G.R. No.

151969

September 4, 2009

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, AMADO M.
SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA, FRANCISCO
ORTIGAS III, ERIC ROXAS, in their capacities as members of the Board of Directors of
Valle Verde Country Club, Inc., and JOSE RAMIREZ,Petitioners,
vs.
VICTOR AFRICA, Respondent.
DECISION
BRION, J.:
In this petition for review on certiorari,1 the parties raise a legal question on corporate
governance: Can the members of a corporations board of directors elect another director to fill
in a vacancy caused by the resignation of a hold-over director?
THE FACTUAL ANTECEDENTS
On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle Verde
Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of
Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal),
Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and
Ray Gamboa.2 In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum
for the holding of the stockholders meeting could not be obtained. Consequently, the abovenamed directors continued to serve in the VVCC Board in a hold-over capacity.

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified.
xxxx
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular
or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall
be elected only for the unexpired term of his predecessor in office. xxx. [Emphasis supplied.]
Africa claimed that a year after Makalintals election as member of the VVCC Board in 1996, his
[Makalintals] term as well as those of the other members of the VVCC Board should be
considered to have already expired. Thus, according to Africa, the resulting vacancy should have
been filled by the stockholders in a regular or special meeting called for that purpose, and not by
the remaining members of the VVCC Board, as was done in this case.
Africa additionally contends that for the members to exercise the authority to fill in vacancies in
the board of directors, Section 29 requires, among others, that there should be an unexpired
term during which the successor-member shall serve. Since Makalintals term had already
expired with the lapse of the one-year term provided in Section 23, there is no more "unexpired
term" during which Ramirez could serve.

On September 1, 1998, Dinglasan resigned from his position as member of the VVCC Board. In
a meeting held on October 6, 1998, the remaining directors, still constituting a quorum of
VVCCs nine-member board, elected Eric Roxas (Roxas) to fill in the vacancy created by the
resignation of Dinglasan.

Through a partial decision4 promulgated on January 23, 2002, the RTC ruled in favor of Africa
and declared the election of Ramirez, as Makalintals replacement, to the VVCC Board as null
and void.

A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC Board.
He was replaced by Jose Ramirez (Ramirez), who was elected by the remaining members of the
VVCC Board on March 6, 2001.

Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas as
member of the VVCC Board, vice hold-over director Dinglasan. While VVCC manifested its
intent to appeal from the SECs ruling, no petition was actually filed with the Court of Appeals;
thus, the appellate court considered the case closed and terminated and the SECs ruling final
and executory.5

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez
as members of the VVCC Board with the Securities and Exchange Commission (SEC) and the
Regional Trial Court (RTC), respectively. The SEC case questioning the validity of Roxas
appointment was docketed as SEC Case No. 01-99-6177. The RTC case questioning the
validity of Ramirez appointment was docketed as Civil Case No. 68726.
In his nullification complaint3 before the RTC, Africa alleged that the election of Roxas was
contrary to Section 29, in relation to Section 23, of the Corporation Code of the Philippines
(Corporation Code). These provisions read:

THE PETITION
VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial decision for being
contrary to law and jurisprudence. VVCC made a direct resort to the Court via a petition for
review on certiorari, claiming that the sole issue in the present case involves a purely legal
question.
As framed by VVCC, the issue for resolution is whether the remaining directors of the
corporations Board, still constituting a quorum, can elect another director to fill in a vacancy
caused by the resignation of a hold-over director.

Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the
resignation of a hold-over director is expressly granted to the remaining members of the
corporations board of directors.
Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the board
of directors caused by the expiration of a members term shall be filled by the corporations
stockholders. Correlating Section 29 with Section 23 of the same law, VVCC alleges that a
members term shall be for one year and until his successor is elected and
qualified; otherwise stated, a members term expires only when his successor to the Board is
elected and qualified. Thus, "until such time as [a successor is] elected or qualified in an annual
election where a quorum is present," VVCC contends that "the term of [a member] of the board
of directors has yet not expired."
As the vacancy in this case was caused by Makalintals resignation, not by the expiration of his
term, VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.
In support of its arguments, VVCC cites the Courts ruling in the 1927 El Hogar6 case which
states:
Owing to the failure of a quorum at most of the general meetings since the respondent has been
in existence, it has been the practice of the directors to fill in vacancies in the directorate by
choosing suitable persons from among the stockholders. This custom finds its sanction in Article
71 of the By-Laws, which reads as follows:
Art. 71. The directors shall elect from among the shareholders members to fill the vacancies that
may occur in the board of directors until the election at the general meeting.
xxxx
Upon failure of a quorum at any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and qualified. Unless the law or the
charter of a corporation expressly provides that an office shall become vacant at the expiration
of the term of office for which the officer was elected, the general rule is to allow the officer to
hold over until his successor is duly qualified. Mere failure of a corporation to elect officers does
not terminate the terms of existing officers nor dissolve the corporation. The doctrine above
stated finds expression in article 66 of the by-laws of the respondent which declares in so many
words that directors shall hold office "for the term of one year or until their successors shall have
been elected and taken possession of their offices." xxx.
It results that the practice of the directorate of filling vacancies by the action of the
directors themselves is valid. Nor can any exception be taken to the personality of the
individuals chosen by the directors to fill vacancies in the body. [Emphasis supplied.]
Africa, in opposing VVCCs contentions, raises the same arguments that he did before the trial
court.
THE COURTS RULING

We are not persuaded by VVCCs arguments and, thus, find its petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining directors of a corporations
Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the
resignation of a hold-over director. The resolution of this legal issue is significantly hinged on the
determination of what constitutes a directors term of office.
The holdover period is not part of the term of office of a member of the board of directors
The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have
defined "term" as the time during which the officer may claim to hold the office as of right, and
fixes the interval after which the several incumbents shall succeed one another.7 The term of
office is not affected by the holdover.8 The term is fixed by statute and it does not change simply
because the office may have become vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a successor has not been elected and has failed
to qualify.
Term is distinguished from tenure in that an officers "tenure" represents the term during which
the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer)
than the term for reasons within or beyond the power of the incumbent.
Based on the above discussion, when Section 239 of the Corporation Code declares that "the
board of directorsshall hold office for one (1) year until their successors are elected and
qualified," we construe the provision to mean that the term of the members of the board of
directors shall be only for one year; their term expires one year after election to the office. The
holdover period that time from the lapse of one year from a members election to the Board
and until his successors election and qualification is not part of the directors original term of
office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary,
when an incumbent member of the board of directors continues to serve in a holdover capacity,
it implies that the office has a fixed term, which has expired, and the incumbent is holding the
succeeding term.10
After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintals
term of office is deemed to have already expired. That he continued to serve in the VVCC Board
in a holdover capacity cannot be considered as extending his term. To be precise, Makalintals
term of office began in 1996 and expired in 1997, but, by virtue of the holdover doctrine in
Section 23 of the Corporation Code, he continued to hold office until his resignation on
November 10, 1998. This holdover period, however, is not to be considered as part of his term,
which, as declared, had already expired.
With the expiration of Makalintals term of office, a vacancy resulted which, by the terms of
Section 2911 of the Corporation Code, must be filled by the stockholders of VVCC in a regular or
special meeting called for the purpose. To assume as VVCC does that the vacancy is
caused by Makalintals resignation in 1998, not by the expiration of his term in 1997, is both
illogical and unreasonable. His resignation as a holdover director did not change the nature of
the vacancy; the vacancy due to the expiration of Makalintals term had been created long
before his resignation.

The powers of the corporations board of directors emanate from its stockholders
VVCCs construction of Section 29 of the Corporation Code on the authority to fill up vacancies
in the board of directors, in relation to Section 23 thereof, effectively weakens the stockholders
power to participate in the corporate governance by electing their representatives to the board of
directors. The board of directors is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the affairs of the
corporation from them. The board of directors, in drawing to themselves the powers of the
corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that
the board should exercise not only care and diligence, but utmost good faith in the management
of corporate affairs.12

WHEREFORE, we DENY the petitioners petition for review on certiorari, and AFFIRM the partial
decision of the Regional Trial Court, Branch 152, Manila, promulgated on January 23, 2002, in
Civil Case No. 68726. Costs against the petitioners.
SO ORDERED.

The underlying policy of the Corporation Code is that the business and affairs of a corporation
must be governed by a board of directors whose members have stood for election, and who
have actually been elected by the stockholders, on an annual basis. Only in that way can the
directors' continued accountability to shareholders, and the legitimacy of their decisions that bind
the corporation's stockholders, be assured. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers over properties that they do not
own.13
This theory of delegated power of the board of directors similarly explains why, under Section 29
of the Corporation Code, in cases where the vacancy in the corporations board of directors is
caused not by the expiration of a members term, the successor "so elected to fill in a vacancy
shall be elected only for the unexpired term of the his predecessor in office." The law has
authorized the remaining members of the board to fill in a vacancy only in specified instances,
so as not to retard or impair the corporations operations; yet, in recognition of the stockholders
right to elect the members of the board, it limited the period during which the successor shall
serve only to the "unexpired term of his predecessor in office."
While the Court in El Hogar approved of the practice of the directors to fill vacancies in the
directorate, we point out that this ruling was made before the present Corporation Code was
enacted14 and before its Section 29 limited the instances when the remaining directors can fill in
vacancies in the board, i.e., when the remaining directors still constitute a quorum and when the
vacancy is caused for reasons other than by removal by the stockholders or by expiration of the
term.1avvphi1

G.R. No. 166862

December 20, 2006

MANILA METAL CONTAINER CORPORATION, petitioner,

REYNALDO C. TOLENTINO, intervenor,
vs.
PHILIPPINE NATIONAL BANK, respondent,
DMCI-PROJECT DEVELOPERS, INC., intervenor.
DECISION
CALLEJO, SR., J.:

It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring
within the directors term of office. When a vacancy is created by the expiration of a term,
logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be
the corporations stockholders who shall possess the authority to fill in a vacancy caused by the
expiration of a members term.
As correctly pointed out by the RTC, when remaining members of the VVCC Board elected
Ramirez to replace Makalintal, there was no more unexpired term to speak of, as Makalintals
one-year term had already expired. Pursuant to law, the authority to fill in the vacancy caused by
Makalintals leaving lies with the VVCCs stockholders, not the remaining members of its board
of directors.

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in
CA-G.R. No. 46153 which affirmed the decision2 of the Regional Trial Court (RTC), Branch 71,
Pasig City, in Civil Case No. 58551, and its Resolution3 denying the motion for reconsideration
filed by petitioner Manila Metal Container Corporation (MMCC).
The Antecedents
Petitioner was the owner of a 8,015 square meter parcel of land located in Mandaluyong (now a
City), Metro Manila. The property was covered by Transfer Certificate of Title (TCT) No. 332098
of the Registry of Deeds of Rizal. To secure a P900,000.00 loan it had obtained from respondent
Philippine National Bank (PNB), petitioner executed a real estate mortgage over the lot.
Respondent PNB later granted petitioner a new credit accommodation of P1,000,000.00; and,
on November 16, 1973, petitioner executed an Amendment4 of Real Estate Mortgage over its

property. On March 31, 1981, petitioner secured another loan of P653,000.00 from respondent
PNB, payable in quarterly installments of P32,650.00, plus interests and other charges.5
On August 5, 1982, respondent PNB filed a petition for extrajudicial foreclosure of the real estate
mortgage and sought to have the property sold at public auction for P911,532.21, petitioner's
outstanding obligation to respondent PNB as of June 30, 1982,6 plus interests and attorney's
fees.

On June 4, 1985, respondent PNB informed petitioner that the PNB Board of Directors had
accepted petitioner's offer to purchase the property, but for P1,931,389.53 in cash less
the P725,000.00 already deposited with it.19 On page two of the letter was a space above the
typewritten name of petitioner's President, Pablo Gabriel, where he was to affix his signature.
However, Pablo Gabriel did not conform to the letter but merely indicated therein that he had
received it.20 Petitioner did not respond, so PNB requested petitioner in a letter dated June 30,
1988 to submit an amended offer to repurchase.

After due notice and publication, the property was sold at public auction on September 28, 1982
where respondent PNB was declared the winning bidder for P1,000,000.00. The Certificate of
Sale7 issued in its favor was registered with the Office of the Register of Deeds of Rizal, and was
annotated at the dorsal portion of the title on February 17, 1983. Thus, the period to redeem the
property was to expire on February 17, 1984.

Petitioner rejected respondent's proposal in a letter dated July 14, 1988. It maintained that
respondent PNB had agreed to sell the property for P1,574,560.47, and that since
its P725,000.00 downpayment had been accepted, respondent PNB was proscribed from
increasing the purchase price of the property.21 Petitioner averred that it had a net balance
payable in the amount of P643,452.34. Respondent PNB, however, rejected petitioner's offer to
pay the balance of P643,452.34 in a letter dated August 1, 1989.22

Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that it be granted
an extension of time to redeem/repurchase the property.8 In its reply dated August 30, 1983,
respondent PNB informed petitioner that the request had been referred to its Pasay City Branch
for appropriate action and recommendation.9

On August 28, 1989, petitioner filed a complaint against respondent PNB for "Annulment of
Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific Performance with Damages."
To support its cause of action for specific performance, it alleged the following:

In a letter10 dated February 10, 1984, petitioner reiterated its request for a one year extension
from February 17, 1984 within which to redeem/repurchase the property on installment basis. It
reiterated its request to repurchase the property on installment.11 Meanwhile, some PNB Pasay
City Branch personnel informed petitioner that as a matter of policy, the bank does not accept
"partial redemption."12
Since petitioner failed to redeem the property, the Register of Deeds cancelled TCT No. 32098
on June 1, 1984, and issued a new title in favor of respondent PNB.13 Petitioner's offers had not
yet been acted upon by respondent PNB.
Meanwhile, the Special Assets Management Department (SAMD) had prepared a statement of
account, and as of June 25, 1984 petitioner's obligation amounted to P1,574,560.47. This
included the bid price of P1,056,924.50, interest, advances of insurance premiums, advances on
realty taxes, registration expenses, miscellaneous expenses and publication cost.14 When
apprised of the statement of account, petitioner remitted P725,000.00 to respondent PNB as
"deposit to repurchase," and Official Receipt No. 978191 was issued to it.15
In the meantime, the SAMD recommended to the management of respondent PNB that
petitioner be allowed to repurchase the property for P1,574,560.00. In a letter dated November
14, 1984, the PNB management informed petitioner that it was rejecting the offer and the
recommendation of the SAMD. It was suggested that petitioner purchase the property
for P2,660,000.00, its minimum market value. Respondent PNB gave petitioner until December
15, 1984 to act on the proposal; otherwise, its P725,000.00 deposit would be returned and the
property would be sold to other interested buyers.16
Petitioner, however, did not agree to respondent PNB's proposal. Instead, it wrote another letter
dated December 12, 1984 requesting for a reconsideration. Respondent PNB replied in a letter
dated December 28, 1984, wherein it reiterated its proposal that petitioner purchase the property
for P2,660,000.00. PNB again informed petitioner that it would return the deposit should
petitioner desire to withdraw its offer to purchase the property.17 On February 25, 1985,
petitioner, through counsel, requested that PNB reconsider its letter dated December 28, 1984.
Petitioner declared that it had already agreed to the SAMD's offer to purchase the property
forP1,574,560.47, and that was why it had paid P725,000.00. Petitioner warned respondent
PNB that it would seek judicial recourse should PNB insist on the position. 18

34. As early as June 25, 1984, PNB had accepted the down payment from Manila
Metal in the substantial amount of P725,000.00 for the redemption/repurchase price
of P1,574,560.47 as approved by its SMAD and considering the reliance made by
Manila Metal and the long time that has elapsed, the approval of the higher
management of the Bank to confirm the agreement of its SMAD is clearly a
potestative condition which cannot legally prejudice Manila Metal which has acted and
relied on the approval of SMAD. The Bank cannot take advantage of a condition which
is entirely dependent upon its own will after accepting and benefiting from the
substantial payment made by Manila Metal.
35. PNB approved the repurchase price of P1,574,560.47 for which it
accepted P725,000.00 from Manila Metal. PNB cannot take advantage of its own
delay and long inaction in demanding a higher amount based on unilateral
computation of interest rate without the consent of Manila Metal.
Petitioner later filed an amended complaint and supported its claim for damages with the
following arguments:
36. That in order to protect itself against the wrongful and malicious acts of the
defendant Bank, plaintiff is constrained to engage the services of counsel at an agreed
fee of P50,000.00 and to incur litigation expenses of at least P30,000.00, which the
defendant PNB should be condemned to pay the plaintiff Manila Metal.
37. That by reason of the wrongful and malicious actuations of defendant PNB,
plaintiff Manila Metal suffered besmirched reputation for which defendant PNB is liable
for moral damages of at leastP50,000.00.
38. That for the wrongful and malicious act of defendant PNB which are highly
reprehensible, exemplary damages should be awarded in favor of the plaintiff by way
of example or correction for the public good of at least P30,000.00.23
Petitioner prayed that, after due proceedings, judgment be rendered in its favor, thus:

a) Declaring the Amended Real Estate Mortgage (Annex "A") null and void and without
any legal force and effect.
b) Declaring defendant's acts of extra-judicially foreclosing the mortgage over
plaintiff's property and setting it for auction sale null and void.
c) Ordering the defendant Register of Deeds to cancel the new title issued in the
name of PNB (TCT NO. 43792) covering the property described in paragraph 4 of the
Complaint, to reinstate TCT No. 37025 in the name of Manila Metal and to cancel the
annotation of the mortgage in question at the back of the TCT No.37025 described in
paragraph 4 of this Complaint.
d) Ordering the defendant PNB to return and/or deliver physical possession of the
TCT No. 37025described in paragraph 4 of this Complaint to the plaintiff Manila Metal.
e) Ordering the defendant PNB to pay the plaintiff Manila Metal's actual damages,
moral and exemplary damages in the aggregate amount of not less than P80,000.00
as may be warranted by the evidence and fixed by this Honorable Court in the
exercise of its sound discretion, and attorney's fees of P50,000.00 and litigation
expenses of at least P30,000.00 as may be proved during the trial, and costs of suit.

On May 31, 1994, the trial court rendered judgment dismissing the amended complaint and
respondent PNB's counterclaim. It ordered respondent PNB to refund the P725,000.00 deposit
petitioner had made.32 The trial court ruled that there was no perfected contract of sale between
the parties; hence, petitioner had no cause of action for specific performance against
respondent. The trial court declared that respondent had rejected petitioner's offer to repurchase
the property. Petitioner, in turn, rejected the terms and conditions contained in the June 4, 1985
letter of the SAMD. While petitioner had offered to repurchase the property per its letter of July
14, 1988, the amount of P643,422.34 was way below the P1,206,389.53 which respondent PNB
had demanded. It further declared that the P725,000.00 remitted by petitioner to respondent
PNB on June 4, 1985 was a "deposit," and not a downpayment or earnest money.
On appeal to the CA, petitioner made the following allegations:
I
THE LOWER COURT ERRED IN RULING THAT DEFENDANT-APPELLEE'S
LETTER DATED 4 JUNE 1985 APPROVING/ACCEPTING PLAINTIFF-APPELLANT'S
OFFER TO PURCHASE THE SUBJECT PROPERTY IS NOT VALID AND
ENFORCEABLE.
II

Plaintiff likewise prays for such further reliefs which may be deemed just and equitable
in the premises.24
In its Answer to the complaint, respondent PNB averred, as a special and affirmative defense,
that it had acquired ownership over the property after the period to redeem had elapsed. It
claimed that no contract of sale was perfected between it and petitioner after the period to
redeem the property had expired.
During pre-trial, the parties agreed to submit the case for decision, based on their stipulation of
facts.25 The parties agreed to limit the issues to the following:
1. Whether or not the June 4, 1985 letter of the defendant approving/accepting
plaintiff's offer to purchase the property is still valid and legally enforceable.
2. Whether or not the plaintiff has waived its right to purchase the property when it
failed to conform with the conditions set forth by the defendant in its letter dated June
4, 1985.

THE LOWER COURT ERRED IN RULING THAT THERE WAS NO PERFECTED

CONTRACT OF SALE BETWEEN PLAINTIFF-APPELLANT AND DEFENDANTAPPELLEE.
III
THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLLANT WAIVED
ITS RIGHT TO PURCHASE THE SUBJECT PROPERTY WHEN IT FAILED TO
CONFORM WITH CONDITIONS SET FORTH BY DEFENDANT-APPELLEE IN ITS
LETTER DATED 4 JUNE 1985.
IV
THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT IT WAS THE
DEFENDANT-APPELLEE WHICH RENDERED IT DIFFICULT IF NOT IMPOSSIBLE
FOR PLAINTIFF-APPELLANT TO COMPLETE THE BALANCE OF THEIR
PURCHASE PRICE.

3. Whether or not there is a perfected contract of sale between the parties.26

V
While the case was pending, respondent PNB demanded, on September 20, 1989, that
petitioner vacate the property within 15 days from notice,27 but petitioners refused to do so.
On March 18, 1993, petitioner offered to repurchase the property for P3,500,000.00.28 The offer
was however rejected by respondent PNB, in a letter dated April 13, 1993. According to it, the
prevailing market value of the property was approximately P30,000,000.00, and as a matter of
policy, it could not sell the property for less than its market value.29 On June 21, 1993, petitioner
offered to purchase the property for P4,250,000.00 in cash.30The offer was again rejected by
respondent PNB on September 13, 1993.31

THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT THERE WAS
NO VALID RESCISSION OR CANCELLATION OF SUBJECT CONTRACT OF
REPURCHASE.
VI
THE LOWER COURT ERRED IN DECLARING THAT PLAINTIFF FAILED AND
REFUSED TO SUBMIT THE AMENDED REPURCHASE OFFER.

VII
THE LOWER COURT ERRED IN DISMISSING THE AMENDED COMPLAINT OF
PLAINTIFF-APPELLANT.
VIII
THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT
ACTUAL, MORAL AND EXEMPLARY DAMAGES, ATTOTRNEY'S FEES AND
LITIGATION EXPENSES.33
Meanwhile, on June 17, 1993, petitioner's Board of Directors approved Resolution No. 3-004,
where it waived, assigned and transferred its rights over the property covered by TCT No. 33099
and TCT No. 37025 in favor of Bayani Gabriel, one of its Directors. 34 Thereafter, Bayani Gabriel
executed a Deed of Assignment over 51% of the ownership and management of the property in
favor of Reynaldo Tolentino, who later moved for leave to intervene as plaintiff-appellant. On July
14, 1993, the CA issued a resolution granting the motion,35 and likewise granted the motion of
Reynaldo Tolentino substituting petitioner MMCC, as plaintiff-appellant, and his motion to
withdraw as intervenor.36
The CA rendered judgment on May 11, 2000 affirming the decision of the RTC.37 It declared that
petitioner obviously never agreed to the selling price proposed by respondent PNB
(P1,931,389.53) since petitioner had kept on insisting that the selling price should be lowered
to P1,574,560.47. Clearly therefore, there was no meeting of the minds between the parties as
to the price or consideration of the sale.
The CA ratiocinated that petitioner's original offer to purchase the subject property had not been
accepted by respondent PNB. In fact, it made a counter-offer through its June 4, 1985 letter
specifically on the selling price; petitioner did not agree to the counter-offer; and the negotiations
did not prosper. Moreover, petitioner did not pay the balance of the purchase price within the
sixty-day period set in the June 4, 1985 letter of respondent PNB. Consequently, there was no
perfected contract of sale, and as such, there was no contract to rescind.
According to the appellate court, the claim for damages and the counterclaim were correctly
dismissed by the court a quo for no evidence was presented to support it. Respondent PNB's
letter dated June 30, 1988 cannot revive the failed negotiations between the parties.
Respondent PNB merely asked petitioner to submit an amended offer to repurchase. While
petitioner reiterated its request for a lower selling price and that the balance of the repurchase
be reduced, however, respondent rejected the proposal in a letter dated August 1, 1989.
Petitioner filed a motion for reconsideration, which the CA likewise denied.
Thus, petitioner filed the instant petition for review on certiorari, alleging that:
I. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED
THAT THERE IS NO PERFECTED CONTRACT OF SALE BETWEEN THE
PETITIONER AND RESPONDENT.
II. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED
THAT THE AMOUNT OF PHP725,000.00 PAID BY THE PETITIONER IS NOT AN
EARNEST MONEY.

III. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED

THAT THE FAILURE OF THE PETITIONER-APPELLANT TO SIGNIFY ITS
CONFORMITY TO THE TERMS CONTAINED IN PNB'S JUNE 4, 1985 LETTER
MEANS THAT THERE WAS NO VALID AND LEGALLY ENFORCEABLE CONTRACT
OF SALE BETWEEN THE PARTIES.
IV. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW THAT NONPAYMENT OF THE PETITIONER-APPELLANT OF THE BALANCE OF THE
OFFERED PRICE IN THE LETTER OF PNB DATED JUNE 4, 1985, WITHIN SIXTY
(60) DAYS FROM NOTICE OF APPROVAL CONSTITUTES NO VALID AND
LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.
V. THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE
LETTERS OF PETITIONER-APPELLANT DATED MARCH 18, 1993 AND JUNE 21,
1993, OFFERING TO BUY THE SUBJECT PROPERTY AT DIFFERENT AMOUNT
WERE PROOF THAT THERE IS NO PERFECTED CONTRACT OF SALE.38
The threshold issue is whether or not petitioner and respondent PNB had entered into a
perfected contract for petitioner to repurchase the property from respondent.
Petitioner maintains that it had accepted respondent's offer made through the SAMD, to sell the
property forP1,574,560.00. When the acceptance was made in its letter dated June 25, 1984; it
then deposited P725,000.00 with the SAMD as partial payment, evidenced by Receipt No.
978194 which respondent had issued. Petitioner avers that the SAMD's acceptance of the
deposit amounted to an acceptance of its offer to repurchase. Moreover, as gleaned from the
letter of SAMD dated June 4, 1985, the PNB Board of Directors had approved petitioner's offer
to purchase the property. It claims that this was the suspensive condition, the fulfillment of which
gave rise to the contract. Respondent could no longer unilaterally withdraw its offer to sell the
property forP1,574,560.47, since the acceptance of the offer resulted in a perfected contract of
sale; it was obliged to remit to respondent the balance of the original purchase price
of P1,574,560.47, while respondent was obliged to transfer ownership and deliver the property
to petitioner, conformably with Article 1159 of the New Civil Code.
Petitioner posits that respondent was proscribed from increasing the interest rate after it had
accepted respondent's offer to sell the property for P1,574,560.00. Consequently, respondent
could no longer validly make a counter-offer of P1,931,789.88 for the purchase of the property. It
likewise maintains that, although theP725,000.00 was considered as "deposit for the repurchase
of the property" in the receipt issued by the SAMD, the amount constitutes earnest money as
contemplated in Article 1482 of the New Civil Code. Petitioner cites the rulings of this Court
in Villonco v. Bormaheco39 and Topacio v. Court of Appeals.40
Petitioner avers that its failure to append its conformity to the June 4, 1984 letter of respondent
and its failure to pay the balance of the price as fixed by respondent within the 60-day period
from notice was to protest respondent's breach of its obligation to petitioner. It did not amount to
a rejection of respondent's offer to sell the property since respondent was merely seeking to
enforce its right to pay the balance of P1,570,564.47. In any event, respondent had the option
either to accept the balance of the offered price or to cause the rescission of the contract.
Petitioner's letters dated March 18, 1993 and June 21, 1993 to respondent during the pendency
of the case in the RTC were merely to compromise the pending lawsuit, they did not constitute
separate offers to repurchase the property. Such offer to compromise should not be taken
against it, in accordance with Section 27, Rule 130 of the Revised Rules of Court.

For its part, respondent contends that the parties never graduated from the "negotiation stage"
as they could not agree on the amount of the repurchase price of the property. All that transpired
was an exchange of proposals and counter-proposals, nothing more. It insists that a definite
agreement on the amount and manner of payment of the price are essential elements in the
formation of a binding and enforceable contract of sale. There was no such agreement in this
case. Primarily, the concept of "suspensive condition" signifies a future and uncertain event upon
the fulfillment of which the obligation becomes effective. It clearly presupposes the existence of
a valid and binding agreement, the effectivity of which is subordinated to its fulfillment. Since
there is no perfected contract in the first place, there is no basis for the application of the
principles governing "suspensive conditions."
According to respondent, the Statement of Account prepared by SAMD as of June 25, 1984
cannot be classified as a counter-offer; it is simply a recital of its total monetary claims against
petitioner. Moreover, the amount stated therein could not likewise be considered as the counteroffer since as admitted by petitioner, it was only recommendation which was subject to approval
of the PNB Board of Directors.
Neither can the receipt by the SAMD of P725,000.00 be regarded as evidence of a perfected
sale contract. As gleaned from the parties' Stipulation of Facts during the proceedings in the
court a quo, the amount is merely an acknowledgment of the receipt of P725,000.00 as deposit
to repurchase the property. The deposit ofP725,000.00 was accepted by respondent on the
condition that the purchase price would still be approved by its Board of Directors. Respondent
maintains that its acceptance of the amount was qualified by that condition, thus not absolute.
Pending such approval, it cannot be legally claimed that respondent is already bound by any
contract of sale with petitioner.
According to respondent, petitioner knew that the SAMD has no capacity to bind respondent and
that its authority is limited to administering, managing and preserving the properties and other
special assets of PNB. The SAMD does not have the power to sell, encumber, dispose of, or
otherwise alienate the assets, since the power to do so must emanate from its Board of
Directors. The SAMD was not authorized by respondent's Board to enter into contracts of sale
with third persons involving corporate assets. There is absolutely nothing on record that
respondent authorized the SAMD, or made it appear to petitioner that it represented itself as
having such authority.
Respondent reiterates that SAMD had informed petitioner that its offer to repurchase had been
approved by the Board subject to the condition, among others, "that the selling price shall be the
total bank's claim as of documentation date x x x payable in cash (P725,000.00 already
deposited)
within 60 days from notice of approval." A new Statement of Account was attached therein
indicating the total bank's claim to be P1,931,389.53 less deposit of P725,000.00,
or P1,206,389.00. Furthermore, while respondent's Board of Directors accepted petitioner's offer
to repurchase the property, the acceptance was qualified, in that it required a higher sale price
and subject to specified terms and conditions enumerated therein. This qualified acceptance
was in effect a counter-offer, necessitating petitioner's acceptance in return.
The Ruling of the Court
The ruling of the appellate court that there was no perfected contract of sale between the parties
on June 4, 1985 is correct.

A contract is a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service.41 Under Article 1318 of the New Civil
Code, there is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Contracts are perfected by mere consent which is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract.42 Once perfected,
they bind other contracting parties and the obligations arising therefrom have the form of law
between the parties and should be complied with in good faith. The parties are bound not only to
the fulfillment of what has been expressly stipulated but also to the consequences which,
according to their nature, may be in keeping with good faith, usage and law.43
By the contract of sale, one of the contracting parties obligates himself to transfer the ownership
of and deliver a determinate thing, and the other to pay therefor a price certain in money or its
equivalent.44 The absence of any of the essential elements will negate the existence of a
perfected contract of sale. As the Court ruled in Boston Bank of the Philippines v. Manalo:45
A definite agreement as to the price is an essential element of a binding agreement to
sell personal or real property because it seriously affects the rights and obligations of
the parties. Price is an essential element in the formation of a binding and enforceable
contract of sale. The fixing of the price can never be left to the decision of one of the
contracting parties. But a price fixed by one of the contracting parties, if accepted by
the other, gives rise to a perfected sale.46
A contract of sale is consensual in nature and is perfected upon mere meeting of the minds.
When there is merely an offer by one party without acceptance of the other, there is no
contract.47 When the contract of sale is not perfected, it cannot, as an independent source of
obligation, serve as a binding juridical relation between the parties. 48
In San Miguel Properties Philippines, Inc. v. Huang,49 the Court ruled that the stages of a
contract of sale are as follows: (1) negotiation, covering the period from the time the prospective
contracting parties indicate interest in the contract to the time the contract is perfected;
(2) perfection, which takes place upon the concurrence of the essential elements of the sale
which are the meeting of the minds of the parties as to the object of the contract and upon the
price; and (3) consummation, which begins when the parties perform their respective
undertakings under the contract of sale, culminating in the extinguishment thereof.
A negotiation is formally initiated by an offer, which, however, must be certain.50 At any time prior
to the perfection of the contract, either negotiating party may stop the negotiation. At this stage,
the offer may be withdrawn; the withdrawal is effective immediately after its manifestation. To
convert the offer into a contract, the acceptance must be absolute and must not qualify the terms
of the offer; it must be plain, unequivocal, unconditional and without variance of any sort from the
proposal. In Adelfa Properties, Inc. v. Court of Appeals,51the Court ruled that:

x x x The rule is that except where a formal acceptance is so required, although the
acceptance must be affirmatively and clearly made and must be evidenced by some
acts or conduct communicated to the offeror, it may be shown by acts, conduct, or
words of the accepting party that clearly manifest a present intention or determination
to accept the offer to buy or sell. Thus, acceptance may be shown by the acts,
conduct, or words of a party recognizing the existence of the contract of sale.52
A qualified acceptance or one that involves a new proposal constitutes a counter-offer and a
rejection of the original offer. A counter-offer is considered in law, a rejection of the original offer
and an attempt to end the negotiation between the parties on a different basis.53 Consequently,
when something is desired which is not exactly what is proposed in the offer, such acceptance is
not sufficient to guarantee consent because any modification or variation from the terms of the
offer annuls the offer.54 The acceptance must be identical in all respects with that of the offer so
as to produce consent or meeting of the minds.
In this case, petitioner had until February 17, 1984 within which to redeem the property.
However, since it lacked the resources, it requested for more time to redeem/repurchase the
property under such terms and conditions agreed upon by the parties.55 The request, which was
made through a letter dated August 25, 1983, was referred to the respondent's main branch for
appropriate action.56 Before respondent could act on the request, petitioner again wrote
respondent as follows:
1. Upon approval of our request, we will pay your goodselves ONE HUNDRED &
FIFTY THOUSAND PESOS (P150,000.00);
2. Within six months from date of approval of our request, we will pay another FOUR
HUNDRED FIFTY THOUSAND PESOS (P450,000.00); and
3. The remaining balance together with the interest and other expenses that will be
incurred will be paid within the last six months of the one year grave period requested
for.57
When the petitioner was told that respondent did not allow "partial redemption,"58 it sent a letter
to respondent's President reiterating its offer to purchase the property.59 There was no response
to petitioner's letters dated February 10 and 15, 1984.
The statement of account prepared by the SAMD stating that the net claim of respondent as of
June 25, 1984 was P1,574,560.47 cannot be considered an unqualified acceptance to
petitioner's offer to purchase the property. The statement is but a computation of the amount
which petitioner was obliged to pay in case respondent would later agree to sell the property,
including interests, advances on insurance premium, advances on realty taxes, publication cost,
registration expenses and miscellaneous expenses.
There is no evidence that the SAMD was authorized by respondent's Board of Directors to
accept petitioner's offer and sell the property for P1,574,560.47. Any acceptance by the SAMD
of petitioner's offer would not bind respondent. As this Court ruled in AF Realty Development,
Inc. vs. Diesehuan Freight Services, Inc.:60
Section 23 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. Just as a natural person
may authorize another to do certain acts in his behalf, so may the board of directors of
a corporation validly delegate some of its functions to individual officers or agents
appointed by it. Thus, contracts or acts of a corporation must be made either by the
board of directors or by a corporate agent duly authorized by the board. Absent such

valid delegation/authorization, the rule is that the declarations of an individual director

relating to the affairs of the corporation, but not in the course of, or connected with the
performance of authorized duties of such director, are held not binding on the
corporation.
Thus, a corporation can only execute its powers and transact its business through its Board of
Directors and through its officers and agents when authorized by a board resolution or its bylaws.61
It appears that the SAMD had prepared a recommendation for respondent to accept petitioner's
offer to repurchase the property even beyond the one-year period; it recommended that
petitioner be allowed to redeem the property and pay P1,574,560.00 as the purchase price.
Respondent later approved the recommendation that the property be sold to petitioner. But
instead of the P1,574,560.47 recommended by the SAMD and to which petitioner had previously
conformed, respondent set the purchase price at P2,660,000.00. In fine, respondent's
acceptance of petitioner's offer was qualified, hence can be at most considered as a counteroffer. If petitioner had accepted this counter-offer, a perfected contract of sale would have arisen;
as it turns out, however, petitioner merely sought to have the counter-offer reconsidered. This
request for reconsideration would later be rejected by respondent.
We do not agree with petitioner's contention that the P725,000.00 it had remitted to respondent
was "earnest money" which could be considered as proof of the perfection of a contract of sale
under Article 1482 of the New Civil Code. The provision reads:
ART. 1482. Whenever earnest money is given in a contract of sale, it shall be
considered as part of the price and as proof of the perfection of the contract.
This contention is likewise negated by the stipulation of facts which the parties entered into in
the trial court:
8. On June 8, 1984, the Special Assets Management Department (SAMD) of PNB
prepared an updated Statement of Account showing MMCC's total liability to PNB as
of June 25, 1984 to be P1,574,560.47 and recommended this amount as the
repurchase price of the subject property.
9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase the
property. The deposit of P725,000 was accepted by PNB on the condition that the
purchase price is still subject to the approval of the PNB Board.62
Thus, the P725,000.00 was merely a deposit to be applied as part of the purchase price of the
property, in the event that respondent would approve the recommendation of SAMD for
respondent to accept petitioner's offer to purchase the property for P1,574,560.47. Unless and
until the respondent accepted the offer on these terms, no perfected contract of sale would arise.
Absent proof of the concurrence of all the essential elements of a contract of sale, the giving of
earnest money cannot establish the existence of a perfected contract of sale. 63
It appears that, per its letter to petitioner dated June 4, 1985, the respondent had decided to
accept the offer to purchase the property for P1,931,389.53. However, this amounted to an
amendment of respondent's qualified acceptance, or an amended counter-offer, because while
the respondent lowered the purchase price, it still declared that its acceptance was subject to
the following terms and conditions:
1. That the selling price shall be the total Bank's claim as of documentation date (pls.
see attached statement of account as of 5-31-85), payable in cash (P725,000.00
already deposited) within sixty (60) days from notice of approval;

2. The Bank sells only whatever rights, interests and participation it may have in the
property and you are charged with full knowledge of the nature and extent of said
rights, interests and participation and waive your right to warranty against eviction.
3. All taxes and other government imposts due or to become due on the property, as
well as expenses including costs of documents and science stamps, transfer fees,
etc., to be incurred in connection with the execution and registration of all covering
documents shall be borne by you;
4. That you shall undertake at your own expense and account the ejectment of the
occupants of the property subject of the sale, if there are any;
5. That upon your failure to pay the balance of the purchase price within sixty (60)
days from receipt of advice accepting your offer, your deposit shall be forfeited and the
Bank is thenceforth authorized to sell the property to other interested parties.
6. That the sale shall be subject to such other terms and conditions that the Legal
Department may impose to protect the interest of the Bank.64
It appears that although respondent requested petitioner to conform to its amended counteroffer, petitioner refused and instead requested respondent to reconsider its amended counteroffer. Petitioner's request was ultimately rejected and respondent offered to refund
its P725,000.00 deposit.
In sum, then, there was no perfected contract of sale between petitioner and respondent over
the subject property.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED.
The assailed decision is AFFIRMED. Costs against petitioner Manila Metal Container
Corporation.SO ORDERED.
G.R. No. L-48237 June 30, 1987
MADRIGAL & COMPANY, INC., petitioner,
vs.
HON. RONALDO B. ZAMORA, PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS, THE
HON. SECRETARY OF LABOR, and MADRIGAL CENTRAL OFFICE EMPLOYEES
UNION, respondents.
No. L-49023 June 30, 1987
MADRIGAL & COMPANY, INC., petitioner,
vs.
HON. MINISTER OF LABOR and MADRIGAL CENTRAL OFFICE EMPLOYEES
UNION, respondents.

SARMIENTO, J.:
These are two petitions for certiorari and prohibition filed by the petitioner, the Madrigal & Co.,
Inc. The facts are undisputed.
The petitioner was engaged, among several other corporate objectives, in the management of
Rizal Cement Co., Inc. 1 Admittedly, the petitioner and Rizal Cement Co., Inc. are sister
companies. 2 Both are owned by the same or practically the same stockholders. 3 On December
28, 1973, the respondent, the Madrigal Central Office Employees Union, sought for the renewal
of its collective bargaining agreement with the petitioner, which was due to expire on February
28, 1974. 4Specifically, it proposed a wage increase of P200.00 a month, an allowance of
P100.00 a month, and other economic benefits. 5 The petitioner, however, requested for a
deferment in the negotiations.
On July 29, 1974, by an alleged resolution of its stockholders, the petitioner reduced its capital
stock from 765,000 shares to 267,366 shares. 6 This was effected through the distribution of the
marketable securities owned by the petitioner to its stockholders in exchange for their shares in
an equivalent amount in the corporation. 7
On August 22, 1975, by yet another alleged stockholders' action, the petitioner reduced its
authorized capitalization from 267,366 shares to 110,085 shares, again, through the same
scheme. 8
After the petitioner's failure to sit down with the respondent union, the latter, on August 28, 1974,
commenced Case No. LR-5415 with the National Labor Relations Commission on a complaint
for unfair labor practice. 9 In due time, the petitioner filed its position paper, 10 alleging
operational losses. Pending the resolution of Case No. LR-5415, the petitioner, in a letter dated
November 17, 1975, 11 informed the Secretary of Labor that Rizal Cement Co., Inc., "from which
it derives income" 12 "as the General Manager or Agent" 13 had "ceased operating
temporarily." 14 "In addition, "because of the desire of the stockholders to phase out the
operations of the Madrigal & Co., Inc. due to lack of business incentives and prospects, and in
order to prevent further losses," 15 it had to reduce its capital stock on two occasions "As the
situation, therefore, now stands, the Madrigal & Co., Inc. is without substantial income to speak
of, necessitating a reorganization, by way of retrenchment, of its employees and
operations." 16 The petitioner then requested that it "be allowed to effect said reorganization
gradually considering all the circumstances, by phasing out in at least three (3) stages, or in a
manner the Company deems just, equitable and convenient to all concerned, about which your
good office will be apprised accordingly." 17 The letter, however, was not verified and neither
was it accompanied by the proper supporting papers. For this reason, the Department of Labor
took no action on the petitioner's request.
On January 19, 1976, the labor arbiter rendered a decision 18 granting, among other things, a
general wage increase of P200.00 a month beginning March 1, 1974 plus a monthly living
allowance of P100.00 monthly in favor of the petitioner's employees. The arbiter specifically
found that the petitioner "had been making substantial profits in its operation" 19 since 1972
through 1975. The petitioner appealed.
On January 29, 1976, the petitioner applied for clearance to terminate the services of a number
of employees pursuant supposedly to its retrenchment program. On February 3, 1976, the

petitioner applied for clearance to terminate 18 employees more. 20 On the same date, the
respondent union went to the Regional Office (No. IV) of the Department of Labor (NLRC Case
No. R04-2-1432-76) to complain of illegal lockout against the petitioner. 21 Acting on this
complaint, the Secretary of 22 Labor, in a decision dated December 14, 1976, 22 found the
dismissals "to be contrary to law" 23 and ordered the petitioner to reinstate some 40 employees,
37 of them with backwages. 24 The petitioner then moved for reconsideration, which the Acting
Labor Secretary, Amado Inciong, denied. 25

II. SAID RESPONDENTS ERRED IN NOT HOLDING THAT THERE IS NO LOCKOUT HERE IN
LEGAL CONTEMPLATION, MUCH LESS FOR UNION-BUSTING PURPOSES.

Thereafter, the petitioner filed an appeal to the Office of the President. The respondent, the
Presidential Assistant on Legal Affairs, affirmed with modification the Labor Department's
decision, thus:

IV. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN LEAVING TO THE JUDGMENT OF

RESPONDENT SECRETARY THE CASES OF ROGELIO MENESES AND ROBERTO
TALADRO WHO HAD VOLUNTARILY RETIRED AND PAID THEIR RETIREMENT PAY. 31

xxx xxx xxx

1. Eliseo Dizon, Eugenio Evangelista and Benjamin Victorio are excluded
from the order of reinstatement.
2. Rogelio Meneses and Roberto Taladro who appear to have voluntarily
retired and paid their retirement pay, their cases are left to the judgment of
the Secretary of Labor who is in a better position to assess appellant's
allegation as to their retirement.
3. The rest are hereby reinstated with six (6) months backwages, except
Aleli Contreras, Teresita Eusebio and Norma Parlade who are to be
reinstated without backwages.
SO ORDERED. 26
xxx xxx xxx
On May 15, 1978, the petitioner came to this court. (G.R. No. 48237.)
Meanwhile, on May 25, 1977, the National Labor Relations Commission rendered a decision
affirming the labor arbiter's judgment in Case No. LR-5415. 27 The petitioner appealed to the
Secretary of Labor. On June 9, 1978, the Secretary of Labor dismissed the appeal. 28 Following
these successive reversals, the petitioner came anew to this court. (G.R. No. 49023.)

III. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN ORDERING THE

REINSTATEMENT OF THE REST OF AFFECTED MEMBERS OF RESPONDENT UNION
WITH SIX (6) MONTHS BACKWAGES, EXCEPT ALELI CONTRERAS, TERESITA EUSEBIO
AND NORMA PARLADE WHO ARE TO BE REINSTATED WITHOUT BACKWAGES.

xxx xxx xxx

while in G.R. No. 49023, it submits that:
xxx xxx xxx
1. RESPONDENT MINISTER ERRED IN AFFIRMING THE DECISION EN BANC OF THE
NATIONAL LABOR RELATIONS COMMISSION DESPITE CLEAR INDICATIONS IN THE
RECORD THAT THE AWARD WAS PREMATURE IN THE ABSENCE OF A DEADLOCK IN
NEGOTIATION AND THE FAILURE ON THE PART OF THE LABOR ARBITER TO RESOLVE
THE MAIN IF NOT ONLY ISSUE OF REFUSAL TO BARGAIN, THEREBY DEPRIVING
PETITIONER OF ITS RIGHT TO DUE PROCESS.
2. ASSUMING ARGUENDO THAT THERE WAS A DEADLOCK IN NEGOTIATION,
RESPONDENT MINISTER ERRED NEVERTHELESS IN NOT FINDING THAT THE
ECONOMIC BENEFITS GRANTED IN THE FORM OF SALARY INCREASES ARE UNFAIR
AND VIOLATIVE OF THE MANDATORY GUIDELINES PRESCRIBED UNDER PRESIDENTIAL
DECREE NO. 525 AND IGNORING THE UNDISPUTED FACT THAT PETITIONER HAD
VIRTUALLY CEASED OPERATIONS AFTER HAVING TWICE DECREASED ITS CAPITAL
STOCKS AND, THEREFORE, NOT FINANCIALLY CAPABLE TO ABSORB SUCH AWARD OF
BENEFITS. 32
xxx xxx xxx
There is no merit in these two (2) petitions.

By our resolution dated October 9, 1978, we consolidated G.R. No. 48237 with G.R. No.
49023. 29 We likewise issued temporary restraining orders. 30
In G.R. No. 48237, the petitioner argues, that.
xxx xxx xxx
I. SAID RESPONDENTS ERRED IN HOLDING THAT THERE WAS NO VALID COMPLIANCE
WITH THE CLEARANCE REQUIREMENT.

As a general rule, the findings of administrative agencies are accorded not only respect but even
finality. 33 This is especially true with respect to the Department of Labor, which performs not only
a statutory function but carries out a Constitutional mandate as well. 34 Our jurisdiction, as a rule,
is confined to cases of grave abuse of discretion. 35 But for certiorari to lie, there must be such
arbitrary and whimsical exercise of power, or that discretion was exercised despotically.36
In no way can the questioned decisions be seen as arbitrary. The decisions themselves show
why.

Anent Case No. R04-2-1432-76 (G.R. No. 48237), we are satisfied with the correctness of the
respondent Presidential Assistant for Legal Affairs' findings. We quote:
xxx xxx xxx
In urging reversal of the appealed decision, appellant contends that (1) its
letter dated November 17, 1975, constitute "substantial compliance with the
clearance requirement to terminate;" and (2) individual appellees' dismissal
had no relation to any union activities, but was the result of an honest-togoodness retrenchment policy occasioned by loss of income due to
cessation of operation.
We find the first contention to be without merit. Aside from the fact that the
controversial letter was unverified, with not even a single document
submitted in support thereof, the same failed to specify the individual
employees to be affected by the intended retrenchment. Not only this, but
the letter is so vague and indefinite regarding the manner of effecting
appellant's retrenchment plan as to provide the Secretary of (sic) a
reasonable basis on which to determine whether the request for
retrenchment was valid or otherwise, and whether the mechanics in giving
effect thereto was just or unjust to the employees concerned. In fact, to be
clearly implied from the letter is that the implementary measures needed to
give effect to the intended retrenchment are yet to be thought of or
concretized in the indefinite future, measures about which the office of the
Secretary "will be apprised accordingly." All these, and more, as correctly
found by the Acting Secretary, cannot but show that the letter is insufficient
in form and substance to constitute a valid compliance with the clearance
requirement. That being so, it matters little whether or not complainant union
or any of its members failed to interpose any opposition thereto.
It cannot be over-emphasized that the purpose in requiring a prior clearance
by the Secretary of Labor, in cases of shutdown or dismissal of employees,
is to afford said official ample opportunity to examine and determine the
reasonableness of the request. This is made imperative in order to give
meaning and substance to the constitutional mandate that the State must
"afford protection to labor," and guarantee their "security of tenure." Indeed,
the rules require that the application for clearance be filed ten (10) days
before the intended shutdown or dismissal, serving a copy thereof to the
employees affected in order that the latter may register their own individual
objections against the grant of the clearance. But how could this
requirement of notice to the employees have been complied with, when, as
observed by the Acting Secretary in his modificatory decision dated June
30, 1977 "the latter of November 17, 1975 does not even state definitely the
employees involved" upon whom service could be made.
With respect to appellant's second contention, we agree with the Acting
Secretary's findings that individual appellee's dismissal was an offshoot of
the union's demand for a renegotiation of the then validly existing collective
bargaining Agreement.

xxx xxx xxx

The pattern of appellant's acts after the decision of the Labor Arbiter in Case
No. LR-5415 has convinced us that its sole objective was to render moot
and academic the desire of the union to exercise its right to bargain
collectively with management, especially so when it is considered in the light
of the fact that under the said decision the demand by the union for wage
increase and allowances was granted. What renders appellant's motive
suspect was its haste in terminating the services of individual appellees,
without waiting the outcome of its appeal in Case No. LR-5415. The amount
involved by its offer to pay double separation could very well have been
used to pay the salaries of those employees whose services were sought to
be terminated, until the resolution of its appeal with the NLRC, since
anyway, if its planned retrenchment is found to be justifiable and done in
good faith, its only liability is to answer for the separation pay provided by
law. By and large, therefore, we agree with the Acting Secretary that, under
the circumstances obtaining in this case, "respondent's action [was] a
systematic and deliberate attempt to get rid of complainants because of
their union activities.
We now come to the individual cases of Aleli Contreras, Teresita Eusebio
and Norma Parlade. It is appellant's claim that these three (3) should not be
reinstated inasmuch as they have abandoned their work by their continued
absences, and moreover in the case of Contreras, she failed to oppose the
application for clearance filed against her on October 24, 1975. However,
appellant's payrolls for December 16-31, 1975, January 1-15, 1976 and
January 16-31, 1976, show that the three (3) were "on leave without pay."
As correctly appreciated by the Acting Secretary, these "payrolls prove, first,
that "leave" has been granted to these employees, and, second, that it is a
practice in the company to grant "leaves without pay" without loss of
employment status, to those who have exhausted their authorized leaves."
As regards, Norma Parlade, the records show that she "truly incurred illness
and actually underwent surgery in Oct., 1975." As to Aleli Contreras, there is
no showing that the Secretary of Labor or appellant ever acted on the
clearance. If we were to follow the logic of appellant, Contreras should not
have been included in the application for clearance filed on Feb. 3, 1976.
The fact that she was included shows that up to that time, she was still
considered as a regular employee. It was for these reasons, coupled with
the length of service that these employees have rendered appellant, that the
Acting Secretary ordered their reinstatement but without backwages. 37
xxx xxx xxx
With respect Lo Case No. LR-5415 (G.R. No. 49023), we are likewise content with the findings
of the National Labor Relations Commission. Thus:
xxx xxx xxx

Appellant now points that the only issue certified to compulsory arbitration is
"refusal to bargain" and it is, therefore, premature to dictate the terms of the
CBA on the assumption that there was already a deadlock in negotiation.
Appellant further contends that, assuming there was deadlock in
negotiation, the economic benefits granted are unreasonable and violative
of the guideline prescribed by P.D. 525.
On the other hand, it is the union's stance that its economic demands are
justified by, the persistent increase in the cost of living and the substantial
earnings of the company from 1971 to 1975.
It bears to stress that although the union's petition was precipitated by the
company's refusal to bargain, there are glaring circumstances pointing out
that the parties also submitted "deadlock" to arbitration. The petition itself is
couched in general terms, praying for arbitration of the union's "dispute" with
the respondent concerning proposed changes in the collective bargaining
agreement." It is supported with a copy of the proposed changes which just
goes to show that the union, aside from the issue concerning respondent's
refusal to bargain, sought determination of the merit of its proposals. On the
part of the appellant company, it pleaded financial incapacity to absorb the
proposed economic benefits during the initial stage of the proceedings
below. Even the evidence and arguments proferred below by both parties
are relevant to deadlock issue. In the face of these factual environment, it is
our view that the Labor Arbiter below did not commit a reversible error in
rendering judgment on the proposed CBA changes. At any rate, the
minimum requirements of due process was satisfied because as heretofore
stated, the appellant was given Opportunity, and had in fact, presented
evidence and argument in avoidance of the proposed CBA changes.
We do not also subscribe to appellant's argument that by reducing its
capital, it is made evident that it is phasing out its operations. On the
contrary, whatever may be the reason behind such reductions, it is
indicative of an intention to keep the company a going concern. So much so
that until now almost four (4) years later, it is still very much in existence and
operational as before.
We now come to the question concerning the equitableness of the
economic benefits granted below. It requires no evidence to show that the
employees concerned deserve some degree of upliftment due to the
unabated increase in the cost of living especially in Metro Manila. Of course
the company would like us to believe that it is losing and is therefore not
financially capable of improving the present CBA to favor its employees. In
support of such assertion, the company points that the profits reflected in its
yearly Statement of Income and Expenses are dividends from security
holdings. We, however, reject as puerile its suggestion to dissociate the
dividends it received from security holdings on the pretext that they belong
exclusively to its stockholders. The dividends received by the company are
corporate earnings arising from corporate investment which no doubt are
attended to by the employees involved in this proceedings. Otherwise. it
would not have been reflected as part of profits in the company's yearly

financial statements. In determining the reasonableness of the economic

grants below, we have, therefore, scrutinized the company's Statement of
Income and Expenses from 1972 to 1975 and after equating the welfare of
the employees with the substantial earnings of the company, we find the
award to be predicated on valid justifications.
The salary increase we herein sanction is also in keeping with the rational
that made imperative the enactment of the Termination Pay Law since in
case the respondent company really closes down, the employees will
receive higher separation pay or retirement benefits to tide them over while
seeking another employment. 38
What clearly emerges from the recorded facts is that the petitioner, awash with profits from its
business operations but confronted with the demand of the union for wage increases, decided to
evade its responsibility towards the employees by a devised capital reduction. While the
reduction in capital stock created an apparent need for retrenchment, it was, by all indications,
just a mask for the purge of union members, who, by then, had agitated for wage increases. In
the face of the petitioner company's piling profits, the unionists had the right to demand for such
salary adjustments.
That the petitioner made quite handsome profits is clear from the records. The labor arbiter
stated in his decision in the collective agreement case (Case No. LR-5415):
xxx xxx xxx
A clear scrutiny of the financial reports of the respondent [herein petitioner]
reveals that it had been making substantial profits in the operation.
In 1972, when it still had 765,000 common shares, of which 305,000 were
unissued and 459,000 outstanding capitalized at P16,830,000.00, the
respondent made a net profit of P2,403,211.58. Its total assets were
P70,821,317.81.
In 1973, based on the same capitalization, its profit increased to
P2,724,465.33. Its total assets increased to P83,240,473.73.
In 1974, although its capitalization was reduced from P16,830,000.00 to
P11,230,459.36, its profits were further increased to P2,922,349.70. Its
assets were P78,842,175.75.
The reduction in its assets by P4,398,297.98 was due to the fact that its
capital stock was reduced by the amount of P5,599,540.54.
In 1975, for the period of only six months, the respondent reported a net
profit of P547,414.72, which when added to the surplus of P5,591.214.19,
makes a total surplus of P6,138,628.91 as of June 30, 1975. 39

xxx xxx xxx

The petitioner would, however, have us believe that it in fact sustained losses. Whatever profits it
earned, so it claims were in the nature of dividends "declared on its shareholdings in other
companies in the earning of which the employees had no participation whatsoever." 40 "Cash
dividends," according to it, "are the absolute property of the stockholders and cannot be made
available for disposition if only to meet the employees' economic demands." 41
There is no merit in this contention. We agree with the National Labor Relations Commission
that "[t]he dividends received by the company are corporate earnings arising from corporate
investment." 42 Indeed, as found by the Commission, the petitioner had entered such earnings in
its financial statements as profits, which it would not have done if they were not in fact profits. 43
Moreover, it is incorrect to say that such profits in the form of dividends are beyond the
reach of the petitioner's creditors since the petitioner had received them as compensation for its
management services in favor of the companies it managed as a shareholder thereof. As such
shareholder, the dividends paid to it were its own money, which may then be available for wage
increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in
which case, such dividends would be the absolute property of the stockholders and hence, out
of reach by creditors of the corporation. Here, the petitioner was acting as stockholder itself, and
in that case, the right to a share in such dividends, by way of salary increases, may not be
denied its employees.
Accordingly, this court is convinced that the petitioner's capital reduction efforts were, to begin
with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits,
and consequently, to justify the mass layoff in its employee ranks, especially of union members.
They were nothing but a premature and plain distribution of corporate assets to obviate a just
sharing to labor of the vast profits obtained by its joint efforts with capital through the years.
Surely, we can neither countenance nor condone this. It is an unfair labor practice.
As we observed in People's Bank and Trust Company v. People's Bank and Trust Co.
Employees Union: 44
xxx xxx xxx
As has been held by this Court in Insular Lumber Company vs. CA, et al., L23875, August 29, 1969, 29 SCRA 371, retrenchment can only be availed of
if the company is losing or meeting financial reverses in its operation, which
certainly is not the case at bar. Undisputed is the fact, that the Bank "at no
time incurred losses. " As a matter of fact, "the net earnings of the Bank
would be in the average of P2,000,000.00 a year from 1960 to 1969 and,
during this period of nine (9) years, the Bank continuously declared
dividends to its stockholders." Thus the mass lay-off or dismissal of the 65
employees under the guise of retrenchment policy of the Bank is a lame
excuse and a veritable smoke-screen of its scheme to bust the Union and
thus unduly disturb the employment tenure of the employees concerned,
which act is certainly an unfair labor practice. 45

Yet, at the same tune, the petitioner would claim that "the phasing out of its operations which
brought about the retrenchment of the affected employees was mainly dictated be the necessity
of its stockholders in their capacity as heirs of the late Don Vicente Madrigal to partition the
estate left by him." 46 It must be noted, however, that the labor cases were tried on the theory of
losses the petitioner was supposed to have incurred to justify retrenchment. The petitioner
cannot change its theory in the Supreme Court. Moreover, there is nothing in the records that
will substantiate this claim. But what is more important is the fact that it is not impossible to
partition the Madrigal estate assuming that the estate is up for partition without the
petitioner's business closing shop and inevitably, without the petitioner laying off its employees.
As regards the question whether or not the petitioner's letter dated November 17, 1975 47 was in
substantial compliance with legal clearance requirements, suffice it to state that apart from the
Secretary of Labor's valid observation that the same "did not constitute a sufficient clearance as
contemplated by law, " 48 the factual circumstances show that the letter in question was itself a
part of the "systematic and deliberate attempt to get rid of [the union members] because of their
union activities." 49 Hence, whether or not the said letter complied with the legal formalities is
beside the point since under the circumstances, retrenchment was, in all events, unjustified.
Parenthetically, the clearance required under Presidential Decree No. 850 has been done away
with by Batas Blg. 130, approved on August 21, 1981.
During the pendency of these petitions, the petitioner submitted manifestations to the effect that
certain employees have accepted retirement benefits pursuant to its retrenchment
scheme. 50 This is a matter of defense that should be raised before the National Labor Relations
Commission.
To do away with the protracted process of determining the earnings acquired by the employees
as a result of ad interim employment, and to erase any doubt as to the amount of backwages
due them, this court, in line with the precedent set in Mercury Drug Co., Inc. v. Court of Industrial
Relations, 51 affirmed in a long line of decisions that came later, 52 hereby fixes the amount of
backwages at three (3) years pay reckoned at the increased rates decreed by the labor arbiter in
Case No. LR-5415 without deduction or qualification.
WHEREFORE, the petitions are hereby DISMISSED. Subject to the modification as to the
amount of backwages hereby awarded, the challenged decisions are AFFIRMED. The
temporary restraining orders are LIFTED. With costs against the petitioner.
This decision is IMMEDIATELY EXECUTORY.
SO ORDERED.
G.R. No. L-19761

January 29, 1923

PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa Naval

Filipina," plaintiff-appellee,
vs.
MARCIANO RIVERA, defendant-appellant.

Araneta and Zaragoza for appellant.

Ross and Lawrence for appellee.
STREET, J.:
This action was instituted on November 21, 1921, in the Court of First Instance of Manila, by the
Philippine Trust Company, as assignee in insolvency of La Cooperativa Naval Filipina, against
Marciano Rivera, for the purpose of recovering a balance of P22,500, alleged to be due upon
defendant's subscription to the capital stock of said insolvent corporation. The trial judge having
given judgment in favor of the plaintiff for the amount sued for, the defendant appealed.
It appears in evidence that in 1918 the Cooperativa Naval Filipina was duly incorporated under
the laws of the Philippine Islands, with a capital of P100,000, divided into one thousand shares
of a par value of P100 each. Among the incorporators of this company was numbered the
defendant Mariano Rivera, who subscribed for 450 shares representing a value of P45,000, the
remainder of the stock being taken by other persons. The articles of incorporation were duly
registered in the Bureau of Commerce and Industry on October 30 of the same year.
In the course of time the company became insolvent and went into the hands of the Philippine
Trust Company, as assignee in bankruptcy; and by it this action was instituted to recover onehalf of the stock subscription of the defendant, which admittedly has never been paid.
The reason given for the failure of the defendant to pay the entire subscription is, that not long
after theCooperativa Naval Filipina had been incorporated, a meeting of its stockholders
occurred, at which a resolution was adopted to the effect that the capital should be reduced by
50 per centum and the subscribers released from the obligation to pay any unpaid balance of
their subscription in excess of 50 per centum of the same. As a result of this resolution it seems
to have been supposed that the subscription of the various shareholders had been cancelled to
the extent stated; and fully paid certificate were issued to each shareholders for one-half of his
subscription. It does not appear that the formalities prescribed in section 17 of the Corporation
Law (Act No. 1459), as amended, relative to the reduction of capital stock in corporations were
observed, and in particular it does not appear that any certificate was at any time filed in the
Bureau of Commerce and Industry, showing such reduction.
His Honor, the trial judge, therefore held that the resolution relied upon the defendant was
without effect and that the defendant was still liable for the unpaid balance of his subscription. In
this we think his Honor was clearly right.
It is established doctrine that subscription to the capital of a corporation constitute a find to which
creditors have a right to look for satisfaction of their claims and that the assignee in insolvency
can maintain an action upon any unpaid stock subscription in order to realize assets for the
payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release
an original subscriber to its capital stock from the obligation of paying for his shares, without a
valuable consideration for such release; and as against creditors a reduction of the capital stock
can take place only in the manner an under the conditions prescribed by the statute or the
charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations
is necessary (14 C. J., 498, 620).

In the case before us the resolution releasing the shareholders from their obligation to pay 50
per centum of their respective subscriptions was an attempted withdrawal of so much capital
from the fund upon which the company's creditors were entitled ultimately to rely and, having
been effected without compliance with the statutory requirements, was wholly ineffectual.
The judgment will be affirmed with cost, and it is so ordered.
G.R. No. 118043 July 23, 1998
LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMG LIFE
INSURANCE CO. INC.),petitioner,
vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

MENDOZA, J.:
This is a petition for review on certiorari of the decision rendered on November 18, 1994 by the
Court of Appeals1 reversing, in part, the decision of the Court of Tax Appeals in C.T.A. Case No.
4583.
The facts are not in dispute. 2 Petitioner, now the Jardine-CMG Life Insurance Company, Inc., is
a domestic corporation engaged in the life insurance business. In 1984, it issued 50,000 shares
of stock as stock dividends, with a par value of P100 or a total of P5 million. Petitioner paid
documentary stamp taxes on each certificate on the basis of its par value. The question in this
case is whether in determining the amount to be paid as documentary stamp tax, it is the par
value of the certificates of stock or the book value of the shares which should be considered.
The pertinent provision of law, as it stood at the time of the questioned transaction, reads as
follows:
Sec. 224. Stamp tax on original issues of certificates of stock. On every
original issue, whether on organization, reorganization or for any lawful
purpose, of certificates of stock by any association, company or corporation,
there shall be collected a documentary stamp tax of one peso and ten
centavos on each two hundred pesos, or fractional part thereof, of the par
value of such certificates:Provided, That in the case of the original issue of
stock without par value the amount of the documentary stamp tax herein
prescribed shall be based upon the actual consideration received by the
association, company, or corporation for the issuance of such stock, and in
the case of stock dividends on the actual value represented by each share. 3
The Commissioner of Internal Revenue took the view that the book value of the shares,
amounting to P19,307,500.00, should be used as basis for determining the amount of the
documentary stamp tax. Accordingly, respondent Internal Revenue Commissioner issued a

deficiency documentary stamp tax assessment in the amount of P78,991.25 in excess of the par
value of the stock dividends.
Together with another documentary stamp tax assessment which it also questioned, petitioner
appealed the Commissioner's ruling to the Court of Tax Appeals. On March 30, 1993, the CTA
rendered its decision holding that the amount of the documentary stamp tax should be based on
the par value stated on each certificate of stock. The dispositive portion of its decision reads:
WHEREFORE, the deficiency documentary stamp tax assessments in the
amount of P464,898.76 and P78,991.25 or a total of P543,890.01 are
hereby cancelled for lack of merit. Respondent Commissioner of Internal
Revenue is ordered to desist from collecting said deficiency documentary
stamp taxes for the same are considered withdrawn.
SO ORDERED.
In turn, respondent Commissioner of Internal Revenue appealed to the Court of Appeals which,
on November 18, 1994, reversed the CTA's decision and held that, in assessing the tax in
question, the basis should be the actual value represented by the subject shares on the
assumption that stock dividends, being a distinct class of shares, are not subject to the
qualification in the law as to the type of certificate of stock used (with or without par value). The
appellate court, therefore, ordered:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby
REVERSED with respect to the deficiency tax assessment on the stock
dividends, but AFFIRMED with regards to the assessment on the Insurance
Policies. Consequently, private respondent is ordered to pay the petitioner
herein the sum of P78,991.25, representing documentary stamp tax on the
stock dividends it issued. No costs pronouncement.
SO ORDERED.
Hence, this petition with the following assignment of error:
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT STOCK
DIVIDENDS INVOLVING SHARES WITH PAR VALUE ARE SUBJECT TO
DOCUMENTARY STAMP TAX BASED ON THE BOOK VALUE OF SAID
SHARES WHICH RULING IS CONTRARY TO WHAT IS CLEARLY
PROVIDED FOR BY SECTION 224 (NOW SECTION 175) OF THE TAX
CODE.
The petition has merit.
First. In ruling that the book value of the shares should be considered in assessing the
documentary stamp tax, the Court of Appeals stated:

There are three (3) classes of stocks referred to in Section 224 (now 175) of
the Internal Revenue Code: (a) Certificate of Stocks with par value,
(b) Certificate of Stock with no par value and (c) stock dividends. The first
two (2) mentioned are original issuances of the corporation, association or
company while the third ones are taken by the corporation, association or
company out of or from their unissued shares of stock, hence are also
originals. Undoubtedly, all the three classifications are subject to the
documentary stamp tax.
Conformably, in the case of stock certificates with par value, the
documentary stamp tax is based on the par value of the stock; for stock
certificates without par value, the same tax is computed from the actual
consideration received by the corporation, association or company; but
for stock dividends, documentary stamp tax is to be paid "on the actual
value represented by each share."
Since in dividends, no consideration is technically received by the
corporation, petitioner is correct in basing the assessment on the book value
thereof rejecting the principles enunciated inCommissioner of Internal
Revenue vs. Heald Lumber Co. (10 SCRA 372) as the said case refers to
purchases of no-par certificates of stocks and not to stock dividends. 4
Apparently, the Court of Appeals treats stock dividends as distinct from ordinary shares of stock
for purposes of the then 224 of the National Internal Revenue Code. There is, however, no
basis for considering stock dividends as a distinct class from ordinary shares of stock since
under this provision only certificates of stock are required to be distinguished (into either one
with par value or one without) rather than the classes of shares themselves.
Indeed, a reading of the then 224 of the NIRC as quoted earlier, starting from its heading, will
show that the documentary stamp tax is not levied upon the shares of stock per se but rather on
the privilege of issuing certificates of stock.
A stock certificate is merely evidence of a share of stock and not the share itself. This distinction
is clear in the Corporation Code, to wit:
Sec. 63. Certificate of stock and transfer of shares. The capital stock of
stock corporations shall be divided into shares for which certificates signed
by the president or vice-president, countersigned by the secretary or
assistant secretary, 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 or
certificates 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 recorded in 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 or certificates and the
number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation. 5

A documentary stamp tax is in the nature of an excise tax. It is not imposed

upon the business transacted but is an excise upon the privilege,
opportunity or facility offered at exchanges for the transaction of the
business. It is an excise upon the facilities used in the transaction of the
business separate and apart from the business itself. (Du Pont v. U.S., 300
U.S. 150; Thomas v. U.S., 192 U.S., 363; Nicol v. Ames, 173 U.S. 509). With
respect to stock certificates, it is levied upon the privilege of issuing them;
not on the money or property received by the issuing company for such
certificates. Neither is it imposed upon the share of stock. As Justice
Learned Hand pointed out in one case, documentary stamp tax is levied on
the document and not on the property which it described, (Empire Trust Co.
v. Hoey, 103 F 2d. 430). . . . 10

Stock dividends are in the nature of shares of stock, the consideration for which is the amount of
unrestricted retained earnings converted into equity in the corporation's books. 6 Thus,
A "stock dividend'' is any dividend payable in shares of stock of the
corporation declaring or authorizing such dividend. It is, what the term itself
implies, a distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a dividend
paid in shares of stock instead of cash, and is properly payable only out of
surplus profits. So, a stock dividend is actually two things: (1) a dividend and
(2) the enforced use of the dividend money to purchase additional shares of
stock at par . . . 7
From the foregoing, it is clear that stock dividends are shares of stock and not certificates or
stock which merely represent them. There is, therefore, no reason for determining the actual
value of such dividends for purposes of the documentary stamp tax if the certificates
representing them indicate a par value.

Third. Settled is the rule that, in case of doubt, tax laws must be construed strictly against the
State and liberally in favor of the taxpayer. This is because taxes, as burdens which must be
endured by the taxpayer, should not be presumed to go beyond what the law expressly and
clearly declares. 11 That such strict construction is necessary in this case is evidenced by the
change in the subject provision as presently worded, which now expressly levies the said tax on
shares of stock as against the privilege of issuing certificates of stock as formerly provided:
Sec. 175. Stamp Tax on Original Issue of Shares of Stock. On every
original issue, whether on organization, reorganization or for any lawful
purpose, of shares of stock by any association, company or corporation,
there shall be collected a documentary stamp tax of Two pesos (P2.00) on
each Two hundred pesos (P200), or fractional part thereof, of the par value,
of such shares of stock:Provided, That in the case of the original issue of
shares of stock without par value the amount of the documentary stamp tax
herein prescribed shall be based upon the actual consideration for the
issuance of such shares of stock: Provided, further, That in the case of
stock dividends, on the actual value represented by each share. 12

The Solicitor General himself says that, based on the then 224, there are only two bases for
determining the amount of the documentary stamp tax:
An examination of the structure of the main provision of Sec. [224] of the
NIRC will show that it intends to classify the tax bases into two, either the
par value, or the actual consideration or actual value. It specifies in the first
part that the basis for the imposition of the documentary stamp tax on
shares of stocks belonging to the first category, discussed in the early part
of this comment, shall be the face value. In contradistinction, the provision
specifies in the proviso that for the second and third categories, the basis for
the tax shall not be the face value. Rather, the basis is either the actual
consideration received by the corporation for the share or the actual value of
the share. 8
Apparently, the former tax code sought to distinguish between stock dividends without par value
and other transactions involving ordinary shares of stock without par value in the second clause
of the then 224 in order to prevent claims that the former are exempt from documentary stamp
taxes as, unlike in the case of ordinary shares, corporations actually receive nothing from their
stockholders in exchange for such stock dividends. Hence the provision that, in the case of stock
dividends, the amount of the documentary stamp tax must be based on the actual value of each
share. This is the only purpose for the distinction in the second clause of the subject provision.

WHEREFORE, the decision of the Court of Appeals is REVERSED insofar as the deficiency tax
assessment on stock dividends is concerned and the decision of the Court of Tax Appeals is
reinstated.
SO ORDERED.

G.R. No. 142936

Second. It is error for the Solicitor General to contend that, under the then 224 of the NIRC, the
basis for assessment is the actual value of the business transaction that is the source of the
original issuance of stock certificates. 9 To the contrary, the documentary stamp tax here is not
levied upon the specific transaction which gives rise to such original issuance but on the
privilege of issuing certificates of stock. As we have held in several cases:

April 17, 2002

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT

CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.
PANGANIBAN, J.:

Basic is the rule that a corporation has a legal personality distinct and separate from the persons
and entities owning it. The corporate veil may be lifted only if it has been used to shield fraud,
defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate
injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been
foreclosed and purchased at the resulting public auction by the Development Bank of the
Philippines (DBP), will not make PNB liable for the PASUMILs contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the Court of Appeals
(CA) in CA-GR CV No. 57610. The decretal portion of the challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED."2
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly
organized, existing, and operating under the laws of the Philippines, with office and
principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while
the defendant [herein petitioner] Philippine National Bank (herein referred to as PNB),
is a semi-government corporation duly organized, existing and operating under the
laws of the Philippines, with office and principal place of business at Escolta Street,
Sta. Cruz, Manila; whereas, the other defendant, the National Sugar Development
Corporation (NASUDECO in brief), is also a semi-government corporation and the
sugar arm of the PNB, with office and principal place of business at the 2nd Floor,
Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga Sugar Mills
(PASUMIL in short), is a corporation organized, existing and operating under the 1975
laws of the Philippines, and had its business office before 1975 at Del Carmen,
Floridablanca, Pampanga; that the plaintiff is engaged in the business of general
construction for the repairs and/or construction of different kinds of machineries and
buildings; that on August 26, 1975, the defendant PNB acquired the assets of the
defendant PASUMIL that were earlier foreclosed by the Development Bank of the
Philippines (DBP) under LOI No. 311; that the defendant PNB organized the
defendant NASUDECO in September, 1975, to take ownership and possession of the
assets and ultimately to nationalize and consolidate its interest in other PNB controlled
sugar mills; that prior to October 29, 1971, the defendant PASUMIL engaged the
services of plaintiff for electrical rewinding and repair, most of which were partially paid
by the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that
finally, on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a
contract for the plaintiff to perform the following, to wit
(a) Construction of one (1) power house building;
(b) Construction of three (3) reinforced concrete foundation for three (3)
units 350 KW diesel engine generating set[s];
(c) Construction of three (3) reinforced concrete foundation for the 5,000
KW and 1,250 KW turbo generator sets;

(d) Complete overhauling and reconditioning tests sum for three (3) 350
KW diesel engine generating set[s];
(e) Installation of turbine and diesel generating sets including transformer,
switchboard, electrical wirings and pipe provided those stated units are
completely supplied with their accessories;
(f) Relocating of 2,400 V transmission line, demolition of all existing
concrete foundation and drainage canals, excavation, and earth fillings all
for the total amount of P543,500.00 as evidenced by a contract, [a] xerox
copy of which is hereto attached as Annex A and made an integral part of
this complaint;
that aside from the work contract mentioned-above, the defendant PASUMIL required
the plaintiff to perform extra work, and provide electrical equipment and spare parts,
such as:
(a) Supply of electrical devices;
(b) Extra mechanical works;
(c) Extra fabrication works;
(d) Supply of materials and consumable items;
(e) Electrical shop repair;
(f) Supply of parts and related works for turbine generator;
(g) Supply of electrical equipment for machinery;
(h) Supply of diesel engine parts and other related works including
fabrication of parts.
that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only
P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to
P527,263.80, as shown in the Certification of the chief accountant of the PNB, a
machine copy of which is appended as Annex C of the complaint; that out of said
unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to
the plaintiff of P14,000.00, in broken amounts, covering the period from January 5,
1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the
defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO,
failed and refused to pay the plaintiff their just, valid and demandable obligation; that
the President of the NASUDECO is also the Vice-President of the PNB, and this
official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought
this official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as
the defendant PNB and NASUDECO now owned and possessed the assets of the
defendant PASUMIL, and these defendants all benefited from the works, and the
electrical, as well as the engineering and repairs, performed by the plaintiff; that
because of the failure and refusal of the defendants to pay their just, valid, and
demandable obligations, plaintiff suffered actual damages in the total amount of
P513,263.80; and that in order to recover these sums, the plaintiff was compelled to

engage the professional services of counsel, to whom the plaintiff agreed to pay a
sum equivalent to 25% of the amount of the obligation due by way of attorneys fees.
Accordingly, the plaintiff prayed that judgment be rendered against the defendants
PNB, NASUDECO, and PASUMIL, jointly and severally to wit:
(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80,
with annual interest of 14% from the time the obligation falls due and
demandable;
(2) Condemning the defendants to pay attorneys fees amounting to 25% of
the amount claim;
(3) Ordering the defendants to pay the costs of the suit.
"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint
chiefly on the ground that the complaint failed to state sufficient allegations to
establish a cause of action against both defendants, inasmuch as there is lack or want
of privity of contract between the plaintiff and the two defendants, the PNB and
NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the case
law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service,
et al. v. Court of Appeals, et al., 20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its Order of November 27,
1980; in the same order, that court directed the defendants to file their answer to the
complaint within 15 days.
"In their answer, the defendant NASUDECO reiterated the grounds of its motion to
dismiss, to wit:
That the complaint does not state a sufficient cause of action against the
defendant NASUDECO because: (a) NASUDECO is not x x x privy to the
various electrical construction jobs being sued upon by the plaintiff under
the present complaint; (b) the taking over by NASUDECO of the assets of
defendant PASUMIL was solely for the purpose of reconditioning the sugar
central of defendant PASUMIL pursuant to martial law powers of the
President under the Constitution; (c) nothing in the LOI No. 189-A (as well
as in LOI No. 311) authorized or commanded the PNB or its subsidiary
corporation, the NASUDECO, to assume the corporate obligations of
PASUMIL as that being involved in the present case; and, (d) all that was
mentioned by the said letter of instruction insofar as the PASUMIL liabilities
[were] concerned [was] for the PNB, or its subsidiary corporation the
NASUDECO, to make a study of, and submit [a] recommendation on the
problems concerning the same.
"By way of counterclaim, the NASUDECO averred that by reason of the filing by the
plaintiff of the present suit, which it [labeled] as unfounded or baseless, the defendant
NASUDECO was constrained to litigate and incur litigation expenses in the amount of
P50,000.00, which plaintiff should be sentenced to pay. Accordingly, NASUDECO
prayed that the complaint be dismissed and on its counterclaim, that the plaintiff be
condemned to pay P50,000.00 in concept of attorneys fees as well as exemplary
damages.
"In its answer, the defendant PNB likewise reiterated the grounds of its motion to
dismiss, namely: (1) the complaint states no cause of action against the defendant

PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and
that the alleged services rendered by the plaintiff to the defendant PASUMIL upon
which plaintiffs suit is erected, was rendered long before PNB took possession of the
assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of
the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose of
reconditioning the sugar central so that PASUMIL may resume its operations in time
for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as well as
in LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of
PASUMIL, let alone that for which the present action is brought; (4) that PNBs
management and operation under LOI No. 311 did not refer to any asset of PASUMIL
which the PNB had to acquire and thereafter [manage], but only to those which were
foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5) that
conformably to LOI No. 311, on August 15, 1975, the PNB and the Development Bank
of the Philippines (DBP) entered into a Redemption Agreement whereby DBP sold,
transferred and conveyed in favor of the PNB, by way of redemption, all its (DBP)
rights and interest in and over the foreclosed real and/or personal properties of
PASUMIL, as shown in Annex C which is made an integral part of the answer; (6) that
again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated
October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in
favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and
interest in and under the above Redemption Agreement. This is shown in Annex D
which is also made an integral part of the answer; [7] that as a consequence of the
said Deed of Assignment, PNB on October 21, 1975 ceased to managed and operate
the above-mentioned assets of PASUMIL, which function was now actually transferred
to NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had
become moot and academic because of the execution of the said Deed of
Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume
the corporate obligations of PASUMIL, including the alleged obligation upon which this
present suit was brought; and [9] that, at most, what was granted to PNB in this
respect was the authority to make a study of and submit recommendation on the
problems concerning the claims of PASUMIL creditors, under sub-par. 5 LOI No. 311.
"In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate
and to incur expenses in this case, hence it is entitled to claim attorneys fees in the
amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be
dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay
defendant PNB the sum of P50,000.00 as attorneys fees, aside from exemplary
damages in such amount that the court may seem just and equitable in the premises.
"Summons by publication was made via the Philippines Daily Express, a newspaper
with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant
PASUMIL, which was thereafter declared in default as shown in the August 7, 1981
Order issued by the Trial Court.
"After due proceedings, the Trial Court rendered judgment, the decretal portion of
which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
the defendant Corporation, Philippine National Bank (PNB) NATIONAL
SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA
SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally
the former the following:
1. The sum of P513,623.80 plus interest thereon at the rate of
14% per annum as claimed from September 25, 1980 until fully
paid;

2. The sum of P102,724.76 as attorneys fees; and,

3. Costs.
SO ORDERED.
Manila, Philippines, September 4, 1986.

'(SGD) ERNESTO S. TENGCO

Judge"3

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity
for a corporation to take over and operate the business of another corporation, while disavowing
or repudiating any responsibility, obligation or liability arising therefrom.4

Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of
the Rules of Court.7 To this rule, however, there are some exceptions enumerated in Fuentes v.
Court of Appeals.8 After a careful scrutiny of the records and the pleadings submitted by the
parties, we find that the lower courts misappreciated the evidence presented. 9 Overlooked by the
CA were certain relevant facts that would justify a conclusion different from that reached in the
assailed Decision.10
Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because
their takeover of the latters foreclosed assets did not make them assignees. On the other hand,
respondent asserts that petitioners and PASUMIL should be treated as one entity and, as such,
jointly and severally held liable for PASUMILs unpaid obligation.1wphi1.nt
As a rule, a corporation that purchases the assets of another will not be liable for the debts of
the selling corporation, provided the former acted in good faith and paid adequate consideration
for such assets, except when any of the following circumstances is present: (1) where the
purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts
to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely
a continuation of the selling corporation, and (4) where the transaction is fraudulently entered
into in order to escape liability for those debts.11
Piercing the Corporate

Hence, this Petition.5

Veil Not Warranted

Issues

"I

A corporation is an artificial being created by operation of law. It possesses the right of

succession and such powers, attributes, and properties expressly authorized by law or incident
to its existence.12 It has a personality separate and distinct from the persons composing it, as
well as from any other legal entity to which it may be related.13 This is basic.

The Court of Appeals gravely erred in law in holding the herein petitioners liable for
the unpaid corporate debts of PASUMIL, a corporation whose corporate existence has
not been legally extinguished or terminated, simply because of petitioners[] take-over
of the management and operation of PASUMIL pursuant to the mandates of LOI No.
189-A, as amended by LOI No. 311.

Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. 14 For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled15 only when it becomes a shield for fraud, illegality or inequity committed against third
persons.16

In their Memorandum, petitioners raise the following errors for the Courts consideration:

"II
The Court of Appeals gravely erred in law in not applying [to] the case at bench the
ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415."6
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for
the unpaid debts of PASUMIL to respondent.
This Courts Ruling
The Petition is meritorious.
Main Issue:

Hence, any application of the doctrine of piercing the corporate veil should be done with
caution.17 A court should be mindful of the milieu where it is to be applied. 18 It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights.19 The wrongdoing must be clearly and
convincingly established; it cannot be presumed.20 Otherwise, an injustice that was never
unintended may result from an erroneous application.21
This Court has pierced the corporate veil to ward off a judgment credit,22 to avoid inclusion of
corporate assets as part of the estate of the decedent,23 to escape liability arising from a
debt,24 or to perpetuate fraud and/or confuse legitimate issues25 either to promote or to shield
unfair objectives26 or to cover up an otherwise blatant violation of the prohibition against forumshopping.27 Only in these and similar instances may the veil be pierced and disregarded.28
The question of whether a corporation is a mere alter ego is one of fact. 29 Piercing the veil of
corporate fiction may be allowed only if the following elements concur: (1) control -- not mere
stock control, but complete domination -- not only of finances, but of policy and business

practice in respect to the transaction attacked, must have been such that the corporate entity as
to this transaction had at the time no separate mind, will or existence of its own; (2) such control
must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation
of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of
plaintiffs legal right; and (3) the said control and breach of duty must have proximately caused
the injury or unjust loss complained of.30
We believe that the absence of the foregoing elements in the present case precludes the
piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of
PASUMIL, there is no showing that their control over it warrants the disregard of corporate
personalities.31 Second, there is no evidence that their juridical personality was used to commit a
fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter
ego, business conduit or instrumentality of another entity or person.32 Third, respondent was not
defrauded or injured when petitioners acquired the assets of PASUMIL.33
Being the party that asked for the piercing of the corporate veil, respondent had the burden of
presenting clear and convincing evidence to justify the setting aside of the separate corporate
personality rule.34 However, it utterly failed to discharge this burden;35 it failed to establish by
competent evidence that petitioners separate corporate veil had been used to conceal fraud,
illegality or inequity.36
While we agree with respondents claim that the assets of the National Sugar Development
Corporation (NASUDECO) can be easily traced to PASUMIL,37 we are not convinced that the
transfer of the latters assets to petitioners was fraudulently entered into in order to escape
liability for its debt to respondent.38
A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL
and acquired the assets as the highest bidder at the public auction conducted.39 The bank was
justified in foreclosing the mortgage, because the PASUMIL account had incurred arrearages of
more than 20 percent of the total outstanding obligation.40 Thus, DBP had not only a right, but
also a duty under the law to foreclose the subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMILs assets
that DBP had foreclosed and purchased in the normal course. Petitioner bank was likewise
tasked to manage temporarily the operation of such assets either by itself or through a
subsidiary corporation.44
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant
to Section 6 of Act No. 3135.45 These assets were later conveyed to PNB for a consideration, the
terms of which were embodied in the Redemption Agreement.46 PNB, as successor-in-interest,
stepped into the shoes of DBP as PASUMILs creditor.47 By way of a Deed of Assignment,48 PNB
then transferred to NASUDECO all its rights under the Redemption Agreement.

the contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot
allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the unpaid obligations of
PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB
to merge or consolidate. On the other hand, petitioners contend that their takeover of the
operations of PASUMIL did not involve any corporate merger or consolidation, because the latter
had never lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives and continues the combined
business.54
The merger, however, does not become effective upon the mere agreement of the constituent
corporations.55Since a merger or consolidation involves fundamental changes in the corporation,
as well as in the rights of stockholders and creditors, there must be an express provision of law
authorizing them.56 For a valid merger or consolidation, the approval by the Securities and
Exchange Commission (SEC) of the articles of merger or consolidation is required.57 These
articles must likewise be duly approved by a majority of the respective stockholders of the
constituent corporations.58
In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and
PNB. The procedure prescribed under Title IX of the Corporation Code59 was not followed.
In fact, PASUMILs corporate existence, as correctly found by the CA, had not been legally
extinguished or terminated.60 Further, prior to PNBs acquisition of the foreclosed assets,
PASUMIL had previously made partial payments to respondent for the formers obligation in the
amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and,
from January 5, 1974 to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to
respondent.61 LOI No. 11 explicitly provides that PNB shall study and submit recommendations
on the claims of PASUMILs creditors.62Clearly, the corporate separateness between PASUMIL
and PNB remains, despite respondents insistence to the contrary.63
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No
pronouncement as to costs.
SO ORDERED.
G.R. No. 152685

December 4, 2007

49

In Development Bank of the Philippines v. Court of Appeals, we had the occasion to resolve a
similar issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque
Minings unpaid obligations to Remington Industrial Sales Corporation (Remington) after the two
banks had foreclosed the assets of Marinduque Mining. We likewise held that Remington failed
to discharge its burden of proving bad faith on the part of Marinduque Mining to justify the
piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial courts lifting of the corporate mask.50 The
CA did not point to any fact evidencing bad faith on the part of PNB and its transferee.51 The
corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or
defend crime.52 None of the foregoing exceptions was shown to exist in the present case.53 On

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner,

vs.
NATIONAL TELECOMMUNICATIONS COMMISSION, JOSEPH A.SANTIAGO, in his capacity
as NTC Commissioner, and EDGARDO CABARRIOS, in his capacity as Chief,
CCAD, respondents.
RESOLUTION

VELASCO, JR., J.:

Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court. It assails
the February 12, 2001 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 61033, which
dismissed petitioners special civil action for certiorari and prohibition, and the March 21, 2002
Resolution3 of the CA denying petitioners motion for reconsideration. The petition raises the sole
issue on whether the appellate court erred in holding that the assessments of the National
Telecommunications Commission (NTC) were contrary to our Decision in G.R. No. 127937
entitled NTC v. Honorable Court of Appeals. 4
This case pertains to Section 40 (e)5 of the Public Service Act6(PSA), as amended on March 15,
1984, pursuant to Batas Pambansa Blg. 325, which authorized the NTC to collect from public
telecommunications companies Supervision and Regulation Fees (SRF) of PhP 0.50 for every
PhP 100 or a fraction of the capital and stock subscribed or paid for of a stock corporation,
partnership or single proprietorship of the capital invested, or of the property and equipment,
whichever is higher.
Under Section 40 (e) of the PSA, the NTC sent SRF assessments to petitioner Philippine Long
Distance Telephone Company (PLDT) starting sometime in 1988. The SRF assessments were
based on the market value of the outstanding capital stock, including stock dividends, of PLDT.
PLDT protested the assessments contending that the SRF ought to be based on the par value of
its outstanding capital stock. Its protest was denied by the NTC and likewise, its motion for
reconsideration.
PLDT appealed before the CA. The CA modified the disposition of the NTC by holding that the
SRF should be assessed at par value of the outstanding capital stock of PLDT, excluding stock
dividends.
With the denial of the NTCs partial reconsideration of the CA Decision, the issue of the basis for
the assessment of the SRF was brought before this Court under G.R. No. 127937 wherein we
ruled that the SRF should be based neither on the par value nor the market value of the
outstanding capital stock but on the value of the stocks subscribed or paid including the
premiums paid therefor, that is, the amount that the corporation receives, inclusive of the
premiums if any, in consideration of the original issuance of the shares. We added that in the
case of stock dividends, it is the amount that the corporation transfers from its surplus profit
account to its capital account, that is, the amount the stock dividends represent is equivalent to
the value paid for its original issuance.
PLDT wanted our July 28, 1999 Decision in G.R. No. 127937 clarified. It posited that the SRF
should be based on the par value in consonance with our holding in Philippine Long Distance
Telephone Company v. Public Service Commission,7 and that the premiums on issued shares
should not be included in the valuation of the outstanding capital stock. Through our November
15, 1999 Resolution in G.R. No. 127937, we elucidated that our July 28, 1999 decision was not
in conflict with our ruling in Philippine Long Distance Telephone Company since we never
enunciated in the said case that the phrase "capital stock subscribed or paid" must be
determined at par value. We reiterated that the term "capital stock subscribed or paid" is the
amount that the corporation receives, inclusive of the premiums, if any, in consideration of the
original issuance of the shares.

Thereafter, to comply with our disposition in G.R. No. 127937, for the reassessment of the SRF
based on the value of the stocks subscribed or paid including the premiums paid for the stocks,
if any, the NTC sent the assailed assessments of February 10, 20008 and September 5, 20009 to
PLDT which included the value of stock dividends issued by PLDT. The assailed assessments
were based on the schedule of capital stock submitted by PLDT.
PLDT now contends that our disposition in G.R. No. 127937 excluded stock dividends from the
SRF coverage, while the NTC asserts the contrary. Also, PLDT questions the assessments for
violating our disposition in G.R. No. 127937 since these assessments were identical to the
previous assessments from 1988 which were questioned by PLDT in G.R. No. 127937 for being
based on the market value of its outstanding capital stock.
PLDT wrote a letter protesting the assailed February 10, 2000 assessment which was not acted
upon by the NTC. Instead, the NTC sent a second assailed assessment on September 5, 2000.
Thus, in an attempt to clarify and resolve this issue, PLDT filed a Motion for Clarification of
Enforcement of the Decision dated 28 July 1999 in G.R. No. 127937 which this Court simply
noted for the case had already become final and executory.
Thus, on October 2, 2000, PLDT instituted the special civil action for certiorari and prohibition
docketed as CA-G.R. SP No. 6103310 before the CA. To maintain the status quo and to defer the
enforcement of the assailed assessments and subsequent assessments, on October 3, 2000,
the CA issued a Temporary Restraining Order. On December 4, 2000, a writ of preliminary
injunction was granted.
Subsequently, on February 12, 2001, the CA rendered the assailed Decision dismissing the
petition. The dispositive portion reads:
WHEREFORE, the petition is DISMISSED for lack of merit, and the writ of preliminary
injunction heretofore issued is DISSOLVED.11
PLDTs motion for reconsideration was denied by the CAs Special Division of Five on March 21,
2002.
Hence, the instant petition for review, raising the core issue:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DISPUTED NTC
ASSESSMENTS WERE NOT CONTRARY TO THE PURISIMA DECISION.12
The petition is bereft of merit.
PLDT argues that in our Decision in G.R. No. 127937 we have excluded from the coverage of
the SRF the capital stocks issued as stock dividends. Petitioner argues that G.R. No. 127937
clearly delineates between capital subscribed and stock dividends to the effect that the latter are
not included in the concept of capital stock subscribed because subscribers or shareholders do
not pay for their subscriptions as no amount is received by the corporation in consideration of
such issuances since these are effected as mere book entries, that is, the transfer from the
retained earnings account to the capital or stock account. To bolster its position, PLDT

repeatedly used the phrase "actual payments" received by a corporation as a consideration for
issuances of shares which do not apply to stock dividends.

shareholders of a corporation pro rata based on the number of shares owned."14 Such
distribution in whatever form is valued at the declared amount or monetary equivalent.

We are not persuaded.

Thus, it cannot be said that no consideration is involved in the issuance of stock dividends. In
fact, the declaration of stock dividends is akin to a forced purchase of stocks. By declaring stock
dividends, a corporation ploughs back a portion or its entire unrestricted retained earnings either
to its working capital or for capital asset acquisition or investments. It is simplistic to say that the
corporation did not receive any actual payment for these. When the dividend is distributed, it
ceases to be a property of the corporation as the entire or portion of its unrestricted retained
earnings is distributed pro rata to corporate shareholders.

Crucial in point is our disquisition in G.R. No. 127937 entitled National Telecommunications
Commission v. Honorable Court of Appeals, which we quote:
The term "capital" and other terms used to describe the capital structure of a
corporation are of universal acceptance and their usages have long been established
in jurisprudence. Briefly, capital refers to the value of the property or assets of a
corporation. The capital subscribed is the total amount of the capital that persons
(subscribers or shareholders) have agreed to take and pay for, which need not
necessarily by, and can be more than, the par value of the shares. In fine, it is the
amount that the corporation receives, inclusive of the premiums if any, in
consideration of the original issuance of the shares. In the case of stock
dividends, it is the amount that the corporation transfers from its surplus profit
account to its capital account. It is the same amount that can be loosely termed as
the "trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed
capital as a trust fund for the payment of the debts of the corporation, to which the
creditors may look for satisfaction. Until the liquidation of the corporation, no part of
the subscribed capital may be returned or released to the stockholder (except in the
redemption of redeemable shares) without violating this principle. Thus, dividends
must never impair the subscribed capital; subscription commitments cannot be
condoned or remitted; nor can the corporation buy its own shares using the
subscribed capital as the considerations therefor.13 (Emphasis supplied.)
Two concepts can be gleaned from the above. First, what constitutes capital stock that is subject
to the SRF. Second, such capital stock is equated to the "trust fund" of a corporation held in trust
as security for satisfaction to creditors in case of corporate liquidation.
The first asks if stock dividends are part of the outstanding capital stocks of a corporation insofar
as it is subject to the SRF. They are. The first issue we have to tackle is, are all the stock
dividends that are part of the outstanding capital stock of PLDT subject to the SRF? Yes, they
are.
PLDTs contention, that stock dividends are not similarly situated as the subscribed capital stock
because the subscribers or shareholders do not pay for their issuances as no amount was
received by the corporation in consideration of such issuances since these are effected as a
mere book entry, is erroneous.
Dividends, regardless of the form these are declared, that is, cash, property or stocks, are
valued at the amount of the declared dividend taken from the unrestricted retained earnings of a
corporation. Thus, the value of the declaration in the case of a stock dividend is the actual value
of the original issuance of said stocks. In G.R. No. 127937 we said that "in the case of stock
dividends, it is the amount that the corporation transfers from its surplus profit account to its
capital account" or "it is the amount that the corporation receives in consideration of the original
issuance of the shares." It is "the distribution of current or accumulated earnings to the

When stock dividends are distributed, the amount declared ceases to belong to the corporation
but is distributed among the shareholders. Consequently, the unrestricted retained earnings of
the corporation are diminished by the amount of the declared dividend while the stockholders
equity is increased. Furthermore, the actual payment is the cash value from the unrestricted
retained earnings that each shareholder foregoes for additional stocks/shares which he would
otherwise receive as required by the Corporation Code to be given to the stockholders subject to
the availability and conditioned on a certain level of retained earnings. 15 Elsewise put, where the
unrestricted retained earnings of a corporation are more than 100% of the paid-in capital stock,
the corporate Board of Directors is mandated to declare dividends which the shareholders will
receive in cash unless otherwise declared as property or stock dividends, which in the latter
case the stockholders are forced to forego cash in lieu of property or stocks.
In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the
monetary value of their dividend for capital stock, and the monetary value they forego is
considered the actual payment for the original issuance of the stocks given as dividends.
Therefore, stock dividends acquired by shareholders for the monetary value they forego are
under the coverage of the SRF and the basis for the latter is such monetary value as declared
by the board of directors.
On the second issue, do the assailed NTC assessments violate the ruling in G.R. No. 127937?
PLDT contends that these did since the assessments are identical to the previous assessments
from 1988 which were questioned by PLDT in the seminal G.R. No. 127937 for being based on
the market value of its outstanding capital stock.
A cursory review of the assessments made by the NTC prior to our July 28, 1999 Decision in
G.R. No. 127937 and the assailed assessments of February 10, 2000 and September 5, 2000
does show that the assessments are substantially identical. In our July 28, 1999 Decision in
G.R. No. 127937, we noted, and similarly true in the petition before us, that, "The actual capital
paid or the amount of capital stock paid and for which PLDT received actual payments were not
disclosed or extant in the records before the Court."16
Hence, as before, we cannot factually determine whether the assailed assessments
substantially followed our Decision in G.R. No. 127937. It is apparent that the assessments are
identical and that the NTC in the earlier case asserted that the SRF be based on the market
value of the capital stock, yet it assessed it to PLDT. However, a closer look at the assailed
assessments of February 13, 2000 and September 5, 2000 would show that the NTC based its
assessment on the schedule of capital stock submitted by PLDT. PLDT did not dispute this; it
only disputed the level of assessment which was the same as before.

Now, where should the NTC base its assessment? It is incumbent upon PLDT to furnish the
NTC the actual payment made on the subscription of its capital stock in order for the NTC to
assess the proper SRF. Logically, the NTC would base its SRF assessment of PLDT from PLDT
data.
PLDT should not bewail that the assailed assessments are substantially the same assessments
it protested in G.R. No. 127937. After all, it had not shown the actual figures of the amount of
premiums and subscriptions it had received for the original issuances of its capital stock. While
indeed it submitted a table of the comparative assessments made by the NTC to this Court,
PLDT has not furnished the NTC nor this Court the correct figures of the actual payments made
for its capital stock.
We are not unaware that in accounting practice, the journal entries for transactions are recorded
in historical value or cost. Thus, the purchase of properties or assets is recorded at acquisition
cost. The same is true with liabilities and equity transactions where the actual loan and the
amount paid for the subscription are recorded at the actual payment, including the premiums
paid for the subscription of capital stock.
Moreover, it is common practice that the values of the accounts recorded at historical value or
cost are not increased or decreased due to market forces. In the case of properties, the
appreciation in values is generally not recorded as income nor the increase in the corresponding
asset because the increase or decrease is not yet realized until the property is actually sold. The
same is true with the capital account. The market value may be much higher than the actual
payment of the par value and premium of capital stock. Still, the books of account will not reflect
such increase; and vice-versa, any decrease of the value of stocks is likewise not reflected in
the books of account. Thus, given the general practice that book entries of the premiums and
subscriptions for capital stock are the actual value for the original issuance of stocks, then the
NTC was correct to follow the schedule of capital stocks submitted by PLDT.
Moreover, the "Trust Fund" doctrine, the second concept this Court elucidated in G.R. No.
127937 and quoted above, bolsters the correctness of the assessments made by the NTC. As a
fund in trust for creditors in case of liquidation, the actual value of the subscriptions and the
value of stock dividends distributed may not be decreased or increased by the fluctuating market
value of the stocks. Thus, absent any showing by PLDT of the actual payment it received for the
original issuance of its capital stock, the assessments made by the NTC, based on the schedule
of outstanding capital stock of PLDT recorded at historical value payments made, is deemed
correct.
Anent stock dividends, the value transferred from the unrestricted retained earnings of PLDT to
the capital stock account pursuant to the issuance of stock dividends is the proper basis for the
assessment of the SRF, which the NTC correctly assessed.
WHEREFORE, we DENY the petition for lack of merit, and AFFIRM the February 12, 2001
Decision and March 21, 2002 Resolution in CA-G.R. SP No. 61033. Costs against petitioner.
SO ORDERED.

G.R. No. 30460

C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated,plaintiffappellant,
vs.
GREGORIO VELASCO, ET AL., defendants-appellees.
Frank H. Young for appellant.
Pablo Lorenzo and Delfin Joven for appellees.
STATEMENT
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The
defendants are residents of the Philippine Islands.
It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vicepresident, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading
Company, at a meeting of the board of directors held on July 24, 1922, approved and authorized
various lawful purchases already made of a large portion of the capital stock of the company
from its various stockholders, thereby diverting its funds to the injury, damage and in fraud of the
creditors of the corporation. That pursuant to such resolution and on March 31, 1922, the
corporation purchased from the defendant S. R. Ganzon 100 shares of its capital stock of the
par value of P10, and on June 29, 1922, it purchased from the defendant Felix D. Mendaros 100
shares of the par value of P10, and on July 16, 1922, it purchased from the defendant Felix D.
Mendaros 100 shares of the par value of P10, each, and on April 5, 1922, it purchased from the
defendant Dionisio Saavedra 10 shares of the same par value, and on June 29, 1922, it
purchased from the defendant Valentin Matias 20 shares of like value. That the total amount of
the capital stock unlawfully purchased was P3,300. That at the time of such purchase, the
corporation had accounts payable amounting to P13,807.50, most of which were unpaid at the
time petition for the dissolution of the corporation was financial condition, in contemplation of an
insolvency and dissolution.
As a second cause of action, plaintiff alleges that on July 24, 1922, the officers and directors of
the corporation approved a resolution for the payment of P3,000 as dividends to its
stockholders, which was wrongfully done and in bad faith, and to the injury and fraud of its
creditors. That at the time the petition for the dissolution of the corporation was presented it had
accounts payable in the sum of P9,241.19, "and practically worthless accounts receivable."

Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio Velasco, Felix del
Castillo, Andres L. Navallo and Rufino Manuel, personally as members of the Board of Directors,
or for the recovery from the defendants S. R. Ganzon, of the sum of P1,000, from the defendant
Felix D. Mendaros, P2,000, and from the defendant Dionisio Saavedra, P100, and under his
second cause of action, he prays judgment for the sum of P3,000, with legal interest against the
board of directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio Saavedra
and Valentin Matias made a general and specific denial.

Ten shares from Dionisio Saavedra at the same price on June 29, 1922.
That during such times, the defendant Gregorio Velasco purchased 13 shares for the
corporation for P130; Felix del Castillo 42 shares for P420; Andres Navallo 15 shares for
P150; and the defendant Mendaros 10 shares for P100. That during the time these various
purchases were made, the total amount of subscribed and paid up capital stock of the
corporation was P10,030, out of the authorized capital stock 2,000 shares of the par value of
P10 each.
Paragraph 4 of the stipulation also recites:

In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2 and 3 of each
cause of action of the complaint, and that the shares mentioned in paragraph 4 of the first cause
of action were purchased, but alleges that they were purchased by virtue of a resolution of the
board of directors of the corporation "when the business of the company was going on very
well." That the defendant is one of the principal shareholders, and that about the same time, he
purchase other shares for his own account, because he thought they would bring profits. As to
the second cause of action, he admits that the dividends described in paragraph 4 of the
complaint were distributed, but alleges that such distribution was authorized by the board of
directors, "and that the amount represented by said dividends really constitutes a surplus profit
of the corporation," and as counterclaim, he asks for judgment against the receiver for
P12,512.47 for and on account of his negligence in failing to collect the accounts.
Although duly served, the defendant Mendaros did not appear or answer. The defendant Navallo
was not served, and the case against him was dismissed.
April 30, 1928, the case was tried and submitted on a stipulation of facts, based upon which the
lower court dismissed plaintiff's complaint, and rendered judgment for the defendants, with costs
against the plaintiff, and absolved him from the cross-complaint of the defendant Velasco, and
on appeal, the plaintiff assigns the following errors:

Be it also admitted as a fact that the time of the said purchases there was a surplus profit of the
corporation above-named of P3,314.72.
Paragraph 5 is as follows:
That at the time of the repeatedly mentioned various purchases of the said capital stock were
made, the said corporation had Accounts Payable in the total amount of P13,807.50 as shown
by the statement of the corporation, dated June 30, 1922, and the Accounts Receivable in the
sum of P19,126.02 according to the books, and that the intention of the Board of Directors was
to resell the stocks purchased by the corporations at a sum above par for each stock, this
expectation being justified by the then satisfactory and sound financial condition of the business
of the corporation.
It is also stipulated that on September 11, 1923, when the petition for the dissolution of the
corporation was presented to the court, according to a statement made June 30, 1923, it has
accounts payable aggregating P9,41.19, and accounts receivable for P12,512.47.
Paragraph 7 of the stipulation recites:

1. In holding that the Sibuguey Trading Company, Incorporated, could legally purchase its own
stock.
2. In holding that the Board of Directors of the said Corporation could legally declared a dividend
of P3,000, July 24, 1922.
JOHNS, J.:
It is stipulated that on July 24, 1922, the directors of the corporation approved the purchase of
stocks as follows:

That the same defendants, mentioned in paragraph 2 of this stipulation of facts and in the same
capacity, on the same date of July 24, 1922, and at the said meeting of the said Board of
Directors, approved and authorized by resolution the payment of dividends to its stockholders, in
the sum of three thousand pesos (P3,000), Philippine currency, which payments were made at
different dates, between September 30, 1922, and May 12, 1923, both dates inclusive, at a time
when the corporation had accounts less in amount than the accounts receivable, which
resolution was based upon the balance sheet made as June 30, 1922, said balance sheet
showing that the corporation had a surplus of P1,069.41, and a profit on the same date of
P2,656.08, or a total surplus amount of P3,725.49, and a reserve fund of P2,889.23 for bad and
doubtful accounts and depreciation of equipment, thereby leaving a balance of P3,314.72 of net
surplus profit after paying this dividend.

One hundred shares from S. R. Ganzon for P1,000;

It is also stipulated at a meeting of the board of directors held on July 24, 1922, as follows:
One hundred shares from Felix D. Mendaros at the same price; which purchase was made on
June 29, 1922; another
One hundred shares from Felix D. Mendaros at the same price on July 16, 1922;

6. The president and manager submitted to the Board of Directors his statement and balance
sheet for the first semester ending June 30, 1922 and recommended that P3,000 out of the
surplus account be set aside for dividends payable, and that payments be made in installments
so as not to effect the financial condition of the corporation. That stockholders having

outstanding account with the corporation should settle first their accounts before payments of
their dividends could be made. Mr. Castillo moved that the statement and balance sheet be
approved as submitted, and also the recommendations of the president. Seconded by Mr.
Manuel. Approved.
Paragraph 8 of the stipulation is as follows:
That according to the balance sheet of the corporation, dated June 30, 1923, it had accounts
receivable in the sum of P12,512.47, due from various contractor and laborers of the National
Coal Company, and also employees of the herein corporation, which the herein receiver, after
his appointment on February 28, 1924, although he made due efforts by personally visiting the
location of the corporation, and of National Coal Company, at its offices, at Malangas, Mindanao,
and by writing numerous letters of demand to the debtors of the corporation, in order to collect
these accounts receivable, he was unable to do so as most of them were without goods or
property, and he could not file any suit against them that might have any property, for the reason
that he had no funds on hand with which to pay the filing and sheriff fees to Malangas, and other
places of their residences.
From all of which, it appears that on June 30, 1922, the board of directors of the corporation
authorized the purchase of, purchased and paid for, 330 shares of the capital stock of the
corporation at the agreed price of P3,300, and that at the time the purchase was made, the
corporation was indebted in the sum of P13,807.50, and that according to its books, it had
accounts receivable in the sum of P19,126.02. That on September 11, 1923, when the petition
was filed for its dissolution upon the ground that it was insolvent, its accounts payable amounted
to P9,241.19, and its accounts receivable P12,512.47, or an apparent asset of P3,271.28 over
and above its liabilities. But it will be noted that there is no stipulation or finding of facts as to
what was the actual cash value of its accounts receivable. Neither is there any stipulation that
those accounts or any part of them ever have been or will be collected, and it does appear that
after his appointment on February 28, 1924, the receiver made a diligent effort to collect them,
and that he was unable to do so, and it also appears from the minutes of the board of directors
that the president and manager "recommended that P3,000 out of the surplus account to be
set aside for dividends payable, and that payments be made in installments so as not to effect
the financial condition of the corporation."
If in truth and in fact the corporation had an actual bona fide surplus of P3,000 over and above
all of its debt and liabilities, the payment of the P3,000 in dividends would not in the least impair
the financial condition of the corporation or prejudice the interests of its creditors.
It is very apparent that on June 24, 1922, the board of directors acted on assumption that,
because it appeared from the books of the corporation that it had accounts receivable of the
face value of P19,126.02, therefore it had a surplus over and above its debts and liabilities. But
as stated there is no stipulation as to the actual cash value of those accounts, and it does
appear from the stipulation that on February 28, 1924, P12,512.47 of those accounts had but
little, if any, value, and it must be conceded that, in the purchase of its own stock to the amount
of P3,300 and in declaring the dividends to the amount of P3,000, the real assets of the
corporation were diminished P6,300. It also appears from paragraph 4 of the stipulation that the
corporation had a "surplus profit" of P3,314.72 only. It is further stipulated that the dividends
should "be made in installments so as not to effect financial condition of the corporation." In
other words, that the corporation did not then have an actual bona fide surplus from which the

dividends could be paid, and that the payment of them in full at the time would "affect the
financial condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation
and in declaring the dividends on the stock was all done at the same meeting of the board of
directors, and it appears in those minutes that the both Ganzon and Mendaros were formerly
directors and resigned before the board approved the purchase and declared the dividends, and
that out of the whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of
300 shares out of the 330, which were purchased by the corporation, and for which it paid
P3,300. In other words, that the directors were permitted to resign so that they could sell their
stock to the corporation. As stated, the authorized capital stock was P20,000 divided into 2,000
shares of the par value of P10 each, which only P10,030 was subscribed and paid. Deducting
the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid up stock, from
which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation and
upon this state of facts, it is very apparent that the directors did not act in good faith or that they
were grossly ignorant of their duties.
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473, section 454
where it is said:
General Duty to Exercise Reasonable Care. The directors of a corporation are bound to care
for its property and manage its affairs in good faith, and for a violation of these duties resulting in
waste of its assets or injury to the property they are liable to account the same as other trustees.
Are there can be no doubt that if they do acts clearly beyond their power, whereby loss ensues
to the corporation, or dispose of its property or pay away its money without authority, they will be
required to make good the loss out of their private estates. This is the rule where the disposition
made of money or property of the corporation is one either not within the lawful power of the
corporation, or, if within the authority of the particular officer or officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. It has been said that directors are not liable for
losses resulting to the corporation from want of knowledge on their part; or for mistake of
judgment, provided they were honest, and provided they are fairly within the scope of the
powers and discretion confided to the managing body. But the acceptance of the office of a
director of a corporation implies a competent knowledge of the duties assumed, and directors
cannot excuse imprudence on the ground of their ignorance or inexperience; and if they commit
an error of judgment through mere recklessness or want of ordinary prudence or skill, they may
be held liable for the consequences. Like a mandatory, to whom he has been likened, a director
is bound not only to exercise proper care and diligence, but ordinary skill and judgment. As he is
bound to exercise ordinary skill and judgment, he cannot set up that he did not possess them.
Creditors of a corporation have the right to assume that so long as there are outstanding debts
and liabilities, the board of directors will not use the assets of the corporation to purchase its
own stock, and that it will not declare dividends to stockholders when the corporation is
insolvent.
The amount involved in this case is not large, but the legal principles are important, and we have
given them the consideration which they deserve.

The judgment of the lower court is reversed, and (a), as to the first cause of action, one will be
entered for the plaintiff and against the defendant S. R. Ganzon for the sum of P1,000, with legal
interest from the 10th of February, 1926, and against the defendant Felix D. Medaros for P2,000,
with like interests, and against the defendant Dionisio Saavedra for P100, with like interest, and
against each of them for costs, each on their primary liability as purchasers of stock, and (b)
against the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as
members of the board of directors of the Sibuguey Trading Company, Incorporated, as
secondarily liable for the whole amount of such stock sold and purchased as above stated, and
on the second cause of action, judgment will be entered (c) for the plaintiff and jointly and
severally against the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel,
personally, as members of the board of directors of the Sibuguey Trading Company,
Incorporated, for P3,000, with interest thereon from February 10, 1926, at the rate of 6 per cent
per annum, and costs. So ordered.

respondent Monomer Sugar Central, Inc. (MSCI, for brevity) from Wage Order No. RO VI-01
issued by the Board.
The relevant antecedents are undisputed.
On January 11, 1990, Asturias Sugar Central, Inc. (ASCI, for brevity), executed a Memorandum
of Agreement with Monomer Trading Industries, Inc. (MTII, for brevity), whereby MTII shall
acquire the assets of ASCI by way of a Deed of Assignment provided that an entirely new
organization in place of MTII shall be organized, which new corporation shall be the assignee of
the assets of ASCI.
By virtue of this Agreement, a new corporation was organized and incorporated on February 15,
1990 under the corporate name Monomer Sugar Central, Inc. or MSCI, the private respondent
herein.
On January 16, 1991, MSCI applied for exemption from the coverage of Wage Order No. RO VI01 issued by the Board on the ground that it is a distressed employer. In support thereto, MSCI
submitted its audited financial statements and income tax returns duly stamped "received" by the
Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC) for the
period beginning February 15, 1990 and ending August 31, 1990, including the quarterly
financial statements and income tax returns for the two quarters ending November 30, 1990 and
February 28, 1991.
The petitioner herein MSCI-NACUSIP Local Chapter (Union, for brevity), in opposition,
maintained that MSCI is not distressed; that respondent applicant has not complied with the
requirements for exemption; and that the financial statements submitted by MSCI do not reflect
the true and valid financial status of the company, and that the paid-up capital would have been
higher than P5 million and thus impairment would have been lower than 25% had the preorganization agreement between ASCI and MTII been complied with.

G.R. No. 125198 March 3, 1997

MSCI-NACUSIP Local Chapter, petitioner,
vs.
NATIONAL WAGES AND PRODUCTIVITY COMMISSION and MONOMER SUGAR
CENTRAL, INC.,respondents.

HERMOSISIMA, JR., J.:

This is a petition for certiorari questioning the February 1, 1995 Decision of public respondent
National Wages and Productivity Commission (Commission, for brevity) in NWPC Case No. E93-007 which reversed on appeal the August 17, 1993 Decision of the Regional Tripartite Wages
and Productivity Board VI (Board, for brevity) denying the application for exemption of private

The Board conducted hearings on the application, during which the applicant was required to
submit additional documents such as its Articles of Incorporation, Memorandum of Agreement
between ASCI and MTII, SEC registration, including the schedules of its long-term liabilities,
income and expenses, production reports and mill share, among others.
On August 17, 1993, the Board denied MSCI's application for exemption based on the finding
that the applicant's losses of P3,400,738.00 for the period February 15, 1990 to August 31, 1990
constitute an impairment of only 5.25% of its paid-up capital of P64,688,528.00, can not be said
to be sufficient to meet the required 25% in order to qualify for the exemption, as provided in
NWPC Guidelines No. 01, Series of 1992 entitled "REVISED GUIDELINES ON EXEMPTION
FROM COMPLIANCE WITH THE PRESCRIBED WAGE/COST OF LIVING ALLOWANCE
INCREASES GRANTED BY THE REGIONAL TRIPARTITE WAGES AND PRODUCTIVITY
BOARDS:"
Sec. 3. CRITERIA FOR EXEMPTION
The following criteria shall be used to determine whether the applicant
establishment is qualified for exemption:

xxx xxx xxx

3. For Distressed Establishments:
a. In the case of a stock corporation, partnership, single proprietorship, nonstock, non-profit organization or cooperative engaged in a business activity
or charging fees for its services
a.1 When accumulated losses for the last 2 full
accounting periods and interim period, if any,
immediately preceding the effectivity of the Order have
impaired by at least 25 percent the:

The Board held that the paid-up capital of MSCI on the aforesaid dates was actually
P64,688,528.00 and not P5 million as claimed by MSCI in its application for exemption and,
thus, the established losses amounting to P3,400,738.00 constitute an impairment of only 5.25%
of the true paid-up capital of P64 million plus, 2 which losses are not enough to meet the required
25% impairment requirement. This conclusion is anchored on the belief of the Board that the
value of the assets of ASCI, party to the Memorandum of Agreement, transferred to MSCI on
March 28, 1990 should be taken into consideration in computing the paid-up capital of MSCI to
reflect its true financial structure. Moreover, the loans or advances extended by MTII, the other
party to the Agreement, to MSCI should allegedly be treated as additional investments to
MSCI, 3 and must therefore be included in computing respondent's paid-up capital.

Paid-up capital at the end of the last full accounting period preceding the
effectivity of the Order, in the case of corporations:

Public respondent Commission thought otherwise. In reversing the Board and granting the
exemption, the Commission held that the Board exceeded its authority in computing and giving
new valuation to what should be the paid-up capital of MSCI. It stressed that RA No. 6727, or
the Wage Rationalization Act, and its implementing guidelines have not conferred upon the
Board the authority to change the paid-up capital of a corporation. 4

Total invested capital at the beginning of the last full accounting period
preceding the effectivity of the Order in the case of partnerships and single
proprietorships.

The foregoing asseveration of the parties considered, we find no grave abuse of discretion on
the part of the Commission in setting aside the findings of the Board and granting full exemption
to MSCI from Wage Order No. RO VI-01.

xxx xxx xxx

The motion for reconsideration, filed by MSCI on September 20, 1993, was denied by the Board
on October 12, 1993.
A timely appeal was brought before the public respondent Commission. In its decision dated
February 1, 1995, the Commission reversed and set aside the foregoing orders of the Board,
and granted MSCI's application for exemption from Wage Order No. RO VI-01, for a period of
one (1) year from its effectivity or from November 27, 1990 to November 26, 1991, in the
following manner:
WHEREFORE, premises considered, the Orders of the Board appealed
from are hereby REVERSED and SET ASIDE. Monomer is hereby
GRANTED full exemption from Wage Order No. RO VI-01, for a period of
one year from effectivity of the Wage Order, which is from 27 November
1990 to 26 November 1991.
SO DECIDED. 1
Petitioner has come before us by way of a Petition for Certiorari under Rule 65.
The issue posed is whether or not respondent MSCI can qualify as a distressed employer from
February 15, 1990 to August 31, 1990 as well as during the interim period from September 1,
1990 to November 30, 1990 and thus be entitled to exemption from compliance with Wage
Order No. RO VI-01. To resolve this issue, however, a pivotal determination must first be made:
What is the correct paid-up capital of MSCI for the pertinent period covered by the application for
exemption P5 million or P64,688,528.00?

NWPC Guidelines No. 01, Series of 1992 as well as the new NWPC Guidelines No. 01, Series
of 1996, defineCapital as referring to paid-up capital at the end of the last full accounting period,
in the case of corporations or total invested capital at the beginning of the period under review,
in the case of partnerships and single proprietorships. To have a clear understanding of what
paid-up capital is, however, a referral to Sections 12 and 13 of BP Blg. 68 or the Corporation
Code would be very helpful, viz:
Sec. 12. Minimum capital stock required of stock corporations. Stock
corporations incorporated under this Code shall not be required to have any
minimum authorized capital stock except as otherwise specifically provided
for by special law, and subject to the provisions of the following section.
Sec. 13. Amount of capital stock to be subscribed and paid for purposes of
incorporation. At least twenty-five (25%) percent of the authorized capital
stock as stated in the articles of incorporation must be subscribed at the
time of incorporation, and at least twenty-five (25%) percent of the total
subscription must be paid upon subscription, the balance to be payable on a
date or dates fixed in the contract of subscription without need of call, or in
the absence of a fixed date or dates, upon call for payment by the board of
directors: Provided, however, That in no case shall the paid-up capital be
less than five thousand (P5,000.00) pesos. (n)
By express provision of Section 13, paid-up capital is that portion of the authorized capital stock
which has been both subscribed and paid. To illustrate, where the authorized capital stock of a
corporation is worth P 1 million and the total subscription amounts to P250,000.00, at least 25%
of this amount, namely, P62,500.00 must be paid up per Section 13. The latter, P62,500.00, is
the paid-up capital or what should more accurately be termed as "paid-up capital
stock." 5

In the case under consideration, there is no dispute, and the Board even mentioned in its August
17, 1993 Decision, that MSCI was organized and incorporated on February 15, 1990 with an
authorized capital stock of P60 million, P20 million of which was subscribed. Of the P20 million
subscribed capital stock, P5 million was paid-up. 6 This fact is only too glaring for the Board to
have been misled into believing that MSCI'S paid-up capital stock was P64 million plus and not
P5 million.
The submission of the Board that the value of the assets of Asturias Sugar Central, Inc.
transferred to MSCI on March 28, 1990, as well as the loans or advances made by MTII to MSCI
should have been taken into consideration in computing the paid-up capital of MSCI is
unmeritorious, at best, and betrays the Board's sheer lack of grasp of a basic concept in
Corporation Law, at worst. Not all funds or assets received by the corporation can be considered
paid-up capital, for this term has a technical signification in Corporation Law. Such must form
part of the authorized capital stock of the corporation, subscribed and then actually paid up.
Furthermore, the Commission aptly observed that the loans and advances of MTII to respondent
MSCI cannot be treated as investments, unless the corresponding shares of stocks are issued.
But as it turned out, such loans and advances were in fact treated as liabilities of MSCI to MTII
as shown in its 1990 audited financial statements.7 The treatment by the Board of these loans as
part of MSCI's capital stock without satisfying certain mandatory requirements is proscribed
under Section 38 of the Corporation Code which provides:
Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. No corporation shall increase or decrease its capital
stock or incur, create or increase any bonded indebtedness
unless approved by a majority vote of the board of directors and, at a
stockholders' meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded indebtedness.
Written notice of the proposed increase or diminution of the capital stock or
of the incurring, creating, or increasing of any bonded indebtedness and of
the time and place of the stockholders' meeting at which the proposed
increase or diminution of the capital stock or the incurring or increasing of
any bonded indebtedness is to be considered, must be addressed to each
stockholders at his place of residence as shown on the books of the
corporation and deposited to de addressee in the post office with postage
prepaid, or served personally.
The above requirements, which are condition precedents before the capital stock of a
corporation may be increased, were unquestionably not observed in this case.
Henceforth, the paid-up capital stock of MSCI for the period covered by the application
for exemption still stood at P5 million. The losses, therefore, amounting to
P3,400,738.00 for the period February 15, 1990 to August 31, 1990 impaired MSCI's
paid-up capital of P5 million by as much as 68%. Likewise, the losses incurred by
MSCI for the interim period from September 1, 1990 to November 30, 1990, as found
by the Commission, per MSCI's quarterly income statements, amounting to
P13,554,337.33 impaired the company's paid-up capital of P5 million by a whopping
271.08%, 8 more than enough to qualify MSCI as a distressed employer. Respondent
Commission thus acted well within its jurisdiction in granting MSCI full exemption from
Wage Order No. RO VI-01 as a distressed employer.

WHEREFORE, the petition is DISMISSED. Costs against petitioner.

G.R. Nos. 177857-58

September 4, 2012

PHILIPPINE COCONUT PRODUCERS FEDERATION, INC. (COCOFED), MANUEL V. DEL

ROSARIO, DOMINGO P. ESPINA, SALVADOR P. BALLARES, JOSELITO A. MORALEDA,
PAZ M. YASON, VICENTE A. CADIZ, CESARIA DE LUNA TITULAR, and RAYMUNDO C. DE
VILLA, Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, Respondent.
WIGBERTO E. TAADA, OSCAR F. SANTOS, SURIGAO DEL SUR FEDERATION OF
AGRICULTURAL COOPERATIVES (SUFAC) and MORO FARMERS ASSOCIATION OF
ZAMBOANGA DEL SUR (MOFAZS), represented by ROMEO C. ROYANDOYAN, Intervenors.
x-----------------------x
G.R. No. 178193
DANILO B. URSUA, Petitioner,
vs.
REPUBLIC OF THE PHILIPPINES, Respondent.
RESOLUTION
VELASCO, JR., J.:
For consideration is a Motion for Reconsideration of the Decision of the Court dated January 24,
2012 interposed by petitioners in G.R. Nos. 177857-58, namely: Philippine Coconut Producers
Federation, Inc. (COCOFED), Manuel V. del Rosario, Domingo P. Espina, Salvador P. Ballares,
Joselito A. Moraleda, Paz M. Yason, Vicente A. Cadiz, Cesaria De Luna Titular, and Raymundo
C. De Villa.
On March 14, 2012, petitioner-movants filed a Manifestation and Motion stating that they failed
to include the Office of the Solicitor General (OSG) in the list of persons to be furnished with a
copy of the Motion for Reconsideration. They accordingly moved that their belated service of a
copy of the Motion for Reconsideration on the OSG be considered compliance with the rules on
service of motions for reconsideration. This Court noted and accepted the Manifestation and
Motion. On March 15, 2012, petitioner-movants filed a Memorandum in support of the instant
motion for reconsideration.
To the said motion, intervenors Wigberto E. Taada, et al. filed on June 10, 2012 their Comment
and Opposition. The OSG, on the other hand, after filing two motions for extension on May 22,
2012 and June 21, 2012, respectively, filed its Motion to Admit Comment, with Comment
attached, on July 13, 2012. This Court noted and admitted the Comment.

As will be recalled, the Court, in its January 24, 2012 Decision, affirmed, with modification, the
Partial Summary Judgments (PSJs) rendered by the Sandiganbayan (1) on July 11, 2003 in Civil
Case No. 0033-A (PSJ-A), as amended by a Resolution issued on June 5, 2007; and (2) on
May 7, 2004 in Civil Case No. 0033-F (PSJ-F), as amended by a Resolution issued on May 11,
2007.
In this recourse, petitioner-movants urge the Court to reconsider its Decision of January 24,
2012 on the ground that it:
1. Made erroneous findings of fact;
2. Erred in affirming the Sandiganbayans jurisdiction of the subject matter of the
subdivided amended complaints;
3. Erred in ruling that due process was not violated;
4. Erred in ruling on the constitutionality of the coconut levy laws;
5. Erred in ruling that the Operative Fact Doctrine does not apply; and
6. Erred in ruling that the right to speedy disposition of cases was not violated.
The instant motion is but a mere reiteration or rehash of the arguments that have already been
previously pleaded, discussed and resolved by this Court in its January 24, 2012 Decision. And
considering that the motions arguments are unsubstantial to warrant a reconsideration or at
least a modification, this Court finds no reason to modify or let alone reverse the challenged
Decision.
As of 1983,1 the Class A and B San Miguel Corporation (SMC) common shares in the names of
the 14 CIIF Holding Companies are 33,133,266 shares. From 1983 to November 19, 2009 when
the Republic of the Philippines representing the Presidential Commission on Good Government
(PCGG) filed the "Motion To Approve Sale of CIIF SMC Series I Preferred Shares," the common
shares of the CIIF Holding companies increased to 753,848,312 Class A and B SMC common
shares.2
Owing, however, to a certain development that altered the factual situation then obtaining in
G.R. Nos. 177857-58, there is, therefore, a compelling need to clarify the fallo of the January 24,
2012 Decision to reconcile it, vis-a-vis the shares of stocks in SMC which were declared owned
by the Government, with this development. We refer to the Resolution3 issued by the Court on
September 17, 2009 in the then consolidated cases docketed as G.R. Nos. 177857-58, G.R. No.
178193 and G.R. No. 180705. In that Resolution which has long become final and executory, the
Court, upon motion of COCOFED and with the approval of the Presidential Commission on
Good Government, granted the conversion of 753,848,312 Class "A" and Class "B" SMC
common shares registered in the name of the CIIF companies to SMC Series 1 Preferred
Shares of 753,848,312, subject to certain terms and conditions. The dispositive portion of the
aforementioned Resolution states:

WHEREFORE, the Court APPROVES the conversion of the 753,848,312 SMC Common Shares
registered in the name of CIIF companies to SMC SERIES 1 PREFERRED SHARES of
753,848,312, the converted shares to be registered in the names of CIIF companies in
accordance with the terms and conditions specified in the conversion offer set forth in SMCs
Information Statement and appended as Annex "A" of COCOFEDs Urgent Motion to Approve
the Conversion of the CIIF SMC Common Shares into SMC Series 1 Preferred Shares. The
preferred shares shall remain in custodia legis and their ownership shall be subject to the final
ownership determination of the Court. Until the ownership issue has been resolved, the
preferred shares in the name of the CIIF companies shall be placed under sequestration and
PCGG management. (Emphasis added.)
The net dividend earnings and/or redemption proceeds from the Series 1 Preferred Shares shall
be deposited in an escrow account with the Land Bank of the Philippines or the Development
Bank of the Philippines.
Respondent Republic, thru the PCGG, is hereby directed to cause the CIIF companies, including
their respective directors, officers, employees, agents, and all other persons acting in their
behalf, to perform such acts and execute such documents as required to effectuate the
conversion of the common shares into SMC Series 1 Preferred Shares, within ten (10) days
from receipt of this Resolution.
Once the conversion is accomplished, the SMC Common Shares previously registered in the
names of the CIIF companies shall be released from sequestration.
SO ORDERED.4
The CIIF block of SMC shares, as converted, is the same shares of stocks that are subject
matter of, and declared as owned by the Government in, the January 24, 2012 Decision. Hence,
the need to clarify.
WHEREFORE, the Court resolves to DENY with FINALITY the instant Motion for
Reconsideration dated February 14, 2012 for lack of merit.
The Court further resolves to CLARIFY that the 753,848,312 SMC Series 1 preferred shares of
the CIIF companies converted from the CIIF block of SMC shares, with all the dividend earnings
as well as all increments arising from, but not limited to, the exercise of preemptive rights subject
of the September 17, 2009 Resolution, shall now be the subject matter of the January 24, 2012
Decision and shall be declared owned by the Government and be used only for the benefit of all
coconut farmers and for the development of the coconut industry.
As modified, the fallo of the January 24, 2012 Decision shall read, as follows:
WHEREFORE, the petitions in G.R. Nos. 177857-58 and 178793 are hereby DENIED. The
Partial Summary Judgment dated July 11, 2003 in Civil Case No. 0033-A as reiterated with
modification in Resolution dated June 5, 2007, as well as the Partial Summary Judgment dated
May 7, 2004 in Civil Case No. 0033-F, which was effectively amended in Resolution dated May
11, 2007, are AFFIRMED with MODIFICATION, only with respect to those issues subject of the
petitions in G.R. Nos. 177857-58 and 178193. However, the issues raised in G.R. No. 180705 in

relation to Partial Summary Judgment dated July 11, 2003 and Resolution dated June 5, 2007 in
Civil Case No. 0033-A, shall be decided by this Court in a separate decision.
The Partial Summary Judgment in Civil Case No. 0033-A dated July 11, 2003, is hereby
MODIFIED, and shall read as follows:
WHEREFORE, in view of the foregoing, We rule as follows:

Agreement dated May 25, 1975 between the PCA and defendant Cojuangco, and
PCA implementing rules, namely, Adm. Order No. 1, s. 1975 and Resolution No. 07478.
4. The so-called "Farmers UCPB shares" covered by 64.98% of the UCPB shares of
stock, which formed part of the 72.2% of the shares of stock of the former FUB and
now of the UCPB, the entire consideration of which was charged by PCA to the CCSF,
are hereby declared conclusively owned by, the Plaintiff Republic of the Philippines.

SUMMARY OF THE COURTS RULING.

A. Re: CLASS ACTION MOTION FOR A SEPARATE SUMMARY JUDGMENT dated April 11,
2001 filed by Defendant Maria Clara L. Lobregat, COCOFED, et al., and Ballares, et al.
The Class Action Motion for Separate Summary Judgment dated April 11, 2001 filed by
defendant Maria Clara L. Lobregat, COCOFED, et al. and Ballares, et al., is hereby DENIED for
lack of merit.
B. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: COCOFED, ET AL. AND
BALLARES, ET AL.) dated April 22, 2002 filed by Plaintiff.
1. a. The portion of Section 1 of P.D. No. 755, which reads:
and that the Philippine Coconut Authority is hereby authorized to distribute, for free,
the shares of stock of the bank it acquired to the coconut farmers under such rules
and regulations it may promulgate.
taken in relation to Section 2 of the same P.D., is unconstitutional: (i) for having
allowed the use of the CCSF to benefit directly private interest by the outright and
unconditional grant of absolute ownership of the FUB/UCPB shares paid for by PCA
entirely with the CCSF to the undefined "coconut farmers", which negated or
circumvented the national policy or public purpose declared by P.D. No. 755 to
accelerate the growth and development of the coconut industry and achieve its
vertical integration; and (ii) for having unduly delegated legislative power to the PCA.

xxx

xxx

SO ORDERED.
The Partial Summary Judgment in Civil Case No. 0033-F dated May 7, 2004, is hereby
MODIFIED, and shall read as follows:
WHEREFORE, the MOTION FOR EXECUTION OF PARTIAL SUMMARY JUDGMENT (RE:
CIIF BLOCK OF SMC SHARES OF STOCK) dated August 8, 2005 of the plaintiff is hereby
denied for lack of merit. However, this Court orders the severance of this particular claim of
Plaintiff. The Partial Summary Judgment dated May 7, 2004 is now considered a separate final
and appealable judgment with respect to the said CIIF Block of SMC shares of stock.1wphi1
The Partial Summary Judgment rendered on May 7, 2004 is modified by deleting the last
paragraph of the dispositive portion, which will now read, as follows:
WHEREFORE, in view of the foregoing, we hold that:
The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding
Companies and Cocofed, et al) filed by Plaintiff is hereby GRANTED. ACCORDINGLY, THE CIIF
COMPANIES, NAMELY:
1. Southern Luzon Coconut Oil Mills (SOLCOM);
2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

b. The implementing regulations issued by PCA, namely, Administrative Order No. 1,

Series of 1975 and Resolution No. 074-78 are likewise invalid for their failure to see to
it that the distribution of shares serve exclusively or at least primarily or directly the
aforementioned public purpose or national policy declared by P.D. No. 755.
2. Section 2 of P.D. No. 755 which mandated that the coconut levy funds shall not be
considered special and/or fiduciary funds nor part of the general funds of the national
government and similar provisions of Sec. 5, Art. III, P.D. No. 961 and Sec. 5, Art. III,
P.D. No. 1468 contravene the provisions of the Constitution, particularly, Art. IX (D),
Sec. 2; and Article VI, Sec. 29 (3).

3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);
5. Granexport Manufacturing Corp. (GRANEX); and
6. Legaspi Oil Co., Inc. (LEGOIL),
AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

3. Lobregat, COCOFED, et al. and Ballares, et al. have not legally and validly obtained
title of ownership over the subject UCPB shares by virtue of P.D. No. 755, the

xxx

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

Costs against petitioners COCOFED, et al., in G.R. Nos. 177857-58 and Danilo S. Ursua in G.R.
No. 178193.

3. Roxas Shares, Inc.;

No further pleadings shall be entertained. Let Entry of Judgment be made in due course.
4. Arc Investors; Inc.;

SO ORDERED.
5. Toda Holdings, Inc.;
6. AP Holdings, Inc.;
7. Fernandez Holdings, Inc.;
8. SMC Officers Corps, Inc.;
9. Te Deum Resources, Inc.;
10. Anglo Ventures, Inc.;
11. Randy Allied Ventures, Inc.;
12. Rock Steel Resources, Inc.;
13. Valhalla Properties Ltd., Inc.; and

G.R. No. L-15092

14. First Meridian Development, Inc.

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.

AND THE CONVERTED SMC SERIES 1 PREFERRED SHARES TOTALING 753,848,312

SHARES SUBJECT OF THE RESOLUTION OF THE COURT DATED SEPTEMBER 17, 2009
TOGETHER "WITH ALL DIVIDENDS DECLARED, PAID OR ISSUEDTHEREON AFTER THAT
DATE, AS WELL AS ANY INCREMENTS THERETO ARISING FROM, BUT NOT LIMITED TO,
EXERCISE OF PRE-EMPTIVE RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT
TO RE USED ONLY FOH THE BENEFIT OF ALL COCONUT FARMERS AND FOR THE
DEVELOPMENT OF THE COCONUT INDUSTRY. AND ORDERED HECONVEYED TO THE
GOVERNMENT.
THE COURT AFFIRMIS THE RESOLUTIONS ISSUED BY THE SANDIGANBAYAN ON JUNE
5, 2007 IN CIVIL CASE NO. 0033-A AND ON MAY 11, 2007 IN CIVIL CASE NO. 0033-F, THAT
THERE IS NO MORE NECESSITY OF FURTHER TRIAL WITH RESPECT TO THE ISSUE OF
OWNERSHIP OF (1) THE SEQUESTERED UCPB SHARES, (2) THE CHF BLOCK OF SMC
SHARES AND (3) THE CIIF COMPANIES, AS THEY HAVE FINALLY BEEN ADJUDICATED IN
THE AFOREMIENTIONED PARTIAL SUMMARY JUDGMENTS DATED JULY 11, 2003 AND
MAY 7, 2004.
SO ORDERED.

May 18, 1962

Taada, Teehankee and Carreon for plaintiffs-appellants.

Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros, in
its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel the defendant
Milling Company to increase plaintiff's share in the sugar produced from their cane, from 60% to
62.33%, starting from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the
Limited co-partnership Gonzaga and Company, had been and are sugar planters adhered to the
defendant-appellee's sugar central mill under identical milling contracts. Originally executed in
1919, said contracts were stipulated to be in force for 30 years starting with the 1920-21 crop,
and provided that the resulting product should be divided in the ratio of 45% for the mill and 55%
for the planters. Sometime in 1936, it was proposed to execute amended milling contracts,
increasing the planters' share to 60% of the manufactured sugar and resulting molasses,
besides other concessions, but extending the operation of the milling contract from the original
30 years to 45 years. To this effect, a printed Amended Milling Contract form was drawn up. On
August 20, 1936, the Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc.,

adopted a resolution (Acts No. 11, Acuerdo No. 1) granting further concessions to the planters
over and above those contained in the printed Amended Milling Contract. The bone of contention
is paragraph 9 of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx

xxx

xxx

Acuerdo No. 1. Previa mocion debidamente secundada, la Junta en

consideracion a una peticion de los plantadores hecha por un comite
nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
xxx

xxx

xxx

9.a Que si durante la vigencia de este contrato de Molienda Enmendado,

lascentrales azucareras, de Negros Occidental, cuya produccion anual de
azucar centrifugado sea mas de una tercera parte de la produccion total de
todas lascentrales azucareras de Negros Occidental, concedieren a sus
plantadores mejores condiciones que la estipuladas en el presente
contrato, entonces esas mejores condiciones se concederan y por el
presente se entenderan concedidas a los platadores que hayan otorgado
este Contrato de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September 10, 1936,
but a copy of the resolution of August 10, 1936, signed by the Central's General Manager, was
not attached to the printed contract until April 17, 1937; with the notation
Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado,
otorgado por y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar centrals
(La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production exceeding onethird of the production of all the sugar central mills in the province, had already granted
increased participation (of 62.5%) to their planters, and that under paragraph 9 of the resolution
of August 20, 1936, heretofore quoted, the appellee had become obligated to grant similar
concessions to the plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling Co., inc.,
resisted the claim, and defended by urging that the stipulations contained in the resolution were
made without consideration; that the resolution in question was, therefore, null and void ab initio,
being in effect a donation that was ultra vires and beyond the powers of the corporate directors
to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant Milling
company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand. It must be remembered
that the controverted resolution was adopted by appellee corporation as a supplement to, or
further amendment of, the proposed milling contract, and that it was approved on August 20,
1936, twenty-one days prior to the signing by appellants on September 10, of the Amended
Milling Contract itself; so that when the Milling Contract was executed, the concessions granted
by the disputed resolution had been already incorporated into its terms. No reason appears of

record why, in the face of such concessions, the appellants should reject them or consider them
as separate and apart from the main amended milling contract, specially taking into account that
appellant Alfredo Montelibano was, at the time, the President of the Planters Association (Exhibit
4, p. 11) that had agitated for the concessions embodied in the resolution of August 20, 1936.
That the resolution formed an integral part of the amended milling contract, signed on
September 10, and not a separate bargain, is further shown by the fact that a copy of the
resolution was simply attached to the printed contract without special negotiations or agreement
between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 were
supported by the same causa or consideration underlying the main amended milling contract;
i.e., the promises and obligations undertaken thereunder by the planters, and, particularly, the
extension of its operative period for an additional 15 years over and beyond the 30 years
stipulated in the original contract. Hence, the conclusion of the court below that the resolution
constituted gratuitous concessions not supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the respondent
sugar milling company to make a gift to the planters would be relevant if the resolution in
question had embodied a separate agreement after the appellants had already bound
themselves to the terms of the printed milling contract. But this was not the case. When the
resolution was adopted and the additional concessions were made by the company, the
appellants were not yet obligated by the terms of the printed contract, since they admittedly did
not sign it until twenty-one days later, on September 10, 1936. Before that date, the printed form
was no more than a proposal that either party could modify at its pleasure, and the appellee
actually modified it by adopting the resolution in question. So that by September 10, 1936
defendant corporation already understood that the printed terms were not controlling, save as
modified by its resolution of August 20, 1936; and we are satisfied that such was also the
understanding of appellants herein, and that the minds of the parties met upon that basis.
Otherwise there would have been no consent or "meeting of the minds", and no binding contract
at all. But the conduct of the parties indicates that they assumed, and they do not now deny, that
the signing of the contract on September 10, 1936, did give rise to a binding agreement. That
agreement had to exist on the basis of the printed terms as modified by the resolution of August
20, 1936, or not at all. Since there is no rational explanation for the company's assenting to the
further concessions asked by the planters before the contracts were signed, except as further
inducement for the planters to agree to the extension of the contract period, to allow the
company now to retract such concessions would be to sanction a fraud upon the planters who
relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be no
novation unless two distinct and successive binding contracts take place, with the later designed
to replace the preceding convention. Modifications introduced before a bargain becomes
obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached
to the printed contract until April 17, 1937. But, except in the case of statutory forms or solemn
agreements (and it is not claimed that this is one), it is the assent and concurrence (the "meeting
of the minds") of the parties, and not the setting down of its terms, that constitutes a binding
contract. And the fact that the addendum is only signed by the General Manager of the milling
company emphasizes that the addition was made solely in order that the memorial of the terms
of the agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board of Directors of the
appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the planters
having agreed to the 60-40 sharing of the sugar set forth in the printed "amended milling
contracts", and did not make any reference at all to the terms of the resolution of August 20,
1936. But a reading of this report shows that it was not intended to inventory all the details of the

amended contract; numerous provisions of the printed terms are alao glossed over. The
Directors of the appellee Milling Company had no reason at the time to call attention to the
provisions of the resolution in question, since it contained mostly modifications in detail of the
printed terms, and the only major change was paragraph 9 heretofore quoted; but when the
report was made, that paragraph was not yet in effect, since it was conditioned on other centrals
granting better concessions to their planters, and that did not happen until after 1950. There was
no reason in 1936 to emphasize a concession that was not yet, and might never be, in effective
operation.
There can be no doubt that the directors of the appellee company had authority to modify the
proposed terms of the Amended Milling Contract for the purpose of making its terms more
acceptable to the other contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in itself,
and not otherwise prohibited, is done for the purpose of serving corporate ends, and is
reasonably tributary to the promotion of those ends, in a substantial, and not in a
remote and fanciful sense, it may fairly be considered within charter powers. The test
to be applied is whether the act in question is in direct and immediate furtherance of
the corporation's business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do it; otherwise,
not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is valid and
binding, and whether or not it will cause losses or decrease the profits of the central, the court
has no authority to review them.
They hold such office charged with the duty to act for the corporation according to
their best judgment, and in so doing they cannot be controlled in the reasonable
exercise and performance of such duty. Whether the business of a corporation should
be operated at a loss during depression, or close down at a smaller loss, is a purely
business and economic problem to be determined by the directors of the corporation
and not by the court. It is a well-known rule of law that questions of policy or of
management are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment of the board of
directors; the board is the business manager of the corporation, and so long as it acts
in good faith its orders are not reviewable by the courts. (Fletcher on Corporations,
Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual sugar
production in Occidental Negros) have granted progressively increasing participations to their
adhered planter at an average rate of
62.333%

for the 1951-52 crop year;

64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20,
1936, duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed
sentencing the defendant-appellee to pay plaintiffs-appellants the differential or increase of
participation in the milled sugar in accordance with paragraph 9 of the appellee Resolution of
August 20, 1936, over and in addition to the 60% expressed in the printed Amended Milling
Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having
received an additional 2% corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all
appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were withheld;
and the right is reserved to plaintiffs-appellants to sue for such additional increases as they may
be entitled to for the crop years subsequent to those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.