thus, the aggrieved party is not SMBI x x x but the spouses
Theodore
and
Nancy
Ang,
who
are
not
even
x
x
x
stockholders."39chanroblesvirtuallawlibrary
WHEREFORE, we DENY the petition. We AFFIRM the 20 September 2011
Decision of the Court of Appeals-Cebu in CA-G.R. SP No. 05546.
SO ORDERED.

G.R. No. L-5174

March 17, 1911

CANDIDO
PASCUAL,
plaintiff-appellant,
vs.
EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees.
C.W.
Ney
and
O'Brien
Ortigas and Fisher for appellees.

and

De

Witt

for

appellant.

TRENT, J.:
This is an appeal by the plaintiff from a judgment sustaining a demurrer to the first
and second causes of action set forth in the amended complaint. The demurrer as
to both causes of action was based upon the following grounds:
(a)
Lack
of
legal
capacity
to
use
(b)
Failure
to
state
facts
constituting
(c)
Defect
of
parties
(d) Uncertainty.

on
a

part
of
cause
of
plaintiff;

plaintiff;
action;
and,

The lower court sustained the demurrer as to both causes of action upon the
second ground above-mentioned.
The following errors have been assigned:
The court a quo erred in sustaining the demurrer to the first cause of action and
dismissing the same because (a) the facts alleged constitute a cause of action,
and (b) the remedy sought by the plaintiff is the only one available.
The same errors are assigned as to the second cause of action.
The gist of the first and second causes of action is as follows:
That during the years 1903, 1904, 1905, and 1907 the defendants and appellees,
without the knowledge, consent, or acquiescence of the stockholders, deducted
their respective compensation from the gross income instead of from the net profits
of the bank, thereby defrauding the bank and its stockholders of approximately
P20,000 per annum; that though due demands has been made upon them
therefor, defendants refuse to refund to the bank the sums so misappropriated, or
any part thereof; that defendants constitute a majority of the present board of
directors of the bank, who alone can authorize an action against them in the name
of the corporation, and that prior to the filing of the present suit plaintiff exhausted
every remedy in the premises within this banking corporation.
The second cause of action sets forth that defendants' and appellees' immediate
predecessors in office in this bank during the years 1899, 1900, 1901, and 1902,

committed the same illegality as to their compensation as is charged against the


defendants themselves; that in the four years immediately following the year 1902,
the defendants and appellees were the only officials or representatives of the bank
who could and should investigate and take action in regard to the sums of money
thus fraudulently appropriated by their predecessors; that they were the only
persons interested in the bank who knew of the fraudulent appropriation by their
predecessors; that they wholly neglected to take any action in the premises or
inform the stockholders thereof; that due demand has been made upon defendants
to reimburse the bank for this loss; that the bank itself can not bring an action in its
own name against the defendants and appellees, for the reason already stated,
and that there remains no remedy within the corporation itself.
The questions raised in third cause of action are not before us at this as the
demurrer to that cause of action was overruled.
The court below sustained the demurrer as to the first and second causes of action
on the ground that in actions of this character the plaintiff must aver in his complaint
that he was the owner of stock in the corporation at the time of the occurrences
complained of, or else that the stock has since devolved upon him by operation of
law.
This action was brought by the plaintiff Pascual, in his own right as a stockholder
of the bank, for the benefit of the bank, and all the other stockholders thereof. The
plaintiff sues on behalf of the corporation, which, even though nominally a
defendant, is to all intents and purposes the real plaintiff in this case. That such is
the case is shown by the prayer of the complaint which is that judgment be entered
in favor of the bank.
According to the pleadings, the Banco Espaol-Filipino is a banking corporation,
constituted as such by royal decree of the Crown of Spain in the year 1854, the
original grant having been subsequently extended and modified by royal decree of
July 14, 1897, and by Act No. 1790 of the Philippine Commission. From the first it
has been a bank of issue, and under the Spanish regime was regarded as a quasipublic institution, its full title having been originally "Banco Espaol-Filipino de
Isabel II." The Captain-General of the Philippine Islands was its protector and
supreme head. To him belonged the power to appoint its directors and other
managing officers, remove them from office for cause, fix the rate of interest
demandable by the bank, resolve all doubts and controversies relating to its
management, "and finally, exercise, as representative of Her Majesty's
Government, the powers that the laws give him respecting public establishments
protected and privileged."

It is alleged in the amended complaint that the only compensation contemplated


or provided for the managing officers of the bank was a certain per cent of the net
profits resulting from the bank's operations, as set forth in article 30 of its reformed
charter or statutes, which article is as follows:
Of the profits or gains which may result from the bank's operations, after deducting
all the expenses of its administration and the part, if any, which corresponds to the
legal reserve fund, there shall be set apart ten per cent for the directors and five
per cent for the board of government, the distribution of which shall be made as
provided in the regulations. The eighty-five per cent remaining shall belong
integrally to the shareholders pro rata the number of shares owned by each.
Before proceeding to the determination of the real questions involved in this case
it might be well to note briefly the origin and history of the right of a stockholder in
a corporation to maintain a suit of this kind.
A corporation is an artificial being, invinsible, intangible, and existing only in
contemplation of law. (Chief Justice Marshall in Trustees of Dartmouth College vs.
Woodward, 4 Wheat., 636.)
The word "corporation" is but a collective name for the corporators or members
who compose an incorporated association; and where it is said that a corporation
is itself a person, or being, or creature, this must be understood in a figurative
sense only. (Morawetz on Private Corporations, 2nd ed., sec. 1.)
A corporation is "an artificial person created by the sovereign from natural persons
and in which artificial person the natural persons of which it is composed become
merged and nonexistent." (Quoted with approval in case of The People, ex rel.
Winchester, etc., respondent, vs. Coleman, et al., commissioners of taxes etc.,
appellants, 133 N.Y. Appls., 279.)
In suits of this character the corporation itself and not the plaintiff stockholder is
the real party in interest. The rights of the individual stockholder are merged into
that of the corporation. It is a universally recognized doctrine that a stockholder in
a corporation has no title legal or equitable to the corporate property; that both of
these are in the corporation itself for the benefit of all the stockholders. Text writers
illustrate this rule by the familiar example of one person or entity owning all the
stock and still having no greater or essentially different title than if he owned but
one single share. Since, therefore, the stockholder has no title, it is evident that
what he does have, with respect to the corporation and his fellow stockholder, are
certain rights sui generis. These rights are generally enumerated as being, first, to
have a certificate or other evidence of his status as stockholder issued to him;
second, to vote at meetings of the corporation; third, to receive his proportionate

share of the profits of the corporation; and lastly, to participate proportionately in


the distribution of the corporate assets upon the dissolution or winding up. (Purdy's
Beach on Private Corporations, sec. 554.)
The right of individual stockholders to maintain suits for and on behalf of the
corporation was denied until within a comparatively short time, but his right is now
no longer doubted. On this point Cook on Corporations, 5th ed. (1903), secs. 644,
645, and 646, says:
Notwithstanding this fact, however, that it was the duty and right of the corporation
to bring suit remedy these wrongs, it gradually became apparent that frequently
the corporation was helpless and unable to institute the suit. It was found, where
the guilty parties themselves controlled the directors and also a majority of the
stock, that the corporation was in their power, was unable to institute suit, and that
the minority of the stockholders were being defrauded of their rights and were
without remedy. The time came when the minority of the stockholders of the
defrauded corporation the corporation itself being controlled by the guilty parties
were given a standing in court for the purpose of taking up the cause of the
corporation, and, in its name and stead, of bringing the guilty parties to an account.
Accordingly, in 1843, in the leading case of Foss vs. Harbottle, a stockholder
brought suit in the name of himself and other defrauded stockholders, and for the
benefit of the corporation, against the directors, for a breach of their duty to the
corporation. This case was decided against the complaining stockholder, on the
ground that the complainant had not proved that the corporation itself was under
the control of the guilty parties, and had not proved that it was unable to institute
suit. The court, however, broadly intimated that a case might arise when a suit
instituted by defrauded stockholders would be entertained by the court and redress
given. Acting upon this suggestion, and impelled by the utter inadequacy of suits
instituted by the corporation, defrauded stockholders continued to institute these
suits and to urge the courts of equity to grant relief. These efforts were
unsuccessful in clearly establishing the right of stockholders herein until the cases
of Atwol against Merriwether, in England, 1867, and of Dodge vs. Woolsey, in this
country, in 1855. These two great and leading cases have firmly established the
law for England and America, that where corporate directors have committed a
breach of trust either by their frauds,ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the wrong, a single
stockholder may institute that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the
wrong done directly to the corporation and indirectly to the stockholders.

It is now no longer doubted, said Mr. Justice Wayne, in the case of Dodge vs.
Woolsey, 18 How. (U.S.), 331 either in England or the United States, that courts
of equity, in both, have a jurisdiction over corporations, at the instance of one or
more of their members; to apply preventive remedies by injunction, to restrain
those who administer them from doing acts which would amount to a violation of
charters, or to prevent any misapplication of their capitals or profits, which might
result in lessening the dividends of stockholders, or the value of their shares, as
either may be protected by the franchises of a corporation, if the acts intended to
be done create what is in the law denominated a breach of trust. And the
jurisdiction extends to inquire into, and to enjoin, as the case may require that to
be done, any proceedings by individuals, in whatever character they may profess
to act, if the subject of complaint is an imputed violation of a corporate franchise,
or the denial of a right growing out of it, for which there is not an adequate remedy
at law.
So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the
bank (corporation) has a right to maintain a suit for and on behalf of the bank, but
the extent of such a right must depend upon when, how, and for what purpose he
acquired the shares which he now owns. In the determination of these questions
we can not see how, if it be true that the bank is a quasi-public institution, it can
affect in any way the final result.
It is alleged that the plaintiff became a stockholder on the 13th of November, 1903;
that the defendants, as members of the board of directors and board of
government, respectively, during each and all the years 1903, 1904, 1905, 1906,
and 1907, did fraudulently, and to the great prejudice of the bank and its
stockholders, appropriate to their own use from the profits of the bank sums of
money amounting approximately to P20,000 per annum.
Article 31 of the bank's charter provides that dividends shall be declared
each semestre. The stockholders meet once a year, in February, to receive and
consider the report of the bank's operations contained in the annual balance and
memorial. Beyond this they have no direct voice in the affairs of the bank, but all
who are then stockholders and have a right to vote must clearly have a right to
vote upon all the business proceedings of the year, irrespective of the date upon
which they may have become stockholders. They are entitled to all the dividends
that have been earned by their stock during the year which has not been earned
by their stock during the year which has not been already declared and paid,
regardless of the precise period of the year in which it may have accrued. So, in
the general meeting of the stockholders on February 3, 1904, the plaintiff had a
right to participate.

Neither the charter, the by-laws, nor the regulations prescribe when, within
the semestre, the dividends shall be declared; but it may be presumed that such
dividends are declared at the end of the semestre and that the firstsemestre begins
with the first day of January of each year. On this basis the owner of stock from
whom the plaintiff purchased his ten shares might have received the dividends
corresponding to these ten shares for the first semestre(six months) of the year
1903. The dividends were declared twice a year, every six months. The times for
declaring the dividends are specifically and distinctly pointed out one period is
separated from the other. Every six months forms a period. So if the plaintiff was
not entitled to the dividends for the first period (from January to July, 1903), he
having become a stockholder in September of that year, he would have been
entitled to the dividends on his stock for the second period, or semestre. The
plaintiff was, therefore, a stockholder during all the time for which he seeks
recovery in his first cause of action, except the first six months of the year 1903.
Then again, as a matter of fact (which we do not now decide), if the defendants
had taken their salaries for the year 1903 at the close of that year or at any time
after September 13, the plaintiff would then have had an interest and, on the theory
that he was a stockholder, could have questioned the legality of the defendants'
right to take such salary, inasmuch as his dividends would be directly affected, in
that, if the defendants took 10 per cent of the gross instead of the net earnings of
the bank, his dividend on his ten shares for the second period (from July to
December, 1903) would be less.
Conceding that this cause of action is demurrable on the grounds that the plaintiff
was not a stockholder during the first six moths of the year 1903, should the
demurrer have been sustained as to the whole cause of action when the time for
which recovery is sought is clearly divisible?
Section 90 of the Code of Civil Procedure in force in the Philippine Islands
provides, in part, as follows:
2. ... If the complaint contains more than one cause of action, each distinct cause
of action must be set forth in a separate paragraph containing all the facts
constituting the particular cause of action.
Where the matter in a single count is divisible in its nature, the demurrer should be
confined to those parts which are defective, as the same general rule which applies
to different counts applies also to divisible matter in the same count constituting
different causes of action; and where one count, containing distinct averments,
discloses a good cause of action in one of such averments, as when several
breaches are assigned, some well and others ill, a general demurrer will be
overruled. (6 Ency. Plead. & Prac., 303, 304.)

The complaint contains three causes of action, each set forth in a separate
paragraph. The matter in the first cause is, as we have said, divisible in its nature.
The rule above quoted is, therefore, perfectly applicable.
The most important question to be decided is, did the lower court err in sustaining
the demurrer to the second cause of action? If this question be decided in the
negative, then it will not be necessary to determine whether or not the allegations
in this part of the complaint are sufficient to hold the defendants liable for the acts
of their predecessors.
It affirmatively appears from the complaint that the plaintiff was not a stockholder
during any of the time in question in this second cause of action. Upon the question
whether or not a stockholder can maintain a suit of this character upon a cause of
action pertaining to the corporation when it appears that he was not a stockholder
at the time of the occurrence of the acts complained of and upon which the action
is based, the authorities do not agree.
In the case of Hawes vs. Oakland (14 Otto [104 U.S.], 450, 456), the plaintiff, a
shareholder in the Contra Costa Waterworks Company, brought a bill in equity
against the company and the city of Oakland in the Circuit Court of the United
States for California, on the ground that he was a citizen of New York and the
defendant citizens of California, alleging that the company was furnishing the city
of Oakland with water free charge beyond what the law required it to do, and that,
although he had required them to desist, the directors had failed to heed his protest
and that unless enjoined they would continue to furnish water to the city in excess
of their legal obligations in this particular, to the damage of plaintiff and the
shareholders.
To this complaint the city of Oakland demurred upon the ground that the appellant
had shown no capacity in himself to maintain the suit, the injury, if any, being to
the corporation and the right to sue pertaining to it solely. The demurrer was
sustained and the bill dismissed, whereupon the plaintiff carried the case to the
Supreme Court of the United States.
The decision of the court, which was written by Mr. Justice Miller and concurred in
by all the other justices, contains a review of the earlier decisions of the English
and American courts with respect to the right of stockholders of corporations to
maintain suits of this character. In concluding, the court, after enumerating a
number of circumstances in which a stockholder might be permitted to sue upon a
cause of action pertaining to the corporation, said:
But in addition to the existence of grievances which call for this kind of relief, it is
equally important that before the shareholder is permitted, in his own name to

institute and conduct a litigation which usually belongs to the corporation, he


should show to the satisfaction of the court that he has exhausted all the means
within his reach to attain within the corporation itself, the redress of his grievances,
or action in conformity to his wishes. He must make an earnest, not a simulated
effort, with the managing body of the corporation, to induce remedial action on their
part, and this must be made apparent to the court. If the time permits, or has
permitted, he must show, if he fails with the directors, that he has made an honest
effort to obtain action by the stockholders as a body, in the matter of which he
complains. And he must show a case, if this is not done, where it could not be
done, or it was not reasonable to require it.
The effort to induce such action as plaintiff desires on the part of the directors, or
of the stockholders when that is necessary, and the cause of failure in these efforts,
and all allegation that plaintiff was a shareholder at the time of the transactions of
which he complains, or that the shares have devolved on him since by operation
of law and that the suit is not a collusive one to confer on a court otherwise have
no cognizance, should be in the bill, which should be verified by affidavit.
This case was decided January 16, 1882. More than a year afterward the Supreme
Court embodied the procedural part of this decision in the 94th Equity Rule,
adopted January 23, 1883. The rule reads as follows:
Every bill brought by one or more stockholders in a corporation against the
corporation and other parties, founded on rights which may properly be asserted
by the corporation, must be verified by oath, and must contain an allegation that
the plaintiff was a shareholder at the time of the transaction of which he complains,
or that his shares had devolved on him since by operation of law, and that the suit
is not a collusive one to confer on a court of the United States jurisdiction of a case
of which it would not otherwise have cognizance. It must also set forth with
particularity the efforts of the plaintiff to secure such action as he desires on the
part of the managing directors or trustees, and, if necessary, of the shareholders,
and the causes of his failure to obtain such action.
January 21, 1884, the Supreme Court decided the case of Dimpfel vs. Ohio, etc.,
R.R. Co. (110 U.S., 212; 28 Law Ed., 121, 122), which was similar to the Hawes
case, above cited. Mr. Justice Field, by whom the opinion of the court was written,
says (p. 122):
The suit was brought to set aside a contract by which the Ohio and Mississippi
Railway Company became the owner of a portion of its road known as the
Springfield Division, and to obtain a decree from the court declaring that the bonds,
issued by the company and secured by a mortgage upon that division, are null and

void. It was commenced by Dimpfel, and individual stockholder in the company,


who stated in his bill, that it was filed on behalf of himself and such other
stockholders as might join him in the suit. Callaghan, another stockholder, is the
only one who joined him. The two claim to be owners of fifteen hundred shares of
the stock of the company. The whole number of shares is 240,000. The owners of
the balance of this large number make no complaint of the transactions which the
complainants seek to annul. And it does not appear that the complainant owned
their shares when these transactions took place. For aught we can see to the
contrary, they may have purchased the shares long afterwards, expressly to annoy
and vex the company, in the hope that they might thereby extort, from its fears, a
larger benefit than the other stockholders have received or may reasonably expect
from the purchase, or compel the company to buy their shares at prices above the
market value. Unfortunately, litigation against large companies is often instituted
by individual stockholders from no higher motive.
The bill in this case was also open to the objection that the plaintiff had not
exhausted the means of redress available within the corporation. The next
proceeds to consider this point, but prefaces its remarks with the following
significant phrase:
But assuming that the complainants were the owners of the shares held by them
when the transactions of which they complain took place, it does not appear that
they made any attempt, etc.
Counsel for the plaintiff in a very able and exhaustive brief sought to show that the
doctrine laid down in these two cases is not applicable to the case at bar, first,
because the Supreme Court in these cases merely established a rule of practice,
designed to prevent collusive suits in the Federal court; and, second, that if such
rule is to be regarded as a declaration of substantive law, it is wrong on principle
and should be disregarded. Many of the authorities cited by the plaintiff to the effect
that the rule is merely one of practice, peculiar to the Federal court, base that
conclusion upon the fact that the requirement of the inclusion of the averments in
question in the bill to be found in the 94th Equity Rule. Some of the authorities
cited, which hold this view, are: Pomeroy, Eq. Jur., sec. 1096; Thompson,
Corporations, sec. 4570; Cook, Corporations vol. 3, secs. 736, 737; Morawetz,
Corporations, sec. 209; Forrester vs. Mining Co., 55 Pac. Rep., 229.
In the first place the doctrine was announced in Hawes vs. Oakland, supra, more
than a year before the 94th Equity Rule was promulgated, so that it can admit of
no dispute that in the opinion of the Supreme Court, as least, the ownership of
stock at the time of the transaction complained of was essential to the right to

maintain such an action as a matter of substantive law, prior to and independent


of the Equity Rule.
It is true that the court in writing the decision in the Hawes case, had in mind the
prevalence of the practice of bringing suits in the Federal courts, by collusion
between the parties, which should property be tried in the State court. It is equally
true that the court was desirous of preventing a continuance of these fraudulent
practices, by establishing a test which should prevent them. The basis of the right
to sue in the Federal courts being diversity of citizenship, the usual method
employed to enable parties to suits of this kind to invoke the jurisdiction of these
courts was to have a few shares of stock transferred to some person who was a
citizen of a State other than that of which the proposed defendants were citizens.
In a case of this kind the transfer of the stock would be, of necessity, merely
nominal, and the plaintiff, under such circumstances, would not be a bona
fide stockholder, and would not be entitled to maintain the suit. Of necessity, in
cases of this kind, of genuine collusion to create a fictitious diversity of citizenship
the nominal transfer of the stock is made at a date subsequent to that of the
occurrence of the acts or omissions complained of. Although the court was lawfully
entitled to protect itself against such frauds as those of which it complains in this
case, and to refuse to take cognizance of cases in which, owing to the purely
fictitious nature of the simulated diversity of citizenship, the proper tribunals were
the State courts, on the other hand, in cases of genuine diversity of citizenship, it
could not lawfully refuse to exercise the jurisdiction vested in it. No citation of
authority is needed to support the proposition that it is the duty of courts to exercise
the jurisdiction properly conferred upon them. It is elementary that where there is
a higher tribunal authorized to issue the writ, mandamuswill lie to put the judicial
machinery in motion. (Spelling, Extraordinary Relief, sec. 1394.) This being the
case, the conclusion is obvious that the mere fact that in some cases persons
suing as stockholders for the redress of grievances anterior to the transfer of the
stock held by the plaintiff are not acting in good faith would not justify or authorize
a refusal to take jurisdiction in any case in which the plaintiff's stock was acquired
after the occurrence of the facts supposed to constitute the cause of action, unless
the court were of the opinion, as a matter of substantive law, that in no event would
a stockholder so situated be entitled to maintain such an action.
It is only upon this assumption that the correctness of the decision in Hawes vs.
Oakland and the legality of the 94th Equity Rule can be maintained. The court had
no authority to change the substantive law either by its decision or the rule, and it
is not to be presumed that it intended to do so. A careful examination of the Hawes
case and of the rule will show that no such change was in fact made. The decision

is merely declaratory of the preexisting law, as the court understood it to be, and
the rule merely provides a rule of pleading.
The decision in the Hawes case it that among other necessary averments, the bill
should contain "an allegation that the plaintiff was a shareholder at the time of the
transaction of which he complains ... and that the suit is not a collusive one to
confer jurisdiction on a court of the United States in a case in which it would
otherwise have no cognizance ... ." The language of the 94th Equity Rule is
practically identical with this. It provides, in terms that a stockholder's bill in cases
of this character "must contain an allegation that the plaintiff was a stockholder at
the time of the transaction of which he complains ... and that the suit is not a
collusive one to confer jurisdiction . . . ."
This is, obviously, a mere rule of pleading it requires averments of facts upon
which the plaintiff's cause of action and the jurisdiction of the court rest. It assumes,
as the court had already decided, that the ownership of the stock at the time of the
transaction is a fact essential to the maintenance of the suit in any event. Unless
that fact exists no cause of action exists, whether the suit is collusive or not. Even
if the stock was owned prior to the transaction complained of, if the suit is collusive
as it would be, for instance if one of the defendants had acquired a merely
colorable domicile in another State to support the allegation of diversity of
citizenship the plaintiff has no right to maintain the action in a Federal court.
Consequently, the rule requires that these two facts be distinctly averred. The
requirement that they be pleaded is procedural. The necessity of the existence of
the facts in order to give rise to the right of action is substantive.
If the Supreme Court had been of the opinion, as are some of the State courts and
text writers cited in plaintiff's brief, that the transferee of shares of stock in a
corporation acquires the right to sue upon the causes of action which accrued
before he acquired such shares, it surely would not have attempted to deprive him
of the right to exercise in the Federal court an action which, were it not for diversity
of citizenship, he might exercise in a State court. If the court had believed that the
transferee of stock could, under any circumstances, sue upon a cause of action
accruing to the corporation prior to such transfer, the rule instead of requiring the
plaintiff to allege unconditionally that he was a stockholder at the time of the
transaction complained of and that the suit is not collusive, would have provided
that the plaintiff should be required to aver in his sworn bill the date upon which he
acquired his stock, and if it appeared that it was acquired after the occurrence of
the acts complained of, then that he should also required to aver under oath that
the suit was not collusive.

Sound reason and good authority sustain the rule that a purchaser of stock can
not complain of the prior acts and management of the corporation. (Home Fire Ins.
Co. vs. Baker, 60 L.R.A., 927, 933, citing Hawes vs. Oakland, supra; Dimpfel vs.
Ohio & M.R. Co., supra; Taylor vs. Fayette Fuel Gas Co., 146 Pa., 13;
Alexandervs. Searcy, 81 Ga., 536; Clark vs. American Coal Co., 86 Iowa, 436;
United Electric Securities Co., vs. Louisiana Electric Light Co., 68 Fed., 673;
Venner vs. Atchison T. & S.F.R. Co., 28 Fed., 581; Heath vs. Erie R. Co., 8 Blachf.,
347; Dannmeyer vs. Coleman, 8 Sawy., 51; Works vs. Sowers, 2 Walk (Pa.), 416;
4 Thompson Corp., 4569.)
In Alexander vs. Searcy, supra, the court said (p. 550):
The weight of authority seems to be that a person who did not own stock at the
time of the transactions complained of can not complain or bring a suit to have
them declared illegal.
In the United Electric Securities Co. vs. Louisiana Electric Light Co., supra, it is
said:
As a general proposition, the purchaser of stock in a corporation is not allowed to
attack the acts and management of the company prior to the acquisition of his
stock; otherwise we might have a case where stock duly represented in a
corporation consented to and participated in bad management and waste, and
after reaping the benefits from such transaction, could be easily passed into the
hands of a subsequent purchaser, who could make his harvest by appearing and
contesting the very acts and conducts which his vendor had consented to.
Where stock is required for the purpose of bringing suit it has been held that the
complainant is a mere interloper and entitled to no consideration. And stockholder
suits not brought in good faith in the interest of the corporation have been
dismissed on the ground. (Home Fire Ins. Co. vs. Baker, supra, and cases cited
therein.) Some of the State courts hold that a purchaser of shares in a corporation
acquires all the rights of the vendor. The Alabama Supreme Court has gone so far
as to hold that a purchaser in good faith is not necessarily disqualified as a suitor
in all cases because the prior holder was personally disqualified. (Parsons vs.
Joseph, 92 Ala., 403.) From the pleadings in this case (it having been decided by
the Supreme Court upon a demurrer) it appears that Joseph sought to have
cancelled certain certificates of stock issued by the Street Railway Company to
Parsons, on the ground that said stock was fictitious and was issued in violation of
the constitution and statute law of the State. It was alleged, as a special defense,
that if the transactions, which form the basis of the issuance of the stock to
Parsons, were illegal, and fraudulent, and not done in good faith, the complainant,

Joseph, was estopped from setting up fraud in such transactions or, seeking to
cancel the stock, because one E. Lesser, who was complainant's transferrer,
participated in all of said transactions. In this case the court, speaking through Mr.
Justice Coleman, said:
If the transferee purchased the shares in good faith, and without notice of the fact
that the prior holder had precluded himself from suing, he would have as just a title
to relief as if he had purchased from a shareholder who was under no disability;
but if the purchaser was aware that the prior holder had barred his right to relief,
neither justice nor public policy would require that the transferee, under these
circumstances, should be accorded any greater rights than his transferrer.
xxx

xxx

xxx

If a stockholder participates in a wrongful or fraudulent contract, or silently


acquiesces until the contract becomes executed, he can not then come into a court
of equity to cancel the contract, and more especially if the company, or himself, as
a stockholder, has reaped a benefit from the contract; and this rule holds good,
although the consideration of the contract may be one expressly prohibited by
statute. The same disability would attach to the transferee of his stock who bought
with notice.
This rule, in the main, is correctly stated, but we think that the latter part of the
same should be modified so as to read: "The same disability would attach to the
transferee of his stock who bought with or without notice." We base our
modification of this rule upon the ground that a transferee could not sue as being
a bona fide purchaser in ignorance of the disability attaching to his vendor,
because shares of stock, strictly speaking, are not negotiable, and the sale can not
pass greater rights than those possessed by the vendor. (Clark vs. American Coal
Co., 86 Iowa, 436; 4 Thomp. Corp., 3410.)
It is self-evident that the plaintiff in the case at bar was not, before he acquired in
September, 1903, the shares which he now owns, injured or affected in any
manner by the transactions set forth in the second cause of action. His vendor
could have complained of these transactions, but he did not choose to do so. The
discretion whether to sue to set them aside, or to acquiesce in and agree to them,
is, in our opinion, incapable of transfer. If the plaintiff himself had been injured by
the acts of defendants' predecessors that is another matter. He ought to take things
as he found them when he voluntarily acquired his ten shares. If he was defrauded
in the purchase of these shares he should sue his vendor.
If the party himself, who is the victim of fraud or usury, chooses to waive his remedy
and release the party, it does not belong to a subsequent purchaser under him to

recall and assume the remedy for him. (Quoted with approval in the case of the
Graham vs. La Crosse and Milwaukee R.R. Co., 102., U.S., 148.)
But it is contended that this is a case in which the debtor corporation was defrauded
of its property, and that as the company had a right of proceeding for its recovery,
any of its judgment and execution creditors have an equal right; that it is a property
right, and one that inures to the benefit of creditors.
Conceding that creditors who were such when the fraudulent procurement of the
debtor's property occurred and cases to that effect have been cited the
question still remains, whether, the debtor being unwilling to disturb the
transaction, subsequent creditors have such an interest that they can reach the
property for the satisfaction of their debts. We doubt whether any case, going as
far as this, can be found. No such case has been cited in the argument. Dicta of
judges to that effect may undoubtedly be produced, but they are not supported by
the facts of the cases under consideration.
It seems clear that subsequent creditors have no better right than subsequent
purchasers, to question a previous transaction in which the debtor's property was
obtained from him by fraud, which he has acquiesced in, and which he has
manifested no desire to disturb. Yet, in such a case, subsequent purchasers have
no such right. (Id.)
So it seems to be settled by the Supreme Court of the United States, as a matter
of substantive law, that a stockholder in a corporation who was not such at the time
of the transactions complained of, or whose shares had not devolved upon him
since by operation of law, can not maintain suits of this character, unless such
transactions continue and are injurious to the stockholder, or affect him especially
and specifically in some other way.
We are, therefore of the opinion, and so hold, that the judgment appealed from,
sustaining the demurrer to the first cause of action should be, and the same is
hereby reversed; and the judgment sustaining the demurrer to the second cause
of action should be, and is hereby affirmed, without any special ruling as to costs.
The record will be returned to the court whence it came for further proceedings in
accordance with this decision. So ordered.