Corporation Law - A-D Cases (FULLTEXTS)

NATIONALITY OF THE CORPORATION
G.R. No. L-64013 November 28, 1983
UNION GLASS & CONTAINER CORPORATION and CARLOS PALANCA, JR., in his capacity as President of Union Glass & Container
Corporation, petitioners,
vs.
THE SECURITIES AND EXCHANGE COMMISSION and CAROLINA HOFILEA, respondents.
Eduardo R. Ceniza for petitioners.

The Solicitor General for respondent SEC.
Remedios C. Balbin for respondent Carolina Y. Hofilea.
ESCOLIN, J.
This petition for certiorari and prohibition seeks to annul and set aside the Order of the Securities and Exchange Commission, dated September 25,
1981, upholding its jurisdiction in SEC Case No. 2035, entitled "Carolina Hofilea, Complainant, versus Development Bank of the Philippines, et al.,
Respondents."
Private respondent Carolina Hofilea, complainant in SEC Case No. 2035, is a stockholder of Pioneer Glass Manufacturing Corporation, Pioneer Glass for
short, a domestic corporation engaged in the operation of silica mines and the manufacture of glass and glassware. Since 1967, Pioneer Glass had
obtained various loan accommodations from the Development Bank of the Philippines [DBP], and also from other local and foreign sources which DBP
guaranteed.
As security for said loan accommodations, Pioneer Glass mortgaged and/or assigned its assets, real and personal, to the DBP, in addition to the
mortgages executed by some of its corporate officers over their personal assets. The proceeds of said financial exposure of the DBP were used in the
construction of a glass plant in Rosario, Cavite, and the operation of seven silica mining claims owned by the corporation.
It appears that through the conversion into equity of the accumulated unpaid interests on the various loans amounting to P5.4 million as of January
1975, and subsequently increased by another P2.2 million in 1976, the DBP was able to gain control of the outstanding shares of common stocks of
Pioneer Glass, and to get two, later three, regular seats in the corporation's board of directors.
Sometime in March, 1978, when Pioneer Glass suffered serious liquidity problems such that it could no longer meet its financial obligations with DBP, it
entered into a dacion en pago agreement with the latter, whereby all its assets mortgaged to DBP were ceded to the latter in full satisfaction of the
corporation's obligations in the total amount of P59,000,000.00. Part of the assets transferred to the DBP was the glass plant in Rosario, Cavite, which
DBP leased and subsequently sold to herein petitioner Union Glass and Container Corporation, hereinafter referred to as Union Glass.
On April 1, 1981, Carolina Hofilea filed a complaint before the respondent Securities and Exchange Commission against the DBP, Union Glass and
Pioneer Glass, docketed as SEC Case No. 2035. Of the five causes of action pleaded therein, only the first cause of action concerned petitioner Union
Glass as transferee and possessor of the glass plant. Said first cause of action was based on the alleged illegality of the aforesaid dacion en pago
resulting from: [1] the supposed unilateral and unsupported undervaluation of the assets of Pioneer Glass covered by the agreement; [2] the self-
dealing indulged in by DBP, having acted both as stockholder/director and secured creditor of Pioneer Glass; and [3] the wrongful inclusion by DBP in its
statement of account of P26M as due from Pioneer Glass when the same had already been converted into equity.
Thus, with respect to said first cause of action, respondent Hofilea prayed that the SEC issue an order: t.hqw
1. Holding that the so called dacion en pago conveying all the assets of Pioneer Glass and the Hofilea personal properties to Union
Glass be declared null and void on the ground that the said conveyance was tainted with. t.hqw
A. Self-dealing on the part of DBP which was acting both as a controlling stockholder/director and as secured
creditor of the Pioneer Glass, all to its advantage and to that of Union Glass, and to the gross prejudice of the
Pioneer Glass,
B. That the dacion en pago is void because there was gross undervaluation of the assets included in the so-
called dacion en pago by more than 100% to the prejudice of Pioneer Glass and to the undue advantage of DBP
and Union Glass;
C. That the DBP unduly favored Union Glass over another buyer, San Miguel Corporation, notwithstanding the
clearly advantageous terms offered by the latter to the prejudice of Pioneer Glass, its other creditors and so-
called 'Minority stockholders.'
2. Holding that the assets of the Pioneer Glass taken over by DBP and part of which was delivered to Union Glass particularly the
glass plant to be returned accordingly.
3. That the DBP be ordered to accept and recognize the appraisal conducted by the Asian Appraisal Inc. in 1975 and again in t978
of the asset of Pioneer Glass. 1
In her common prayer, Hofilea asked that DBP be sentenced to pay Pioneer Glass actual, consequential, moral and exemplary damages, for its alleged
illegal acts and gross bad faith; and for DBP and Union Glass to pay her a reasonable amount as attorney's fees. 2
On April 21, 1981, Pioneer Glass filed its answer. On May 8, 1981, petitioners moved for dismissal of the case on the ground that the SEC had no
jurisdiction over the subject matter or nature of the suit. Respondent Hofilea filed her opposition to said motion, to which herein petitioners filed a
rejoinder.
On July 23, 1981, SEC Hearing Officer Eugenio E. Reyes, to whom the case was assigned, granted the motion to dismiss for lack of jurisdiction.
However, on September 25, 1981, upon motion for reconsideration filed by respondent Hofilea, Hearing Officer Reyes reversed his original order by
upholding the SEC's jurisdiction over the subject matter and over the persons of petitioners. Unable to secure a reconsideration of the Order as well as
to have the same reviewed by the Commission En Banc, petitioners filed the instant petition for certiorari and prohibition to set aside the order of
September 25, 1981, and to prevent respondent SEC from taking cognizance of SEC Case No. 2035.
The issue raised in the petition may be propounded thus: Is it the regular court or the SEC that has jurisdiction over the case?
In upholding the SEC's jurisdiction over the case Hearing Officer Reyes rationalized his conclusion thus: t.hqw
As correctly pointed out by the complainant, the present action is in the form of a derivative suit instituted by a stockholder for the
benefit of the corporation, respondent Pioneer Glass and Manufacturing Corporation, principally against another stockholder,
respondent Development Bank of the Philippines, for alleged illegal acts and gross bad faith which resulted in the dacion en pago
arrangement now being questioned by complainant. These alleged illegal acts and gross bad faith came about precisely by virtue of
respondent Development Bank of the Philippine's status as a stockholder of co-respondent Pioneer Glass Manufacturing Corporation
although its status as such stockholder, was gained as a result of its being a creditor of the latter. The derivative nature of this
instant action can also be gleaned from the common prayer of the complainant which seeks for an order directing respondent
Development Bank of the Philippines to pay co-respondent Pioneer Glass Manufacturing Corporation damages for the alleged illegal
acts and gross bad faith as above-mentioned.
As far as respondent Union Glass and Container Corporation is concerned, its inclusion as a party-respondent by virtue of its being
an indispensable party to the present action, it being in possession of the assets subject of the dacion en pago and, therefore,
situated in such a way that it will be affected by any judgment thereon, 3
In the ordinary course of things, petitioner Union Glass, as transferee and possessor of the glass plant covered by the dacion en pago agreement,
should be joined as party-defendant under the general rule which requires the joinder of every party who has an interest in or lien on the property
subject matter of the dispute. 4 Such joinder of parties avoids multiplicity of suits as well as ensures the convenient, speedy and orderly administration
of justice.
But since petitioner Union Glass has no intra-corporate relation with either the complainant or the DBP, its joinder as party-defendant in SEC Case No.
2035 brings the cause of action asserted against it outside the jurisdiction of the respondent SEC.
The jurisdiction of the SEC is delineated by Section 5 of PD No. 902-A as follows: t.hqw
Sec. 5. In addition to the regulatory and adjudicative function of the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as expressly granted under existing laws and devices, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
a] Devices and schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting
to fraud and misrepresentation which may be detrimental to the interest of the public and/or the stockholders, partners, members
of associations or organizations registered with the Commission
b] Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members or associates;
between any or all of them and the corporation, partnership, or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise
or right to exist as such entity;
c] Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or
associations.
This grant of jurisdiction must be viewed in the light of the nature and function of the SEC under the law. Section 3 of PD No. 902-A confers upon the
latter "absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are grantees of primary franchise and/or
license or permit issued by the government to operate in the Philippines ... " The principal function of the SEC is the supervision and control over
corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities
pursued for the promotion of economic development. 5
It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law explicitly specified and delimited its jurisdiction to
matters intrinsically connected with the regulation of corporations, partnerships and associations and those dealing with the internal affairs of such
corporations, partnerships or associations.
Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: [a] between
the corporation, partnership or association and the public; [b] between the corporation, partnership or association and its stockholders, partners,
members, or officers; [c] between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is
concerned; and [d] among the stockholders, partners or associates themselves.
The fact that the controversy at bar involves the rights of petitioner Union Glass who has no intra-corporate relation either with complainant or the DBP,
places the suit beyond the jurisdiction of the respondent SEC. The case should be tried and decided by the court of general jurisdiction, the Regional
Trial Court. This view is in accord with the rudimentary principle that administrative agencies, like the SEC, are tribunals of limited jurisdiction 6 and, as
such, could wield only such powers as are specifically granted to them by their enabling statutes. 7 As We held in Sunset View Condominium Corp. vs.
Campos, Jr.: 8t.hqw
Inasmuch as the private respondents are not shareholders of the petitioner condominium corporation, the instant cases for
collection cannot be a 'controversy arising out of intra-corporate or partnership relations between and among stockholders,
members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders,
members or associates, respectively,' which controversies are under the original and exclusive jurisdiction of the Securities &
Exchange Commission, pursuant to Section 5 [b] of P.D. No. 902-A. ...
As heretofore pointed out, petitioner Union Glass is involved only in the first cause of action of Hofileas complaint in SEC Case No, 2035. While the
Rules of Court, which applies suppletorily to proceedings before the SEC, allows the joinder of causes of action in one complaint, such procedure
however is subject to the rules regarding jurisdiction, venue and joinder of parties. 9 Since petitioner has no intra-corporate relationship with the
complainant, it cannot be joined as party-defendant in said case as to do so would violate the rule or jurisdiction. Hofileas complaint against petitioner
for cancellation of the sale of the glass plant should therefore be brought separately before the regular court But such action, if instituted, shall be
suspended to await the final outcome of SEC Case No. 2035, for the issue of the validity of the dacion en pago posed in the last mentioned case is a
prejudicial question, the resolution of which is a logical antecedent of the issue involved in the action against petitioner Union Glass. Thus, Hofileas
complaint against the latter can only prosper if final judgment is rendered in SEC Case No. 2035, annulling the dacion en pago executed in favor of the
DBP.
WHEREFORE, the instant petition is hereby granted, and the questioned Orders of respondent SEC, dated September 25, 1981, March 25, 1982 and
May 28, 1982, are hereby set aside. Respondent Commission is ordered to drop petitioner Union Glass from SEC Case No. 2035, without prejudice to
the filing of a separate suit before the regular court of justice. No pronouncement as to costs.
SO ORDERED.1wph1.t
Concepcion, Jr., Guerrero, Abad Santos, De Castro, Melencio-Herrera, Plana, Relova and Gutierrez, Jr., JJ., concur.
Separate Opinions
TEEHANKEE, J., concurring:
I concur in the Court's judgment penned by Mr. Justice Escolin setting aside the questioned orders of respondent SEC and ordering that petitioner Union
Glass be dropped from SEC Case No. 2035 for lack of SEC jurisdiction over it as a third party purchaser of the glass plant acquired by the DBP by dacion
en pago from Pioneer Glass, without prejudice to Hofilea filing a separate suit in the regular courts of justice against Union Glass for recovery and
cancellation of the said sale of the glass plant in favor of Union Glass.
I concur also with the statement in the Court's opinion that the final outcome of SEC Case No. 2035 with regard to the validity of the dacion en pago is
a prejudicial case. If Hofilea's complaint against said dacion en pago fails in the SEC, then it clearly has no cause of action against Union Glass for
cancellation of DBP's sale of the plant to Union Glass.
The purpose of this brief concurrence is with reference to the statement in the Court's opinion that "Thus, Hofileas complaint against the latter can
only prosper if final judgment is rendered in SEC Case No. 2035, annulling the dacion en pago executed in favor of the DBP," to erase any impression
that a favorable judgment secured by Hofilea in SEC Case No. 2035 against the DBP and Pioneer Glass would necessarily mean that its action against
Union Glass in the regular courts of justice for recovery and cancellation of the DBP sale of the glass plant to Union Glass would necessarily prosper. It
must be borne in mind that as already indicated, the SEC has no jurisdiction over Union Glass as an outsider. The suit in the regular courts of justice
that Hofilea might bring against Union Glass is of course subject to all defenses as to the validity of the sale of the glass plant in its favor as a buyer in
good faith and should it successfully substantiate such defenses, then Hofileas action against it for cancellation of the sale might fail as a consequence.
AQUINO, J., dissenting:
I dissent with due deference to Justice Escolin's opinion. What are belatedly assailed in this certiorari and prohibition case filed on May 17, 1983 are the
order of September 25, 1981 of Eugenio E. Reyes, a SEC hearing officer, and the orders of March 25 and May 28, 1982 of Antonio R. Manabat, another
SEC hearing officer.
Although a jurisdictional issue is raised and jurisdiction over the subject matter may be raised at any stage of the case, nevertheless, the petitioners are
guilty of laches and nonexhaustion of the remedy of appeal with the Securities and Exchange Commission en banc.
The petitioners resorted to the special civil actions of certiorari and prohibition because they assail the orders of mere SEC hearing officers. This is not a
review of the order, decision or ruling of the SEC sitting en banc which, according to section 6 of Presidential Decree No. 902-A (1976), may be made by
this Court "in accordance with the pertinent provisions of the Rules of Court."
Rule 43 of the Rules of Court used to allow review by this Court of the SEC order, ruling or decision. Republic Act 5434 (1968) substituted the Court of
Appeals for this Court in line with the policy of lightening our heavy jurisdictional burden. But this Court seems to have been restored as the reviewing
authority by Presidential Decree No. 902-A.
However, section 9 of the Judiciary Reorganization Law returned to the Intermediate Appellate Court the exclusive jurisdiction to review the ruling, order
or decision of the SEC as a quasi-judicial agency. The same section 9 granted to the Appellate Court jurisdiction in certiorari and prohibition cases over
the SEC although not exclusive.t.hqw
In this case, the SEC seems to have adopted the orders of the two hearing officers as its own orders as shown by the stand taken
by the Solicitor General in defending the SEC. If that were so, that is, if the orders of the hearing officers should be treated as the
orders of the SEC itself en banc, this Court would have no jurisdiction over this case. It should be the Appellate Court that should
exercise the power of review.
Carolina Hofilea has been a stockholder since 1958 of the Pioneer Glass Manufacturing Corporation. Her personal assets valued at P6,804,810 were
apparently or supposedly mortgaged to the DBP to secure the obligations of Pioneer Glass (p. 32, Rollo).
Pioneer Glass became indebted to the Development Bank of the Philippines in the total sum of P59,000,000. Part of the loan was used by Pioneer Glass
to establish its glass plant in Rosario, Cavite. The unpaid interest on the loan amounting to around seven million pesos became the DBP's equity in
Pioneer Glass. The DBP became a substantial stockholder of Pioneer Glass. Three members of the Pioneer Glass' board of directors were from the DBP.
The glass plant commenced operations in 1977. At that time, Pioneer Glass was heavily indebted to the DBP. Instead of foreclosing its mortgage, DBP
maneuvered to have the mortgaged assets of Pioneer Glass, including the glass plant, transferred to the DBP by way of dacion en pago. This transaction
was alleged to be an "auto contract" or a case of the DBP contracting with itself since the DBP had a dominant position in Pioneer Glass.
Hofilea alleged that although the debt to the DBP of Pioneer Glass amounted to P59,000,000, the glass plant in 1977 had a "sound value" of
P77,329,000 and a "reproduction cost" of P90,403,000. She further alleged that San Miguel Corporation was willing to buy the glass plant for
P40,000,000 cash, whereas it was actually sold to Union Glass & Container Corporation for the same amount under a 25-year term of payment (pp. 32-
34, Rollo).
On March 31, 1981; Carmen Hofilea filed with the SEC a complaint against the DBP, Union Glass, Pioneer Glass and Rafael Sison as chairman of the
DBP and Pioneer Glass boards of directors. Union Glass filed a motion to dismiss on the ground that jurisdiction over the case is lodged in the Court of
First Instance. Hofilea opposed the motion. Hearing Officer Reyes in his order of July 23, 1981 dismissed the complaint on the ground that the case is
beyond the jurisdiction of the SEC.
Hofilea filed a motion for reconsideration which was opposed by Union Glass. Hearing Officer Reyes in his order of September 25, 1981 reconsidered
his dismissal order and ruled that Union Glass is an indispensable party because it is the transferee of the controverted assets given by way of dacion en
pago to the DBP. He ruled that the SEC has jurisdiction over the case.
Union Glass filed a motion for reconsideration. Hearing Officer Antonio R. Manabat denied the motion on the ground "that the present action is an intra-
corporate dispute involving stockholders of the same corporation (p. 26, Rollo).
Union Glass filed a second motion for reconsideration with the prayer that the SEC should decide the motion en banc. The hearing officer ruled that the
remedy of Union Glass was to file a timely appeal. Hence, its second motion for reconsideration was denied by the hearing officer. (This ruling is a
technicality which hinders substantial justice.)
It is clear that Union Glass has no cause of action for certiorari and prohibition. Its recourse was to appeal to the SEC en banc the denial of its first
motion for reconsideration.
There is no question that the SEC has jurisdiction over the intra-corporate dispute between Hofilea and the DBP, both stockholders of Pioneer Glass,
over the dacion en pago.
Now, does the SEC lose jurisdiction because of the joinder of Union Glass which has privity with the DBP since it was the transferee of the assets
involved in the dacion en pago?
Certainly, the joinder of Union Glass does not divest the SEC of jurisdiction over the case. The joinder of Union Glass is necessary because the DBP, its
transfer or, is being sued regarding the dacion en pago. The defenses of Union Glass are tied up with the defenses of the DBP in the intra-corporate
dispute. Hofileas cause of action should not be split.
It would not be judicious and expedient to require Hofilea to sue the DBP and Union Glass in the Regional Trial Court. The SEC is more competent than
the said court to decide the intra-corporate dispute.
The SEC, as the agency enforcing Presidential Decree No. 902-A, is in the best position to know the extent of its jurisdiction. Its determination that it
has jurisdiction in this case has persuasive weight.
Concepcion, Jr., Guerro, Abad Santos, De Castro, Melencio-Herrera, Plana, Relova and Gutierrez, Jr., JJ., concur.
Separate Opinions
34, Rollo).
Fernando, C.J. and Makasiar, J., join Aquino, J., dissent.
Separate Opinions
34, Rollo).
Fernando, C.J. and Makasiar, J., join Aquino, J., dissent.
G.R. No. L-63558 May 19, 1987
SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC. TRONIC SYSTEMS, INC., petitioners,
vs.
HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL TRIAL COURT (NATIONAL CAPITAL JUDICIAL REGION, BRANCH CLX-PASIG),
SPOUSES AGAPITO BRAGA AND VIRGINIA BRAGA, VIRGILIO BRAGA AND NORBERTO BRAGA, respondents.
No. L-68450-51 May 19, 1987
POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA, VIRGILIO T. BRAGA, NORBERTO BRAGA, and VIRGINIA BRAGA, petitioners,
vs.
THE HONORABLE SECURITIES AND EXCHANGE COMMISSION, TELECTRONIC SYSTEMS, INC., JOSE ABEJO, JOSE LUIS SANTIAGO,
SIMEON A. MIRAVITE, SR., ANDRES T. VELARDE AND L. QUIDATO BANDOLINO, respondents.
TEEHANKEE, C.J.:
These two cases, jointly heard, are jointly herein decided. They involve the question of who, between the Regional Trial Court and the Securities and
Exchange Commission (SEC), has original and exclusive jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell
Philippines, Inc. (Pocket Bell), a "tone and voice paging corporation," namely, the spouses Jose Abejo and Aurora Abejo (hereinafter referred to as the
Abejos) and the purchaser, Telectronic Systems, Inc. (hereinafter referred to as Telectronics) of their 133,000 minority shareholdings (for P5 million)
and of 63,000 shares registered in the name of Virginia Braga and covered by five stock certificates endorsed in blank by her (for P1,674,450.00), and
the spouses Agapito Braga and Virginia Braga (hereinafter referred to as the Bragas), erstwhile majority stockholders. With the said purchases,
Telectronics would become the majority stockholder, holding 56% of the outstanding stock and voting power of the corporation Pocket Bell.
With the said purchases in 1982, Telectronics requested the corporate secretary of the corporation, Norberto Braga, to register and transfer to its name,
and those of its nominees the total 196,000 Pocket Bell shares in the corporation's transfer book, cancel the surrendered certificates of stock and issue
the corresponding new certificates of stock in its name and those of its nominees.
Norberto Braga, the corporate secretary and son of the Bragas, refused to register the aforesaid transfer of shares in t e corporate oo s, asserting that
the Bragas claim preemptive rights over the 133,000 Abejo shares and that Virginia Braga never transferred her 63,000 shares to Telectronics but had
lost the five stock certificates representing those shares.
This triggered off the series of intertwined actions between the protagonists, all centered on the question of jurisdiction over the dispute, which were to
culminate in the filing of the two cases at bar.
The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the Securities and Exchange Commission, while the Abejos
claim the contrary. A summary of the actions resorted to by the parties follows:
A. ABEJOS ACTIONS IN SEC
1. The Abejos and Telectronics and the latter's nominees, as new majority shareholders, filed SEC Cases Nos. 02379 and 02395 against the Bragas on
December 17, 1982 and February 14, 1983, respectively.
2. In SEC Case No. 02379, they prayed for mandamus from the SEC ordering Norberto Braga, as corporate secretary of Pocket Bell to register in their
names the transfer and sale of the aforesaid 196,000 Pocket Bell shares (of the Abejos 1 and Virginia Braga 2, cancel the surrendered certificates as
duly endorsed and to issue new certificates in their names.
3. In SEC Case No.02395, they prayed for injunction and a temporary restraining order that the SEC enjoin the Bragas from disbursing or disposing
funds and assets of Pocket Bell and from performing such other acts pertaining to the functions of corporate officers.
4. Pocket Bell's corporate secretary, Norberto Braga, filed a Motion to Dismiss the mandamus case (SEC Case No. 02379) contending that the SEC has
no jurisdiction over the nature of the action since it does not involve an intracorporate controversy between stockholders, the principal petitioners
therein, Telectronics, not being a stockholder of record of Pocket Bell.
5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay denied the motion. On January 14, 1983, the corporate secretary filed a Motion for
Reconsideration. On March 21, 1983, SEC Hearing Officer Joaquin Garaygay issued an order granting Braga's motion for reconsideration and dismissed
SEC Case No. 02379.
6. On February 11, 1983, the Bragas filed their Motion to Dismiss the injunction case, SEC Case No. 02395. On April 8, 1985, the SEC Director, Eugenio
Reyes, acting upon the Abejos'ex-parte motion, created a three-man committee composed of Atty. Emmanuel Sison as Chairman and Attys. Alfredo Oca
and Joaquin Garaygay as members, to hear and decide the two SEC cases (Nos. 02379 and 02395).
7. On April 13, 1983, the SEC three-man committee issued an order reconsidering the aforesaid order of March 21, 1983 of the SEC Hearing Officer
Garaygay (dismissing the mandamus petition SEC Case No. 02379) and directing corporate secretary Norberto Braga to file his answer to the petitioner
therein.
B. BRAGAS' ACTION IN SEC
8. On December 12, 1983, the Bragas filed a petition for certiorari, prohibition and mandamus with the SEC en banc, SEC Case No. EB #049, seeking
the dismissal of SEC Cases Nos.' 02379 and 02395 for lack of jurisdiction of the Comn-iission and the setting aside of the various orders issued by the
SEC three-man committee in the course of the proceedings in the two SEC cases.
9. On May 15, 1984, the SEC en banc issued an order dismissing the Bragas' petition in SEC Case No. EB#049 for lack of merit and at the same time
ordering the SEC Hearing Committee to continue with the hearings of the Abejos and Telectronics SEC Cases Nos. 02379 and 02395, ruhng that the
"issue is not the ownership of shares but rather the nonperformance by the Corporate Secretary of the ministerial duty of recording transfers of shares
of stock of the corporation of which he is secretary."
10. On May 15, 1984 the Bragas filed a motion for reconsideration but the SEC en banc denied the same on August 9, 1984.
C. BRAGAS' ACTION IN CFI (NOWRTC)
11. On November 25, 1982, following the corporate secretary's refusal to register the transfer of the shares in question, the Bragas filed a complaint
against the Abejos and Telectronics in the Court of First Instance of Pasig, Branch 21 (now the Regional Trial Court, Branch 160) docketed as Civil Case
No. 48746 for: (a) rescission and annulment of the sale of the shares of stock in Pocket Bell made by the Abejos in favor of Telectronics on the ground
that it violated the Bragas' alleged pre-emptive right over the Abej os' shareholdings and an alleged perfected contract with the Abejos to sell the same
shares in their (Bragas) favor, (Ist cause of action); plus damages for bad faith; and (b) declaration ofnullity of any transfer, assignment or
endorsement of Virginia Bragas' stock certificates for 63,000 shares in Pocket Ben to Telectronics for want of consent and consideration, alleging that
said stock certificates, which were intended as security for a loan application and were thus endorsed by her in blank, had been lost (2nd cause of
action).
12. On January 4, 1983, the Abejos filed a Motion to Dismiss the complaint on the ground that it is the SEC that is vested under PD 902-A with original
and exclusive jurisdiction to hear and decide cases involving, among others, controversies "between and among stockholders" and that the Bragas' suit
is such a controversy as the issues involved therein are the stockholders' alleged pre-emptive rights, the validity of the transfer and endorsement of
certificates of stock, the election of corporate officers and the management and control of the corporation's operations. The dismissal motion was
granted by Presiding Judge G. Pineda on January 14, 1983.
13. On January 24, 1983, the Bragas filed a motion for reconsideration. The Abejos opposed. Meanwhile, respondent Judge Rafael de la Cruz was
appointed presiding judge of the court (renamed Regional Trial Court) in place of Judge G. Pineda.
14. On February 14, 1983, respondent Judge de la Cruz issued an order rescinding the January 14, 1983 order and reviving the temporary restraining
order previously issued on December 23, 1982 restraining Telectronics' agents or representatives from enforcing their resolution constituting themselves
as the new set of officers of Pocket Bell and from assuming control of the corporation and discharging their functions.
15. On March 2, 1983, the Abejos filed a motion for reconsideration, which motion was duly opposed by the Bragas. On March 11, 1983, respondent
Judge denied the motion for reconsideration.
D. ABEJOS' PETITION AT BAR
16. On March 26, 1983, the Abejos, alleging that the acts of respondent Judge in refusing to dismiss the complaint despite clear lack of jurisdiction over
the action and in refusing to reconsider his erroneous position were performed without jurisdiction and with grave abuse of discretion, filed their herein
Petition for certiorari and Prohibition with Preliminary Injunction. They prayed that the challenged orders of respondent Judge dated February 14, 1983
and March 11, 1983 be set aside for lack of jurisdiction and that he be ordered to permanently desist from further proceedings in Civil Case No. 48746.
Respondent judge desisted from further proceedings in the case, dispensing with the need of issuing any restraining order.
E. BRAGAS' PETITION AT BAR
17. On August 29, 1984, the Bragas, alleging in turn that the SEC has no jurisdiction over SEC Cases Nos. 02379 and 02395 and that it acted arbitrarily,
whimsically and capriciously in dismissing their petition (in SEC Case No. EB #049) for dismissal of the said cases, filed their herein Petition for certiorari
and Prohibition with Preliminary Injunction or TRO. The petitioner seeks the reversal and/or setting aside of the SEC Order dated May 15, 1984
dismissing their petition in said SEC Case No. EB #049 and sustaining its jurisdiction over SEC Cases Nos. 02379 and 02395, filed by the Abejos. On
September 24, 1984, this Court issued a temporary restraining order to maintain the status quo and restrained the SEC and/or any of its officers or
hearing committees from further proceeding with the hearings in SEC Cases Nos. 02379 and 02395 and from enforcing any and all orders and/or
resolutions issued in connection with the said cases.
The cases, having been given due course, were jointly heard by the Court on March 27, 1985 and the parties thereafter filed on April 16, 1985 their
respective memoranda in amplification of oral argument on the points of law that were crystalled during the hearing,
The Court rules that the SEC has original and exclusive jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell,
namely, the Abejos and
Telectronics, the purchasers of the 56% majority stock (supra, at page 2) on the one hand, and the Bragas, erstwhile majority stockholders, on the
other, and that the SEC, through its en banc Resolution of May 15, 1984 co"ectly ruled in dismissing the Bragas' Petition questioning its jurisdiction, that
"the issue is not the ownership of shares but rather the nonperformance by the Corporate Secretary of the ministerial duty of recording transfers of
shares of stock of the Corporation of which he is secretary."
1. The SEC ruling upholding its primary and exclusive jurisdiction over the dispute is correctly premised on, and fully supported by, the applicable
provisions of P.D. No. 902-A which reorganized the SEC with additional powers "in line with the government's policy of encouraging investments, both
domestic and foreign, and more active publicParticipation in the affairs of private corporations and enterprises through which desirable activities may be
pursued for the promotion of economic development; and, to promote a wider and more meaningful equitable distribution of wealth," and accordingly
provided that:
SEC. 3. The Commission shall have absolute jurisdiction, supervision and control ouer all corporations, partnerships or associations,
who are the grantees of primary franchise and/or a license or permit issued by the government to operate in the Philippines; ...
SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts, of the board of directors, business associations, its officers or
partners, amounting to fruud and misrepresentation which may be detrimental to the interest of the public
andlor of the stockholder, partners, members of associations or organizations registered with the Commission.
b) Controversies arising out of intracorporate or partnership relations, between and among stockholders,
members, or associates; between any andlor all of them and the corporation, partnership or association of
which they are stockholders, members or assmiates, respectively; and between such corporation, partnership or
assmiation and the state insofar as it concems their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such

corporations, partnerships or associations. 3
Section 6 further grants the SEC "in order to effectively exercise such jurisdiction," the power, inter alia, "to issue preliminary or permanent injunctions,
whether prohibitory or mandatory, in all cases in which it has jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply."
2. Basically and indubitably, the dispute at bar, as held by the SEC, is an intracorporate dispute that has arisen between and among the principal
stockholders of the corporation Pocket Bell due to the refusal of the corporate secretary, backed up by his parents as erstwhile majority shareholders, to
perform his "ministerial duty" to record the transfers of the corporation's controlling (56%) shares of stock, covered by duly endorsed certificates of
stock, in favor of Telectronics as the purchaser thereof. mandamus in the SEC to compel the corporate secretary to register the transfers and issue new
certificates in favor of Telectronics and its nominees was properly resorted to under Rule XXI, Section 1 of the SEC's New Rules of Procedure, 4 which
provides for the filing of such petitions with the SEC. Section 3 of said Rules further authorizes the SEC to "issue orders expediting the proceedings ...
and also [to] grant a preliminary injunction for the preservation of the rights of the parties pending such proceedings, "
The claims of the Bragas, which they assert in their complaint in the Regional Trial Court, praying for rescission and annulment of the sale made by the
Abejos in favor of Telectronics on the ground that they had an alleged perfected preemptive right over the Abejos' shares as well as for annulment of
sale to Telectronics of Virginia Braga's shares covered by street certificates duly endorsed by her in blank, may in no way deprive the SEC of its primary
and exclusive jurisdiction to grant or not the writ of mandamus ordering the registration of the shares so transferred. The Bragas' contention that the
question of ordering the recording of the transfers ultimately hinges on the question of ownership or right thereto over the shares notwithstanding, the
jurisdiction over the dispute is clearly vested in the SEC.
3. The very complaint of the Bragas for annulment of the sales and transfers as filed by them in the regular court questions the validity of the transfer
and endorsement of the certificates of stock, claiming alleged pre-emptive rights in the case of the Abejos' shares and alleged loss of thio certificates
and lack of consent and consideration in the case of Virginia Braga's shares. Such dispute c learly involve's controversies "between and among
stockholders, " as to the Abej os' right to sell and dispose of their shares to Telectronics, the validity of the latter's acquisition of Virginia Braga's shares,
who between the Bragas and the Abejos' transferee should be recognized as the controlling shareholders of the corporation, with the right to elect the
corporate officers and the management and control of its operations. Such a dispute and case clearly fag within the original and exclusive jurisdiction of
the SEC to decide, under Section 5 of P.D. 902-A, above-quoted. The restraining order issued by the Regional Trial Court restraining Telectronics agents
and representatives from enforcing their resolution constituting themselves as the new set of officers of Pocket Bell and from assuming control of the
corporation and discharging their functions patently encroached upon the SEC's exclusive jurisdiction over such specialized corporate controversies
calling for its special competence. As stressed by the Solicitor General on behalf of the SEC, the Court has held that "Nowhere does the law [PD 902-A]
empower any Court of First Instance [now Regional Trial Court] to interfere with the orders of the Commission," 5 and consequently "any ruling by the
trial court on the issue of ownership of the shares of stock is not binding on the Commission 6 for want of jurisdiction.
4. The dispute therefore clearly falls within the general classification of cases within the SEC's original and exclusive jurisdiction to hear and decide,
under the aforequoted governing section 5 of the law. Insofar as the Bragas and their corporate secretary's refusal on behalf of the corporation Pocket
Bell to record the transfer of the 56% majority shares to Telectronics may be deemed a device or scheme amounting to fraud and misrepresentation
emplolyed by them to keep themselves in control of the corporation to the detriment of Telectronics (as buyer and substantial investor in the corporate
stock) and the Abejos (as substantial stockholders-sellers), the case falls under paragraph (a). The dispute is likewise an intra-corporate controversy
between and among the majority and minority stockholders as to the transfer and disposition of the controlling shares of the corporation, failing under
paragraph (b). As stressed by the Court in DMRC Enterprises v. Este del Sol Mountain Reserve, Inc, 7 Considering the announced policy of PD 902-A,
the expanded jurisdiction of the respondent Securities and Exchange Commission under said decree extends exclusively to matters arising from
contracts involving investments in private corporations, partnerships and associations." The dispute also concerns the fundamental issue ofwhether the
Bragas or Telectronics have the right to elect the corporate directors and officers and manage its business and operations, which falls under paragraph
(c).
5. Most of the cases that have come to this Court involve those under paragraph (b), i.e. whether the controversy is an intra-corporate one, arising
"between and among stockholders" or "between any or allof them and the corporation." The parties have focused their arguments on this question. The
Bragas' contention in his field must likewise fail. In Philex Mining Corp. v. Reyes, 8 the Court spelled out that"'an intra-corporate controversy is one
which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exemption whatsoever. The provision is broad
and covers all kinds of controversies between stockholders and corporations. The issue of whether or not a corporation is bound to replace a
stockholder's lost certificate of stock is a matter purely between a stockholder and the corporation. It is a typical intra-corporate dispute. The quqsjion of
damage's raised is merely incidental to that main issue. The Court rejected the stockholders' theory of excluding his complaint (for replacement of a lost
stock [dividend] certificate which he claimed to have never received) from the classification of intra-corporate controversies as one that "does not
square with the intent of the law, which is to segregate from the general jurisdiction of regular Courts controversies involving corporations and their
stockholders and to bring them to the SEC for exclusive resolution, in much the same way that labor disputes are now brought to the Ministry-of Labor
and Employment (MOLE) and the National Labor Relations Commission (NLRC), and not to the Courts."
(a) The Bragas contend that Telectronics, as buyertransferee of the 56% majority shares is not a registered stockholder, because
they, through their son the corporate secretary, appear to have refused to perform "the ministerial duty of recording transfers of
shares of stock of the corporation of which he is the secretary," and that the dispute is therefore, not an intracorporate one. This
contention begs the question which must properly be resolved by the SEC, but which they would prevent by their own act, through
their son, of blocking the due recording of the transfer and cannot be sanctioned. It can be seen from their very complaint in the
regular courts that they with their two sons constituting the plaintiffs are all stockholders while the defendants are the Abejos who
are also stockholders whose sale of the shares to Telectronics they would annul.
(b) There can be no question that the dispute between the Abejos and the Bragas as to the sale and transfer of the former's shares
to Telectronics for P5 million is an intracorporate one under section 5 (b), prescinding from the applicability of section 5 (a) and (c),
(supra, par. 4) lt is the SEC which must resolve the Bragas' claim in their own complaint in the court case filed by them of an alleged
pre-emptive right to buy the Abejos' shares by virtue of "on-going negotiations," which they may submit as their defense to the
mandamus petition to register the sale of the shares to Telectronics. But asserting such preemptive rights and asking that the same
be enforced is a far cry from the Bragas' claim that "the case relates to questions of ownership" over the shares in question. 9 (Not
to mention, as pointed out by the Abejos, that the corporation is not a close corporation, and no restriction over the free
transferability of the shares appears in the Articles of Incorporation, as well as in the by-laws 10 and the certificates of stock
themselves, as required by law for the enforcement of such restriction. See Go Soc & Sons, etc. v. IAC, G.R. No. 72342, Resolution
of February 19, 1987.)
(c) The dispute between the Bragas and Telectronics as to the sale and transfer for P1,674,450.00 of Virginia Braga's 63.000 shares
covered by Street certificates duly endorsed in blank by her is within the special competence and jurisdiction of the SEC, dealing as
it does with the free transferability of corporate shares, particularly street certificates," as guaranteed by the Corporation Code and
its proclaimed policy of encouraging foreign and domestic investments in Philippine private corpora. tions and more active public
participation therein for the Promotion of economic development. Here again, Virginia Braga's claim of loss of her street certificates
11 or theft thereof (denounced by Telectronics as 11 perjurious" 12 ) must be pleaded by her as a defense against
Telectronics'petition for mandamus and recognition now as the controlling stockholder of the corporation in the light of the joint
affidavit of Geneml Cerefino S. Carreon of the National Telecommunications Commission and private respondent Jose Luis Santiago
of Telectronics narrating the facts and circumstances of how the former sold and delivered to Telectronics on behalf of his
compadres, the Bragas, Virginia Braga's street certificates for 63,000 shares equivalent to 18% of the corporation's outstanding
stock and received the cash price thereof. 13 But as to the sale and transfer of the Abejos' shares, the Bragas cannot oust the SEC
of its original and exclusive jurisdiction to hear and decide the case, by blocking through the corporate secretary, their son, the due
recording of the transfer and sale of the shares in question and claiming that Telectronics is not a stockholder of the corporation
which is the very issue that the SEC is called upon to resolve. As the SEC maintains, "There is no requirement that a stockholder of
a corporation must be a registered one in order that,the Securities and Exchange Commission may take cognizance of a suit seeking
to enforce his rights as such stockholder." 14 This is because the SEC by express mandate has "absolute jurisdiction, supervision
and control over all corporations" and is called upon to enforce the provisions of the Corporation Code, among which is the stock
purchaser's right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. Needless to
say, any problem encountered in securing the certificates of stock representing the investment made by the buyer must be
expeditiously dealt with through administrative mandamus proceedings with the SEC, rather than through the usual tedious regular
court procedure. Furthermore, as stated in the SEC order of April 13, 1983, notice given to the corporation of the sale of the shares
and presentation of the certificates for transfer is ,equivalent to registration: "Whether the refusal of the (corporation) to effect the
same is ivalid or not is still subject to the outcome of the hearing on the merits of the case. 15
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and boards the power to resolve specialized
disputes in the field of labor (as in corporations, public transportation and public utilities) ruled that Congress in requiring the Industrial Court's
intervention in the resolution of labor-management controversies likely to cause strikes or lockouts meant such jurisdiction to be exclusive, although it
did not so expressly state in the law. The Court held that under the "sense-making and expeditious doctrine of primary jurisdiction ... the courts cannot
or will n6t determine a controversy involving a question which is within the jurisdiction of an administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the special knowledge, experience, and seruices of the administratiue tribunal to determine
technical and intricate matters of fact, and a uniformity of ruling is essential to comply uith the purposes of the regulatory statute administered " 16
In this era of clogged court dockets, the need for specialized administrative boards or commissions with the special knowledge, experience and
capability to hear and determine promptly disputes on technical matters or essentially factual matters, subject to judicial review in case of grave abuse
of discretion, has become well nigh indispensable. Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a
court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been committed to the view that unless the law speaks
clearly and unequivocably, the choice should fall on [an administrative agency.]' " 17 The Court in the earlier case of Ebon vs. De Guzman 18 noted
that the lawmaking authority, in restoring to the labor arbiters and the NLRC their jurisdiction to award all kinds of damages in labor cases, as against
the previous P.D. amendment splitting their jurisdiction with the regular courts, "evidently ... had second thoughts about depriving the Labor Arbiters
and the NLRC of the jurisdiction to award damages in labor cases because that setup would mean duplicity of suits, splitting the cause of action and
possible conflicting findings and conclusions by two tribunals on one and the same claim."
7. Thus, the Corporation Code (B.P. No. 178) enacted on May 1, 1980 specifically vests the SEC with the Rule-making power in the discharge of its task
of implementing the provisions of the Code and particularly charges it with the duty of preventing fraud and abuses on the part of controlling
stockholders, directors and officers, as follows:
SEC. 143. Rule-making power of the Securities and Exchange Commission. The Securities and Exchange Commission shall have
the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to
enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers. (Emphasis supplied)
The dispute between the contending parties for control of thecorporation manifestly fans within the primary and exclusive jurisdiction of the SEC in
whom the law has reserved such jurisdiction as an administrative agency of special competence to deal promptly and expeditiously therewith.
As the Court stressed in Union Glass & Container Corp. v. SEC, 19 "This grant of jurisdiction [in Section 51 must be viewed in the light of the nature and
functions of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter 'absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are grantees of primary franchise and/or license or permit issued by the government to operate in the
Philippines ... The principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that
investment in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development.
"It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law explicitly specified and delin-dted its jurisdiction to
matters intrinsically connected with the regulation of corporations, partnerships and associations and those dealing with the internal affairs of such
corporations, partnerships or associations.
"Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: [al between
the corporation, partnership or association and the public; [b] between the corporation, partnership or association and its stockholders, partners,
members, or officers; [c] between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is
concerned; and Id] among the stockholders, partners or associates themselves." 20
Parenthetically, the cited case of Union Glass illustrates by way of contrast what disputes do not fall within the special jurisdiction of the SEC. In this
case, the SEC had properly assumed jurisdiction over the dissenting stockholders' com. Plaint against the corporation Pioneer Glass questioning its
dacion en pago of its glass plant and all its assets in favor of the DBP which was clearly an intra-corporate controversy dealing with its internal affairs.
But the Court held that the SEC had no jurisdiction over petitioner Union Glass Corp., imPle,aded as third party purchaser of the plant from DBP in the
action to annul the dacion en pago. The Court held that such action for recovery of the glass plant could be brought by the dissenting stockholder to the
regular courts only if and when the SE C rendered final judgment annulling the dacion en pago and furthermore subject to Union Glass' defenses as a
third party buyer in good faith. Similarly, in the DMRC case, therein petitioner's,tomplaint for collection of the amounts due to it as payment of rentals
for the lease of its heavy equipment in the form mainly of cash and part in shares of stock of the debtor-defendant corporation was held to be not
covered by the SEC's exclusive jurisdiction over intracorporate disputes, since "to pass upon a money claim under a lease contract would be beyond the
competence Of the Securities and Exchange Commission and to separate the claim for money from the claim for shares of stock would be splitting a
single cause of action resulting in a multiplicity of suitS." 21 Such an action for collection of a debt does not involve enforcement Of rights and
obligations under the Corporation Code nor the in. temal or intracorporate affairs of the debtor corporation. But in aR disputes affecting and dealing
With the interests of the corporation and its stockholders, following the trend and clear legislative intent of entmsting all disputes of a specialized nature
to administrative agencies possessing. the requisite competence, special knowledge, experience and services and facilities to expeditiously resolve them
and determine the essential facts including technical and intricate matters, as in labor and public utilities rates disputes, the SEC has been given "the
original and exclusive jurisdiction to hear anddecide" them (under section 5 of P.D. 902-A) "in addition to [its] regulatory and adjudicative functions"
(under Section 3, vesting in it "absolute jurisdiction, supervision and control over all corporations" and the Rule-making power granted it in Section 143
of the Corporation Code, supra). As stressed by the Court in the Philex case, supra, "(T)here is no distinction, qualification, nor any exemption
whatsoever. The provision is broad and covers all kinds of controversies between stockholders and corporations."
It only remains now to deal with the Order dated April 15, 1983 (Annex H, Petition) 22 of the SEC's three-member Hearing Conunittee granting
Telectronics' motion for creation of a receivership or management committee with the ample powers therein enumerated for the preservation pendente
lite of the corporation's assets and in discharge of its "power and duty to preserve the rights of the parties, the stockholders, the public availing of the
corporation's services and the rights of creditors," as well as "for reasons of equity and justice ... (and) to prevent possible paralization of corporate
business." The said Order has not been implemented notwithstanding its having been upheld per the SEC en banc's Order of May 15, 1984 (Annex "V",
Petition) dismissing for lack of merit the petition for certiorari, prohibition and mandamus with prayer for restraining order or injunction filed by the
Bragas seeking the disbandment of the Hearing Committee and the setting aside of its Orders, and its Resolution of August 9, 1984, denying
reconsideration (Annex "X", Petition), due to the Bragas' filing of the petition at bar.
Prescinding from the great concern of damage and prejudice expressed by Telectronics due to the Bragas having remained in control of the corporation
and having allegedly committed acts of gross mismanagement and misapplication of funds, the Court finds that under the facts and circumstances of
record, it is but fair and just that the SEC's order creating a receivership committee be implemented forthwith, in accordance with its terms, as follows:
The three-man receivership committee shall be composed of a representative from the commission, in the person of the Director,
Examiners and Appraisers Department or his designated representative, and a representative from the petitioners and a
representative of the respondent.
The petitioners and respondent are therefore directed to sub. mit to the Commission the name of their designated representative
within three (3) days from receipt of this order. The Conunission shall appoint the other representatives if either or both parties fafl
to comply with the requirement within the stated time.
ACCORDINGLY, judgment is hereby rendered:
(a) Granting the petition in G.R. No. 63558, annulling the challenged Orders of respondent Judge clated February 14, 1983 and
March i 1, 1983 (Annexes "L" and "P" of the Abejos' petition) and prohibiting respondent Judge from further proceeding in Civil Case
No. 48746 filed in his Court other than to dismiss the same for lack or jurisdiction over the subject-matter;
(b) Dismissing the petition in G.R. Nos. 68450-51 and lifting the temporary restraining order issued on September 24, 1984,
effective immediately upon promulgation hereof,
(c) Directing the SEC through its Hearing Committee to proceed immediately with hearing and resolving the pending mandamus
petition for recording in the corporate books the transfer to Telectronics and its nominees of the majority (56%) shares of stock of
the corporation Pocket Bell pertaining to the Abejos and Virginia Braga and all related issues, taking into consideration, without need
of resubmittal to it, the pleadings, annexes and exhibits filed by the contending parties in the cases at bar; and
(d) Likewise directing the SEC through its Hearing Committee to proceed immediately with the implementation of its receivership or
management committee Order of April 15, 1983 in SEC Case No. 2379 and for the purpose, the contending parties are ordered to
submit to said Hearing Committee the name of their designated representatives in the receivership/management committee within
three (3) days from receipt of this decision, on pain of forfeiture of such right in case of failure to comply herewith, as provided in
the said Order; and ordering theBragas to perform only caretaker acts in the corporation pending the organization of such
receivership/management committee and assumption of its functions.
This decision shall be immediately executory upon its promulgation.
SO ORDERED.
G.R. No. 87135 May 22, 1992
ALMA MAGALAD, petitioner,

vs.
PREMIERE FINANCING CORP., respondent.
PARAS, J.:
This is an appeal originally filed with the Court of Appeals but certified to this court for disposition since it involves purely questions of law from the
decision of the Regional Trial Court (RTC), Branch LXXXV, Quezon City, dated May 22, 1984, in Civil Case No. Q-40392, ordering the defendant-
appellant Premiere Financing Corporation (Premiere for short) to pay to the plaintiff-appellee Alma Magalad (Magalad for short) the sum of:
(a) P50,000.00, the principal obligation, plus interest at the legal rate from September 12, 1983, until the full amount is paid; (b) P10,000.00, both for
moral and exemplary damages; (c) P5,000.00, for and as attorney's fees and (d) the costs of suit.
The antecedent facts of the case are as follows:
Premiere is a financing company engaged in soliciting and accepting money market placements or deposits (Original Record, p. 29).
On September 12, 1983 with expired permit to issue commercial papers ( Ibid., p. 8) and with intention not to pay or defraud its creditors, Premiere
induced and misled Magalad into making a money market placement of P50,000.00 at 22% interest per annum for which it issued a receipt ( Ibid., Exh.
"B", p. 8). Aside from the receipt, Premier likewise issued two (2) post-dated checks in the total sum of P51,079.00 ( Ibid., Exh. "C", p. 9) and assigned
to Magalad its receivable from a certain David Saman for the same amount ( Ibid., Exh. "C", p. 10).
When the said checks were presented for payment on their due dates, the drawee bank dishonored the checks for lack of sufficient funds to cover the
amount (Ibid., Exhs. "D-1", "E-1", pp. 11-12). Despite demands by Magalad for the replacement of said checks with cash, Premiere, for no valid reason,
failed and refused to honor such demands and due to fraudulent acts of Premiere, Magalad suffered sleepless nights, mental anguish, fright, serious
anxiety, considering the fact that the money she invested is blood money and is the only source of support for her family ( Ibid., p. 4).
Magalad in order to seek redress and retrieve her blood money, availed of the service of counsel for which she agreed to pay twenty percent (20%) of
the amount due as and for attorney's fees (Ibid.)
On January 10, 1984, Magalad filed a complaint for damages with prayer for writ of preliminary attachment with the RTC, Branch LXXXV, Quezon City,
docketed as Civil Case No. Q-40392 against herein Premiere ( Ibid., p. 3-6).
Premiere having failed to file an answer and acting on Magalad's motion, the lower court declared Premiere in default by virtue of an order dated April
5, 1984 allowing Magalad to present evidence ex-parte (Ibid., pp. 21; 22)
On May 22, 1984 the lower court rendered a default judgment against Premiere, the dispositive portion of which reads:
From the foregoing evidence, the court finds that plaintiff has fully established her claim that defendant had indeed acted
fraudulently in incurring the obligation and considering that no evidence has been adduced by the defendant to contradict the same,
judgment is hereby rendered ordering the defendant to pay plaintiff as follows:
(a) P50,000.00, the principal obligation, plus interest at the legal rate from September 12, 1983 until the full amount is paid;
(b) P10,000.00 both for moral and exemplary damages;
(c) P5,000.00 for and as attorney's fees; and
(d) the costs of suit.
SO ORDERED. (Ibid., p. 30)
Premiere filed a motion for reconsideration of the foregoing decision, based principally on a question of law alleging that the Securities and Exchange
Commission (SEC) has exclusive and original jurisdiction over a corporation under a state of suspension of payments ( Ibid., pp. 32-41).
Magalad filed an opposition to the motion for reconsideration on January 8, 1985 alleging among others that the regular court has jurisdiction over the
case to the exclusion of the SEC. (Ibid., pp. 51-53).
On May 28, 1986 the lower court issued an order denying the motion for reconsideration ( Ibid., p. 61).
On June 11, 1986 Premiere filed his notice of appeal which led to the issuance of the order of the lower court dated July 29, 1986 elevating the case to
the Court of Appeals (CA) (Ibid., pp. 62-63).
The Court of Appeals in its resolution dated September 8, 1987 dismissed the case for failure of Premiere to file its brief despite the ninety-day
extension granted to it, which expired on June 10, 1987 (Rollo, p. 16).
An omnibus motion for reconsideration and admission of late filing of Premiere's brief was filed on September 22, 1987 ( Rollo, pp. 17-19; 32).
On September 30, 1987 the Court of Appeals issued a resolution which reconsidered its previous resolution dated September 5, 1987 and admitted the
Premiere's brief (Rollo, p. 26).
On January 31, 1989 the Court of Appeals issued a resolution certifying the instant case to this Court on the ground that the case involves a question of
law, the dispositive part of which stating:
ACCORDINGLY, pursuant to Rule 50, Sec. 3, in relation to the Judiciary Act of 1948, Sec. 17, par. 4(3) (4), the Appeal in this case is
hereby certified to the Supreme Court on the ground that the only issue raised concerns the jurisdiction of the trial court and only a
question of law. (Rollo, p. 33)
Hence, this appeal.
The pivotal issue in this case is whether or not the court a quo had jurisdiction to try the instant case.
At the very core of this appeal assailing the aforesaid pronouncement of the lower court, and around which revolve the arguments of the parties, is the
applicability of Presidential Decree No. 902-A (Reorganization of the SEC with Additional Powers), as amended by Presidential Decrees Nos. 1653, 1758
and 1799. Magalad submits that the legal suit which she has brought against Premiere is an ordinary action for damages with the preliminary
attachment cognizable solely by the RTC. Premiere, on the other hand, espouses the original and exclusive jurisdiction of the Securities and Exchange
Commission.
Presidential Decree No. 902-A, Section 3, provides:

Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations,
who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines; and in
the exercise of its authority, it shall have the power to enlist the aid and support of and to deputize any and all enforcement
agencies of the government, civil or military as well as any private institution, corporation, firm, association or person. (As amended
by Presidential Decree No. 1758).
Sec. 3 of Pres. Decree No. 902-A should also be read in conjunction with Sec. 5 of the same law, providing:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as expressly granted under the existing laws and decrees, it shall
have original and exclusive jurisdiction to hear and decide cases involving:
a) Devises or schemes employed by or any acts of the Board of Directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the public and/or to the
stockholders, partners, members of associations or organizations registered with the Commission. (Emphasis
supplied)
Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and misrepresentation committed by Premiere, the SEC must be held
to retain its original and exclusive jurisdiction over the case, despite the fact that the suit involves collection of sums of money paid to said corporation,
the recovery of which would ordinarily fall within the jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public and,
therefore, encompasses a category of relationship within the SEC jurisdiction.
Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between
the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners,
members or officers; (c) between the corporation, partnership or association and the state so far as its franchise, permit or license to operate is
concerned; and (d) among the stockholders, partners or associates themselves (Union Glass & Container Corp. v. SEC, 126 SCRA 31; 38; 1983; Abejo v.
De la Cruz, 149 SCRA 654, 1987).
In this case, the recitals of the complaint sufficiently allege that devices or schemes amounting to fraud and misrepresentation detrimental to the
interest of the public have been resorted to by Premiere Corporation. It can not but be conceded, therefore, that the SEC may exercise its adjudicative
powers pursuant to Sec. 5(a) of Pres. Decree No. 902-A ( Supra).
The fact that Premiere's authority to engage in financing already expired will not have the effect of divesting the SEC of its original and exclusive
jurisdiction. The expanded jurisdiction of the SEC was conceived primarily to protect the interest of the investing public. That Magalad's money
placements were in the nature of investments in Premiere can not be gainsaid. Magalad had reasonably expected to receive returns from moneys she
had paid to Premiere. Unfortunately, however, she was the victim of alleged fraud and misrepresentation.
Reliance by Magalad on the cases of DMRC v. Este del Sol, (132 SCRA 293) and Union Glass & Container Corp. v. SEC (126 SCRA 31), where the
jurisdiction of the ordinary Courts was upheld, is misplaced for, as explicitly stated in those cases, nowhere in the complaints therein is found any
averment of fraud or misrepresentation committed by the respective corporations involved. The causes of action, therefore, were nothing more than
simple money claims.
Further bolstering the jurisdiction of the SEC in this case is the fact that said agency had already appointed a Rehabilitation Receiver for Premiere and
has directed all proceedings or claims against it be suspended. This, pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing that "upon appointment
of a . . . rehabilitation receiver . . . all actions for claims against corporations . . . under receivership pending before any court, tribunal, board or body
shall be suspended accordingly."
By so doing, SEC has exercised its original and exclusive jurisdiction to hear and decide cases involving:
a) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the
corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting
them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover
its liabilities but is under the management of a Rehabilitation Receiver or Management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree. (Section 5(d) of Pres. Decree No. 902-A as added by Pres. Decree 1758).
In fine, the adjudicative powers of the SEC being clearly defined by law, its jurisdiction over this case has to be upheld.
PREMISES CONSIDERED, the instant appeal is GRANTED, and the order of the Presiding Judge of the Regional Trial Court, Quezon City, Branch LXXXV
dated May 22, 1984, in Civil Case No. Q-40392 is REVERSED and SET ASIDE, without prejudice to the filing by Alma Magalad of the appropriate
complaint against Premiere Financing Corporation with the Securities and Exchange Commission.
SO ORDERED.
G.R. No. L-12719 May 31, 1962
THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.

V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal Revenue, assessing against and
demanding from the "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly
due from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation organized under the laws of the
Philippines with an original authorized capital stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar,
operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no
prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y denominacion cualquiera para el recreo y
entrenamiento saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-
laws is there a provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after
paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a bar-restaurant where it sells
wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of
the club and its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to
defray its overhead expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from the re-valuation of its real properties,
the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a
BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and B-
7 licenses. In a letter dated December 22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club, the following sums:
As percentage tax on its gross receipts

during the tax years 1946 to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946 to 1952 70.00
Compromise penalty 500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for
review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage taxes and surcharges prescribed in sections
182, 183 and 191 of the Tax Code, under which the assessment was made, in connection with the operation of its bar and restaurant, during the
periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay
in full a fixed annual tax of ten pesos for each calendar year or fraction thereof in which such person shall engage in said business." Section 183
provides in general that "the percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the
business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment
parlors and other eating places shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are served five per centum of
their gross receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by
mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper
and restaurateur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive,
and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or
livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959,
giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the
facts of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and
entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable
Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered
only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail
from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to
reason that the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making
enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental
to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club
makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus (Jesus
Sacred Heart College v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct.
23, 1956).1wph1.t
It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock corporation. This is unmeritorious. The facts
that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the
business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as
stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the
business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced,
the Tax Court concluded that the Club is not engaged in the business as a barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to
distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case
at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly
speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock organizations, unless the intent to the
contrary is manifest and patent" (Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not liable
for fixed and percentage taxes, it follows that it is not liable for any penalty, much less of a compromise penalty.
WHEREFORE, the decision appealed from is affirmed without costs.
G.R. No. 91889 August 27, 1993
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND NEPOMUCENO REDOVAN, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO AND CASTRENSE
C. VELOSO, respondents.
Virgilio E. Dulay for petitioners.

Torres, Tobias, Azura & Jocson for private respondents.
NOCON, J.:
This is a petition for review on certiorari to annul and set aside the decision 1 of the Court of Appeals affirming the decision2 of the Regional Trial Court
of Pasay, Branch 114 Civil Cases Nos. 8198-P, and 2880-P, the dispositive portion of which reads, as follows:
Wherefore, in view of all the foregoing considerations, in this Court hereby renders judgment, as follows:
In Civil Case No. 2880-P, the petition filed by Manuel R. Dulay Enterprises, Inc. and Virgilio E. Dulay for annulment or declaration of
nullity of the decision of the Metropolitan Trial Court, Branch 46, Pasay City, in its Civil Case No. 38-81 entitled "Edgardo D. Pabalan,
et al., vs. Spouses Florentino Manalastas, et al.," is dismissed for lack of merits;
In Civil Case No. 8278-P, the complaint filed by Manuel R. Dulay Enterprises, Inc. for cancellation of title of Manuel A. Torres, Jr.
(TCT No. 24799 of the Register of Deeds of Pasay City) and reconveyance, is dismissed for lack or merit, and,
In Civil Case No. 8198-P, defendants Manuel R. Dulay Enterprises, Inc. and Virgilio E. Dulay are ordered to surrender and deliver
possession of the parcel of land, together with all the improvements thereon, described in Transfer Certificate of Title No. 24799 of
the Register of Deeds of Pasay City, in favor of therein plaintiffs Manuel A. Torres, Jr. as owner and Edgardo D. Pabalan as real
estate administrator of said Manuel A. Torres, Jr.; to account for and return to said plaintiffs the rentals from dwelling unit No. 8-A
of the apartment building (Dulay Apartment) from June 1980 up to the present, to indemnify plaintiffs, jointly and severally,
expenses of litigation in the amount of P4,000.00 and attorney's fees in the sum of P6,000.00, for all the three (3) cases. Co-
defendant Nepomuceno Redovan is ordered to pay the current and subsequent rentals on the premises leased by him to plaintiffs.
The counterclaim of defendants Virgilio E. Dulay and Manuel R. Dulay Enterprises, Inc. and N. Redovan, dismissed for lack of merit.
With costs against the three (3) aforenamed defendants. 3
The facts as found by the trial court are as follows:
Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation with the following as members of its Board of Directors: Manuel R. Dulay with
19,960 shares and designated as president, treasurer and general manager, Atty. Virgilio E. Dulay with 10 shares and designated as vice-president;
Linda E. Dulay with 10 shares; Celia Dulay-Mendoza with 10 shares; and Atty. Plaridel C. Jose with 10 shares and designated as secretary, owned a
property covered by TCT No. 17880 4 and known as Dulay Apartment consisting of sixteen (16) apartment units on a six hundred eighty-nine (689)
square meters lot, more or less, located at Seventh Street (now Buendia Extension) and F.B. Harrison Street, Pasay City.
Petitioner corporation through its president, Manuel Dulay, obtained various loans for the construction of its hotel project, Dulay Continental Hotel (now
Frederick Hotel). It even had to borrow money from petitioner Virgilio Dulay to be able to continue the hotel project. As a result of said loan, petitioner
Virgilio Dulay occupied one of the unit apartments of the subject property since property since 1973 while at the same time managing the Dulay
Apartment at his shareholdings in the corporation was subsequently increased by his father. 5
On December 23, 1976, Manuel Dulay by virtue of Board Resolution

No 186 of petitioner corporation sold the subject property to private respondents spouses Maria Theresa and Castrense Veloso in the amount of
P300,000.00 as evidenced by the Deed of Absolute Sale.7 Thereafter, TCT No. 17880 was cancelled and TCT No. 23225 was issued to private
respondent Maria Theresa Veloso. 8 Subsequently, Manuel Dulay and private respondents spouses Veloso executed a Memorandum to the Deed of
Absolute Sale of December 23, 1976 9 dated December 9, 1977 giving Manuel Dulay within (2) years or until December 9, 1979 to repurchase the
subject property for P200,000.00 which was, however, not annotated either in TCT No. 17880 or TCT No. 23225.
On December 24, 1976, private respondent Maria Veloso, without the knowledge of Manuel Dulay, mortgaged the subject property to private
respondent Manuel A. Torres for a loan of P250,000.00 which was duly annotated as Entry No. 68139 in TCT No. 23225. 10
Upon the failure of private respondent Maria Veloso to pay private respondent Torres, the subject property was sold on April 5, 1978 to private
respondent Torres as the highest bidder in an extrajudicial foreclosure sale as evidenced by the Certificate of Sheriff's Sale 11 issued on April 20, 1978.
On July 20, 1978, private respondent Maria Veloso executed a Deed of Absolute Assignment of the Right to Redeem 12 in favor of Manuel Dulay
assigning her right to repurchase the subject property from private respondent Torres as a result of the extra sale held on April 25, 1978.
As neither private respondent Maria Veloso nor her assignee Manuel Dulay was able to redeem the subject property within the one year statutory period
for redemption, private respondent Torres filed an Affidavit of Consolidation of Ownership 13 with the Registry of Deeds of Pasay City and TCT No.
24799 14 was subsequently issued to private respondent Manuel Torres on April 23, 1979.
On October 1, 1979, private respondent Torres filed a petition for the issuance of a writ of possession against private respondents spouses Veloso and
Manuel Dulay in LRC Case No. 1742-P. However, when petitioner Virgilio Dulay was never authorized by the petitioner corporation to sell or mortgage
the subject property, the trial court ordered private respondent Torres to implead petitioner corporation as an indispensable party but the latter moved
for the dismissal of his petition which was granted in an Order dated April 8, 1980.
On June 20, 1980, private respondent Torres and Edgardo Pabalan, real estate administrator of Torres, filed an action against petitioner corporation,
Virgilio Dulay and Nepomuceno Redovan, a tenant of Dulay Apartment Unit No. 8-A for the recovery of possession, sum of money and damages with
preliminary injunction in Civil Case, No. 8198-P with the then Court of First Instance of Rizal.
On July 21, 1980, petitioner corporation filed an action against private respondents spouses Veloso and Torres for the cancellation of the Certificate of
Sheriff's Sale and TCT No. 24799 in Civil Case No. 8278-P with the then Court of First Instance of Rizal.
On January 29, 1981, private respondents Pabalan and Torres filed an action against spouses Florentino and Elvira Manalastas, a tenant of Dulay
Apartment Unit No. 7-B, with petitioner corporation as intervenor for ejectment in Civil Case No. 38-81 with the Metropolitan Trial Court of Pasay City
which rendered a decision on April 25, 1985, dispositive portion of which reads, as follows:
Wherefore, judgment is hereby rendered in favor of the plaintiff (herein private respondents) and against the defendants:
1. Ordering the defendants and all persons claiming possession under them to vacate the premises.
2. Ordering the defendants to pay the rents in the sum of P500.000 a month from May, 1979 until they shall have vacated the
premises with interest at the legal rate;
3. Ordering the defendants to pay attorney's fees in the sum of P2,000.00 and P1,000.00 as other expenses of litigation and for
them to pay the costs of the suit.15
Thereafter or on May 17, 1985, petitioner corporation and Virgilio Dulay filed an action against the presiding judge of the Metropolitan Trial Court of
Pasay City, private respondents Pabalan and Torres for the annulment of said decision with the Regional Trial Court of Pasay in Civil Case No. 2880-P.
Thereafter, the three (3) cases were jointly tried and the trial court rendered a decision in favor of private respondents.
Not satisfied with said decision, petitioners appealed to the Court of Appeals which rendered a decision on October 23, 1989, the dispositive portion of
which reads, as follows:
PREMISES CONSIDERED, the decision being appealed should be as it is hereby AFFIRMED in full. 16
On November 8, 1989, petitioners filed a Motion for Reconsideration which was denied on January 26, 1990.
Hence, this petition.
During the pendency of this petition, private respondent Torres died on April 3, 1991 as shown in his death certificate 17 and named Torres-Pabalan
Realty & Development Corporation as his heir in his holographic will 18 dated October 31, 1986.
Petitioners contend that the respondent court had acted with grave abuse of discretion when it applied the doctrine of piercing the veil of corporate
entity in the instant case considering that the sale of the subject property between private respondents spouses Veloso and Manuel Dulay has no
binding effect on petitioner corporation as Board Resolution No. 18 which authorized the sale of the subject property was resolved without the approval
of all the members of the board of directors and said Board Resolution was prepared by a person not designated by the corporation to be its secretary.
We do not agree.
Section 101 of the Corporation Code of the Philippines provides:
Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws provide otherwise, any action by the directors
of a close corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the directors, or
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied acquiese of all the stockholders, or
4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in
writing.
If a directors' meeting is held without call or notice, an action taken therein within the corporate powers is deemed ratified by a
director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having
knowledge thereof.
In the instant case, petitioner corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of
the subject property is not necessary to bind the corporation for the action of its president. At any rate, corporate action taken at a board meeting
without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the
secretary of the corporation after having knowledge of the meeting which, in his case, petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which has a personality distinct and separate from its individual stockholders or members,
19 the veil of corporate fiction may be pierced when it is used to defeat public convenience justify wrong, protect fraud or defend crime. 20 The
privilege of being treated as an entity distinct and separate from its stockholder or members is therefore confined to its legitimate uses and is subject to
certain limitations to prevent the commission of fraud or other illegal or unfair act. When the corporation is used merely as an alter ego or business
conduit of a person, the law will regard the corporation as the act of that person. 21 The Supreme Court had repeatedly disregarded the separate
personality of the corporation where the corporate entity was used to annul a valid contract executed by one of its members.
Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private respondents spouses Veloso is null and void as the
alleged Board Resolution No. 18 was passed without the knowledge and consent of the other members of the board of directors cannot be sustained. As
correctly pointed out by the respondent Court of Appeals:
Appellant Virgilio E. Dulay's protestations of complete innocence to the effect that he never participated nor was even aware of any
meeting or resolution authorizing the mortgage or sale of the subject premises (see par. 8, affidavit of Virgilio E. Dulay, dated May
31, 1984, p. 14, Exh. "21") is difficult to believe. On the contrary, he is very much privy to the transactions involved. To begin with,
he is a incorporator and one of the board of directors designated at the time of the organization of Manuel R. Dulay Enterprise, Inc.
In ordinary parlance, the said entity is loosely referred to as a "family corporation". The nomenclature, if imprecise, however, fairly
reflects the cohesiveness of a group and the parochial instincts of the individual members of such an aggrupation of which Manuel
R. Dulay Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father
whose name identifies their corporation (Articles of Incorporation of Manuel R. Dulay Enterprises, Inc. Exh. "31-A"). 22
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit 23 that he was a signatory witness to the execution of the post-
dated Deed of Absolute Sale of the subject property in favor of private respondent Torres indicates that he was aware of the transaction executed
between his father and private respondents and had, therefore, adequate knowledge about the sale of the subject property to private respondents.
Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to private respondents by Manuel Dulay is
valid and binding. As stated by the trial court:
. . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V. Veloso and Castrense C. Veloso, was a
corporate act of the former and not a personal transaction of Manuel R. Dulay. This is so because Manuel R. Dulay was not only
president and treasurer but also the general manager of the corporation. The corporation was a closed family corporation and the
only non-relative in the board of directors was Atty. Plaridel C. Jose who appeared on paper as the secretary. There is no denying
the fact, however, that Maria Socorro R. Dulay at times acted as secretary. . . ., the Court can not lose sight of the fact that the
Manuel R. Dulay Enterprises, Inc. is a closed family corporation where the incorporators and directors belong to one single family. It
cannot be concealed that Manuel R. Dulay as president, treasurer and general manager almost had absolute control over the
business and affairs of the corporation. 24
Moreover, the appellate courts will not disturb the findings of the trial judge unless he has plainly overlooked certain facts of substance and value that, if
considered, might affect the result of the case, 25 which is not present in the instant case.
Petitioners' contention that private respondent Torres never acquired ownership over the subject property since the latter was never in actual
possession of the subject property nor was the property ever delivered to him is also without merit.
Paragraph 1, Article 1498 of the New Civil Code provides:
When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is
the object of the contract, if from the deed the contrary do not appear or cannot clearly be inferred.
Under the aforementioned article, the mere execution of the deed of sale in a public document is equivalent to the delivery of the property. Likewise,
this Court had held that:
It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during
the period of one year after the registration of the sale. As such, he is entitled to the possession of the said property and can
demand it at any time following the consolidation of ownership in his name and the issuance to him of a new transfer certificate of
title. The buyer can in fact demand possession of the land even during the redemption period except that he has to post a bond in
accordance with Section 7 of Act No. 3133 as amended. No such bond is required after the redemption period if the property is not
redeemed. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. 26
Therefore, prior physical delivery or possession is not legally required since the execution of the Deed of Sale in deemed equivalent to delivery.
Finally, we hold that the respondent appellate court did not err in denying petitioner's motion for reconsideration despite the fact that private
respondents failed to submit their comment to said motion as required by the respondent appellate court from resolving petitioners' motion for
reconsideration without the comment of the private respondent which was required merely to aid the court in the disposition of the motion. The courts
are as much interested as the parties in the early disposition of cases before them. To require otherwise would unnecessarily clog the courts' dockets.
WHEREFORE, the petition is DENIED and the decision appealed from is hereby AFFIRMED.
SO ORDERED.
[G.R. Nos. 84132-33 : December 10, 1990.]
192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., Petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO SHERIFF
and GODOFREDO QUILING, in his capacity as Deputy Sheriff of Calamba, Laguna , Respondents.
DECISION
CRUZ, J.:
This case involves the constitutionality of a presidential decree which, like all other issuances of President Marcos during his regime, was at that time
regarded as sacrosanct. It is only now, in a freer atmosphere, that his acts are being tested by the touchstone of the fundamental law that even then
was supposed to limit presidential action.: rd
The particular enactment in question is Pres. Decree No. 1717, which ordered the rehabilitation of the Agrix Group of Companies to be administered
mainly by the National Development Company. The law outlined the procedure for filing claims against the Agrix companies and created a Claims
Committee to process these claims. Especially relevant to this case, and noted at the outset, is Sec. 4(1) thereof providing that "all mortgages and other
liens presently attaching to any of the assets of the dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine Veterans Bank a real estate mortgage dated July 7,
1978, over three (3) parcels of land situated in Los Baos, Laguna. During the existence of the mortgage, AGRIX went bankrupt. It was for the
expressed purpose of salvaging this and the other Agrix companies that the aforementioned decree was issued by President Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee for the payment of its loan credit. In the meantime, the New
Agrix, Inc. and the National Development Company, petitioners herein, invoking Sec. 4 (1) of the decree, filed a petition with the Regional Trial Court of
Calamba, Laguna, for the cancellation of the mortgage lien in favor of the private respondent. For its part, the private respondent took steps to
extrajudicially foreclose the mortgage, prompting the petitioners to file a second case with the same court to stop the foreclosure. The two cases were
consolidated.
After the submission by the parties of their respective pleadings, the trial court rendered the impugned decision. Judge Francisco Ma. Guerrero annulled
not only the challenged provision, viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of legislative
power was a violation of the principle of separation of powers; (2) the law impaired the obligation of contracts; and (3) the decree violated the equal
protection clause. The motion for reconsideration of this decision having been denied, the present petition was filed.: rd
The petition was originally assigned to the Third Division of this Court but because of the constitutional questions involved it was transferred to the
Court en banc. On August 30, 1988, the Court granted the petitioner's prayer for a temporary restraining order and instructed the respondents to cease
and desist from conducting a public auction sale of the lands in question. After the Solicitor General and the private respondent had filed their
comments and the petitioners their reply, the Court gave due course to the petition and ordered the parties to file simultaneous memoranda. Upon
compliance by the parties, the case was deemed submitted.
The petitioners contend that the private respondent is now estopped from contesting the validity of the decree. In support of this contention, it cites the
recent case of Mendoza v. Agrix Marketing, Inc., 1 where the constitutionality of Pres. Decree No. 1717 was also raised but not resolved. The Court,
after noting that the petitioners had already filed their claims with the AGRIX Claims Committee created by the decree, had simply dismissed the petition
on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent also invoked the provisions of Pres. Decree No. 1717 by filing a claim with the
AGRIX Claims Committee. Failing to get results, it sought to foreclose the real estate mortgage executed by AGRIX in its favor, which had been
extinguished by the decree. It was only when the petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the decree, that the private
respondent attacked the validity of the provision. At that stage, however, consistent with Mendoza, the private respondent was already estopped from
questioning the constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX Claims Committee pursuant to this decree. It must be noted, however, that
this was done in 1980, when President Marcos was the absolute ruler of this country and his decrees were the absolute law. Any judicial challenge to
them would have been futile, not to say foolhardy. The private respondent, no less than the rest of the nation, was aware of that reality and knew it
had no choice under the circumstances but to conform.: nad
It is true that there were a few venturesome souls who dared to question the dictator's decisions before the courts of justice then. The record will show,
however, that not a single act or issuance of President Marcos was ever declared unconstitutional, not even by the highest court, as long as he was in
power. To rule now that the private respondent is estopped for having abided with the decree instead of boldly assailing it is to close our eyes to a
cynical fact of life during that repressive time.
This case must be distinguished from Mendoza, where the petitioners, after filing their claims with the AGRIX Claims Committee, received in settlement
thereof shares of stock valued at P40,000.00 without protest or reservation. The herein private respondent has not been paid a single centavo on its
claim, which was kept pending for more than seven years for alleged lack of supporting papers. Significantly, the validity of that claim was not
questioned by the petitioner when it sought to restrain the extrajudicial foreclosure of the mortgage by the private respondent. The petitioner limited
itself to the argument that the private respondent was estopped from questioning the decree because of its earlier compliance with its provisions.
Independently of these observations, there is the consideration that an affront to the Constitution cannot be allowed to continue existing simply because
of procedural inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing all mortgages and other liens attaching to the assets of
AGRIX. It also notes, with equal concern, the restriction in Subsection (ii) thereof that all "unsecured obligations shall not bear interest" and in
Subsection (iii) that "all accrued interests, penalties or charges as of date hereof pertaining to the obligations, whether secured or unsecured, shall not
be recognized."
These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1 that "no person shall be deprived of life, liberty or
property without due course of law nor shall any person be denied the equal protection of the law" and in Section 10 that "no law impairing the
obligation of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like all rights, are subject to regulation under the police power for the promotion of
the common welfare. The contention is that this inherent power of the state may be exercised at any time for this purpose so long as the taking of the
property right, even if based on contract, is done with due process of law.
This argument is an over-simplification of the problem before us. The police power is not a panacea for all constitutional maladies. Neither does its mere
invocation conjure an instant and automatic justification for every act of the government depriving a person of his life, liberty or property.
A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method. In more familiar words, a) the interests of
the public generally, as distinguished from those of a particular class, should justify the interference of the state; and b) the means employed are
reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that the interests of the public are not sufficiently involved to warrant the
interference of the government with the private contracts of AGRIX. The decree speaks vaguely of the "public, particularly the small investors," who
would be prejudiced if the corporation were not to be assisted. However, the record does not state how many there are of such investors, and who they
are, and why they are being preferred to the private respondent and other creditors of AGRIX with vested property rights.:-cralaw
The public interest supposedly involved is not identified or explained. It has not been shown that by the creation of the New Agrix, Inc. and the
extinction of the property rights of the creditors of AGRIX, the interests of the public as a whole, as distinguished from those of a particular class, would
be promoted or protected. The indispensable link to the welfare of the greater number has not been established. On the contrary, it would appear that
the decree was issued only to favor a special group of investors who, for reasons not given, have been preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the means employed to rehabilitate AGRIX fall far short of the requirement
that they shall not be unduly oppressive. The oppressiveness is patent on the face of the decree. The right to property in all mortgages, liens, interests,
penalties and charges owing to the creditors of AGRIX is arbitrarily destroyed. No consideration is paid for the extinction of the mortgage rights. The
accrued interests and other charges are simply rejected by the decree. The right to property is dissolved by legislative fiat without regard to the private
interest violated and, worse, in favor of another private interest.
A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of Rights. So do interests on loans, as well as
penalties and charges, which are also vested rights once they accrue. Private property cannot simply be taken by law from one person and given to
another without compensation and any known public purpose. This is plain arbitrariness and is not permitted under the Constitution.
And not only is there arbitrary taking, there is discrimination as well. In extinguishing the mortgage and other liens, the decree lumps the secured
creditors with the unsecured creditors and places them on the same level in the prosecution of their respective claims. In this respect, all of them are
considered unsecured creditors. The only concession given to the secured creditors is that their loans are allowed to earn interest from the date of the
decree, but that still does not justify the cancellation of the interests earned before that date. Such interests, whether due to the secured or the
unsecured creditors, are all extinguished by the decree. Even assuming such cancellation to be valid, we still cannot see why all kinds of creditors,
regardless of security, are treated alike.
Under the equal protection clause, all persons or things similarly situated must be treated alike, both in the privileges conferred and the obligations
imposed. Conversely, all persons or things differently situated should be treated differently. In the case at bar, persons differently situated are similarly
treated, in disregard of the principle that there should be equality only among equals.- nad
One may also well wonder why AGRIX was singled out for government help, among other corporations where the stockholders or investors were also
swindled. It is not clear why other companies entitled to similar concern were not similarly treated. And surely, the stockholders of the private
respondent, whose mortgage lien had been cancelled and legitimate claims to accrued interests rejected, were no less deserving of protection, which
they did not get. The decree operated, to use the words of a celebrated case, 3 "with an evil eye and an uneven hand."
On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision of Article XIV, Section 4 of the 1973 Constitution, then in
force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation, organization, or regulation of private corporations, unless
such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the government. The National Development Corporation was merely required to extend a loan
of not more than P10,000,000.00 to New Agrix, Inc. Pending payment thereof, NDC would undertake the management of the corporation, but with the
obligation of making periodic reports to the Agrix board of directors. After payment of the loan, the said board can then appoint its own management.
The stocks of the new corporation are to be issued to the old investors and stockholders of AGRIX upon proof of their claims against the abolished
corporation. They shall then be the owners of the new corporation. New Agrix, Inc. is entirely private and so should have been organized under the
Corporation Law in accordance with the above-cited constitutional provision.
The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private respondent without justification. While it is
true that the police power is superior to the impairment clause, the principle will apply only where the contract is so related to the public welfare that it
will be considered congenitally susceptible to change by the legislature in the interest of the greater number. 5 Most present-day contracts are of that
nature. But as already observed, the contracts of loan and mortgage executed by AGRIX are purely private transactions and have not been shown to be
affected with public interest. There was therefore no warrant to amend their provisions and deprive the private respondent of its vested property rights.
It is worth noting that only recently in the case of the Development Bank of the Philippines v. NLRC, 6 we sustained the preference in payment of a
mortgage creditor as against the argument that the claims of laborers should take precedence over all other claims, including those of the government.
In arriving at this ruling, the Court recognized the mortgage lien as a property right protected by the due process and contract clauses notwithstanding
the argument that the amendment in Section 110 of the Labor Code was a proper exercise of the police power.: nad
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in conformity with the traditional requirements of
a lawful subject and a lawful method. The extinction of the mortgage and other liens and of the interest and other charges pertaining to the legitimate
creditors of AGRIX constitutes taking without due process of law, and this is compounded by the reduction of the secured creditors to the category of
unsecured creditors in violation of the equal protection clause. Moreover, the new corporation, being neither owned nor controlled by the Government,
should have been created only by general and not special law. And insofar as the decree also interferes with purely private agreements without any
demonstrated connection with the public interest, there is likewise an impairment of the obligation of the contract.
With the above pronouncements, we feel there is no more need to rule on the authority of President Marcos to promulgate Pres. Decree No. 1717 under
Amendment No. 6 of the 1973 Constitution. Even if he had such authority, the decree must fall just the same because of its violation of the Bill of
Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared UNCONSTITUTIONAL. The temporary restraining order dated August 30,
1988, is LIFTED. Costs against the petitioners.- nad
SO ORDERED.
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and
JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,,
FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No. 66195 which modified the decision of the
then Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents
in G.R. No. 84197) was dismissed but in all other respects the trial court's decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff the amount of P311,056.02, with
interest at the rate of 12% per annum compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from
July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary damages.
It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside from Pl51,000.00,,making a
total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half
and Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the cross-complaints until the amount is fully
paid; plus moral and exemplary damages in the amount of P184,878.84 with interest from the filing of the cross-complaints until the
amount is fully paid; plus moral and exemplary damages in the amount of P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another P20,000.00 to Constancio B.
Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the Cervanteses and Constancio
B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the defendants Bormaheco and the Cervanteses the amount of
P20,000.00 as attorney's fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The fact that the properties of
the Bormaheco and the Cervanteses were attached and that they were required to file a counterbond in order to dissolve the
attachment, is not an act of bad faith. When a man tries to protect his rights, he should not be saddled with moral or exemplary
damages. Furthermore, the rights exercised were provided for in the Rules of Court, and it was the court that ordered it, in the
exercise of its discretion.
No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it only secured the attachment
prayed for by the plaintiff Pioneer. If an insurance company would be liable for damages in performing an act which is clearly within
its power and which is the reason for its being, then nobody would engage in the insurance business. No further claim or counter-
claim for or against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of Southern Air Lines (SAL) a single
proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract (Exhibit A) for the sale and
purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in
installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety executed and issued its Surety Bond No.
6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio
Maglana (respondents in both petitions) contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed
to be their contributions to a new corporation proposed by Lim to expand his airline business. They executed two (2) separate indemnity agreements
(Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the indemnitors principally agree and bind themselves jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind and nature which
Pioneer may incur in consequence of having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and
assigns, all sums and amounts of money which it or its representatives should or may pay or cause to be paid or become liable to pay on them of
whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel mortgage as security for the
latter's suretyship in favor of the former. It was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was
duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to the Chattel
Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of Davao City. The Cervanteses and
Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and respondents,
the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not privies to the contracts signed by
Lim and, by way of counterclaim, sought for damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim for
the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all the defendants was dismissed. In all
other respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE SOLE
GROUND THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE
JDA AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS
DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation
to Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the amount of P298,666.28 from defendants
will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action as it does not stand to be
benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from defendants, hence, it instituted the
action is utterly devoid of merit. Plaintiff did not even present any evidence that it is the attorney-in-fact of the reinsurance
company, authorized to institute an action for and in behalf of the latter. To qualify a person to be a real party in interest in whose
name an action must be prosecuted, he must appear to be the present real owner of the right sought to be enforced (Moran, Vol. I,
Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the party who would be
benefited or injured by the judgment or the party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil.
125, 131). By real party in interest is meant a present substantial interest as distinguished from a mere expectancy or a future,
contingent, subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d
1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as it has already been paid by
the reinsurer the sum of P295,000.00 the bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the former was able to foreclose
extra-judicially one of the subject airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that
plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be tantamount to
unjust enrichment as it has already been paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of
defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the
expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was paid by its reinsurer in the aforesaid amount,
as this matter has never been raised by any of the parties herein both in their answers in the court below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had any interest in the matter since
the reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable
considering that whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA as has been paid with
reinsurance money?
2. If the answer to the preceding question is in the negative, has Pioneer still any claim against defendants, considering the amount
it has realized from the sale of the mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of JDA, collected the proceeds
of such reinsurance in the sum of P295,000, and paid with the said amount the bulk of its alleged liability to JDA under the said
surety bond, it is plain that on this score it no longer has any right to collect to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the amount paid to it by the
reinsurers, notwithstanding that the cause of action pertains to the latter, Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is representing
the reinsurers to recover the amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing defendants
as their attorney-in-fact.
But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as attorney-in- fact of the reinsurers
for any amount. Lastly, and most important of all, Pioneer has no right to institute and maintain in its own name an action for the
benefit of the reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own name instead of that of the
principal will not prosper, and this is so even where the name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in the name of the
real party in interest.' This provision is mandatory. The real party in interest is the party who would be
benefitted or injured by the judgment or is the party entitled to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a real party in interest, that there is no law
permitting an action to be brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484;
Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L-
22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from the reinsurers, the uninsured
portion of what it paid to JDA is the difference between the two amounts, or P3,666.28. This is the amount for which Pioneer may
sue defendants, assuming that the indemnity agreement is still valid and effective. But since the amount realized from the sale of
the mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer
is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this admitted payment, the only issue that
cropped up was the effect of payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly between the petitioner as insured and the reinsuring company pursuant to Section 91 (should be
Section 98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in similar cases where the
original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in general applicable to actions or contracts of reinsurance.
(Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or
injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co . (101 Phil. 1031 [1957]) which we subsequently
applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article that the insurer
is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover
the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in
interest with regard to the portion of the indemnity paid is the insurer and not the insured . (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the respondents for the reason that
the petitioner was not the real party in interest in the complaint and, therefore, has no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been dismissed on the premise that the
evidence on record shows that it is entitled to recover from the counter indemnitors. It does not, however, cite any grounds except its allegation that
respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its finding that the counter-indemnitors are not
liable to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after the execution of the chattel
mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the bond provided that the same
would be mortgaged to it, but this was not possible because the planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover the
bond, and this indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have impaired and rendered insufficient the
security under the chattel mortgage and there is thus no other sufficient security for the claim sought to be
enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other security for the claim sought to be enforced by this
action, which necessarily means that the indemnity agreement had ceased to have any force and effect at the time this action was
instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso
jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as indemnitors, would be entitled to be
subrogated to the right of Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes any further action to recover
any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were as provided in Article 1484 of the New Civil Code, known as the
Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and the instant suit. Such
being the case, as provided by the aforementioned provisions, Pioneer shall have no further action against the purchaser to recover
any unpaid balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772,
May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is not the vendor but JDA.
The reason is that Pioneer is actually exercising the rights of JDA as vendor, having subrogated it in such rights. Nor may the
application of the provision be validly opposed on the ground that these defendants and defendant Maglana are not the vendee but
indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged these defendants from any
liability as alleged indemnitors. The change of the maturity dates of the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three months interval installments, the first of which
shall be due and payable 25 August 1965, the remainder of which ... shall be due and payable on the 26th day x
x x of each succeeding three months and the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA, modifying the maturity dates
of the obligations, as follows:
The principal hereof shall be paid in eight equal successive three month interval installments the first of which
shall be due and payable 4 September 1965, the remainder of which ... shall be due and payable on the 4th day
... of each succeeding months and the last of which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different from that fixed in the
aforesaid memorandum; the due date of the first installment appears as October 15, 1965, and those of the rest of the installments,
the 15th of each succeeding three months, that of the last installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity dates, effected twice, were done without the knowledge, much
less, would have it believed that these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed that
these defendants and defendant Maglana knew of and consented to the modification of the obligations. But if that were so, there
would have been the corresponding documents in the form of a written notice to as well as written conformity of these defendants,
and there are no such document. The consequence of this was the extinguishment of the obligations and of the surety bond
secured by the indemnity agreement which was thereby also extinguished. Applicable by analogy are the rulings of the Supreme
Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45
Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes
the guaranty The mere failure on the part of the creditor to demand payment after the debt has become due
does not of itself constitute any extension time referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently, Pioneer has no more cause of
action to recover from these defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the
surety bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or SAL on every installment,
released Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such
payment is made after the obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by reason of the filing of the
instant case against them and the attachment and garnishment of their properties. The instant action is clearly unfounded insofar as
plaintiff drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose agreement was to do business through the corporate vehicle
but who failed to incorporate the entity in which they had chosen to invest? How are the losses to be treated in situations where
their contributions to the intended 'corporation' were invested not through the corporate form? This Petition presents these
fundamental questions which we believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of respondents Bormaheco, Spouses Cervantes, Constancio
Maglana and petitioner Lim to incorporate, a de facto partnership among them was created, and that as a consequence of such relationship all must
share in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the respondents to the petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total amount of P184,878.74 as correctly
found by the trial court, with interest from the filing of the cross-complaints until the amount is fully paid. Defendant Lim should pay
one-half of the said amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is established in the
records that defendant Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and Maglana representing the
latter's participation in the ownership of the subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs
incurred additional expenses, hence, the total sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating thereto and not by the rules governing partners (Cannon v.
Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name occupy the position of partners inter se (Lynch v. Perryman, 119
P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves together under articles to purchase property
to carry on a business, and their organization is so defective as to come short of creating a corporation within the statute, they
become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will
be recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain
persons associated themselves as a corporation for the development of land for irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a third the difference in the proportionate value of the land conveyed by him, and
no stock was ever issued in the corporation, it was treated as a trustee for the associates in an action between them for an
accounting, and its capital stock was treated as partnership assets, sold, and the proceeds distributed among them in proportion to
the value of the property contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist,
for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no
partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be
implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders and other stockholders, who
were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of
debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics
supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pretrial despite notification. In his
answer, the petitioner denied having received any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the
appellate court, however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing the participation of Bormaheco
and Atty. Constancio B. Maglana in the ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave P75,000.00
to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations to them. This
gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a
proposed corporation which was never formed because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary certificates of public convenience and necessity as well as the required
permits for the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to Lim which
Cervantes did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his share of the undertaking. Lim in an
undertaking sometime on or about August 9,1965, promised to incorporate his airline in accordance with their agreement and
proceeded to acquire the planes on his own account. Since then up to the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two airplanes and spare parts from
Japan which the latter considered as their lawful contribution and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim. Down payments were advanced by defendants Bormaheco and
the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the alleged chattel mortgage and surety bond agreement in his personal capacity
as the alleged proprietor of the SAL. The answering defendants learned for the first time of this trickery and misrepresentation of
the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to
file an adverse claim in the form of third party claim. Notwithstanding repeated oral demands made by defendants Bormaheco and
Cervanteses, to defendant Lim, to surrender the possession of the two planes and their accessories and or return the amount
advanced by the former amounting to an aggregate sum of P 178,997.14 as evidenced by a statement of accounts, the latter
ignored, omitted and refused to comply with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was created among the parties which
would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows that the petitioner was acting on
his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Corporate Juridical Personality
G.R. No. 124293 January 31, 2005
J.G. SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and Members; ASSET
PRIVATIZATION TRUST; and PHILYARDS HOLDINGS, INC., respondents.
RESOLUTION
PUNO, J.:
For resolution before this Court are two motions filed by the petitioner, J.G. Summit Holdings, Inc. for reconsideration of our Resolution dated
September 24, 2003 and to elevate this case to the Court En Banc. The petitioner questions the Resolution which reversed our Decision of November
20, 2000, which in turn reversed and set aside a Decision of the Court of Appeals promulgated on July 18, 1995.
I. Facts
The undisputed facts of the case, as set forth in our Resolution of September 24, 2003, are as follows:
On January 27, 1997, the National Investment and Development Corporation (NIDC), a government corporation, entered into a Joint Venture
Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation and management of the Subic
National Shipyard, Inc. (SNS) which subsequently became the Philippine Shipyard and Engineering Corporation (PHILSECO). Under the JVA, the NIDC
and KAWASAKI will contribute 330 million for the capitalization of PHILSECO in the proportion of 60%-40% respectively. One of its salient features is
the grant to the parties of the right of first refusal should either of them decide to sell, assign or transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS [PHILSECO] to any third party without giving the other under the same
terms the right of first refusal. This provision shall not apply if the transferee is a corporation owned or controlled by the GOVERNMENT or by a
KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO to the Philippine National Bank (PNB). Such interests were
subsequently transferred to the National Government pursuant to Administrative Order No. 14. On December 8, 1986, President Corazon C. Aquino
issued Proclamation No. 50 establishing the Committee on Privatization (COP) and the Asset Privatization Trust (APT) to take title to, and possession of,
conserve, manage and dispose of non-performing assets of the National Government. Thereafter, on February 27, 1987, a trust agreement was entered
into between the National Government and the APT wherein the latter was named the trustee of the National Government's share in PHILSECO. In
1989, as a result of a quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National Government's shareholdings in PHILSECO
increased to 97.41% thereby reducing KAWASAKI's shareholdings to 2.59%.
In the interest of the national economy and the government, the COP and the APT deemed it best to sell the National Government's share in PHILSECO
to private entities. After a series of negotiations between the APT and KAWASAKI, they agreed that the latter's right of first refusal under the JVA be
"exchanged" for the right to top by five percent (5%) the highest bid for the said shares. They further agreed that KAWASAKI would be entitled to name
a company in which it was a stockholder, which could exercise the right to top. On September 7, 1990, KAWASAKI informed APT that Philyards
Holdings, Inc. (PHI)1 would exercise its right to top.
At the pre-bidding conference held on September 18, 1993, interested bidders were given copies of the JVA between NIDC and KAWASAKI, and of the
Asset Specific Bidding Rules (ASBR) drafted for the National Government's 87.6% equity share in PHILSECO. The provisions of the ASBR were explained
to the interested bidders who were notified that the bidding would be held on December 2, 1993. A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through public bidding is the National Government's equity in PHILSECO consisting of
896,869,942 shares of stock (representing 87.67% of PHILSECO's outstanding capital stock), which will be sold as a whole block in accordance with the
rules herein enumerated.
xxx xxx xxx
2.0 The highest bid, as well as the buyer, shall be subject to the final approval of both the APT Board of Trustees and the Committee on Privatization
(COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The Indicative price set for the National Government's 87.67% equity in PHILSECO
is PESOS: ONE BILLION THREE HUNDRED MILLION (1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at its regular meeting following the bidding, for the purpose of determining
whether or not it should be endorsed by the APT Board of Trustees to the COP, and the latter approves the same. The APT shall advise Kawasaki Heavy
Industries, Inc. and/or its nominee, [PHILYARDS] Holdings, Inc., that the highest bid is acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then have a period of thirty (30) calendar days from the date of receipt of such advice from
APT within which to exercise their "Option to Top the Highest Bid" by offering a bid equivalent to the highest bid plus five (5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. exercise their "Option to Top the Highest Bid," they shall so notify the
APT about such exercise of their option and deposit with APT the amount equivalent to ten percent (10%) of the highest bid plus five percent (5%)
thereof within the thirty (30)-day period mentioned in paragraph 6.0 above. APT will then serve notice upon Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. declaring them as the preferred bidder and they shall have a period of ninety (90) days from the receipt of the APT's notice
within which to pay the balance of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. fail to exercise their "Option to Top the Highest Bid" within the thirty
(30)-day period, APT will declare the highest bidder as the winning bidder.
xxx xxx xxx
12.0 The bidder shall be solely responsible for examining with appropriate care these rules, the official bid forms, including any addenda or amendments
thereto issued during the bidding period. The bidder shall likewise be responsible for informing itself with respect to any and all conditions concerning
the PHILSECO Shares which may, in any manner, affect the bidder's proposal. Failure on the part of the bidder to so examine and inform itself shall be
its sole risk and no relief for error or omission will be given by APT or COP. . . .
At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc. 2 submitted a bid of Two Billion and Thirty Million Pesos
(2,030,000,000.00) with an acknowledgment of KAWASAKI/[PHILYARDS'] right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has up to thirty (30) days to act on APT's recommendation based on the result of this
bidding. Should the COP approve the highest bid, APT shall advise Kawasaki Heavy Industries, Inc. and/or its nominee, [PHILYARDS] Holdings, Inc. that
the highest bid is acceptable to the National Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then have a period
of thirty (30) calendar days from the date of receipt of such advice from APT within which to exercise their "Option to Top the Highest Bid" by offering a
bid equivalent to the highest bid plus five (5%) percent thereof.
As petitioner was declared the highest bidder, the COP approved the sale on December 3, 1993 "subject to the right of Kawasaki Heavy Industries, Inc./
[PHILYARDS] Holdings, Inc. to top JGSMI's bid by 5% as specified in the bidding rules."
On December 29, 1993, petitioner informed APT that it was protesting the offer of PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI
consortium composed of KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the last four (4)
companies were the losing bidders thereby circumventing the law and prejudicing the weak winning bidder; (b) only KAWASAKI could exercise the right
to top; (c) giving the same option to top to PHI constituted unwarranted benefit to a third party; (d) no right of first refusal can be exercised in a public
bidding or auction sale; and (e) the JG Summit consortium was not estopped from questioning the proceedings.
On February 2, 1994, petitioner was notified that PHI had fully paid the balance of the purchase price of the subject bidding. On February 7, 1994, the
APT notified petitioner that PHI had exercised its option to top the highest bid and that the COP had approved the same on January 6, 1994. On
February 24, 1994, the APT and PHI executed a Stock Purchase Agreement. Consequently, petitioner filed with this Court a Petition for Mandamus
under G.R. No. 114057. On May 11, 1994, said petition was referred to the Court of Appeals. On July 18, 1995, the Court of Appeals denied the same
for lack of merit. It ruled that the petition for mandamus was not the proper remedy to question the constitutionality or legality of the right of first
refusal and the right to top that was exercised by KAWASAKI/PHI, and that the matter must be brought "by the proper party in the proper forum at the
proper time and threshed out in a full blown trial." The Court of Appeals further ruled that the right of first refusal and the right to top are prima facie
legal and that the petitioner, "by participating in the public bidding, with full knowledge of the right to top granted to KAWASAKI/[PHILYARDS] is
estopped from questioning the validity of the award given to [PHILYARDS] after the latter exercised the right to top and had paid in full the purchase
price of the subject shares, pursuant to the ASBR." Petitioner filed a Motion for Reconsideration of said Decision which was denied on March 15, 1996.
Petitioner thus filed a Petition for Certiorari with this Court alleging grave abuse of discretion on the part of the appellate court.
On November 20, 2000, this Court rendered x x x [a] Decision ruling among others that the Court of Appeals erred when it dismissed the petition on the
sole ground of the impropriety of the special civil action of mandamus because the petition was also one of certiorari. It further ruled that a shipyard like
PHILSECO is a public utility whose capitalization must be sixty percent (60%) Filipino-owned. Consequently, the right to top granted to KAWASAKI
under the Asset Specific Bidding Rules (ASBR) drafted for the sale of the 87.67% equity of the National Government in PHILSECO is illegal not only
because it violates the rules on competitive bidding but more so, because it allows foreign corporations to own more than 40% equity in the
shipyard. It also held that "although the petitioner had the opportunity to examine the ASBR before it participated in the bidding, it cannot be estopped
from questioning the unconstitutional, illegal and inequitable provisions thereof." Thus, this Court voided the transfer of the national government's
87.67% share in PHILSECO to Philyard[s] Holdings, Inc., and upheld the right of JG Summit, as the highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed Decision and Resolution of the Court of Appeals are REVERSED and
SET ASIDE. Petitioner is ordered to pay to APT its bid price of Two Billion Thirty Million Pesos (2,030,000,000.00), less its bid deposit plus interests
upon the finality of this Decision. In turn, APT is ordered to:
(a) accept the said amount of 2,030,000,000.00 less bid deposit and interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of stocks representing 87.6% of PHILSECO's total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One Hundred Thirty-One Million Five Hundred Thousand Pesos
(2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.
In separate Motions for Reconsideration, respondents submit[ted] three basic issues for x x x resolution: (1) Whether PHILSECO is a public utility; (2)
Whether under the 1977 JVA, KAWASAKI can exercise its right of first refusal only up to 40% of the total capitalization of PHILSECO; and (3) Whether
the right to top granted to KAWASAKI violates the principles of competitive bidding. 3 (citations omitted)
In a Resolution dated September 24, 2003, this Court ruled in favor of the respondents. On the first issue, we held that Philippine Shipyard and
Engineering Corporation (PHILSECO) is not a public utility, as by nature, a shipyard is not a public utility 4 and that no law declares a shipyard to be a
public utility.5 On the second issue, we found nothing in the 1977 Joint Venture Agreement (JVA) which prevents Kawasaki Heavy Industries, Ltd. of
Kobe, Japan (KAWASAKI) from acquiring more than 40% of PHILSECOs total capitalization. 6 On the final issue, we held that the right to top granted to
KAWASAKI in exchange for its right of first refusal did not violate the principles of competitive bidding. 7
On October 20, 2003, the petitioner filed a Motion for Reconsideration 8 and a Motion to Elevate This Case to the Court En Banc.9 Public respondents
Committee on Privatization (COP) and Asset Privatization Trust (APT), and private respondent Philyards Holdings, Inc. (PHILYARDS) filed their
Comments on J.G. Summit Holdings, Inc.s (JG Summits) Motion for Reconsideration and Motion to Elevate This Case to the Court En Banc on January
29, 2004 and February 3, 2004, respectively.
II. Issues
Based on the foregoing, the relevant issues to resolve to end this litigation are the following:
1. Whether there are sufficient bases to elevate the case at bar to the Court en banc.
2. Whether the motion for reconsideration raises any new matter or cogent reason to warrant a reconsideration of this Courts Resolution of
September 24, 2003.
Motion to Elevate this Case to the

Court En Banc
The petitioner prays for the elevation of the case to the Court en banc on the following grounds:
1. The main issue of the propriety of the bidding process involved in the present case has been confused with the policy issue of the supposed
fate of the shipping industry which has never been an issue that is determinative of this case. 10
2. The present case may be considered under the Supreme Court Resolution dated February 23, 1984 which included among en banc cases
those involving a novel question of law and those where a doctrine or principle laid down by the Court en banc or in division may be modified
or reversed.11
3. There was clear executive interference in the judicial functions of the Court when the Honorable Jose Isidro Camacho, Secretary of Finance,
forwarded to Chief Justice Davide, a memorandum dated November 5, 2001, attaching a copy of the Foreign Chambers Report dated October
17, 2001, which matter was placed in the agenda of the Court and noted by it in a formal resolution dated November 28, 2001. 12
Opposing J.G. Summits motion to elevate the case en banc, PHILYARDS points out the petitioners inconsistency in previously opposing PHILYARDS
Motion to Refer the Case to the Court En Banc. PHILYARDS contends that J.G. Summit should now be estopped from asking that the case be referred to
the Court en banc. PHILYARDS further contends that the Supreme Court en banc is not an appellate court to which decisions or resolutions of its
divisions may be appealed citing Supreme Court Circular No. 2-89 dated February 7, 1989. 13 PHILYARDS also alleges that there is no novel question of
law involved in the present case as the assailed Resolution was based on well-settled jurisprudence. Likewise, PHILYARDS stresses that the Resolution
was merely an outcome of the motions for reconsideration filed by it and the COP and APT and is "consistent with the inherent power of courts to
amend and control its process and orders so as to make them conformable to law and justice. (Rule 135, sec. 5)" 14 Private respondent belittles the
petitioners allegations regarding the change in ponente and the alleged executive interference as shown by former Secretary of Finance Jose Isidro
Camachos memorandum dated November 5, 2001 arguing that these do not justify a referral of the present case to the Court en banc.
In insisting that its Motion to Elevate This Case to the Court En Banc should be granted, J.G. Summit further argued that: its Opposition to the Office of
the Solicitor Generals Motion to Refer is different from its own Motion to Elevate; different grounds are invoked by the two motions; there was
unwarranted "executive interference"; and the change in ponente is merely noted in asserting that this case should be decided by the Court en banc.15
We find no merit in petitioners contention that the propriety of the bidding process involved in the present case has been confused with the policy issue
of the fate of the shipping industry which, petitioner maintains, has never been an issue that is determinative of this case. The Courts Resolution of
September 24, 2003 reveals a clear and definitive ruling on the propriety of the bidding process. In discussing whether the right to top granted to
KAWASAKI in exchange for its right of first refusal violates the principles of competitive bidding, we made an exhaustive discourse on the rules and
principles of public bidding and whether they were complied with in the case at bar. 16 This Court categorically ruled on the petitioners argument that
PHILSECO, as a shipyard, is a public utility which should maintain a 60%-40% Filipino-foreign equity ratio, as it was a pivotal issue. In doing so, we
recognized the impact of our ruling on the shipbuilding industry which was beyond avoidance. 17
We reject petitioners argument that the present case may be considered under the Supreme Court Resolution dated February 23, 1984 which included
among en banc cases those involving a novel question of law and those where a doctrine or principle laid down by the court en banc or in division may
be modified or reversed. The case was resolved based on basic principles of the right of first refusal in commercial law and estoppel in civil law.
Contractual obligations arising from rights of first refusal are not new in this jurisdiction and have been recognized in numerous cases. 18 Estoppel is too
known a civil law concept to require an elongated discussion. Fundamental principles on public bidding were likewise used to resolve the issues raised
by the petitioner. To be sure, petitioner leans on the right to top in a public bidding in arguing that the case at bar involves a novel issue. We are not
swayed. The right to top was merely a condition or a reservation made in the bidding rules which was fully disclosed to all bidding parties. In Bureau
Veritas, represented by Theodor H. Hunermann v. Office of the President, et al., 19 we dealt with this conditionality, viz:
x x x It must be stressed, as held in the case of A.C. Esguerra & Sons v. Aytona, et al., (L-18751, 28 April 1962, 4 SCRA 1245), that in an "invitation to
bid, there is a condition imposed upon the bidders to the effect that the bidding shall be subject to the right of the government to
reject any and all bids subject to its discretion. In the case at bar, the government has made its choice and unless an unfairness or
injustice is shown, the losing bidders have no cause to complain nor right to dispute that choice. This is a well-settled doctrine in this
jurisdiction and elsewhere."
The discretion to accept or reject a bid and award contracts is vested in the Government agencies entrusted with that function. The discretion given to
the authorities on this matter is of such wide latitude that the Courts will not interfere therewith, unless it is apparent that it is used as a shield to a
fraudulent award (Jalandoni v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this discretion is a policy decision that necessitates prior inquiry,
investigation, comparison, evaluation, and deliberation. This task can best be discharged by the Government agencies concerned, not by the Courts.
The role of the Courts is to ascertain whether a branch or instrumentality of the Government has transgressed its constitutional boundaries. But the
Courts will not interfere with executive or legislative discretion exercised within those boundaries. Otherwise, it strays into the realm of policy decision-
making.
It is only upon a clear showing of grave abuse of discretion that the Courts will set aside the award of a contract made by a government entity. Grave
abuse of discretion implies a capricious, arbitrary and whimsical exercise of power (Filinvest Credit Corp. v. Intermediate Appellate Court, No. 65935, 30
September 1988, 166 SCRA 155). The abuse of discretion must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal
to perform a duty enjoined by law, as to act at all in contemplation of law, where the power is exercised in an arbitrary and despotic manner by reason
of passion or hostility (Litton Mills, Inc. v. Galleon Trader, Inc., et al[.], L-40867, 26 July 1988, 163 SCRA 489).
The facts in this case do not indicate any such grave abuse of discretion on the part of public respondents when they awarded the CISS contract to
Respondent SGS. In the "Invitation to Prequalify and Bid" (Annex "C," supra), the CISS Committee made an express reservation of the right of the
Government to "reject any or all bids or any part thereof or waive any defects contained thereon and accept an offer most
advantageous to the Government." It is a well-settled rule that where such reservation is made in an Invitation to Bid, the highest or
lowest bidder, as the case may be, is not entitled to an award as a matter of right (C & C Commercial Corp. v. Menor, L-28360, 27 January
1983, 120 SCRA 112). Even the lowest Bid or any Bid may be rejected or, in the exercise of sound discretion, the award may be made to another than
the lowest bidder (A.C. Esguerra & Sons v. Aytona, supra, citing 43 Am. Jur., 788). (emphases supplied) 1awphi1.nt
Like the condition in the Bureau Veritas case, the right to top was a condition imposed by the government in the bidding rules which was made known
to all parties. It was a condition imposed on all bidders equally, based on the APTs exercise of its discretion in deciding on how best to
privatize the governments shares in PHILSECO. It was not a whimsical or arbitrary condition plucked from the ether and inserted in the bidding
rules but a condition which the APT approved as the best way the government could comply with its contractual obligations to KAWASAKI under the JVA
and its mandate of getting the most advantageous deal for the government. The right to top had its history in the mutual right of first refusal in the JVA
and was reached by agreement of the government and KAWASAKI.
Further, there is no "executive interference" in the functions of this Court by the mere filing of a memorandum by Secretary of Finance Jose Isidro
Camacho. The memorandum was merely "noted" to acknowledge its filing. It had no further legal significance. Notably too, the assailed Resolution
dated September 24, 2003 was decided unanimously by the Special First Division in favor of the respondents.
Again, we emphasize that a decision or resolution of a Division is that of the Supreme Court 20 and the Court en banc is not an appellate court to which
decisions or resolutions of a Division may be appealed.21
For all the foregoing reasons, we find no basis to elevate this case to the Court en banc.
Motion for Reconsideration

Three principal arguments were raised in the petitioners Motion for Reconsideration. First, that a fair resolution of the case should be based on contract
law, not on policy considerations; the contracts do not authorize the right to top to be derived from the right of first refusal. 22 Second, that neither the
right of first refusal nor the right to top can be legally exercised by the consortium which is not the proper party granted such right under either the JVA
or the Asset Specific Bidding Rules (ASBR). 23 Third, that the maintenance of the 60%-40% relationship between the National Investment and
Development Corporation (NIDC) and KAWASAKI arises from contract and from the Constitution because PHILSECO is a landholding corporation and
need not be a public utility to be bound by the 60%-40% constitutional limitation. 24
On the other hand, private respondent PHILYARDS asserts that J.G. Summit has not been able to show compelling reasons to warrant a reconsideration
of the Decision of the Court.25 PHILYARDS denies that the Decision is based mainly on policy considerations and points out that it is premised on
principles governing obligations and contracts and corporate law such as the rule requiring respect for contractual stipulations, upholding rights of first
refusal, and recognizing the assignable nature of contracts rights. 26 Also, the ruling that shipyards are not public utilities relies on established case law
and fundamental rules of statutory construction. PHILYARDS stresses that KAWASAKIs right of first refusal or even the right to top is not limited to the
40% equity of the latter.27 On the landholding issue raised by J.G. Summit, PHILYARDS emphasizes that this is a non-issue and even involves a
question of fact. Even assuming that this Court can take cognizance of such question of fact even without the benefit of a trial, PHILYARDS opines that
landholding by PHILSECO at the time of the bidding is irrelevant because what is essential is that ultimately a qualified entity would eventually hold
PHILSECOs real estate properties.28 Further, given the assignable nature of the right of first refusal, any applicable nationality restrictions, including
landholding limitations, would not affect the right of first refusal itself, but only the manner of its exercise. 29 Also, PHILYARDS argues that if this Court
takes cognizance of J.G. Summits allegations of fact regarding PHILSECOs landholding, it must also recognize PHILYARDS assertions that PHILSECOs
landholdings were sold to another corporation. 30 As regards the right of first refusal, private respondent explains that KAWASAKIs reduced
shareholdings (from 40% to 2.59%) did not translate to a deprivation or loss of its contractually granted right of first refusal. 31 Also, the bidding was
valid because PHILYARDS exercised the right to top and it was of no moment that losing bidders later joined PHILYARDS in raising the purchase
price.32
In cadence with the private respondent PHILYARDS, public respondents COP and APT contend:
1. The conversion of the right of first refusal into a right to top by 5% does not violate any provision in the JVA between NIDC and
KAWASAKI.
2. PHILSECO is not a public utility and therefore not governed by the constitutional restriction on foreign ownership.
3. The petitioner is legally estopped from assailing the validity of the proceedings of the public bidding as it voluntarily submitted itself to the
terms of the ASBR which included the provision on the right to top.
4. The right to top was exercised by PHILYARDS as the nominee of KAWASAKI and the fact that PHILYARDS formed a consortium to raise the
required amount to exercise the right to top the highest bid by 5% does not violate the JVA or the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement for the acquisition of lands does not apply to PHILSECO because as admitted by
petitioner itself, PHILSECO no longer owns real property.
6. Petitioners motion to elevate the case to the Court en banc is baseless and would only delay the termination of this case. 33
In a Consolidated Comment dated March 8, 2004, J.G. Summit countered the arguments of the public and private respondents in this wise:
1. The award by the APT of 87.67% shares of PHILSECO to PHILYARDS with losing bidders through the exercise of a right to top, which is
contrary to law and the constitution is null and void for being violative of substantive due process and the abuse of right provision in the Civil
Code.
a. The bidders[] right to top was actually exercised by losing bidders.
b. The right to top or the right of first refusal cannot co-exist with a genuine competitive bidding.
c. The benefits derived from the right to top were unwarranted.
2. The landholding issue has been a legitimate issue since the start of this case but is shamelessly ignored by the respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.
c. That PHILSECO owned land at the time that the right of first refusal was agreed upon and at the time of the bidding are most
relevant.
d. Whether a shipyard is a public utility is not the core issue in this case.
3. Fraud and bad faith attend the alleged conversion of an inexistent right of first refusal to the right to top.
a. The history behind the birth of the right to top shows fraud and bad faith.
b. The right of first refusal was, indeed, "effectively useless."
4. Petitioner is not legally estopped to challenge the right to top in this case.
a. Estoppel is unavailing as it would stamp validity to an act that is prohibited by law or against public policy.
b. Deception was patent; the right to top was an attractive nuisance.

c. The 10% bid deposit was placed in escrow.
J.G. Summits insistence that the right to top cannot be sourced from the right of first refusal is not new and we have already ruled on the issue in our
Resolution of September 24, 2003. We upheld the mutual right of first refusal in the JVA. 34 We also ruled that nothing in the JVA prevents KAWASAKI
from acquiring more than 40% of PHILSECOs total capitalization. 35 Likewise, nothing in the JVA or ASBR bars the conversion of the right of first refusal
to the right to top. In sum, nothing new and of significance in the petitioners pleading warrants a reconsideration of our ruling.
Likewise, we already disposed of the argument that neither the right of first refusal nor the right to top can legally be exercised by the consortium which
is not the proper party granted such right under either the JVA or the ASBR. Thus, we held:
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group, Insular Life Assurance, Mitsui and ICTSI), has joined PHILYARDS in
the latter's effort to raise 2.131 billion necessary in exercising the right to top is not contrary to law, public policy or public morals. There is nothing in
the ASBR that bars the losing bidders from joining either the winning bidder (should the right to top is not exercised) or KAWASAKI/PHI (should it
exercise its right to top as it did), to raise the purchase price. The petitioner did not allege, nor was it shown by competent evidence, that the
participation of the losing bidders in the public bidding was done with fraudulent intent. Absent any proof of fraud, the formation by [PHILYARDS] of a
consortium is legitimate in a free enterprise system. The appellate court is thus correct in holding the petitioner estopped from questioning the validity
of the transfer of the National Government's shares in PHILSECO to respondent. 36
Further, we see no inherent illegality on PHILYARDS act in seeking funding from parties who were losing bidders. This is a purely commercial decision
over which the State should not interfere absent any legal infirmity. It is emphasized that the case at bar involves the disposition of shares in a
corporation which the government sought to privatize. As such, the persons with whom PHILYARDS desired to enter into business with in order to raise
funds to purchase the shares are basically its business. This is in contrast to a case involving a contract for the operation of or construction of a
government infrastructure where the identity of the buyer/bidder or financier constitutes an important consideration. In such cases, the government
would have to take utmost precaution to protect public interest by ensuring that the parties with which it is contracting have the ability to satisfactorily
construct or operate the infrastructure.
On the landholding issue, J.G. Summit submits that since PHILSECO is a landholding company, KAWASAKI could exercise its right of first refusal only up
to 40% of the shares of PHILSECO due to the constitutional prohibition on landholding by corporations with more than 40% foreign-owned equity. It
further argues that since KAWASAKI already held at least 40% equity in PHILSECO, the right of first refusal was inutile and as such, could not
subsequently be converted into the right to top. 37 Petitioner also asserts that, at present, PHILSECO continues to violate the constitutional provision on
landholdings as its shares are more than 40% foreign-owned. 38 PHILYARDS admits that it may have previously held land but had already divested such
landholdings.39 It contends, however, that even if PHILSECO owned land, this would not affect the right of first refusal but only the exercise thereof. If
the land is retained, the right of first refusal, being a property right, could be assigned to a qualified party. In the alternative, the land could be divested
before the exercise of the right of first refusal. In the case at bar, respondents assert that since the right of first refusal was validly converted into a
right to top, which was exercised not by KAWASAKI, but by PHILYARDS which is a Filipino corporation (i.e., 60% of its shares are owned by Filipinos),
then there is no violation of the Constitution. 40 At first, it would seem that questions of fact beyond cognizance by this Court were involved in the issue.
However, the records show that PHILYARDS admits it had owned land up until the time of the bidding. 41 Hence, the only issue is whether
KAWASAKI had a valid right of first refusal over PHILSECO shares under the JVA considering that PHILSECO owned land until the time
of the bidding and KAWASAKI already held 40% of PHILSECOs equity.
We uphold the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC. First of all, the right of first refusal is a property
right of PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their JVA. This right allows them to purchase the shares of their co-
shareholder before they are offered to a third party. The agreement of co-shareholders to mutually grant this right to each other, by itself,
does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations. As
PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal can be validly assigned to a qualified Filipino entity in order to maintain
the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof of any fraudulent intent. The transfer
could be made either to a nominee or such other party which the holder of the right of first refusal feels it can comfortably do business with.
Alternatively, PHILSECO may divest of its landholdings, in which case KAWASAKI, in exercising its right of first refusal, can exceed 40% of PHILSECOs
equity. In fact, it can even be said that if the foreign shareholdings of a landholding corporation exceeds 40%, it is not the foreign
stockholders ownership of the shares which is adversely affected but the capacity of the corporation to own land that is, the
corporation becomes disqualified to own land. This finds support under the basic corporate law principle that the corporation and its stockholders are
separate juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the
corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is
the corporation from owning land. This is the clear import of the following provisions in the Constitution:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or
timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources
shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The
State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino
citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens . Such agreements may be
for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided
by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may
be the measure and limit of the grant.
xxx xxx xxx
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain.42 (emphases supplied)
The petitioner further argues that "an option to buy land is void in itself (Philippine Banking Corporation v. Lui She, 21 SCRA 52 [1967]). The right of
first refusal granted to KAWASAKI, a Japanese corporation, is similarly void. Hence, the right to top, sourced from the right of first refusal, is also
void."43 Contrary to the contention of petitioner, the case of Lui She did not that say "an option to buy land is void in itself," for we ruled as follows:
x x x To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien the right to buy real property on
condition that he is granted Philippine citizenship. As this Court said in Krivenko vs. Register of Deeds:
[A]liens are not completely excluded by the Constitution from the use of lands for residential purposes. Since their residence in the Philippines is
temporary, they may be granted temporary rights such as a lease contract which is not forbidden by the Constitution. Should they desire to remain here
forever and share our fortunes and misfortunes, Filipino citizenship is not impossible to acquire.
But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner cannot sell
or otherwise dispose of his property, this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of
ownership whereby the owner divests himself in stages not only of the right to enjoy the land (jus possidendi, jus utendi, jus fruendi
and jus abutendi) but also of the right to dispose of it ( jus disponendi) rights the sum total of which make up ownership. It is just
as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until ultimately all the rights of
which ownership is made up are consolidated in an alien. And yet this is just exactly what the parties in this case did within this pace of one year,
with the result that Justina Santos'[s] ownership of her property was reduced to a hollow concept. If this can be done, then the Constitutional ban
against alien landholding in the Philippines, as announced in Krivenko vs. Register of Deeds, is indeed in grave peril. 44 (emphases supplied;
Citations omitted)
In Lui She, the option to buy was invalidated because it amounted to a virtual transfer of ownership as the owner could not sell or dispose of his
properties. The contract in Lui She prohibited the owner of the land from selling, donating, mortgaging, or encumbering the property during the 50-
year period of the option to buy. This is not so in the case at bar where the mutual right of first refusal in favor of NIDC and KAWASAKI does not
amount to a virtual transfer of land to a non-Filipino. In fact, the case at bar involves a right of first refusal over shares of stock while the Lui She
case involves an option to buy the land itself. As discussed earlier, there is a distinction between the shareholders ownership of shares and the
corporations ownership of land arising from the separate juridical personalities of the corporation and its shareholders.
We note that in its Motion for Reconsideration, J.G. Summit alleges that PHILSECO continues to violate the Constitution as its foreign equity is above
40% and yet owns long-term leasehold rights which are real rights.45 It cites Article 415 of the Civil Code which includes in the definition of
immovable property, "contracts for public works, and servitudes and other real rights over immovable property." 46 Any existing landholding, however, is
denied by PHILYARDS citing its recent financial statements. 47 First, these are questions of fact, the veracity of which would require introduction of
evidence. The Court needs to validate these factual allegations based on competent and reliable evidence. As such, the Court cannot resolve the
questions they pose. Second, J.G. Summit misreads the provisions of the Constitution cited in its own pleadings, to wit:
29.2 Petitioner has consistently pointed out in the past that private respondent is not a 60%-40% corporation, and this violates the Constitution x x x
The violation continues to this day because under the law, it continues to own real property
xxx xxx xxx
32. To review the constitutional provisions involved, Section 14, Article XIV of the 1973 Constitution (the JVA was signed in 1977), provided:
"Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified
to acquire or hold lands of the public domain."
32.1 This provision is the same as Section 7, Article XII of the 1987 Constitution.
32.2 Under the Public Land Act, corporations qualified to acquire or hold lands of the public domain are corporations at least 60% of which is owned
by Filipino citizens (Sec. 22, Commonwealth Act 141, as amended). (emphases supplied)
As correctly observed by the public respondents, the prohibition in the Constitution applies only to ownership of land. 48 It does not extend to
immovable or real property as defined under Article 415 of the Civil Code. Otherwise, we would have a strange situation where the ownership
of immovable property such as trees, plants and growing fruit attached to the land 49 would be limited to Filipinos and Filipino corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioners Motion for Reconsideration is DENIED WITH FINALITY and the decision appealed from is
AFFIRMED. The Motion to Elevate This Case to the Court En Banc is likewise DENIED for lack of merit.
SO ORDERED.
G.R. No. 111008 November 7, 1994
TRAMAT MERCANTILE, INC. AND DAVID ONG, petitioners, vs. HON. COURT OF APPEALS AND MELCHOR DE LA CUESTA, respondents.
Emilio G. Abrogena for petitioners.

Constante B. Albano for private respondent.
VITUG, J.:
This petition for review on certiorari challenges the 04th March 1993 decision of the Court of Appeals and its resolution of 01 July 1993 denying the
On 09 April 1984, Melchor de la Cuesta, doing business under the name and style of "Farmers Machineries," sold to Tramat Mercantile, Inc. ("Tramat"),
one (1) unit HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.P. diesel engine. In payment, David Ong, Tramat's president and manager,
issued a check for P33,500.00 (apparently replacing an earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor, together with an
attached lawn mower fabricated by it, to the Metropolitan Waterworks and Sewerage System ("NAWASA") for P67,000.00. David Ong caused a "stop
payment" of the check when NAWASA refused to pay the tractor and lawn mower after discovering that, aside from some stated defects of the attached
lawn mower, the engine (sold by de la Cuesta) was a reconditioned unit.
On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00, as well as attorney's fees of P10,000.00, and the costs of suit. Ong, in his
answer, averred, among other things, that de la Cuesta had no cause of action; that the questioned transaction was between plaintiff and Tramat
Mercantile, Inc., and not with Ong in his personal capacity; and that the payment of the check was stopped because the subject tractor had been priced
as a brand new, not as a reconditioned unit.
On 02 November 1989, after the reception of evidence, the trial court rendered a decision, the dispositive portions of which read:
WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered:
1. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of P33,500.00 with legal interest
thereon at the rate of 12% per annum from July 7, 1984 until fully paid; and
2. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of P10,000.00 as attorney's fees,
and the costs of this suit.
SO ORDERED. 1
An appeal was timely interposed by the defendants. On 04 March 1993, the Court of Appeals affirmed in toto the decision of the trial court. Defendant-
appellants' motion for reconsideration was denied.
Hence, the instant petition.
We could find no reason to reverse the factual findings of both the trial court and the appellate court, particularly in holding that the contract between
de la Cuesta and TRAMAT was one of absolute, not conditional, sale of the tractor and that de la Cuesta did not violate any warranty on the sale of the
tractor to TRAMAT. The appellate court, in its decision, adequately explained:
If the perfection of the sale was dependent upon acceptance by the MWSS of the subject tractor why did the appellants issue a
check in payment of the item to the appellee? And long after MWSS had complained about the defective tractor engine, and after
the appellee had failed to remedy the defect, why did the appellants still draw and deliver a replacement check to the appellee for
the increased amount of P33,500.00?
These payments argue against the claim now made by the defendants that the sale was conditional.
According to the appellee, the additional amount covered the cost of replacing the oil gasket of the tractor engine when it was
repaired in Soledad Cac's gasoline station in Quezon City. The appellants, on the other hand, claims the amount represented the
freight charges for transporting the tractor from Cauayan, Isabela to Metro Manila.
The appellants should have explained why they failed to include the freight charges in the first check. The tractor was transported
from Isabela to Metro Manila as early as April 1984, and the first check was drawn at about the same time. The freight charges
cannot be said to have been incurred when the tractor engine was delivered back to the supplier for repairs. The appellants
admitted that the engine was not brought back to Isabela. The repairs were done at Soledad Cac's gasoline station in Quezon City.
Anent the first assigned error, We sustain the trial court's finding that at the time of the purchase, the appellants did not reveal to
the appellee the true purpose for which the tractor would be used. Granting that the appellants informed the appellee that they
would be reselling the unit to the MWSS, an entity admittedly not engaged in farming, and that they ordered the tractor without the
power tiller, an indispensable accessory if the tractor would be used in farming, these in themselves would not constitute the
required implied notice to the appellee as seller.
xxx xxx xxx
In regard to the second assigned error, We do not agree that the appellee should have been held liable for the tractor's alleged
hidden defects. . . .
It has to be noted in this regard that, to satisfy the requirements of the MWSS, the appellants borrowed a lawn mower from the
MWSS so they could fabricate one such mower. The appellants' witness stated that the kind of mid-mounted lawn mower was being
manufactured by their competitor, Alpha Machinery, which had by then stopped supplying the same (tsn,
Nov. 29, 1988, pp. 73-74). There is no showing that the appellants had had any previous experience in the fabrication of this lawn
mower. In fact, as aforesaid, they had to borrow one from the MWSS which they could copy. But although they made a copy with
the same specifications and design, there was no assurance that the copy would function as well as with the model.
xxx xxx xxx
Although the trial court discussed it in a different light, We view the matter in the same way the trial court did that the lawn
mower as fabricated by the appellants was the root of the parties' problems.
Having had no previous experience in the manufacture of lawn mowers of the same type as that in litigation, and in a possibly
patent-infringing effort to undercut their competition, the appellants gathered enough daring to do the fabrication themselves. But
the product might have proved too much for the subject tractor to power, and the tractor's engine was strained beyond its limits,
causing it to overheat and damage its gaskets.
No wonder, then, it was a gasket Soledad Cac had to replace, at a cost chargeable to the appellants. No wonder, furthermore, the
appellants' witness declared that even after the replacement of that one gasket, the engine still leaked oil after being torture-tested.
The integrity of the other engine gaskets might have been impaired, too. Such was the burden placed on the engine. The engine
malfunctioned not necessarily because the engine, as alleged by the appellants, had been a reconditioned, and not a brand new,
one. It malfunctioned because it was made to do what it simply could not.2
It was, nevertheless, an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the questioned transaction. Ong had
there so acted, not in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it should only
be the corporation, not the person acting for and on its behalf, that properly could be made liable thereon.3
Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only
when
1. He assents (a) to a patently unlawful act of the corporation, or

(b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or
other persons;4
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written
objection thereto;5
3. He agrees to hold himself personally and solidarily liable with the corporation;6 or
4. He is made, by a specific provision of law, to personally answer for his corporate action.7
In the case at bench, there is no indication that petitioner David Ong could be held personally accountable under any of the abovementioned cases.
WHEREFORE, the petition is given DUE COURSE and the decision of the trial court, affirmed by the appellate court, is MODIFIED insofar as it holds
petitioner David Ong jointly and severally liable with Tramat Mercantile, Inc., which portion of the questioned judgment is SET ASIDE. In all other
respects, the decision appealed from is AFFIRMED. No costs.
SO ORDERED.
G.R. No. L-5081 February 24, 1954
MARVEL BUILDING CORPORATION, ET AL., plaintiffs-appellees, vs. SATURNINO DAVID, in his capacity as Collector, Bureau of Internal
Revenue, defendant-appellant.
Assistant Solicitor General Francisco Carreon for appellant.

Antonio Quirino and Rosendo J. Tansinsin for appellees.
LABRADOR, J.:
This action was brought by plaintiffs as stockholders of the Marvel Building Corporation to enjoin the defendant Collector of Internal Revenue from
selling at public auction various properties described in the complaint, including three parcels of land, with the buildings situated thereon, known as the
Aguinaldo Building, the Wise Building, and the Dewey Boulevard-Padre Faura Mansion, all registered in the name of the said corporation. Said properties
were seized and distrained by defendant to collect war profits taxes assessed against plaintiff Maria B. Castro (Exhibit B). Plaintiffs allege that the said
three properties (lands and buildings) belong to Marvel Building Corporation and not to Maria B. Castro, while the defendant claims that Maria B. Castro
is the true and sole owner of all the subscribed stock of the Marvel Building Corporation, including those appearing to have been subscribed and paid for
by the other members, and consequently said Maria B. Castro is also the true and exclusive owner of the properties seized. The trial court held that the
evidence, which is mostly circumstantial, fails to show to its satisfaction that Maria B. Castro is the true owner of all the stock certificates of the
corporation, because the evidence is susceptible of two interpretations and an interpretation may not be made which would deprive one of the property
without due process of law.
It appears that on September 15, 1950, the Secretary of Finance, upon consideration of the report of a special committee assigned to study the war
profits tax case of Mrs. Maria B. Castro, recommended the collection of P3,593,950.78 as war profits taxes for the latter, and on September 22, 1953
the President instructed the Collector that steps be taken to collect the same (Exhibits 114, 114-A to 114-D). Pursuant thereto various properties,
including the three above mentioned, were seized by the Collector of Internal Revenue on October 31, 1950. On November 13, 1950, the original
complaint in this case was filed. After trial, the Court of First Instance of Manila rendered judgment ordering the release of the properties mentioned,
and enjoined the Collector of Internal Revenue from selling the same. The Collector of Internal Revenue has appealed to this Court against the
judgment.
The following facts are not disputed, or are satisfactorily proved by the evidence:
The Articles of Incorporation of the Marvel Building Corporation is dated February 12, 1947 and according to it the capital stock is P2,000,000, of which
P1,025,000 was (at the time of incorporation) subscribed and paid for by the following incorporators:
Maria B. Castro 250 shares P 250,000.00
Amado A. Yatco 100 " 100,000.00
Santiago Tan 100 " 100,000.00
Jose T. Lopez 90 " 90,000.00
Benita Lamagna 90 " 90,000.00
C.S. Gonzales 80 " 80,000.00

Maria Cristobal 70 " 70,000.00
Segundo Esguerra, Sr. 75 " 75,000.00
Ramon Sangalang 70 " 70,000.00
Maximo Cristobal 55 " 55,000.00
Antonio Cristobal 45 " 45,000.00
P1,025,000.00
Maria B Castro was elected President and Maximo Cristobal, Secretary-Treasurer (Exhibit A).
The Wise Building was purchased on September 4, 1946, the purchase being made in the name of Dolores Trinidad, wife of Amado A. Yatco (Exhibit V),
and the Aguinaldo Building, on January 17, 1947, in the name of Segundo Esguerra, Sr. (Exhibit M). Both building were purchased for P1,800,000, but
as the corporation had only P1,025,000, the balance of the purchase price was obtained as loans from the Insular Life Assurance Co., Ltd. and the
Philippine Guaranty Co., Inc. (Exhibit C).
Of the incorporators of the Marvel Building Corporation, Maximo Cristobal and Antonio Cristobal are half-brothers of Maria B. Castro, Maria Cristobal is a
half-sister, and Segundo Esguerra, Sr. a brother-in-law, husband of Maria Cristobal, Maria B. Castro's half-sister. Maximo B. Cristobal did not file any
income tax returns before the year 1946, except for three years 1939 and 1940, but in these years he was exempted from the tax. He has not filed any
war profits tax return (Exhibit 54). Antonio Cristobal, Segundo Esguerra, Sr. and Jose T. Lopez did not file any income tax returns for the years prior to
1946, and neither did they file any war profits tax returns (Exhibit 52). Maria Cristobal filed income tax returns for the year 1929 to 1942, but they were
exempt from the tax (Exhibit 53). Benita A. Lamagna did not file any income tax returns prior to 1945, except for 1942 which was exempt. She did not
file any was profits tax (Exhibit 55). Ramon M. Sangalang did not file income tax returns up to 1945 except for the years 1936, 1937, 1938, 1939 and
1940. He has not filed any war profits tax return (Exhibit 57). Amada A. Yatco did not file income tax returns prior to 1945, except for the years 1937,
1938, 1939, 1941 and 1942, but these were exempt. He did not file any war profits tax return (Exhibit 58).
Antonio Cristobal's income in 1946 is P15,630, and in 1947, P4,550 (Exhibits 59-60); Maximo B. Cristobal's income in 1946 is P19,759.10, in 1947,
P9,773.47 (Exhibits 61-62); Segundo Esquerra's income in 1946 is P5,500, in 1947, P7,754.32 (Exhibits 63-64); Jose T. Lopez's income in 1946 is
P20,785, in 1947, P14,302.77 (Exhibits 69-70); Benita A. Lamagna's income in 1945 is P1,559, in 1946, P6,463.36, in 1947, P6,189.79 and her
husband's income in 1947 is P10,825.53 (Exhibits 65-68); Ramon M. Sangalang's income in 1945 is P5,500, in 1946, P18,300.00 (Exhibits 71-72);
Santiago Tan's income in 1945 is P456, in 1947 is P9,167.95, and in 1947, P7,620.11 (Exhibits 73-75); and Amado Yatco's income in 1945 is P12,600, in
1946, P23,960, and in 1947, P11,160 (Exhibits 76-78).
In October, 1945 Maria B. Castro, Nicasio Yatco, Maxima Cristobal de Esquerra, Maria Cristobal Lopez and Maximo Cristobal organized the Maria B.
Castro, Inc. with capital stock of P100,000, of which Maria B. Castro subscribed for P99,600 and all others for P100 each. This was increased in 1950 to
P500,000 and Maria B. Castro subscribed P76,000 and the others P1,000 each (Exhibit 126).
It does not appear that the stockholders or the board of directors of the Marvel Building Corporation have ever held a business meeting, for no books
thereof or minutes meeting were ever mentioned by the officers thereof or presented by them at the trial. The by-laws of the corporation, if any had
ever been approved, has not been presented. Neither does it appear that any report of the affairs of the corporation has been made, either of its
transactions or accounts.
From the book of accounts of the corporation, advances to the Marvel Building Corporation of P125,000 were made by Maria B. Castro in 1947,
P102,916.05 in 1948 and P102,916.05 in 1948, and P160,910.96 in 1949 (Exhibit 118).
The main issue involved in these proceedings is: Is Maria B. Castro the owner of all the shares of stocks of Marvel Building Corporation and the other
stockholders mere dummies of hers?
The most important evidence presented by the Collector of Internal Revenue to prove his claim that Maria B. Castro is the sole and exclusive owner of
the shares of stock of the Marvel Building Corporation is supposed endorsement in blank of the shares of stock issued in the name of the other
incorporators, and the possession thereof by Maria B. Castro. The existence of said endorsed certificates was testified to by witnesses Felipe Aquino,
internal revenue examiner, Antonio Mariano, examiner, and Crispin Llamado, Under Secretary of Finance, who declared as follows: Towards the end of
the year 1948 and about the beginning of the year 1949, while Aquino and Mariano were examining the books and papers were furnished by its
secretary, Maximo Cristobal, they came across an envelope containing eleven stock certificates, bound together by an Acco fastener, which (certificates)
corresponded in number and in amount on their face to the subscriptions of the stockholders that all the certificates, except that in the name of Maria B.
Castro, were endorsed in the bank by the subscribers; that as the two revenue agents could not agree what to do with the certificates, Aquino brought
them to Under-Secretary of Finance Llamado, who thereupon suggested that photostatic copies thereof be taken; that this was done, and the
photostatic copies taken are (Exhibits 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13; and in that July, 1950, copy-cat copies of the above photostats were taken,
and said copy-cat copies are Exhibits 40-49.
Julio Llamado, bookkeeper of the Marvel Building Corporation from 1947 to May, 1948, also testified that he was the one who had prepared the original
certificates, putting therein the number of shares in words in handprint; that the originals were given to him by Maria B. Castro for comparison with the
articles of incorporation; that they were not yet signed by the President and by the Secretary-Treasurer when he had the certificates; and that after the
checking he returned all of them to Mrs. Castro. He recognized the photostats, Exhibit 4 to 13 as photostats of the said originals. He also declared that
he also prepared a set of stock certificates, similar to the certificates which were copied in the photostats, the number of shares, and the date issue, and
that the certificates he had prepared are Exhibits H, H-1 to H-7 and J (Exhibits 30-38). This set of certificates was made by him first and the set of
which photostats were taken, a few days later.
The plaintiffs offered a half-hearted denial of the existence of the endorsed blank certificates, Maximo Cristobal, secretary of the corporation, saying that
no investigation was ever made by Aquino and Mariano in which said certificates were discovered by the latter. They, however, vigorously attack the
credibility of the witnesses for the defendant, imputing to the Llamados, enmity against Maria B. Castro, and to Aquino and Mariano, a very doubtful
conduct in not divulging the existence of the certificates either Lobrin, Chief Income Tax Examiner, or to the Collector of Internal Revenue, both their
immediate chiefs. Reliance is also placed on a certificate, Exhibit W, wherein Aquino and others declare that the certificates (Exhibits 30 to 38, or H, H-1
to H-7 and J) were regular and were not endorsed when the same were examined. In connection with this certificate, Exhibit W, we note that it states
that the certificates examined were Exhibits 30 to 38, the existence or character of which are not disputed. But the statement contains nothing to the
effect that the above certificates were the only one existence, according to their knowledge. Again the certificate was issued for an examination on
September 1949, not by Aquino and Mariano at the end of 1948 or the beginning of 1949. The certificate, therefore, neither denies the existence of the
endorsed certificates, nor that Aquino and Mariano had made an examination of the papers of the corporation at the end of the year 1948. It ca not,
therefore, discredit the testimonies of the defendant's witnesses.
As to the supposed enmity of the Llamados towards the plaintiff Maria B. Castro, we note that, supposing that there really was such enmity, it does not
appear that it was of such magnitude or force as could have induced the Llamados and Maria B. Castro were close friends way back in 1947 and up to
1949; but that at the time of the trial the friendship had been marred by misunderstandings. We believe that in 1948 and 1949 the Llamados were
trusted friends of Maria B. Castro, and this explains why they had knowledge of her secret transactions. The younger Llamado even made advances for
the hand of Maria B. Castro's daughter, and this at the time when as a bookkeeper he was entrusted with checking up the certificates of stock. When
the older Llamado kept secret the existence of the endorsed certificates, the friendship between the two families was yet intact; hence, the existence of
the endorsed certificates must have been kept to himself by the older Llamado. All the above circumstances reinforce our belief that the Llamados had
personal knowledge of the facts they testify to, and the existence of this knowledge in turn renders improbable plaintiffs' claim that their testimonies
were biased.
Attempt was also made by the plaintiffs to show by expert evidence that the endorsement could have been superimposed, i.e., that the signatures made
on other papers and these were pasted and thereafter the documents photographed. Judicial experience is to the effect that the expert witnesses can
always be obtained for both sides of an issue, most likely because expert witnesses are no longer impermeable to the influence of fees (II Wigmore,
Sec. 563(2), p. 646). And if parties are capable of paying fees, expert opinion should be received with caution. In the case at bar, the opinion on the
supposed superimposition was merely a possibility, and we note various circumstances which proved that the signatures were not superimposed and
corroborate defendant's claim that they were genuine. In the first place,, the printed endorsement contains a very heavy line at the bottom for the
signature of the endorsee. This line in almost all the endorsements is as clear as the printed letters above it, and at the points where the letters of the
signature extend down and transversed it (the line), there is no indication that the line is covered by a superimposed paper. Again in these places both
the signatures and the lines are clear and distinct where they cross one another. Had there been superimpositions the above features could not have
been possible. In the second place, Maria B. Castro admitted having signed 25 stock certificates, but only eleven were issued (t. s. n., p. 662). No
explanation is given by her why she had to sign as many as 25 forms when there were only eleven subscribers and eleven forms to be filed. This
circumstances corroborate the young Llamado's declaration that two sets of certificates had been prepared. The nineteen issue must be Exhibits H, H-1
to H-7 and J, or Nos. 30 to 38, and the stock certificates endorsed whose photostatic copies are Exhibits 4 to 13. It is to be remembered also, that it is a
common practice among unscrupulous merchants to carry two sets of books, one set for themselves and another to be shown to tax collectors. This
practice could not have been unknown to Maria B. Castro, who apparently had been able to evade the payment of her war profits taxes. These
circumstances, coupled with the testimony of Julio Llamado that two sets of certificates were given to him for checking, show to an impartial mind the
existence of the set of certificates endorsed in blank, thus confirming the testimonies of the defendant's witnesses, Aquino, Mariano and Crispin
Llamado, and thus discrediting the obviously partial testimony of the expert presented by plaintiffs. The genuineness of the signatures on the
endorsements is not disputed. How could the defendant have secured these genuine signatures? Plaintiffs offer no explanation for this, although they do
not question them. It follows that the genuine signatures must have been made on the stock certificates themselves.
Next in importance among the evidence submitted by the defendant collector to prove his contention that Maria B. Castro is the sole owner of the
shares of stock of the Marvel Building Corporation, is the fact that the other stockholders did not have incomes in such amounts, during the time of the
organization of the corporation in 1947, or immediately thereto, as to enable them to pay in full for their supposed subscriptions. This fact is proved by
their income tax returns, or the absence thereof. Let us take Amado A. Yatco as an example. Before 1945 his returns were exempt from the tax, in 1945
he had P12,600 and in 1946, P23,000. He has four children. How could he have paid P100,000 in 1945 and 1946? Santiago Tan who also contributed
P100,000 had no appreciable income before 1946, and this year an income of only P9,167.95. Jose T. Lopez also did not file any income tax returns
before 1940 and 1946 he had an income of only P20,785, whereas he is supposed to have subscribed P90,000 worth of stock early in 1947. Benita
Lamagna had no returns either up to 1945, except in 1942, which was exempt and in 1945 she had an income of P1,550 and in 1946, P6,463.36. In the
same situation are all the others, and besides, brothers and sisters and brother-in-law of Maria B. Castro. On the other hand, Maria B. Castro had been
found to have made enormous gains or profits in her business such that the taxes thereon were assessed at around P3,000,000. There was, therefore, a
prima facie case out by the defendant collector that Maria B. Castro had furnished (& all the money that the Marvel Building Corporation had.
In order the meet the above evidence only three of the plaintiffs testified, namely, Maximo Cristobal, the corporation's secretary, who made the general
assertion on the witness stand that the other stockholders paid for their shares in full, Maria B. Castro, who stated that payments for the subscription
were made to her, and C.S. Gonzales, who admitted that Maria B. Castro, paid for his subscription. After a careful study of the above testimonies,
however, we find them subject to various objections. Maximo Cristobal declared that he issued provincial receipts for the subscriptions supposedly paid
to him in 1946; but none of the supposed receipts were presented. If the subscriptions were really received by him, big as the amounts were, he would
have been able to tell specifically, by dates and in fix amounts, when and how the payments were made. The general assertion of alleged payments,
without the concrete days and amounts of payments, are, according to our experience, positive identifications of untruthfulness, for when a witness
testified to a fact that actually occurs, the act is concretely stated and no generalization is made.
With respect to Maria B. Castro's testimony, we find it to be as untruthful as that of Cristobal. She declared that payments of the subscriptions took
place between July and December, 1946, and that first payments were first deposited by her in the National City Bank of New York. A study of her
account in said bank (Exhibit 82), however, fails to show the alleged deposit of the subscriptions during the year 1946 (See Exhibits 83-112). This fact
completely belies her assertion. As to the testimony of C.S. Gonzales that Maria B. Castro advanced his subscription, there is nothing in the evidence to
corroborate it, and the circumstances show otherwise. If he had really been a stockholder and Maria B. Castro advanced his subscription, the agreement
between him and Castro should have been put in writing, the amount advanced being quite considerable (P80,000), and it appearing further that
Gonzales is no close relative or confidant of Castro.
Lastly, it is significant that the plaintiffs, the supposed subscribers, who should have come to court to assert that they actually paid for their
subscriptions, and are not mere dummies, did not do so. They could not have afforded such a costly indifference, valued at from P70,000 to P100,000
each, if they were not actual dummies. This failure on their part to take the witness stand to deny or refute the charge that they were mere dummies is
to us of utmost significance. What could have been easier to disprove the charge that they were dummies, than for them to come to court and show
their receipts and testify on the payments they have paid on their subscriptions? This they, however refused to do so. They had it in their power to
rebut the charges, but they chose to keep silent. The non-production of evidence that would naturally have been produced by an honest and therefore
fearless claimant permits the inference that its tenor is unfavorable to the party's cause (II Wigmore, Sec. 285, p.162). A party's silence to adverse
testimony is equivalent to an admission of its truth (Ibid, Sec. 289, p. 175).
Our consideration of the evidence submitted on both sides leads us to a conclusion exactly opposite that arrived at by the trial court. In general the
evidence offered by the plaintiffs is testimonial and direct evidence, easy of fabrication; that offered by defendant, documentary and circumstantial, not
only difficult of fabrication but in most cases found in the possession of plaintiffs. There is very little room for choice as between the two. The
circumstantial evidence is not only convincing; it is conclusive. The existence of endorsed certificates, discovered by the internal revenue agents
between 1948 and 1949 in the possession of the Secretary-Treasurer, the fact that twenty-five certificates were signed by the president of the
corporation, for no justifiable reason, the fact that two sets of certificates were issued, the undisputed fact that Maria B. Castro had made enormous
profits and, therefore, had a motive to hide them to evade the payment of taxes, the fact that the other subscribers had no incomes of sufficient
magnitude to justify their big subscriptions, the fact that the subscriptions were not receipted for and deposited by the treasurer in the name of the
corporation but were kept by Maria B. Castro herself, the fact that the stockholders or the directors never appeared to have ever met to discuss the
business of the corporation, the fact that Maria B. Castro advanced big sums of money to the corporation without any previous arrangement or
accounting, and the fact that the books of accounts were kept as if they belonged to Maria B. Castro alone these facts are of patent and potent
significance. What are their necessary implications? Maria B. Castro would not have asked them to endorse their stock certificates, or be keeping these
in her possession, if they were really the owners. They never would have consented that Maria B. Castro keep the funds without receipts or accounting,
nor that she manages the business without their knowledge or concurrence, were they owners of the stocks in their own rights. Each and every one of
the facts all set forth above, in the same manner, is inconsistent with the claim that the stockholders, other than Maria B. Castro, own their shares in
their own right. On the other hand, each and every one of them, and all of them, can point to no other conclusion than that Maria B. Castro was the
sole and exclusive owner of the shares and that they were only her dummies.
In our opinion, the facts and circumstances duly set forth above, all of which have been proved to our satisfaction, prove conclusively and beyond
reasonable doubt (section 89, Rule 123 of the Rules of Court and section 42 of the Provisional law for the application of the Penal Code) that Maria B.
Castro is the sole and exclusive owner of all the shares of stock of the Marvel Building Corporation and that the other partners are her dummies.
Wherefore, the judgment appealed from should be, as it hereby is, reversed and the action filed by plaintiffs-appellees, dismissed, with costs against
plaintiffs-appellees. So ordered.
G.R. No. L-20886 April 27, 1967
NATIONAL MARKETING CORPORATION (NAMARCO), plaintiff-appellant, vs. ASSOCIATED FINANCE COMPANY, INC., and FRANCISCO
SYCIP, defendants.
FRANCISCO SYCIP, defendant-appellee.
Tomas P. Matic, Jr,. for plaintiff and appellant.

Francisco Sycip in his behalf as defendant and appellee.
DIZON, J.:
Appeal by the National Marketing Corporation hereinafter referred to as NAMARCO, from the decision of the Court of First Instance of Manila in Civil
Case No. 45770 ordering the Associated Finance Company, Inc. hereinafter referred to as the ASSOCIATED to pay the NAMARCO the sum of
P403,514.28, with legal interest thereon from the date of filing of the action until fully paid, P80,702.26 as liquidated damages, P5,000.00 as attorney's
fees, plus costs, but dismissing the complaint insofar as defendant Francisco Sycip was concerned, as well as the latter's counterclaim. The appeal is
only from that portion of the decision dismissing the case as against Francisco Sycip.
On March 25, 1958, ASSOCIATED, a domestic corporation, through its President, appellee Francisco Sycip, entered into an agreement to exchange
sugar with NAMARCO, represented by its then General Manager, Benjamin Estrella, whereby the former would deliver to the latter 22,516 bags (each
weighing 100 pounds) of "Victorias" and/or "National" refined sugar in exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" raw
sugar belonging to NAMARCO, both agreeing to pay liquidated damages equivalent to 20% of the contractual value of the sugar should either party fail
to comply with the terms and conditions stipulated (Exhibit A). Pursuant thereto, on May 19,1958, NAMARCO delivered to ASSOCIATED 7,732.71 bars of
"Busilak" and 17,285.08 piculs of "Pasumil" domestic raw sugar. As ASSOCIATED failed to deliver to NAMARCO the 22,516 bags of "Victoria" and/or
"National" refined sugar agreed upon, the latter, on January 12, 1959, demanded in writing from the ASSOCIATED either (a) immediate delivery thereof
before January 20, or (b) payment of its equivalent cash value amounting to P372,639.80.
On January 19, 1959, ASSOCIATED, through Sycip, offered to pay NAMARCO the value of 22,516 bags of refined sugar at the rate of P15.30 per bag,
but the latter rejected the offer. Instead, on January 21 of the same year it demanded payment of the 7,732.71 bags of "Busilak" raw sugar at P15.30
per bag, amounting to P118,310.40. and of the 17,285.08 piculs of "Pasumil" raw sugar at P16.50 per picul, amounting, to P285.203.82, or a total price
of P403,514.28 for both kinds of sugar, based on the sugar quotations (Exh. H) as of March 20, 1958 the date when the exchange agreement was
entered into.
As ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar delivered to it, inspite of repeated demands therefore, NAMARCO
instituted the present action in the lower court to recover the sum of P403,514.28 in payment of the raw sugar received by defendants from it;
P80,702.86 as liquidated damages; P10,000.00 as attorney's fees, expenses of litigation and exemplary damages, with legal interest thereon from the
filing of the complaint until fully paid.
In their amended answer defendants, by way of affirmative defenses, alleged that the correct value of the sugar delivered by NAMARCO to them was
P259,451.09 or P13.30 per bag of 100 lbs. weight (quedan basis) and not P403,514.38 as claimed by NAMARCO. As counterclaim they prayed for the
award of P500,000.00 as moral damages, P100,000.00 as exemplary damages and P10,000.00 as attorney's fees.
After due trial court rendered the appealed judgment. The appeal was taken to the Court of Appeals, but on January 15, 1963 the latter certified the
case to us for final adjudication pursuant to sections 17 and 31 of the Judiciary Act of 1948, as amended, the amount involved being more than
P200,000.00, exclusive of interests and cost.
The only issue to be resolved is whether, upon the facts found by the trial court, which, in our opinion, are fully supported by the evidence
Francisco Sycip may be held liable, jointly and severally with his co-defendant, for the sums of money adjudged in favor of NAMARCO.
The evidence of record shows that, of the capital stock of ASSOCIATED, Sycip owned P60,000.00 worth of shares, while his wife the second biggest
stockholder owned P20,000.00 worth of shares; that the par value of the subscribed capital stock of ASSOCIATED was only P105,000.00; that
negotiations that lead to the execution of the exchange agreement in question were conducted exclusively by Sycip on behalf of ASSOCIATED; that, as
a matter of fact, in the course of his testimony, Sycip referred to himself as the one who contracted or transacted the business in his personal capacity,
and asserted that the exchange agreement was his personal contract; that it was Sycip who made personal representations and gave assurances that
ASSOCIATED was in actual possession of the 22,516 bags of "Victorias" and/or "National" refined sugar which the latter had agreed to deliver to
NAMARCO, and that the same was ready for delivery; that, as a matter of fact, ASSOCIATED was at that time already insolvent; that when NAMARCO
made demands upon ASSOCIATED to deliver the 22,516 bags of refined sugar it was under obligation to deliver to the former, ASSOCIATED and Sycip,
instead of making delivery of the sugar, offered to pay its value at the rate of P15.30 per bag a clear indication that they did not have the sugar
contracted for.1wph1.t
The foregoing facts, fully established by the evidence, can lead to no other conclusion than that Sycip was guilty of fraud because through false
representations he succeeded in inducing NAMARCO to enter into the aforesaid exchange agreement, with full knowledge, on his part, on the fact that
ASSOCIATED whom he represented and over whose business and affairs he had absolute control, was in no position to comply with the obligation it had
assumed. Consequently, he can not now seek refuge behind the general principle that a corporation has a personality distinct and separate from that of
its stockholders and that the latter are not personally liable for the corporate obligations. To the contrary, upon the proven facts, We feel perfectly
justified in "piercing the veil of corporate fiction" and in holding Sycip personally liable, jointly and severally with his co-defendant, for the sums of
money adjudged in favor of appellant. It is settled law in this and other jurisdictions that when the corporation is the mere alter ego of a person, the
corporate fiction may be disregarded; the same being true when the corporation is controlled, and its affairs are so conducted as to make it merely an
instrumentality, agency or conduit of another (Koppel Phils., etc. vs. Yatco, etc., 43 O.G. No. 11. Nov. 1947; Yutivo Sons, etc. vs. Court of Tax Appeals,
etc., G.R. No. L-13203, promulgated on January 28, 1961).
Wherefore, the decision appealed from is modified by sentencing defendant-appellee Francisco Sycip to pay, jointly and severally with the Associated
Finance Company, Inc., the sum of money which the trial court sentenced the latter to pay to the National Marketing Corporation, as follows: the sum of
FOUR HUNDRED THREE THOUSAND FIVE HUNDRED FOURTEEN PESOS, and TWENTY-EIGHT CENTAVOS P403,514.28), with interest at the legal rate
from the date of the filing of the action until fully paid plus an additional amount of EIGHTY THOUSAND SEVEN HUNDRED TWO PESOS and EIGHTY-SIX
CENTAVOS (P80,702.86) as liquidated damages and P5,000.00 as attorney's fees and further to pay the costs. With costs.
G.R. No. 96490 February 3, 1992
INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO, petitioner, vs. VOLUNTARY ARBITRATOR TEODORICO P. CALICA and INDOPHIL
TEXTILE MILLS, INC., respondents.
Romeo C. Lagman for petitioner.

Borreta, Gutierrez & Leogardo for respondent Indophil Textile Mills, Inc.
MEDIALDEA, J.:
This is a petition for certiorari seeking the nullification of the award issued by the respondent Voluntary Arbitrator Teodorico P. Calica dated December
8, 1990 finding that Section 1 (c), Article I of the Collective Bargaining Agreement between Indophil Textile Mills, Inc. and Indophil Textile Mill Workers
Union-PTGWO does not extend to the employees of Indophil Acrylic Manufacturing Corporation as an extension or expansion of Indophil Textile Mills,
Incorporated.
The antecedent facts are as follows:
Petitioner Indophil Textile Mill Workers Union-PTGWO is a legitimate labor organization duly registered with the Department of Labor and Employment
and the exclusive bargaining agent of all the rank-and-file employees of Indophil Textile Mills, Incorporated. Respondent Teodorico P. Calica is
impleaded in his official capacity as the Voluntary Arbitrator of the National Conciliation and Mediation Board of the Department of Labor and
Employment, while private respondent Indophil Textile Mills, Inc. is a corporation engaged in the manufacture, sale and export of yarns of various
counts and kinds and of materials of kindred character and has its plants at Barrio Lambakin. Marilao, Bulacan.
In April, 1987, petitioner Indophil Textile Mill Workers Union-PTGWO and private respondent Indophil Textile Mills, Inc. executed a collective bargaining
agreement effective from April 1, 1987 to March 31, 1990.
On November 3, 1967 Indophil Acrylic Manufacturing Corporation was formed and registered with the Securities and Exchange Commission.
Subsequently, Acrylic applied for registration with the Board of Investments for incentives under the 1987 Omnibus Investments Code. The application
was approved on a preferred non-pioneer status.
In 1988, Acrylic became operational and hired workers according to its own criteria and standards. Sometime in July, 1989, the workers of Acrylic
unionized and a duly certified collective bargaining agreement was executed.
In 1990 or a year after the workers of Acrylic have been unionized and a CBA executed, the petitioner union claimed that the plant facilities built and set
up by Acrylic should be considered as an extension or expansion of the facilities of private respondent Company pursuant to Section 1(c), Article I of the
CBA, to wit,.
c) This Agreement shall apply to the Company's plant facilities and installations and to any extension and
expansion thereat. (Rollo, p.4)
In other words, it is the petitioner's contention that Acrylic is part of the Indophil bargaining unit.
The petitioner's contention was opposed by private respondent which submits that it is a juridical entity separate and distinct from Acrylic.
The existing impasse led the petitioner and private respondent to enter into a submission agreement on September 6, 1990. The parties jointly
requested the public respondent to act as voluntary arbitrator in the resolution of the pending labor dispute pertaining to the proper interpretation of
the CBA provision.
After the parties submitted their respective position papers and replies, the public respondent Voluntary Arbitrator rendered its award on December 8,
1990, the dispositive portion of which provides as follows:
PREMISES CONSIDERED, it would be a strained interpretation and application of the questioned CBA provision if we would extend to
the employees of Acrylic the coverage clause of Indophil Textile Mills CBA. Wherefore, an award is made to the effect that the
proper interpretation and application of Sec. l, (c), Art. I, of the 1987 CBA do ( sic) not extend to the employees of Acrylic as an
extension or expansion of Indophil Textile Mills, Inc. ( Rollo, p.21)
Hence, this petition raising four (4) issues, to wit:
1. WHETHER OR NOT THE RESPONDENT ARBITRATOR ERRED IN INTERPRETING SECTION 1(c), ART I OF THE
CBA BETWEEN PETITIONER UNION AND RESPONDENT COMPANY.
2. WHETHER OR NOT INDOPHIL ACRYLIC IS A SEPARATE AND DISTINCT ENTITY FROM RESPONDENT
COMPANY FOR PURPOSES OF UNION REPRESENTATION.
3. WHETHER OR NOT THE RESPONDENT ARBITRATOR GRAVELY ABUSED HIS DISCRETION AMOUNTING TO
LACK OR IN EXCESS OF HIS JURISDICTION.
4. WHETHER OR NOT THE RESPONDENT ARBITRATOR VIOLATED PETITIONER UNION'S CARDINAL PRIMARY
RIGHT TO DUE PROCESS. (Rollo, pp. 6-7)
The central issue submitted for arbitration is whether or not the operations in Indophil Acrylic Corporation are an extension or expansion of private
respondent Company. Corollary to the aforementioned issue is the question of whether or not the rank-and-file employees working at Indophil Acrylic
should be recognized as part of, and/or within the scope of the bargaining unit.
Petitioner maintains that public respondent Arbitrator gravely erred in interpreting Section l(c), Article I of the CBA in its literal meaning without taking
cognizance of the facts adduced that the creation of the aforesaid Indophil Acrylic is but a devise of respondent Company to evade the application of the
CBA between petitioner Union and respondent Company.
Petitioner stresses that the articles of incorporation of the two corporations establish that the two entities are engaged in the same kind of business,
which is the manufacture and sale of yarns of various counts and kinds and of other materials of kindred character or nature.
Contrary to petitioner's assertion, the public respondent through the Solicitor General argues that the Indophil Acrylic Manufacturing Corporation is not
an alter ego or an adjunct or business conduit of private respondent because it has a separate legitimate business purpose. In addition, the Solicitor
General alleges that the primary purpose of private respondent is to engage in the business of manufacturing yarns of various counts and kinds and
textiles. On the other hand, the primary purpose of Indophil Acrylic is to manufacture, buy, sell at wholesale basis, barter, import, export and otherwise
deal in yarns of various counts and kinds. Hence, unlike private respondent, Indophil Acrylic cannot manufacture textiles while private respondent
cannot buy or import yarns.
Furthermore, petitioner emphasizes that the two corporations have practically the same incorporators, directors and officers. In fact, of the total stock
subscription of Indophil Acrylic, P1,749,970.00 which represents seventy percent (70%) of the total subscription of P2,500,000.00 was subscribed to by
respondent Company.
On this point, private respondent cited the case of Diatagon Labor Federation v. Ople, G.R. No. L-44493-94, December 3, 1980, 10l SCRA 534, which
ruled that two corporations cannot be treated as a single bargaining unit even if their businesses are related. It submits that the fact that there are as
many bargaining units as there are companies in a conglomeration of companies is a positive proof that a corporation is endowed with a legal
personality distinctly its own, independent and separate from other corporations ( see Rollo, pp. 160-161).
Petitioner notes that the foregoing evidence sufficiently establish that Acrylic is but an extension or expansion of private respondent, to wit:
(a) the two corporations have their physical plants, offices and facilities situated in the same compound, at
Barrio Lambakin, Marilao, Bulacan;
(b) many of private respondent's own machineries, such as dyeing machines, reeling, boiler, Kamitsus among
others, were transferred to and are now installed and being used in the Acrylic plant;
(c) the services of a number of units, departments or sections of private respondent are provided to Acrylic; and
(d) the employees of private respondent are the same persons manning and servicing the units of Acrylic. ( see
Rollo, pp. 12-13)
Private respondent insists that the existence of a bonafide business relationship between Acrylic and private respondent is not a proof of being a single
corporate entity because the services which are supposedly provided by it to Acrylic are auxiliary services or activities which are not really essential in
the actual production of Acrylic. It also pointed out that the essential services are discharged exclusively by Acrylic personnel under the control and
supervision of Acrylic managers and supervisors.
In sum, petitioner insists that the public respondent committed grave abuse of discretion amounting to lack or in excess of jurisdiction in erroneously
interpreting the CBA provision and in failing to disregard the corporate entity of Acrylic.
We find the petition devoid of merit.
Time and again, We stress that the decisions of voluntary arbitrators are to be given the highest respect and a certain measure of finality, but this is not
a hard and fast rule, it does not preclude judicial review thereof where want of jurisdiction, grave abuse of discretion, violation of due process, denial of
substantial justice, or erroneous interpretation of the law were brought to our attention. ( see Ocampo, et al. v. National Labor Relations Commission,
G.R. No. 81677, 25 July 1990, First Division Minute Resolution citing Oceanic Bic Division (FFW) v. Romero, G.R. No. L-43890, July 16, 1984, 130 SCRA
392)
It should be emphasized that in rendering the subject arbitral award, the voluntary arbitrator Teodorico Calica, a professor of the U.P. Asian Labor
Education Center, now the Institute for Industrial Relations, found that the existing law and jurisprudence on the matter, supported the private
respondent's contentions. Contrary to petitioner's assertion, public respondent cited facts and the law upon which he based the award. Hence, public
respondent did not abuse his discretion.
Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a
juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a
mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is liability will attach directly to
the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation. (Umali et al. v. Court of Appeals, G.R. No. 89561, September 13, 1990, 189 SCRA 529, 542)
In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the corporation is a devise to evade the
application of the CBA between petitioner Union and private respondent Company. While we do not discount the possibility of the similarities of the
businesses of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the relief sought. The fact
that the businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning
and providing for auxilliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our
considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.
In the same case of Umali, et al. v. Court of Appeals (supra), We already emphasized that "the legal corporate entity is disregarded only if it is sought to
hold the officers and stockholders directly liable for a corporate debt or obligation." In the instant case, petitioner does not seek to impose a claim
against the members of the Acrylic.
Furthermore, We already ruled in the case of Diatagon Labor Federation Local 110 of the ULGWP v . Ople (supra) that it is grave abuse of discretion to
treat two companies as a single bargaining unit when these companies are indubitably distinct entities with separate juridical personalities.
Hence, the Acrylic not being an extension or expansion of private respondent, the rank-and-file employees working at Acrylic should not be recognized
as part of, and/or within the scope of the petitioner, as the bargaining representative of private respondent.
All premises considered, the Court is convinced that the public respondent Voluntary Arbitrator did not commit grave abuse of discretion in its
interpretation of Section l(c), Article I of the CBA that the Acrylic is not an extension or expansion of private respondent.
ACCORDINGLY, the petition is DENIED and the award of the respondent Voluntary Arbitrator are hereby AFFIRMED.
SO ORDERED.
G.R. No. 108734 May 29, 1996
CONCEPT BUILDERS, INC., petitioner, s THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto Marabe;
Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut, Emilio
Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe
Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben Robalos, respondents.
HERMOSISIMA, JR., J.:p
The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another
corporation. Where badges of fraud exist; where public convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction
or the notion of legal entity should come to naught. The law in these instances will regard the corporation as a mere association of persons and, in case
of two corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary liability for damages, the corporation may not be heard to say
that it has a personality separate and distinct from the other corporation. The piercing of the corporate veil comes into play.
This special civil action ostensibly raises the question of whether the National Labor Relations Commission committed grave abuse of discretion when it
issued a "break-open order" to the sheriff to be enforced against personal property found in the premises of petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the
construction business. Private respondents were employed by said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of termination of employment by petitioner, effective on November 30,
1981. It was stated in the individual notices that their contracts of employment had expired and the project in which they were hired had been
completed.
Public respondent found it to be, the fact, however, that at the time of the termination of private respondent's employment, the project in which they
were hired had not yet been finished and completed. Petitioner had to engage the services of sub-contractors whose workers performed the functions of
private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay and
thirteenth-month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment1 ordering petitioner to reinstate private respondents and to pay them back wages
equivalent to one year or three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for reconsideration filed by petitioner on the ground that
the said decision had already become final and executory.2
On October 16, 1986, the NLRC Research and Information Department made the finding that private respondents' back wages amounted to
P199,800.00.3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision, dated December 19, 1984. The writ was
partially satisfied through garnishment of sums from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect from herein petitioner the sum of
P117,414.76, representing the balance of the judgment award, and to reinstate private respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on petitioner through the security guard on duty
but the service was refused on the ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his progress report, dated November 2, 1989:
1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that they were employees of Hydro Pipes
Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the properties he had levied upon.4
The said special sheriff recommended that a "break-open order" be issued to enable him to enter petitioner's premises so that he could proceed with
the public auction sale of the aforesaid personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the properties sought to be levied upon
by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order," alleging that HPPI and petitioner corporation were
owned by the same incorporator/stockholders. They also alleged that petitioner temporarily suspended its business operations in order to evade its legal
obligations to them and that private respondents were willing to post an indemnity bond to answer for any damages which petitioner and HPPI may
suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents presented duly certified copies of the General Informations Sheet, dated May 15, 1987,
submitted by petitioner to the Securities Exchange Commission (SEC) and the General Information Sheet, dated May 25, 1987, submitted by HPPI to the
Securities and Exchange Commission.
The General Information Sheet submitted by the petitioner revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed

HPPI P 6,999,500.00
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00
Elisa C. Lim 100,000.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Dennis S. Cuyegkeng Member
Elisa C. Lim Member
Teodulo R. Dino Member
Virgilio O. Casino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa O. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road
Valenzuela, Metro Manila.5
On the other hand, the General Information Sheet of HPPI revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed

Antonio W. Lim P 400,000.00
Elisa C. Lim 57,700.00
AWL Trading 455,000.00
Dennis S. Cuyegkeng 40,100.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Elisa C. Lim Member
Dennis S. Cuyegkeng Member
Virgilio O. Casino Member
Teodulo R. Dino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa C. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6
On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of a break-open order, contending that HPPI is a corporation
which is separate and distinct from petitioner. HPPI also alleged that the two corporations are engaged in two different kinds of businesses, i.e., HPPI is
a manufacturing firm while petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents' motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of the Labor Arbiter, issued a break-open order and
directed private respondents to file a bond. Thereafter, it directed the sheriff to proceed with the auction sale of the properties already levied upon. It
dismissed the third-party claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its decision despite a third-party claim on the
levied property. Petitioner further contends, that the doctrine of piercing the corporate veil should not have been applied, in this case, in the absence of
any showing that it created HPPI in order to evade its liability to private respondents. It also contends that HPPI is engaged in the manufacture and sale
of steel, concrete and iron pipes, a business which is distinct and separate from petitioner's construction business. Hence, it is of no consequence that
petitioner and HPPI shared the same premises, the same President and the same set of officers and subscribers.7
We find petitioner's contention to be unmeritorious.
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to
which it may be connected.8 But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to
promote justice.9 So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend
crime, or is used as a device to defeat the labor laws,10 this separate personality of the corporation may be disregarded or the veil of corporate fiction
pierced.11 This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation.12
The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and
fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of the doctrine of piercing
the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13
The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the separate juridical personality of corporations as
follows:
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or
adjunct of the other, the fiction of the corporate entity of the "instrumentality" may be disregarded. The control necessary to invoke
the rule is not majority or even complete stock control but such domination of instances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in
mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control
and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so 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 fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty or dishonest and unjust act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's
relationship to that operation.14
Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986, it filed an Information Sheet with the
Securities and Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other
hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casio as the corporate secretary of both corporations. It would also not
be amiss to note that both corporations had the same president, the same board of directors, the same corporate officers, and
substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the third-party claimant shared the
same address and/or premises. Under this circumstances, ( sic) it cannot be said that the property levied upon by the sheriff were
not of respondents.16
Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages and to bar their reinstatement to
their former positions. HPPI is obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the financial
liability that already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had the occasion to rule:
Respondent court's findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1, 1957, up to December 7, 1962, when the latter finally
ceased to operate, were not disputed by petitioner. It is very clear that the latter corporation was a continuation and successor of
the first entity . . . . Both predecessors and successor were owned and controlled by petitioner Eduardo Claparols and there was no
break in the succession and continuity of the same business. This "avoiding-the-liability" scheme is very patent, considering that
90% of the subscribed shares of stock of the Claparols Steel Corporation (the second corporation) was owned by respondent . . .
Claparols himself, and all the assets of the dissolved Claparols Steel and Nail plant were turned over to the emerging Claparols Steel
Corporation.
It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case could,
and should, be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the execution, private respondents had no other
recourse but to apply for a break-open order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with
Section 3, Rule VII of the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his representative entry to the place where the
property subject of execution is located or kept, the judgment creditor may apply to the Commission or Labor Arbiter concerned for
a break-open order.
Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing were complied with. Petitioner and the third-party
claimant were given the opportunity to submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies supported by substantial evidence are binding on
this Court and are entitled to great respect, in the absence of showing of grave abuse of a discretion.18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.
G.R. No. L-23893 October 29, 1968
VILLA REY TRANSIT, INC., plaintiff-appellant,

vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE COMMISSION, defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,

vs.
JOSE M. VILLARAMA, third-party defendant-appellee.
Chuidian Law Office for plaintiff-appellant.

Bengzon, Zarraga & Villegas for defendant-appellant / third-party plaintiff-appellant.
Laurea & Pison for third-party defendant-appellee.
ANGELES, J.:
This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil Case No. 41845, declaring null and void the sheriff's sale of two
certificates of public convenience in favor of defendant Eusebio E. Ferrer and the subsequent sale thereof by the latter to defendant Pangasinan
Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner of the said certificates of public convenience; and ordering
the private defendants, jointly and severally, to pay to the plaintiff, the sum of P5,000.00 as and for attorney's fees. The case against the PSC was
dismissed.
The rather ramified circumstances of the instant case can best be understood by a chronological narration of the essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey Transit, pursuant to certificates of public
convenience granted him by the Public Service Commission (PSC, for short) in Cases Nos. 44213 and 104651, which authorized him to operate a total of
thirty-two (32) units on various routes or lines from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the aforementioned two
certificates of public convenience to the Pangasinan Transportation Company, Inc. (otherwise known as Pantranco), for P350,000.00 with the condition,
among others, that the seller (Villarama) "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing
with the buyer."
Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey Transit, Inc. (which shall be referred to hereafter as the Corporation)
was organized with a capital stock of P500,000.00 divided into 5,000 shares of the par value of P100.00 each; P200,000.00 was the subscribed stock;
Natividad R. Villarama (wife of Jose M. Villarama) was one of the incorporators, and she subscribed for P1,000.00; the balance of P199,000.00 was
subscribed by the brother and sister-in-law of Jose M. Villarama; of the subscribed capital stock, P105,000.00 was paid to the treasurer of the
corporation, who was Natividad R. Villarama.
In less than a month after its registration with the Securities and Exchange Commission (March 10, 1959), the Corporation, on April 7, 1959, bought five
certificates of public convenience, forty-nine buses, tools and equipment from one Valentin Fernando, for the sum of P249,000.00, of which P100,000.00
was paid upon the signing of the contract; P50,000.00 was payable upon the final approval of the sale by the PSC; P49,500.00 one year after the final
approval of the sale; and the balance of P50,000.00 "shall be paid by the BUYER to the different suppliers of the SELLER."
The very same day that the aforementioned contract of sale was executed, the parties thereto immediately applied with the PSC for its approval, with a
prayer for the issuance of a provisional authority in favor of the vendee Corporation to operate the service therein involved. 1 On May 19, 1959, the PSC
granted the provisional permit prayed for, upon the condition that "it may be modified or revoked by the Commission at any time, shall be subject to
whatever action that may be taken on the basic application and shall be valid only during the pendency of said application." Before the PSC could take
final action on said application for approval of sale, however, the Sheriff of Manila, on July 7, 1959, levied on two of the five certificates of public
convenience involved therein, namely, those issued under PSC cases Nos. 59494 and 63780, pursuant to a writ of execution issued by the Court of First
Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant, judgment
debtor. The Sheriff made and entered the levy in the records of the PSC. On July 16, 1959, a public sale was conducted by the Sheriff of the said two
certificates of public convenience. Ferrer was the highest bidder, and a certificate of sale was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted for approval their corresponding contract of sale to
the PSC.2 Pantranco therein prayed that it be authorized provisionally to operate the service involved in the said two certificates.
The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case No. 124057, and that of Ferrer and Pantranco, Case
No. 126278, were scheduled for a joint hearing. In the meantime, to wit, on July 22, 1959, the PSC issued an order disposing that during the pendency
of the cases and before a final resolution on the aforesaid applications, the Pantranco shall be the one to operate provisionally the service under the two
certificates embraced in the contract between Ferrer and Pantranco. The Corporation took issue with this particular ruling of the PSC and elevated the
matter to the Supreme Court,3 which decreed, after deliberation, that until the issue on the ownership of the disputed certificates shall have been finally
settled by the proper court, the Corporation should be the one to operate the lines provisionally.
On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a complaint for the annulment of the sheriff's sale of the aforesaid
two certificates of public convenience (PSC Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the subsequent sale thereof by the latter
to Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff Corporation prayed therein that all the orders of the PSC relative to the parties'
dispute over the said certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff Corporation had no valid title to the certificates in question because
the contract pursuant to which it acquired them from Fernando was subject to a suspensive condition the approval of the PSC which has not yet
been fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public auction of the certificates referred to, as well as the sale of the same
by Ferrer to Pantranco, were valid and regular, and vested unto Pantranco, a superior right thereto.
Pantranco, on its part, filed a third-party complaint against Jose M. Villarama, alleging that Villarama and the Corporation, are one and the same; that
Villarama and/or the Corporation was disqualified from operating the two certificates in question by virtue of the aforementioned agreement between
said Villarama and Pantranco, which stipulated that Villarama "shall not for a period of 10 years from the date of this sale, apply for any TPU service
identical or competing with the buyer."
Upon the joinder of the issues in both the complaint and third-party complaint, the case was tried, and thereafter decision was rendered in the terms, as
above stated.
As stated at the beginning, all the parties involved have appealed from the decision. They submitted a joint record on appeal.
Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc. (Corporation) is a distinct and separate entity from Jose
M. Villarama; that the restriction clause in the contract of January 8, 1959 between Pantranco and Villarama is null and void; that the Sheriff's sale of
July 16, 1959, is likewise null and void; and the failure to award damages in its favor and against Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void; and the sale of the two certificates in question by
Valentin Fernando to the Corporation, is valid. He also assails the award of P5,000.00 as attorney's fees in favor of the Corporation, and the failure to
award moral damages to him as prayed for in his counterclaim.
The Corporation, on the other hand, prays for a review of that portion of the decision awarding only P5,000.00 as attorney's fees, and insisting that it is
entitled to an award of P100,000.00 by way of exemplary damages.
After a careful study of the facts obtaining in the case, the vital issues to be resolved are: (1) Does the stipulation between Villarama and Pantranco, as
contained in the deed of sale, that the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE
IDENTICAL OR COMPETING WITH THE BUYER," apply to new lines only or does it include existing lines?; (2) Assuming that said stipulation covers all
kinds of lines, is such stipulation valid and enforceable?; (3) In the affirmative, that said stipulation is valid, did it bind the Corporation?
For convenience, We propose to discuss the foregoing issues by starting with the last proposition.
The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the Corporation, alleging that he did not become such,
because he did not have sufficient funds to invest, his wife, however, was an incorporator with the least subscribed number of shares, and was elected
treasurer of the Corporation. The finances of the Corporation which, under all concepts in the law, are supposed to be under the control and
administration of the treasurer keeping them as trust fund for the Corporation, were, nonetheless, manipulated and disbursed as if they were the
private funds of Villarama, in such a way and extent that Villarama appeared to be the actual owner-treasurer of the business without regard to the
rights of the stockholders. The following testimony of Villarama, 4 together with the other evidence on record, attests to that effect:
Q. Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc. You heard the testimony presented here by the bank
regarding the initial opening deposit of ONE HUNDRED FIVE THOUSAND PESOS, of which amount Eighty-Five Thousand Pesos was a check
drawn by yourself personally. In the direct examination you told the Court that the reason you drew a check for Eighty-Five Thousand Pesos
was because you and your wife, or your wife, had spent the money of the stockholders given to her for incorporation. Will you please tell the
Honorable Court if you knew at the time your wife was spending the money to pay debts, you personally knew she was spending the money
of the incorporators?
A. You know my money and my wife's money are one. We never talk about those things.
Q. Doctor, your answer then is that since your money and your wife's money are one money and you did not know when your wife was
paying debts with the incorporator's money?
A. Because sometimes she uses my money, and sometimes the money given to her she gives to me and I deposit the money.
Q. Actually, aside from your wife, you were also the custodian of some of the incorporators here, in the beginning?
A. Not necessarily, they give to my wife and when my wife hands to me I did not know it belonged to the incorporators.
Q. It supposes then your wife gives you some of the money received by her in her capacity as treasurer of the corporation?
A. Maybe.
Q. What did you do with the money, deposit in a regular account?
A. Deposit in my account.
Q. Of all the money given to your wife, she did not receive any check?
A. I do not remember.
Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking what is this?
xxx xxx xxx
JUDGE: Reform the question.
Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand Pesos, did your wife give you Fifty-two Thousand Pesos?
A. I have testified before that sometimes my wife gives me money and I do not know exactly for what.
The evidence further shows that the initial cash capitalization of the corporation of P105,000.00 was mostly financed by Villarama. Of the P105,000.00
deposited in the First National City Bank of New York, representing the initial paid-up capital of the Corporation, P85,000.00 was covered by Villarama's
personal check. The deposit slip for the said amount of P105,000.00 was admitted in evidence as Exh. 23, which shows on its face that P20,000.00 was
paid in cash and P85,000.00 thereof was covered by Check No. F-50271 of the First National City Bank of New York. The testimonies of Alfonso Sancho 5
and Joaquin Amansec,6 both employees of said bank, have proved that the drawer of the check was Jose Villarama himself.
Another witness, Celso Rivera, accountant of the Corporation, testified that while in the books of the corporation there appears an entry that the
treasurer received P95,000.00 as second installment of the paid-in subscriptions, and, subsequently, also P100,000.00 as the first installment of the
offer for second subscriptions worth P200,000.00 from the original subscribers, yet Villarama directed him (Rivera) to make vouchers liquidating the
sums.7 Thus, it was made to appear that the P95,000.00 was delivered to Villarama in payment for equipment purchased from him, and the
P100,000.00 was loaned as advances to the stockholders. The said accountant, however, testified that he was not aware of any amount of money that
had actually passed hands among the parties involved, 8 and actually the only money of the corporation was the P105,000.00 covered by the deposit slip
Exh. 23, of which as mentioned above, P85,000.00 was paid by Villarama's personal check.
Further, the evidence shows that when the Corporation was in its initial months of operation, Villarama purchased and paid with his personal checks
Ford trucks for the Corporation. Exhibits 20 and 21 disclose that the said purchases were paid by Philippine Bank of Commerce Checks Nos. 992618-B
and 993621-B, respectively. These checks have been sufficiently established by Fausto Abad, Assistant Accountant of Manila Trading & Supply Co., from
which the trucks were purchased9 and Aristedes Solano, an employee of the Philippine Bank of Commerce, 10 as having been drawn by Villarama.
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers showing that Villarama had co-mingled his personal funds and
transactions with those made in the name of the Corporation, are very illuminating evidence. Villarama has assailed the admissibility of these exhibits,
contending that no evidentiary value whatsoever should be given to them since "they were merely photostatic copies of the originals, the best evidence
being the originals themselves." According to him, at the time Pantranco offered the said exhibits, it was the most likely possessor of the originals
thereof because they were stolen from the files of the Corporation and only Pantranco was able to produce the alleged photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility of secondary evidence when the original is in the custody of
the adverse party, thus: (1) opponent's possession of the original; (2) reasonable notice to opponent to produce the original; (3) satisfactory proof of its
existence; and (4) failure or refusal of opponent to produce the original in court. 11 Villarama has practically admitted the second and fourth
requisites.12 As to the third, he admitted their previous existence in the files of the Corporation and also that he had seen some of them. 13 Regarding
the first element, Villarama's theory is that since even at the time of the issuance of the subpoena duces tecum, the originals were already missing,
therefore, the Corporation was no longer in possession of the same. However, it is not necessary for a party seeking to introduce secondary evidence to
show that the original is in the actual possession of his adversary. It is enough that the circumstances are such as to indicate that the writing is in his
possession or under his control. Neither is it required that the party entitled to the custody of the instrument should, on being notified to produce it,
admit having it in his possession. 14 Hence, secondary evidence is admissible where he denies having it in his possession. The party calling for such
evidence may introduce a copy thereof as in the case of loss. For, among the exceptions to the best evidence rule is "when the original has been lost,
destroyed, or cannot be produced in court." 15 The originals of the vouchers in question must be deemed to have been lost, as even the Corporation
admits such loss. Viewed upon this light, there can be no doubt as to the admissibility in evidence of Exhibits 6 to 19 and 22.
Taking account of the foregoing evidence, together with Celso Rivera's testimony, 16 it would appear that: Villarama supplied the organization expenses
and the assets of the Corporation, such as trucks and equipment; 17 there was no actual payment by the original subscribers of the amounts of
P95,000.00 and P100,000.00 as appearing in the books; 18 Villarama made use of the money of the Corporation and deposited them to his private
accounts;19 and the Corporation paid his personal accounts.20
Villarama himself admitted that he mingled the corporate funds with his own money. 21 He also admitted that gasoline purchases of the Corporation
were made in his name22 because "he had existing account with Stanvac which was properly secured and he wanted the Corporation to benefit from
the rebates that he received."23
The foregoing circumstances are strong persuasive evidence showing that Villarama has been too much involved in the affairs of the Corporation to
altogether negative the claim that he was only a part-time general manager. They show beyond doubt that the Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above as proof of Villarama's oneness with the Corporation has been denied by him. On the
contrary, he has admitted them with offered excuses.
Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the Corporation with the lame excuse that "his wife had requested
him to reimburse the amount entrusted to her by the incorporators and which she had used to pay the obligations of Dr. Villarama (her husband)
incurred while he was still the owner of Villa Rey Transit, a single proprietorship." But with his admission that he had received P350,000.00 from
Pantranco for the sale of the two certificates and one unit,24 it becomes difficult to accept Villarama's explanation that he and his wife, after
consultation,25 spent the money of their relatives (the stockholders) when they were supposed to have their own money. Even if Pantranco paid the
P350,000.00 in check to him, as claimed, it could have been easy for Villarama to have deposited said check in his account and issued his own check to
pay his obligations. And there is no evidence adduced that the said amount of P350,000.00 was all spent or was insufficient to settle his prior obligations
in his business, and in the light of the stipulation in the deed of sale between Villarama and Pantranco that P50,000.00 of the selling price was
earmarked for the payments of accounts due to his creditors, the excuse appears unbelievable.
On his having paid for purchases by the Corporation of trucks from the Manila Trading & Supply Co. with his personal checks, his reason was that he
was only sharing with the Corporation his credit with some companies. And his main reason for mingling his funds with that of the Corporation and for
the latter's paying his private bills is that it would be more convenient that he kept the money to be used in paying the registration fees on time, and
since he had loaned money to the Corporation, this would be set off by the latter's paying his bills. Villarama admitted, however, that the corporate
funds in his possession were not only for registration fees but for other important obligations which were not specified. 26
Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only a part-time manager, 27 he admitted not only having held the
corporate money but that he advanced and lent funds for the Corporation, and yet there was no Board Resolution allowing it. 28
Villarama's explanation on the matter of his involvement with the corporate affairs of the Corporation only renders more credible Pantranco's claim that
his control over the corporation, especially in the management and disposition of its funds, was so extensive and intimate that it is impossible to
segregate and identify which money belonged to whom. The interference of Villarama in the complex affairs of the corporation, and particularly its
finances, are much too inconsistent with the ends and purposes of the Corporation law, which, precisely, seeks to separate personal responsibilities from
corporate undertakings. It is the very essence of incorporation that the acts and conduct of the corporation be carried out in its own corporate name
because it has its own personality.
The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in
all cases which are within reason and the law. 29 When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or
crime,30 the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of evidence have shown that the Villa Rey Transit, Inc.
is an alter ego of Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and
binding against the said Corporation. For the rule is that a seller or promisor may not make use of a corporate entity as a means of evading the
obligation of his covenant. 31 Where the Corporation is substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from
competing with the covenantee.32
The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and Villarama are one and the same, the restrictive clause in the
contract between Villarama and Pantranco does not include the purchase of existing lines but it only applies to application for the new lines. The clause
in dispute reads thus:
(4) The SELLER shall not, for a period of ten (10) years from the date of this sale apply for any TPU service identical or competing with the
BUYER. (Emphasis supplied)
As We read the disputed clause, it is evident from the context thereof that the intention of the parties was to eliminate the seller as a competitor of the
buyer for ten years along the lines of operation covered by the certificates of public convenience subject of their transaction. The word "apply" as
broadly used has for frame of reference, a service by the seller on lines or routes that would compete with the buyer along the routes acquired by the
latter. In this jurisdiction, prior authorization is needed before anyone can operate a TPU service, 33whether the service consists in a new line or an old
one acquired from a previous operator. The clear intention of the parties was to prevent the seller from conducting any competitive line for 10 years
since, anyway, he has bound himself not to apply for authorization to operate along such lines for the duration of such period. 34
If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru an application with the Public Service Commission,
this would, in effect, allow the seller just the same to compete with the buyer as long as his authority to operate is only acquired thru transfer or sale
from a previous operator, thus defeating the intention of the parties. For what would prevent the seller, under the circumstances, from having a
representative or dummy apply in the latter's name and then later on transferring the same by sale to the seller? Since stipulations in a contract is the
law between the contracting parties,
Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith. (Art. 19, New Civil Code.)
We are not impressed of Villarama's contention that the re-wording of the two previous drafts of the contract of sale between Villarama and Pantranco
is significant in that as it now appears, the parties intended to effect the least restriction. We are persuaded, after an examination of the supposed
drafts, that the scope of the final stipulation, while not as long and prolix as those in the drafts, is just as broad and comprehensive. At most, it can be
said that the re-wording was done merely for brevity and simplicity.
The evident intention behind the restriction was to eliminate the sellers as a competitor, and this must be, considering such factors as the good will 35
that the seller had already gained from the riding public and his adeptness and proficiency in the trade. On this matter, Corbin, an authority on
Contracts has this to say.36
When one buys the business of another as a going concern, he usually wishes to keep it going; he wishes to get the location, the building, the
stock in trade, and the customers. He wishes to step into the seller's shoes and to enjoy the same business relations with other men. He is
willing to pay much more if he can get the "good will" of the business, meaning by this the good will of the customers, that they may continue
to tread the old footpath to his door and maintain with him the business relations enjoyed by the seller.
... In order to be well assured of this, he obtains and pays for the seller's promise not to reopen business in competition with the business
sold.
As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on the matter 37says:
The law concerning contracts which tend to restrain business or trade has gone through a long series of changes from time to time with the
changing condition of trade and commerce. With trifling exceptions, said changes have been a continuous development of a general rule. The
early cases show plainly a disposition to avoid and annul all contract which prohibited or restrained any one from using a lawful trade "at any
time or at any place," as being against the benefit of the state. Later, however, the rule became well established that if the restraint was
limited to "a certain time" and within "a certain place," such contracts were valid and not "against the benefit of the state." Later cases, and
we think the rule is now well established, have held that a contract in restraint of trade is valid providing there is a limitation upon either time
or place. A contract, however, which restrains a man from entering into business or trade without either a limitation as to time or place, will
be held invalid.
The public welfare of course must always be considered and if it be not involved and the restraint upon one party is not greater than
protection to the other requires, contracts like the one we are discussing will be sustained. The general tendency, we believe, of modern
authority, is to make the test whether the restraint is reasonably necessary for the protection of the contracting parties. If the contract is
reasonably necessary to protect the interest of the parties, it will be upheld. (Emphasis supplied.)
Analyzing the characteristics of the questioned stipulation, We find that although it is in the nature of an agreement suppressing competition, it is,
however, merely ancillary or incidental to the main agreement which is that of sale. The suppression or restraint is only partial or limited: first, in scope,
it refers only to application for TPU by the seller in competition with the lines sold to the buyer; second, in duration, it is only for ten (10) years; and
third, with respect to situs or territory, the restraint is only along the lines covered by the certificates sold. In view of these limitations, coupled with the
consideration of P350,000.00 for just two certificates of public convenience, and considering, furthermore, that the disputed stipulation is only incidental
to a main agreement, the same is reasonable and it is not harmful nor obnoxious to public service. 38 It does not appear that the ultimate result of the
clause or stipulation would be to leave solely to Pantranco the right to operate along the lines in question, thereby establishing monopoly or
predominance approximating thereto. We believe the main purpose of the restraint was to protect for a limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of price controls or deterioration of the service because of the close
supervision of the Public Service Commission. 39 This Court had stated long ago, 40 that "when one devotes his property to a use in which the public has
an interest, he virtually grants to the public an interest in that use and submits it to such public use under reasonable rules and regulations to be fixed
by the Public Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement, the underlying reason sustaining its validity is well
explained in 36 Am. Jur. 537-539, to wit:
... Numerous authorities hold that a covenant which is incidental to the sale and transfer of a trade or business, and which purports to bind
the seller not to engage in the same business in competition with the purchaser, is lawful and enforceable. While such covenants are designed
to prevent competition on the part of the seller, it is ordinarily neither their purpose nor effect to stifle competition generally in the locality,
nor to prevent it at all in a way or to an extent injurious to the public. The business in the hands of the purchaser is carried on just as it was in
the hands of the seller; the former merely takes the place of the latter; the commodities of the trade are as open to the public as they were
before; the same competition exists as existed before; there is the same employment furnished to others after as before; the profits of the
business go as they did before to swell the sum of public wealth; the public has the same opportunities of purchasing, if it is a mercantile
business; and production is not lessened if it is a manufacturing plant.
The reliance by the lower court on tile case of Red Line Transportation Co. v. Bachrach41 and finding that the stipulation is illegal and void seems
misplaced. In the said Red Line case, the agreement therein sought to be enforced was virtually a division of territory between two operators, each
company imposing upon itself an obligation not to operate in any territory covered by the routes of the other. Restraints of this type, among common
carriers have always been covered by the general rule invalidating agreements in restraint of trade. 42
Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant case. In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking
of the applicant therein not to apply for the lifting of restrictions imposed on his certificates of public convenience was not an ancillary or incidental
agreement. The restraint was the principal objective. On the other hand, in Red Line Transportation Co., Inc. v. Gonzaga ,44 the restraint there in
question not to ask for extension of the line, or trips, or increase of equipment was not an agreement between the parties but a condition imposed in
the certificate of public convenience itself.
Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a period of 10 years to "apply" for TPU service along
the lines covered by the certificates of public convenience sold by him to Pantranco is valid and reasonable. Having arrived at this conclusion, and
considering that the preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself the alter ego of Villarama, We hold, as prayed for in
Pantranco's third party complaint, that the said Corporation should, until the expiration of the 1-year period abovementioned, be enjoined from
operating the line subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized that the 10-year prohibition upon Villarama is not against his application for, or purchase of,
certificates of public convenience, but merely the operation of TPU along the lines covered by the certificates sold by him to Pantranco. Consequently,
the sale between Fernando and the Corporation is valid, such that the rightful ownership of the disputed certificates still belongs to the plaintiff being
the prior purchaser in good faith and for value thereof. In view of the ancient rule of caveat emptor prevailing in this jurisdiction, what was acquired by
Ferrer in the sheriff's sale was only the right which Fernando, judgment debtor, had in the certificates of public convenience on the day of the sale. 45
Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service was notified that "by virtue of an Order of Execution issued by
the Court of First Instance of Pangasinan, the rights, interests, or participation which the defendant, VALENTIN A. FERNANDO in the above entitled
case may have in the following realty/personalty is attached or levied upon, to wit: The rights, interests and participation on the Certificates of Public
Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. ... Lines Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy
only shows that Ferrer, the vendee at auction of said certificates, merely stepped into the shoes of the judgment debtor. Of the same principle is the
provision of Article 1544 of the Civil Code, that "If the same thing should have been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it should be movable property."
There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of public convenience in question, between the Corporation and
Fernando, was not consummated, it being only a conditional sale subject to the suspensive condition of its approval by the Public Service Commission.
While section 20(g) of the Public Service Act provides that "subject to established limitation and exceptions and saving provisions to the contrary, it shall
be unlawful for any public service or for the owner, lessee or operator thereof, without the approval and authorization of the Commission previously had
... to sell, alienate, mortgage, encumber or lease its property, franchise, certificates, privileges, or rights or any part thereof, ...," the same section also
provides:
... Provided, however, That nothing herein contained shall be construed to prevent the transaction from being negotiated or completed before
its approval or to prevent the sale, alienation, or lease by any public service of any of its property in the ordinary course of its business.
It is clear, therefore, that the requisite approval of the PSC is not a condition precedent for the validity and consummation of the sale.
Anent the question of damages allegedly suffered by the parties, each of the appellants has its or his own version to allege.
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco and Ferrer) in acquiring the certificates of public convenience
in question, despite constructive and actual knowledge on their part of a prior sale executed by Fernando in favor of the said corporation, which
necessitated the latter to file the action to annul the sheriff's sale to Ferrer and the subsequent transfer to Pantranco, it is entitled to collect actual and
compensatory damages, and attorney's fees in the amount of P25,000.00. The evidence on record, however, does not clearly show that said defendants
acted in bad faith in their acquisition of the certificates in question. They believed that because the bill of sale has yet to be approved by the Public
Service Commission, the transaction was not a consummated sale, and, therefore, the title to or ownership of the certificates was still with the seller.
The award by the lower court of attorney's fees of P5,000.00 in favor of Villa Rey Transit, Inc. is, therefore, without basis and should be set aside.
Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale, he had suffered and should be awarded moral, exemplary
damages and attorney's fees, cannot be entertained, in view of the conclusion herein reached that the sale by Fernando to the Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with the allegation that when it purchased ViIlarama's business for P350,000.00, it
intended to build up the traffic along the lines covered by the certificates but it was rot afforded an opportunity to do so since barely three months had
elapsed when the contract was violated by Villarama operating along the same lines in the name of Villa Rey Transit, Inc. It is further claimed by
Pantranco that the underhanded manner in which Villarama violated the contract is pertinent in establishing punitive or moral damages. Its contention
as to the proper measure of damages is that it should be the purchase price of P350,000.00 that it paid to Villarama. While We are fully in accord with
Pantranco's claim of entitlement to damages it suffered as a result of Villarama's breach of his contract with it, the record does not sufficiently supply
the necessary evidentiary materials upon which to base the award and there is need for further proceedings in the lower court to ascertain the proper
amount.
PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:
1. The sale of the two certificates of public convenience in question by Valentin Fernando to Villa Rey Transit, Inc. is declared preferred over that made
by the Sheriff at public auction of the aforesaid certificate of public convenience in favor of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation Co. against Jose M. Villarama, holding that Villa Rey
Transit, Inc. is an entity distinct and separate from the personality of Jose M. Villarama, and insofar as it awards the sum of P5,000.00 as attorney's fees
in favor of Villa Rey Transit, Inc.;
3. The case is remanded to the trial court for the reception of evidence in consonance with the above findings as regards the amount of damages
suffered by Pantranco; and
4. On equitable considerations, without costs. So ordered.
[G.R. No. 160039. June 29, 2004]
RAYMUNDO ODANI SECOSA, EL BUENASENSO SY and DASSAD WAREHOUSING and PORT SERVICES, INCORPORATED, petitioners, vs. HEIRS OF
ERWIN SUAREZ FRANCISCO, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the decision[1] of the Court of Appeals dated February 27, 2003
in CA-G.R. CV No. 61868, which affirmed in toto the June 19, 1998 decision[2] of Branch 20 of the Regional Trial Court of Manila in Civil Case No. 96-
79554.
The facts are as follows:
On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physical therapy student of the Manila Central
University, was riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard Gate in the City of Manila. At the same time, petitioner,
Raymundo Odani Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the same road. The truck was owned by petitioner, Dassad
Warehousing and Port Services, Inc.
Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn was being tailed by the Isuzu truck driven by Secosa.
The three vehicles were traversing the southbound lane at a fairly high speed. When Secosa overtook the sand and gravel truck, he bumped the
motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then ran over Francisco, which resulted in his instantaneous death. Fearing for
his life, petitioner Secosa left his truck and fled the scene of the collision.[3]
Respondents, the parents of Erwin Francisco, thus filed an action for damages against Raymond Odani Secosa, Dassad Warehousing and Port Services,
Inc. and Dassads president, El Buenasucenso Sy. The complaint was docketed as Civil Case No. 96-79554 of the RTC of Manila, Branch 20.
On June 19, 1998, after a full-blown trial, the court a quo rendered a decision in favor of herein respondents, the dispositive portion of which states:
WHEREFORE, premised on the foregoing, judgment is hereby rendered in favor of the plaintiffs ordering the defendants to pay plaintiffs jointly and
severally:
1. The sum of P55,000.00 as actual and compensatory damages;
2. The sum of P20,000.00 for the repair of the motorcycle;
3. The sum of P100,000.00 for the loss of earning capacity;
4. The sum of P500,000.00 as moral damages;
5. The sum of P50,000.00 as exemplary damages;
6. The sum of P50,000.00 as attorneys fees plus cost of suit.
SO ORDERED.
Petitioners appealed the decision to the Court of Appeals, which affirmed the appealed decision in toto.[4]
Hence the present petition, based on the following arguments:
I.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT THAT PETITIONER DASSAD DID NOT
EXERCISE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN
ACCORDANCE WITH ARTICLE 2180 OF THE NEW CIVIL CODE AND RELATED JURISPRUDENCE ON THE MATTER.
II.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT IN HOLDING PETITIONER EL BUENASENSO SY
SOLIDARILY LIABLE WITH PETITIONERS DASSAD AND SECOSA IN VIOLATION OF THE CORPORATION LAW AND RELATED JURISPRUDENCE ON THE
MATTER.
III.
THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT OF APPEALS AWARDING P500,000.00 AS MORAL DAMAGES IS MANIFESTLY
ABSURD, MISTAKEN AND UNJUST.[5]
The petition is partly impressed with merit.
On the issue of whether petitioner Dassad Warehousing and Port Services, Inc. exercised the diligence of a good father of a family in the selection and
supervision of its employees, we find the assailed decision to be in full accord with pertinent provisions of law and established jurisprudence.
Article 2176 of the Civil Code provides:
Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence,
if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.
On the other hand, Article 2180, in pertinent part, states:
The obligation imposed by article 2176 is demandable not only for ones own acts or omissions, but also for those of persons for whom one is
responsible x x x.
Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even
though the former are not engaged in any business or industry x x x.
The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of
a family to prevent damage.
Based on the foregoing provisions, when an injury is caused by the negligence of an employee, there instantly arises a presumption that there was
negligence on the part of the employer either in the selection of his employee or in the supervision over him after such selection. The presumption,
however, may be rebutted by a clear showing on the part of the employer that it exercised the care and diligence of a good father of a family in the
selection and supervision of his employee. Hence, to evade solidary liability for quasi-delict committed by an employee, the employer must adduce
sufficient proof that it exercised such degree of care.[6]
How does an employer prove that he indeed exercised the diligence of a good father of a family in the selection and supervision of his employee? The
case of Metro Manila Transit Corporation v. Court of Appeals[7] is instructive:
In fine, the party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of presenting at the trial such amount of
evidence required by law to obtain a favorable judgment[8] . . . In making proof in its or his case, it is paramount that the best and most complete
evidence is formally entered.[9]
Coming now to the case at bar, while there is no rule which requires that testimonial evidence, to hold sway, must be corroborated by documentary
evidence, inasmuch as the witnesses testimonies dwelt on mere generalities, we cannot consider the same as sufficiently persuasive proof that there
was observance of due diligence in the selection and supervision of employees. Petitioners attempt to prove its deligentissimi patris familias in the
selection and supervision of employees through oral evidence must fail as it was unable to buttress the same with any other evidence, object or
documentary, which might obviate the apparent biased nature of the testimony.[10]
Our view that the evidence for petitioner MMTC falls short of the required evidentiary quantum as would convincingly and undoubtedly prove its
observance of the diligence of a good father of a family has its precursor in the underlying rationale pronounced in the earlier case of Central Taxicab
Corp. vs. Ex-Meralco Employees Transportation Co., et al.,[11] set amidst an almost identical factual setting, where we held that:
The failure of the defendant company to produce in court any record or other documentary proof tending to establish that it had exercised all the
diligence of a good father of a family in the selection and supervision of its drivers and buses, notwithstanding the calls therefor by both the trial court
and the opposing counsel, argues strongly against its pretensions.
We are fully aware that there is no hard-and-fast rule on the quantum of evidence needed to prove due observance of all the diligence of a good father
of a family as would constitute a valid defense to the legal presumption of negligence on the part of an employer or master whose employee has by his
negligence, caused damage to another. x x x (R)educing the testimony of Albert to its proper proportion, we do not have enough trustworthy evidence
left to go by. We are of the considered opinion, therefore, that the believable evidence on the degree of care and diligence that has been exercised in
the selection and supervision of Roberto Leon y Salazar, is not legally sufficient to overcome the presumption of negligence against the defendant
company.
The above-quoted ruling was reiterated in a recent case again involving the Metro Manila Transit Corporation,[12] thus:
In the selection of prospective employees, employers are required to examine them as to their qualifications, experience, and service records.[13] On
the other hand, with respect to the supervision of employees, employers should formulate standard operating procedures, monitor their implementation,
and impose disciplinary measures for breaches thereof. To establish these factors in a trial involving the issue of vicarious liability, employers must
submit concrete proof, including documentary evidence.
In this case, MMTC sought to prove that it exercised the diligence of a good father of a family with respect to the selection of employees by presenting
mainly testimonial evidence on its hiring procedure. According to MMTC, applicants are required to submit professional driving licenses, certifications of
work experience, and clearances from the National Bureau of Investigation; to undergo tests of their driving skills, concentration, reflexes, and vision;
and, to complete training programs on traffic rules, vehicle maintenance, and standard operating procedures during emergency cases.
xxxxxxxxx
Although testimonies were offered that in the case of Pedro Musa all these precautions were followed, the records of his interview, of the results of his
examinations, and of his service were not presented. . . [T]here is no record that Musa attended such training programs and passed the said
examinations before he was employed. No proof was presented that Musa did not have any record of traffic violations. Nor were records of daily
inspections, allegedly conducted by supervisors, ever presented. . . The failure of MMTC to present such documentary proof puts in doubt the credibility
of its witnesses.
Jurisprudentially, therefore, the employer must not merely present testimonial evidence to prove that he observed the diligence of a good father of a
family in the selection and supervision of his employee, but he must also support such testimonial evidence with concrete or documentary evidence. The
reason for this is to obviate the biased nature of the employers testimony or that of his witnesses.[14]
Applying the foregoing doctrines to the present case, we hold that petitioner Dassad Warehousing and Port Services, Inc. failed to conclusively prove
that it had exercised the requisite diligence of a good father of a family in the selection and supervision of its employees.
Edilberto Duerme, the lone witness presented by Dassad Warehousing and Port Services, Inc. to support its position that it had exercised the diligence
of a good father of a family in the selection and supervision of its employees, testified that he was the one who recommended petitioner Raymundo
Secosa as a driver to Dassad Warehousing and Port Services, Inc.; that it was his duty to scrutinize the capabilities of drivers; and that he believed
petitioner to be physically and mentally fit for he had undergone rigid training and attended the PPA safety seminar.[15]
Petitioner Dassad Warehousing and Port Services, Inc. failed to support the testimony of its lone witness with documentary evidence which would have
strengthened its claim of due diligence in the selection and supervision of its employees. Such an omission is fatal to its position, on account of which,
Dassad can be rightfully held solidarily liable with its co-petitioner Raymundo Secosa for the damages suffered by the heirs of Erwin Francisco.
However, we find that petitioner El Buenasenso Sy cannot be held solidarily liable with his co-petitioners. While it may be true that Sy is the president of
petitioner Dassad Warehousing and Port Services, Inc., such fact is not by itself sufficient to hold him solidarily liable for the liabilities adjudged against
his co-petitioners.
It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate from that of its stockholders or members.[16]
It has a personality separate and distinct from those of the persons composing it as well as from that of any other entity to which it may be related.
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground
for disregarding the separate corporate personality.[17] A corporations authority to act and its liability for its actions are separate and apart from the
individuals who own it.[18]
The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a general rule, a
corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.[19] Also, the
corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation
internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical
personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established.[20] It cannot be presumed.[21]
The records of this case are bereft of any evidence tending to show the presence of any grounds enumerated above that will justify the piercing of the
veil of corporate fiction such as to hold the president of Dassad Warehousing and Port Services, Inc. solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad Warehousing and Port Services, Inc., and not in the name
of El Buenasenso Sy. Raymundo Secosa is an employee of Dassad Warehousing and Port Services, Inc. and not of El Buenasenso Sy. All these things,
when taken collectively, point toward El Buenasenso Sys exclusion from liability for damages arising from the death of Erwin Francisco.
Having both found Raymundo Secosa and Dassad Warehousing and Port Services, Inc. liable for negligence for the death of Erwin Francisco on June 27,
1996, we now consider the question of moral damages which his parents, herein respondents, are entitled to recover. Petitioners assail the award of
moral damages of P500,000.00 for being manifestly absurd, mistaken and unjust. We are not persuaded.
Under Article 2206, the spouse, legitimate and illegitimate descendants and ascendants of the deceased may demand moral damages for mental
anguish for the death of the deceased. The reason for the grant of moral damages has been explained in this wise:
. . . the award of moral damages is aimed at a restoration, within the limits possible, of the spiritual status quo ante; and therefore, it must be
proportionate to the suffering inflicted. The intensity of the pain experienced by the relatives of the victim is proportionate to the intensity of affection
for him and bears no relation whatsoever with the wealth or means of the offender.[22]
In the instant case, the spouses Francisco presented evidence of the searing pain that they felt when the premature loss of their son was relayed to
them. That pain was highly evident in the testimony of the father who was forever deprived of a son, a son whose untimely death came at that point
when the latter was nearing the culmination of every parents wish to educate their children. The death of Francis has indeed left a void in the lives of
the respondents. Antonio Francisco testified on the effect of the death of his son, Francis, in this manner:
Q: (Atty. Balanag): What did you do when you learned that your son was killed on June 27, 1996?
A: (ANTONIO FRANCISCO): I boxed the door and pushed the image of St. Nio telling why this happened to us.
Q: Mr. Witness, how did you feel when you learned of the untimely death of your son, Erwin Suares (sic)?
A: Masakit po ang mawalan ng anak. Its really hard for me, the thought that my son is dead.
xxxxxxxxx
Q: How did your family react to the death of Erwin Suarez Francisco?
A: All of my family and relatives were felt (sic) sorrow because they knew that my son is (sic) good.
Q: We know that it is impossible to put money terms(s) [on] the life of [a] human, but since you are now in court and if you were to ask this court how
much would you and your family compensate? (sic)
A: Even if they pay me millions, they cannot remove the anguish of my son (sic).[23]
Moral damages are emphatically not intended to enrich a plaintiff at the expense of the defendant. They are awarded to allow the former to obtain
means, diversion or amusements that will serve to alleviate the moral suffering he has undergone due to the defendants culpable action and must,
perforce, be proportional to the suffering inflicted.[24] We have previously held as proper an award of P500,000.00 as moral damages to the heirs of a
deceased family member who died in a vehicular accident. In our 2002 decision in Metro Manila Transit Corporation v. Court of Appeals, et al.,[25] we
affirmed the award of moral damages of P500,000.00 to the heirs of the victim, a mother, who died from injuries she sustained when a bus driven by an
employee of the petitioner hit her. In the case at bar, we likewise affirm the portion of the assailed decision awarding the moral damages.
Since the petitioners did not question the other damages adjudged against them by the court a quo, we affirm the award of these damages to the
respondents.
WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED with the MODIFICATION that petitioner El Buenasenso Sy is ABSOLVED from
any liability adjudged against his co-petitioners in this case.
Costs against petitioners.
SO ORDERED.
G.R. No. 97212 June 30, 1993
BENJAMIN YU, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY LIMITED, WILLY CO, RHODORA D. BENDAL,
LEA BENDAL, CHIU SHIAN JENG and CHEN HO-FU, respondents.
Jose C. Guico for petitioner.

Wilfredo Cortez for private respondents.
FELICIANO, J.:
Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying and export business operated by a registered partnership
with the firm name of "Jade Mountain Products Company Limited" ("Jade Mountain"). The partnership was originally organized on 28 June 1984 with
Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and Yu Chang, all citizens of the Republic of China (Taiwan), as
limited partners. The partnership business consisted of exploiting a marble deposit found on land owned by the Sps. Ricardo and Guillerma Cruz,
situated in Bulacan Province, under a Memorandum Agreement dated 26 June 1984 with the Cruz spouses. 1 The partnership had its main office in
Makati, Metropolitan Manila.
Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant General Manager with a monthly salary of P4,000.00.
According to petitioner Yu, however, he actually received only half of his stipulated monthly salary, since he had accepted the promise of the partners
that the balance would be paid when the firm shall have secured additional operating funds from abroad. Benjamin Yu actually managed the operations
and finances of the business; he had overall supervision of the workers at the marble quarry in Bulacan and took charge of the preparation of papers
relating to the exportation of the firm's products.
Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and Rhodora Bendal sold and transferred their interests in
the partnership to private respondent Willy Co and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and transferred his interest in
the partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private respondent Willy Co acquired the great bulk of the partnership
interest. The partnership now constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade Mountain, though they
moved the firm's main office from Makati to Mandaluyong, Metropolitan Manila. A Supplement to the Memorandum Agreement relating to the operation
of the marble quarry was entered into with the Cruz spouses in February of 1988.2 The actual operations of the business enterprise continued as
before. All the employees of the partnership continued working in the business, all, save petitioner Benjamin Yu as it turned out.
On 16 November 1987, having learned of the transfer of the firm's main office from Makati to Mandaluyong, petitioner Benjamin Yu reported to the
Mandaluyong office for work and there met private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the latter had bought
the business from the original partners and that it was for him to decide whether or not he was responsible for the obligations of the old partnership,
including petitioner's unpaid salaries. Petitioner was in fact not allowed to work anymore in the Jade Mountain business enterprise. His unpaid salaries
remained unpaid.3
On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid salaries accruing from November 1984 to October
1988, moral and exemplary damages and attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The partnership and
Willy Co denied petitioner's charges, contending in the main that Benjamin Yu was never hired as an employee by the present or new partnership.4
In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had been illegally dismissed. The Labor Arbiter decreed his
reinstatement and awarded him his claim for unpaid salaries, backwages and attorney's fees.5
On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor Arbiter and dismissed petitioner's complaint in a
Resolution dated 29 November 1990. The NLRC held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the Jade
Mountain business, that the new partnership had not retained petitioner Yu in his original position as Assistant General Manager, and that there was no
law requiring the new partnership to absorb the employees of the old partnership. Benjamin Yu, therefore, had not been illegally dismissed by the new
partnership which had simply declined to retain him in his former managerial position or any other position. Finally, the NLRC held that Benjamin Yu's
claim for unpaid wages should be asserted against the original members of the preceding partnership, but these though impleaded had, apparently, not
been served with summons in the proceedings before the Labor Arbiter.6
Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside and annul the Resolution of the NLRC as a product of
grave abuse of discretion amounting to lack or excess of jurisdiction.
The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership has a juridical personality separate and distinct from
that of each of its members. Such independent legal personality subsists, petitioner claims, notwithstanding changes in the identities of the partners.
Consequently, the employment contract between Benjamin Yu and the partnership Jade Mountain could not have been affected by changes in the
latter's membership.7
Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the partnership which had hired petitioner Yu as Assistant
General Manager had been extinguished and replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a new
partnership had come into existence, whether petitioner Yu could nonetheless assert his rights under his employment contract as against the new
partnership.
In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal effect of the changes in the membership of the
partnership was the dissolution of the old partnership which had hired petitioner in 1984 and the emergence of a new firm composed of Willy Co and
Emmanuel Zapanta in 1987.
The applicable law in this connection of which the NLRC seemed quite unaware is found in the Civil Code provisions relating to partnerships. Article
1828 of the Civil Code provides as follows:
Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the business. (Emphasis supplied)
Article 1830 of the same Code must also be noted:
Art. 1830. Dissolution is caused:
(1) without violation of the agreement between the partners;
xxx xxx xxx
(b) by the express will of any partner, who must act in good faith, when no definite term or
particular undertaking is specified;
xxx xxx xxx
(2) in contravention of the agreement between the partners, where the circumstances do
not permit a dissolution under any other provision of this article, by the express will of any
partner at any time;
xxx xxx xxx
(Emphasis supplied)
In the case at bar, just about all of the partners had sold their partnership interests (amounting to 82% of the total partnership interest) to Mr. Willy Co
and Emmanuel Zapanta. The record does not show what happened to the remaining 18% of the original partnership interest. The acquisition of 82% of
the partnership interest by new partners, coupled with the retirement or withdrawal of the partners who had originally owned such 82% interest, was
enough to constitute a new partnership.
The occurrence of events which precipitate the legal consequence of dissolution of a partnership do not, however, automatically result in the termination
of the legal personality of the old partnership. Article 1829 of the Civil Code states that:
[o]n dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.
In the ordinary course of events, the legal personality of the expiring partnership persists for the limited purpose of winding up and closing of the affairs
of the partnership. In the case at bar, it is important to underscore the fact that the business of the old partnership was simply continued by the new
partners, without the old partnership undergoing the procedures relating to dissolution and winding up of its business affairs. In other words, the new
partnership simply took over the business enterprise owned by the preceeding partnership, and continued using the old name of Jade Mountain
Products Company Limited, without winding up the business affairs of the old partnership, paying off its debts, liquidating and distributing its net assets,
and then re-assembling the said assets or most of them and opening a new business enterprise. There were, no doubt, powerful tax considerations
which underlay such an informal approach to business on the part of the retiring and the incoming partners. It is not, however, necessary to inquire into
such matters.
What is important for present purposes is that, under the above described situation, not only the retiring partners (Rhodora Bendal, et al.) but also the
new partnership itself which continued the business of the old, dissolved, one, are liable for the debts of the preceding partnership. In Singson, et al. v.
Isabela Saw Mill, et al ,8 the Court held that under facts very similar to those in the case at bar, a withdrawing partner remains liable to a third party
creditor of the old partnership.9 The liability of the new partnership, upon the other hand, in the set of circumstances obtaining in the case at bar, is
established in Article 1840 of the Civil Code which reads as follows:
Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the person or partnership continuing the
business:
(1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of
the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners
and one or more third persons, if the business is continued without liquidation of the partnership affairs ;
(2) When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership
property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with others ;
(3) When any Partner retires or dies and the business of the dissolved partnership is continued as set forth in Nos. 1 and 2 of this
Article, with the consent of the retired partners or the representative of the deceased partner, but without any assignment of his
right in partnership property;
(4) When all the partners or their representatives assign their rights in partnership property to one or more third persons who
promise to pay the debts and who continue the business of the dissolved partnership;
(5) When any partner wrongfully causes a dissolution and remaining partners continue the business under the provisions of article
1837, second paragraph, No. 2, either alone or with others, and without liquidation of the partnership affairs;
(6) When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation of
the partnership affairs;
The liability of a third person becoming a partner in the partnership continuing the business, under this article, to the creditors of
the dissolved partnership shall be satisfied out of the partnership property only, unless there is a stipulation to the contrary.
When the business of a partnership after dissolution is continued under any conditions set forth in this article the creditors of the
retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner or
the representative of the deceased partner against the person or partnership continuing the business on account of the retired or
deceased partner's interest in the dissolved partnership or on account of any consideration promised for such interest or for his right
in partnership property.
Nothing in this article shall be held to modify any right of creditors to set assignment on the ground of fraud .
xxx xxx xxx
(Emphasis supplied)
Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade Mountain which continued the business of the old one
without liquidation of the partnership affairs. Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for unpaid
wages, is entitled to priority vis-a-vis any claim of any retired or previous partner insofar as such retired partner's interest in the dissolved partnership is
concerned. It is not necessary for the Court to determine under which one or mare of the above six (6) paragraphs, the case at bar would fall, if only
because the facts on record are not detailed with sufficient precision to permit such determination. It is, however, clear to the Court that under Article
1840 above, Benjamin Yu is entitled to enforce his claim for unpaid salaries, as well as other claims relating to his employment with the previous
partnership, against the new Jade Mountain.
It is at the same time also evident to the Court that the new partnership was entitled to appoint and hire a new general or assistant general manager to
run the affairs of the business enterprise take over. An assistant general manager belongs to the most senior ranks of management and a new
partnership is entitled to appoint a top manager of its own choice and confidence. The non-retention of Benjamin Yu as Assistant General Manager did
not therefore constitute unlawful termination, or termination without just or authorized cause. We think that the precise authorized cause for
termination in the case at bar was redundancy. 10 The new partnership had its own new General Manager, apparently Mr. Willy Co, the principal new
owner himself, who personally ran the business of Jade Mountain. Benjamin Yu's old position as Assistant General Manager thus became superfluous or
redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one month's pay for each year of service that he had
rendered to the old partnership, a fraction of at least six (6) months being considered as a whole year.
While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ, we consider that Benjamin Yu was very shabbily
treated by the new partnership. The old partnership certainly benefitted from the services of Benjamin Yu who, as noted, previously ran the whole
marble quarrying, processing and exporting enterprise. His work constituted value-added to the business itself and therefore, the new partnership
similarly benefitted from the labors of Benjamin Yu. It is worthy of note that the new partnership did not try to suggest that there was any cause
consisting of some blameworthy act or omission on the part of Mr. Yu which compelled the new partnership to terminate his services. Nonetheless, the
new Jade Mountain did not notify him of the change in ownership of the business, the relocation of the main office of Jade Mountain from Makati to
Mandaluyong and the assumption by Mr. Willy Co of control of operations. The treatment (including the refusal to honor his claim for unpaid wages)
accorded to Assistant General Manager Benjamin Yu was so summary and cavalier as to amount to arbitrary, bad faith treatment, for which the new
Jade Mountain may legitimately be required to respond by paying moral damages. This Court, exercising its discretion and in view of all the
circumstances of this case, believes that an indemnity for moral damages in the amount of P20,000.00 is proper and reasonable.
In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six percent (6%) per annum on the amount of unpaid
wages, and of his separation pay, computed from the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade Mountain
compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he is entitled to attorney's fees in the amount of ten percent (10%) of
the total amount due from private respondent Jade Mountain.
WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the Comment filed by private respondents is treated as their
Answer to the Petition for Certiorari, and the Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A new Decision is
hereby ENTERED requiring private respondent Jade Mountain Products Company Limited to pay to petitioner Benjamin Yu the following amounts:
(a) for unpaid wages which, as found by the Labor Arbiter, shall be computed at the rate of P2,000.00 per month multiplied by thirty-six (36)
months (November 1984 to December 1987) in the total amount of P72,000.00;
(b) separation pay computed at the rate of P4,000.00 monthly pay multiplied by three (3) years of service or a total of P12,000.00;
(c) indemnity for moral damages in the amount of P20,000.00;
(d) six percent (6%) per annum legal interest computed on items (a) and (b) above, commencing on 26 December 1989 and until fully paid;
and
(e) ten percent (10%) attorney's fees on the total amount due from private respondent Jade Mountain.
Costs against private respondents.
SO ORDERED.
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners, vs. INTERMEDIATE APPELLATE COURT and HYDRO PIPES
PHILIPPINES, INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's contention that the deed of exchange
whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of stock was
actually a deed of sale which violated a right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate Identified as Lot.
No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which is covered by
Transfer Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same property and providing that
during the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same
to the lessee and the letter has the priority to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the contract of
lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco
(Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per stipulation of the parties
(Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the latter the leased property (TCT No.T-4240) together with another parcel of land
also located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a
total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes
Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades
Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs preferential right to acquire the
subject property (right of first refusal) and ordering the defendants and all persons deriving rights therefrom to convey the said
property to plaintiff who may offer to acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose
area is 27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246- 247).
(Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a parcel of industrial land consisting
of 27,169 square meters or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq.
meter, or a total of P380,366, although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of actual ownership interests
by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will acquire the land not
under "similar conditions" by which it was transferred to petitioner Delpher Trades Corporation, as provided in the same contractual
provision invoked by private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the
Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first refusal
over the leased property included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation;
that the corporation was organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco
and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property
through the corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which had been
leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was transferred to the corporation by virtue of a deed of
exchange of property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are
equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all
about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as
"estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the Pachecos
remained in control of the property. Thus, the petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation
remained in the hands of the original co-owners, there was no transfer of actual ownership interests over the land when the same was transferred to
petitioner corporation in exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In
reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to
be the same, there being in substance and in effect an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged the land for shares of
stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is
transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in
consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos. Thus,
it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having
treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who may allege that this separate corporate
existence should be disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the same was
transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual
owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their
properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos
became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay for original unissued
shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but
only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the
certificate itself that he is only an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not
hidden beneath a false appearance of a given sum in money, as in the case of par value shares. The capital stock of a corporation
issuing only no-par value shares is not set forth by a stated amount of money, but instead is expressed to be divided into a stated
number of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of
the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of
shares, the attention of persons interested in the financial condition of a corporation is focused upon the value of assets and the
amount of its debts. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition,
p. 107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square meter was turned over to
the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55%
as against 45% of the other stockholders, who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the
nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at
the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and Pacheco in connection with their execution
of a deed of exchange on the properties for no par value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of taxation in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free exchange of property, they were able to execute the deed of
exchange free from income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2) Exceptions regarding the provision which I quote: "No
gain or loss shall also be recognized if a person exchanges his property for stock in a corporation of which as a result of such exchange said
person alone or together with others not exceeding four persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par value share in the defendant corporation was for the purpose of
flexibility. Can you explain flexibility in connection with the ownership of the property in question?
A There is flexibility in using no par value shares as the value is determined by the board of directors in increasing capitalization. The board
can fix the value of the shares equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to the property indefinitely for a period of at least 50 years. On the other
hand, if the property is held by the spouse the property will be tied up in succession proceedings and the consequential payments of estate
and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a
taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted."
(Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no
transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another.
The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then Intermediate Appellate Court are REVERSED
and SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
G.R. No. 151438 July 15, 2005
JARDINE DAVIES, INC., Petitioners, vs. JRB REALTY, INC., Respondent.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review of the Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 54201 affirming in toto that of the Regional Trial Court
(RTC) in Civil Case No. 90-237 for specific performance; and the Resolution dated January 11, 2002 denying the motion for reconsideration thereof.
The facts are as follows:
In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo
Village, Makati City. An air conditioning system was needed for the Blanco Law Firm housed at the second floor of the building. On March 13, 1980, the
respondents Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration
Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning equipment with a net total selling price of
99,586.00.2 Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH 3 were installed
by Aircon. When the units with rotary compressors were installed, they could not deliver the desired cooling temperature. Despite several adjustments
and corrective measures, the respondent conceded that Fedders Air Conditioning USAs technology for rotary compressors for big capacity conditioners
like those installed at the Blanco Center had not yet been perfected. The parties thereby agreed to replace the units with reciprocating/semi-hermetic
compressors instead. In a Letter dated March 26, 1981, 4 Aircon stated that it would be replacing the units currently installed with new ones using rotary
compressors, at the earliest possible time. Regrettably, however, it could not specify a date when delivery could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the units, inclusive of parts and services. In October 1987,
the respondent learned, through newspaper ads, 5 that Maxim Industrial and Merchandising Corporation (Maxim, for short) was the new and exclusive
licensee of Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale, installation and maintenance of Fedders air
conditioners. The respondent requested that Maxim honor the obligation of Aircon, but the latter refused. Considering that the ten-year period of
prescription was fast approaching, to expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an action for specific performance
with damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and
petitioner Jardine Davies, Inc.6 The latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. The respondent
prayed that judgment be rendered, as follows:
1. Ordering the defendants to jointly and severally at their account and expense deliver, install and place in operation two
brand new units of each 10-tons capacity Fedders unitary packaged air conditioners with Fedders USAs technology perfected rotary compressors to
always deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;
2. Ordering defendants to jointly and severally reimburse plaintiff not only the sums of 415,118.95 for unsaved electricity from 21st October 1981 to
7th January 1990 and 99,287.77 for repair costs of the two service units from 7th March 1987 to 11th January 1990, with legal interest thereon from
the filing of this Complaint until fully reimbursed, but also like unsaved electricity costs and like repair costs therefrom until Prayer No. 1 above shall
have been complied with;
3. Ordering defendants to jointly and severally pay plaintiffs 150,000.00 attorneys fees and other costs of litigation, as well as exemplary damages in
an amount not less than or equal to Prayer 2 above; and
4. Granting plaintiff such other and further relief as shall be just and equitable in the premises. 7
Of the four defendants, only the petitioner filed its Answer. The court did not acquire jurisdiction over Aircon because the latter ceased operations, as its
corporate life ended on December 31, 1986.8 Upon motion, defendants Fedders Air Conditioning USA and Maxim were declared in default. 9
On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial and
Merchandising Corporation, jointly and severally:
1. To deliver, install and place into operation the two (2) brand new units of Fedders unitary packaged airconditioning units each of 10 tons capacity
with rotary compressors to deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco Center building, or to pay plaintiff the current price for
two such units;
2. To reimburse plaintiff the amount of 556,551.55 as and for the unsaved electricity bills from October 21, 1981 up to April 30, 1995; and another
amount of 185,951.67 as and for repair costs;
3. To pay plaintiff 50,000.00 as and for attorneys fees; and
4. Cost of suit.10
The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in holding it liable because it was not a party to the contract
between JRB Realty, Inc. and Aircon, and that it had a personality separate and distinct from that of Aircon.
On March 23, 2000, the CA affirmed the trial courts ruling in toto; hence, this petition.
The petitioner raises the following assignment of errors:
I.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE ALLEGED CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE THE LATTER
WAS FORMERLY JARDINES SUBSIDIARY.
II.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING
AIRCONS OBLIGATION TO DELIVER THE TWO (2) AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY COMPLIED WITH IN GOOD
FAITH.
III.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING
JRBS CAUSES OF ACTION AS HAVING BEEN BARRED BY LACHES.
IV.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN FINDING JRB
ENTITLED TO RECOVER ALLEGED UNSAVED ELECTRICITY EXPENSES.
V.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY ATTORNEYS FEES.
VI.
THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR DAMAGES. 11
It is the well-settled rule that factual findings of the trial court, as affirmed by the CA, are accorded high respect, even finality at times. However,
considering that the factual findings of the CA and the RTC were based on speculation and conjectures, unsupported by substantial evidence, the Court
finds that the instant case falls under one of the excepted instances. There is, thus, a need to correct the error.
The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded, thus:
Plaintiffs documentary evidence shows that at the time it contracted with Aircon on March 13, 1980 (Exhibit "D") and on the date the revised
agreement was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The phrase "A subsidiary of Jardine Davies, Inc." was printed on
Aircons letterhead of its March 13, 1980 contract with plaintiff (Exhibit "D-1"), as well as the Aircons letterhead of Jardines Director and Senior Vice-
President A.G. Morrison and Aircons President in his March 26, 1981 letter to plaintiff (Exhibit "J-2") confirming the revised agreement. Aircons
newspaper ads of April 12 and 26, 1981 and a press release on August 30, 1982 (Exhibits "E," "F" and "L") also show that defendant Jardine publicly
represented Aircon to be its subsidiary.
Records from the Securities and Exchange Commission (SEC) also reveal that as per Jardines December 31, 1986 and 1985 Financial Statements that
"The company acts as general manager of its subsidiaries" (Exhibit "P"). Jardines Consolidated Balance Sheet as of December 31, 1979 filed with the
SEC listed Aircon as its subsidiary by owning 94.35% of Aircon (Exhibit "P-1"). Also, Aircons reportorial General Information Sheet as of April 1980 and
April 1981 filed with the SEC show that Jardine was 94.34% owner of Aircon (Exhibits "Q" and "R") and that out of seven members of the Board of
Directors of Aircon, four (4) are also of Jardine.
Defendant Jardines witness, Atty. Fe delos Santos-Quiaoit admitted that defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. "is one of
the subsidiaries of Jardine Davies" (TSN, September 22, 1995, p. 12). She also testified that Jardine nominated, elected, and appointed the controlling
majority of the Board of Directors and the highest officers of Aircon (Ibid, pp. 10,13-14).
The foregoing circumstances provide justifiable basis for this Court to disregard the fiction of corporate entity and treat defendant Aircon as part of the
instrumentality of co-defendant Jardine.12
The respondent court arrived at the same conclusion basing its ruling on the following documents, to wit:
(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);
(b) Newspaper Advertisements (Exhs. E-1 and F-1);
(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty. J.R. Blanco (Exh. J);
(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);
(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing Aircon as one of its subsidiaries (Exh. P);
(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);
(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1). 13
Applying the doctrine of piercing the veil of corporate fiction, both the respondent and trial courts conveniently held the petitioner liable for the alleged
omissions of Aircon, considering that the latter was its instrumentality or corporate alter ego. The petitioner is now before us, reiterating its defense of
separateness, and the fact that it is not a party to the contract.
We find merit in the petition.
It is an elementary and fundamental principle of corporation law that a corporation is an artificial being invested by law with a personality separate and
distinct from its stockholders and from other corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful
purpose, the law will regard it as an association of persons or in case of two corporations, merge them into one, when this corporate legal entity is used
as a cloak for fraud or illegality. 14 This is the doctrine of piercing the veil of corporate
fiction which applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. 15 The rationale
behind piercing a corporations identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and
illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. 16
While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircons corporate legal existence can just be disregarded.
In Velarde v. Lopez, Inc.,17 the Court categorically held that a subsidiary has an independent and separate juridical personality, distinct from that of its
parent company; hence, any claim or suit against the latter does not bind the former, and vice versa. In applying the doctrine, the following requisites
must be established: (1) control, not merely majority or complete stock control; (2) such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in contravention of plaintiffs legal rights; and (3)
the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. 18
The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircons majority of capital stock. It, however, does not
exercise complete control over Aircon; nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management
agreement exists between the petitioner and Aircon, and the latter is an entirely different entity from the petitioner. 19
Jardine Davies, Inc., incorporated as early as June 28, 1946, 20 is primarily a financial and trading company. Its Articles of Incorporation states among
many others that the purposes for which the said corporation was formed, are as follows:
(a) To carry on the business of merchants, commission merchants, brokers, factors, manufacturers, and agents;
(b) Upon complying with the requirements of law applicable thereto, to act as agents of companies and underwriters doing and engaging in any and all
kinds of insurance business.21
On the other hand, Aircon, incorporated on December 27, 1952, 22 is a manufacturing firm. Its Articles of Incorporation states that its purpose is mainly
-
To carry on the business of manufacturers of commercial and household appliances and accessories of any form, particularly to manufacture, purchase,
sell or deal in air conditioning and refrigeration products of every class and description as well as accessories and parts thereof, or other kindred articles;
and to erect, or buy, lease, manage, or otherwise acquire manufactories, warehouses, and depots for manufacturing, assemblage, repair and storing,
buying, selling, and dealing in the aforesaid appliances, accessories and products. 23
The existence of interlocking directors, corporate officers and shareholders, which the respondent court considered, is not enough justification to pierce
the veil of corporate fiction, in the absence of fraud or other public policy considerations. 24 But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime. 25 To warrant resort to this extraordinary remedy, there must be proof that the corporation is being used as a cloak or cover for
fraud or illegality, or to work injustice. 26 Any piercing of the corporate veil has to be done with caution. 27 The wrongdoing must be clearly and
convincingly established. It cannot just be presumed. 28
In the instant case, there is no evidence that Aircon was formed or utilized with the intention of defrauding its creditors or evading its contracts and
obligations. There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a manufacturing firm of air
conditioners, complied with its obligation of providing two air conditioning units for the second floor of the Blanco Center in good faith, pursuant to its
contract with the respondent. Unfortunately, the performance of the air conditioning units did not satisfy the respondent despite several adjustments
and corrective measures. In a Letter 29 dated October 22, 1980, the respondent even conceded that Fedders Air Conditioning USA has not yet perhaps
perfected its technology of rotary compressors, and agreed to change the compressors with the semi-hermetic type. Thus, Aircon substituted the units
with serviceable ones which delivered the cooling temperature needed for the law office. After enjoying ten (10) years of its cooling power, respondent
cannot now complain about the performance of these units, nor can it demand a replacement thereof.
Moreover, it was reversible error to award the respondent the amount of 556,551.55 representing the alleged 30% unsaved electricity costs and
185,951.67 as maintenance cost without showing any basis for such award. To justify a grant of actual or compensatory damages, it is necessary to
prove with a reasonable degree of certainty, premised upon competent proof and on the best evidence obtainable by the injured party, the actual
amount of loss.30 The respondent merely based its cause of action on Aircons alleged representation that Fedders air conditioners with rotary
compressors can save as much as 30% on electricity compared to other brands. Offered in evidence were newspaper advertisements published on April
12 and 26, 1981. The respondent then recorded its electricity consumption from October 21, 1981 up to April 3, 1995 and computed 30% thereof,
which amounted to 556,551.55. The Court rules that this amount is highly speculative and merely hypothetical, and for which the petitioner can not be
held accountable.
First. The respondent merely relied on the newspaper advertisements showing the Fedders window-type air conditioners, which are far different from
the big capacity air conditioning units installed at Blanco Center.
Second. After such print advertisements, the respondent informed Aircon that it was going to install an electric meter to register its electric consumption
so as to determine the electric costs not saved by the presently installed units with semi-hermetic compressors. Contrary to the allegations of the
respondent that this was in pursuance to their Revised Agreement, no proof was adduced that Aircon agreed to the respondents proposition. It was a
unilateral act on the part of the respondent, which Aircon did not oblige or commit itself to pay.
Third. Needless to state, the amounts computed are mere estimates representing the respondents self-serving claim of unsaved electricity cost, which is
too speculative and conjectural to merit consideration. No other proofs, reports or bases of comparison showing that Fedders Air Conditioning USA could
indeed cut down electricity cost by 30% were adduced.
Likewise, there is no basis for the award of 185,951.67 representing maintenance cost. The respondent merely submitted a schedule 31 prepared by
the respondents accountant, listing the alleged repair costs from March 1987 up to June 1994. Such evidence is self-serving and can not also be given
probative weight, considering that there are no proofs of receipts, vouchers, etc., which would substantiate the amounts paid for such services. Absent
any more convincing proof, the Court finds that the respondents claims are without basis, and cannot, therefore, be awarded.
We sustain the petitioners separateness from that of Aircon in this case. It bears stressing that the petitioner was never a party to the contract. Privity
of contracts take effect only between parties, their successors-in-interest, heirs and assigns. 32 The petitioner, which has a
separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable.
IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of the Court of Appeals, affirming the decision of the Regional Trial
Court is REVERSED and SET ASIDE. The complaint of the respondent is DISMISSED. Costs against the respondent.
SO ORDERED.
G.R. No. L-47673 October 10, 1946
KOPPEL (PHILIPPINES), INC., plaintiff-appellant, vs. ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.
Padilla, Carlos and Fernando for appellant.

Office of the Solicitor General Ozaeta, First Assistant Solicitor General Reyes and.
Office of the Solicitor General Reyes and Solicitor Caizanes for appellee.
HILADO, J.:
This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court of First Instance of Manila in civil case No. 51218 of said court dismissing
said corporation's complaint for the recovery of the sum of P64,122.51 which it had paid under protest to the Collector of Internal Revenue on October
30, 1936, as merchant sales tax. The main facts of the case were stipulated in the court below as follows:
AGREED STATEMENT OF FACTS
Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the Solicitor General and undersigned Assistant Attorney of the
Bureau of Justice and, with leave of this Honorable Court, hereby respectfully stipulated and agree to the following facts, to wit:
I. That plaintiff is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office therein at
the City of Manila, the capital stock of which is divided into thousand (1,000) shares of P100 each. The Koppel Industrial Car and Equipment
company, a corporation organized and existing under the laws of the State of Pennsylvania, United States of America, and not licensed to do
business in the Philippines, owned nine hundred and ninety-five (995) shares out of the total capital stock of the plaintiff from the year 1928
up to and including the year 1936, and the remaining five (5) shares only were and are owned one each by officers of the plaintiff
corporation.
II. That plaintiff, at all times material to this case, was and now is duly licensed to engage in business as a merchant and commercial broker in
the Philippines; and was and is the holder of the corresponding merchant's and commercial broker's privilege tax receipts.
III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer in lieu of Mr. Alfredo L. Yatco.
IV. That during the period from January 1, 1929, up to and including December 31, 1932, plaintiff transacted business in the Philippines in the
following manner, with the exception of the transactions which are described in paragraphs V and VI of this stipulation:
When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it asked for price quotations from plaintiff.
Atypical form of such request is attached hereto and made a part hereof as Exhibit A. (Exhibit A represents typical transactions arising from
written requests for quotations, while Exhibits B to G, inclusive, are typical transactions arising from verbal requests for quotation.) Plaintiff
then cabled for the quotation desired for Koppel Industrial Car and Equipment Company. A sample of the pertinent cable is hereto attached
and made a part hereof as Exhibit B. Koppel Industrial Car and Equipment Company answered by cable quoting its cost price, usually A. C. I.
F. Manila cost price, which was later followed by a letter of confirmation. A sample of the said cable quotation and of the letter of confirmation
are hereto attached and made a part hereof as Exhibits C and C-1. Plaintiff, however, quoted by Koppel Industrial Car and Equipment
Company. Copy of the plaintiff's letter to purchaser is hereto attached and made a part hereof as Exhibit D. On the basis of these quotations,
orders were placed by the local purchasers, copies of which orders are hereto attached as Exhibits E and E-1.
A cable was then sent to Koppel Industrial Car and Equipment company giving instructions to ship the merchandise to Manila forwarding the
customer's order. Sample of said cable is hereto attached as Exhibit F. The bills of lading were usually made to "order" and indorsed in blank
with notation to the effect that the buyer be notified of the shipment of the goods covered in the bills of lading; commercial invoices were
issued by Koppel Industrial Car and Equipment Company in the names of the purchasers and certificates of insurance were likewise issued in
their names, or in the name of Koppel Industrial Car and Equipment Company but indorsed in blank and attached to drafts drawn by Koppel
Industrial Car and Equipment Company on the purchasers, which were forwarded through foreign banks to local banks. Samples of the bills of
lading are hereto attached as Exhibits F-1, I-1, I-2 and I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have been employed, but
said Exhibits I-1, I-2 and I-3 have no connection with the transaction covered by Exhibits B to G, inclusive. The purchasers secured the
shipping papers by arrangement with the banks, and thereupon received and cleared the shipments. If the merchandise were of European
origin, and if there was not sufficient time to forward the documents necessary for clearance, through foreign banks to local banks, to the
purchasers, the Koppel Industrial Car and Equipment company did, in many cases, send the documents directly from Europe to plaintiff with
instructions to turn these documents over to the purchasers. In many cases, where sales was effected on the basis of C. I. F. Manila, duty
paid, plaintiff advanced the sums required for the payment of the duty, and these sums, so advanced, were in every case reimbursed to
plaintiff by Koppel Industrial Car and Equipment Company. The price were payable by drafts agreed upon in each case and drawn by Koppel
Industrial Car and Equipment Company on respective purchasers through local banks, and payments were made to the banks by the
purchasers on presentation and delivery to them of the above-mentioned shipping documents or copies thereof. A sample of said drafts is
hereto attached as Exhibit G. Plaintiff received by way of compensation a percentage of the profits realized on the above transactions as fixed
in paragraph 6 of the plaintiff's contract with Koppel Industrial Car and Equipment Company, which contract is hereto attached as Exhibit H,
and suffered its corresponding share in the losses resulting from some of the transactions.
That the total gross sales from January 1, 1929, up to and including December 31, 1932, effected in the foregoing manner and under the
above specified conditions, amount to P3, 596,438.84.
V. That when a local sugar central was interested in the purchase of railway materials, machinery and supplies, it secured quotations from,
and placed the corresponding orders with, the plaintiff in substantially the same manner as outlined in paragraph IV of this stipulation, with
the only difference that the purchase orders which were agreed to by the central and the plaintiff are similar to the sample hereto attached
and made a part hereof as Exhibit I. Typical samples of the bills of lading covering the herein transaction are hereto attached and made a part
hereto as Exhibits I-1, I-2 and I-3. The value of the sales carried out in the manner mentioned in this paragraph is P133,964.98.
VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila, Philippines, placed an option with Koppel Industrial Car and Equipment
Company, through plaintiff, to purchase within three months a pair of Atlas-Diesel Marine Engines. Koppel Industrial Car and Equipment
Company purchased said Diesel Engines in Stockholm, Sweden, for $16,508.32. The suppliers drew a draft for the amount of $16,508.32 on
the Koppel Industrial Car and Equipment Company, which paid the amount covered by the draft. Later, Miguel J. Ossorio definitely called the
deal off, and as Koppel Industrial Car and Equipment Company could not ship to or draw on said Mr. Miguel J. Ossorio, it in turn drew another
draft on plaintiff for the same amount at six months sight, with the understanding that Koppel Industrial Car and Equipment Company would
reimburse plaintiff when said engines were disposed of. Plaintiff honored the draft and debited the said sum of $16,508.32 to merchandise
account. The engines were left stored at Stockholm, Sweden. On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was
found and the same engines were sold to him for $21,000 (P42,000) C. I. F. Hongkong. The engines were shipped to Hongkong and a draft
for $21,000 was drawn by Koppel Industrial Car and Equipment Company on Mr. Cesar Barrios. After the draft was fully paid by Mr. Barrios,
Koppel Industrial Car and Equipment Company reimbursed plaintiff with cost price of $16,508.32 and credited it with $1,152.95 as its share of
the profit on the transaction. Exhibits J and J-1 are herewith attached and made integral parts of this stipulation with particular reference to
paragraph VI hereof.
VII. That plaintiff's share in the profits realized out of these transactions described in paragraphs IV, V and VI hereof totaling P3,772,403.82,
amounts to P132,201.30; and that plaintiff within the time provided by law returned the aforesaid amount P132,201.30 for the purpose of the
commercial broker's 4 per cent tax and paid thereon the sum P5,288.05 as such tax.
VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the merchants' sales tax of 1% per cent on the amount of
P3,772,403.82, representing the total gross value of the sales mentioned in paragraphs IV, V and VI hereof, including the 25 per cent
surcharge for the late payment of the said tax, which tax and surcharge were determined after the amount of P5,288.05 mentioned in
paragraph VI hereof was deducted.
IX. That plaintiff, on October 30, 1936, paid under protest said sum of P64,122.51 in order to avoid further penalties, levy and distraint
proceedings.
X. That defendant, on November 10, 1936, overruled plaintiff's protest, and defendant has failed and refused and still fails and refuses,
notwithstanding demands by plaintiff, to return to the plaintiff said sum of P64,122.51 or any part thereof.
xxx xxx xxx
That the parties hereby reserve the right to present additional evidence in support of their respective contentions.
Manila, Philippines, December 26, 1939
(Sgd.) ROMAN OZAETA

Solicitor General
(Sgd.) ANTONIO CAIZARES

Assistant Attorney
(Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila
Both parties adduced some oral evidence in clarification of or addition to their agreed statement of facts. A preponderance of evidence has
established, besides the facts thus stipulated, the following:
(a) The shares of stock of plaintiff corporation were and are all owned by Koppel Industries Car and Equipment Company of
Pennsylvania, U. S. A., exceptive which were necessary to qualify the Board of Directors of said plaintiff corporation;
(b) In the transactions involved herein the plaintiff corporation acted as the representative of Koppel Industrial Car and Equipment
Company only, and not as the agent of both the latter company and the respective local purchasers plaintiff's principal witness,
A.H. Bishop, its resident Vice-President, in his testimony invariably referred to Koppel Industrial Car and Equipment Co. as "our
principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at the bottom of page 10 to the top of page 11, the witness stated that they
had "several principal" abroad but that "our principal abroad was, for the years in question, Koppel Industrial Car and Equipment
Company," and on page 68, he testified that what he actually said was ". . . but our principal abroad" and not "our principal abroad"
as to which it is very significant that neither this witness nor any other gave the name of even a single other principal abroad of
the plaintiff corporation;
(c) The plaintiff corporation bore alone incidental expenses as, for instance, cable expenses-not only those of its own cables but
also those of its "principal" (t.s.n., pp. 52, 53);
(d) the plaintiff's "share in the profits" realized from the transactions in which it intervened was left virtually in the hands of Koppel
Industrial Car and Equipment Company (t.s.n., p. 51);
(e) Where drafts were not paid by the purchasers, the local banks were instructed not to protest them but to refer them to plaintiff
which was fully empowered by Koppel Industrial Car and Equipment company to instruct the banks with regards to disposition of
the drafts and documents (t.s.n., p. 50; Exhibit G); lawphil.net
(f) Where the goods were European origin, consular invoices, bill of lading, and, in general, the documents necessary for clearance
were sent directly to plaintiff (t.s.n., p. 14);
(g) If the plaintiff had in stock the merchandise desired by local buyers, it immediately filled the orders of such local buyers and
made delivery in the Philippines without the necessity of cabling its principal in America either for price quotations or confirmation or
rejection of that agreed upon between it and the buyer (t.s.n., pp. 39-43);
(h) Whenever the deliveries made by Koppel Industrial Car and Equipment Company were incomplete or insufficient to fill the local
buyer's orders, plaintiff used to make good the deficiencies by deliveries from its own local stock, but in such cases it charged its
principal only the actual cost of the merchandise thus delivered by it from its stock and in such transactions plaintiff did not realize
any profit (t.s.n., pp. 53-54);
(i) The contract of sale involved herein were all perfected in the Philippines.
Those described in paragraph IV of the agreed statement of facts went through the following process: (1) "When a local buyer was interested
in the purchase of railway materials, machinery, and supplies, it asked for price quotations from plaintiff"; (2) "Plaintiff then cabled for the
quotation desired from Koppel Industrial Car and Equipment Company"; (3) "Plaintiff, however, quoted to the purchaser a selling price above
the figures quoted by Koppel Industrial Car and Equipment Company"; (4) "On the basis of these quotations, orders were placed by the local
purchasers . . ."
Those described in paragraph V of said agreed statement of facts were transacted "in substantially the same manner as outlined in paragraph
IV."
As to the single transaction described in paragraph VI of the same agreed statement of facts, discarding the Ossorio option which anyway was
called off, "On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for
$21,000(P42,000) C.I.F. Hongkong." (Emphasis supplied.).
(j) Exhibit H contains the following paragraph:
It is clearly understood that the intent of this contract is that the broker shall perform only the functions of a broker as set forth above, and
shall not take possession of any of the materials or equipment applying to said orders or perform any acts or duties outside the scope of a
broker; and in no sense shall this contract be construed as granting to the broker the power to represent the principal as its agent or to make
commitments on its behalf.
The Court of First Instance held for the defendant and dismissed plaintiff's complaint with costs to it.
Upon this appeal, seven errors are assigned to said judgment as follows:.
1. That the court a quo erred in not holding that appellant is a domestic corporation distinct and separate from, and not a mere branch of
Koppel Industrial Car and Equipment Co.;
2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated January 31, 1931, Exhibit M;
3. the court a quo erred in not holding that a character of a broker is determined by the nature of the transaction and not by the basis or
measure of his compensation;
4. The court a quo erred in not holding that appellant acted as a commercial broker in the transactions covered under paragraph VI of the
agreed statement of facts;
5. The court a quo erred in not holding that appellant acted as a commercial broker in the transactions covered under paragraph v of the
6. The court a quo erred in not holding that appellant acted as a commercial broker in the sole transaction covered under paragraph VI of the
7. the court a quo erred in dismissing appellant's complaint.

The lower court found and held that Koppel (Philippines), Inc. is a mere dummy or brach (" hechura") of Koppel industrial Car and Equipment Company.
The lower court did not deny legal personality to Koppel (Philippines), Inc. for any and all purposes, but in effect its conclusion was that, in the
transactions involved herein, the public interest and convenience would be defeated and what would amount to a tax evasion perpetrated, unless resort
is had to the doctrine of "disregard of the corporate fiction."
I. In its first assignment of error appellant submits that the trial court erred in not holding that it is a domestic corporation distinct and separate from
and not a mere branch of Koppel Industrial Car and Equipment Company. It contends that its corporate existence as Philippine corporation can not be
collaterally attacked and that the Government is estopped from so doing. As stated above, the lower court did not deny legal personality to appellant for
any and all purposes, but held in effect that in the transaction involved in this case the public interest and convenience would be defeated and what
would amount to a tax evasion perpetrated, unless resort is had to the doctrine of "disregard of the corporate fiction." In other words, in looking
through the corporate form to the ultimate person or corporation behind that form, in the particular transactions which were involved in the case
submitted to its determination and judgment, the court did so in order to prevent the contravention of the local internal revenue laws, and the
perpetration of what would amount to a tax evasion, inasmuch as it considered and in our opinion, correctly that appellant Koppel (Philippines),
Inc. was a mere branch or agency or dummy (" hechura") of Koppel Industrial Car and Equipment Co. The court did not hold that the corporate
personality of Koppel (Philippines), Inc., would also be disregarded in other cases or for other purposes. It would have had no power to so hold. The
courts' action in this regard must be confined to the transactions involved in the case at bar "for the purpose of adjudging the rights and liabilities of the
parties in the case. They have no jurisdiction to do more." (1 Flethcer, Cyclopedia of Corporation, Permanent ed., p. 124, section 41.)
A leading and much cited case puts it as follows:
If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general
rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convinience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. (1 Fletcher Cyclopedia of Corporation
[Permanent Edition], pp. 135, 136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255, per Sanborn, J.)
In his second special defense appellee alleges "that the plaintiff was and is in fact a branch or subsidiary of Koppel Industrial Car and Equipment Co., a
Pennsylvania corporation not licensed to do business in the Philippines but actually doing business here through the plaintiff; that the said foreign
corporation holds 995 of the 1,000 shares of the plaintiff's capital stock, the remaining five shares being held by the officers of the plaintiff herein in
order to permit the incorporation thereof and to enable its aforesaid officers to act as directors of the plaintiff corporation; and that plaintiff was
organized as a Philippine corporation for the purpose of evading the payment by its parent foreign corporation of merchants' sales tax on the
transactions involved in this case and others of similar nature."
By most courts the entity is normally regarded but is disregarded to prevent injustice, or the distortion or hiding of the truth, or to let in a just
defense. (1 Fletcher, Cyclopedia of Corporation, Permanent Edition, pp. 139,140; emphasis supplied.)
Another rule is that, when the corporation is the mere alter ego, or business conduit of a person, it may de disregarded." (1 Fletcher,
Cyclopedia of Corporation, Permanent Edition, p. 136.)
Manifestly, the principle is the same whether the "person" be natural or artificial.
A very numerous and growing class of cases wherein the corporate entity is disregarded is that (it is so organized and controlled, and its
affairs are so conducted, as to make it merely an instrumentality, agency, conduit or adjunct of another corporation)." (1 Fletcher, Cyclopedia
of Corporation, Permanent ed., pp. 154, 155.)
While we recognize the legal principle that a corporation does not lose its entity by the ownership of the bulk or even the whole of its stock,
by another corporation (Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79 Am. St. Rep., 685) yet it is equally well settled and
ignore corporate forms." (Colonial Trust Co. vs. Montello Brick Works, 172 Fed., 310.)
Where it appears that two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when
necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities, and treat them as
identical. (Abney vs. Belmont Country Club Properties, Inc., 279 Pac., 829.)
. . . the legal fiction of distinct corporate existence will be disregarded in a case where a corporation is so organized and controlled and its
affairs are so conducted, as to make it merely an instrumentality or adjunct of another corporation. (Hanter vs. Baker Motor Vehicle Co., 190
Fed., 665.)
In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458, 464), the Supreme Court of the United States disregarded the artificial
personality of the subsidiary coal company in order to avoid that the parent corporation, the Lehigh Valley R. Co., should be able, through the fiction of
that personality, to evade the prohibition of the Hepburn Act against the transportation by railroad companies of the articles and commodities described
therein.
Chief Justice White, speaking for the court, said:
. . . Coming to discharge this duty it follows, in view of the express prohibitions of the commodities clause, it must be held that while the right
of a railroad company as a stockholder to use its stock ownership for the purpose of a bona fide separate administration of the affairs of a
corporation in which it has a stock interest may not be denied, the use of such stock ownership in substance for the purpose of destroying the
entity of a producing, etc., corporation, and commingling its affairs in administration with the affairs of the railroad company, so as to make
the two corporations virtually one, brings the railroad company so voluntarily acting as to such producing, etc., corporation within the
prohibitions of the commodities clause. In other words, that by operation and effect of the commodities clause there is duty cast upon a
railroad company proposing to carry in interstate commerce the product of a producing, etc., corporation in which it has a stock interest, not
to abuse such power so as virtually to do by indirection that which the commodities clause prohibits, a duty which plainly would be violated
by the unnecessary commingling of the affairs of the producing company with its own, so as to cause them to be one and inseparable.
Corrobarative authorities can be cited in support of the same proposition, which we deem unnecessary to mention here.
From the facts hereinabove stated, as established by a preponderance of the evidence , particularly those narrated in paragraph ( a), (b), (c), (d), (e),
(f), (h), (i), and (j) after the agreed statement of facts, we find that, in so far as the sales involved herein are concerned, Koppel (Philippines), Inc., and
Koppel Industrial Car and Equipment company are to all intents and purposes one and the same; or, to use another mode of expression, that, as
regards those transactions, the former corporation is a mere branch, subsidiary or agency of the latter. To our mind, this is conclusively borne out by
the fact, among others, that the amount of he so-called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole, unbridled
control of Koppel Industrial Car and Equipment Company. If, in their relations with each other, Koppel (Philippines), Inc., was considered and intended
to function as a bona fide separate corporation, we can not conceive how this arrangement could have been adopted, for if there was any factor in its
business as to which it would in that case naturally have been opposed to being thus controlled, it must have been precisely the amount of profit which
it could endeavor and hope to earn. No group of businessmen could be expected to organize a mercantile corporation the ultimate end of which
could only be profit if the amount of that profit were to be subjected to such a unilateral control of another corporation, unless indeed the former has
previously been designed by the incorporators to serve as a mere subsidiary, branch or agency of the latter. Evidently, Koppel Industrial Car and
Equipment Company made us of its ownership of the overwhelming majority 99.5% of the capital stock of the local corporation to control the
operations of the latter to such an extent that it had the final say even as to how much should be allotted to said local entity in the so-called sharing in
the profits. We can not overlook the fact that in the practical working of corporate organizations of the class to which these two entities belong, the
holder or holders of the controlling part of the capital stock of the corporation, particularly where the control is determined by the virtual ownership of
the totality of the shares, dominate not only the selection of the Board of Directors but, more often than not, also the action of that Board. Applying this
to the instant case, we can not conceive how the Philippine corporation could effectively go against the policies, decisions, and desires of the American
corporation with regards to the scheme which was devised through the instrumentality of the contract Exhibit H, as well as all the other details of the
system which was adopted in order to avoid paying the 1 per cent merchants sales tax. Neither can we conceive how the Philippine corporation could
avoid following the directions of the American corporation held 99.5 per cent of the capital stock of the Philippine corporation. In the present instance,
we note that Koppel (Philippines), Inc., was represented in the Philippines by its "resident Vice-President." This fact necessarily leads to the inference
that the corporation had at least a Vice-President, and presumably also a President, who were not resident in the Philippines but in America, where the
parent corporation is domiciled. If Koppel (Philippines), Inc., had been intended to operate as a regular domestic corporation in the Philippines, where it
was formed, the record and the evidence do not disclose any reason why all its officers should not reside and perform their functions in the Philippines.
Other facts appearing from the evidence, and presently to be stated, strengthen our conclusion, because they can only be explained if the local entity is
considered as a mere subsidiary, branch or agency of the parent organization. Plaintiff charged the parent corporation no more than actual cost
without profit whatsoever for merchandise allegedly of its own to complete deficiencies of shipments made by said parent corporation (t.s.n., pp. 53,
54) a fact which could not conceivably have been the case if plaintiff had acted in such transactions as an entirely independent entity doing business
for profit, of course with the American concern. There has been no attempt even to explain, if the latter situation really obtained, why these two
corporations should have thus departed from the ordinary course of business. Plaintiff was charged by the American corporation with the cost even of
the latter's cable quotations from ought that appears from the evidence, this can only be comprehended by considering plaintiff as such a subsidiary,
branch or agency of the parent entity, in which case it would be perfectly understandable that for convenient accounting purposes and the easy
determination of the profits or losses of the parent corporation's Philippines should be charged against the Philippine office and set off against its
receipts, thus separating the accounts of said branch from those which the central organization might have in other countries. The reference to plaintiff
by local banks, under a standing instruction of the parent corporation, of unpaid drafts drawn on Philippine customers by said parent corporation,
whenever said customers dishonored the drafts, and the fact that the American corporation had previously advised said banks that plaintiff in those
cases was "fully empowered to instruct (the banks) with regard to the disposition of the drafts and documents" (t.s.n., p. 50), in the absence of any
other satisfactory explanation naturally give rise to the inference that plaintiff was a subsidiary, branch or agency of the American concern, rather than
an independent corporation acting as a broker. For, without such positive explanation, this delegation of power is indicative of the relations between
central and branch offices of the same business enterprise, with the latter acting under instructions already given by the former. Far from disclosing a
real separation between the two entities, particularly in regard to the transactions in question, the evidence reveals such commongling and interlacing of
their activities as to render even incomprehensible certain accounting operations between them, except upon the basis that the Philippine corporation
was to all intents and purposes a mere subsidiary, branch, or agency of the American parent entity. Only upon this basis can it be comprehended why it
seems not to matter at all how much profit would be allocated to plaintiff, or even that no profit at all be so allocated to it, at any given time or after
any given period.
As already stated above, under the evidence the sales in the Philippines of the railway materials, machinery and supplies imported here by Koppel
Industrial Car and Equipment Company could have been as conviniently and efficiently transacted and handled if not more so had said corporation
merely established a branch or agency in the Philippines and obtained license to do business locally; and if it had done so and said sales had been
effected by such branch or agency, there seems to be no dispute that the 1 per cent merchants' sales tax then in force would have been collectible.
So far as we can discover, there would be only one, but very important, difference between the two schemes a difference in tax liability on the
ground that the sales were made through another and distinct corporation, as alleged broker, when we have seen that this latter corporation is virtually
owned by the former, or that they practically one and the same, is to sanction a circumvention of our tax laws, and permit a tax evasion of no mean
proportions and the consequent commission of a grave injustice to the Government. Not only this; it would allow the taxpayer to do by indirection what
the tax laws prohibited to be done directly (non-payment of legitimate taxes), paraphrasing the United States Supreme Court in United States vs. Lehigh
Valley R. Co., supra.
The act of one corporation crediting or debiting the other for certain items, expenses or even merchandise sold or disposed of, is perfectly compatible
with the idea of the domestic entity being or acting as a mere branch, agency or subsidiary of the parent organization. Such operations were called for
any way by the exigencies or convenience of the entire business. Indeed, accounting operation such as these are invitable, and have to be effected in
the ordinary course of business enterprise extends its trade to another land through a branch office, or through another scheme amounting to the same
thing.
If plaintiff were to act as broker in the Philippines for any other corporation, entity or person, distinct from Koppel Industrial Car and Equipment
company, an entirely different question will arise, which, however, we are not called upon, nor in a position, to decide.
As stated above, Exhibit H contains to the following paragraph:
It is clearly understood that the intent of this contract is that the broker shall perform only the functions of a broker as set forth above, and
shall not take possession of any of the materials or equipment applying to said orders or perform any acts or duties outside the scope of a
broker; and in no sense shall this contract be construed as granting to the broker the power to represent the principal as its agent or to make
commitments on its behalf.
The foregoing paragraph, construed in the light of other facts noted elsewhere in this decision, betrays, we think a deliberate intent, through the
medium of a scheme devised with great care, to avoid the payment of precisely the 1 per cent merchants' sales tax in force in the Philippines before,
at the time of, and after, the making of the said contract Exhibit H. If this were to be allowed, the payment of a tax, which directly could not have been
avoided, could be evaded by indirection, consideration being had of the aforementioned peculiar relations between the said American and local
corporations. Such evasion, involving as it would, a violation of the former Internal Revenue Law, would even fall within the penal sanction of section
2741 of the Revised Administrative Code. Which only goes to show the illegality of the whole scheme. We are not here concerned with the impossibility
of collecting the merchants' sales tax, as a mere incidental consequence of transactions legal in themselves and innocent in their purpose. We are
dealing with a scheme the primary, not to say the sole, object of which the evasion of the payment of such tax. It is this aim of the scheme that makes
it illegal.
We have said above that the contracts of sale involved herein were all perfected in the Philippines. From the facts stipulated in paragraph IV of the
agreed statement of facts, it clearly appears that the Philippine purchasers had to wait for Koppel Industrial Car and Equipment Company to
communicate its cost prices to Koppel (Philippines), Inc., were perfected in the Philippines. In those cases where no such price quotations from the
American corporation were needed, of course, the sales effected in those cases described in paragraph V of the agreed statement of facts were, as
expressed therein, transacted "in substantially the same manner as outlined in paragraph VI." Even the single transaction described in paragraph VI of
the agreed statement of facts was also perfected in the Philippines, because the contracting parties were here and the consent of each was given here.
While it is true that when the contract was thus perfected in the Philippines the pair of Atlas-Diesel Marine Engines were in Sweden and the agreement
was to deliver them C.I.F. Hongkong, the contract of sale being consensual perfected by mere consent (Civil Code, article 1445; 10 Manresa, 4th
ed., p. 11), the location of the property and the place of delivery did not matter in the question of where the agreement was perfected.
In said paragraph VI, we read the following, as indicating where the contract was perfected, considering beforehand that one party, Koppel
(Philippines),Inc., which in contemplation of law, as to that transaction, was the same Koppel Industrial Car Equipment Co., was in the Philippines:
. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for $21,000
(P42,000) C.I.F. Hongkong . . . (Emphasis supplied.)
Under the revenue law in force when the sales in question took place, the merchants' sales tax attached upon the happening of the respective sales of
the "commodities, goods, wares, and merchandise" involved, and we are clearly of opinion that such "sales" took place upon the perfection of the
corresponding contracts. If such perfection took place in the Philippines, the merchants' sales tax then in force here attached to the transactions.
Even if we should consider that the Philippine buyers in the cases covered by paragraph IV and V of the agreed statement of facts, contracted with
Koppel Industrial Car and Equipment company, we will arrive at the same final result. It can not be denied in that case that said American corporation
contracted through Koppel (Philippines), Inc., which was in the Philippines. The real transaction in each case of sale, in final effect, began with an offer
of sale from the seller, said American corporation, through its agent, the local corporation, of the railway materials, machinery, and supplies at the
prices quoted, and perfected or completed by the acceptance of that offer by the local buyers when the latter, accepting those prices, placed their
orders. The offer could not correctly be said to have been made by the local buyers when they asked for price quotations, for they could not rationally
be taken to have bound themselves to buy before knowing the prices. And even if we should take into consideration the fact that the american
corporation contracted, at least partly, through correspondence, according to article 54 of the Code of Commerce, the respective contracts were
completed from the time of the acceptance by the local buyers, which happened in the Philippines.
Contracts executed through correspondence shall be completed from the time an answer is made accepting the proposition or the conditions
by which the latter may be modified." (Code of Commerce, article 54; emphasis supplied.)
A contract is as a rule considered as entered into at the place where the place it is performed. So where delivery is regarded as made at the
place of delivery." (13 C. J., 580-81, section 581.)
(In the consensual contract of sale delivery is not needed for its perfection.)
II. Appellant's second assignment of error can be summarily disposed of. It is clear that the ruling of the Secretary of Finance, Exhibit M, was not
binding upon the trial court, much less upon this tribunal, since the duty and power of interpreting the laws is primarily a function of the judiciary.
(Ortua vs. Singson Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused from abiding by this legal principle, nor can it properly be heard to say
that it relied on the Secretary's ruling and that, therefore, the courts should not now apply an interpretation at variance therewith. The rule of stare
decisis is undoubtedly entitled to more respect in the construction of statutes than the interpretations given by officers of the administrative branches of
the government, even those entrusted with the administration of particular laws. But this court, in Philippine Trust Company and Smith, Bell and Co. vs.
Mitchell(59 Phil., 30, 36), said:
. . . The rule of stare decisis is entitled to respect. Stability in the law, particularly in the business field, is desirable. But idolatrous reverence
for precedent, simply as precedent, no longer rules. More important than anything else is that court should be right. . . .
III. In the view we take of the case, and after the disposition made above of the first assignment of error, it becomes unnecessary to make any specific
ruling on the third, fourth, fifth, sixth, and seventh assignments of error, all of which are necessarily disposed of adversely to appellant's contention.
Wherefore, he judgment appealed from is affirmed, with costs of both instances against appellant. So ordered.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones, and Tuason, JJ., concur.
Separate Opinions
PERFECTO, J., concurring:
We fully agree with the well-written decision penned by Mr. Justice Hilado in this case. We only wish to add that the ingenious device of evading the
payment of taxes, is not a new one. It is only one of the manifold manifestations of the shrewdness of the masterminds behind some powerful
corporations who, without ay compunction, do not stop at adopting any scheme by which the controlling capitalists may get even richer and richer,
sometimes at government expense, sometimes by squeezing credulous or ignorant small shareholders, sometimes with the exploitation of the helpless
public at large, and sometimes at great sacrifice of all the three entities.
The system of corporation combines, of holding and subsidiary corporations, of spreading and interlocking companies, has no well developed and has
grown so powerful that even the wisest government had been unable to defend itself and protect the people from the crushing tentacles of the
moneyed octopuses. It is true that in the United States of America anti trusts laws were enacted but, notwithstanding their ability and wisdom, the
Americans were unable to stave off the effects of the bankruptcy of the pyramid of holding and interlocking companies built around the tragic figure of
Samuel Insull.
That Philippine Government, that Filipino consumers, that Filipino public at large, had already been victims of the evil effects of such a system has been
conclusively proved in the scandalous illegalities and irregularities disclosed in the investigation made by the first National Assembly, through its
Committee on Rate Reducing of Public Utilities. In said investigation, it was revealed that, by a system of holding and interlocking companies, by their
manipulation of books of accounts, our government was defrauded of enormous amounts in taxes and millions of pesos were unjustly squeezed from
the public.
It is high time that alarm be sounded so that our government and our public may avoid being further victimized and this country turned into a puppet at
the mercy of moneyed tycoons who are not stopped by any scruple to attain their unquenchable thristiness for more money and for power and
domination. All liberal-minded people must fight not only against political imperialism, but also against economic or financial imperialism, in fact, against
any kind of imperialism. The call for eternal vigilance must be heeded by all, including tribunals, if the survival of our people must not be jeopardized by
artful corporations and unscrupulous financiers.
G.R. No. 182770 September 17, 2014
WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners, vs. FE CORAZON LABAYEN, Respondent.
DECISION
BRION, J.:
We review in this petition for review on certiorari1 the decision2 dated September 28, 2007 and the resolution3 dated April 28, 2008 of the Court of
Appeals (CA) in CA-G.R. CV No. 68289 that affirmed with modification the decision4 of the Regional Trial Court (RTC), Branch 77, Quezon City.
The Factual Background
The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a management and consultant firm. The petitioner, WPM
International Trading, Inc. (WPM), is a domestic corporation engaged in the restaurant business, while Warlito P. Manlapaz (Manlapaz) is its president.
Sometime in 1990, WPM entered into a management agreement with the respondent, by virtue of which the respondent was authorized to operate,
manage and rehabilitate Quickbite, a restaurant owned and operated by WPM. As part of her tasks, the respondent looked for a contractor who would
renovate the two existing Quickbite outlets in Divisoria, Manila and Lepanto St., University Belt, Manila. Pursuant to the agreement, the respondent
engaged the services of CLN Engineering Services (CLN) to renovate Quickbite-Divisoria at the cost of 432,876.02.
On June 13, 1990, Quickbite-Divisorias renovation was finally completed, and its possession was delivered to the respondent. However, out of the
432,876.02 renovation cost, only the amount of 320,000.00 was paid to CLN, leaving a balance of 112,876.02.
Complaint for Sum of Money (Civil Case No. Q-90-7013)
On October 19, 1990, CLN filed a complaint for sum of money and damages before the RTC against the respondent and Manlapaz, which was docketed
as Civil Case No. Q-90-7013. CLN later amended the complaint to exclude Manlapaz as defendant. The respondent was declared in default for her failure
to file a responsive pleading.
The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN actual damages inthe amount of 112,876.02 with 12% interest per
annum from June 18,1990 (the date of first demand) and 20% of the amount recoverable as attorneys fees.
Complaint for Damages (Civil Case No. Q-92-13446)
Thereafter, the respondent instituted a complaint for damages against the petitioners, WPM and Manlapaz. The respondent alleged that in Civil Case No.
Q-90-7013, she was adjudged liable for a contract that she entered into for and in behalf of the petitioners, to which she should be entitled to
reimbursement; that her participation in the management agreement was limited only to introducing Manlapaz to Engineer Carmelo Neri (Neri), CLNs
general manager; that it was actually Manlapaz and Neri who agreed on the terms and conditions of the agreement; that when the complaint for
damages was filed against her, she was abroad; and that she did not know of the case until she returned to the Philippines and received a copy of the
decision of the RTC.
In her prayer, the respondent sought indemnification in the amount of 112,876.60 plus interest at 12%per annum from June 18, 1990 until fully paid;
and 20% of the award as attorneys fees. She likewise prayed that an award of 100,000.00 as moral damages and 20,000.00 as attorneys fees be
paid to her.
In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar Alcansajewho was in-charge with the daily operations of the Quickbite
outlets; that when Alcansaje left WPM, the remaining directors were compelled to hire the respondent as manager; that the respondent had entered
intothe renovation agreement with CLN in her own personal capacity; that when he found the amount quoted by CLN too high, he instructed the
respondent to either renegotiate for a lower price or to look for another contractor; that since the respondent had exceeded her authority as agent of
WPM, the renovation agreement should only bind her; and that since WPM has a separate and distinct personality, Manlapaz cannot be made liable for
the respondents claim.
Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way of counterclaim, for the award of 350,000.00 as moral and
exemplary damages and 50,000.00 attorneys fees.
The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to file a responsive pleading.
The Decision of the RTC
In its decision, the RTC held that the respondent is entitled to indemnity from Manlapaz. The RTC found that based on the records, there is a clear
indication that WPM is a mere instrumentality or business conduit of Manlapaz and as such, WPM and Manlapaz are considered one and the same. The
RTC also found that Manlapaz had complete control over WPM considering that he is its chairman, president and treasurer at the same time. The RTC
thus concluded that Manlapaz is liable in his personal capacity to reimburse the respondent the amount she paid to CLN inconnection with the
renovation agreement.
The petitioners appealed the RTC decision with the CA. There, they argued that in view of the respondents act of entering into a renovation agreement
with CLN in excess of her authority as WPMs agent, she is not entitled to indemnity for the amount she paid. Manlapaz also contended that by virtue
ofWPMs separate and distinct personality, he cannot be madesolidarily liable with WPM.
The Ruling of the Court of Appeals
On September 28, 2007, the CA affirmed, with modification on the award of attorneys fees, the decision of the RTC.The CA held that the petitioners are
barred from raising as a defense the respondents alleged lack of authority to enter into the renovation agreement in view of their tacit ratification of the
contract.
The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and the same based on the following: (1) Manlapaz is the principal stockholder
of WPM; (2) Manlapaz had complete control over WPM because he concurrently held the positions of president, chairman of the board and treasurer, in
violation of the Corporation Code; (3) two of the four other stockholders of WPM are employed by Manlapaz either directly or indirectly; (4) Manlapazs
residence is the registered principal office of WPM; and (5) the acronym "WPM" was derived from Manlapazs initials. The CA applied the principle of
piercing the veil of corporate fiction and agreed with the RTC that Manlapaz cannot evade his liability by simply invoking WPMs separate and distinct
personality.
After the CA's denial of their motion for reconsideration, the petitioners filed the present petition for review on certiorari under Rule 45 of the Rules of
Court.
The Petition
The petitioners submit that the CA gravely erred in sustaining the RTCs application of the principle of piercing the veil of corporate fiction. They argue
that the legal fiction of corporate personality could only be discarded upon clear and convincing proof that the corporation is being used as a shield to
avoid liability or to commit a fraud. Since the respondent failed to establish that any of the circumstances that would warrant the piercing is present,
Manlapaz claims that he cannot be made solidarily liable with WPM to answerfor damages allegedly incurred by the respondent.
The petitioners further argue that, assuming they may be held liable to reimburse to the respondentthe amount she paid in Civil Case No. Q-90-7013,
such liability is only limited to the amount of 112,876.02, representing the balance of the obligation to CLN, and should not include the twelve 12%
percent interest, damages and attorneys fees.
The Issues
The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business conduit of Manlapaz; and (2) whether Manlapaz is jointly and
severally liable with WPM to the respondent for reimbursement, damages and interest.
Our Ruling
We find merit in the petition.
We note, at the outset, that the question of whether a corporation is a mere instrumentality or alter-ego of another is purely one of fact. 5 This is also
true with respect to the question of whether the totality of the evidence adduced by the respondentwarrants the application of the piercing the veil of
corporate fiction doctrine.6
Generally, factual findings of the lower courts are accorded the highest degree of respect, if not finality. When adopted and confirmed by the CA, these
findings are final and conclusive and may not be reviewed on appeal,7 save in some recognized exceptions8 among others, when the judgment is based
on misapprehension of facts.
We have reviewed the records and found that the application of the principle of piercing the veil of corporate fiction is unwarranted in the present case.
On the Application ofthe Principle of Piercing the Veil of Corporate Fiction
The rule is settled that a corporation has a personality separate and distinct from the persons acting for and in its behalf and, in general, from the
people comprising it.9 Following this principle, the obligations incurred by the corporate officers, orother persons acting as corporate agents, are the
direct accountabilities ofthe corporation they represent, and not theirs. Thus, a director, officer or employee of a corporation is generally not held
personally liable for obligations incurred by the corporation;10 it is only in exceptional circumstances that solidary liability will attach to them.
Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct corporate
personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud cases, or
when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is
essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs so
conducted as to make it merely aninstrumentality, agency, conduit or adjunct of another corporation.11
Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements, namely:
(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in
respect to the transaction attacked so 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 beenused by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.
The absence of any ofthese elements prevents piercing the corporate veil.12
In the present case, the attendantcircumstances do not establish that WPM is a mere alter ego of Manlapaz.
Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show that WPM was organized and controlled, and its affairs
conducted in a manner that made it merely an instrumentality, agency, conduit or adjunct ofManlapaz. As held in Martinez v. Court of Appeals, 13 the
mere ownership by a singlestockholder of even all or nearly all of the capital stocks ofa corporation is not by itself a sufficient ground to disregard the
separate corporate personality. To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly
established.14
Likewise, the records of the case do not support the lower courts finding that Manlapaz had control or domination over WPM or its finances. That
Manlapaz concurrentlyheld the positions of president, chairman and treasurer, or that the Manlapazs residence is the registered principal office of WPM,
are insufficient considerations to prove that he had exercised absolutecontrol over WPM.
In this connection, we stress thatthe control necessary to invoke the instrumentality or alter ego rule is not majority or even complete stock control but
such domination of finances, policies and practices that the controlled corporation has, so tospeak, no separate mind, will or existence of its own, and is
but a conduit for its principal. The control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control
and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.
Here, the respondent failed to prove that Manlapaz, acting as president, had absolute control over WPM. 1wphi1 Even granting that he exercised a
certain degree of control over the finances, policies and practices of WPM, in view of his position as president, chairman and treasurer of the
corporation, such control does not necessarily warrant piercing the veil of corporate fiction since there was not a single proof that WPM was formed to
defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or fraud.
On the contrary, the evidence establishes that CLN and the respondent knew and acted on the knowledgethat they were dealing with WPM for the
renovation of the latters restaurant, and not with Manlapaz. That WPM later reneged on its monetary obligation to CLN, resulting to the filing of a civil
case for sum of money against the respondent, does not automatically indicate fraud, in the absence of any proof to support it.
This Court also observed that the CA failed to demonstrate how the separate and distinct personalityof WPM was used by Manlapaz to defeat the
respondents right for reimbursement. Neither was there any showing that WPM attempted to avoid liability or had no property against which to
proceed.
Since no harm could be said to have been proximately caused by Manlapaz for which the latter could be held solidarily liable with WPM, and considering
that there was no proof that WPM had insufficient funds, there was no sufficient justification for the RTC and the CA to have ruled that Manlapaz should
be held jointly and severally liable to the respondent for the amount she paid to CLN. Hence, only WPM is liable to indemnify the respondent.
Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and thus, must be done with caution. 15 It can only be done if it
has been clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a
deception. The court 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; it cannot be presumed.
On the Award of Moral Damages
On the award of moral damages, we find the same in order in view of WPM's unjustified refusal to pay a just debt. Under Article 2220 of the New Civil
Code,16 moral damages may be awarded in cases of a breach of contract where the defendant acted fraudulently or in bad faith or was guilty of gross
negligence amounting to bad faith.
In the present case, when payment for the balance of the renovation cost was demanded, WPM, instead of complying with its obligation, denied having
authorized the respondent to contract in its behalf and accordingly refused to pay. Such cold refusal to pay a just debt amounts to a breach of contract
in bad faith, as contemplated by Article 2220. Hence, the CA's order to pay moral damages was in order.
WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the Court of Appeals in CA-G.R. CV No. 68289 is MODIFIED and.that
petitioner Warlito P. Manlapaz is ABSOLVED from any liability under the renovation agreement.
SO ORDERED.
G.R. No. L-13119 September 22, 1959
RICARDO TANTONGCO, petitioner,

vs.
KAISAHAN NG MGA MANGGAGAWA SA LA CAMPAN (KKM) AND THE HONORABLE COURT OF INDUSTRIAL RELATIONS, respondents.
Ernesto C. Estrella for petition for petitioner.

Carlos E. Santiago for respondent Union.
Pedro M. Ligaya for respondent CIR.
MONTEMAYOR, J.:
This is a petition for certiorari and prohibition with prayer for issuance of a writ of preliminary injunction to prohibit respondent Court of Industrial
Relations from proceeding with the hearing of the contempt proceedings for which petitioner Ricardo Tantongco was cited to appear the present his
evidence. The contempt proceedings which petitioner seeks to stop are based on the order of the Court of Industrial Relations, dated September 30,
1957, which reads as follows:
It appearing that the Order of this Court, in the above-entitled case, dated February 18, 1957 (folios 134-166), has become final and
executory and the respondents have failed to comply with the same, the said respondents, namely, the La Campana Starch and Coffee
Factory or its manager or the person who has charge of the management, and the administrator of the Estate of Ramon Tantongco are
hereby ordered to comply with said order, within five days from receipt hereof, particularly the following, to wit:
(a) To reinstate the persons named in the said Order of February 18, 1957;
(b) To deposit the amount of P65,534.01 with this Court.
With respect to possible back wages from August 28, 1957 as mentioned in the petition for contempt of August 30, 1957, the same shall first
be determined.
Failure to comply with this Order shall be directly dealt with accordingly.
It would appear that petitioner Ricardo Tantongco failed to comply with said order and so, as already stated, he was cited to appear and to adduce
evidence on his behalf to show why he should not be punished for indirect contempt.
The facts in this case may be briefly narrated thus: Sometime in June, 1951, members of the Kaisahan ng mga Manggagawa sa La Campana, a labor
union to which were affiliated workers in the La Campana Starch Factory and La Campana Coffee Factory, two separate entities but under the one
management, presented demands for higher wages, and more privileges and benefits in connection with their work. When the management failed and
refused to grant the demands, the Department of Labor intervened; but failing to settle the controversy, it certified the dispute to the Court of Industrial
Relations on July 17, 1951, where it was docketed as Case No. 584V. On the theory that the laborers presenting the demands were only the ones
working in the coffee factory, said company filed through the management a motion to dismiss claiming that inasmuch as there were only 14 of them in
said factory, the Court of Industrial Relations had no jurisdiction to entertain and decide the case. The motion was denied by the Court of Industrial
Relations, which said:
. . . There was only management for the business of gawgaw and coffee with whom the laborers are dealing regarding their work. Hence, the
filing of action against the La Campana Starch and Coffee Factory is proper and justified. 1wphl.nt
The order of denial was appealed to this Tribunal through certiorari under G.R. No. L-5677. In disposing of the case, we held:
As to the first ground, petitioners obviously do not question the fact that the number of employees of the La Campana Gaugau Packing
involved in the case is more than the jurisdictional number (31) required by law, but they contend that the industrial court has no jurisdiction
to try case against La Campana Coffee Factory Co. Inc. because the latter has allegedly only 14 laborers and only five of these are members
of respondent Kaisahan. This contention loses force when it is noted that, as found by the industrial court and this finding is conclusive
upon us La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are operating under one single management, that is, one
business though with two trade names. True, the coffee factory is a corporation , and, by legal fiction, an entity existing separate and part
from the persons composing it, that is, Tan Tong and his family. But is settled this fiction of law, which has been introduced as a matter of
convenience and to subserve the ends of justice cannot be invoke to further an end subversive of that purpose.
... The attempt to make the two factories appear as two separate business, when in reality, they are but one is but a device to defeat the
ends of the law (the Act governing capital and labor relations) and should not be permitted to prevail. (La Campana Coffee Factory, et al., vs.
Kaisahan ng mga Manggagawa, etc. et al., 93 Phil., 160; 49 Off. Gaz., [6] 2300.)
Upon the return of the case to the Court of Industrial Relations, the latter proceeded with the hearing. In the meantime incidental cases involving the
same parties came up and were filed before the Court of Industrial Relations in the following cases: 1wphl.nt
Case No. 584-V(1) petition for contempt against the La Campana Starch and Coffee Factory for having employed 21 new laborers in
violation of the order of July 21, 1951, filed on July 25, 1951;
Case No. 584-V(2) petition of La Campana for authority for authority to dismiss Loreto Bernabe, filed on July 25, 19651;
Case No. 584-V(3) petition of Union to reinstate Bonifacio Calderon with backpay, filed on August 3, 1951;
Case No. 584-V(5) petition of Union to reinstate Marcelo Estrada and Exequiel Rapiz with back pay and to punish officials of the company
for contempt, filed on February 13, 1952; and
Case No. 584-V(6) petition of union for reinstatement of Ibardolaza and seven other member-laborers and to punish the officers of the
company for contempt, filed on July 15, 1953.
These five cases were heard jointly. In the meantime Ramon Tantongco supposed to be the owner and manager of the La Campana Starch Factory and
the person in charge of the La Campana Coffee Factory died on May 16, 1956. On motion of the labor union, the Court of Industrial Relations order the
inclusion as party respondent of the administrator of the estate of Ramon Tantongco who was Ricardo Tantongco.
Ricardo Tantongco, as administrator, under a special appearance filed a motion to dismiss all the cases including the main case, that is to say, Cases
No. 584-(V) to 584-V(6), on the ground that said cases involved claims for sums of money and consequently should be filed before the probate court
having jurisdiction over the estate, pursuant to the provisions of Rule 3, Section 21, and Rule 88, Section 1 of the Rules of Court. On August 23, 1956,
the Court of Industrial Relations denied the motion to dismiss and proceed to hear the incidental cases against the La Campana entities.
On June 12, 1956, a partial decision was rendered in the main case No. 584-V, which partial decision was elevated to us and is still pending appeal. On
February 18, 1957, the Court of Industrial Relations issued an order in incidental Cases No. 584-V(1), V(2), V(5) and V(6), directing the "management of
the respondent company and or the administrator of the Estate of Ramon Tantongco", to reinstate the dismissed laborers mentioned therein with back
wages. This order of February 18, 1957, as well as the order directing the inclusion of the administrator of the estate of Ramon Tantongco as additional
respondent in the incidental cases, and the order denying the petition of the administrator to dismiss said incidental cases were appealed to this tribunal
though certiorari. The appeal, however, was summarily dismissed by this Court in its resolution of June 12, 1957, as follows:
This Court, deliberating upon the allegations of the petition filed in case l-12355 (La Campana Starch Coffee Factory et al. vs. Kaisahan ng
Mga Manggagawa sa la Campana, KKM, et al) for review, on certiorari of the decision of the Court of Industrial Relations referred to therein,
and finding that there is no merit in the petition, RESOLVE TO DISMISS the same.
The CIR order of February 18, ,1957, in the incidental cases Nos. 584-V to V(6), having become final and executory , the laborers involved reported for
work on August 28, 1957, but they were not admitted by the management. Consequently, the union filed a petition dated August 30, 1957, to hold
respondents in said cases for contempt. After hearing the CIR issued the order of September 30, 1957, subject of this petition, ordering "the La
Campana Starch and Coffee Factory or its manager or the person who has charge of its management and the administrator of the estate of Ramon
Tantongco" to "reinstate the persons named in the order of February 18, 1957" and "to deposit the amount of P65,534.01." For refusal or failure to
comply with said order, petitioner Ricardo Tantongco was required to appear before the attorney of the CIR in contempt proceedings. Petitioner now
seeks to prohibit the CIR from proceeding with the trial for contempt and to enjoin respondent CIR from enforcing its order of September 30, 1957.
Petitioner contends that upon the death of Ramon Tantongco, the claims of the laborers should have been dismissed and that said claims should have
been filed with the probate court having jurisdiction over the administration proceedings of the estate of Ramon Tantongco, pursuant to the provisions
of Rule 3, Section 21 of the Rules of Court and that the failure to file claims with the administrator forever barred said claims as provided in Rule 87,
Section 5 of the Rules of Court, especially after the assets of the estate had been distributed among the heirs, and petitioner had ceased to be the
administrator of the estate. As already stated this same question was raised by petitioner in G.R. No. L-12355, entitled "La Campana Starch and Coffee
Factory and Ricardo Tantongco, etc. vs. Kaisahan ng mga Manggagawa sa La Campana (KKM)," which, as already stated, was summarily dismissed by
this Court in a resolution dated June 12, 1957. Consequently, said question may not again be raised in the present case. Furthermore, it may be recalled
that both in the main case in the incidental cases No. 584-V to 584-V(6), Ramon Tantongco was never a party. The party there was the La Campana
Starch and Coffee Factory by which name it was sought to designate the two entities La Campana Starch Packing and the La Campana Coffee Factory.
Naturally, the claims contained in said cases were not the claims contemplated by law to be submitted before the administrator. In other words the
death of Ramon Tantongco did not deprive the CIR of its jurisdiction over the cases aforementioned. Moreover, the money claims of the laborers were
merely incidental to their demands for reinstatement for having been unjustly dismissed, and for better working conditions.
Petitioner, however, contends that in G.R. No. L-5677, we "pierced the veil of corporate existence", and held that the La Campana Starch and Coffee
Factory and its owner, Ramon Tantongco, were one; so that with the death of Ramon, the La Campana entities ceased to exist, resulting in the loss of
jurisdiction of the CIR to enforce its order against said entities. The reason we applied the so-called "piercing the veil of corporate existence" in G.R. No.
L-5677 was to avoid the technicality therein advanced in order to defeat the jurisdiction of the CIR. We there found that although there were ostensibly
two separate companies or entities, they were managed by the same person or persons and the workers in both were used interchangeably so that in
order to determine whether or not the CIR had jurisdiction, the number of workers in both entitles, not in only one, was to be considered. However, we
still believe that although the family of Ramon Tantongco was practically the owner of both the coffee factory and the starch factory, nevertheless these
entities are separate from the personality of Ramon. The coffee factory is a stock corporation and the shares are owned not only by Ramon but also by
others, such as petitioner Ricardo who not only is a stockholder and director and treasurer but also the management of the same Furthermore,
petitioner is now estopped from claiming that the two entities in question and Ramon are one. Thus in Annex 3-CIR (par. 1 thereof) which is a
complaint for injunction filed by La Campana Food Products, et al and La Campana Starch Packing against the consolidated Labor Organization of the
Philippines, in civil Case No. P-25482 in the Court of First Instance of Rizal, petitioner admitted the existence and operation of said entities; in Annex 4
CIR where petitioner appeared as General Manager representing the two entities in its agreement with the La Campana Workers Union to resolve the
dispute between the two entities and the laborers in case Nos. 1072-V and 1371-ULP, the existence of the two entities appears to have been admitted;
and in Annex 5-A-CIR, an answer to the complaint of La Campana Workers Union in case No. 1471-ULP (Annex 5-CIR), petitioner admitted the
allegation that said two factories were in existence and doing business with petitioner as manager of the same.
In relation to the order of the CIR requiring petitioner to appear in the contempt proceedings instituted against him, petitioner contends that after he
ceased to be the administrator of the estate of Ramon Tantongco, he may not now be compelled to comply with the order of the court. In answer, it is
enough to bear in mind the jurisdiction and authority of the CIR as to compliance with and violations of its orders under section 6, Commonwealth Act
No. 143, which we quote below:
. . . The Court or any Judge thereof shall have furthermore, all the inherent powers of a court of justice provided in paragraph 5 of Rule 124
of the Supreme Court, as well as the power to punish direct and indirect contempt as provided in Rule 64 of the same Court, under the same
procedure and penalties provided therein.
Any violation of any order, award, or decision of the Court of Industrial Relations shall, after such order, award or decision has become final,
conclusive, and executory, constitute contempt of court: . . .
In case the employer (or landlord) committing any such violation or contempt is an association or corporation, the manager or the person who
has the charge of the management of the business of the association or corporation and the officers of directors thereof who have ordered or
authorized the violation of contempt shall be liable. . . .
In conclusion, we find and hold that the La Campana Starch and Food Products Company which stands for the La Campana Starch and Coffee Factory
are entities distinct from the personality of Ramon Tantongco; that after the death of Ramon these two entities continued to exist and to operate under
the management of petitioner and that consequently he is the proper person and official to which the orders of the CIR are addressed and who is in
duty bound to comply with the same. We further find that the CIR acted with in its jurisdiction in issuing its order of September 30, 1957 and in
requiring petitioner to appear to give his evidence if any in relation with the contempt proceedings instituted against him. 1wphl.nt
In view of the foregoing, the petition for certiorari is .hereby denied and the writ of preliminary injunction dissolved, with costs.
CASE DIGEST: CRUZ VS DALISAY

152 SCRA 482 Business Organization Corporation Law Piercing the Veil of Corporate Fiction Exercised by the Wrong Person
In 1984, the National Labor Relations Commission issued an order against Qualitrans Limousine Service, Inc. (QLSI) ordering the latter to reinstate the
employees it terminated and to pay them backwages. Quiterio Dalisay, Deputy Sheriff of the court, to satisfy the backwages, then garnished the bank
account of Adelio Cruz. Dalisay justified his act by averring that Cruz was the owner and president of QLSI. Further, he claimed that the counsel for the
discharged employees advised him to garnish the account of Cruz.
ISSUE: Whether or not the action of Dalisay is correct.
HELD: No. What Dalisay did is tantamount to piercing the veil of corporate fiction. He actually usurped the power of the court. He also overstepped his
duty as a deputy sheriff. His duty is merely ministerial and it is incumbent upon him to execute the decision of the court according to its tenor and only
against the persons obliged to comply. In this case, the person judicially named to comply was QLSI and not Cruz. It is a well-settled doctrine both in
law and in equity that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members. The mere fact
that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since the president, as
individual, and the corporation are separate entities.
G.R. No. 165442 August 25, 2010
NASECO GUARDS ASSOCIATION-PEMA (NAGA-PEMA), Petitioner, vs. NATIONAL SERVICE CORPORATION (NASECO), Respondent.
DECISION
VILLARAMA, JR., J.:
This petition for review on certiorari under Rule 45 assails the Decision1 dated May 27, 2004 of the Court of Appeals (CA) in CA-G.R. SP No. 76667. The
appellate court set aside the January 15, 2003 2 and March 11, 20033 Orders of the Department of Labor and Employment (DOLE) and ordered the
latter to allow the parties to adduce evidence in support of their respective positions.
The facts follow.
Respondent National Service Corporation (NASECO) is a wholly-owned subsidiary of the Philippine National Bank (PNB) organized under the Corporation
Code in 1975. It supplies security and manpower services to different clients such as the Securities and Exchange Commission, the Philippine Deposit
Insurance Corporation, Food Terminal Incorporated, Forex Corporation and PNB. Petitioner NASECO Guards Association-PEMA (NAGA-PEMA) is the
collective bargaining representative of the regular rank and file security guards of respondent. NASECO Employees Union-PEMA (NEMU-PEMA) is the
collective bargaining representative of the regular rank and file (non-security) employees of respondent such as messengers, janitors, typists, clerks and
radio-telephone operators.4
On December 2, 1993, respondent entered into a memorandum of agreement 5 with petitioner. The terms of the agreement covered the monetary
claims of the petitioner such as salary adjustments, conversion of salary scheme under Republic Act (R.A.) No. 6758 6 to R.A. No. 6727,7 signing bonus,
leaves and other benefits. A year after, petitioner demanded full negotiation for a collective bargaining agreement (CBA) with the respondent and
submitted its proposals thereto.
On June 8, 1995, petitioner and respondent agreed to sign a CBA on non-economic terms. 8
On September 24, 1996, petitioner filed a notice of strike because of respondents refusal to bargain for economic benefits in the CBA. Following
conciliation hearings, the parties again commenced CBA negotiations and started to resolve the issues on wage increase, productivity bonus, incentive
bonus, allowances, and other benefits but failed to reach an agreement.
Meanwhile, respondent and NEMU-PEMA entered into a CBA on non-economic terms. 9 Unfortunately, a dispute among the leaders of NEMU-PEMA arose
and at a certain point, leadership of the organization was unclear. Hence, the negotiations concerning the economic terms of the CBA were put on hold
until the internal dispute could be resolved.
On April 29, 1997, petitioner filed a notice of strike before the National Conciliation and Mediation Board (NCMB) against respondent and PNB due to a
bargaining deadlock. The following day, NEMU-PEMA likewise filed a notice of strike against respondent and PNB on the ground of unfair labor
practices.10 Efforts by the NCMB to conciliate failed and pursuant to Article 263(g) of the Labor Code,11 as amended, then DOLE Secretary Cresenciano
B. Trajano assumed jurisdiction over the strike notices on June 25, 1998. 12
On November 19, 1999, then DOLE Secretary Bienvenido E. Laguesma issued a Resolution 13 directing petitioner and respondent to execute a new CBA
incorporating therein his dispositions regarding benefits of the employees as to wage increase, productivity bonus, vacation and sick leave, medical
allowances and signing bonus. Respondent was further ordered to negotiate, for purposes of collective bargaining agreement, with NEMU-PEMA led by
its president, Ligaya Valencia. The charge of unfair labor practice against respondent and PNB was dismissed. 14
Respondent promptly filed a petition for certiorari before the CA questioning the DOLE Secretarys order and arguing that the ruling of the DOLE
Secretary in favor of the unions and awarding them monetary benefits totaling five hundred thirty-one million four hundred forty-six thousand six
hundred sixty-six and 67/100 (531,446,666.67) was inimical and deleterious to its financial standing and will result in closure and cessation of business
for the company.
By Decision15 dated March 19, 2001 (first CA Decision), the CA partly granted the petition and ruled that a recomputation and reevaluation of the
benefits awarded was in order.
WHEREFORE, the instant petition is partly GRANTED in that the case is remanded to the Secretary of Labor for purposes of recomputation and
reevaluation of the CBA benefits.
SO ORDERED.16
In compliance with the CA directive, then DOLE Secretary Patricia A. Sto. Tomas conducted several clarificatory hearings. On January 15, 2003,
Secretary Sto. Tomas issued an Order which provides:
From the above, it is indubitable that the total cost to NASECO of our questioned award would amount to only 322,725,000, not 531,446,666.67 as
claimed by the company. Thus, our November 19, 1999 Order is hereby affirmed en toto.
WHEREFORE, judgment is hereby rendered:
1. [D]irecting NAGA-PEMA and NASECO to execute a new collective bargaining agreement effective November 1, 1993, incorporating therein
the dispositions contained in our November 19, 1999 Order as well as all other items agreed upon by the parties.
2. Ordering NASECO to negotiate with NEMA-PEMA for a new collective bargaining agreement.
The charges of unfair labor practice against NASECO and PNB are dismissed for lack of merit.
SO ORDERED.17
Respondent filed a motion for reconsideration with the DOLE Secretary which was denied on March 11, 2003.
Respondent thus filed a petition for certiorari with the CA arguing that the DOLE Secretary, in issuing the January 15, 2003 Order deprived respondent
of due process of law for there was no reevaluation that took place in the DOLE. It also argued that the order merely recomputed the DOLE Secretarys
initial award of 531,446,666.67 and reduced it to 322,725,000.00, contrary to the ruling of the CA to recompute and reevaluate. Respondent claimed
that what the DOLE Secretary should have done was to let the parties introduce evidence to show the proper computation of the monetary awards
under the approved CBA.
In its second Decision dated May 27, 2004, the CA granted the petition, thus:
WHEREFORE, the orders dated 15 January 2003 and 11 March 2003 are hereby SET ASIDE and the case remanded to the public respondent to allow
the parties to adduce evidence in support of their respective positions.
SO ORDERED.18
A motion for reconsideration was filed by herein petitioner but the same was denied by the CA on September 22, 2004 19 finding no reason to reverse
and set aside its earlier decision.
Petitioner now comes to this Court for relief by way of a petition for review on certiorari seeking to set aside and reverse the May 27, 2004 Decision and
the September 22, 2004 Resolution of the CA.
The main issue in this case is whether or not the respondents right to due process was violated. A side issue raised by the petitioner is whether or not
PNB, being the undisputed owner of and exercising control over respondent, should be made liable to pay the CBA benefits awarded to the petitioner.
Petitioner argues first that there was no violation of due process because respondent was never prohibited by the DOLE Secretary to submit supporting
documents when the instant case was pending on remand. Petitioner contends that due process is properly observed when there is an opportunity to be
heard, to present evidence and to file pleadings, which was never denied to respondent.
Second, petitioner argues that the CA erred in stating that respondent was a company operating at a loss and therefore cannot be expected to act
generously and confer upon its employees additional benefits exceeding what is mandated by law. It is the petitioners position that based on the "no
loss, no profit" policy of respondent with PNB, respondent in truth has no "pocket" of its own and is, in effect, one (1) and the same with PNB with
regard to financial gains and/or liabilities. Thus, petitioners contend that the CBA benefits should be shouldered by PNB considering the poor financial
condition of respondent. To support such claim, petitioner submitted evidence 20 to show that PNB is in superb financial condition and is very much
capable of shouldering the CBA award.21
Respondent on the other hand maintains that the DOLE Secretary violated its right to due process when she merely recomputed the CBA award instead
of reevaluating the entire case and allowing it to present supporting documents in accordance with the first CA decision. 22 It claims that the order of
the CA to reevaluate included and required a full assessment of the case together with reception of evidence such as financial statements, and the
omission of such is a violation of its right to due process.
As to the petitioners argument that respondent and PNB are essentially the same when it comes to financial condition, respondent contends that
although a subsidiary, it has a separate and distinct personality from PNB with its own charter. Hence, the issue of PNBs financial well-being is
immaterial in this case.
The petition is partly meritorious.
In simple terms, the constitutional guarantee of due process requires that a litigant be given "a day in court." It is the availability of the opportunity to
be heard that determines whether or not due process was violated. A litigant may or may not avail of the opportunity to be heard but as long as such
was made available to him/her, there is no violation of the due process clause. In the case of Lumiqued v. Exevea, 23 this Court declared that "[a]s long
as a party was given the opportunity to defend his interests in due course, he cannot be said to have been denied due process of law, for this
opportunity to be heard is the very essence of due process. Moreover, this constitutional mandate is deemed satisfied if a person is granted an
opportunity to seek reconsideration of the action or ruling complained of."
The respondents right to due process in this case has not been denied. The order in the first CA decision to recompute and reevaluate was satisfied
when the DOLE Secretary reexamined their initial findings and adjusted the awarded benefits. A reevaluation, contrary to what the respondent claims, is
a process by which a person or office (in this case the DOLE secretary) revisits its own initial pronouncement and makes another assessment of its
findings. In simple terms, to reevaluate is to take another look at a previous matter in issue. A reevaluation does not necessitate the introduction of new
materials for review nor does it require a full hearing for new arguments.
From a procedural standpoint, a reevaluation is a continuation of the original case and not a new proceeding. Hence, the evidence, financial reports and
other documents submitted by the parties in the course of the original proceeding are to be visited and reviewed again. In this light, the respondent has
been given the opportunity to be heard by the DOLE Secretary.
Also, contrary to the claim of the respondent that it was barred by the DOLE Secretary to introduce supporting documents during the recomputation and
reevaluation, the records show that an Order by then Secretary of Labor Patricia A. Sto. Tomas dated July 11, 2002 specifically allowed both parties to
submit their respective computations as regards the awarded benefits. To wit:
WHEREFORE, the Bureau of Working Conditions is hereby directed to submit to this Office a detailed computation of the CBA benefits indicated in the
resolution of November 19, 2001 within twenty (20) days from receipt of this Order. The parties may submit their own computations to the Bureau for
validation.
SO ORDERED.24 (Italics supplied.)
It is thus inaccurate for the respondent to claim that it was denied due process because it had all the opportunity to introduce any supporting document
in the course of the recomputation and reevaluation of the DOLE Secretary. Respondent admits that it did attach the financial statements and other
documents in support of its alleged financial incapacity to pay the CBA awarded benefits, the same evidence it had earlier submitted before the CA
(Memorandum in the first CA decision) in the motion for reconsideration of the DOLE Secretarys January 15, 2003 Order. 25 There is thus no showing
that the DOLE Secretary denied respondent this basic constitutional right.
On the issue of liability, petitioner contends that PNB should be held liable to shoulder the CBA benefits awarded to them by virtue of it being a
company having full financial, managerial and functional control over respondent as its subsidiary, and by reason of the unique "no loss, no profit"
scheme implemented between respondent and PNB.
We are not persuaded.
Verily, what the petitioner is asking this Court to do is to pierce the veil of corporate fiction of respondent and hold PNB (being the mother company)
liable for the CBA benefits.
In Concept Builders, Inc. v. NLRC,26 we explained the doctrine of piercing the corporate veil, as follows:
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to
which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote
justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is
used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is
true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation.
Also in Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission, 27 this Court ruled:
Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved. However, any piercing
of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary
in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives.
Applying the doctrine to the case at bar, we find no reason to pierce the corporate veil of respondent and go beyond its legal personality. Control, by
itself, does not mean that the controlled corporation is a mere instrumentality or a business conduit of the mother company. Even control over the
financial and operational concerns of a subsidiary company does not by itself call for disregarding its corporate fiction. There must be a perpetuation of
fraud behind the control or at least a fraudulent or illegal purpose behind the control in order to justify piercing the veil of corporate fiction. Such
fraudulent intent is lacking in this case.
Petitioner argues that the appreciation, analysis and inquiry of this case may go beyond the presentation of respondent, and therefore must include the
PNB, the bank being the undisputed whole owner of respondent and the sole provider of funds for the companys operations and for the payment of
wages and benefits of the employees, under the "no loss, no profit" scheme.28
We disagree. There is no showing that such "no loss, no profit" scheme between respondent and PNB was implemented to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, nor does the scheme show that respondent is a mere
business conduit or alter ego of PNB. Absent proof of these circumstances, respondents corporate personality cannot be pierced. 1wphi1
It is apparent that petitioner wants the Court to disregard the corporate personality of respondent and directly go after PNB in order for it to collect the
CBA benefits. On the same breath, however, petitioner argues that ultimately it is PNB, by virtue of the "no loss, no profit" scheme, which shoulders and
provides the funds for financial liabilities of respondent including wages and benefits of employees. If such scheme was indeed true as the petitioner
presents it, then there was absolutely no need to pierce the veil of corporate fiction of respondent. Moreover, the Court notes the pendency of a
separate suit for absorption or regularization of NASECO employees filed by petitioner and NEMU-PEMA against PNB and respondent, docketed as NLRC
NCR Case No. 06-03944-96), which is still on appeal with the National Labor Relations Commission (NLRC), as per manifestation by respondent. In the
said case, petitioner submitted for resolution by the labor tribunal the issues of whether PNB is the employer of NASECOs work force and whether
NASECO is a labor-only contractor.29
WHEREFORE, the petition is PARTLY GRANTED. The Decision dated May 27, 2004 and Resolution dated September 22, 2004 in CA-G.R. SP No. 76667
are hereby REVERSED and SET ASIDE as to the order to remand the case to the Secretary of Labor for introduction of supporting evidence. Accordingly,
the Orders of the Secretary of Labor dated January 15, 2003 and March 11, 2003 are REINSTATED and UPHELD.
No costs.
SO ORDERED.
G.R. No. 199687
PACIFIC REHOUSE CORPORATION, Petitioners, vs. COURT OF APPEALS and EXPORT AND INDUSTRY BANK, INC., Respondents.
x-----------------------x
G.R. No. 201537
PACIFIC REHOUSE CORPORATION, PACIFIC CONCORDE CORPORATION, MIZPAH HOLDINGS, INC., FORUM HOLDINGS CORPORATION
and EAST ASIA OIL COMPANY, INC., Petitioners, vs. EXPORT AND INDUSTRY BANK, INC., Respondent.
DECISION
REYES, J.:
On the scales of justice precariously lie the right of a prevailing party to his victor's cup, no more, no less; and the right of a separate entity from being
dragged by the ball and chain of the vanquished party.
The facts of this case as garnered from the Decision1 dated April 26, 2012 of the Court of Appeals (CA) in CA-G.R. SP No. 120979 are as follows:
We trace the roots of this case to a complaint instituted with the Makati City Regional Trial Court (RTC), Branch 66, against EIB
Securities Inc. (E-Securities) for unauthorized sale of 32,180,000 DMCI shares of private respondents Pacific Rehouse Corporation,
Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum Holdings Corporation, and East Asia Oil Company, Inc. In its October 18,
2005 Resolution, the RTC rendered judgment on the pleadings. The fallo reads:
WHEREFORE, premises considered, judgment is hereby rendered directing the defendant [E-Securities] to return the
plaintiffs [private respondents herein] 32,180,000 DMCI shares, as of judicial demand.
On the other hand, plaintiffs are directed to reimburse the defendant the amount of [P]10,942,200.00, representing the
buy back price of the 60,790,000 KPP shares of stocks at [P]0.18 per share.
SO ORDERED. x x x
The Resolution was ultimately affirmed by the Supreme Court and attained finality.
When the Writ of Execution was returned unsatisfied, private respondents moved for the issuance of an alias writ of execution to hold
Export and Industry Bank, Inc. liable for the judgment obligation as E- Securities is "a wholly-owned controlled and dominated
subsidiary of Export and Industry Bank, Inc., and is[,] thus[,] a mere alter ego and business conduit of the latter . E-Securities opposed
the motion[,] arguing that it has a corporate personality that is separate and distinct from petitioner. On July 27, 2011, private
respondents filed their (1) Reply attaching for the first time a sworn statement executed by Atty. Ramon F. Aviado, Jr., the former
corporate secretary of petitioner and E-Securities, to support their alter ego theory; and (2) Ex-Parte Manifestation alleging service of
copies of the Writ of Execution and Motion for Alias Writ of Execution on petitioner.
On July 29, 2011, the RTC concluded that E-Securities is a mere business conduit or alter ego of petitioner, the dominant parent
corporation, which justifies piercing of the veil of corporate fiction. The trial court brushed aside E-Securities claim of denial of due
process on petitioner as "xxx case records show that notices regarding these proceedings had been tendered to the latter, which
refused to even receive them. Clearly, [petitioner] had been sufficiently put on notice and afforded the chance to give its side[,] yet[,] it
chose not to." Thus, the RTC disposed as follows:
WHEREFORE, xxx,
Let an Alias Writ of Execution be issued relative to the above-entitled case and pursuant to the RESOLUTION dated
October 18, 2005 and to this Order directing defendant EIB Securities, Inc., and/or Export and Industry Bank, Inc.,
to fully comply therewith.
The Branch Sheriff of this Court is directed to cause the immediate implementation of the given alias writ in accordance
with the Order of Execution to be issued anew by the Branch Clerk of Court.
SO ORDERED. x x x
With this development, petitioner filed an Omnibus Motion (Ex Abundanti Cautela) questioning the alias writ because it
was not impleaded as a party to the case. The RTC denied the motion in its Order dated August 26, 2011 and directed
the garnishment of P1,465,799,000.00, the total amount of the 32,180,000 DMCI shares at P45.55 per share, against
petitioner and/or E-Securities.2 x x x. (Citations omitted)
The Regional Trial Court (RTC) ratiocinated that being one and the same entity in the eyes of the law, the service of summons upon EIB Securities, Inc.
(E-Securities) has bestowed jurisdiction over both the parent and wholly-owned subsidiary.3 The RTC cited the cases of Sps. Violago v. BA Finance
Corp. et al.4 and Arcilla v. Court of Appeals5 where the doctrine of piercing the veil of corporate fiction was applied notwithstanding that the affected
corporation was not brought to the court as a party. Thus, the RTC held in its Order6 dated August 26, 2011:
WHEREFORE, premises considered, the Motion for Reconsideration with Motion to Inhibit filed by defendant EIB Securities, Inc. is
denied for lack of merit. The Omnibus Motion Ex Abundanti C[au]tela is likewise denied for lack of merit.
Pursuant to Rule 39, Section 10 (a) of the Rules of Court, the Branch Clerk of Court or the Branch Sheriff of this Court is hereby directed
to acquire 32,180,000 DMCI shares of stock from the Philippine Stock Exchange at the cost of EIB Securities, Inc. and Export and
Industry Bank[,] Inc. and to deliver the same to the plaintiffs pursuant to this Courts Resolution dated October 18, 2005.
To implement this Order, let GARNISHMENT issue against ALL THOSE HOLDING MONEYS, PROPERTIES OF ANY AND ALL KINDS, REAL
OR PERSONAL BELONGING TO OR OWNED BY DEFENDANT EIB SECURITIES, INC. AND/OR EXPORT AND INDUSTRY BANK[,] INC.,
[sic] in such amount as may be sufficient to acquire 32,180,000 DMCI shares of stock to the Philippine Stock Exchange, based on the
closing price of Php45.55 per share of DMCI shares as of August 1, 2011, the date of the issuance of the Alias Writ of Execution, or the
total amount of PhP1,465,799,000.00.
SO ORDERED.7
CA-G.R. SP No. 120979
Export and Industry Bank, Inc. (Export Bank) filed before the CA a petition for certiorari with prayer for the issuance of a temporary restraining order
(TRO)8 seeking the nullification of the RTC Order dated August 26, 2011 for having been made with grave abuse of discretion amounting to lack or
excess of jurisdiction. In its petition, Export Bank made reference to several rulings9 of the Court upholding the separate and distinct personality of a
corporation.
In a Resolution10 dated September 2, 2011, the CA issued a 60-day TRO enjoining the execution of the Orders of the RTC dated July 29, 2011 and
August 26, 2011, which granted the issuance of an alias writ of execution and ordered the garnishment of the properties of E-Securities and/or Export
Bank. The CA also set a hearing to determine the necessity of issuing a writ of injunction, viz:
Considering the amount ordered to be garnished from petitioner Export and Industry Bank, Inc. and the fiduciary duty of the banking
institution to the public, there is grave and irreparable injury that may be caused to [Export Bank] if the assailed Orders are immediately
implemented. We thus resolve to GRANT the Temporary Restraining Order effective for a period of sixty (60) days from notice,
restraining/enjoining the Sheriff of the Regional Trial Court of Makati City or his deputies, agents, representatives or any person acting
in their behalf from executing the July 29, 2011 and August 26, 2011 Orders. [Export Bank] is DIRECTED to POST a bond in the sum of
fifty million pesos (P50,000,000.00) within ten (10) days from notice, to answer for any damage which private respondents may suffer
by reason of this Temporary Restraining Order; otherwise, the same shall automatically become ineffective.
Let the HEARING be set on September 27, 2011 at 2:00 in the afternoon at the Paras Hall, Main Building, Court of Appeals, to
determine the necessity of issuing a writ of preliminary injunction. The Division Clerk of Court is DIRECTED to notify the parties and
their counsel with dispatch.
xxxx
SO ORDERED.11
Pacific Rehouse Corporation (Pacific Rehouse), Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum Holdings Corporation and East Asia Oil
Company, Inc. (petitioners) filed their Comment12 to Export Banks petition and proffered that the cases mentioned by Export Bank are inapplicable
owing to their clearly different factual antecedents. The petitioners alleged that unlike the other cases, there are circumstances peculiar only to E-
Securities and Export Bank such as: 499,995 out of 500,000 outstanding shares of stocks of E-Securities are owned by Export Bank; 13 Export Bank had
actual knowledge of the subject matter of litigation as the lawyers who represented E-Securities are also lawyers of Export Bank. 14 As an alter ego,
there is no need for a finding of fraud or illegality before the doctrine of piercing the veil of corporate fiction can be applied.15
After oral arguments before the CA, the parties were directed to file their respective memoranda.16
On October 25, 2011, the CA issued a Resolution,17 granting Export Banks application for the issuance of a writ of preliminary injunction, viz:
WHEREFORE, finding [Export Banks] application for the ancillary injunctive relief to be meritorious, and it further appearing that there is
urgency and necessity in restraining the same, a Writ of Preliminary Injunction is hereby GRANTED and ISSUED against the Sheriff of
the Regional Trial Court of Makati City, Branch 66, or his deputies, agents, representatives or any person acting in their behalf from
executing the July 29, 2011 and August 26, 2011 Orders. Public respondents are ordered to CEASE and DESIST from enforcing and
implementing the subject orders until further notice from this Court.18
The petitioners filed a Manifestation19 and Supplemental Manifestation20 challenging the above-quoted CA resolution for lack of concurrence of
Associate Justice Socorro B. Inting (Justice Inting), who was then on official leave.
On December 22, 2011, the CA, through a Special Division of Five, issued another Resolution,21 which reiterated the Resolution dated October 25, 2011
granting the issuance of a writ of preliminary injunction.
On January 2, 2012, one of the petitioners herein, Pacific Rehouse filed before the Court a petition for certiorari22 under Rule 65, docketed as G.R. No.
199687, demonstrating its objection to the Resolutions dated October 25, 2011 and December 22, 2011 of the CA.
On April 26, 2012, the CA rendered the assailed Decision23 on the merits of the case, granting Export Banks petition. The CA disposed of the case in
this wise:
We GRANT the petition. The Orders dated July 29, 2011 and August 26, 2011 of the Makati City Regional Trial Court, Branch 66, insofar
as [Export Bank] is concerned, are NULLIFIED. The Writ of Preliminary Injunction (WPI) is rendered PERMANENT.
SO ORDERED.24
The CA explained that the alter ego theory cannot be sustained because ownership of a subsidiary by the parent company is not enough justification to
pierce the veil of corporate fiction. There must be proof, apart from mere ownership, that Export Bank exploited or misused the corporate fiction of E-
Securities. The existence of interlocking incorporators, directors and officers between the two corporations is not a conclusive indication that they are
one and the same.25 The records also do not show that Export Bank has complete control over the business policies, affairs and/or transactions of E-
Securities. It was solely E-Securities that contracted the obligation in furtherance of its legitimate corporate purpose; thus, any fall out must be confined
within its limited liability.26
The petitioners, without filing a motion for reconsideration, filed a Petition for Review27 under Rule 45 docketed as G.R. No. 201537,28 impugning the
Decision dated April 26, 2012 of the CA.
Considering that G.R. Nos. 199687 and 201537 originated from the same set of facts, involved the same parties and raised intertwined issues, the cases
were then consolidated per Resolution dated September 26, 2012, for a thorough discussion of the merits of the case.
Issues
In prcis, the issues for resolution of this Court are the following:
In G.R. No. 199687,

WHETHER THE CA COMMITTED GRAVE ABUSE OF DISCRETION IN GRANTING EXPORT BANKS APPLICATION FOR THE ISSUANCE OF A
WRIT OF PRELIMINARY INJUNCTION.
In G.R. No. 201537,
I.
WHETHER THE CA COMMITTED A REVERSIBLE ERROR IN RULING THAT EXPORT BANK MAY NOT BE HELD LIABLE FOR A FINAL AND
EXECUTORY JUDGMENT AGAINST E-SECURITIES IN AN ALIAS WRIT OF EXECUTION BY PIERCING ITS VEIL OF CORPORATE FICTION;
and
II.
WHETHER THE CA COMMITTED A REVERSIBLE ERROR IN RULING THAT THE ALTER EGO DOCTRINE IS NOT APPLICABLE.
Ruling of the Court
G.R. No. 199687
The Resolution dated October 25, 2011 was initially challenged by the petitioners in its Manifestation29 and Supplemental Manifestation30 due to the
lack of concurrence of Justice Inting, which according to the petitioners rendered the aforesaid resolution null and void.
To the petitioners mind, Section 5, Rule VI of the Internal Rules of the CA (IRCA)31 requires the submission of the resolution granting an application for
TRO or preliminary injunction to the absent Justice/s when they report back to work for ratification, modification or recall, such that when the absent
Justice/s do not agree with the issuance of the TRO or preliminary injunction, the resolution is recalled and without force and effect. 32 Since the
resolution which granted the application for preliminary injunction appears short of the required number of consensus, owing to the absence of Justice
Intings signature, the petitioners contest the validity of said resolution.
The petitioners also impugn the CA Resolution dated December 22, 2011 rendered by the Special Division of Five. The petitioners maintain that
pursuant to Batas Pambansa Bilang 12933 and the IRCA,34 such division is created only when the three members of a division cannot reach a
unanimous vote in deciding a case on the merits.35 Furthermore, for petitioner Pacific Rehouse, this Resolution is likewise infirm because the purpose of
the formation of the Special Division of Five is to decide the case on the merits and not to grant Export Banks application for a writ of preliminary
injunction.36
We hold that the opposition to the CA resolutions is already nugatory because the CA has already rendered its Decision on April 16, 2012, which
disposed of the substantial merits of the case. Consequently, the petitioners concern that the Special Division of Five should have been created to
resolve cases on the merits has already been addressed by the rendition of the CA Decision dated April 16, 2012.
"It is well-settled that courts will not determine questions that have become moot and academic because there is no longer any justiciable controversy
to speak of. The judgment will not serve any useful purpose or have any practical legal effect because, in the nature of things, it cannot be enforced." 37
In such cases, there is no actual substantial relief to which the petitioners would be entitled to and which would be negated by the dismissal of the
petition.38 Thus, it would be futile and pointless to address the issue in G.R. No. 199687 as this has become moot and academic.
G.R. No. 201537
The petitioners bewail that the certified true copy of the CA Decision dated April 26, 2012 along with its Certification at the bottom portion were not
signed by the Chairperson39 of the Special Division of Five; thus, it is not binding upon the parties. 40 The petitioners quoted this Courts
pronouncement in Limkaichong v. Commission on Elections ,41 that a decision must not only be signed by the Justices who took part in the deliberation,
but must also be promulgated to be considered a Decision.42
A cursory glance on a copy of the signature page43 of the decision attached to the records would show that, indeed, the same was not signed by CA
Associate Justice Magdangal M. De Leon. However, it must be noted that the CA, on May 7, 2012, issued a Resolution 44 explaining that due to
inadvertence, copies of the decision not bearing the signature of the Chairperson were sent to the parties on the same day of promulgation. The CA
directed the Division Clerk of Court to furnish the parties with copies of the signature page with the Chairpersons signature. Consequently, as the
mistake was immediately clarified and remedied by the CA, the lack of the Chairpersons signature on the copies sent to the parties has already become
a non-issue.
It must be emphasized that the instant cases sprang from Pacific Rehouse Corporation v. EIB Securities, Inc. 45 which was decided by this Court last
October 13, 2010. Significantly, Export Bank was not impleaded in said case but was unexpectedly included during the execution stage, in addition to E-
Securities, against whom the writ of execution may be enforced in the Order46 dated July 29, 2011 of the RTC. In including Export Bank, the RTC
considered E-Securities as a mere business conduit of Export Bank.47 Thus, one of the arguments interposed by the latter in its Opposition48 that it was
never impleaded as a defendant was simply set aside.
This action by the RTC begs the question: may the RTC enforce the alias writ of execution against Export Bank?
The question posed before us is not novel.
The Court already ruled in Kukan International Corporation v. Reyes49 that compliance with the recognized modes of acquisition of jurisdiction cannot
be dispensed with even in piercing the veil of corporate fiction, to wit:
The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and the same juridical person with
respect to a given transaction, is basically applied only to determine established liability; it is not available to confer on the court a jurisdiction it has not
acquired, in the first place, over a party not impleaded in a case. Elsewise put, a corporation not impleaded in a suit cannot be subject to the
courts process of piercing the veil of its corporate fiction. In that situation, the court has not acquired jurisdiction over the corporation and,
hence, any proceedings taken against that corporation and its property would infringe on its right to due process. Aguedo Agbayani, a recognized
authority on Commercial Law, stated as much:
"23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the trial of the case after the court
has already acquired jurisdiction over the corporation. Hence, before this doctrine can be applied, based on the evidence presented, it is
imperative that the court must first have jurisdiction over the corporation. x x x"50 (Citations omitted)
From the preceding, it is therefore correct to say that the court must first and foremost acquire jurisdiction over the parties; and only then would the
parties be allowed to present evidence for and/or against piercing the veil of corporate fiction. If the court has no jurisdiction over the corporation, it
follows that the court has no business in piercing its veil of corporate fiction because such action offends the corporations right to due process.
"Jurisdiction over the defendant is acquired either upon a valid service of summons or the defendants voluntary appearance in court. When the
defendant does not voluntarily submit to the courts jurisdiction or when there is no valid service of summons, any judgment of the court which has no
jurisdiction over the person of the defendant is null and void."51 "The defendant must be properly apprised of a pending action against him and
assured of the opportunity to present his defenses to the suit. Proper service of summons is used to protect ones right to due process."52
As Export Bank was neither served with summons, nor has it voluntarily appeared before the court, the judgment sought to be enforced against E-
Securities cannot be made against its parent company, Export Bank. Export Bank has consistently disputed the RTC jurisdiction, commencing from its
filing of an Omnibus Motion53 by way of special appearance during the execution stage until the filing of its Comment54 before the Court wherein it was
pleaded that "RTC [of] Makati[, Branch] 66 never acquired jurisdiction over Export [B]ank. Export [B]ank was not pleaded as a party in this case. It was
never served with summons by nor did it voluntarily appear before RTC [of] Makati[, Branch] 66 so as to be subjected to the latters jurisdiction."55
In dispensing with the requirement of service of summons or voluntary appearance of Export Bank, the RTC applied the cases of Violago and Arcilla.
The RTC concluded that in these cases, the Court decided that the doctrine of piercing the veil of corporate personality can be applied even when one of
the affected parties has not been brought to the Court as a party.56
A closer perusal on the rulings of this Court in Violago and Arcilla, however, reveals that the RTC misinterpreted the doctrines on these cases. We agree
with the CA that these cases are not congruent to the case at bar. In Violago, Spouses Pedro and Florencia Violago (Spouses Violago) filed a third party
complaint against their cousin Avelino Violago (Avelino), who is also the president of Violago Motor Sales Corporation (VMSC), for selling them a vehicle
which was already sold to someone else. VMSC was not impleaded as a third party defendant. Avelino contended that he was not a party to the
transaction personally, but VMSC. The Court ruled that "[t]he fact that VMSC was not included as defendant in [Spouses Violagos] third party complaint
does not preclude recovery by Spouses Violago from Avelino; neither would such non-inclusion constitute a bar to the application of the piercing-of-the-
corporate-veil doctrine."57 It should be pointed out that although VMSC was not made a third party defendant, the person who was found liable in
Violago, Avelino, was properly made a third party defendant in the first instance. The present case could not be any more poles apart from Violago,
because Export Bank, the parent company which was sought to be accountable for the judgment against E-Securities, is not a party to the main case.
In Arcilla, meanwhile, Calvin Arcilla (Arcilla) obtained a loan in the name of Csar Marine Resources, Inc. (CMRI) from Emilio Rodulfo. A complaint was
then filed against Arcilla for non-payment of the loan. CMRI was not impleaded as a defendant. The trial court eventually ordered Arcilla to pay the
judgment creditor for such loan. Arcilla argued that he is not personally liable for the adjudged award because the same constitutes a corporate liability
which cannot even bind the corporation as the latter is not a party to the collection suit. The Court made the succeeding observations:
[B]y no stretch of even the most fertile imagination may one be able to conclude that the challenged Amended Decision directed Csar Marine Resources,
Inc. to pay the amounts adjudged. By its clear and unequivocal language, it is the petitioner who was declared liable therefor and consequently made to
pay. x x x, even if We are to assume arguendo that the obligation was incurred in the name of the corporation, the petitioner would still be personally
liable therefor because for all legal intents and purposes, he and the corporation are one and the same. Csar Marine Resources, Inc. is nothing more
than his business conduit and alter ego. The fiction of a separate juridical personality conferred upon such corporation by law should be disregarded. x x
x.58 (Citation omitted)
It is important to bear in mind that although CMRI was not a party to the suit, it was Arcilla, the defendant himself who was found ultimately liable for
the judgment award. CMRI and its properties were left untouched from the main case, not only because of the application of the alter ego doctrine, but
also because it was never made a party to that case.
The disparity between the instant case and those of Violago and Arcilla is that in said cases, although the corporations were not impleaded as
defendant, the persons made liable in the end were already parties thereto since the inception of the main case. Consequently, it cannot be said that
the Court had, in the absence of fraud and/or bad faith, applied the doctrine of piercing the veil of corporate fiction to make a non-party liable. In short,
liabilities attached only to those who are parties. None of the non-party corporations (VMSC and CMRI) were made liable for the judgment award
against Avelino and Arcilla.
The Alter Ego Doctrine is not applicable
"The question of whether one corporation is merely an alter ego of another is purely one of fact. So is the question of whether a corporation is a paper
company, a sham or subterfuge or whether petitioner adduced the requisite quantum of evidence warranting the piercing of the veil of respondents
corporate entity."59
As a rule, the parties may raise only questions of law under Rule 45, because the Supreme Court is not a trier of facts. Generally, we are not duty-
bound to analyze again and weigh the evidence introduced in and considered by the tribunals below. 60 However, justice for all is of primordial
importance that the Court will not think twice of reviewing the facts, more so because the RTC and the CA arrived in contradicting conclusions.
"It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to
which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote
justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is
used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is
true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation."61
"Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the "instrumentality" may be disregarded. The control necessary to invoke the rule is not majority or even complete
stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence
of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts
complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is
made."62
The Court has laid down a three-pronged control test to establish when the alter ego doctrine should be operative:
own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive
(3) The aforesaid control and breach of duty must [have] proximately caused the injury or unjust loss complained of.63
The absence of any one of these elements prevents piercing the corporate veil in applying the instrumentality or alter ego doctrine, the courts are
concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation.64 Hence, all three
elements should concur for the alter ego doctrine to be applicable.
In its decision, the RTC maintained that the subsequently enumerated factors betray the true nature of E-Securities as a mere alter ego of Export Bank:
1. Defendant EIB Securities, a subsidiary corporation 100% totally owned by Export and Industry Bank, Inc., was only re-activated by the
latter in 2002-2003 and the continuance of its operations was geared for no other reason tha[n] to serve as the securities brokerage arm
of said parent corporation bank;
2. It was the parent corporation bank that provided and infused the fresh working cash capital needed by defendant EIB Securities which prior
thereto was non-operating and severely cash-strapped. [This was so attested by the then Corporate Secretary of both corporations, Atty.
Ramon Aviado, Jr., in his submitted Sworn Statement which is deemed allowable "evidence on motion", under Sec. 7, Rule 133, Rules on
Evidence; Bravo vs. Borja, 134 SCRA 438];
3. For effective control purposes, defendant EIB Securities and its operating office and staff are all housed in Exportbank Plaza located at
Chino Roces cor. Sen. Gil Puyat Avenue, Makati City which is the same building w[h]ere the bank parent corporation has its headquarters;
4. As shown in the General Information Sheets annually filed with the S.E.C. from 2002 to 2011, both defendant EIB Securities and the bank
parent corporation share common key Directors and corporate officers. Three of the 5-man Board of Directors of defendant EIB Securities are
Directors of the bank parent corporation, namely: Jaime C. Gonzales, Pauline C. Tan and Dionisio E. Carpio, Jr. In addition, Mr. Gonzales is
Chairman of the Board of both corporations, whereas Pauline C. Tan is concurrently President/General Manager of EIB Securities, and Dionisio
Carpio Jr., is not only director of the bank, but also Director Treasurer of defendant EIB Securities;
5. As admitted by the bank parent corporation in its consolidated audited financial statements[,] EIB Securities is a CONTROLLED
SUBSIDIARY, and for which reason its financial condition and results of operations are included and integrated as part of the groups
consolidated financial statements, examined and audited by the same auditing firm;
6. The lawyers handling the suits and legal matters of defendant EIB Securities are the same lawyers in the Legal Department of the bank
parent corporation.1wphi1 The Court notes that in [the] above-entitled suit, the lawyers who at the start represented said defendant EIB
Securities and filed all the pleadings and filings in its behalf are also the lawyers in the Legal Services Division of the bank parent corporation.
They are Attys. Emmanuel A. Silva, Leonardo C. Bool, Riva Khristine E. Maala and Ma. Esmeralda R. Cunanan, all of whom worked at the
Legal Services Division of Export Industry Bank located at 36/F, Exportbank Plaza, Don Chino Roces Avenue, cor. Sen. Gil Puyat Avenue,
Makati City.
7. Finally[,] and this is very significant, the control and sway that the bank parent corporation held over defendant EIB Securities was
prevailing in June 2004 when the very act complained of in plaintiffs Complaint took place, namely the unauthorized disposal of the
32,180,000 DMCI shares of stock. Being then under the direction and control of the bank parent corporation, the unauthorized disposal of
those shares by defendant EIB Securities is attributable to, and the responsibility of the former.65
All the foregoing circumstances, with the exception of the admitted stock ownership, were however not properly pleaded and proved in accordance with
the Rules of Court.66 These were merely raised by the petitioners for the first time in their Motion for Issuance of an Alias Writ of Execution67 and
Reply,68 which the Court cannot consider. "Whether the separate personality of the corporation should be pierced hinges on obtaining facts
appropriately pleaded or proved."69
Albeit the RTC bore emphasis on the alleged control exercised by Export Bank upon its subsidiary E-Securities, "[c]ontrol, by itself, does not mean that
the controlled corporation is a mere instrumentality or a business conduit of the mother company. Even control over the financial and operational
concerns of a subsidiary company does not by itself call for disregarding its corporate fiction. There must be a perpetuation of fraud behind the control
or at least a fraudulent or illegal purpose behind the control in order to justify piercing the veil of corporate fiction. Such fraudulent intent is lacking in
this case."70
Moreover, there was nothing on record demonstrative of Export Banks wrongful intent in setting up a subsidiary, E-Securities. If used to perform
legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be
confined to those arising in their respective business.71 To justify treating the sole stockholder or holding company as responsible, it is not enough that
the subsidiary is so organized and controlled as to make it "merely an instrumentality, conduit or adjunct" of its stockholders. It must further appear
that to recognize their separate entities would aid in the consummation of a wrong.72
As established in the main case73 and reiterated by the CA, the subject 32,180,000 DMCI shares which E-Securities is obliged to return to the
petitioners were originally bought at an average price of P0.38 per share and were sold for an average price of P0.24 per share. The proceeds were
then used to buy back 61,100,000 KPP shares earlier sold by E-Securities. Quite unexpectedly however, the total amount of these DMCI shares
ballooned to P1,465,799,000.00.74 It must be taken into account that this unexpected turnabout did not inure to the benefit of E-Securities, much less
Export Bank.
Furthermore, ownership by Export Bank of a great majority or all of stocks of E-Securities and the existence of interlocking directorates may serve as
badges of control, but ownership of another corporation, per se, without proof of actuality of the other conditions are insufficient to establish an alter
ego relationship or connection between the two corporations, which will justify the setting aside of the cover of corporate fiction. The Court has declared
that "mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality." The Court has likewise ruled that the "existence of interlocking directors, corporate officers
and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations."75
While the courts have been granted the colossal authority to wield the sword which pierces through the veil of corporate fiction, concomitant to the
exercise of this power, is the responsibility to uphold the doctrine of separate entity, when rightly so; as it has for so long encouraged businessmen to
enter into economic endeavors fraught with risks and where only a few dared to venture.
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to
be applied. 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. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.76
In closing, we understand that the petitioners are disgruntled at the turnout of this case-that they cannot enforce the award due them on its entirety;
however, the Court cannot supplant a remedy which is not sanctioned by our laws and prescribed rules.
WHEREFORE, the petition in G.R. No. 199687 is hereby DISMISSED for having been rendered moot and academic. The petition in G.R. No. 201537,
meanwhile, is hereby DENIED for lack of merit. Consequently, the Decision dated April 26, 2012 of the Court of Appeals in CA-G.R. SP No. 120979 is
AFFIRMED.
SO ORDERED.
G.R. No. 182729 September 29, 2010
KUKAN INTERNATIONAL CORPORATION, Petitioner,

vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 21, and ROMEO M. MORALES,
doing business under the name and style "RM Morales Trophies and Plaques," Respondents.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January 23, 2008 Decision 1 and the April 16, 2008 Resolution 2
rendered by the Court of Appeals (CA) in CA-G.R. SP No. 100152.
The assailed CA decision affirmed the March 12, 2007 3 and June 7, 20074 Orders of the Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case
No. 99-93173, entitled Romeo M. Morales, doing business under the name and style RM Morales Trophies and Plaques v. Kukan, Inc . In the said orders,
the RTC disregarded the separate corporate identities of Kukan, Inc. and Kukan International Corporation and declared them to be one and the same
entity. Accordingly, the RTC held Kukan International Corporation, albeit not impleaded in the underlying complaint of Romeo M. Morales, liable for the
judgment award decreed in a Decision dated November 28, 20025 in favor of Morales and against Kukan, Inc.
The Facts
Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of signages in a building being constructed in Makati City.
Morales tendered the winning bid and was awarded the PhP 5 million contract. Some of the items in the project award were later excluded resulting in
the corresponding reduction of the contract price to PhP 3,388,502. Despite his compliance with his contractual undertakings, Morales was only paid the
amount of PhP 1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite demands. Shortchanged, Morales filed a
Complaint6 with the RTC against Kukan, Inc. for a sum of money, the case docketed as Civil Case No. 99-93173 and eventually raffled to Branch 17 of
the court.
Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial ensued. However, starting November 2000, Kukan, Inc. no
longer appeared and participated in the proceedings before the trial court, prompting the RTC to declare Kukan, Inc. in default and paving the way for
Morales to present his evidence ex parte.
On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan, Inc., disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by preponderance of evidence, judgment is hereby rendered
in favor of the plaintiff, ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal
interest at 12% per annum from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorneys fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06) as litigation expenses.
For lack of factual foundation, the counterclaim is DISMISSED.
IT IS SO ORDERED.7
After the above decision became final and executory, Morales moved for and secured a writ of execution 8 against Kukan, Inc. The sheriff then levied
upon various personal properties found at what was supposed to be Kukan, Inc.s office at Unit 2205, 88 Corporate Center, Salcedo Village, Makati City.
Alleging that it owned the properties thus levied and that it was a different corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an
Affidavit of Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil Case No. 99-
93173.
In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30, 2003. In it, Morales prayed, applying the principle of piercing
the veil of corporate fiction, that an order be issued for the satisfaction of the judgment debt of Kukan, Inc. with the properties under the name or in
the possession of KIC, it being alleged that both corporations are but one and the same entity. KIC opposed Morales motion. By Order of May 29,
20039 as reiterated in a subsequent order, the court denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true relationship between the two, Morales filed a Motion for
Examination of Judgment Debtors dated May 4, 2005. In this motion Morales sought that subponae be issued against the primary stockholders of
Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This too was denied by the trial court in an Order dated May 24, 2005. 10
Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually granted the motion. The case was re-raffled to Branch
21, presided by public respondent Judge Amor Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate Fiction to declare KIC as having no existence separate from
Kukan, Inc. This time around, the RTC, by Order dated March 12, 2007, granted the motion, the dispositive portion of which reads:
WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby declares as follows:
1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the same corporation;
2. the levy made on the properties of Kukan International Corp. is hereby valid;
3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the amount awarded to plaintiff pursuant to the decision
of November [28], 2002 which has long been final and executory.
SO ORDERED.
From the above order, KIC moved but was denied reconsideration in another Order dated June 7, 2007.
KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7, 2007 RTC Orders.
On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which states:
WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders dated March 12, 2007 and June 7, 2007 of the court a quo
are both AFFIRMED. No costs.
SO ORDERED.11
The CA later denied KICs motion for reconsideration in the assailed resolution.
Hence, the instant petition for review, with the following issues KIC raises for the Courts consideration:
1. There is no legal basis for the [CA] to resolve and declare that petitioners Constitutional Right to Due Process was not violated by the
public respondent in rendering the Orders dated March 12, 2007 and June 7, 2007 and in declaring petitioner to be liable for the judgment
obligations of the corporation "Kukan, Inc." to private respondent as petitioner is a stranger to the case and was never made a party in the
case before the trial court nor was it ever served a summons and a copy of the complaint.
2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and June 7, 2007 rendered by public
respondent declaring the petitioner liable to the judgment obligations of the corporation "Kukan, Inc." to private respondent are valid as said
orders of the public respondent modify and/or amend the trial courts final and executory decision rendered on November 28, 2002.
3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and June 7, 2007 rendered by public
respondent declaring the petitioner [KIC] and the corporation "Kukan, Inc." as one and the same, and, therefore, the Veil of Corporate Fiction
between them be pierced as the procedure undertaken by public respondent which the [CA] upheld is not sanctioned by the Rules of Court
and/or established jurisprudence enunciated by this Honorable Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first, whether the trial court can, after the judgment against Kukan, Inc. has attained
finality, execute it against the property of KIC; second, whether the trial court acquired jurisdiction over KIC; and third, whether the trial and appellate
courts correctly applied, under the premises, the principle of piercing the veil of corporate fiction.
The Ruling of the Court
The petition is meritorious.
First Issue: Against Whom Can a Final and

Executory Judgment Be Executed
The preliminary question that must be answered is whether or not the trial court can, after adjudging Kukan, Inc. liable for a sum of money in a final
and executory judgment, execute such judgment debt against the property of KIC.
The poser must be answered in the negative.
In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the execution of its judgment:
A case in which an execution has been issued is regarded as still pending so that all proceedings on the execution are proceedings in the suit. There is
no question that the court which rendered the judgment has a general supervisory control over its process of execution, and this power carries with it
the right to determine every question of fact and law which may be involved in the execution.
We reiterated the above holding in Javier v. Court of Appeals 14 in this wise: "The said branch has a general supervisory control over its processes in the
execution of its judgment with a right to determine every question of fact and law which may be involved in the execution."
The courts supervisory control does not, however, extend as to authorize the alteration or amendment of a final and executory decision, save for
certain recognized exceptions, among which is the correction of clerical errors. Else, the court violates the principle of finality of judgment and its
immutability, concepts which the Court, in Tan v. Timbal, 15 defined:
As we held in Industrial Management International Development Corporation vs. NLRC:
It is an elementary principle of procedure that the resolution of the court in a given issue as embodied in the dispositive part of a decision or order is the
controlling factor as to settlement of rights of the parties. Once a decision or order becomes final and executory, it is removed from the power or
jurisdiction of the court which rendered it to further alter or amend it. It thereby becomes immutable and unalterable and any amendment or alteration
which substantially affects a final and executory judgment is null and void for lack of jurisdiction, including the entire proceedings held for that purpose.
An order of execution which varies the tenor of the judgment or exceeds the terms thereof is a nullity. (Emphasis supplied.)
Republic v. Tango16 expounded on the same principle and its exceptions:
Deeply ingrained in our jurisprudence is the principle that a decision that has acquired finality becomes immutable and unalterable. As such,
it may no longer be modified in any respect even if the modification is meant to correct erroneous conclusions of fact or law and whether it will be
made by the court that rendered it or by the highest court of the land. x x x
The doctrine of finality of judgment is grounded on the fundamental principle of public policy and sound practice that, at the risk of occasional error, the
judgment of courts and the award of quasi-judicial agencies must become final on some definite date fixed by law. The only exceptions to the general
rule are the correction of clerical errors, the so-called nunc pro tunc entries which cause no prejudice to any party, void judgments, and whenever
circumstances transpire after the finality of the decision which render its execution unjust and inequitable. None of the exceptions obtains here to merit
the review sought. (Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order the execution of its final decision in a manner as would
amount to its prohibited alteration or modification?
We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by preponderance of evidence, judgment is hereby rendered
in favor of the plaintiff, ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal
interest at 12% per annum from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorneys fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06) as litigation expenses.
x x x x (Emphasis supplied.)
As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the aforementioned awards to Morales. Thus, making KIC, thru
the medium of a writ of execution, answerable for the above judgment liability is a clear case of altering a decision, an instance of granting relief not
contemplated in the decision sought to be executed. And the change does not fall under any of the recognized exceptions to the doctrine of finality and
immutability of judgment. It is a settled rule that a writ of execution must conform to the fallo of the judgment; as an inevitable corollary, a writ beyond
the terms of the judgment is a nullity.17
Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an examination of the other issues raised by KIC would be proper.
Second Issue: Propriety of the RTC

Assuming Jurisdiction over KIC
The next issue turns on the validity of the execution the trial court authorized against KIC and its property, given that it was neither made a party nor
impleaded in Civil Case No. 99-93173, let alone served with summons. In other words, did the trial court acquire jurisdiction over KIC?
In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to the jurisdiction of the trial court owing to its filing of four
(4) pleadings adverted to earlier, namely: (a) the Affidavit of Third-Party Claim; 18 (b) the Comment and Opposition to Plaintiffs Omnibus Motion; 19 (c)
the Motion for Reconsideration of the RTC Order dated March 12, 2007; 20 and (d) the Motion for Leave to Admit Reply. 21 The CA, citing Section 20,
Rule 14 of the Rules of Court, stated that "the procedural rule on service of summons can be waived by voluntary submission to the courts jurisdiction
through any form of appearance by the party or its counsel."22
We cannot give imprimatur to the appellate courts appreciation of the thrust of Sec. 20, Rule 14 of the Rules in concluding that the trial court acquired
jurisdiction over KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire jurisdiction over the parties in a civil case:
Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other hand, jurisdiction over the defendants in a civil case is
acquired either through the service of summons upon them or through their voluntary appearance in court and their submission to its authority.
(Emphasis supplied.)
In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security Corporation, stating: "[I]n civil cases, the trial court acquires
jurisdiction over the person of the defendant either by the service of summons or by the latters voluntary appearance and submission to the authority
of the former."
The courts jurisdiction over a party-defendant resulting from his voluntary submission to its authority is provided under Sec. 20, Rule 14 of the Rules,
which states:
Section 20. Voluntary appearance. The defendants voluntary appearance in the actions shall be equivalent to service of summons. The inclusion in a
motion to dismiss of other grounds aside from lack of jurisdiction over the person of the defendant shall not be deemed a voluntary appearance.
To be sure, the CAs ruling that any form of appearance by the party or its counsel is deemed as voluntary appearance finds support in the kindred
Republic v. Ker & Co., Ltd.25 and De Midgely v. Ferandos.26
Republic and De Midgely, however, have already been modified if not altogether superseded 27 by La Naval Drug Corporation v. Court of Appeals, 28
wherein the Court essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A] special appearance before the courtchallenging
its jurisdiction over the person through a motion to dismiss even if the movant invokes other groundsis not tantamount to estoppel or a waiver by the
movant of his objection to jurisdiction over his person; and such is not constitutive of a voluntary submission to the jurisdiction of the court." 29
In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it is conceded that it raised affirmative defenses through its
aforementioned pleadings, KIC never abandoned its challenge, however implicit, to the RTCs jurisdiction over its person. The challenge was subsumed
in KICs primary assertion that it was not the same entity as Kukan, Inc. Pertinently, in its Comment and Opposition to Plaintiffs Omnibus Motion dated
May 20, 2003, KIC entered its "special but not voluntary appearance" alleging therein that it was a different entity and has a separate legal
personality from Kukan, Inc. And KIC would consistently reiterate this assertion in all its pleadings, thus effectively resisting all along the RTCs
jurisdiction of its person. It cannot be overemphasized that KIC could not file before the RTC a motion to dismiss and its attachments in Civil Case No.
99-93173, precisely because KIC was neither impleaded nor served with summons. Consequently, KIC could only assert and claim through its affidavits,
comments, and motions filed by special appearance before the RTC that it is separate and distinct from Kukan, Inc.
Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection to the courts lack of jurisdiction over its person. It would
defy logic to say that KIC unequivocally submitted itself to the jurisdiction of the RTC when it strongly asserted that it and Kukan, Inc. are different
entities. In the scheme of things obtaining, KIC had no other option but to insist on its separate identity and plead for relief consistent with that
position.
Third Issue: Piercing the

Veil of Corporate Fiction
The third and main issue in this case is whether or not the trial and appellate courts correctly applied the principle of piercing the veil of corporate
entitycalled also as disregarding the fiction of a separate juridical personality of a corporationto support a conclusion that Kukan, Inc. and KIC are
but one and the same corporation with respect to the contract award referred to at the outset. This principle finds its context on the postulate that a
corporation is an artificial being invested with a personality separate and distinct from those of the stockholders and from other corporations to which it
may be connected or related.31
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission, 32 the Court revisited the subject principle of piercing the
veil of corporate fiction and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a mere collection of individuals or an aggregation of
persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation of
this doctrine is that when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary
to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or as one and the
same.
Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved .
However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:
While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations, merge them into
one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine
applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and convincingly. It cannot be presumed. 33
Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to due process when, in the execution of its November 28,
2002 Decision, the court authorized the issuance of the writ against KIC for Kukan, Inc.s judgment debt, albeit KIC has never been a party to the
underlying suit. As a counterpoint, Morales argues that KICs specific concern on due process and on the validity of the writ to execute the RTCs
November 28, 2002 Decision would be mooted if it were established that KIC and Kukan, Inc. are indeed one and the same corporation.
Morales contention is untenable.
The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and the same juridical person with
respect to a given transaction, is basically applied only to determine established liability; 34 it is not available to confer on the court a jurisdiction it has
not acquired, in the first place, over a party not impleaded in a case. Elsewise put, a corporation not impleaded in a suit cannot be subject to the courts
process of piercing the veil of its corporate fiction. In that situation, the court has not acquired jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its property would infringe on its right to due process. Aguedo Agbayani, a recognized authority on
Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the trial of the case after the court has already acquired
jurisdiction over the corporation. Hence, before this doctrine can be applied, based on the evidence presented, it is imperative that the court must first
have jurisdiction over the corporation.35 x x x (Emphasis supplied.)
The implication of the above comment is twofold: (1) the court must first acquire jurisdiction over the corporation or corporations involved before its or
their separate personalities are disregarded; and (2) the doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over
a cause of action duly commenced involving parties duly brought under the authority of the court by way of service of summons or what passes as such
service.
The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter of the time and manner of raising the principle in
question, it is undisputed that no full-blown trial involving KIC was had when the RTC disregarded the corporate veil of KIC. The reason for this actuality
is simple and undisputed: KIC was not impleaded in Civil Case No. 99-93173 and that the RTC did not acquire jurisdiction over it. It was dragged to the
case after it reacted to the improper execution of its properties and veritably hauled to court, not thru the usual process of service of summons, but by
mere motion of a party with whom it has no privity of contract and after the decision in the main case had already become final and executory. As to
the propriety of a plea for the application of the principle by mere motion, the following excerpts are instructive:
Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and is not available to settle important questions of law, or to
dispose of the merits of the case. A motion is usually a proceeding incidental to an action, but it may be a wholly distinct or independent proceeding. A
motion in this sense is not within this discussion even though the relief demanded is denominated an "order."
A motion generally relates to procedure and is often resorted to in order to correct errors which have crept in along the line of the principal actions
progress. Generally, where there is a procedural defect in a proceeding and no method under statute or rule of court by which it may be called to the
attention of the court, a motion is an appropriate remedy. In many jurisdictions, the motion has replaced the common-law pleas testing the sufficiency
of the pleadings, and various common-law writs, such as writ of error coram nobis and audita querela. In some cases, a motion may be one of several
remedies available. For example, in some jurisdictions, a motion to vacate an order is a remedy alternative to an appeal therefrom.
Statutes governing motions are given a liberal construction. 36 (Emphasis supplied.)
The bottom line issue of whether Morales can proceed against KIC for the judgment debt of Kukan, Inc.assuming hypothetically that he can, applying
the piercing the corporate veil principleresolves itself into the question of whether a mere motion is the appropriate vehicle for such purpose.
Verily, Morales espouses the application of the principle of piercing the corporate veil to hold KIC liable on theory that Kukan, Inc. was out to defraud
him through the use of the separate and distinct personality of another corporation, KIC. In net effect, Morales adverted motion to pierce the veil of
corporate fiction dated January 3, 2007 stated a new cause of action, i.e., for the liability of judgment debtor Kukan, Inc. to be borne by KIC on the
alleged identity of the two corporations. This new cause of action should be properly ventilated in another complaint and subsequent trial where the
doctrine of piercing the corporate veil can, if appropriate, be applied, based on the evidence adduced. Establishing the claim of Morales and the
corresponding liability of KIC for Kukan Inc.s indebtedness could hardly be the subject, under the premises, of a mere motion interposed after the
principal action against Kukan, Inc. alone had peremptorily been terminated. After all, a complaint is one where the plaintiff alleges causes of action.
In any event, the principle of piercing the veil of corporate fiction finds no application to the instant case.
As a general rule, courts should be wary of lifting the corporate veil between corporations, however related. Philippine National Bank v. Andrada Electric
Engineering Company37 explains why:
A corporation is an artificial being created by operation of law. x x x 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. This is basic.
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. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against third persons.
disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.
This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to
escape liability arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives or to cover up
an otherwise blatant violation of the prohibition against forum-shopping. Only in these and similar instances may the veil be pierced and
disregarded. (Emphasis supplied.)
In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and convincing proof that the separate and distinct personality of
the corporation was purposefully employed to evade a legitimate and binding commitment and perpetuate a fraud or like wrongdoings. To be sure, the
Court has, on numerous occasions,38 applied the principle where a corporation is dissolved and its assets are transferred to another to avoid a financial
liability of the first corporation with the result that the second corporation should be considered a continuation and successor of the first entity.
In those instances when the Court pierced the veil of corporate fiction of two corporations, there was a confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second corporation to avoid a financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such that the second corporation should be considered as a continuation
and successor of the first corporation.
In the instant case, however, the second and third factors are conspicuously absent. There is, therefore, no compelling justification for disregarding the
fiction of corporate entity separating Kukan, Inc. from KIC. In applying the principle, both the RTC and the CA miserably failed to identify the presence
of the abovementioned factors. Consider:
The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the following premises and arguments:
While it is true that a corporation has a separate and distinct personality from its stockholder, director and officers, the law expressly provides for an
exception. When Michael Chan, the Managing Director of defendant Kukan, Inc. (majority stockholder of the newly formed corporation [KIC]) confirmed
the award to plaintiff to supply and install interior signages in the Enterprise Center he (Michael Chan, Managing Director of defendant Kukan, Inc.)
knew that there was no sufficient corporate funds to pay its obligation/account, thus implying bad faith on his part and fraud in contracting the
obligation. Michael Chan neither returned the interior signages nor tendered payment to the plaintiff. This circumstance may warrant the piercing of the
veil of corporation fiction. Having been guilty of bad faith in the management of corporate matters the corporate trustee, director or officer may be held
personally liable. x x x
Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. x x x [A]nd the
circumstances are: the signature of Michael Chan, Managing Director of Kukan, Inc. appearing in the confirmation of the award sent to the plaintiff;
signature of Chan Kai Kit, a British National appearing in the Articles of Incorporation and signature of Michael Chan also a British National appearing in
the Articles of Incorporation [of] Kukan International Corp. give the impression that they are one and the same person, that Michael Chan and Chan Kai
Kit are both majority stockholders of Kukan International Corp. and Kukan, Inc. holding 40% of the stocks; that Kukan International Corp. is practically
doing the same kind of business as that of Kukan, Inc.39 (Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of Kukan, Inc. and KIC on the main argument that Michael
Chan owns 40% of the common shares of both corporations, obviously oblivious that overlapping stock ownership is a common business phenomenon.
It must be remembered, however, that KICs properties were the ones seized upon levy on execution and not that of Kukan, Inc. or of Michael Chan for
that matter. Mere ownership by a single stockholder or by another corporation of a substantial block of shares of a corporation does not, standing alone,
provide sufficient justification for disregarding the separate corporate personality. 40 For this ground to hold sway in this case, there must be proof that
Chan had control or complete dominion of Kukan and KICs finances, policies, and business practices; he used such control to commit fraud; and the
control was the proximate cause of the financial loss complained of by Morales. The absence of any of the elements prevents the piercing of the
corporate veil.41 And indeed, the records do not show the presence of these elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x x worth more than three million pesos although it had
only Php5,000.00 paid-up capital; [KIC] was incorporated shortly before Kukan, Inc. suddenly ceased to appear and participate in the trial; [KICs]
purpose is related and somewhat akin to that of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan Kai Kit, holds forty percent of the outstanding
stocks, while he formerly held the same amount of stocks in Kukan Inc. These would lead to the inescapable conclusion that Kukan, Inc. committed
fraudulent representation by awarding to the private respondent the contract with full knowledge that it was not in a position to comply with the
obligation it had assumed because of inadequate paid-up capital. It bears stressing that shareholders should in good faith put at the risk of the
business, unencumbered capital reasonably adequate for its prospective liabilities. The capital should not be illusory or trifling compared with the
business to be done and the risk of loss.
Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan, a.k.a. Chan Kai Kit has the largest block of shares in both
business enterprises. The emergence of the former was cleverly timed with the hasty withdrawal of the latter during the trial to avoid the financial
liability that was eventually suffered by the latter. The two companies have a related business purpose. Considering these circumstances, the obvious
conclusion is that the creation of Kukan International Corporation served as a device to evade the obligation incurred by Kukan, Inc. and yet profit from
the goodwill attained by the name "Kukan" by continuing to engage in the same line of business with the same list of clients. 42 (Emphasis supplied.)
Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of the business activities in which both corporations are
engaged as a jumping board to its conclusion that the creation of KIC "served as a device to evade the obligation incurred by Kukan, Inc." The appellate
court, however, left a gaping hole by failing to demonstrate that Kukan, Inc. and its stockholders defrauded Morales. In fine, there is no showing that
the incorporation, and the separate and distinct personality, of KIC was used to defeat Morales right to recover from Kukan, Inc. Judging from the
records, no serious attempt was made to levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc. tried to avoid
liability or had no property against which to proceed.
Morales further contends that Kukan, Inc.s closure is evidenced by its failure to file its 2001 General Information Sheet (GIS) with the Securities and
Exchange Commission. However, such fact does not necessarily mean that Kukan, Inc. had altogether ceased operations, as Morales would have this
Court believe, for it is stated on the face of the GIS that it is only upon a failure to file the corporate GIS for five (5) consecutive years that non-
operation shall be presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up capital of PhP 5,000 is not an indication of the intent on the
part of its management to defraud creditors. Paid-up capital is merely seed money to start a corporation or a business entity. As in this case, it merely
represented the capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up capitalization of PhP 5,000 is not and should not be taken as a
reflection of the firms capacity to meet its recurrent and long-term obligations. It must be borne in mind that the equity portion cannot be equated to
the viability of a business concern, for the best test is the working capital which consists of the liquid assets of a given business relating to the nature of
the business concern.lawphil
Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a badge of fraud, for it is in compliance with Sec. 13 of the
Corporation Code,43 which only requires a minimum paid-up capital of PhP 5,000.1avvphi1
The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and controlled as they are by the same stockholders, stands without
factual basis. It is true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of both corporations. But such circumstance,
standing alone, is insufficient to establish identity. There must be at least a substantial identity of stockholders for both corporations in order to consider
this factor to be constitutive of corporate identity.
It would not avail Morales any to rely 44 on General Credit Corporation v. Alsons Development and Investment Corporation. 45 General Credit
Corporation is factually not on all fours with the instant case. There, the common stockholders of the corporations represented 90% of the outstanding
capital stock of the companies, unlike here where Michael Chan merely represents 40% of the outstanding capital stock of both KIC and Kukan, Inc.,
not even a majority of it. In that case, moreover, evidence was adduced to support the finding that the funds of the second corporation came from the
first. Finally, there was proof in General Credit Corporation of complete control, such that one corporation was a mere dummy or alter ego of the other,
which is absent in the instant case.
Evidently, the aforementioned case relied upon by Morales cannot justify the application of the principle of piercing the veil of corporate fiction to the
instant case. As shown by the records, the name Michael Chan, the similarity of business activities engaged in, and incidentally the word "Kukan"
appearing in the corporate names provide the nexus between Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to establish the
identity of KIC as the alter ego or successor of Kukan, Inc.
It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly, those who seek to pierce the veil must clearly establish that
the separate and distinct personalities of the corporations are set up to justify a wrong, protect fraud, or perpetrate a deception. In the concrete and on
the assumption that the RTC has validly acquired jurisdiction over the party concerned, Morales ought to have proved by convincing evidence that
Kukan, Inc. was collapsed and thereafter KIC purposely formed and operated to defraud him. Morales has not to us discharged his burden.
WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008 Decision and April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby
REVERSED and SET ASIDE. The levy placed upon the personal properties of Kukan International Corporation is hereby ordered lifted and the personal
properties ordered returned to Kukan International Corporation. The RTC of Manila, Branch 21 is hereby directed to execute the RTC Decision dated
November 28, 2002 against Kukan, Inc. with reasonable dispatch.
No costs.
SO ORDERED.
G.R. No. 167530 March 13, 2013
PHILIPPINE NATIONAL BANK, Petitioner,

vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
x-----------------------x
G.R. No. 167561
ASSET PRIVATIZATION TRUST, Petitioner,

vs.
x-----------------------x
G.R. No. 167603
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision 2 dated November 30, 2004 and the Resolution3 dated March 22, 2005 of the Court of
Appeals in CA-G.R. CV No. 57553. The said Decision affirmed the Decision 4 dated November 6, 1995 of the Regional Trial Court (RTC) of Makati City,
Branch 62, granting a judgment award of 8,370,934.74, plus legal interest, in favor of respondent Hydro Resources Contractors Corporation (HRCC)
with the modification that the Privatization and Management Office (PMO), successor of petitioner Asset Privatization Trust (APT), 5 has been held
solidarily liable with Nonoc Mining and Industrial Corporation (NMIC) 6 and petitioners Philippine National Bank (PNB) and Development Bank of the
Philippines (DBP), while the Resolution denied reconsideration separately prayed for by PNB, DBP, and APT.
Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque Mining and Industrial Corporation
(MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the business operations of the defunct
MMIC by organizing NMIC.7 DBP and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying shares. 8 As of September
1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada,
were either from DBP or PNB.9
Subsequently, NMIC engaged the services of Hercon, Inc., for NMICs Mine Stripping and Road Construction Program in 1985 for a total contract price of
35,770,120. After computing the payments already made by NMIC under the program and crediting the NMICs receivables from
Hercon, Inc., the latter found that NMIC still has an unpaid balance of 8,370,934.74. 10 Hercon, Inc. made several demands on NMIC, including a letter
of final demand dated August 12, 1986, and when these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch 136
seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon, Inc. 11 The case was docketed as Civil Case No. 15375.
Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This prompted the amendment of the complaint to substitute
HRCC for Hercon, Inc.12
Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT for the expeditious disposition and
privatization of certain government corporations and/or the assets thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB
executed their respective deeds of transfer in favor of the National Government assigning, transferring and conveying certain assets and liabilities,
including their respective stakes in NMIC.13 In turn and on even date, the National Government transferred the said assets and liabilities to the APT as
trustee under a Trust Agreement.14 Thus, the complaint was amended for the second time to implead and include the APT as a defendant.
In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its contract with HRCC was entered into by its then President
without any authority. Moreover, the said contract allegedly failed to comply with laws, rules and regulations concerning government contracts. NMIC
further claimed that the contract amount was manifestly excessive and grossly disadvantageous to the government. NMIC made counterclaims for the
amounts already paid to Hercon, Inc. and attorneys fees, as well as payment for equipment rental for four trucks, replacement of parts and other
services, and damage to some of NMICs properties.16
For its part, DBPs answer17 raised the defense that HRCC had no cause of action against it because DBP was not privy to HRCCs contract with NMIC.
Moreover, NMICs juridical personality is separate from that of DBP. DBP further interposed a counterclaim for attorneys fees. 18
PNBs answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCCs part and laches as defenses, claiming that the inclusion
of PNB in the complaint was the first time a demand for payment was made on it by HRCC. PNB also invoked the separate juridical personality of NMIC
and made counterclaims for moral damages and attorneys fees.20
APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity between Hercon, Inc. and APT, and the National
Governments preferred lien over the assets of NMIC.22
After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It pierced the corporate veil of NMIC and held DBP and
PNB solidarily liable with NMIC:
On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction, this Court likewise finds for the plaintiff.
From the documentary evidence adduced by the plaintiff, some of which were even adopted by defendants and DBP and PNB as their own evidence
(Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I5-A", "I-5-B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been established that except for five (5)
qualifying shares, NMIC is owned by defendants DBP and PNB, with the former owning 57% thereof, and the latter 43%. As of September 24, 1984, all
the members of NMICs Board of Directors, namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada
are either from DBP or PNB (Exhibits "I-5", "I-5-C", "I-5-D").
The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it was Rolando M. Zosa, then Governor of DBP, who
was signing and entering into contracts with third persons, on behalf of NMIC.
In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third persons, disregard legal fiction that two (2) corporations are distinct entities, and treat
them as identical." (Phil. Veterans Investment Development Corp. vs. CA, 181 SCRA 669).
From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB. Thus, the DBP and PNB are jointly and
severally liable with NMIC for the latters unpaid obligations to plaintiff. 23
Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the trial court reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff HYDRO RESOURCES CONTRACTORS CORPORATION and
against the defendants NONOC
MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and PHILIPPINE NATIONAL BANK, ordering the aforenamed
defendants, to pay the plaintiff jointly and severally, the sum of 8,370,934.74 plus legal interest thereon from date of demand, and attorneys fees
equivalent to 25% of the judgment award.
The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING AND INDUSTRIAL CORPORATION is directed to ensure
compliance with this Decision.24
DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was wrong for the RTC to pierce the veil of NMICs corporate
personality and hold DBP and PNB solidarily liable with NMIC.25
The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of the veil of the corporate personality of NMIC and held
DBP, PNB, and APT solidarily liable with NMIC. In particular, the Court of Appeals made the following findings:
In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to the extent of 57% and 43% respectively; that said two (2)
appellants are the only stockholders, with the qualifying stockholders of five (5) consisting of its own officers and included in its charter merely to
comply with the requirement of the law as to number of incorporators; and that the directorates of DBP, PNB and [NMIC] are interlocked.
xxxx
We find it therefore correct for the lower court to have ruled that:
"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB. Thus, the DBP and PNB are jointly and
severally liable with NMIC for the latters unpaid obligation to plaintiff." 26 (Citation omitted.)
The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the corporate veil of NMIC should be pierced,
ratiocinating:
For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing beneficial contracts, and then using such separate entity to
evade the payment of a just debt, would be the height of injustice and iniquity. Surely that could not have been the intendment of the law with respect
to corporations. x x x.27
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The judgment in favor of appellee Hydro Resources Contractors
Corporation in the amount of 8,370,934.74 with legal interest from date of demand is hereby AFFIRMED, but the dismissal of the case as against
Assets Privatization Trust is REVERSED, and its successor the Privatization and Management Office is INCLUDED as one of those jointly and severally
liable for such indebtedness. The award of attorneys fees is DELETED.
All other claims and counter-claims are hereby DISMISSED.
Costs against appellants.28
The respective motions for reconsideration of DBP, PNB, and APT were denied. 29
Hence, these consolidated petitions.30
All three petitioners assert that NMIC is a corporate entity with a juridical personality separate and distinct from both PNB and DBP. They insist that the
majority ownership by DBP and PNB of NMIC is not a sufficient ground for disregarding the separate corporate personality of NMIC because NMIC was
not a mere adjunct, business conduit or alter ego of DBP and PNB. According to them, the application of the doctrine of piercing the corporate veil is
unwarranted as nothing in the records would show that the ownership and control of the shareholdings of NMIC by DBP and PNB were used to commit
fraud, illegality or injustice. In the absence of evidence that the stock control by DBP and PNB over NMIC was used to commit some fraud or a wrong
and that said control was the proximate cause of the injury sustained by HRCC, resort to the doctrine of "piercing the veil of corporate entity" is
misplaced.31
DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay NMICs exclusive and separate corporate indebtedness to
HRCC, such liability of the two banks was transferred to and assumed by the National Government through the APT, now the PMO, under the respective
deeds of transfer both dated February 27, 1997 executed by DBP and PNB pursuant to Proclamation No. 50 dated December 8, 1986 and Administrative
Order No. 14 dated February 3, 1987.32
For its part, the APT contends that, in the absence of an unqualified assumption by the National Government of all liabilities incurred by NMIC, the
National Government through the APT could not be held liable for NMICs contractual liability. The APT asserts that HRCC had not sufficiently shown that
the APT is the successor-in-interest of all the liabilities of NMIC, or of DBP and PNB as transferors, and that the adjudged liability is included among the
liabilities assigned and transferred by DBP and PNB in favor of the National Government.33
HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil of corporate fiction." It claims that NMIC was the alter
ego of DBP and PNB which owned, conducted and controlled the business of NMIC as shown by the following circumstances: NMIC was owned by DBP
and PNB, the officers of DBP and PNB were also the officers of NMIC, and DBP and PNB financed the operations of NMIC. HRCC further argues that a
parent corporation may be held liable for the contracts or obligations of its subsidiary corporation where the latter is a mere agency, instrumentality or
adjunct of the parent corporation.34
Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and NMIC because the APT assumed the obligations of DBP and
PNB as the successor-in-interest of the said banks with respect to the assets and liabilities of NMIC. 35 As trustee of the Republic of the Philippines, the
APT also assumed the responsibility of the Republic pursuant to the following provision of Section 2.02 of the respective deeds of transfer executed by
DBP and PNB in favor of the Republic:
SECTION 2. TRANSFER OF BANKS LIABILITIES
xxxx
2.02 With respect to the Banks liabilities which are contingent and those liabilities where the Banks creditors consent to the transfer thereof is not
obtained, said liabilities shall remain in the books of the BANK with the GOVERNMENT funding the payment thereof. 36
After a careful review of the case, this Court finds the petitions impressed with merit.
A corporation is an artificial entity 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. 37 It has a personality separate and distinct from that of its stockholders and from that of other
corporations to which it may be connected. 38 As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to
promote capital formation,39 a corporation incurs its own liabilities and is legally responsible for payment of its obligations. 40 In other words, by virtue
of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder. 41 This protection from
liability for shareholders is the principle of limited liability. 42
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. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against third persons. 43
However, the rule is that a court should be careful in assessing the milieu where the doctrine of the corporate veil may be applied. Otherwise an
injustice, although unintended, may result from its erroneous application. 44 Thus, cutting through the corporate cover requires an approach
characterized by due care and caution:
disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. x x x. 45 (Emphases supplied; citations
omitted.)
Sarona v. National Labor Relations Commission46 has defined the scope of application of the doctrine of piercing the corporate veil:
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is
used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. (Citation omitted.)
Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of DBP and PNB) should be held solidarily liable for
using NMIC as alter ego.47 The RTC sustained the allegation of HRCC and pierced the corporate veil of NMIC pursuant to the alter ego theory when it
concluded that NMIC "is a mere adjunct, business conduit or alter ego of both DBP and PNB." 48 The Court of Appeals upheld such conclusion of the trial
court.49 In other words, both the trial and appellate courts relied on the alter ego theory when they disregarded the separate corporate personality of
NMIC.
In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as the
instrumentality theory, namely:
own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of. 50 (Emphases omitted.)
The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and domination of the
parent.51 It examines the parent corporations relationship with the subsidiary. 52 It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence as a
distinct corporate entity will be ignored. 53 It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though
acting through the subsidiary in form and appearance, "is operating the business directly for itself." 54
The second prong is the "fraud" test. This test requires that the parent corporations conduct in using the subsidiary corporation be unjust, fraudulent or
wrongful.55 It examines the relationship of the plaintiff to the corporation.56 It recognizes that piercing is appropriate only if the parent corporation
uses the subsidiary in a way that harms the plaintiff creditor.57 As such, it requires a showing of "an element of injustice or fundamental unfairness." 58
The third prong is the "harm" test. This test requires the plaintiff to show that the defendants control, exerted in a fraudulent, illegal or otherwise unfair
manner toward it, caused the harm suffered. 59 A causal connection between the fraudulent conduct committed through the instrumentality of the
subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil
is pierced, it will have been treated unjustly by the defendants exercise of control and improper use of the corporate form and, thereby, suffer
damages.60
To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the
stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil. 61
This Court finds that none of the tests has been satisfactorily met in this case.
In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants
relationship to that operation.62 With respect to the control element, it refers not to paper or formal control by majority or even complete stock control
but actual control which amounts to "such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate
mind, will or existence of its own, and is but a conduit for its principal." 63 In addition, the control must be shown to have been exercised at the time the
acts complained of took place.64
Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate cover of NMIC based on two factors: (1) the
ownership by DBP and PNB of effectively all the stocks of NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC. 65 Unfortunately,
the conclusion of the trial and appellate courts that the DBP and PNB fit the alter ego theory with respect to NMICs transaction with HRCC on the
premise of complete stock ownership and interlocking directorates involved a quantum leap in logic and law exposing a gap in reason and fact.
While ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of
control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego relationship or connection between
DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing of the latters corporate cover. This Court has declared that
"mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality." 66 This Court has likewise ruled that the "existence of interlocking directors, corporate
officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy
considerations."67
True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on appeal to this Court, provided they are borne out of the
record or are based on substantial evidence. 68 It is equally true that the question of whether one corporation is merely an alter ego of another is purely
one of fact. So is the question of whether a corporation is a paper company, a sham or subterfuge or whether the requisite quantum of evidence has
been adduced warranting the piercing of the veil of corporate personality. 69 Nevertheless, it has been held in Sarona v. National Labor Relations
Commission70 that this Court has the power to resolve a question of fact, such as whether a corporation is a mere alter ego of another entity or
whether the corporate fiction was invoked for fraudulent or malevolent ends, if the findings in the assailed decision are either not supported by the
evidence on record or based on a misapprehension of facts.
In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC were dominated by DBP and PNB in such a way
that NMIC could be considered to have no separate mind, will or existence of its own but a mere conduit for DBP and PNB. On the contrary, the
evidence establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC, not with NMICs stockholders. The letter proposal of
Hercon, Inc., HRCCs predecessor-in-interest, regarding the contract for NMICs mine stripping and road construction program was addressed to and
accepted by NMIC.71 The various billing reports, progress reports, statements of accounts and communications of Hercon, Inc./HRCC regarding NMICs
mine stripping and road construction program in 1985 concerned NMIC and NMICs officers, without any indication of or reference to the control
exercised by DBP and/or PNB over NMICs affairs, policies and practices. 72
HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the alleged undue disregard by NMIC of the demands of
HRCC to satisfy the unpaid claims for services rendered by HRCC in connection with NMICs mine stripping and road construction program in 1985. On
the contrary, the overall picture painted by the evidence offered by HRCC is one where HRCC was dealing with NMIC as a distinct juridical person acting
through its own corporate officers.73
Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were interlocking has no basis. HRCCs Exhibit "I-5," 74 the initial
General Information Sheet submitted by NMIC to the Securities and Exchange Commission, relied upon by the trial court and the Court of Appeals may
have proven that DBP and PNB owned the stocks of NMIC to the extent of 57% and 43%, respectively. However, nothing in it supports a finding that
NMIC, DBP, and PNB had interlocking directors as it only indicates that, of the five members of NMICs board of directors, four were nominees of either
DBP or PNB and only one was a nominee of both DBP and PNB. 75 Only two members of the board of directors of NMIC, Jose Tengco, Jr. and Rolando
Zosa, were established to be members of the board of governors of DBP and none was proved to be a member of the board of directors of PNB. 76 No
director of NMIC was shown to be also sitting simultaneously in the board of governors/directors of both DBP and PNB.
In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand and NMIC on the other hand, the Court of Appeals
invoked Sibagat Timber Corporation v. Garcia, 77 which it described as "a case under a similar factual milieu." 78 However, in Sibagat Timber
Corporation, this Court took care to enumerate the circumstances which led to the piercing of the corporate veil of Sibagat Timber Corporation for being
the alter ego of Del Rosario & Sons Logging Enterprises, Inc. Those circumstances were as follows: holding office in the same building, practical identity
of the officers and directors of the two corporations and assumption of management and control of Sibagat Timber Corporation by the directors/officers
of Del Rosario & Sons Logging Enterprises, Inc.
Here, DBP and PNB maintain an address different from that of NMIC. 79 As already discussed, there was insufficient proof of interlocking directorates.
There was not even an allegation of similarity of corporate officers. Instead of evidence that DBP and PNB assumed and controlled the management of
NMIC, HRCCs evidence shows that NMIC operated as a distinct entity endowed with its own legal personality. Thus, what obtains in this case is a
factual backdrop different from, not similar to, Sibagat Timber Corporation.
In relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or unjust act in contravention of a
plaintiffs legal rights must be clearly and convincingly established; it cannot be presumed. Without a demonstration that any of the evils sought to be
prevented by the doctrine is present, it does not apply.80
In this case, the Court of Appeals declared:
We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying that NMIC was used to conceal fraud. x x x. 81
Such a declaration clearly negates the possibility that DBP and PNB exercised control over NMIC which DBP and PNB used "to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights." It is a
recognition that, even assuming that DBP and PNB exercised control over NMIC, there is no evidence that the juridical personality of NMIC was used by
DBP and PNB to commit a fraud or to do a wrong against HRCC.
There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed against HRCC by DBP and PNB under the guise of NMIC,
there is no basis to hold that NMIC was a mere alter ego of DBP and PNB. As this Court ruled in Ramoso v. Court of Appeals 82:
As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud, and proof of it. For the separate
juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed.
As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or fundamental unfairness perpetuated by DBP and
PNB through the corporate cover of NMIC, no harm could be said to have been proximately caused by DBP and PNB on HRCC for which HRCC could
hold DBP and PNB solidarily liable with NMIC.1wphi1
Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as transferee of the rights, titles and interests of DBP
and PNB in NMIC will attach only if DBP and PNB are held liable, the APT incurs no liability for the judgment indebtedness of NMIC. Even HRCC
recognizes that "as assignee of DBP and PNB 's loan receivables," the APT simply "stepped into the shoes of DBP and PNB with respect to the latter's
rights and obligations" in NMIC.83 As such assignee, therefore, the APT incurs no liability with respect to NMIC other than whatever liabilities may be
imputable to its assignors, DBP and PNB.
Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which HRCC invokes, the APT cannot be held liable. The
contingent liability for which the National Government, through the APT, may be held liable under the said provision refers to contingent liabilities of
DBP and PNB. Since DBP and PNB may not be held solidarily liable with NMIC, no contingent liability may be imputed to the APT as well. Only NMIC as a
distinct and separate legal entity is liable to pay its corporate obligation to HRCC in the amount of 8,370,934.74, with legal interest thereon from date
of demand.
As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of the judgment against it. The APT itself acknowledges this. 84
WHEREFORE, the petitions are hereby GRANTED.
The complaint as against Development Bank of the Philippines, the Philippine National Bank, and the Asset Privatization Trust, now the Privatization and
Management Office, is DISMISSED for lack of merit. The Asset Privatization Trust, now the Privatization and Management Office, as trustee of Nonoc
Mining and Industrial Corporation, now the Philnico Processing Corporation, is DIRECTED to ensure compliance by the Nonoc Mining and Industrial
Corporation, now the Philnico Processing Corporation, with this Decision.
SO ORDERED.
\
G.R. No. 156759 June 5, 2013
ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR., ISAIAS ALBANO, LILY REYES, JANET BAY, JESUS R. GALANG, AND RANDY HAGOS,
Petitioners,
vs.
FRANCISCO R. CO, JR., Respondent.
DECISION
BERSAMIN, J.:
To warrant the substituted service of the summons and copy of the complaint, the serving officer must first attempt to effect the same upon the
defendant in person. Only after the attempt at personal service has become futile or impossible within a reasonable time may the officer resort to
substituted service.
The Case
Petitioners defendants in a suit for libel brought by respondent appeal the decision promulgated on March 8, 2002 1 and the resolution promulgated
on January 13, 2003,2 whereby the Court of Appeals (CA) respectively dismissed their petition for certiorari, prohibition and mandamus and denied their
motion for reconsideration. Thereby, the CA upheld the order the Regional Trial Court (RTC), Branch 51, in Manila had issued on March 12, 2001
denying their motion to dismiss because the substituted service of the summons and copies of the complaint on each of them had been valid and
effective.3
Antecedents
On July 3, 2000, respondent, a retired police officer assigned at the Western Police District in Manila, sued Abante Tonite, a daily tabloid of general
circulation; its Publisher Allen A. Macasaet; its Managing Director Nicolas V. Quijano; its Circulation Manager Isaias Albano; its Editors Janet Bay, Jesus
R. Galang and Randy Hagos; and its Columnist/Reporter Lily Reyes (petitioners), claiming damages because of an allegedly libelous article petitioners
published in the June 6, 2000 issue of Abante Tonite. The suit, docketed as Civil Case No. 00-97907, was raffled to Branch 51 of the RTC, which in due
course issued summons to be served on each defendant, including Abante Tonite, at their business address at Monica Publishing Corporation, 301-305
3rd Floor, BF Condominium Building, Solana Street corner A. Soriano Street, Intramuros, Manila. 4
In the morning of September 18, 2000, RTC Sheriff Raul Medina proceeded to the stated address to effect the personal service of the summons on the
defendants. But his efforts to personally serve each defendant in the address were futile because the defendants were then out of the office and
unavailable. He returned in the afternoon of that day to make a second attempt at serving the summons, but he was informed that petitioners were still
out of the office. He decided to resort to substituted service of the summons, and explained why in his sheriffs return dated September 22, 2005, 5 to
wit:
SHERIFFS RETURN
This is to certify that on September 18, 2000, I caused the service of summons together with copies of complaint and its annexes attached thereto,
upon the following:
1. Defendant Allen A. Macasaet, President/Publisher of defendant AbanteTonite, at Monica Publishing Corporation, Rooms 301-305 3rd Floor,
BF Condominium Building, Solana corner A. Soriano Streets, Intramuros, Manila, thru his secretary Lu-Ann Quijano, a person of sufficient age
and discretion working therein, who signed to acknowledge receipt thereof. That effort (sic) to serve the said summons personally upon said
defendant were made, but the same were ineffectual and unavailing on the ground that per information of Ms. Quijano said defendant is
always out and not available, thus, substituted service was applied;
2. Defendant Nicolas V. Quijano, at the same address, thru his wife Lu-Ann Quijano, who signed to acknowledge receipt thereof. That effort
(sic) to serve the said summons personally upon said defendant were made, but the same were ineffectual and unavailing on the ground that
per information of (sic) his wife said defendant is always out and not available, thus, substituted service was applied;
3. Defendants Isaias Albano, Janet Bay, Jesus R. Galang, Randy Hagos and Lily Reyes, at the same address, thru Rene Esleta, Editorial
Assistant of defendant AbanteTonite, a person of sufficient age and discretion working therein who signed to acknowledge receipt thereof.
That effort (sic) to serve the said summons personally upon said defendants were made, but the same were ineffectual and unavailing on the
ground that per information of (sic) Mr. Esleta said defendants is (sic) always roving outside and gathering news, thus, substituted service was
applied.
Original copy of summons is therefore, respectfully returned duly served.
Manila, September 22, 2000.
On October 3, 2000, petitioners moved for the dismissal of the complaint through counsels special appearance in their behalf, alleging lack of
jurisdiction over their persons because of the invalid and ineffectual substituted service of summons. They contended that the sheriff had made no prior
attempt to serve the summons personally on each of them in accordance with Section 6 and Section 7, Rule 14 of the Rules of Court. They further
moved to drop Abante Tonite as a defendant by virtue of its being neither a natural nor a juridical person that could be impleaded as a party in a civil
action.
At the hearing of petitioners motion to dismiss, Medina testified that he had gone to the office address of petitioners in the morning of September 18,
2000 to personally serve the summons on each defendant; that petitioners were out of the office at the time; that he had returned in the afternoon of
the same day to again attempt to serve on each defendant personally but his attempt had still proved futile because all of petitioners were still out of
the office; that some competent persons working in petitioners office had informed him that Macasaet and Quijano were always out and unavailable,
and that Albano, Bay, Galang, Hagos and Reyes were always out roving to gather news; and that he had then resorted to substituted service upon
realizing the impossibility of his finding petitioners in person within a reasonable time.
On March 12, 2001, the RTC denied the motion to dismiss, and directed petitioners to file their answers to the complaint within the remaining period
allowed by the Rules of Court,6 relevantly stating:
Records show that the summonses were served upon Allen A. Macasaet, President/Publisher of defendant AbanteTonite, through LuAnn Quijano; upon
defendants Isaias Albano, Janet Bay, Jesus R. Galang, Randy Hagos and Lily Reyes, through Rene Esleta, Editorial Assistant of defendant Abante Tonite
(p. 12, records). It is apparent in the Sheriffs Return that on several occasions, efforts to served (sic) the summons personally upon all the defendants
were ineffectual as they were always out and unavailable, so the Sheriff served the summons by substituted service.
Considering that summonses cannot be served within a reasonable time to the persons of all the defendants, hence substituted service of summonses
was validly applied. Secretary of the President who is duly authorized to receive such document, the wife of the defendant and the Editorial Assistant of
the defendant, were considered competent persons with sufficient discretion to realize the importance of the legal papers served upon them and to
relay the same to the defendants named therein (Sec. 7, Rule 14, 1997 Rules of Civil Procedure).
WHEREFORE, in view of the foregoing, the Motion to Dismiss is hereby DENIED for lack of merit..
Accordingly, defendants are directed to file their Answers to the complaint within the period still open to them, pursuant to the rules.
SO ORDERED.
Petitioners filed a motion for reconsideration, asserting that the sheriff had immediately resorted to substituted service of the summons upon being
informed that they were not around to personally receive the summons, and that Abante Tonite, being neither a natural nor a juridical person, could not
be made a party in the action.
On June 29, 2001, the RTC denied petitioners motion for reconsideration.7 It stated in respect of the service of summons, as follows:
The allegations of the defendants that the Sheriff immediately resorted to substituted service of summons upon them when he was informed that they
were not around to personally receive the same is untenable. During the hearing of the herein motion, Sheriff Raul Medina of this Branch of the Court
testified that on September 18, 2000 in the morning, he went to the office address of the defendants to personally serve summons upon them but they
were out. So he went back to serve said summons upon the defendants in the afternoon of the same day, but then again he was informed that the
defendants were out and unavailable, and that they were always out because they were roving around to gather news. Because of that information and
because of the nature of the work of the defendants that they are always on field, so the sheriff resorted to substituted service of summons. There was
substantial compliance with the rules, considering the difficulty to serve the summons personally to them because of the nature of their job which
compels them to be always out and unavailable. Additional matters regarding the service of summons upon defendants were sufficiently discussed in
the Order of this Court dated March 12, 2001.
Regarding the impleading of Abante Tonite as defendant, the RTC held, viz:
"Abante Tonite" is a daily tabloid of general circulation. People all over the country could buy a copy of "Abante Tonite" and read it, hence, it is for
public consumption. The persons who organized said publication obviously derived profit from it. The information written on the said newspaper will
affect the person, natural as well as juridical, who was stated or implicated in the news. All of these facts imply that "Abante Tonite" falls within the
provision of Art. 44 (2 or 3), New Civil Code. Assuming arguendo that "Abante Tonite" is not registered with the Securities and Exchange Commission, it
is deemed a corporation by estoppels considering that it possesses attributes of a juridical person, otherwise it cannot be held liable for damages and
injuries it may inflict to other persons.
Undaunted, petitioners brought a petition for certiorari, prohibition, mandamusin the CA to nullify the orders of the RTC dated March 12, 2001 and June
29, 2001.
Ruling of the CA
On March 8, 2002, the CA promulgated its questioned decision,8 dismissing the petition for certiorari, prohibition, mandamus, to wit:
We find petitioners argument without merit. The rule is that certiorari will prosper only if there is a showing of grave abuse of discretion or an act
without or in excess of jurisdiction committed by the respondent Judge. A judicious reading of the questioned orders of respondent Judge would show
that the same were not issued in a capricious or whimsical exercise of judgment. There are factual bases and legal justification for the assailed orders.
From the Return, the sheriff certified that "effort to serve the summons personally xxx were made, but the same were ineffectual and unavailing xxx.
and upholding the trial courts finding that there was a substantial compliance with the rules that allowed the substituted service.
Furthermore, the CA ruled:
Anent the issue raised by petitioners that "Abante Tonite is neither a natural or juridical person who may be a party in a civil case," and therefore the
case against it must be dismissed and/or dropped, is untenable.
The respondent Judge, in denying petitioners motion for reconsideration, held that:
xxxx
Abante Tonites newspapers are circulated nationwide, showing ostensibly its being a corporate entity, thus the doctrine of corporation by estoppel may
appropriately apply.
An unincorporated association, which represents itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a
third person who relies in good faith on such representation.
There being no grave abuse of discretion committed by the respondent Judge in the exercise of his jurisdiction, the relief of prohibition is also
unavailable.
WHEREFORE, the instant petition is DENIED. The assailed Orders of respondent Judge are AFFIRMED.
SO ORDERED.9
On January 13, 2003, the CA denied petitioners motion for reconsideration. 10
Issues
Petitioners hereby submit that:
1. THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN HOLDING THAT THE TRIAL COURT ACQUIRED JURISDICTION OVER HEREIN
PETITIONERS.
2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR BY SUSTAINING THE INCLUSION OF ABANTE TONITE AS PARTY IN THE
INSTANT CASE.11
Ruling
The petition for review lacks merit.
Jurisdiction over the person, or jurisdiction in personam the power of the court to render a personal judgment or to subject the parties in a particular
action to the judgment and other rulings rendered in the action is an element of due process that is essential in all actions, civil as well as criminal,
except in actions in rem or quasi in rem. Jurisdiction over the defendantin an action in rem or quasi in rem is not required, and the court acquires
jurisdiction over an actionas long as it acquires jurisdiction over the resthat is thesubject matter of the action. The purpose of summons in such action is
not the acquisition of jurisdiction over the defendant but mainly to satisfy the constitutional requirement of due process. 12
The distinctions that need to be perceived between an action in personam, on the one hand, and an action inrem or quasi in rem, on the other hand,
are aptly delineated in Domagas v. Jensen,13 thusly:
The settled rule is that the aim and object of an action determine its character. Whether a proceeding is in rem, or in personam, or quasi in rem for that
matter, is determined by its nature and purpose, and by these only. A proceeding in personam is a proceeding to enforce personal rights and obligations
brought against the person and is based on the jurisdiction of the person, although it may involve his right to, or the exercise of ownership of, specific
property, or seek to compel him to control or dispose of it in accordance with the mandate of the court. The purpose of a proceeding in personam is to
impose, through the judgment of a court, some responsibility or liability directly upon the person of the defendant. Of this character are suits to compel
a defendant to specifically perform some act or actions to fasten a pecuniary liability on him. An action in personam is said to be one which has for its
object a judgment against the person, as distinguished from a judgment against the property to determine its state. It has been held that an action in
personam is a proceeding to enforce personal rights or obligations; such action is brought against the person. As far as suits for injunctive relief are
concerned, it is well-settled that it is an injunctive act in personam. In Combs v. Combs, the appellate court held that proceedings to enforce personal
rights and obligations and in which personal judgments are rendered adjusting the rights and obligations between the affected parties is in personam.
Actions for recovery of real property are in personam.
On the other hand, a proceeding quasi in rem is one brought against persons seeking to subject the property of such persons to the discharge of the
claims assailed. In an action quasi in rem, an individual is named as defendant and the purpose of the proceeding is to subject his interests therein to
the obligation or loan burdening the property. Actions quasi in rem deal with the status, ownership or liability of a particular property but which are
intended to operate on these questions only as between the particular parties to the proceedings and not to ascertain or cut off the rights or interests of
all possible claimants. The judgments therein are binding only upon the parties who joined in the action.
As a rule, Philippine courts cannot try any case against a defendant who does not reside and is not found in the Philippines because of the impossibility
of acquiring jurisdiction over his person unless he voluntarily appears in court; but when the case is an action in rem or quasi in rem enumerated in
Section 15, Rule 14 of the Rules of Court, Philippine courts have jurisdiction to hear and decide the case because they have jurisdiction over the res, and
jurisdiction over the person of the non-resident defendant is not essential. In the latter instance, extraterritorial service of summons can be made upon
the defendant, and such extraterritorial service of summons is not for the purpose of vesting the court with jurisdiction, but for the purpose of
complying with the requirements of fair play or due process, so that the defendant will be informed of the pendency of the action against him and the
possibility that property in the Philippines belonging to him or in which he has an interest may be subjected to a judgment in favor of the plaintiff, and
he can thereby take steps to protect his interest if he is so minded. On the other hand, when the defendant in an action in personam does not reside
and is not found in the Philippines, our courts cannot try the case against him because of the impossibility of acquiring jurisdiction over his person
unless he voluntarily appears in court.14
As the initiating party, the plaintiff in a civil action voluntarily submits himself to the jurisdiction of the court by the act of filing the initiatory pleading. As
to the defendant, the court acquires jurisdiction over his person either by the proper service of the summons, or by a voluntary appearance in the
action.15
Upon the filing of the complaint and the payment of the requisite legal fees, the clerk of court forthwith issues the corresponding summons to the
defendant.16 The summons is directed to the defendant and signed by the clerk of court under seal. It contains the name of the court and the names of
the parties to the action; a direction that the defendant answers within the time fixed by the Rules of Court; and a notice that unless the defendant so
answers, the plaintiff will take judgment by default and may be granted the relief applied for. 17 To be attached to the original copy of the summons and
all copies thereof is a copy of the complaint (and its attachments, if any) and the order, if any, for the appointment of a guardian ad litem. 18
The significance of the proper service of the summons on the defendant in an action in personam cannot be overemphasized. The service of the
summons fulfills two fundamental objectives, namely: (a) to vest in the court jurisdiction over the person of the defendant; and (b) to afford to the
defendant the opportunity to be heard on the claim brought against him. 19 As to the former, when jurisdiction in personam is not acquired in a civil
action through the proper service of the summons or upon a valid waiver of such proper service, the ensuing trial and judgment are void. 20 If the
defendant knowingly does an act inconsistent with the right to object to the lack of personal jurisdiction as to him, like voluntarily appearing in the
action, he is deemed to have submitted himself to the jurisdiction of the court. 21 As to the latter, the essence of due process lies in the reasonable
opportunity to be heard and to submit any evidence the defendant may have in support of his defense. With the proper service of the summons being
intended to afford to him the opportunity to be heard on the claim against him, he may also waive the process. 21 In other words, compliance with the
rules regarding the service of the summons is as much an issue of due process as it is of jurisdiction. 23
Under the Rules of Court, the service of the summons should firstly be effected on the defendant himself whenever practicable. Such personal service
consists either in handing a copy of the summons to the defendant in person, or, if the defendant refuses to receive and sign for it, in tendering it to
him.24 The rule on personal service is to be rigidly enforced in order to ensure the realization of the two fundamental objectives earlier mentioned. If,
for justifiable reasons, the defendant cannot be served in person within a reasonable time, the service of the summons may then be effected either (a)
by leaving a copy of the summons at his residence with some person of suitable age and discretion then residing therein, or (b) by leaving the copy at
his office or regular place of business with some competent person in charge thereof. 25 The latter mode of service is known as substituted service
because the service of the summons on the defendant is made through his substitute.
It is no longer debatable that the statutory requirements of substituted service must be followed strictly, faithfully and fully, and any substituted service
other than that authorized by statute is considered ineffective. 26 This is because substituted service, being in derogation of the usual method of service,
is extraordinary in character and may be used only as prescribed and in the circumstances authorized by statute. 27 Only when the defendant cannot be
served personally within a reasonable time may substituted service be resorted to. Hence, the impossibility of prompt personal service should be shown
by stating the efforts made to find the defendant himself and the fact that such efforts failed, which statement should be found in the proof of service
or sheriffs return.28 Nonetheless, the requisite showing of the impossibility of prompt personal service as basis for resorting to substituted service may
be waived by the defendant either expressly or impliedly. 29
There is no question that Sheriff Medina twice attempted to serve the summons upon each of petitioners in person at their office address, the first in
the morning of September 18, 2000 and the second in the afternoon of the same date. Each attempt failed because Macasaet and Quijano were "always
out and not available" and the other petitioners were "always roving outside and gathering news." After Medina learned from those present in the office
address on his second attempt that there was no likelihood of any of petitioners going to the office during the business hours of that or any other day,
he concluded that further attempts to serve them in person within a reasonable time would be futile. The circumstances fully warranted his conclusion.
He was not expected or required as the serving officer to effect personal service by all means and at all times, considering that he was expressly
authorized to resort to substituted service should he be unable to effect the personal service within a reasonable time. In that regard, what was a
reasonable time was dependent on the circumstances obtaining. While we are strict in insisting on personal service on the defendant, we do not cling to
such strictness should the circumstances already justify substituted service instead. It is the spirit of the procedural rules, not their letter, that
governs.30
In reality, petitioners insistence on personal service by the serving officer was demonstrably superfluous. They had actually received the summonses
served through their substitutes, as borne out by their filing of several pleadings in the RTC, including an answer with compulsory counterclaim ad
cautelam and a pre-trial brief ad cautelam. They had also availed themselves of the modes of discovery available under the Rules of Court. Such acts
evinced their voluntary appearance in the action.
Nor can we sustain petitioners contention that Abante Tonite could not be sued as a defendant due to its not being either a natural or a juridical
person. In rejecting their contention, the CA categorized Abante Tonite as a corporation by estoppel as the result of its having represented itself to the
reading public as a corporation despite its not being incorporated. Thereby, the CA concluded that the RTC did not gravely abuse its discretion in
holding that the non-incorporation of Abante Tonite with the Securities and Exchange Commission was of no consequence, for, otherwise, whoever of
the public who would suffer any damage from the publication of articles in the pages of its tabloids would be left without recourse. We cannot disagree
with the CA, considering that the editorial box of the daily tabloid disclosed that basis, nothing in the box indicated that Monica Publishing Corporation
had owned Abante Tonite.
WHEREFORE, the Court AFFIRMS the decision promulgated on March 8, 2002; and ORDERS petitioners to pay the costs of suit.
SO ORDERED.
G.R. No.197530 July 9, 2014
ABOITIZ EQUITY VENTURES, INC., Petitioner,

vs.
VICTOR S. CHIONGBIAN, BENJAMIN D. GOTHONG, and CARLOS A. GOTHONG LINES, INC. (CAGLI), Respondents.
DECISION
LEONEN, J.:
This is a petition for review on certiorari with an application for the issuance of a temporary restraining order and/or writ of preliminary injunction under
Rule 45 of the Rules of Court. This petition prays that the assailed orders dated May 5, 20111 and June 24, 20112 of the Regional Trial Court, Cebu City,
Branch 10 in Civil Case No. CEB-37004 be nullified and set aside and that judgment be rendered dismissing with prejudice the complaint 3 dated July 20,
2010 filed by respondents Carlos A. Gothong Lines, Inc. ("CAGLI") and Benjamin D. Gothong. On January 8, 1996, Aboitiz Shipping Corporation ("ASC"),
principally owned by the Aboitiz family, CAGLI, principally owned by the Gothong family, and William Lines, Inc.("WLI"), principally owned by the
Chiongbian family, entered into anagreement (the "Agreement"),4 whereby ASC and CAGLI would transfer their shipping assets to WLI in exchange for
WLIs shares of stock.5 WLI, in turn, would run their merged shipping businesses and, henceforth, be known as WG&A, Inc. ("WG&A").6
Sec. 11.06 of the Agreement required all disputes arising out of or in connection with the Agreement tobe settled by arbitration:
11.06 Arbitration
All disputes arising out of or in connection with this Agreement including any issue as to this Agreements validity or enforceability, which cannot be
settled amicably among the parties, shall be finally settled by arbitration in accordance with the Arbitration Law (Republic Act No. 876) by an arbitration
tribunal composed of four (4) arbitrators. Each of the parties shall appoint one (1) arbitrator, the three (3) to appoint the fourth arbitrator who shall act
as Chairman. Any award by the arbitration tribunal shall be final and binding upon the parties and shall be enforced by judgment of the Courts of Cebu
or Metro Manila.7
Among the attachments to the Agreement was Annex SL-V.8 This was a letter dated January 8,1996, from WLI, through its President (herein
respondent) Victor S. Chiongbian addressed to CAGLI, through its Chief Executive Officer Bob D. Gothong and Executive Vice President for Engineering
(herein respondent) Benjamin D. Gothong. On its second page, Annex SL-V bore the signatures ofBob D. Gothong and respondent Benjamin D. Gothong
by way of a conforme on behalf of CAGLI.
Annex SL-V confirmed WLIs commitment to acquire certain inventories of CAGLI. These inventories would havea total aggregate value of, at most,
400 million, "as determinedafter a special examination of the [i]nventories."9 Annex SL-V also specificallystated that such acquisition was "pursuant to
the Agreement."10
The entirety of Annex SL-Vs substantive portion reads:
We refer to the Agreement dated January 8, 1996 (the "Agreement") among William Lines, Inc. ("Company C"), Aboitiz Shipping Corporation ("Company
A") and Carlos A. Gothong Lines, Inc. ("Company B") regarding the transfer of various assets of Company A and Company B to Company C in
exchangefor shares of capital stock of Company C. Terms defined in the Agreement are used herein as therein defined.
This will confirm our commitment to acquire certain spare parts and materials inventory (the "Inventories") of Company B pursuant to the Agreement.
The total aggregate value of the Inventories to be acquired shall not exceed 400 Million as determined after a special examination of the Inventories as
performed by SGV & Co. to be completed on or before the Closing Date under the agreed procedures determined by the parties.
Subject to documentation acceptable to both parties, the Inventories to be acquired shall be determined not later than thirty (30) days after the Closing
Date and the payments shall be made in equal quarterly instalments over a period of two years with the first payment due on March 31, 1996.11
Pursuant to Annex SL-V, inventories were transferred from CAGLI to WLI. These inventories were assessed to have a value of 514 million, which was
later adjusted to 558.89 million.12 Of the total amount of 558.89 million, "CAGLIwas paid the amount of 400 Million."13 In addition to the payment of
400 million,petitioner Aboitiz Equity Ventures ("AEV") noted that WG&A shares with a book value of 38.5 million were transferred to CAGLI.14
As there was still a balance, in2001, CAGLI sent WG&A (the renamed WLI) demand letters "for the return of or the payment for the excess
[i]nventories."15 AEV alleged that to satisfy CAGLIs demand, WLI/WG&A returned inventories amounting to 120.04 million. 16 As proof of this, AEV
attached copies of delivery receipts signed by CAGLIs representatives as Annex "K" of the present petition.17
Sometime in 2002, the Chiongbian and Gothong families decided to leave the WG&A enterprise and sell their interest in WG&A to the Aboitiz family. As
such, a share purchase agreement18 ("SPA") was entered into by petitioner AEV and the respective shareholders groups of the Chiongbians and
Gothongs. In the SPA, AEV agreedto purchase the Chiongbian group's 40.61% share and the Gothong group's 20.66% share in WG&As issued and
outstanding stock.19
Section 6.5 of the SPA provided for arbitration as the mode of settling any dispute arising from the SPA. It reads:
6.5 Arbitration. Should there be any dispute arising between the parties relating to this Agreement including the interpretation or performance hereof
which cannot beresolved by agreement of the parties within fifteen (15) days after written notice by a party to another, such matter shall then be finally
settled by arbitration in Cebu City in accordance with the Philippine Arbitration Law. Substantive aspects of the dispute shall be settled by applying the
laws of the Philippines. The decision of the arbitrators shall be final and binding upon the parties hereto and the expense of arbitration (including
without limitation the award of attorneys fees to the prevailing party) shall be paid as the arbitrators shall determine.20
Section 6.8 of the SPA further provided that the Agreement (of January 8, 1996) shall be deemed terminated except its Annex SL-V. It reads:
6.8 Termination of Shareholders Agreement. The Buyer and the Sellers hereby agree that on Closing, the Agreement among Aboitiz Shipping
Corporation, Carlos A. Gothong Lines, Inc. and William Lines, Inc. dated January 8, 1996, as the same has been amended from time to time (the
"Shareholders Agreement") shall all be considered terminated, except with respect to such rights and obligations that the parties to the Shareholders
Agreement have under a letter dated January 8, 1996 (otherwise known as "SL-V") from William Lines, Inc. to Carlos A. Gothong Lines, Inc. regarding
certain spare parts and materials inventory, which rights and obligations shall survive through the date prescribed by the applicable statute of
limitations.21
As part of the SPA, the parties entered into an Escrow Agreement22 whereby ING Bank N.V.-Manila Branch was to take custody of the shares subject of
the SPA.23 Section 14.7 of the Escrow Agreement provided that all disputes arising from it shall be settled through arbitration:
14.7 All disputes, controversies or differences which may arise by and among the parties hereto out of, or in relation to, or in connection with this
Agreement, orfor the breach thereof shall be finally settled by arbitration in Cebu City in accordance with the Philippine Arbitration Law. The award
rendered by the arbitrator(s) shall be final and binding upon the parties concerned. However, notwithstanding the foregoing provision, the parties
reserve the right to seek redress before the regular court and avail of any provisional remedies in the event of any misconduct, negligence, fraud or
tortuous acts which arise from any extra-contractual conduct that affects the ability ofa party to comply with his obligations and responsibilities under
this Agreement.24
As a result of the SPA, AEV became a stockholder of WG&A. Subsequently, WG&A was renamed Aboitiz Transport Shipping Corporation ("ATSC").25
Petitioner AEV alleged that in2008, CAGLI resumed making demands despite having already received 120.04 million worth of excess inventories. 26
CAGLI initially made its demand to ATSC (the renamed WLI/WG&A) through a letter 27 dated February 14, 2008. As alleged by AEV, however, CAGLI
subsequently resorted to a "shotgun approach"28 and directed its subsequent demand letters to AEV29 as well as to FCLC30 (a company related to
respondent Chiongbian).
AEV responded to CAGLIs demands through several letters.31 In these letters, AEV rebuffed CAGLI's demands noting that: (1) CAGLI already received
the excess inventories;(2) it was not a party to CAGLI's claim as it had a personality distinct from WLI/WG&A/ATSC; and (3) CAGLI's claim was already
barred by prescription.
In a reply-letter32 dated May 5, 2008, CAGLI claimed that it was unaware of the delivery to it of the excess inventories and asked for copies of the
corresponding delivery receipts.33 CAGLI threatened that unless it received proof of payment or return ofexcess inventories having been made on or
before March 31, 1996, it would pursue arbitration.34
In letters written for AEV (the first dated October 16, 2008 by Aboitiz and Company, Inc.s Associate General Counsel Maria Cristina G. Gabutina 35 and
the second dated October 27, 2008 by SyCip Salazar Hernandez and Gatmaitan 36), it was noted that the excess inventories were delivered to GT Ferry
Warehouse.37 Attached to these letters were a listing and/or samples38 of the corresponding delivery receipts. In these letters it was also noted that
the amount of excess inventories delivered (120.04 million) was actually in excess of the value of the supposedly unreturned inventories (119.89
million).39 Thus, it was pointed out that it was CAGLI which was liable to return the difference between 120.04 million and 119.89 million.40 Its claims
not having been satisfied, CAGLI filed on November 6, 2008 the first of two applications for arbitration ("first complaint") 41 against respondent
Chiongbian, ATSC, ASC, and petitioner AEV, before the Cebu City Regional Trial Court, Branch 20. The first complaint was docketed as Civil Case No.
CEB-34951.
In response, AEV filed a motion to dismiss42 dated February 5, 2009. AEV argued that CAGLI failed to state a cause of action as there was no
agreement to arbitrate between CAGLI and AEV.43 Specifically, AEV pointed out that: (1) AEV was never a party to the January 8, 1996 Agreement or
to its Annex SL-V;44 (2) while AEV is a party to the SPA and Escrow Agreement, CAGLI's claim had no connection to either agreement; (3) the unsigned
and unexecuted SPA attached to the complaint cannot be a source of any right to arbitrate;45 and (4) CAGLI did not say how WLI/WG&A/ATSC's
obligation to return the excess inventories can be charged to AEV.
On December 4, 2009, the Cebu City Regional Trial Court, Branch 20 issued an order 46 dismissing the first complaint with respect to AEV. It sustained
AEVs assertion that there was no agreement binding AEV and CAGLI to arbitrate CAGLIs claim. 47 Whether by motion for reconsideration, appeal or
other means, CAGLI did not contest this dismissal.
On February 26, 2010, the Cebu CityRegional Trial Court, Branch 20 issued an order48 directing the parties remaining in the first complaint (after the
discharge of AEV) to proceed with arbitration.
The February 26, 2010 order notwithstanding, CAGLI filed a notice of dismissal49 dated July 8, 2010, withdrawing the first complaint. In an order50
dated August 13, 2010, the Cebu City Regional Trial Court, Branch 20 allowed this withdrawal.
ATSC (the renamed WLI/WG&A) filed a motion for reconsideration51 dated September 20, 2010 to the allowance of CAGLI's notice of dismissal. This
motion was denied in an order52 dated April 15, 2011.
On September 1, 2010, while the first complaint was still pending (n.b., it was only on April 15, 2011 that the Cebu City Regional Trial Court, Branch 20
denied ATSCs motion for reconsideration assailing the allowance of CAGLIs notice of disallowance), CAGLI, now joined by respondent Benjamin D.
Gothong, filed a second application for arbitration ("second complaint")53 before the Cebu City Regional Trial Court, Branch 10. The second complaint
was docketed as Civil Case No. CEB-37004 and was also in view of the return of the same excess inventories subject of the first complaint.
On October 28, 2010, AEV filed a motion to dismiss54 the second complaint on the following grounds:55 (1) forum shopping; (2) failure to state a cause
of action; (3) res judicata; and (4) litis pendentia.
In the first of the two (2) assailed orders dated May 5, 2011,56 the Cebu City Regional Trial Court, Branch 10 denied AEV's motion to dismiss.
On the matter of litis pendentia, the Regional Trial Court, Branch 10 noted that the first complaint was dismissed with respect to AEV on December 4,
2009, while the second complaint was filed on September 1, 2010. As such, the first complaint was no longer pending at the time of the filing of the
second complaint.57 On the matter of res judicata, the trial court noted that the dismissal without prejudice of the first complaint "[left] the parties free
to litigate the matter in a subsequent action, as though the dismiss[ed] action had not been commenced." 58 It added that since litis pendentia and res
judicata did not exist, CAGLI could not be charged with forum shopping.59 On the matter of an agreement to arbitrate, the Regional Trial Court, Branch
10 pointed to the SPA as "clearly express[ing] the intention of the parties to bring to arbitration process all disputes, if amicable settlement fails." 60 It
further dismissed AEVs claim that it was not a party to the SPA, as "already touching on the merits of the case" 61 and therefore beyond its duty "to
determine if they should proceed to arbitration or not."62
In the second assailed order63 dated June 24, 2011, the Cebu City Regional Trial Court, Branch 10 deniedAEV's motion for reconsideration.
Aggrieved, AEV filed the present petition.64 AEV asserts that the second complaint is barred by res judicata and litis pendentia and that CAGLI engaged
in blatant forum shopping.65 It insists that it is not bound by an agreement to arbitrate with CAGLI and that, even assuming that it may be required to
arbitrate, it is being ordered to do so under terms that are "manifestly contrary to the . . . agreements on which CAGLI based its demand for
arbitration."66
For resolution are the following issues:
I. Whether the complaint in Civil Case No. CEB-37004 constitutes forum shopping and/or is barred by res judicata and/or litis pendentia
II. Whether petitioner, Aboitiz Equity Ventures, Inc., is bound by an agreement to arbitrate with Carlos A. Gothong Lines, Inc., with respect to the
latters claims for unreturned inventories delivered to William Lines, Inc./WG&A, Inc./Aboitiz Transport System Corporation
AEV availed of the wrong

remedy in seeking relief from
this court
Before addressing the specific mattersraised by the present petition, we emphasize that AEV is in error inseeking relief from this court via a petition for
review on certiorari under Rule45 of the Rules of Court. As such, we are well in a position to dismiss the present petition outright. Nevertheless, as the
actions of the Cebu City Regional Trial Court, Branch 10 are tainted with grave abuse of discretion amounting to lack or excess of jurisdiction, this court
treats the present Rule 45 petition as a Rule 65 petition and gives it due course.
A petition for review on certiorari under Rule 45 is a mode of appeal. This is eminently clear from the very title and from the first section of Rule 45 (as
amended by A.M. No. 07-7-12-SC):
Rule 45
APPEAL BY CERTIORARITO THE SUPREME COURT
SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by certiorarifrom a judgment, final order or resolution of the Court of
Appeals, the Sandiganbayan, the Court of Tax Appeals, the Regional Trial Court or other courts, whenever authorized by law, may file with the Supreme
Court a verified petition for review on certiorari. The petition may include an application for a writ of preliminary injunction or other provisional remedies
and shall raise only questions of law, which must be distinctly set forth. The petitioner may seek the same provisional remedies by verified motion filed
inthe same action or proceeding at any time during its pendency. (Emphasis supplied)
Further, it is elementary that anappeal may only be taken from a judgment or final order that completely disposes of the case. 67 As such, no appeal
may be taken from an interlocutory order68 (i.e., "one which refers to something between the commencement and end of the suit which decides some
point or matter but it is not the final decision of the whole controversy"69). As explained in Sime Darby Employees Association v. NLRC,70 "[a]n
interlocutory order is not appealable until after the rendition of the judgment on the merits for a contrary rule would delay the administration of justice
and unduly burden the courts."71
An order denying a motion to dismiss is interlocutory in character. Hence, it may not be the subject of an appeal. The interlocutory nature of an order
denying a motion to dismiss and the remedies for assailing such an order were discussed in Douglas Lu Ym v. Nabua:72
An order denying a motion to dismiss is an interlocutory order which neither terminates nor finally disposes of a case, as it leaves something to be done
by the court before the case is finally decided on the merits. As such, the general rule is that the denial of a motion to dismiss cannot be questioned in a
special civil action for certiorariwhich is a remedy designed to correct errors ofjurisdiction and not errors of judgment. Neither can a denial of a motion
todismiss be the subject of an appeal unless and until a final judgment or order is rendered.In order to justify the grant of the extraordinary remedy of
certiorari, the denial of the motion to dismiss must have been tainted with grave abuse of discretion amounting to lack or excess of jurisdiction. 73
(Emphasis supplied)
Thus, where a motion to dismiss is denied, the proper recourse is for the movant to file an answer. 74 Nevertheless, where the order denying the motion
to dismiss is tainted with grave abuse of discretion amounting to lack or excess of jurisdiction, the movant may assail such order via a Rule 65 (i.e.,
certiorari, prohibition, and/or mandamus) petition. This is expressly recognized in the third paragraph of Rule 41, Section 1 of the Rules of Court.75
Following the enumeration in the second paragraph of Rule 41, Section 1 of the instances when an appeal may not be taken, the third paragraph
specifies that "[in] any of the foregoing circumstances, the aggrieved party may file an appropriate special civil action as provided in Rule 65."76
Per these rules, AEV is in error for having filed what it itself calls a "Petition for Review on Certiorari [Appeal by Certiorari under Rule 45 of the Rules of
Court]."77 Since AEV availed of the improper remedy, this court is well in a position to dismiss the present petition.
Nevertheless, there have been instances when a petition for review on certiorari under Rule 45 was treated by this court as a petition for certiorari
under Rule 65. As explained in China Banking Corporation v. Asian Construction and Development Corporation:78
[I]n many instances, the Court has treated a petition for review on certiorariunder Rule 45 as a petition for certiorari under Rule 65 of the Rules of
Court, such as in cases where the subject of the recourse was one of jurisdiction, or the act complained of was perpetrated by a court with grave abuse
of discretion amounting to lack or excess of jurisdiction.79
In this case, the May 5, 2011 and June 24, 2011 orders of the Cebu City Regional Trial Court, Branch 10 in Civil Case No. CEB-37004 are assailed for
having denied AEVs motion todismiss despite: first, the second complaint having been filed in a manner constituting forum shopping; second, the prior
judgment on the merits made in Civil Case No. CEB-34951, thereby violating the principle ofres judicata; and third, the (then) pendency of Civil Case
No. CEB-34951 with respect to the parties that, unlike AEV, were not discharged from the case, thereby violating the principle of litis pendentia. The
same orders are assailed for having allowed CAGLIs application for arbitration to continue despite supposedly clear and unmistakable evidence that AEV
is not bound by an agreement to arbitrate with CAGLI.
As such, the Cebu City, Regional Trial Court, Branch 10s orders are assailed for having been made with grave abuse of discretion amounting to lack or
excess of jurisdiction in that the Cebu City Regional Trial Court, Branch 10 chose to continue taking cognizance of the second complaint, despite there
being compelling reasons for its dismissal and the Cebu City, Regional Trial Court Branch 20s desistance. Conformably, we treat the present petition as
a petition for certiorari under Rule 65 of the Rules of Court and give it due course.
The complaint in Civil Case

No. CEB-37004 constitutes
forum shopping and is barred
by res judicata
The concept of and rationale against forum shopping were explained by this court in Top Rate Construction & General Services, Inc. v. Paxton
Development Corporation:80
FORUM SHOPPING is committed by a party who institutes two or more suits in different courts, either simultaneously or successively, in order to ask the
courts to rule on the same or related causes or to grant the same or substantially the same reliefs, on the supposition that one or the other court would
make a favorabledisposition or increase a party's chances of obtaining a favorable decision or action. It is an act of malpractice for it trifles with the
courts, abuses their processes, degrades the administration of justice and adds to the already congested court dockets. What is critical is the vexation
brought upon the courts and the litigants by a party who asks different courts to rule on the same or related causes and grant the same or substantially
the same reliefs and in the process creates the possibility of conflicting decisions being rendered by the different fora upon the same issues, regardless
of whether the court in which one of the suits was brought has no jurisdiction over the action.81
Equally settled is the test for determining forum shopping. As this court explained in Yap v. Chua:82
To determine whether a party violated the rule against forum shopping, the most important factor toask is whether the elements of litis pendentiaare
present, or whether a final judgment in one case will amount to res judicatain another; otherwise stated, the test for determining forum shopping is
whether in the two (or more) cases pending, there is identity of parties, rights or causes of action, and reliefs sought.83
Litis pendentia "refers to that situation wherein another action is pending between the same parties for the same cause ofaction, such that the second
action becomes unnecessary and vexatious."84 It requires the concurrence of three (3) requisites: "(1)the identity of parties, or at least such as
representing the same interests in both actions; (2) the identity of rights asserted and relief prayed for,the relief being founded on the same facts; and
(3) the identity of the two cases such that judgment in one, regardless of which party issuccessful, would amount tores judicatain the other."85
In turn, prior judgment or res judicata bars a subsequent case when the following requisites concur: "(1) the former judgment is final; (2) it is rendered
by a court having jurisdiction over the subject matter and the parties; (3) it is a judgment or an order on the merits; (4) there is between the first
and the second actions identityof parties, of subject matter, and of causes of action."86
Applying the cited concepts and requisites, we find that the complaint in Civil Case No. CEB-37004 is barred byres judicata and constitutes forum
shopping.
First, between the first and second complaints, there is identity of parties. The first complaint was brought by CAGLI as the sole plaintiff against Victor
S. Chiongbian, ATSC, and AEV as defendants. In the second complaint, CAGLI was joined by Benjamin D. Gothong as (co-)plaintiff. As to the
defendants, ATSC was deleted while Chiongbian and AEV were retained.
While it is true that the parties to the first and second complaints are not absolutely identical, this court has clarified that, for purposes of forum
shopping, "[a]bsolute identity of parties is not required [and that it] is enough that there is substantial identity of parties."87
Even as the second complaint alleges that Benjamin D. Gothong "is . . . suing in his personal capacity,"88 Gothong failed to show any personal interest
in the reliefs sought by the second complaint. Ultimately, what is at stake in the second complaint is the extent to which CAGLI may compel AEV and
Chiongbian to arbitrate in order that CAGLI may then recover the value of its alleged unreturned inventories. This claim for recovery is pursuant to the
agreement evinced in Annex SL-V. Annex SL-V was entered into by CAGLI and not by Benjamin D. Gothong. While it is true that Benjamin D. Gothong,
along with Bob D. Gothong, signed Annex SL-V, he did so only in a representative, and not in a personal, capacity. As such, Benjamin D. Gothong
cannot claim any right that personally accrues to him on account of Annex SL-V. From this, it follows that Benjamin D. Gothong is not a real party in
interest "one who stands to be benefitted or injured by the judgment in the suit or the party entitled to the avails of the suit" 89 and that his
inclusion in the second complaint is an unnecessary superfluity.
Second, there is identity in subject matter and cause of action. There is identity in subject matter as both complaints are applications for the same relief.
There is identity in cause ofaction as both complaints are grounded on the right to be paid for or to receive the value of excess inventories (and the
supposed corresponding breach thereof) as spelled out in Annex SL-V.
The first and second complaints are both applications for arbitration and are founded on the same instrument Annex SL-V. Moreover, the intended
arbitrations in both complaintscater to the sameultimate purpose, i.e., that CAGLI may recover the value of its supposedly unreturned inventories earlier
delivered to WLI/WG&A/ATSC.
In both complaints, the supposedpropriety of compelling the defendants to submit themselves to arbitration are anchored on the same bases: (1)
Section 6.8 of the SPA, which provides that the January 8, 1996 Agreement shall be deemed terminatedbut that the rights and obligations arising from
Annex SL-V shall continue to subsist;90 (2) Section 6.5 of the SPA, which requires arbitration as the mode for settling disputes relating to the SPA; 91
and, (3) defendants refusal to submit themselves to arbitration vis-a-vis Republic Act No. 876, which provides that "[a] party aggrieved by the failure,
neglect or refusal of another to perform under an agreement in writing providing for arbitration may petition the court for an order directing that such
arbitration proceed in the manner provided for in such agreement."92
Both complaints also rely on the same factual averments:93
1. that ASC, CAGLI, and WLI entered into an agreement on January 8, 1996;
2. that under Annex SL-V of the Agreement, WLI/WG&A "committed to acquire certain [inventories], the total aggregate value of which shall
not exceed 400 Million";94
3. that after examination, it was ascertained that the value of the transferred inventories exceeded 400 million;
4. that pursuant to Annex SL-V, WG&A paid CAGLI 400 million but that the former failed to return or pay for spare parts representing a value
in excess of 400 million;
5. "[t]hat on August 31, 2001, [CAGLI] wrote the WG&A through its AVP Materials Management, Ms. Concepcion M. Magat, asking for the
return of the excess spare parts";95
6. that on September 5, 2001, WG&As Ms. Magat replied that the matter is beyond her authority level and that she must elevate it to higher
management;
7. that several communications demanding the return of the excess spare parts were sent to WG&Abut these did not elicit any response; and
8. "[t]hat the issue of excess spare parts, was taken over by events, when on July 31, 2002," 96 the Chiongbians and Gothongs entered into
an Escrow Agreement with AEV.
Third, the order dated December 4, 2009 of the Cebu City Regional Trial Court, Branch 20, which dismissed the first complaint with respect to AEV,
attained finality when CAGLI did not file a motion for reconsideration, appealed, or, in any other manner, questioned the order.
Fourth, the parties did not dispute that the December 4, 2009 order was issued by a court having jurisdiction over the subject matter and the parties.
Specifically as to jurisdiction over the parties,jurisdiction was acquired over CAGLI as plaintiff when it filed the first complaint and sought relief from the
Cebu City Regional Trial Court, Branch 20; jurisdiction over defendants AEV, ATSC, and Victor S.Chiongbian was acquired with the service of summons
upon them. Fifth, the dismissal of the first complaint with respect to AEV was a judgment on the merits. As explained in Cabreza, Jr. v. Cabreza:97
A judgment may be considered as one rendered on the merits "when it determines the rights and liabilities of the parties based on the disclosed facts,
irrespective of formal, technical or dilatoryobjections"; or when the judgment is rendered "aftera determination of which party is right, as distinguished
from a judgment rendered upon some preliminary or formal or merely technical point."98
Further, as this court clarified in Mendiola v. Court of Appeals,99 "[i]t is not necessary . . . that there [be] a trial" 100 in order that a judgment be
considered as one on the merits.
Prior to issuing the December 4, 2009 order dismissing the first complaint with respect to AEV, the Cebu City Regional Trial Court, Branch 20 allowed
the parties the full opportunity to establish the facts and to ventilate their arguments relevant to the complaint. Specifically, the Cebu City Regional Trial
Court, Branch 20 admitted: 1) AEVs motion to dismiss;101 2) CAGLIs opposition to the motion to dismiss;102 3) AEVs reply and opposition;103 4)
CAGLIs rejoinder;104 and 5) AEVs surrejoinder.105
Following these, the Cebu City Regional Trial Court, Branch 20 arrived at the following findings and made a definitive determination that CAGLI had no
right to compel AEV to subject itself to arbitration with respect to CAGLIs claims under Annex SL-V:
After going over carefully the contentions and arguments of both parties, the court has found that no contract or document exists binding CAGLI and
AEV to arbitrate the formers claim. The WLI Letter upon which the claim is based confirms only the commitment of William Lines, Inc. (WLI) to
purchase certain material inventories from CAGLI. It does not involve AEV. The court has searched in vain for any agreement or document showing that
said commitment was passed on to and assumed by AEV. Such agreement or document, if one exists, being an actionable document, should have been
attached to the complaint. While the Agreement of January 8, 1996 and the Share Purchase Agreement provide for arbitration of disputes, they refer to
disputes arising from or in connection with the Agreements themselves. No reference is made, as included therein, to the aforesaid commitment of WLI
or to any claim that CAGLI may pursue based thereon or relative thereto. Section 6.8 of the Share Purchase Agreement, cited by plaintiff CAGLI, does
not incorporate therein, expressly or impliedly, the WLI commitment above-mentioned. It only declares that the rights and obligations of the parties
under the WLI Letter shall survive even after the termination of the Shareholders Agreement. It does not speak of arbitration. Finally, the complaint
does not allege the existence of a contract obliging CAGLI and AEV to arbitrate CAGLIs claim under the WLI Letter. Consequently, there is no legal or
factual basis for the present complaint for application for arbitration.106 (Emphasis supplied)
In the assailed order dated May 5, 2011, the Cebu City Regional Trial Court, Branch 10 made much of the Cebu City Regional Trial Court, Branch 20s
pronouncement in the latters December 4, 2009 order that "the [first] complaint fails to state a cause of action."107 Based on this, the Cebu City
Regional Trial Court, Branch 10 concluded that the dismissal of the first complaint was one made without prejudice, thereby "leav[ing] the parties free
to litigate the matter ina subsequent action, as though the dismissal [sic] action had not been commenced."108
The Cebu City Regional Trial Court, Branch 10 is in serious error. In holding that the second complaint was not barred by res judicata, the Cebu City
Regional Trial Court, Branch 10 ignored established jurisprudence.
Referring to the earlier cases of Manalo v. Court of Appeals109 and Mendiola v. Court of Appeals,110 this court emphasized in Luzon Development Bank
v. Conquilla111 that dismissal for failure to state a cause of action may very well be considered a judgment on the merits and, thereby, operate as res
judicata on a subsequent case:
[E]ven a dismissal on the ground of "failure to state a cause of action" may operate as res judicata on a subsequent case involving the same parties,
subject matter, and causes of action, provided that the order of dismissalactually ruled on the issues raised.What appears to be essential to a judgment
on the merits is that it be a reasoned decision, which clearly states the facts and the law on which it is based.112 (Emphasis supplied)
To reiterate, the Cebu City Regional Trial Court, Branch 20 made a definitive determination that CAGLI had no right to compel AEV to subject itself to
arbitrationvis-a-vis CAGLIs claims under Annex SL-V. This determination was arrived at after due consideration of the facts established and the
arguments advancedby the parties. Accordingly, the Cebu City Regional Trial Court, Branch 20s December 4, 2009 order constituted a judgment on the
merits and operated as res judicata on the second complaint.
In sum, the requisites for res judicata have been satisfied and the second complaint should, thus, have been dismissed. From this, it follows that CAGLI
committed an act of forum shopping in filing the second complaint. CAGLI instituted two suits in two regional trial court branches, albeit successively
and not simultaneously. It asked both branches to rule on the exact same cause and to grant the exact same relief. CAGLI did so after it had obtained
an unfavorable decision (at least with respect to AEV) from the Cebu City Regional Trial Court, Branch 20. These circumstances afford the reasonable
inference that the second complaint was filed in the hopes of a more favorable ruling.
Notwithstanding our pronouncements sustaining AEVs allegations that CAGLI engaged in forum shopping and that the second complaint was barred by
res judicata, we find that at the time of the filing of the second complaint, AEV had already been discharged from the proceedings relating to the first
complaint. Thus, asbetween AEV and CAGLI, the first complaint was no longer pending at the time of the filing of the second complaint. Accordingly, the
second complaint could not have been barred by litis pendentia.
There is no agreement
binding AEV to arbitrate
with CAGLI on the latters
claims arising from Annex SL-V
For arbitration to be proper, it is imperative thatit be grounded on an agreement between the parties. This was adequately explained in Ormoc
Sugarcane Planters Association,Inc. v. Court of Appeals:113
Section 2 of R.A. No. 876 (the Arbitration Law) pertinently provides:
Sec. 2. Persons and matterssubject to arbitration. Two or more persons or parties may submit to the arbitration of one or more arbitrators any
controversy existing between them at the time of the submission and which may be the subject of an action, or the parties to any contract may in such
contract agree to settle by arbitration a controversy thereafter arising between them. Such submission or contract shall be valid, enforceable and
irrevocable, save upon such grounds as exist at law for the revocation of any contract. . . . (Emphasis ours)
The foregoing provision speaks of two modes of arbitration: (a) an agreement to submit to arbitration somefuture dispute, usually stipulated upon in a
civil contract between the parties, and known as an agreement to submit to arbitration, and (b) an agreement submitting an existing matter of
difference to arbitrators, termed the submission agreement. Article XX of the milling contract is an agreement to submit to arbitrationbecause it was
made in anticipation of a dispute that might arise between the parties after the contracts execution.
Except where a compulsory arbitration is provided by statute, the first step toward the settlement of a difference by arbitration is the entry by the
parties into a valid agreement to arbitrate.An agreement to arbitrate is a contract, the relation ofthe parties is contractual, and the rights and liabilities
of the parties are controlled by the law of contracts. In an agreement for arbitration, the ordinary elements of a valid contract must appear, including an
agreement toarbitrate some specific thing, and an agreement to abide by the award, either in express language or by implication. 114 (Emphasis
supplied)
In this petition, not one of the parties AEV, CAGLI, Victor S. Chiongbian, and Benjamin D. Gothong has alleged and/or shown that the controversy
is properly the subject of "compulsory arbitration [as] provided by statute."115 Thus, the propriety of compelling AEV to submit itself to arbitration must
necessarilybe founded on contract.
Four (4) distinct contracts have been cited in the present petition:
1. The January 8, 1996 Agreement in which ASC, CAGLI, and WLI merged their shipping enterprises, with WLI (subsequently renamed WG&A)
as the surviving entity. Section 11.06 of this Agreement provided for arbitration as the mechanism for settling all disputes arising out of or in
connection with the Agreement.
2. Annex SL-V of the Agreement between CAGLI and WLI (and excluded ASC and any other Aboitiz-controlled entity), and which confirmed
WLIs commitment to acquire certain inventories, worth not more than 400 million, of CAGLI. Annex SL-V stated that the acquisition was
"pursuant to the Agreement."116 It did not contain an arbitration clause.
3. The September 23, 2003 Share Purchase Agreement or SPA in which AEV agreed to purchasethe Chiongbian and Gothong groups' shares in
WG&As issued and outstanding stock. Section 6.5 of the SPA provided for arbitration as the mode of settling any dispute arising from the
SPA. Section 6.8 of the SPA further provided that the Agreement of January 8, 1996 shall be deemed terminatedexcept its Annex SL-V.
4. The Escrow Agreement whereby ING Bank N.V.-Manila Branch was to take custody of the shares subject of the SPA. Section 14.7 of the
Escrow Agreement provided that all disputes arising from it shall be settled via arbitration.
The obligation for WLI to acquire certain inventories of CAGLI and which is the subject of the present petition was contained in Annex SL-V. It is
therefore this agreement which deserves foremost consideration. As to this particular agreement, these points must be underscored: first, that it has no
arbitration clause; second, Annex SL-V is only between WLI and CAGLI.
On the first point, it is clear, pursuant to this courts pronouncements in Ormoc Sugarcane Planters Association, that neither WLI nor CAGLI can compel
arbitration under Annex SL-V. Plainly, there is no agreement to arbitrate.
It is of no moment that Annex SL-Vstates that it was made "pursuant to the Agreement" or that Section 11.06 of the January 8, 1996 Agreement
provides for arbitration as the mode of settling disputes arising out of or in connection with the Agreement.
For one, to say that Annex SL-V was made"pursuant to the Agreement" is merely to acknowledge: (1) the factual context in which Annex SL-V was
executed and (2) that it was that context that facilitated the agreement embodied in it. Absentany other clear or unequivocal pronouncement integrating
Annex SL-V into the January 8, 1996 Agreement, it would be too much of a conjecture to jump to the conclusion that Annex SL-V is governed by the
exact same stipulations which govern the January 8, 1996 Agreement.
Likewise, a reading of the Agreements arbitration clause will reveal that it does not contemplate disputes arising from Annex SL-V.
Section 11.06 of the January 8, 1996 Agreement requires the formation of an arbitration tribunal composed of four (4) arbitrators. Each of the parties
WLI, CAGLI, and ASC shall appoint one (1) arbitrator, and the fourth arbitrator, who shall actas chairman, shall be appointed by the three (3)
arbitrators appointed by the parties. From the manner by which the arbitration tribunal is to be constituted, the necessary implication is that the
arbitration clause is applicable tothree-party disputes as will arise from the tripartite January 8, 1996 Agreement and not to two-party disputesas
will arise from the two-party Annex SL-V.
From the second point that Annex SL-V is only between WLI and CAGLI it necessarily follows that none but WLI/WG&A/ATSC and CAGLI are
bound by the terms of Annex SL-V. It is elementary that contracts are characterized by relativity or privity, that is, that "[c]ontracts take effect only
between the parties, their assigns and heirs."117 As such, one who is not a party to a contract may not seek relief for such contracts breach. Likewise,
one who is not a party to a contract may not be held liable for breach of any its terms.
While the principle of privity or relativity of contracts acknowledges that contractual obligations are transmissible to a partys assigns and heirs, AEV is
not WLIs successor-in-interest. In the period relevant to this petition, the transferee of the inventories transferred by CAGLI pursuant to Annex SL-V
assumed three (3) names: (1) WLI, the original name of the entity that survived the merger under the January 8, 1996 Agreement; (2) WG&A, the
name taken by WLI in the wake of the Agreement; and (3) ATSC, the name taken by WLI/WG&A inthe wake of the SPA. As such, it is now ATSC that is
liable under Annex SL-V.
Pursuant to the January 8, 1996 Agreement, the Aboitiz group (via ASC) and the Gothong group (viaCAGLI) became stockholders of WLI/WG&A, along
with the Chiongbiangroup (which initially controlled WLI). This continued until, pursuant to the SPA, the Gothong group and the Chiongbian group
transferred their shares to AEV. With the SPA, AEV became a stockholder of WLI/WG&A, which was subsequently renamed ATSC. Nonetheless, AEVs
status asATSCs stockholder does not subject it to ATSCs obligations
It is basic that a corporation has a personality separate and distinct from that of its individual stockholders. Thus, a stockholder does not automatically
assume the liabilities of the corporation of which he is a stockholder. As explained in Philippine National Bankv. Hydro Resources Contractors
Corporation:118
A corporation is an artificial entitycreated 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. It has a personality separate and distinct from that of its stockholders and from that of other corporations
to which it may be connected. As a consequence of its status as a distinct legal entityand as a result of a conscious policy decision to promote capital
formation, a corporation incurs its own liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the separate
juridical personality ofa corporation, the corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for
shareholders is the principle of limited liability.119
In fact, even the ownership by a single stockholder of all or nearly all the capital stock of a corporation is not, in and of itself, a ground for disregarding
a corporations separate personality. As explained in Secosa v. Heirs of Francisco:120
It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate from thatof its stockholders or members. It has
a personality separate and distinct from those of the persons composing it as well as from that of any other entity to which it may be related. Mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for
disregarding the separate corporate personality.A corporations authority to act and its liability for its actions are separate and apart from the individuals
who own it.
The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a general rule, a
corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the
corporate entity may be disregarded in the interest of justice in such cases asfraud that may work inequities among members of the corporation
internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical
personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed.121 (Emphasis
supplied)
AEVs status as ATSCs stockholder is, in and of itself, insufficient to make AEV liable for ATSCs obligations. Moreover, the SPA does not contain any
stipulation which makes AEV assume ATSCs obligations. It is true that Section 6.8 of the SPA stipulates that the rights and obligations arising from
Annex SL-V are not terminated. But all that Section 6.8 does is recognize that the obligations under Annex SL-V subsist despite the termination of the
January 8, 1996 Agreement. At no point does the text of Section 6.8 support the position that AEV steps into the shoes of the obligor under Annex SL-V
and assumes its obligations.
Neither does Section 6.5 of the SPAsuffice to compel AEV to submit itself to arbitration. While it is true that Section 6.5 mandates arbitration as the
mode for settling disputes between the parties to the SPA, Section 6.5 does not indiscriminatelycover any and all disputes which may arise between the
parties to the SPA. Rather, Section 6.5 is limited to "dispute[s] arising between the parties relating tothis Agreement [i.e., the SPA]." 122 To belabor the
point, the obligation which is subject of the present dispute pertains to Annex SL-V, not to the SPA. That the SPA, in Section 6.8, recognizes the
subsistence of Annex SL-Vis merely a factual recognition. It does not create new obligations and does not alter or modify the obligations spelled out in
Annex SL-V.
AEV was drawn into the present controversy on account of its having entered into the SPA. This SPA made AEV a stockholder of WLI/WG&A/ATSC. Even
then, AEV retained a personality separate and distinct from WLI/WG&A/ATSC. The SPA did not render AEV personally liable for the obligations of the
corporation whose stocks it held.
The obligation animating CAGLIs desire to arbitrate is rooted in Annex SL-V. Annex SL-V is a contractentirely different from the SPA. It created distinct
obligations for distinctparties. AEV was never a party to Annex SL-V. Rather than pertaining to AEV, Annex SL-V pertained to a different entity: WLI
(renamed WG&A then renamed ATSC). AEV is, thus, not bound by Annex SL-V.
On one hand, Annex SL-V does not stipulate that disputes arising from it are to be settled via arbitration.On the other hand, the SPA requires arbitration
as the mode for settling disputes relating to it and recognizes the subsistence of the obligations under Annex SL-V. But as a separate contract, the mere
mention of Annex SL-V in the SPA does not suffice to place Annex SL-V under the ambit of the SPA or to render it subject to the SPAs terms, such as
the requirement to arbitrate.
WHEREFORE, the petition is GRANTED. The assailed orders dated May 5, 2011 and June 24,2011 of the Regional Trial Court, Cebu City, Branch 10 in
Civil Case No. CEB-37004 are declared VOID. The Regional Trial Court, Cebu City, Branch 10 is ordered to DISMISSCivil Case No. CEB-37004.
SO ORDERED.
G.R. No. 181416 November 11, 2013
MEDICAL PLAZA MAKATI CONDOMINIUM CORPORATION, Petitioner,

vs.
ROBERT H. CULLEN, Respondent.
DECISION
PERALTA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the Court of Appeals (CA) Decision1 dated July 10, 2007 and
Resolution2 dated January 25, 2008 in CA-G.R. CV No. 86614. The assailed decision reversed and set aside the September 9, 2005 Order 3 of the
Regional Trial Court (RTC) of Makati, Branch 58 in Civil Case No. 03-1018; while the assailed resolution denied the separate motions for reconsideration
filed by petitioner Medical Plaza Makati Condominium Corporation (MPMCC) and Meridien Land Holding, Inc. (MLHI).
The factual and procedural antecedents are as follows:
Respondent Robert H. Cullen purchased from MLHI condominium Unit No. 1201 of the Medical Plaza Makati covered by Condominium Certificate of Title
No. 45808 of the Register of Deeds of Makati. Said title was later cancelled and Condominium Certificate of Title No. 64218 was issued in the name of
respondent.
On September 19, 2002, petitioner, through its corporate secretary, Dr. Jose Giovanni E. Dimayuga, demanded from respondent payment for alleged
unpaid association dues and assessments amounting to 145,567.42. Respondent disputed this demand claiming that he had been religiously paying his
dues shown by the fact that he was previously elected president and director of petitioner. 4 Petitioner, on the other hand, claimed that respondents
obligation was a carry-over of that of MLHI.5 Consequently, respondent was prevented from exercising his right to vote and be voted for during the
2002 election of petitioners Board of Directors.6 Respondent thus clarified from MLHI the veracity of petitioners claim, but MLHI allegedly claimed that
the same had already been settled.7 This prompted respondent to demand from petitioner an explanation why he was considered a delinquent payer
despite the settlement of the obligation. Petitioner failed to make such explanation. Hence, the Complaint for Damages8 filed by respondent against
petitioner and MLHI, the pertinent portions of which read:
xxxx
6. Thereafter, plaintiff occupied the said condominium unit no. 1201 and religiously paid all the corresponding monthly
contributions/association dues and other assessments imposed on the same. For the years 2000 and 2001, plaintiff served as President and
Director of the Medical Plaza Makati Condominium Corporation;
7. Nonetheless, on September 19, 2002, plaintiff was shocked/surprised to receive a letter from the incumbent Corporate Secretary of the
defendant Medical Plaza Makati, demanding payment of alleged unpaid association dues and assessments arising from plaintiffs condominium
unit no. 1201. The said letter further stressed that plaintiff is considered a delinquent member of the defendant Medical Plaza Makati.
x x x;
8. As a consequence, plaintiff was not allowed to file his certificate of candidacy as director. Being considered a delinquent, plaintiff was also
barred from exercising his right to vote in the election of new members of the Board of Directors x x x;
9. x x x Again, prior to the said election date, x x x counsel for the defendant [MPMCC] sent a demand letter to plaintiff, anent the said
delinquency, explaining that the said unpaid amount is a carry-over from the obligation of defendant Meridien. x x x;
10. Verification with the defendant [MPMCC] resulted to the issuance of a certification stating that Condominium Unit 1201 has an outstanding
unpaid obligation in the total amount of 145,567.42 as of November 30, 2002, which again, was attributed by defendant [MPMCC] to
defendant Meridien. x x x;
11. Due to the seriousness of the matter, and the feeling that defendant Meridien made false representations considering that it fully
warranted to plaintiff that condominium unit 1201 is free and clear from all liens and encumbrances, the matter was referred to counsel, who
accordingly sent a letter to defendant Meridien, to demand for the payment of said unpaid association dues and other assessments imposed
on the condominium unit and being claimed by defendant [MPMCC]. x x x;
12. x x x defendant Meridien claimed however, that the obligation does not exist considering that the matter was already settled and paid by
defendant Meridien to defendant [MPMCC]. x x x;
13. Plaintiff thus caused to be sent a letter to defendant [MPMCC] x x x. The said letter x x x sought an explanation on the fact that, as per
the letter of defendant Meridien, the delinquency of unit 1201 was already fully paid and settled, contrary to the claim of defendant [MPMCC].
x x x;
14. Despite receipt of said letter on April 24, 2003, and to date however, no explanation was given by defendant [MPMCC], to the damage
and prejudice of plaintiff who is again obviously being barred from voting/participating in the election of members of the board of directors for
the year 2003;
15. Clearly, defendant [MPMCC] acted maliciously by insisting that plaintiff is a delinquent member when in fact, defendant Meridien had
already paid the said delinquency, if any. The branding of plaintiff as delinquent member was willfully and deceitfully employed so as to
prevent plaintiff from exercising his right to vote or be voted as director of the condominium corporation; 16. Defendant [MPMCC]s ominous
silence when confronted with claim of payment made by defendant Meridien is tantamount to admission that indeed, plaintiff is not really a
delinquent member;
17. Accordingly, as a direct and proximate result of the said acts of defendant [MPMCC], plaintiff experienced/suffered from mental anguish,
moral shock, and serious anxiety. Plaintiff, being a doctor of medicine and respected in the community further suffered from social humiliation
and besmirched reputation thereby warranting the grant of moral damages in the amount of 500,000.00 and for which defendant [MPMCC]
should be held liable;
18. By way of example or correction for the public good, and as a stern warning to all similarly situated, defendant [MPMCC] should be
ordered to pay plaintiff exemplary damages in the amount of 200,000.00;
19. As a consequence, and so as to protect his rights and interests, plaintiff was constrained to hire the services of counsel, for an acceptance
fee of 100,000.00 plus 2,500.00 per every court hearing attended by counsel;
20. In the event that the claim of defendant [MPMCC] turned out to be true, however, the herein defendant Meridien should be held liable
instead, by ordering the same to pay the said delinquency of condominium unit 1201 in the amount of 145,567.42 as of November 30, 2002
as well as the above damages, considering that the non-payment thereof would be the proximate cause of the damages suffered by plaintiff;9
Petitioner and MLHI filed their separate motions to dismiss the complaint on the ground of lack of jurisdiction. 10 MLHI claims that it is the Housing and
Land Use Regulatory Board (HLURB) which is vested with the exclusive jurisdiction to hear and decide the case. Petitioner, on the other hand, raises the
following specific grounds for the dismissal of the complaint: (1) estoppel as respondent himself approved the assessment when he was the president;
(2) lack of jurisdiction as the case involves an intra-corporate controversy; (3) prematurity for failure of respondent to exhaust all intra-corporate
remedies; and (4) the case is already moot and academic, the obligation having been settled between petitioner and MLHI.11
On September 9, 2005, the RTC rendered a Decision granting petitioners and MLHIs motions to dismiss and, consequently, dismissing respondents
complaint.
The trial court agreed with MLHI that the action for specific performance filed by respondent clearly falls within the exclusive jurisdiction of the
HLURB.12 As to petitioner, the court held that the complaint states no cause of action, considering that respondents obligation had already been settled
by MLHI. It, likewise, ruled that the issues raised are intra-corporate between the corporation and member.13
On appeal, the CA reversed and set aside the trial courts decision and remanded the case to the RTC for further proceedings. Contrary to the RTC
conclusion, the CA held that the controversy is an ordinary civil action for damages which falls within the jurisdiction of regular courts. 14 It explained
that the case hinged on petitioners refusal to confirm MLHIs claim that the subject obligation had already been settled as early as 1998 causing
damage to respondent.15 Petitioners and MLHIs motions for reconsideration had also been denied.16
Aggrieved, petitioner comes before the Court based on the following grounds:
I.
THE COURT A QUO HAS DECIDED A QUESTION OF SUBSTANCE, NOT THERETOFORE DETERMINED BY THE SUPREME COURT, OR HAS
DECIDED IT IN A WAY NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THE SUPREME COURT WHEN IT
DECLARED THE INSTANT CASE AN ORDINARY ACTION FOR DAMAGES INSTEAD OF AN INTRA-CORPORATE CONTROVERSY
COGNIZABLE BY A SPECIAL COMMERCIAL COURT.
II.
THE COURT A QUO HAS DECIDED THE INSTANT CASE IN A WAY NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS
OF THE SUPREME COURT WHEN IT TOOK COGNIZANCE OF THE APPEAL WHILE RAISING ONLY PURE QUESTIONS OF LAW.17
The petition is meritorious.
It is a settled rule that jurisdiction over the subject matter is determined by the allegations in the complaint. It is not affected by the pleas or the
theories set up by the defendant in an answer or a motion to dismiss. Otherwise, jurisdiction would become dependent almost entirely upon the whims
of the defendant.18 Also illuminating is the Courts pronouncement in Go v. Distinction Properties Development and Construction, Inc.:19
Basic as a hornbook principle is that jurisdiction over the subject matter of a case is conferred by law and determined by the allegations in the complaint
which comprise a concise statement of the ultimate facts constituting the plaintiffs cause of action. The nature of an action, as well as which court or
body has jurisdiction over it, is determined based on the allegations contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff
is entitled to recover upon all or some of the claims asserted therein. The averments in the complaint and the character of the relief sought are the ones
to be consulted. Once vested by the allegations in the complaint, jurisdiction also remains vested irrespective of whether or not the plaintiff is entitled to
recover upon all or some of the claims asserted therein. x x x20
Based on the allegations made by respondent in his complaint, does the controversy involve intra-corporate issues as would fall within the jurisdiction of
the RTC sitting as a special commercial court or an ordinary action for damages within the jurisdiction of regular courts?
In determining whether a dispute constitutes an intra-corporate controversy, the Court uses two tests, namely, the relationship test and the nature of
the controversy test.21
An intra-corporate controversy is one which pertains to any of the following relationships: (1) between the corporation, partnership or association and
the public; (2) between the corporation, partnership or association and the State insofar as its franchise, permit or license to operate is concerned; (3)
between the corporation, partnership or association and its stockholders, partners, members or officers; and (4) among the stockholders, partners or
associates themselves.22 Thus, under the relationship test, the existence of any of the above intra-corporate relations makes the case intra-
corporate.23
Under the nature of the controversy test, "the controversy must not only be rooted in the existence of an intra-corporate relationship, but must as well
pertain to the enforcement of the parties correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory
rules of the corporation."24 In other words, jurisdiction should be determined by considering both the relationship of the parties as well as the nature of
the question involved.25
Applying the two tests, we find and so hold that the case involves intra-corporate controversy. It obviously arose from the intra-corporate relations
between the parties, and the questions involved pertain to their rights and obligations under the Corporation Code and matters relating to the regulation
of the corporation.26
Admittedly, petitioner is a condominium corporation duly organized and existing under Philippine laws, charged with the management of the Medical
Plaza Makati. Respondent, on the other hand, is the registered owner of Unit No. 1201 and is thus a stockholder/member of the condominium
corporation. Clearly, there is an intra-corporate relationship between the corporation and a stockholder/member.
The nature of the action is determined by the body rather than the title of the complaint. 1wphi1 Though denominated as an action for damages, an
examination of the allegations made by respondent in his complaint shows that the case principally dwells on the propriety of the assessment made by
petitioner against respondent as well as the validity of petitioners act in preventing respondent from participating in the election of the corporations
Board of Directors. Respondent contested the alleged unpaid dues and assessments demanded by petitioner.
The issue is not novel. The nature of an action involving any dispute as to the validity of the assessment of association dues has been settled by the
Court in Chateau de Baie Condominium Corporation v. Moreno.27 In that case, respondents therein filed a complaint for intra-corporate dispute against
the petitioner therein to question how it calculated the dues assessed against them, and to ask an accounting of association dues. Petitioner, however,
moved for the dismissal of the case on the ground of lack of jurisdiction alleging that since the complaint was against the owner/developer of a
condominium whose condominium project was registered with and licensed by the HLURB, the latter has the exclusive jurisdiction. In sustaining the
denial of the motion to dismiss, the Court held that the dispute as to the validity of the assessments is purely an intra-corporate matter between
petitioner and respondent and is thus within the exclusive jurisdiction of the RTC sitting as a special commercial court. More so in this case as
respondent repeatedly questioned his characterization as a delinquent member and, consequently, petitioners decision to bar him from exercising his
rights to vote and be voted for. These issues are clearly corporate and the demand for damages is just incidental. Being corporate in nature, the issues
should be threshed out before the RTC sitting as a special commercial court. The issues on damages can still be resolved in the same special
commercial court just like a regular RTC which is still competent to tackle civil law issues incidental to intra-corporate disputes filed before it.28
Moreover, Presidential Decree No. 902-A enumerates the cases over which the Securities and Exchange Commission (SEC) exercises exclusive
jurisdiction:
xxxx
b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members or associates; between
any or all of them and the corporation, partnership or association of which they are stockholders, members, or associates, respectively; and
between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such
entity; and
c) Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations, partnerships, or
associations.29
To be sure, this action partakes of the nature of an intra-corporate controversy, the jurisdiction over which pertains to the SEC. Pursuant to Section 5.2
of Republic Act No. 8799, otherwise known as the Securities Regulation Code, the jurisdiction of the SEC over all cases enumerated under Section 5 of
Presidential Decree No. 902-A has been transferred to RTCs designated by this Court as Special Commercial Courts.30 While the CA may be correct that
the RTC has jurisdiction, the case should have been filed not with the regular court but with the branch of the RTC designated as a special commercial
court. Considering that the RTC of Makati City, Branch 58 was not designated as a special commercial court, it was not vested with jurisdiction over
cases previously cognizable by the SEC.31 The CA, therefore, gravely erred in remanding the case to the RTC for further proceedings.
Indeed, Republic Act (RA) No. 9904, or the Magna Carta for Homeowners and Homeowners Associations, approved on January 7, 2010 and became
effective on July 10, 2010, empowers the HLURB to hear and decide inter-association and/or intra-association controversies or conflicts concerning
homeowners associations. However, we cannot apply the same in the present case as it involves a controversy between a condominium unit owner and
a condominium corporation. While the term association as defined in the law covers homeowners associations of other residential real property which is
broad enough to cover a condominium corporation, it does not seem to be the legislative intent. A thorough review of the deliberations of the bicameral
conference committee would show that the lawmakers did not intend to extend the coverage of the law to such kind of association. We quote
hereunder the pertinent portion of the Bicameral Conference Committees deliberation, to wit:
THE CHAIRMAN (SEN. ZUBIRI). Lets go back, Mr. Chair, very quickly on homeowners.
THE ACTING CHAIRMAN (REP. ZIALCITA). Ang sa akin lang, I think our views are similar, Your Honor, Senator Zubiri, the entry of the condominium
units might just complicate the whole matters. So wed like to put it on record that were very much concerned about the plight of the Condominium
Unit Homeowners Association. But this could very well be addressed on a separate bill that Im willing to co-sponsor with the distinguished Senator
Zubiri, to address in the Condominium Act of the Philippines, rather than address it here because it might just create a red herring into the entire thing
and it will just complicate matters, hindi ba?
THE CHAIRMAN (SEN. ZUBIRI). I also agree with you although I sympathize with them---although we sympathize with them and we feel that many
times their rights have been also violated by abusive condominium corporations. However, there are certain things that we have to reconcile. There are
certain issues that we have to reconcile with this version.
In the Condominium Code, for example, they just raised a very peculiar situation under the Condominium Code --- Condominium Corporation Act. Its
five years the proxy, whereas here, its three years. So there would already be violation or there will be already a problem with their version and our
version. Sino ang matutupad doon? Will it be our version or their version?
So I agree that has to be studied further. And because they have a law pertaining to the condominium housing units, I personally feel that it would
complicate matters if we include them. Although I agree that they should be looked after and their problems be looked into.
Probably we can ask our staff, Your Honor, to come up already with the bill although we have no more time. Hopefully we can tackle this again on the
15th Congress. But I agree with the sentiments and the inputs of the Honorable Chair of the House panel.
May we ask our resource persons to also probably give comments?
Atty. Dayrit.
MR. DAYRIT.
Yes I agree with you. There are many, I think, practices in their provisions in the Condominium Law that may be conflicting with this version of ours.
For instance, in the case of, lets say, the condominium, the so-called common areas and/or maybe so called open spaces that they may have, especially
common areas, they are usually owned by the condominium corporation. Unlike a subdivision where the open spaces and/or the common areas are not
necessarily owned by the association. Because sometimes --- generally these are donated to the municipality or to the city. And it is only when the city
or municipality gives the approval or the conformity that this is donated to the homeowners association. But generally, under PD [Presidential Decree]
957, its donated. In the Condominium Corporation, hindi. Lahat ng mga open spaces and common areas like corridors, the function rooms and
everything, are owned by the corporation. So thats one main issue that can be conflicting.
THE CHAIRMAN (SEN. ZUBIRI). Ill just ask for a one-minute suspension so we can talk.
THE ACTING CHAIRMAN (REP. ZIALCITA). Unless you want to put a catchall phrase like what we did in the Senior Citizens Act. Something like, to the
extent --- paano ba iyon? To the extent that it is practicable and applicable, the rights and benefits of the homeowners, are hereby extended to the ---
mayroon kaming ginamit na phrase eh...to the extent that it be practicable and applicable to the unit homeoweners, is hereby extended, something like
that. Its a catchall phrase. But then again, it might create a...
MR. JALANDONI. It will become complicated. There will be a lot of conflict of laws between the two laws.
THE ACTING CHAIRMAN (REP. ZIALCITA). Kaya nga eh. At saka, I dont know. I think the --- mayroon naman silang protection sa ano eh, di ba? Buyers
decree doon sa Condominium Act. Im sure there are provisions there eh. Huwag na lang, huwag na lang.
MR. JALANDONI. Mr. Chairman, I think it would be best if your previous comments that youd be supporting an amendment. 1wphi1 I think that would
be --- Well, that would be the best course of action with all due respect.
THE ACTING CHAIRMAN (REP. ZIALCITA). Yeah. Okay. Thank you. So iyon na lang final proposal naming yung catchall phrase, "With respect to
the..."32
xxxx
THE CHAIRMAN (SEN. ZUBIRI). xxx And so, what is their final decision on the definition of homeowners?
THE ACTING CHAIRMAN (REP. ZIALCITA).
We stick to the original, Mr. Chairman. Well just open up a whole can of worms and a whole new ball game will come into play. Besides, I am not
authorized, neither are you, by our counterparts to include the condominium owners.
THE CHAIRMAN (SEN. ZUBIRI).
Basically that is correct. We are not authorized by the Senate nor because we have discussed this lengthily on the floor, actually, several months on
the floor. And we dont have the authority as well for other Bicam members to add a provision to include a separate entity that has already their legal or
their established Republic Act tackling on that particular issue. But we just like to put on record, we sympathize with the plight of our friends in the
condominium associations and we will just guarantee them that we will work on an amendment to the Condominium Corporation Code. So with that
we skipped, that is correct, we have to go back to homeowners association definition, Your Honor, because we had skipped it altogether. So just
quickly going back to Page 7 because there are amendments to the definition of homeowners. If it is alright with the House Panel, adopt the opening
phrase of Subsection 7 of the Senate version as opening phrase of Subsection 10 of the reconciled version.
x x x x33
To be sure, RA 4726 or the Condominium Act was enacted to specifically govern a condominium. Said law sanctions the creation of the condominium
corporation which is especially formed for the purpose of holding title to the common area, in which the holders of separate interests shall automatically
be members or shareholders, to the exclusion of others, in proportion to the appurtenant interest of their respective units. 34 The rights and obligations
of the condominium unit owners and the condominium corporation are set forth in the above Act.
Clearly, condominium corporations are not covered by the amendment. Thus, the intra-corporate dispute between petitioner and respondent is still
within the jurisdiction of the RTC sitting as a special commercial court and not the HLURB. The doctrine laid down by the Court in Chateau de Baie
Condominium Corporation v. Moreno35 which in turn cited Wack Wack Condominium Corporation, et al v. CA36 is still a good law.
WHEREFORE, we hereby GRANT the petition and REVERSE the Court of Appeals Decision dated July 10, 2007 and Resolution dated January 25, 2008 in
CA-G.R. CV No. 86614. The Complaint before the Regional Trial Court of Makati City, Branch 58, which is not a special commercial court, docketed as
Civil Case No. 03-1018 is ordered DISMISSED for lack of jurisdiction. Let the case be REMANDED to the Executive Judge of the Regional Trial Court of
Makati City for re-raffle purposes among the designated special commercial courts.
SO ORDERED.
G.R. No. 176579 October 9, 2012
HEIRS OF WILSON P. GAMBOA,* Petitioners,

vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE
OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L.
NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND EXCHANGE
COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.
RESOLUTION
CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V.
Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and Exchange Commission (SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe SEC, 5 assailing the 28 June 2011 Decision. However,
it subsequently filed a Consolidated Comment on behalf of the State,6 declaring expressly that it agrees with the Court's definition of the term "capital"
in Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012, the OSG reiterated its position consistent with the Court's 28
June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-
reaching implications to the national economy. In fact, a resolution of this issue will determine whether Filipinos are masters, or second-class citizens, in
their own country. What is at stake here is whether Filipinos or foreigners will have effective control of the Philippine national economy. Indeed, if
ever there is a legal issue that has far-reaching implications to the entire nation, and to future generations of Filipinos, it is the threshold legal issue
presented in this case.
Contrary to Pangilinans narrow view, the serious economic consequences resulting in the interpretation of the term "capital" in Section 11, Article XII of
the Constitution undoubtedly demand an immediate adjudication of this issue. Simply put, the far-reaching implications of this issue justify the
treatment of the petition as one for mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board ,8 the Court deemed it wise and expedient to resolve the case although the petition for declaratory
relief could be outrightly dismissed for being procedurally defective. There, appellant admittedly had already committed a breach of the Public Service
Act in relation to the Anti-Dummy Law since it had been employing non- American aliens long before the decision in a prior similar case. However, the
main issue in Luzon Stevedoring was of transcendental importance, involving the exercise or enjoyment of rights, franchises, privileges, properties and
businesses which only Filipinos and qualified corporations could exercise or enjoy under the Constitution and the statutes. Moreover, the same issue
could be raised by appellant in an appropriate action. Thus, in Luzon Stevedoring the Court deemed it necessary to finally dispose of the case for the
guidance of all concerned, despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed procedural defect of the petition and the pivotal legal issue involved, resemble
those in Luzon Stevedoring. Consequently, in the interest of substantial justice and faithful adherence to the Constitution, we opted to resolve this case
for the guidance of the public and all concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been settled and defined to refer to the total outstanding
shares of stock, whether voting or non-voting. In fact, movants claim that the SEC, which is the administrative agency tasked to enforce the 60-40
ownership requirement in favor of Filipino citizens in the Constitution and various statutes, has consistently adopted this particular definition in its
numerous opinions. Movants point out that with the 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream
redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term "capital" found in various economic provisions of
the 1935, 1973 and 1987 Constitutions. There has never been a judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987
Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the Court in defining the term "capital" in its 28 June 2011
Decision modified, reversed, or set aside the purported long-standing definition of the term "capital," which supposedly refers to the total outstanding
shares of stock, whether voting or non-voting. To repeat, until the present case there has never been a Court ruling categorically defining the term
"capital" found in the various economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term "capital" as referring to both voting and non-voting
shares (combined total of common and preferred shares) are, in the first place, conflicting and inconsistent. There is no basis whatsoever to the claim
that the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital" contrary to the definition that this Court adopted in
its 28 June 2011 Decision.
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in Section 9, Article XIV of the 1973 Constitution was raised,
that is, whether the term "capital" includes "both preferred and common stocks." The issue was raised in relation to a stock-swap transaction between a
Filipino and a Japanese corporation, both stockholders of a domestic corporation that owned lands in the Philippines. Then Minister of Justice Estelito P.
Mendoza ruled that the resulting ownership structure of the corporation would be unconstitutional because 60% of the voting stock would be owned
by Japanese while Filipinos would own only 40% of the voting stock, although when the non-voting stock is added, Filipinos would own 60% of the
combined voting and non-voting stock. This ownership structure is remarkably similar to the current ownership structure of PLDT. Minister
Mendoza ruled:
xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and preferred) while the Japanese
investors control sixty percent (60%) of the common (voting) shares.
It is your position that x x x since Section 9, Article XIV of the Constitution uses the word "capital," which is construed
"to include both preferred and common shares" and "that where the law does not distinguish, the courts shall not
distinguish."
xxxx
In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question may not be
constitutionally upheld. While it may be ordinary corporate practice to classify corporate shares into common voting shares and
preferred non-voting shares, any arrangement which attempts to defeat the constitutional purpose should be eschewed. Thus, the
resultant equity arrangement which would place ownership of 60%11 of the common (voting) shares in the Japanese
group, while retaining 60% of the total percentage of common and preferred shares in Filipino hands would amount to
circumvention of the principle of control by Philippine stockholders that is implicit in the 60% Philippine nationality
requirement in the Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article XIV of the 1973 Constitution includes "both
preferred and common stocks" treated as the same class of shares regardless of differences in voting rights and privileges. Minister Mendoza stressed
that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution is not complied with unless the corporation " satisfies the
criterion of beneficial ownership" and that in applying the same "the primordial consideration is situs of control."
On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan Pantaleon & San Jose, then SEC General Counsel
Vernette G. Umali-Paco applied the Voting Control Test, that is, using only the voting stock to determine whether a corporation is a Philippine
national. The Opinion states:
Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national because: (1) sixty percent (60%) of
its outstanding capital stock entitled to vote is owned by a Philippine national, the Trustee; and (2) at least sixty percent (60%) of
the ERF will accrue to the benefit of Philippine nationals. Still pursuant to the Control Test, MLRCs investment in 60% of
BFDCs outstanding capital stock entitled to vote shall be deemed as of Philippine nationality, thereby qualifying BFDC
to own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals, considering that: (1) sixty percent (60%) of
their respective outstanding capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee, in the case of
MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their respective board of directors are Filipino citizens. (Boldfacing
and italicization supplied)
Clearly, these DOJ and SEC opinions are compatible with the Courts interpretation of the 60-40 ownership requirement in favor of Filipino citizens
mandated by the Constitution for certain economic activities. At the same time, these opinions highlight the conflicting, contradictory, and inconsistent
positions taken by the DOJ and the SEC on the definition of the term "capital" found in the economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC rules and regulations because only the SEC en banc can adopt rules
and regulations. As expressly provided in Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any of its individual Commissioner
or staff the power to adopt any rule or regulation. Further, under Section 5.1 of the same Code, it is the SEC as a collegial body , and not any
of its legal officers, that is empowered to issue opinions and approve rules and regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or office of the Commission, an
individual Commissioner or staff member of the Commission except its review or appellate authority and its power to adopt, alter
and supplement any rule or regulation.
The Commission may review upon its own initiative or upon the petition of any interested party any action of any department or office,
individual Commissioner, or staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and shall have the powers and
functions provided by this Code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and
supervise compliance with such rules, regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have the effect of SEC rules or regulations is ultra
vires. Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the force and effect of rules or regulations.
Section 4.6 of the Code bars the SEC en banc from delegating to any individual Commissioner or staff the power to adopt rules or regulations. In short,
any opinion of individual Commissioners or SEC legal officers does not constitute a rule or regulation of the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual commissioners or legal staff, is empowered to issue
opinions which have the same binding effect as SEC rules and regulations, thus:
JUSTICE CARPIO:
So, under the law, it is the Commission En Banc that can issue an
SEC Opinion, correct?
COMMISSIONER GAITE:13
Thats correct, Your Honor.
JUSTICE CARPIO:
Can the Commission En Banc delegate this function to an SEC officer?
COMMISSIONER GAITE:
Yes, Your Honor, we have delegated it to the General Counsel.
JUSTICE CARPIO:
It can be delegated. What cannot be delegated by the Commission En Banc to a commissioner or an individual employee of
the Commission?
COMMISSIONER GAITE:
Novel opinions that [have] to be decided by the En Banc...
JUSTICE CARPIO:
What cannot be delegated, among others, is the power to adopt or amend rules and regulations, correct?
COMMISSIONER GAITE:
Thats correct, Your Honor.

JUSTICE CARPIO:
So, you combine the two (2), the SEC officer, if delegated that power, can issue an opinion but that opinion
does not constitute a rule or regulation, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, all of these opinions that you mentioned they are not rules and regulations, correct?
COMMISSIONER GAITE:
They are not rules and regulations.
JUSTICE CARPIO:
If they are not rules and regulations, they apply only to that particular situation and will not constitute a precedent, correct?
COMMISSIONER GAITE:
Yes, Your Honor.14 (Emphasis supplied)
Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC, has adopted even the
Grandfather Rule in determining compliance with the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of the required Filipino " ownership and
control," is laid down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. ,15 to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily,
therefore, the Rule interpreting the constitutional provision should not diminish that right through the legal fiction of
corporate ownership and control. But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored
foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine
the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or
business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined by ascertaining if 60% of the
investing corporations outstanding capital stock is owned by "Filipino citizens", or as interpreted, by natural or individual Filipino
citizens. If such investing corporation is in turn owned to some extent by another investing corporation, the same process must be
observed. One must not stop until the citizenships of the individual or natural stockholders of layer after layer of investing corporations
have been established, the very essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In one of the discussions on
what is now Article XII of the present Constitution, the framers made the following exchange:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40
in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with the question: Where do we base the equity requirement, is it
on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation? Will
the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who
provided us a draft. The phrase that is contained here which we adopted from the UP draft is 60 percent of voting
stock.
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital
stock shall be entitled to vote.

MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another corporation, say, a corporation
with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution to
engage in certain economic activities applies not only to voting control of the corporation, but also to the beneficial ownership of the corporation.
Thus, in our 28 June 2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial ownership of
60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required . The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation is a "Philippine national."
The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions which respondents relied upon, is merely preliminary
and an opinion only of such officers. To repeat, any such opinion does not constitute an SEC rule or regulation. In fact, many of these opinions contain a
disclaimer which expressly states: "x x x the foregoing opinion is based solely on facts disclosed in your query and relevant only to the particular
issue raised therein and shall not be used in the nature of a standing rule binding upon the Commission in other cases whether of similar
or dissimilar circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute binding precedents on any one, not even on the
SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither conclusive nor controlling and thus, do not bind the
Court. It is hornbook doctrine that any interpretation of the law that administrative or quasi-judicial agencies make is only preliminary, never conclusive
on the Court. The power to make a final interpretation of the law, in this case the term "capital" in Section 11, Article XII of the 1987 Constitution, lies
with this Court, not with any other government entity.
In his motion for reconsideration, the PSE President cites the cases of National Telecommunications Commission v. Court of Appeals 17 and Philippine
Long Distance Telephone Company v. National Telecommunications Commission 18 in arguing that the Court has already defined the term "capital" in
Section 11, Article XII of the 1987 Constitution.19
The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of Appeals20 and Philippine Long Distance Telephone
Company v. National Telecommunications Commission, 21 the Court did not define the term "capital" as found in Section 11, Article XII of the 1987
Constitution. In fact, these two cases never mentioned, discussed or cited Section 11, Article XII of the Constitution or any of its
economic provisions, and thus cannot serve as precedent in the interpretation of Section 11, Article XII of the Constitution . These two
cases dealt solely with the determination of the correct regulatory fees under Section 40(e) and (f) of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of other public services and/or in the
regulation or fixing of their rates, twenty centavos for each one hundred pesos or fraction thereof, of the capital stock subscribed or
paid, or if no shares have been issued, of the capital invested, or of the property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction thereof, of the increased capital.
(Emphasis supplied)
The Courts interpretation in these two cases of the terms "capital stock subscribed or paid," "capital stock" and "capital" does not pertain to, and cannot
control, the definition of the term "capital" as used in Section 11, Article XII of the Constitution, or any of the economic provisions of the Constitution
where the term "capital" is found. The definition of the term "capital" found in the Constitution must not be taken out of context. A careful reading of
these two cases reveals that the terms "capital stock subscribed or paid," "capital stock" and "capital" were defined solely to determine the basis for
computing the supervision and regulation fees under Section 40(e) and (f) of the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the ideals that the Constitution intends to achieve. 22
The Preamble reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and humane society, and establish a
Government that shall embody our ideals and aspirations, promote the common good, conserve and develop our patrimony, and
secure to ourselves and our posterity, the blessings of independence and democracy under the rule of law and a regime of truth, justice,
freedom, love, equality, and peace, do ordain and promulgate this Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the development of a national economy " effectively
controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:
Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates,
reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that
will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to
qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its
national goals and priorities.23
Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the Philippines or to corporations or associations at least
sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments." Thus,
in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty percent of the "capital" of
which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors
Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or
R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.
With respect to public utilities, the 1987 Constitution specifically ordains:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except
under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires.
The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines. (Emphasis supplied)
This provision, which mandates the Filipinization of public utilities, requires that any form of authorization for the operation of public utilities shall be
granted only to "citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens." "The provision is [an express] recognition of the sensitive and vital position of public utilities
both in the national economy and for national security."24
The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino citizens, or (2) corporations or associations at
least 60 percent of whose "capital" is owned by Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own and operate a
public utility. In the case of corporations or associations, at least 60 percent of their "capital" must be owned by Filipino citizens. In other words,
under Section 11, Article XII of the 1987 Constitution, to own and operate a public utility a corporations capital must at least be 60
percent owned by Philippine nationals.
IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted Republic Act No. 7042 or the Foreign
Investments Act of 1991 (FIA), as amended, which defined a "Philippine national" as follows:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund
will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of
the members of the Board of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation,
shall be considered a "Philippine national." (Boldfacing, italicization and underscoring supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a domestic corporation at least "60% of the capital
stock outstanding and entitled to vote" is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its predecessor statute, Executive Order No. 226
or the Omnibus Investments Code of 1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this Code states:
Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or association wholly-owned by citizens
of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty per cent (60%)
of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations
must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of
both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)
Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a Philippine national x x x shall do business
x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the effect that such business or economic
activity x x x would not conflict with the Constitution or laws of the Philippines."27 Thus, a "non-Philippine national" cannot own and operate a reserved
economic activity like a public utility. This means, of course, that only a "Philippine national" can own and operate a public utility.
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987 was a reiteration of the meaning of such
term as provided in Article 14 of the Omnibus Investments Code of 1981,28 to wit:
Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens
of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty per cent (60%)
of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own
stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations
must be owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of
both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a Philippine national x x x shall do business x x x in
the Philippines x x x without first securing a written certificate from the Board of Investments to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."29 Thus, a "non-Philippine national" cannot own and operate a reserved economic
activity like a public utility. Again, this means that only a "Philippine national" can own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment Incentives Act, which took effect on 16 September 1967,
contained a similar definition of a "Philippine national," to wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is a Philippine National and at least sixty per cent of the fund will
accrue to the benefit of Philippine Nationals: Provided, That where a corporation and its non-Filipino stockholders own stock in a
registered enterprise, at least sixty per cent of the capital stock outstanding and entitled to vote of both corporations must be owned
and held by the citizens of the Philippines and at least sixty per cent of the members of the Board of Directors of both corporations must
be citizens of the Philippines in order that the corporation shall be considered a Philippine National. (Boldfacing, italicization and
underscoring supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect on 30 September 1968, if the investment in a
domestic enterprise by non-Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise must obtain prior approval from the Board
of Investments before accepting such investment. Such approval shall not be granted if the investment "would conflict with existing constitutional
provisions and laws regulating the degree of required ownership by Philippine nationals in the enterprise."31 A "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. Again, this means that only a "Philippine national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or a domestic corporation "at least sixty
percent (60%) of the capital stock outstanding and entitled to vote " is owned by Filipino citizens. A domestic corporation is a "Philippine
national" only if at least 60% of its voting stock is owned by Filipino citizens. This definition of a "Philippine national" is crucial in the present case
because the FIA reiterates and clarifies Section 11, Article XII of the 1987 Constitution, which limits the ownership and operation of public utilities to
Filipino citizens or to corporations or associations at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of business and area of investment. The FIA spells
out the procedures by which non-Philippine nationals can invest in the Philippines. Among the key features of this law is the concept of a negative list or
the Foreign Investments Negative List.32 Section 8 of the law states:
SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative List]. - The Foreign Investment
Negative List shall have two 2 component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and
specific laws.
b. List B shall contain the areas of activities and enterprises regulated pursuant to law:
1. which are defense-related activities, requiring prior clearance and authorization from the Department of National Defense [DND] to
engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military
ordinance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a
substantial export component, to a non-Philippine national by the Secretary of National Defense; or
2. which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of
gambling; nightclubs, bars, beer houses, dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing, underscoring and
italicization supplied)
Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign Investment Negative List A consists of " areas
of activities reserved to Philippine nationals by mandate of the Constitution and specific laws ," where foreign equity participation in
any enterprise shall be limited to the maximum percentage expressly prescribed by the Constitution and other specific laws. In short,
to own and operate a public utility in the Philippines one must be a "Philippine national" as defined in the FIA. The FIA is abundant
notice to foreign investors to what extent they can invest in public utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the ownership and operation of public utilities, which
the Constitution expressly reserves to Filipino citizens and to corporations at least 60% owned by Filipino citizens. In other words, Negative List A of
the FIA reserves the ownership and operation of public utilities only to "Philippine nationals," defined in Section 3(a) of the FIA as "(1)
a citizen of the Philippines; x x x or (3) a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or (4) a corporation organized abroad
and registered as doing business in the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock outstanding
and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus Investments Code of 1981, to the enactment of
the Omnibus Investments Code of 1987, and to the passage of the present Foreign Investments Act of 1991, or for more than four decades, the
statutory definition of the term "Philippine national" has been uniform and consistent: it means a Filipino citizen, or a domestic
corporation at least 60% of the voting stock is owned by Filipinos. Likewise, these same statutes have uniformly and consistently
required that only "Philippine nationals" could own and operate public utilities in the Philippines. The following exchange during the Oral
Arguments is revealing:
JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991, x x x? And the FIA of 1991 took
effect in 1991, correct? Thats over twenty (20) years ago, correct?
COMMISSIONER GAITE:
JUSTICE CARPIO:
And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine nationals can own and operate public
utilities[], correct?
COMMISSIONER GAITE:
Yes, Your Honor.
JUSTICE CARPIO:
And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a citizen of the Philippines, or if it is a
corporation at least sixty percent (60%) of the voting stock is owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
JUSTICE CARPIO:
And, you are also aware that under the predecessor law of the Foreign Investments Act of 1991, the Omnibus Investments
Act of 1987, the same provisions apply: x x x only Philippine nationals can own and operate a public utility and the Philippine
national, if it is a corporation, x x x sixty percent (60%) of the capital stock of that corporation must be owned by citizens of
the Philippines, correct?
COMMISSIONER GAITE:
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments Act of 1981, the same rules apply: x
x x only a Philippine national can own and operate a public utility and a Philippine national, if it is a corporation, sixty percent
(60%) of its x x x voting stock, must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
JUSTICE CARPIO:
And even prior to that, under [the]1967 Investments Incentives Act and the Foreign Company Act of 1968, the same rules
applied, correct?
COMMISSIONER GAITE:
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law has been very consistent only a Philippine national can own
and operate a public utility, and a Philippine national, if it is a corporation, x x x at least sixty percent (60%) of
the voting stock must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.33 (Emphasis supplied)
Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which categorically prescribe that certain economic activities, like
the ownership and operation of public utilities, are reserved to corporations "at least sixty percent (60%) of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines." Foreign Investment Negative List A refers to "activities reserved to Philippine nationals by
mandate of the Constitution and specific laws." The FIA is the basic statute regulating foreign investments in the Philippines. Government
agencies tasked with regulating or monitoring foreign investments, as well as counsels of foreign investors, should start with the FIA in determining to
what extent a particular foreign investment is allowed in the Philippines. Foreign investors and their counsels who ignore the FIA do so at their own
peril. Foreign investors and their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise a red flag. There are already numerous opinions of
SEC legal officers that cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining whether a particular corporation is qualified
to own and operate a nationalized or partially nationalized business in the Philippines. This shows that SEC legal officers are not only aware of, but also
rely on and invoke, the provisions of the FIA in ascertaining the eligibility of a corporation to engage in partially nationalized industries. The following
are some of such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;
2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine Overseas Employment Administration;
3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S. Calma;
4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado.
The SEC legal officers occasional but blatant disregard of the definition of the term "Philippine national" in the FIA signifies their lack of integrity and
competence in resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA should be limited and interpreted to refer to corporations seeking to avail
of tax and fiscal incentives under investment incentives laws and cannot be equated with the term "capital" in Section 11, Article XII of the 1987
Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to "companies which have not registered and obtained
special incentives under the schemes established by those laws."
Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any enterprise. Tax and fiscal incentives to investments are
granted separately under the Omnibus Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to 56 of Book II of
the Omnibus Investments Code of 1987, which articles previously regulated foreign investments in nationalized or partially nationalized industries.
The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized industries. There is nothing in the FIA, or even in the
Omnibus Investments Code of 1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or its predecessor statutes do not apply
to enterprises not availing of tax and fiscal incentives under the Code. The FIA and its predecessor statutes apply to investments in all domestic
enterprises, whether or not such enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or its predecessor statutes.
The reason is quite obvious mere non-availment of tax and fiscal incentives by a non-Philippine national cannot exempt it from
Section 11, Article XII of the Constitution regulating foreign investments in public utilities. In fact, the Board of Investments Primer on
Investment Policies in the Philippines,34 which is given out to foreign investors, provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives, (i.e., the activity is not listed in the
IPP, and they are not exporting at least 70% of their production) may go ahead and make the investments without seeking incentives.
They only have to be guided by the Foreign Investments Negative List (FINL).
The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areas outside of this list are fully open to
foreign investors. (Emphasis supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the Constitution to engage in certain economic activities applies
not only to voting control of the corporation, but also to the beneficial ownership of the corporation. To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the Constitution. Full beneficial ownership
of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required . The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by "a trustee of funds for pension or other
employee retirement or separation benefits," the trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled
with appropriate voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but also to the
beneficial ownership of the corporation, it is therefore imperative that such requirement apply uniformly and across the board to all classes of shares,
regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital stock 35 consists of all classes of
shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in
the articles of incorporation.36
The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows denial of the right to vote in specific
corporate matters. Thus, common shares have the right to vote in the election of directors, while preferred shares may be denied such right.
Nonetheless, preferred shares, even if denied the right to vote in the election of directors, are entitled to vote on the following corporate matters: (1)
amendment of articles of incorporation; (2) increase and decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness; (4) sale,
lease, mortgage or other disposition of substantially all corporate assets; (5) investment of funds in another business or corporation or for a purpose
other than the primary purpose for which the corporation was organized; (6) adoption, amendment and repeal of by-laws; (7) merger and
consolidation; and (8) dissolution of corporation.37
Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares
without voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the eight specific
corporate matters mentioned above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and
preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares
must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 percent of such shares must necessarily be
owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares,
whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership
requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be
reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor
of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of
public utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the "controlling interest" in public utilities always lies in the hands of Filipino
citizens. This addresses and extinguishes Pangilinans worry that foreigners, owning most of the non-voting shares, will exercise greater control over
fundamental corporate matters requiring two-thirds or majority vote of all shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the Constitutional Commission to support his claim that the
term "capital" refers to the total outstanding shares of stock, whether voting or non-voting, the following excerpts of the deliberations reveal otherwise.
It is clear from the following exchange that the term "capital" refers to controlling interest of a corporation, thus:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-
40 in Section 9 and 2/3-1/3 in Section 15.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation"? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a draft.
The phrase that is contained here which we adopted from the UP draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be
entitled to vote.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in
another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes.39
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations at least sixty
percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens.
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the
capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a
situation where the corporation is controlled by foreigners despite being the minority because they have the voting
capital. That is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that
according to Commissioner Rodrigo, there are associations that do not have stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."
MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and underscoring supplied)
Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the corporation.
The use of the term "capital" was intended to replace the word "stock" because associations without stocks can operate public utilities as long as they
meet the 60-40 ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII of the Constitution. However, this did not change
the intent of the framers of the Constitution to reserve exclusively to Philippine nationals the "controlling interest" in public utilities.
During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the nationalists in the Convention."41 The same battle-cry
resulted in the nationalization of the public utilities.42 This is also the same intent of the framers of the 1987 Constitution who adopted the exact
formulation embodied in the 1935 and 1973 Constitutions on foreign equity limitations in partially nationalized industries.
The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Courts interpretation of the term "capital." In its Consolidated
Comment, the OSG explains that the deletion of the phrase "controlling interest" and replacement of the word "stock" with the term "capital" were
intended specifically to extend the scope of the entities qualified to operate public utilities to include associations without stocks. The framers omission
of the phrase "controlling interest" did not mean the inclusion of all shares of stock, whether voting or non-voting. The OSG reiterated essentially the
Courts declaration that the Constitution reserved exclusively to Philippine nationals the ownership and operation of public utilities consistent with the
States policy to "develop a self-reliant and independent national economy effectively controlled by Filipinos."
As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding capital stock, treated as a single class
regardless of the actual classification of shares, grossly contravenes the intent and letter of the Constitution that the "State shall develop a self-reliant
and independent national economy effectively controlled by Filipinos." We illustrated the glaring anomaly which would result in defining the term
"capital" as the total outstanding capital stock of a corporation, treated as a single class of shares regardless of the actual classification of shares, to
wit:
Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso ( 1.00) per share. Under the broad definition of the term "capital,"
such corporation would be considered compliant with the 40 percent constitutional limit on foreign equity of public utilities since the
overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in the election of directors, even if they hold
only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent, exercise control over the public utility. On the other
hand, the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence, have no control
over the public utility. This starkly circumvents the intent of the framers of the Constitution, as well as the clear language of the
Constitution, to place the control of public utilities in the hands of Filipinos. x x x
Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino board of directors, this situation does not
guarantee Filipino control and does not in any way cure the violation of the Constitution. The independence of the Filipino board members so elected by
such foreign shareholders is highly doubtful. As the OSG pointed out, quoting Justice George Sutherlands words in Humphreys Executor v. US,44 "x x x
it is quite evident that one who holds his office only during the pleasure of another cannot be depended upon to maintain an attitude of independence
against the latters will." Allowing foreign shareholders to elect a controlling majority of the board, even if all the directors are Filipinos, grossly
circumvents the letter and intent of the Constitution and defeats the very purpose of our nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:
The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in
its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.
During the Oral Arguments, the OSG emphasized that there was never a question on the intent of the framers of the Constitution to limit foreign
ownership, and assure majority Filipino ownership and control of public utilities. The OSG argued, "while the delegates disagreed as to the percentage
threshold to adopt, x x x the records show they clearly understood that Filipino control of the public utility corporation can only be and is obtained only
through the election of a majority of the members of the board."
Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23 August 1986 was the extent of majority Filipino
control of public utilities. This is evident from the following exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase "two thirds of whose voting stock or
controlling interest," and instead substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will read: "No
franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at least SIXTY PERCENT OF WHOSE CAPITAL is
owned by such citizens."
xxxx
THE PRESIDENT: Will Commissioner Jamir first explain?
MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous sections in which we fixed the Filipino
equity to 60 percent as against 40 percent for foreigners. It is only in this Section 15 with respect to public utilities that the committee
proposal was increased to two-thirds. I think it would be better to harmonize this provision by providing that even in the case of public
utilities, the minimum equity for Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had with representatives of the Filipino
majority owners of the international record carriers, and the subsequent memoranda they submitted to me. x x x
Their second point is that under the Corporation Code, the management and control of a corporation is vested in the board of directors,
not in the officers but in the board of directors. The officers are only agents of the board. And they believe that with 60 percent of the
equity, the Filipino majority stockholders undeniably control the board. Only on important corporate acts can the 40-percent foreign
equity exercise a veto, x x x.
x x x x45
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum by the spokesman of the Philippine
Chamber of Communications on why they would like to maintain the present equity, I am referring to the 66 2/3. They would prefer to
have a 75-25 ratio but would settle for 66 2/3. x x x
xxxx
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-thirds rather than the 60 percent?
MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino citizens.
x x x x46
While they had differing views on the percentage of Filipino ownership of capital, it is clear that the framers of the Constitution intended public utilities
to be majority Filipino-owned and controlled. To ensure that Filipinos control public utilities, the framers of the Constitution approved, as additional
safeguard, the inclusion of the last sentence of Section 11, Article XII of the Constitution commanding that "[t]he participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of
such corporation or association must be citizens of the Philippines." In other words, the last sentence of Section 11, Article XII of the Constitution
mandates that (1) the participation of foreign investors in the governing body of the corporation or association shall be limited to their proportionate
share in the capital of such entity; and (2) all officers of the corporation or association must be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers of the corporation or association to be Filipino citizens
specifically to prevent management contracts, which were designed primarily to circumvent the Filipinization of public utilities, and to assure Filipino
control of public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a phrase which states: "THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES." I have with me their position paper.
THE PRESIDENT. The Commissioner may proceed.
MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which Commissioner Romulo mentioned
Philippine Global Communications, Eastern Telecommunications, Globe Mackay Cable are 40-percent owned by foreign multinational
companies and 60-percent owned by their respective Filipino partners. All three, however, also have management contracts with these
foreign companies Philcom with RCA, ETPI with Cable and Wireless PLC, and GMCR with ITT. Up to the present time, the general
managers of these carriers are foreigners. While the foreigners in these common carriers are only minority owners, the foreign
multinationals are the ones managing and controlling their operations by virtue of their management contracts and by virtue of their
strength in the governing bodies of these carriers.47
xxxx
MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose an amendment with respect to the
operating management of public utilities, and in this amendment, we are associated with Fr. Bernas, Commissioners Nieva and Rodrigo.
Commissioner Rosario Braid will state this amendment now.
Thank you.
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. This is still on Section 15.
MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. Yes, Madam President.
xxxx
MS. ROSARIO BRAID. Madam President, I propose a new section to read: THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
This will prevent management contracts and assure control by Filipino citizens. Will the committee assure us that this
amendment will insure that past activities such as management contracts will no longer be possible under this amendment?
xxxx
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads: "THE PARTICIPATION OF FOREIGN
INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE
IN THE CAPITAL THEREOF AND..."
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS
OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL
BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE
CITIZENS OF THE PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the amendment. Is that all right with
Commissioner Rosario Braid?
xxxx
MR. DE LOS REYES. The governing body refers to the board of directors and trustees.
MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.
MR. RAMA. The body is now ready to vote, Madam President.
VOTING
xxxx
The results show 29 votes in favor and none against; so the proposed amendment is approved.
xxxx
THE PRESIDENT. All right. Can we proceed now to vote on Section 15?
MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?
MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned by such citizens." May I request Commissioner Bengzon to please
continue reading.
MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE
SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND MANAGING
OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR A PERIOD
LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by Congress when the common
good so requires. The State shall encourage equity participation in public utilities by the general public."
VOTING
xxxx
The results show 29 votes in favor and 4 against; Section 15, as amended, is approved.48 (Emphasis supplied)
The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on the limited participation of foreign investors in the
governing body of public utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973 Constitution, 49 signifying its importance in
reserving ownership and control of public utilities to Filipino citizens.
VIII.
The undisputed facts
There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus Filipinos do not control PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting
rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn; 50 (5) preferred shares have twice the par value of common
shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%.
Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the question of whether PLDT violated the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the 1987 Constitution. Such question indisputably calls for a presentation and
determination of evidence through a hearing, which is generally outside the province of the Courts jurisdiction, but well within the SECs statutory
powers. Thus, for obvious reasons, the Court limited its decision on the purely legal and threshold issue on the definition of the term "capital" in Section
11, Article XII of the Constitution and directed the SEC to apply such definition in determining the exact percentage of foreign ownership in PLDT.
IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:
xxxx
5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is the sole basis in determining
foreign equity in a public utility and that any other government rulings, opinions, and regulations inconsistent with this declaratory relief
be declared unconstitutional and a violation of the intent and spirit of the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess of 40 percent of the total
subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine Stock Exchange to require PLDT
to make a public disclosure of all of its foreign shareholdings and their actual and real beneficial owners.
Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform its statutory duty to investigate whether "the required
percentage of ownership of the capital stock to be owned by citizens of the Philippines has been complied with [by PLDT] as required by x x x the
Constitution."51 Such plea clearly negates SECs argument that it was not impleaded.
Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to order the SECs compliance with its directive contained
in the 28 June 2011 Decision in view of the far-reaching implications of this case. In Domingo v. Scheer,52 the Court dispensed with the amendment of
the pleadings to implead the Bureau of Customs considering (1) the unique backdrop of the case; (2) the utmost need to avoid further delays; and (3)
the issue of public interest involved. The Court held:
The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petition should not be dismissed because
the second action would only be a repetition of the first. In Salvador, et al., v. Court of Appeals, et al. , we held that this Court has full
powers, apart from that power and authority which is inherent, to amend the processes, pleadings, proceedings and decisions by
substituting as party-plaintiff the real party-in-interest. The Court has the power to avoid delay in the disposition of this case,
to order its amendment as to implead the BOC as party-respondent. Indeed, it may no longer be necessary to do so
taking into account the unique backdrop in this case, involving as it does an issue of public interest. After all, the Office of
the Solicitor General has represented the petitioner in the instant proceedings, as well as in the appellate court, and maintained the
validity of the deportation order and of the BOCs Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not
afforded its day in court, simply because only the petitioner, the Chairperson of the BOC, was the respondent in the CA, and the
petitioner in the instant recourse. In Alonso v. Villamor, we had the occasion to state:
There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose is to
facilitate the application of justice to the rival claims of contending parties. They were created, not to hinder
and delay, but to facilitate and promote, the administration of justice. They do not constitute the thing itself, which
courts are always striving to secure to litigants. They are designed as the means best adapted to obtain that thing. In
other words, they are a means to an end. When they lose the character of the one and become the other, the
administration of justice is at fault and courts are correspondingly remiss in the performance of their obvious duty. 53
(Emphasis supplied)
In any event, the SEC has expressly manifested54 that it will abide by the Courts decision and defer to the Courts definition of the
term "capital" in Section 11, Article XII of the Constitution. Further, the SEC entered its special appearance in this case and argued
during the Oral Arguments, indicating its submission to the Courts jurisdiction. It is clear, therefore, that there exists no legal
impediment against the proper and immediate implementation of the Courts directive to the SEC.
PLDT is an indispensable party only insofar as the other issues, particularly the factual questions, are concerned. In other words, PLDT must be
impleaded in order to fully resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign
ownership of PLDT; (2) whether the sale of common shares to foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3) whether the
total percentage of the PLDT common shares with voting rights complies with the 60-40 ownership requirement in favor of Filipino citizens under the
Constitution for the ownership and operation of PLDT. These issues indisputably call for an examination of the parties respective evidence, and thus are
clearly within the jurisdiction of the SEC. In short, PLDT must be impleaded, and must necessarily be heard, in the proceedings before the SEC where
the factual issues will be thoroughly threshed out and resolved.
Notably, the foregoing issues were left untouched by the Court. The Court did not rule on the factual issues raised by Gamboa, except the
single and purely legal issue on the definition of the term "capital" in Section 11, Article XII of the Constitution. The Court confined the resolution of the
instant case to this threshold legal issue in deference to the fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue in this case even without the participation of PLDT
since defining the term "capital" in Section 11, Article XII of the Constitution does not, in any way, depend on whether PLDT was impleaded. Simply put,
PLDT is not indispensable for a complete resolution of the purely legal question in this case.55 In fact, the Court, by treating the petition as one for
mandamus,56 merely directed the SEC to apply the Courts definition of the term "capital" in Section 11, Article XII of the Constitution in determining
whether PLDT committed any violation of the said constitutional provision. The dispositive portion of the Courts ruling is addressed not to
PLDT but solely to the SEC, which is the administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino
citizens in Section 11, Article XII of the Constitution.
Since the Court limited its resolution on the purely legal issue on the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution,
and directed the SEC to investigate any violation by PLDT of the 60-40 ownership requirement in favor of Filipino citizens under the Constitution, 57
there is no deprivation of PLDTs property or denial of PLDTs right to due process, contrary to Pangilinan and Nazarenos misimpression. Due process
will be afforded to PLDT when it presents proof to the SEC that it complies, as it claims here, with Section 11, Article XII of the Constitution.
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in a sudden flight of existing foreign investors to
"friendlier" countries and simultaneously deterring new foreign investors to our country. In particular, the PSE claims that the 28 June 2011 Decision
may result in the following: (1) loss of more than 630 billion in foreign investments in PSE-listed shares; (2) massive decrease in foreign trading
transactions; (3) lower PSE Composite Index; and (4) local investors not investing in PSE-listed shares.58
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants apprehension. Without providing specific details, he pointed
out the depressing state of the Philippine economy compared to our neighboring countries which boast of growing economies. Further, Dr. Villegas
explained that the solution to our economic woes is for the government to "take-over" strategic industries, such as the public utilities sector, thus:
JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional information on whether this high FDI59 countries in East Asia have
allowed foreigners x x x control [of] their public utilities, so that we can compare apples with apples.
DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an industry strategic, their solution is not to "Filipinize" or
"Vietnamize" or "Singaporize." Their solution is to make sure that those industries are in the hands of state enterprises. So,
in these countries, nationalization means the government takes over. And because their governments are competent
and honest enough to the public, that is the solution. x x x 60 (Emphasis supplied)
If government ownership of public utilities is the solution, then foreign investments in our public utilities serve no purpose. Obviously, there can never
be foreign investments in public utilities if, as Dr. Villegas claims, the "solution is to make sure that those industries are in the hands of state
enterprises." Dr. Villegass argument that foreign investments in telecommunication companies like PLDT are badly needed to save our ailing economy
contradicts his own theory that the solution is for government to take over these companies. Dr. Villegas is barking up the wrong tree since State
ownership of public utilities and foreign investments in such industries are diametrically opposed concepts, which cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot be used as argument to decide the present case differently for two reasons. First, the
governments of our neighboring countries have, as claimed by Dr. Villegas, taken over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions limiting foreign ownership in public utilities which the Court is sworn to
uphold regardless of the experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and operation of public utilities to Filipino citizens, or corporations or associations
at least 60 percent of whose capital belongs to Filipinos. Following Dr. Villegass claim, the Philippines appears to be more liberal in allowing foreign
investors to own 40 percent of public utilities, unlike in other Asian countries whose governments own and operate such industries.
XI.
Prospective Application of Sanctions
In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the application and imposition of appropriate sanctions
against PLDT if found violating Section 11, Article XII of the Constitution. 1avvphi1
As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated Section 11, Article XII of the Constitution. Thus, there
is no dispute that it is only after the SEC has determined PLDTs violation, if any exists at the time of the commencement of the administrative case or
investigation, that the SEC may impose the statutory sanctions against PLDT. In other words, once the 28 June 2011 Decision becomes final, the SEC
shall impose the appropriate sanctions only if it finds after due hearing that, at the start of the administrative case or investigation, there is an existing
violation of Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public utilities that fail to comply with the nationality requirement
under Section 11, Article XII and the FIA can cure their deficiencies prior to the start of the administrative case or investigation.61
XII.
Final Word
The Constitution expressly declares as State policy the development of an economy " effectively controlled" by Filipinos. Consistent with such State
policy, the Constitution explicitly reserves the ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose capital with voting rights belongs to Filipinos.
The FIAs implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential." In
effect, the FIA clarifies, reiterates and confirms the interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution refers to
shares with voting rights, as well as with full beneficial ownership . This is precisely because the right to vote in the election of directors,
coupled with full beneficial ownership of stocks, translates to effective control of a corporation.
Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the letter and intent of the Constitution. Any other
meaning of the term "capital" openly invites alien domination of economic activities reserved exclusively to Philippine nationals. Therefore, respondents
interpretation will ultimately result in handing over effective control of our national economy to foreigners in patent violation of the Constitution, making
Filipinos second-class citizens in their own country.
Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment, which gave Americans the same rights as
Filipinos in the exploitation of natural resources, and in the ownership and control of public utilities, in the Philippines. To do this the 1935 Constitution,
which contained the same 60 percent Filipino ownership and control requirement as the present 1987 Constitution, had to be amended to give
Americans parity rights with Filipinos. There was bitter opposition to the Parity Amendment62 and many Filipinos eagerly awaited its expiration. In late
1968, PLDT was one of the American-controlled public utilities that became Filipino-controlled when the controlling American stockholders divested in
anticipation of the expiration of the Parity Amendment on 3 July 1974.63 No economic suicide happened when control of public utilities and mining
corporations passed to Filipinos hands upon expiration of the Parity Amendment.
Movants interpretation of the term "capital" would bring us back to the same evils spawned by the Parity Amendment, effectively giving foreigners
parity rights with Filipinos, but this time even without any amendment to the present Constitution . Worse, movants interpretation opens
up our national economy to effective control not only by Americans but also by all foreigners, be they Indonesians, Malaysians or Chinese,
even in the absence of reciprocal treaty arrangements. At least the Parity Amendment, as implemented by the Laurel-Langley Agreement, gave
the capital-starved Filipinos theoretical parity the same rights as Americans to exploit natural resources, and to own and control public utilities, in the
United States of America. Here, movants interpretation would effectively mean a unilateral opening up of our national economy to all foreigners,
without any reciprocal arrangements. That would mean that Indonesians, Malaysians and Chinese nationals could effectively control our mining
companies and public utilities while Filipinos, even if they have the capital, could not control similar corporations in these countries.
The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control requirement for public utilities like PLOT. Any deviation
from this requirement necessitates an amendment to the Constitution as exemplified by the Parity Amendment. This Court has no power to amend the
Constitution for its power and duty is only to faithfully apply and interpret the Constitution.
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
MARIA LOURDES P.A. SERENO

Chief Justice
PRESBITERO J. VELASCO, JR. TERESITA J. LEONARDO-DE CASTRO
Associate Justice Associate Justice
ARTURO D. BRION DIOSDADO M. PERALTA

LUCAS P. BERSAMIN MARIANO C. DEL CASTILLO

ROBERTO A. ABAD MARTIN S. VILLARAMA, JR.

JOSE PORTUGAL PEREZ JOSE C. MENDOZA

BIENVENIDO L. REYES ESTELA M. PERLAS-BERNABE

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Resolution had been reached in consultation before
the case was assigned to the writer of the opinion of the Court.
MARIA LOURDES P.A. SERENO

Chief Justice
DISSENTING OPINION
VELASCO, JR., J.:
Before Us are separate motions for recon~ideration of the Court's June 28, 2011 Decision, 1 which partially granted the petition for prohibition,
injunction and declaratory relief interposed by Wilson P. Gamboa (petitioner or Gamboa). Very simply, the Court held that the term "capital" appearing
in Section 11, Article XII of the 1987 Constitution refers only to common shares or shares of stock entitled to vote in the election of the members of the
board of directors of a public utility, and not to the total outstanding capital stock.
Respondents Manuel V. Pangilinan (Pangilinan) and Napoleon L.Nazare no (Nazareno) separately moved for reconsideration on procedural and
substantive grounds, but reserved their main arguments against the majority's holding on the meaning of "capital." The Office of the Solicitor General
(OSG), which initially representL:d the Securities and Exchange Commission (SEC), also requested recon~itkratiun even as it manifested agreement with
the majority's construal ct' the \Vord "capital." Unable to join the OSG's stand on the determinative issue of capital, the SEC sought leave to join the fray
on its mvn. fn its Jtdotion to Admit A1anifestation and Omnibus Motion, the SEC stated that the OSGs position on said issue does not reflect its own and
in fact diverges from what the Commission has consistently adopted prior to this case. And because the decision in question has a penalty component
which it is tasked to impose, SEC requested clarification as to when the reckoning period of application of the appropriate sanctions may be
imposed on Philippine Long Distance Telephone Company (PLDT) in case the SEC determines that it has violated Sec. 11, Art. XII of
the Constitution.
To the foregoing motions, the main petitioner, now deceased, filed his Comment and/or Opposition to Motions for Reconsideration .
Acting on the various motions and comment, the Court conducted and heard the parties in oral arguments on April 17 and June 26, 2012.
After considering the parties positions as articulated during the oral arguments and in their pleadings and respective memoranda, I vote to grant
reconsideration. This disposition is consistent with my dissent, on procedural and substantive grounds, to the June 28, 2011 majority Decision.
Conspectus
The core issue is the meaning of the word "capital" in the opening sentence of Sec. 11, Art. XII of the 1987 Constitution which reads:
Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except
under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires.
The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens of the Philippines . (Emphasis
supplied.)
For an easier comprehension of the two contrasting positions on the contentious meaning of the word "capital," as found in the first sentence of the
aforequoted provision, allow me to present a brief comparative analysis showing the dissimilarities.
The majority, in the June 28, 2011 Decision, as reiterated in the draft resolution, is of the view that the word "capital" in the first sentence of Sec. 11,
Art. XII refers to common shares or voting shares only; thus limiting foreign ownership of such shares to 40%. The rationale, as stated in the basic
ponencia, is that this interpretation ensures that control of the Board of Directors stays in the hands of Filipinos, since foreigners can only own a
maximum of 40% of said shares and, accordingly, can only elect the equivalent percentage of directors. As a necessary corollary, Filipino stockholders
can always elect 60% of the Board of Directors which, to the majority, translates to control over the corporation.
The opposite view is that the word "capital" in the first sentence refers to the entire capital stock of the corporation or both voting and non-voting
shares and NOT solely to common shares. From this standpoint, 60% control over the capital stock or the stockholders owning both voting and non-
voting shares is assured to Filipinos and, as a consequence, over corporate matters voted upon and decisions reached during stockholders meetings. On
the other hand, the last sentence of Sec. 11, Art. XII, with the word "capital" embedded in it, is the provision that ensures Filipino control over the
Board of Directors and its decisions.
To resolve the conflicting interpretations of the word "capital," the first sentence of Sec. 11, Art. XII must be read and considered in conjunction with
the last sentence of said Sec. 11 which prescribes that "the participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital." After all, it is an established principle in constitutional construction that provisions in the
Constitution must be harmonized.
It has been made very clear during the oral arguments and even by the parties written submissions that control by Filipinos over the public utility
enterprise exists on three (3) levels, namely:
1. Sixty percent (60%) control of Filipinos over the capital stock which covers both voting and non-voting shares and inevitably over the stockholders.
This level of control is embodied in the first sentence of Sec. 11, Art. XII which reads:
Philippines, at least sixty per centum of whose capital is owned by such citizens x x x.
The word "capital" in the above provision refers to capital stock or both voting and non-voting shares. Sixty percent (60%) control over the capital stock
translates to control by Filipinos over almost all decisions by the stockholders during stockholders meetings including ratification of the decisions and
acts of the Board of Directors. During said meetings, voting and even non-voting shares are entitled to vote. The exercise by non-voting shares of
voting rights over major corporate decisions is expressly provided in Sec. 6 of the Corporation Code which reads:
Sec. 6. x x x x
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Construing the word "capital" in the first sentence of Sec. 11, Art. XII of the Constitution as capital stock would ensure Filipino control over the public
utility with respect to major corporate decisions. If we adopt the view espoused by Justice Carpio that the word "capital" means only common shares or
voting shares, then foreigners can own even up to 100% of the non-voting shares. In such a situation, foreigners may very well exercise control over all
major corporate decisions as their ownership of the nonvoting shares remains unfettered by the 40% cap laid down in the first sentence of Sec. 11, Art.
XII. This will spawn an even greater anomaly because it would give the foreigners the opportunity to acquire ownership of the net assets of the
corporation upon its dissolution to include what the Constitution enjoinsland ownership possibly through dummy corporations. With the view of
Justice Carpio, Filipinos will definitely lose control over major corporate decisions which are decided by stockholders owning the majority of the non-
voting shares.
2. Sixty percent (60%) control by Filipinos over the common shares or voting shares and necessarily over the Board of Directors of the public utility.
Control on this level is guaranteed by the last sentence of Sec. 11, Art. XII which reads:
The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its "capital" x x x.
In its ordinary signification, "participation" connotes "the action or state of taking part with others in an activity." 2 This participation in its decision-
making function can only be the right to elect board directors. Hence, the last sentence of Sec. 11, Art. XII of the Constitution effectively
restricts the right of foreigners to elect directors to the board in proportion to the limit on their total shareholdings. Since the first part
of Sec. 11, Art. XII of the Constitution specifies a 40% limit of foreign ownership in the total capital of the public utility corporation, then the rights of
foreigners to be elected to the board of directors, is likewise limited to 40 percent. If the foreign ownership of common shares is lower than 40%, the
participation of foreigners is limited to their proportionate share in the capital stock.
In the highly hypothetical public utility corporation with 100 common shares and 1,000,000 preferred non-voting shares, or a total of 1,000,100 shares
cited in the June 28, 2011 Decision, foreigners can thus only own up to 400,040 shares of the corporation, consisting of the maximum 40 (out of the
100) voting shares and 400,000 non-voting shares. And, assuming a 10- member board, the foreigners can elect only 4 members of the board using
the 40 voting shares they are allowed to own.
Following, in fine, the dictates of Sec. 11, Art. XII, as couched, the foreign shareholders right to elect members of the governing
board of a given public utility corporation is proportional only to their right to hold a part of the total shareholdings of that entity.
Since foreigners can only own, in the maximum, up to 40% of the total shareholdings of the company, then their voting entitlement as to the
numerical composition of the board would depend on the level of their shareholding in relation to the capital stock, but in no case
shall it exceed the 40% threshold.
Contrary to the view of Justice Carpio that the objective behind the first sentence of Sec. 11, Art. XII is to ensure control of Filipinos over the Board of
Directors by limiting foreign ownership of the common shares or voting shares up to 40%, it is actually the first part of the aforequoted last
sentence of Sec. 11, Art. XII that limits the rights of foreigners to elect not more than 40% of the board seats thus ensuring a clear
majority in the Board of Directors to Filipinos. If we follow the line of reasoning of Justice Carpio on the meaning of the word "capital" in the first
sentence, then there is no need for the framers of the Constitution to incorporate the last sentence in Sec. 11, Art. XII on the 40% maximum
participation of the foreigners in the Board of Directors. The last sentence would be a useless redundancy, a situation doubtless unintended by the
framers of the Constitution. A construction that renders a part of the law or Constitution being construed superfluous is an aberration, 3 for it is at all
times presumed that each word used in the law is intentional and has a particular and special role in the approximation of the policy sought to be
attained, ut magis valeat quam pereat.
3. The third level of control proceeds from the requirement tucked in the second part of the ultimate sentence that "all the executive and managing
officers of the corporation must be citizens of the Philippines." This assures full Filipino control, at all times, over the management of the public
utility.
To summarize, the Constitution, as enacted, establishes not just one but a three-tiered control-enhancing-and-locking mechanism in Sec. 11, Article XII
to ensure that Filipinos will always have full beneficial ownership and control of public utility corporations:
1. 40% ceiling on foreign ownership in the capital stock that ensures sixty percent (60%) Filipino control over the capital stock which covers both voting
and non-voting shares. As a consequence, Filipino control over the stockholders is assured. (First sentence of Sec. 11, Art. XII). Thus, foreigners can
own only up to 40% of the capital stock.
2. 40% ceiling on the right of foreigners to elect board directors that guarantees sixty percent (60%) Filipino control over the Board of Directors. (First
part of last sentence of Sec. 11, Art. XII).
3. Reservation to Filipino citizens of the executive and managing officers, regardless of the level of alien equity ownership to secure total Filipino control
over the management of the public utility enterprise (Second part of last sentence of Sec. 11, Art. XII). Thus, all executive and managing officers must
be Filipinos.
Discussion
Undoubtedly there is a clash of conflicting opinions as to what "capital" in the first sentence of Sec. 11, Art. XII means. The majority says it refers only
to common or voting shares. The minority says it includes both voting and non-voting shares. A resort to constitutional construction is unavoidable.
It is settled though that the "primary source from which to ascertain constitutional intent or purpose is the language of the constitution itself." 4 To this
end, the words used by the Constitution should as much as possible be understood in their ordinary meaning as the Constitution is not a
lawyers document.5 This approach, otherwise known as the verba legis rule, should be applied save where technical terms are employed.6
The plain meaning of "capital" in the first

sentence of Sec. 11, Art. XII of the Constitution
includes both voting and non-voting shares
J.M. Tuason & Co., Inc. v. Land Tenure Administration illustrates the verba legis rule. There, the Court cautions against departing from the commonly
understood meaning of ordinary words used in the Constitution, viz.:
We look to the language of the document itself in our search for its meaning. We do not of course stop there, but that is where we
begin. It is to be assumed that the words in which constitutional provisions are couched express the objective sought to be
attained. They are to be given their ordinary meaning except where technical terms are employed in which case the significance thus
attached to them prevails. As the Constitution is not primarily a lawyer's document, it being essential for the rule of law to obtain that it
should ever be present in the people's consciousness, its language as much as possible should be understood in the sense
they have in common use. What it says according to the text of the provision to be construed compels acceptance and negates the
power of the courts to alter it, based on the postulate that the framers and the people mean what they say. Thus, there are cases
where the need for construction is reduced to a minimum.7 (Emphasis supplied.)
The primary reason for the verba legis approach, as pointed out by Fr. Joaquin Bernas during the June 26, 2012 arguments, is that the people who
ratified the Constitution voted on their understanding of the word capital in its everyday meaning. Fr. Bernas elucidated thus:
x x x Over the years, from the 1935 to the 1973 and finally even under the 1987 Constitution, the prevailing practice has been to base
the 60-40 proportion on total outstanding capital stock, that is, the combined total of common and non-voting preferred shares. This is
what occasioned the case under consideration.
What is the constitutional relevance of this continuing practice? I suggest that it is relevant for determining what the people in the street
voted for when they ratified the Constitution. When the draft of a Constitution is presented to the people for ratification,
what the people vote on is not the debates in the constituent body but the text of the draft. Concretely, what the
electorate voted on was their understanding of the word capital in its everyday meaning they encounter in daily life. We
cannot attribute to the voters a jurists sophisticated meaning of capital and its breakdown into common and preferred. What they vote
on is what they see. Nor do they vote on what the drafters saw as assumed meaning, to use Bengzons explanation. In the language of
the sophisticates, what voters in a plebiscite vote on is verba legis and not anima legis about which trained jurists debate.
What then does it make of the contemporary understanding by SEC etc. Is the contemporary understanding unconstitutional or
constitutional? I hesitate to characterize it as constitutional or unconstitutional. I would merely characterize it as popular. What I mean
is it reflects the common understanding of the ordinary populi, common but incomplete.8 (Emphasis supplied.)
"Capital" in the first sentence of Sec. 11, Art. XII must then be accorded a meaning accepted, understood, and used by an ordinary person not versed in
the technicalities of law. As defined in a non-legal dictionary, capital stock or capital is ordinarily taken to mean "the outstanding shares of a joint
stock company considered as an aggregate"9 or "the ownership element of a corporation divided into shares and represented by certificates."10
The term "capital" includes all the outstanding shares of a company that represent "the proprietary claim in a business." 11 It does not distinguish
based on the voting feature of the stocks but refers to all shares, be they voting or non-voting . Neither is the term limited to the
management aspect of the corporation but clearly refers to the separate aspect of ownership of the corporate shares thereby encompassing all shares
representing the equity of the corporation.
This plain meaning, as understood, accepted, and used in ordinary parlance, hews with the definition given by Black who equates capital to capital
stock12 and defines it as "the total number of shares of stock that a corporation may issue under its charter or articles of incorporation, including both
common stock and preferred stock."13 This meaning is also reflected in legal commentaries on the Corporation Code. The respected commentator
Ruben E. Agpalo defines "capital" as the "money, property or means contributed by stockholders for the business or enterprise for which the corporation
was formed and generally implies that such money or property or means have been contributed in payment for stock issued to the contributors." 14
Meanwhile, "capital stock" is "the aggregate of the shares actually subscribed [or] the amount subscribed and paid-in and upon which the
corporation is to conduct its operations, or the amount paid-in by its stockholders in money, property or services with which it is to conduct its
business."15
This definition has been echoed by numerous other experts in the field of corporation law. Dean Villanueva wrote, thus:
In defining the relationship between the corporation and its stockholders, the capital stock represents the proportional standing of the
stockholders with respect to the corporation and corporate matters, such as their rights to vote and to receive dividends.
In financial terms, the capital stock of the corporation as reflected in the financial statement of the corporation represents
the financial or proprietary claims of the stockholders to the net assets of the corporation upon dissolution. In addition,
the capital stock represents the totality of the portion of the corporations assets and receivables which are covered by the trust fund
doctrine and provide for the amount of assets and receivables of the corporation which are deemed protected for the benefit of the
corporate creditors and from which the corporation cannot declare any dividends. 16 (Emphasis supplied.)
Similarly, renowned author Hector S. de Leon defines "capital" and "capital stock" in the following manner:
Capital is used broadly to indicate the entire property or assets of the corporation. It includes the amount invested by the stockholders
plus the undistributed earnings less losses and expenses. In the strict sense, the term refers to that portion of the net assets paid by the
stockholders as consideration for the shares issued to them, which is utilized for the prosecution of the business of the corporation. It
includes all balances or instalments due the corporation for shares of stock sold by it and all unpaid subscription for shares.
xxxx
The term is also used synonymously with the words "capital stock," as meaning the amount subscribed and paid-in and upon which the
corporation is to conduct its operation (11 Fletcher Cyc. Corp., p. 15 [1986 ed.]) and it is immaterial how the stock is classified,
whether as common or preferred.17 (Emphasis and underscoring supplied.)
Hence, following the verba legis approach, I see no reason to stray away from what appears to be a common and settled acceptation of the word
"capital," given that, as used in the constitutional provision in question, it stands unqualified by any restrictive or expansive word as to reasonably
justify a distinction or a delimitation of the meaning of the word. Ubi lex non distinguit nos distinguere debemus, when the law does not distinguish, we
must not distinguish.18 Using this plain meaning of "capital" within the context of Sec. 11, Art. XII, foreigners are entitled to own not more than 40%
of the outstanding capital stock, which would include both voting and non-voting shares.
Extraneous aids to ferret out constitutional intent
When the seeming ambiguity on the meaning of "capital" cannot be threshed out by looking at the language of the Constitution, then resort to
extraneous aids has become imperative. The Court can utilize the following extraneous aids, to wit: (1) proceedings of the convention; (2) changes in
phraseology; (3) history or realities existing at the time of the adoption of the Constitution; (4) prior laws and judicial decisions; (5) contemporaneous
construction; and (6) consequences of alternative interpretations. 19 I submit that all these aids of constitutional construction affirm that the only
acceptable construction of "capital" in the first sentence of Sec. 11, Art. XII of the 1987 Constitution is that it refers to all shares of a corporation, both
voting and non-voting.
Deliberations of the Constitutional Commission of 1986 demonstrate that capital means both Jvoting and non-voting shares (1st
extrinsic aid)
The proceedings of the 1986 Constitutional Commission that drafted the 1987 Constitution were accurately recorded in the Records of the Constitutional
Commission.
To bring to light the true meaning of the word "capital" in the first line of Sec. 11, Art. XII, one must peruse, dissect and analyze the entire deliberations
of the Constitutional Commission pertinent to the article on national economy and patrimony, as quoted below:
August 13, 1986, Wednesday
PROPOSED RESOLUTION NO. 496
RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON NATIONAL ECONOMY AND PATRIMONY
Be it resolved as it is hereby resolved by the Constitutional Commission in session assembled, To incorporate the National Economy and
Patrimony of the new Constitution, the following provisions:
ARTICLE____
NATIONAL ECONOMY AND PATRIMONY
SECTION 1. The State shall develop a self-reliant and independent national economy. x x x
xxxx
SEC. 3. x x x The exploration, development, and utilization of natural resources shall be under the full control and supervision of the
State. Such activities may be directly undertaken by the State, or it may enter into co-production, joint venture, production-sharing
agreements with Filipino citizens or corporations or associations at least sixty percent of whose voting stock or controlling
interest is owned by such citizens. x x x
xxxx
SEC. 9. The Congress shall reserve to citizens of the Philippines or to corporations or associations at least sixty per cent of whose
voting stock or controlling interest is owned by such citizens or such higher percentage as Congress may prescribe, certain areas of
investments when the national interest so dictates.
xxxx
SEC. 15. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least two-thirds of whose
voting stock or controlling interest is owned by such citizens. Neither shall any such franchise or right be granted except under
the condition that it shall be subject to amendment, alteration, or repeal by Congress when the common good so requires. The State
shall encourage equity participation in public utilities by the general public. (Origin of Sec. 11, Article XII)
xxxx
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-
40 in Section 9, and 2/3-1/3 in Section 15.
MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation?" Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a draft. The
phrase that is contained here which we adopted from the UP draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be
entitled to vote.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in
another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes.20
August 14, 1986, Thursday
MR. FOZ. Mr. Vice-President, in Sections 3 and 9, the provision on equity is both 60 percent, but I notice that this is now different from
the provision in the 1973 Constitution in that the basis for the equity provision is voting stock or controlling interest instead of the usual
capital percentage as provided for in the 1973 Constitution. We would like to know what the difference would be between the previous
and the proposed provisions regarding equity interest.
MR. VILLEGAS. Commissioner Suarez will answer that.
MR. SUAREZ. Thank you.
As a matter of fact, this particular portion is still being reviewed by this Committee. In Section 1, Article XIII of the 1935 Constitution,
the wording is that the percentage should be based on the capital which is owned by such citizens. In the proposed draft, this phrase
was proposed: "voting stock or controlling interest." This was a plan submitted by the UP Law Center.
Three days ago, we had an early morning breakfast conference with the members of the UP Law Center and precisely, we were seeking
clarification regarding the difference. We would have three criteria to go by: One would be based on capital, which is capital stock of the
corporation, authorized, subscribed or paid up, as employed under the 1935 and the 1973 Constitution. The idea behind the introduction
of the phrase "voting stock or controlling interest" was precisely to avoid the perpetration of dummies, Filipino dummies of
multinationals. It is theoretically possible that a situation may develop where these multinational interests would not really be only 40
percent but will extend beyond that in the matter of voting because they could enter into what is known as a voting trust or voting
agreement with the rest of the stockholders and, therefore, notwithstanding the fact that on record their capital extent is only up to 40-
percent interest in the corporation, actually, they would be managing and controlling the entire company. That is why the UP Law
Center members suggested that we utilize the words "voting interest" which would preclude multinational control in the matter of
voting, independent of the capital structure of the corporation. And then they also added the phrase "controlling interest" which up to
now they have not been able to successfully define the exact meaning of. But they mentioned the situation where theoretically the
board would be controlled by these multinationals, such that instead of, say, three Filipino directors out of five, there would be three
foreign directors and, therefore, they would be controlling the management of the company with foreign interest. That is why they
volunteered to flesh out this particular portion which was submitted by them, but up to now, they have not come up with a constructive
rephrasing of this portion. And as far as I am concerned, I am not speaking in behalf of the Committee, I would feel more
comfortable if we go back to the wording of the 1935 and the 1973 Constitution, that is to say, the 60-40 percentage
could be based on the capital stock of the corporation.
MR. FOZ. I understand that that was the same view of Dean Carale who does not agree with the others on this panel at the UP Law
Center regarding the percentage of the ratio.
MR. SUAREZ. That is right. Dean Carale shares my sentiment about this matter.
MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So there are already two in the Committee who want
to go back to the wording of the 1935 and the 1973 Constitution.21
August 15, 1986, Friday
MR. MAAMBONG. I ask that Commissioner Treas be recognized for an amendment on line 14.
THE PRESIDENT. Commissioner Treas is recognized.
MR. TREAS. Madam President, may I propose an amendment on line 14 of Section 3 by deleting therefrom "whose voting stock and
controlling interest." And in lieu thereof, insert the CAPITAL so the line should read: "associations at least sixty percent of
the CAPITAL is owned by such citizens.
MR. VILLEGAS. We accept the amendment.
MR. TREAS. Thank you.
THE PRESIDENT. The amendment of Commissioner Treas on line 14 has been accepted by the Committee.
Is there any objection? (Silence) The Chair hears none; the amendment is approved.
xxxx
THE PRESIDENT. Commissioner Suarez is recognized.
MR. SUAREZ. Thank you, Madam President.
Two points actually are being raised by Commissioner Davides proposed amendment. One has reference to the percentage of holdings
and the other one is the basis for that percentage. Would the body have any objection if we split it into two portions because there may
be several Commissioners who would be willing to accept the Commissioners proposal on capital stock in contradistinction to a voting
stock for controlling interest?
MR. VILLEGAS. The proposal has been accepted already.
MR. DAVIDE. Yes, but it was 60 percent.
MR. SUAREZ. So, it is now 60 percent as against wholly owned?
MR. DAVIDE. Yes.
MR. SUAREZ. Is the Commissioner not insisting on the voting capital stock because that was already accepted by the Committee?
MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?
MR. SUAREZ. No, under the Commissioners proposal it is just "CAPITAL" not "stock."
MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the Committee? How shall it read?
MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY owned."
MR. VILLEGAS. Let me read lines 12 to 14 which state:
enter into co-production, joint venture, production sharing agreements with Filipino citizens or corporations or
associations at least 60 percent of whose CAPITAL is owned by such citizens.
We are going back to the 1935 and 1973 formulations.
MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not really be the guiding principle. It is
the ownership of the corporation. It may be voting or not voting, but that is not the guiding principle.
MR. SUAREZ. So, the Commissioner is insisting on the use of the term "CAPITAL STOCK"?
MR. DAVIDE. Yes, to be followed by the phrase "WHOLLY owned."
MR. SUAREZ. Yes, but we are only concentrating on the first point "CAPITAL STOCK" or merely "CAPITAL."
MR. DAVIDE. CAPITAL STOCK?
MR. SUAREZ. Yes, it is "CAPITAL STOCK."
SUSPENSION OF SESSION
At 4:42 p.m., the session was resumed.
THE PRESIDENT. The session is resumed.
Commissioner Davide is to clarify his point.

MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in place of "voting stock or controlling
interest." This is an amendment already accepted by the Committee.
We would like to call for a vote on 100-percent Filipino versus 60- percent Filipino.
MR. ALONTO. Is it 60 percent?
MR. VILLEGAS. Sixty percent, yes.
MR. GASCON. Madam President, shall we vote on the proposed amendment of Commissioner Davide of "ONE HUNDRED PERCENT?"
MR. VILLEGAS. Yes.
MR. GASCON. Assuming that it is lost, that does not prejudice any other Commissioner to make any recommendations on other
percentages?
MR. VILLEGAS. I would suggest that we vote on "sixty," which is indicated in the committee report.
MR. GASCON. It is the amendment of Commissioner Davide that we should vote on, not the committee report.
MR. VILLEGAS. Yes, it is all right.
MR. AZCUNA. Madam President.
THE PRESIDENT. Commissioner Azcuna is recognized.
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee?
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling
interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations
at least sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens?
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the capital is owned by
them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation where the corporation is
controlled by foreigners despite being the minority because they have the voting capital. That is the anomaly that would result there.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that according to
Commissioner Rodrigo, there are associations that do not have stocks. That is why we say "CAPITAL."
MR. BENGZON. In the case of stock corporations, it is assumed.
MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.
MR. BENGZON. Yes, that is understood.
MR. AZCUNA. Yes, because if we just say "sixty percent of whose capital is owned by the Filipinos," the capital may be voting or
nonvoting.
MR. BENGZON. That is correct.
MR. AZCUNA. My concern is the situation where there is a voting stock. It is a stock corporation. What the Committee requires is that 60
percent of the capital should be owned by Filipinos. But that would not assure control because that 60 percent may be non-voting.
MS. AQUINO. Madam President.
MR. ROMULO. May we vote on the percentage first?
THE PRESIDENT. Before we vote on this, we want to be clarified first.
MS. AQUINO. Madam President.
THE PRESIDENT. Commissioner Aquino is recognized.
MS. AQUINO. I would suggest that we vote on the Davide amendment which is 100-percent capital, and if it is voted down, then we
refer to the original draft which is "capital stock" not just "capital."
MR. AZCUNA. The phrase "controlling interest" is an important consideration.
THE PRESIDENT. Let us proceed to vote then.
MR. PADILLA. Madam President.
THE PRESIDENT. The Vice-President, Commissioner Padilla, is recognized.
MR. PADILLA. The Treas amendment has already been approved. The only one left is the Davide amendment which is
substituting the "sixty percent" to "WHOLLY owned by Filipinos." (The Treas amendment deleted the phrase "whose voting
stocks and controlling interest" and inserted the word "capital." It approved the phrase "associations at least sixty percent of the
CAPITAL is owned by such citizens.)(see page 16)
Madam President, I am against the proposed amendment of Commissioner Davide because that is an ideal situation where domestic
capital is available for the exploration, development and utilization of these natural resources, especially minerals, petroleum and other
mineral oils. These are not only risky business but they also involve substantial capital. Obviously, it is an ideal situation but it is not
practical. And if we adopt the 100-percent capital of Filipino citizens, I am afraid that these natural resources, particularly these minerals
and oil, et cetera, may remain hidden in our lands, or in other offshore places without anyone being able to explore, develop or utilize
them. If it were possible to have a 100-percent Filipino capital, I would prefer that rather than the 60 percent, but if we adopt the 100
percent, my fear is that we will never be able to explore, develop and utilize our natural resources because we do not have the domestic
resources for that.
MR. DAVIDE. Madam President, may I be allowed to react?
THE PRESIDENT. Commissioner Davide is recognized.
MR. DAVIDE. I am very glad that Commissioner Padilla emphasized minerals, petroleum and mineral oils. The Commission has just
approved the possible foreign entry into the development, exploration and utilization of these minerals, petroleum and other mineral oils
by virtue of the Jamir amendment. I voted in favour of the Jamir amendment because it will eventually give way to vesting in exclusively
Filipino citizens and corporations wholly owned by Filipino citizens the right to utilize the other natural resources. This means that as a
matter of policy, natural resources should be utilized and exploited only by Filipino citizens or corporations wholly owned by such
citizens. But by virtue of the Jamir amendment, since we feel that Filipino capital may not be enough for the development and utilization
of minerals, petroleum and other mineral oils, the President can enter into service contracts with foreign corporations precisely for the
development and utilization of such resources. And so, there is nothing to fear that we will stagnate in the development of minerals,
petroleum, and mineral oils because we now allow service contracts. It is, therefore, with more reason that at this time we must provide
for a 100-percent Filipinization generally to all natural resources.
MR. VILLEGAS. I think we are ready to vote, Madam President.
THE PRESIDENT. The Acting Floor Leader is recognized.
MR. MAAMBONG. Madam President, we ask that the matter be put to a vote.
THE PRESIDENT. Will Commissioner Davide please read lines 14 and 15 with his amendment.
MR. DAVIDE. Lines 14 and 15, Section 3, as amended, will read: "associations whose CAPITAL stock is WHOLLY owned by such
citizens."
VOTING
THE PRESIDENT. As many as are in favour of this proposed amendment of Commissioner Davide on lines 14 and 15 of Section 3, please
raise their hand. (Few Members raised their hand.)
As many as are against the amendment, please raise their hand. (Several Members raised their hand.)
The results show 16 votes in favour and 22 against; the amendment is lost.
MR. MAAMBONG. Madam President, I ask that Commissioner Davide be recognized once more for further amendments.
THE PRESIDENT. Commissioner Davide is recognized.
MR. DAVIDE. Thank you, Madam President.
This is just an insertion of a new paragraph between lines 24 and 25 of Section 3 of the same page. It will read as follows: THE
GOVERNING AND MANAGING BOARDS OF SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF THE PHILIPPINES.
MR. VILLEGAS. Which corporations is the Commissioner referring to?
MR. DAVIDE. This refers to corporations 60 percent of whose capital is owned by such citizens.
MR. VILLEGAS. Again the amendment will read
MR. DAVIDE. "THE GOVERNING AND MANAGING BODIES OF SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF
THE PHILIPPINES."
REV. RIGOS. Madam President.
THE PRESIDENT. Commissioner Rigos is recognized.
REV. RIGOS. I wonder if Commissioner Davide would agree to put that sentence immediately after "citizens" on line 15.
MR. ROMULO. May I ask a question. Presumably, it is 60-40?
MR. DAVIDE. Yes.
MR. ROMULO. What about the 40 percent? Would they not be entitled to a proportionate seat in the board?
MR. DAVIDE. Under my proposal, they should not be allowed to sit in the board.
MR. ROMULO. Then the Commissioner is really proposing 100 percent which is the opposite way?
MR. DAVIDE. Not necessarily, because if 40 percent of the capital stock will be owned by aliens who may sit in the board, they can still
exercise their right as ordinary stockholders and can submit the necessary proposal for, say, a policy to be undertaken by the board.
MR. ROMULO. But that is part of the stockholders right to sit in the board of directors.
MR. DAVIDE. That may be allowed but this is a very unusual and abnormal situation so the Constitution itself can prohibit them to sit in
the board.
MR. ROMULO. But it would be pointless to allow them 40 percent when they cannot sit in the board nor have a say in the management
of the company. Likewise, that would be extraordinary because both the 1935 and the 1973 Constitutions allowed not only the 40
percent but commensurately they were represented in the board and management only to the extent of their equity interest, which is
40 percent. The management of a company is lodged in the board; so if the 60 percent, which is composed of Filipinos, controls the
board, then the Filipino part has control of the company.
I think it is rather unfair to say: "You may have 40 percent of the company, but that is all. You cannot manage, you cannot sit in the
board." That would discourage investments. Then it is like having a one hundredpercent ownership; I mean, either we allow a 60-40
with full rights to the 40 percent, limited as it is as to a minority, or we do not allow them at all. This means if it is allowed; we cannot
have it both ways.
MR. DAVIDE. The aliens cannot also have everything. While they may be given entry into subscriptions of the capital stock of the
corporation, it does not necessarily follow that they cannot be deprived of the right of membership in the managing or in the governing
board of a particular corporation. But it will not totally deprive them of a say because they can still exercise the ordinary rights of
stockholders. They can submit their proposal and they can be heard.
MR. ROMULO. Yes, but they have no vote. That is like being represented in the Congress but not being allowed to vote like our old
resident Commissioners in the United States. They can be heard; they can be seen but they cannot vote.
MR. DAVIDE. If that was allowed under that situation, why can we not do it now in respect to our natural resources? This is a very
critical and delicate issue.
MR. ROMULO. Precisely, we used to complain how unfair that was. One can be seen and heard but he cannot vote.
MR. DAVIDE. We know that under the corporation law, we have the rights of the minority stockholders. They can be heard. As a matter
of fact, they can probably allow a proxy to vote for them and, therefore, they still retain that specific prerogative to participate just like
what we did in the Article on Social Justice.
MR. ROMULO. That would encourage dummies if we give them proxies.
MR. DAVIDE. As a matter of fact, when it comes to encouraging dummies, by allowing 40-percent ownership to come in we will expect
the proliferation of corporations actually owned by aliens using dummies.
MR. ROMULO. No, because 40 percent is a substantial and fair share and, therefore, the bona fide foreign investor is satisfied with that
proportion. He does not have to look for dummies. In fact, that is what assures a genuine investment if we give a foreign investor the
40 percent and all the rights that go with it. Otherwise, we are either discouraging the investment altogether or we are encouraging
circumvention. Let us be fair. If it is 60-40, then we give him the right, limited as to his minority position.
MR. MAAMBONG. Madam President, the body would like to know the position of the Committee so that we can put the matter to a vote.
MR. VILLEGAS. The Committee does not accept the amendment.
THE PRESIDENT. The Committee does not accept.
Will Commissioner Davide insist on his amendment?
MR. DAVIDE. We request a vote.
THE PRESIDENT. Will Commissioner Davide state his proposed amendment again?
MR. DAVIDE. The proposed amendment would be the insertion of a new paragraph to Section 3, between lines 24 and 25, page 2,
which reads: "THE GOVERNING AND MANAGING BODIES OF SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF
THE PHILIPPINES."
THE PRESIDENT. Commissioner Padilla is recognized.
MR. PADILLA. Madam President, may I just say that this Section 3 speaks of "co-production, joint venture, production sharing
agreements with Filipino citizens." If the foreign share of, say, 40 percent will not be represented in the board or in management, I
wonder if there would be any foreign investor who will accept putting capital but without any voice in management. I think that might
make the provision on "coproduction, joint venture and production sharing" illusory.
VOTING
THE PRESIDENT. If the Chair is not mistaken, that was the same point expressed by Commissioner Romulo, a member of the
Committee.
As many as are in favour of the Davide amendment, please raise their hand. ( Few Members raised their hand.)
As many as are against, please raise their hand. (Several Members raised their hand.)
As many as are abstaining, please raise their hand. (One Member raised his hand.)
xxxx
THE PRESIDENT. Commissioner Garcia is recognized.
MR. GARCIA. My amendment is on Section 3, the same item which Commissioner Davide tried to amend. It is basically
on the share of 60 percent. I would like to propose that we raise the 60 percent to SEVENTY-FIVE PERCENT so the line
would read: "SEVENTY-FIVE PERCENT of whose CAPITAL is owned by such citizens."
THE PRESIDENT. What does the Committee say?
SUSPENSION OF SESSION
MR. VILLEGAS. The Committee insists on staying with the 60 percent 60-40.
Madam President, may we ask for a suspension of the session.
THE PRESIDENT. The session is suspended.
It was 5:07 p.m.
RESUMPTION OF SESSION
At 5:31 p.m., the session was resumed.
THE PRESIDENT. The session is resumed.
MR. SARMIENTO. Madam President.
THE PRESIDENT. The Acting Floor Leader, Commissioner Sarmiento, is recognized.
MR. SARMIENTO: Commissioner Garcia still has the floor. May I ask that he be recognized.
THE PRESIDENT. Commissioner Garcia is recognized.
MR. GARCIA. Thank you very much, Madam President.
I would like to propose the following amendment on Section 3, line 14 on page 2. I propose to change the word "sixty"
to SEVENTY-FIVE. So, this will read: "or it may enter into co-production, joint venture, production sharing agreements
with Filipino citizens or corporations or associations at least SEVENTY-FIVE percent of whose CAPITAL stock or
controlling interest is owned by such citizens."
MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not insisting on the retention of the phrase
"controlling interest," so we will retain "CAPITAL" to go back really to the 1935 and 1973 formulations.
MR. BENNAGEN. May I suggest that we retain the phrase "controlling interest"?
MR. VILLEGAS. Yes, we will retain it. (The statement of Commissioner Villegas is possibly erroneous considering his consistent
statement, especially during the oral arguments, that the Constitutional Commission rejected the UP Proposal to use the phrase
"controlling interest.")
THE PRESIDENT. Are we now ready to vote?
MR. SARMIENTO. Yes, Madam President.
VOTING
THE PRESIDENT. As many as are in favour of the proposed amendment of Commissioner Garcia for "SEVENTY-FIVE" percent, please
raise their hand. (Few Members raised their hand.)
As many as are against the amendment, please raise their hand. (Several Members raised their hand.)
As many as are abstaining, please raise their hand. (One Member raised his hand.)
The results show 16 votes in favour, 18 against and 1 abstention; the Garcia amendment is lost.
MR. SARMIENTO. Madam President, may I ask that Commissioner Foz be recognized.
THE PRESIDENT. Commissioner Foz is recognized.
MR. FOZ. After losing by only two votes, I suppose that this next proposal will finally get the vote of the majority. The amendment is to
provide for at least TWO-THIRDS.
MR. SUAREZ. It is equivalent to 66 2/3.
THE PRESIDENT. Will the Commissioner repeat?
MR. FOZ. I propose "TWO-THIRDS of whose CAPITAL is owned by such citizens." Madam President, we are referring to
the same provision to which the previous amendments have been suggested. First, we called for a 100-percent
ownership; and then, second, we called for a 75-percent ownership by Filipino citizens.
So my proposal is to provide for at least TWO-THIRDS of the capital to be owned by Filipino citizens. I would like to call the attention of
the body that the same ratio or equity requirement is provided in the case of public utilities. And if we are willing to provide such equity
requirements in the case of public utilities, we should at least likewise provide the same equity ratio in the case of natural resources.
MR. VILLEGAS. Commissioner Romulo will respond.
MR. ROMULO. I just want to point out that there is an amendment here filed to also reduce the ratio in Section 15 to 60-40.
THE PRESIDENT. Commissioner Padilla is recognized.
MR. PADILLA. The 60 percent which appears in the committee report has been repeatedly upheld in various votings. One proposal was
whole 100 percent; another one was 75 percent and now it is 66 2/3 percent. Is not the decision of this Commission in voting to
uphold the percentage in the committee report already a decision on this issue?
MR. FOZ. Our amendment has been previously brought to the attention of the body.
MR. VILLEGAS. The Committee does not accept the Commissioners amendment. This has been discussed fully and, with only one-third
of the vote, it is like having nothing at all in decision-making. It can be completely vetoed.
MR. RODRIGO. Madam President.
THE PRESIDENT. Commissioner Rodrigo is recognized.
MR. RODRIGO. This is an extraordinary suggestion. But considering the circumstances that the proposals from the 100 percent to 75
percent lost, and now it went down to 66 2/3 percent, we might go down to 65 percent next time. So I suggest that we vote between
66 2/3 and 60 percent. Which does the body want? Then that should be the end of it; otherwise, this is ridiculous. After this, if the 66
2/3 percent will lose, then somebody can say: "Well, how about 65 percent?"
THE PRESIDENT. The Chair was made to understand that Commissioner Foz proposal is the last proposal on this particular line. Will
Commissioner Foz restate his proposal?
MR. FOZ. My proposal is "TWO-THIRDS of whose CAPITAL or controlling interest is owned by such citizens."
VOTING
THE PRESIDENT. We now put Commissioner Foz amendment to a vote.
As many as are in favour of the amendment of Commissioner Foz, please raise their hand. ( Few Members raised their hand.)
As many as are against, please raise their hand. (Several Members raised their hand.)
The results show 17 votes in favour, 20 against, and not abstention; the amendment is lost. 22
xxxx
August 22, 1986, Friday
THE PRESIDENT. Commissioner Nolledo is recognized.
MR. NOLLEDO. Thank you, Madam President.
I would like to propound some questions to the chairman and members of the committee. I have here a copy of the
approved provisions on Article on the National Economy and Patrimony. On page 2, the first two lines are with respect
to the Filipino and foreign equity and I said: "At least sixty percent of whose capital or controlling interest is owned by
such citizens."
I notice that this provision was amended by Commissioner Davide by changing "voting stocks" to "CAPITAL," but I still
notice that there appears the term "controlling interest" which seems to refer to assocaitions other than corporations
and it is merely 50 percent plus one percent which is less than 60 percent. Besides, the wordings may indicate that the
60 percent may be based not only on capital but also on controlling interest; it could mean 60 percent or 51 percent.
Before I propound the final question, I would like to make a comment in relation to Section 15 since they are related to
each other. I notice that in Section 15, there still appears the phrase "voting stock or controlling interest." The term
"voting stocks" as the basis of the Filipino equity means that if 60 percent of the voting stocks belong to Filipinos,
foreigners may now own more than 40 percent of the capital as long as the 40 percent or the excess thereof will cover
nonvoting stock. This is aside from the fact that under the Corporation Code, even nonvoting shares can vote on certain
instances. Control over investments may cover aspects of management and participation in the fruits of production or
exploitation.
So, I hope the committee will consider favorably my recommendation that instead of using "controlling interests," we
just use "CAPITAL" uniformly in cases where foreign equity is permitted by law, because the purpose is really to help
the Filipinos in the exploitation of natural resources and in the operation of public utilities. I know the committee, at its
own instance, can make the amendment.
What does the committee say?
MR. VILLEGAS. We completely agree with the Commissioners views. Actually, it was really an oversight. We did decide
on the word "CAPITAL." I think it was the opinion of the majority that the phrase "controlling interest" is ambiguous.
So, we do accept the Commissioners proposal to eliminate the phrase "or controlling interest" in all the provisions that
talk about foreign participation.
MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.
Thank you very much.
MR. MAAMBONG. Madam President.
THE PRESIDENT. Commissioner Maambong is recognized.
MR. MAAMBONG. In view of the manifestation of the committee, I would like to be clarified on the use of the word "CAPITAL."
MR. VILLEGAS. Yes, that was the word used in the 1973 and 1935 Constitutions.
MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL". In the Corporation Law, if I remember correctly, we
have three types of capital: the authorized capital stock, the subscribed capital stock and the paid-up capital stock.
The authorized capital stock could be interpreted as the capital of the corporation itself because that is the totality of
the investment of the corporation as stated in the articles of incorporation. When we refer to 60 percent, are we
referring to the authorized capital stock or the paid-up capital stock since the determinant as to who owns the
corporation, as far as equity is concerned, is the subscription of the person?
I think we should delimit ourselves also to what we mean by 60 percent. Are we referring to the authorized capital
stock or to the subscribed capital stock, because the determination, as I said, on the controlling interest of a
corporation is based on the subscribed capital stock? I would like a reply on that.
MR. VILLEGAS. Commissioner Suarez, a member of the committee, would like to answer that.
THE PRESIDENT. Commissioner Suarez is recognized.
MR. SUAREZ. Thank you, Madam President.
We stated this because there might be a misunderstanding regarding the interpretation of the term "CAPITAL" as now used as the basis
for the percentage of foreign investments in appropriate instances and the interpretation attributed to the word is that it should be
based on the paidup capital. We eliminated the use the phrase "voting stock or controlling interest" because that is only used in
connection with the matter of voting. As a matter of fact, in the declaration of dividends for private corporations, it is usually based on
the paid-up capitalization.
So, what is really the dominant factor to be considered in matters of determining the 60-40 percentage should really be the paid-up
capital of the corporation.
MR. MAAMBONG. I would like to get clarification on this. If I remember my corporation law correctly, we usually use a determinant in
order to find out what the ratio of ownership is, not really on the paid-up capital stock but on the subscribed capital stock.
For example, if the whole authorized capital stock of the corporation is 1 million, if the subscription is 60 percent of 1 million which
is 600,000, then that is supposed to be the determinant whether there is a sharing of 60 percent of Filipinos or not. It is not really on
the paid-up capital because once a person subscribes to a capital stock then whether that capital stock is paid up or not, does not really
matter, as far as the books of the corporation are concerned. The subscribed capital stock is supposed to be owned by the person who
makes the subscription. There are so many laws on how to collect the delinquency and so on.
I view of the Commissioners answer, I would like to know whether he is determined to put on the record that in order to determine the
60-40 percent sharing, we have to determine whether we will use a determinant which is the subscribed capital stock or the paid-up
capital stock.
MR SUAREZ. We are principally concerned about the interpretation which would be attached to it; that is, it should be limited to
authorized capital stock, not to subscribed capital stock.
I will give the Commissioner an illustration of what he is explaining to the Commission.
MR. MAAMBONG. Yes, thank you.
MR. SUAREZ. Let us say the authorized capital stock is 1 million. Under the present rules in the Securities and Exchange Commission,
at least 25 percent of that amount must be subscribed and at least 25 percent of this subscribed capital must be paid up.
Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60 percent of the subscriptions would be allocated
to Filipinos and 40 percent of the subscribed capital would be held by foreigners. Then we come to the paid-up capitalization. Under the
present rules in the Securities and Exchange Commission, a foreign corporation is supposed to subscribe to a 40-percent share which
must be fully paid up.
On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at least 25 percent of the subscription must be
paid up for purposes of complying with the Corporation Law. We can illustrate the matter further by saying that the compliance of 25
percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40 percent by the foreigners.
So, we have a situation where the Filipino percentage of 60 may not even comply with the 25-percent requirement because of the
totality due to the fully payment of the 40-percent of the foreign investors, the payment of 25 percent paid-up on the subscription
would have been considered fulfilled. That is exactly what we are trying to avoid.
MR. MAAMBONG I appreciate very much the explanation but I wonder if the committee would subscribe to that view because I will stick
to my thinking that in the computation of the 60-40 ratio, the basis should be on the subscription. If the subscription is being done by
60 percent Filipinos, whether it is paid-up or not and the subscription is accepted by the corporation, I think that is the proper
determinant. If we base the 60-40 on the paid-up capital stock, we have a problem here where the 40 percent is fully paid up and the
60 percent is not fully paid up this may be contrary to the provisions of the Constitution. So I would like to ask for the proper
advisement from the Committee as to what should be the proper interpretation because this will cause havoc on the interpretation of
our Corporation Law.
MR. ROMULO. Madam President.

MR. ROMULO. We go by the established rule which I believe is uniformly held. It is based on the subscribed capital. I know only of one
possible exception and that is where the bylaws prohibit the subscriber from voting. But that is a very rare provision in bylaws.
Otherwise, my information and belief is that it is based on the subscribed capital.
MR. MAAMBONG. It is, therefore, the understanding of this Member that the Commissioner is somewhat revising the answer of
Commissioner Suarez to that extent?
MR. ROMULO. No, I do not think we contradict each other. He is talking really of the instance where the subscriber is a non-resident
and, therefore, must fully pay. That is how I understand his position.
MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing under the present formulation, the determinant is
the paid-up capital stock to which I disagree.
MR. ROMULO. At least, from my point of view, it is the subscribed capital stock.
MR. MAAMBONG. Then that is clarified.23
xxxx
August 23, 1986, Saturday
MS. ROSARIO BRAID. Madam President, I propose a new section to read: "THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
This will prevent management contracts and assure control by Filipino citizens. Will the committee assure us that this amendment will
insure that past activities such as management contracts will no longer be possible under this amendment?
MR. ROMULO. Madam President, if I may reply.
MR. ROMULO. May I ask the proponent to read the amendment again.
MS. ROSARIO BRAID. The amendment reads: "THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL
CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
MR. DE LOS REYES. Madam President, will Commissioner Rosario Braid agree to a reformulation of her amendment for it to be more
comprehensive and all-embracing?
THE PRESIDENT. Commissioner de los Reyes is recognized.
MR. DE LOS REYES. This is an amendment I submitted to the committee which reads: "MAJORITY OF THE DIRECTORS OR TRUSTEES
AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATION OR ASSOCIATION MUST BE CITIZENS OF THE
PHILIPPINES."
This amendment is more direct because it refers to particular officers to be all-Filipino citizens.
MR. BENGZON. Madam President.
THE PRESIDENT. Commissioner Bengzon is recognized.
MR. BENGZON. The committee sitting out here accepts the amendment of Commissioner de los Reyes which subsumes the amendment
of Commissioner Rosario Braid.
THE PRESIDENT. So this will be a joint amendment now of Commissioners Rosario Braid, de los Reyes and others.
MR. REGALADO. Madam President, I join in that amendment with the request that it will be the last sentence of Section 15 because we
intend to put an anterior amendment. However, that particular sentence which subsumes also the proposal of Commissioner Rosario
Braid can just be placed as the last sentence of the article.
THE PRESIDENT. Is that acceptable to the committee?

MR. VILLEGAS. Yes, Madam President.
MS. ROSARIO BRAID. Thank you.
MR. RAMA, The body is now ready to vote on the amendment.
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads: "THE
PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE
LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND"
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS MUST
BE CITIZENS OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY
ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF" I do not have the
rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS
MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the amendment. Is that
all right with Commissioner Rosario Braid?
THE PRESIDENT. The original authors of this amendment are Commissioners Rosario Braid, de los Reyes, Regalado,
Natividad, Guingona and Fr. Bernas.
MR. DE LOS REYES. The governing body refers to the board of directors and trustees.
MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.
MR. RAMA. The body is now ready to vote, Madam President.
VOTING
THE PRESIDENT. As many as are in favour of this proposed amendment which should be the last sentence of Section 15 and has been
accepted by the committee, pleas raise their hand. (All Members raised their hand.)
As many as are against, please raise their hand. (No Member raised his hand.)
The results show 29 votes in favour and none against; so the proposed amendment is approved. 24
It can be concluded that the view advanced by Justice Carpio is incorrect as the deliberations easily reveal that the intent of the framers was not to
limit the definition of the word "capital" as meaning voting shares/stocks.
The majority in the original decision reproduced the CONCOM deliberations held on August 13 and August 15, 1986, but neglected to quote the other
pertinent portions of the deliberations that would have shed light on the true intent of the framers of the Constitution.
It is conceded that Proposed Resolution No. 496 on the language of what would be Art. XII of the Constitution contained the phrase "voting stock or
controlling interest," viz:
PROPOSED RESOLUTION NO. 496
RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON NATIONAL ECONOMY AND PATRIMONY
Be it resolved as it is hereby resolved by the Constitutional Commission in session assembled, To incorporate the National Economy and
Patrimony of the new Constitution, the following provisions:
ARTICLE____
NATIONAL ECONOMY AND PATRIMONY
xxxx
SEC. 15. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least two-thirds of whose
voting stock or controlling interest is owned by such citizens. Neither shall any such franchise or right be granted except under
the condition that it shall be subject to amendment, alteration, or repeal by Congress when the common good so requires. The State
shall encourage equity participation in public utilities by the general public.25 (This became Sec. 11, Art. XII)(Emphasis supplied.)
The aforequoted deliberations disclose that the Commission eventually and unequivocally decided to use "capital," which refers to the
capital stock of the corporation, "as was employed in the 1935 and 1973 Constitution," instead of the proposed "voting stock or
controlling interest" as the basis for the percentage of ownership allowed to foreigners . The following exchanges among Commissioners
Foz, Suarez and Bengzon reflect this decision, but the majority opinion in the June 28, 2011 Decision left their statements out:
MR. FOZ. Mr. Vice-President, in Sections 3 and 9, 26 the provision on equity is both 60 percent, but I notice that this is now
different from the provision in the 1973 Constitution in that the basis for the equity provision is voting stock or
controlling interest instead of the usual capital percentage as provided for in the 1973 Constitution. We would like to know
what the difference would be between the previous and the proposed provisions regarding equity interest.
xxxx
MR. SUAREZ. x x x As a matter of fact, this particular portion is still being reviewed x x x. In Section 1, Article XIII of the 1935
Constitution, the wording is that the percentage should be based on the capital which is owned by such citizens. In the
proposed draft, this phrase was proposed: "voting stock or controlling interest." This was a plan submitted by the UP Law
Center.
x x x We would have three criteria to go by: One would be based on capital, which is capital stock of the corporation,
authorized, subscribed or paid up, as employed under the 1935 and the 1973 Constitution. The idea behind the introduction
of the phrase "voting stock or controlling interest" was precisely to avoid the perpetration of dummies, Filipino dummies of
multinationals. It is theoretically possible that a situation may develop where these multinational interests would not really be only 40
percent but will extend beyond that in the matter of voting because they could enter into what is known as a voting trust or voting
agreement with the rest of the stockholders and, therefore, notwithstanding the fact that on record their capital extent is only up to 40-
percent interest in the corporation, actually, they would be managing and controlling the entire company. That is why the UP Law
Center members suggested that we utilize the words "voting interest" which would preclude multinational control in the matter of
voting, independent of the capital structure of the corporation. And then they also added the phrase "controlling interest" which
up to now they have not been able to successfully define the exact meaning of. x x x And as far as I am concerned, I am not speaking
in behalf of the Committee, I would feel more comfortable if we go back to the wording of the 1935 and the 1973 Constitution,
that is to say, the 60-40 percentage could be based on the capital stock of the corporation.
xxxx
MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So there are already two in the Committee who want
to go back to the wording of the 1935 and the 1973 Constitution.27
In fact, in another portion of the CONCOM deliberations conveniently glossed over by the June 28, 2011 Decision, then Commissioner Davide strongly
resisted the retention of the term "capital" as used in the 1935 and 1973 Constitution on the ground that the term refers to both voting and nonvoting.
Eventually, however, he came around to accept the use of "CAPITAL" along with the majority of the members of the Committee on Natural Economy
and Patrimony in the afternoon session held on August 15, 1986:
MR. TREAS. x x x may I propose an amendment on line 14 of Section 3 by deleting therefrom "whose voting stock and
controlling interest." And in lieu thereof, insert the CAPITAL so the line should read: "associations at least sixty percent
of the CAPITAL is owned by such citizens.
MR. VILLEGAS. We accept the amendment.
MR. TREAS. Thank you.
THE PRESIDENT. The amendment of Commissioner Treas on line 14 has been accepted by the Committee.
Is there any objection? (Silence) The Chair hears none; the amendment is approved.28
xxxx
MR. SUAREZ. x x x Two points are being raised by Commissioner Davides proposed amendment. One has reference to the percentage
of holdings and the other one is the basis for the percentage x x x x Is the Commissioner not insisting on the voting capital
stock because that was already accepted by the Committee?
MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?
MR. SUAREZ. No, under the Commissioners proposal it is just "CAPITAL" not "stock."
MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the Committee? How shall it read?
MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY owned."
MR. VILLEGAS. Let me read lines 12 to 14 which state:
enter into co-production, joint venture, production sharing agreements with Filipino citizens or corporations or
associations at least 60 percent of whose CAPITAL is owned by such citizens.
We are going back to the 1935 and 1973 formulations.
MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not really be the guiding principle. It is
the ownership of the corporation. It may be voting or not voting, but that is not the guiding principle.
xxxx
THE PRESIDENT. Commissioner Davide is to clarify his point.
MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in place of "voting stock or controlling
interest." This is an amendment already accepted by the Committee.29
The above exchange precedes the clarifications made by then Commissioner Azcuna, which were cited in the June 28, 2011 Decision. Moreover, the
statements made subsequent to the portion quoted in the June 28, 2011 Decision emphasize the CONCOMs awareness of the plain meaning of the term
"capital" without the qualification espoused in the majoritys decision:
MR. AZCUNA. May I be clarified as to [what] was accepted x x x.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations at least sixty
percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens?
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the capital is owned by
them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation where the corporation is
controlled by foreigners despite being the minority because they have the voting capital. That is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that xxx there are
associations that do not have stocks. That is why we say "CAPITAL."
MR. BENGZON. In the case of stock corporation, it is assumed.
MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.
MR. BENGZON. Yes, that is understood.
MR. AZCUNA. Yes, because if we just say "sixty percent of whose capital is owned by the Filipinos," the capital may be
voting or non-voting.
MR. BENGZON. That is correct.30
More importantly, on the very same August 15, 1986 session, Commissioner Azcuna no longer insisted on retaining the delimiting phrase "controlling
interest":
MR. GARCIA. Thank you very much, Madam President.
I would like to propose the following amendment on Section 3, line 14 on page 2. I propose to change the word "sixty" to SEVENTY-
FIVE. So, this will read: "or it may enter into co-production, joint venture, production sharing agreements with Filipino citizens or
corporations or associations at least SEVENTY-FIVE percent of whose CAPITAL stock or controlling interest is owned by such citizens."
MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not insisting on the retention of the phrase
"controlling interest," so we will retain "CAPITAL" to go back really to the 1935 and 1973 formulations .31 (Emphasis
supplied.)
The later deliberations held on August 22, 1986 further underscore the framers true intent to include both voting and non-voting shares as coming
within the pale of the word "capital." The UP Law Center attempted to limit the scope of the word along the line then and now adopted by the majority,
but, as can be gleaned from the following discussion, the framers opted not to adopt the proposal of the UP Law Center to add the more
protectionist phrase "voting stock or controlling interest":
MR. NOLLEDO. x x x I would like to propound some questions xxx. I have here a copy of the approved provisions on Article on the
National Economy and Patrimony. x x x
I notice that this provision was amended by Commissioner Davide by changing "voting stocks" to "CAPITAL," but I still notice that there
appears the term "controlling interest" x x x. Besides, the wordings may indicate that the 60 percent may be based not only on capital
but also on controlling interest; it could mean 60 percent or 51 percent.
Before I propound the final question, I would like to make a comment in relation to Section 15 since they are related to each other. I
notice that in Section 15, there still appears the phrase "voting stock or controlling interest." The term "voting stocks" as the basis of the
Filipino equity means that if 60 percent of the voting stocks belong to Filipinos, foreigners may now own more than 40 percent of the
capital as long as the 40 percent or the excess thereof will cover nonvoting stock. This is aside from the fact that under the Corporation
Code, even nonvoting shares can vote on certain instances. Control over investments may cover aspects of management and
participation in the fruits of production or exploitation.
So, I hope the committee will consider favorably my recommendation that instead of using "controlling interests," we
just use "CAPITAL" uniformly in cases where foreign equity is permitted by law, because the purpose is really to help
the Filipinos in the exploitation of natural resources and in the operation of public utilities. x x x
What does the committee say?
MR. VILLEGAS. We completely agree with the Commissioners views. Actually, it was really an oversight. We did decide on the
word "CAPITAL." I think it was the opinion of the majority that the phrase "controlling interest" is ambiguous.
So, we do accept the Commissioners proposal to eliminate the phrase "or controlling interest" in all the provisions that
talk about foreign participation.
MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.32 (Emphasis supplied.)
In fact, on the very same day of deliberations, the Commissioners clarified that the proper and more specific "interpretation" that should be attached to
the word "capital" is that it refers to the "subscribed capital," a corporate concept defined as "that portion of the authorized capital stock that is covered
by subscription agreements whether fully paid or not"33 and refers to both voting and non-voting shares:
MR. MAAMBONG. x x x I would like to be clarified on the use of the word "CAPITAL."
MR. VILLEGAS. Yes, that was the word used in the 1973 and the 1935 Constitutions.
MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL." In the Corporation Law, if I remember correctly, we have three types
of capital: the authorized capital stock, the subscribed capital stock and the paid-up capital stock.
xxxx
I would like to get clarification on this. If I remember my corporation law correctly, we usually use a determinant in order to
find out what the ratio of ownership is, not really on the paid-up capital stock but on the subscribe capital stock.
xxxx
x x x I would like to know whether (Commissioner Suarez) is determined to put on the record that in order to determine the 60-40
percent sharing, we have to determine whether we will use a determinant which is the subscribed capital stock or the paid-up capital
stock.
MR. SUAREZ. We are principally concerned about the interpretation which would be attached to it, that is, it should be
limited to authorized capital stock, not to subscribed capital stock.
I will give the Commissioner an illustration of what he is explaining to the Commission.
xxxx
Let us say authorized capital stock is 1 million. Under the present rules in the [SEC], at least 25 percent of that amount must be
subscribed and at least 25 percent of this subscribed capital must be paid up.
Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60 percent of the subscriptions would be allocated
to Filipinos and 40 percent of the subscribed capital stock would be held by foreigners. Then we come to the paid-up capitalization.
Under the present rules in the [SEC], a foreign corporation is supposed to subscribe to 40-percent share which must be fully paid up.
On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at least 25 percent of the subscription must be
paid up for purposes of complying with the Corporation Law. We can illustrate the matter further by saying that the compliance of 25
percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40 percent by the foreigners.
So, we have a situation where the Filipino percentage of 60 may not even comply with the 25-percent requirement because of the
totality due to the full payment of the 40-percent of the foreign investors, the payment of 25 percent paid-up on the subscription would
have been considered fulfilled. That is exactly what we are trying to avoid.
MR. MAAMBONG. I appreciate very much the explanation but I wonder if the committee would subscribe to that view because I will
stick to my thinking that in the computation of the 60-40 ratio, the basis should be on the subscription. x x x
xxxx
MR. ROMULO. We go by the established rule which I believe is uniformly held. It is based on the subscribed capital. x x x
xxxx
I do not think that we contradict each other. (Commisioner Suarez) is talking really of the instance where the subscriber is a non-
resident and, therefore, must fully pay. That is how I understand his position.
MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing under the present formulation, the determinant is
the paid-up capital stock to which I disagree.
MR . ROMULO. At least, from my point of view, it is the subscribed capital stock."34
Clearly, while the concept of voting capital as the norm to determine the 60-40 Filipino-alien ratio was initially debated upon as a result of the proposal
to use "at least two-thirds of whose voting stock or controlling interest is owned by such citizens, "35 in what would eventually be Sec. 11, Art. XII of the
Constitution, that proposal was eventually discarded. And nowhere in the records of the CONCOM can it be deduced that the idea of full ownership of
voting stocks presently parlayed by the majority was earnestly, if at all, considered. In fact, the framers decided that the term "capital," as used in the
1935 and 1973 Constitutions, should be properly interpreted as the "subscribed capital," which, again, does not distinguish stocks based on their board-
membership voting features.
Indeed, the phrase "voting stock or controlling interest" was suggested for and in fact deliberated, but was similarly dropped in the approved draft
provisions on National Economy and Patrimony, particularly in what would become Sections 2 36 and 10,37 Article XII of the 1987 Constitution.
However, the framers expressed preference to the formulation of the provision in question in the 1935 and 1973 Constitutions, both of which employed
the word "capital" alone. This was very apparent in the aforementioned deliberations and affirmed by amicus curiae Dr. Bernardo Villegas, Chair of the
Committee on the National Economy and Patrimony in charge of drafting Section 11 and the rest of Article XII of the Constitution. During the June 26,
2012 oral arguments, Dr. Villegas manifested that:
x x x Justice Abad was right. [If i]t was not in the minds of the Commissioners to define capital broadly, these additional provisions
would be meaningless. And it would have been really more or less expressing some kind of a contradiction in terms. So, that is why I
was pleasantly surprised that one of the most pro-Filipino members of the Commission, Atty. Jose Suarez, who actually voted "NO" to
the entire Constitution has only said, was one of the first to insist, during one of the plenary sessions that we should reject the UP Law
Center recommendation. In his words, I quote "I would feel more comfortable if we go back to the wording of the 1935
and 1970 Constitutions that is to say the 60-40 percentage could be based on the capital stock of the corporation." The
final motion was made by Commissioner Efren Treas, in the same plenary session when he moved, "Madam President, may I propose
an amendment on line 14 of Section 3 by deleting therefrom whose voting stock and controlling interest and in lieu thereof, insert
capital, so the line should read: "associations of at least sixty percent (60%) of the capital is owned by such citizens." After I accepted
the amendment since I was the chairman of the National Economy Committee, in the name of the Committee, the
President of the Commission asked for any objection. When no one objected, the President solemnly announced that
the amendment had been approved by the Plenary. It is clear, therefore, that in the minds of the Commissioners the
word "capital" in Section 11 of Article XII refers, not to voting stock, but to total subscribed capital, both common and
preferred.38 (Emphasis supplied.)
There was no change in phraseology from the 1935 and

1973 Constitutions, or a transitory provision that signals
such change, with respect to foreign ownership in public
utility corporations (2nd extrinsic aid)
If the framers wanted the word "capital" to mean voting capital stock, their terminology would have certainly been unmistakably limiting as to leave no
doubt about their intention. But the framers consciously and purposely excluded restrictive phrases, such as "voting stocks" or "controlling
interest," in the approved final draft, the proposal of the UP Law Center, Commissioner Davide and Commissioner Azcuna notwithstanding. Instead, they
retained "capital" as "used in the 1935 and 1973 Constitutions." 39 There was, therefore, a conscious design to avoid stringent words that would limit
the meaning of "capital" in a sense insisted upon by the majority. Cassus omissus pro omisso habendus est a person, object, or thing omitted must
have been omitted intentionally. More importantly, by using the word "capital," the intent of the framers of the Constitution was to include all types of
shares, whether voting or nonvoting, within the ambit of the word.
History or realities or circumstances prevailing during the

drafting of the Constitution validate the adoption of the plain
meaning of "Capital" (3rd extrinsic aid)
This plain, non-exclusive interpretation of "capital" also comes to light considering the economic backdrop of the 1986 CONCOM when the country was
still starting to rebuild the financial markets and regain the foreign investors confidence following the changes caused by the toppling of the Martial Law
regime. As previously pointed out, the Court, in construing the Constitution, must take into consideration the aims of its framers and the evils they
wished to avoid and address. In Civil Liberties Union v. Executive Secretary,40 We held:
A foolproof yardstick in constitutional construction is the intention underlying the provision under consideration. Thus, it has been held
that the Court in construing a Constitution should bear in mind the object sought to be accomplished by its adoption,
and the evils, if any, sought to be prevented or remedied. A doubtful provision will be examined in the light of the history of the
times, and the condition and circumstances under which the Constitution was framed. The object is to ascertain the reason which
induced the framers of the Constitution to enact the particular provision and the purpose sought to be accomplished
thereby, in order to construe the whole as to make the words consonant to that reason and calculated to effect that
purpose. (Emphasis supplied.)
It is, thus, proper to revisit the circumstances prevailing during the drafting period. In an astute observation of the economic realities in 1986, quoted by
respondent Pangilinan, University of the Philippines School of Economics Professor Dr. Emmanuel S. de Dios examined the nations dire need for foreign
investments and foreign exchange during the time when the framers deliberated on what would eventually be the National Economy and Patrimony
provisions of the Constitution:
The period immediately after the 1986 EDSA Revolution is well known to have witnessed the countrys deepest
economic crisis since the Second World War. Official data readily show this period was characterised by the highest
unemployment, highest interest rates, and largest contractions in output the Philippine economy experienced in the postwar period. At
the start of the Aquino administration in 1986, total output had already contracted by more than seven percent annually for two
consecutive years (1984 and 1985), inflation was running at an average of 35 percent, unemployment more than 11 percent, and the
currency devalued by 35 percent.
The proximate reason for this was the moratorium on foreigndebt payments the country had called in late 1983,
effectively cutting off the countrys access to international credit markets (for a deeper contemporary analysis of what led to
the debt crisis, see de Dios 1984). The country therefore had to subsist only on its current earnings from exports, which
meant there was a critical shortage of foreign exchange. Imports especially of capital goods and intermediate goods
therefore had to be drastically curtailed x x x.
For the same reasons, obviously, new foreign investments were unlikely to be forthcoming. This is recorded by Bautista 2003:158, who
writes:
Long-term capital inflows have been rising at double-digit rates since 1980, except during 1986-1990, a time of
great political and economic uncertainty following the period of martial law under President Marcos.
The foreign-exchange controls then effectively in place will have made importing inputs difficult for new enterprises, particularly foreign
investors (especially Japanese) interested in relocating some of theirexport-oriented but import-dependent operations to the Philippines.
x x x The same foreign-exchange restrictions would have made the freedom to remit profits a dicey affairs. Finally, however, the period
was also characterised by extreme political uncertainty, which did not cease even after the Marcos regime was toppled. 41 x x x
Surely, it was far from the minds of the framers to alienate and disenfranchise foreign investors by imposing an indirect restriction that only exacerbates
the dichotomy between management and ownership without the actual guarantee of giving control and protection to the Filipino investors. Instead, it
can be fairly assumed that the framers intended to avoid further economic meltdown and so chose to attract foreign investors by allowing them to 40%
equity ownership of the entirety of the corporate shareholdings but, wisely, imposing limits on their participation in the governing body to ensure that
the effective control and ultimate economic benefits still remained with the Filipino shareholders.
Judicial decisions and prior laws use and/or treat

"capital" as "capital stock" (4th extrinsic aid)
That the term "capital" in Sec. 11, Art. XII is equivalent to "capital stock," which encompasses all classes of shares regardless of their nomenclature or
voting capacity, is easily determined by a review of various laws passed prior to the ratification of the 1987 Constitution. In 1936, for instance, the
Public Service Act42 established the nationality requirement for corporations that may be granted the authority to operate a "public service," 43 which
include most of the present-day public utilities, by referring to the paid-up "capital stock" of a corporation, viz:
Sec. 16. Proceedings of the Commission, upon notice and hearing. The Commission shall have power, upon proper notice and hearing
in accordance with the rules and provisions of this Act, subject to the limitations and exceptions mentioned and saving provisions to the
contrary:
(a) To issue certificates which shall be known as certificates of public convenience, authorizing the operation of public service
within the Philippines whenever the Commission finds that the operation of the public service proposed and the authorization
to do business will promote the public interest in a proper and suitable manner. Provided, That thereafter, certificates of
public convenience and certificates of public convenience and necessity will be granted only to citizens of the
Philippines or of the United States or to corporations, co-partnerships, associations or joint-stock companies
constituted and organized under the laws of the Philippines; Provided, That sixty per centum of the stock or
paid-up capital of any such corporations, co-partnership, association or joint-stock company must belong
entirely to citizens of the Philippines or of the United States: Provided, further, That no such certificates shall be issued
for a period of more than fifty years. (Emphasis supplied.)
The heading of Sec. 2 of Commonwealth Act No. (CA) 108, or the Anti-Dummy Law, which was approved on October 30, 1936, similarly conveys the
idea that the term "capital" is equivalent to "capital stock"44:
Section 2. Simulation of minimum capital stock In all cases in which a constitutional or legal provision requires that, in
order that a corporation or association may exercise or enjoy a right, franchise or privilege, not less than a certain per
centum of its capital must be owned by citizens of the Philippines or of any other specific country, it shall be unlawful to falsely
simulate the existence of such minimum stock or capital as owned by such citizens, for the purpose of evading said provision. The
president or managers and directors or trustees of corporations or associations convicted of a violation of this section shall be punished
by imprisonment of not less than five nor more than fifteen years, and by a fine not less than the value of the right, franchise or
privilege, enjoyed or acquired in violation of the provisions hereof but in no case less than five thousand pesos. 45 (Emphasis and
underscoring supplied.)
Pursuant to these legislative acts and under the aegis of the Constitutional nationality requirement of public utilities then in force, Congress granted
various franchises upon the understanding that the "capital stock" of the grantee is at least 60% Filipino. In 1964, Congress, via Republic Act No. (RA)
4147,46 granted Filipinas Orient Airway, Inc. a legislative franchise to operate an air carrier upon the understanding that its "capital stock" was 60%
percent Filipino-owned. Section 14 of RA 4147, provided:
Sec. 14. This franchise is granted with the understanding that the grantee is a corporation sixty per cent of the capital stock of
which is the bona fide property of citizens of the Philippines and that the interest of such citizens in its capital stock or in the
capital of the Company with which it may merge shall at no time be allowed to fall below such percentage, under the penalty of the
cancellation of this franchise. (Emphasis and underscoring supplied.)
The grant of a public utility franchise to Air Manila. Inc. to establish and maintain air transport in the country a year later pursuant to RA 4501 47
contained exactly the same Filipino capitalization requirement imposed in RA 4147:
Sec. 14. This franchise is granted with the understanding that the grantee is a corporation, sixty per cent of the capital stock of
which is owned or the bona fide property of citizens of the Philippines and that the interest of such citizens in its capital stock
or in the capital of the company with which it may merge shall at no time be allowed to fall below such percentage, under the penalty of
the cancellation of this franchise. (Emphasis and underscoring supplied.)
In like manner, RA 5514,48 which granted a franchise to the Philippine Communications Satellite Corporation in 1969, required of the grantee to
execute management contracts only with corporations whose "capital or capital stock" are at least 60% Filipino:
Sec. 9. The grantee shall not lease, transfer, grant the usufruct of, sell or assign this franchise to any person or entity, except any
branch or instrumentality of the Government, without the previous approval of the Congress of the Philippines: Provided, That the
grantee may enter into management contract with any person or entity, with the approval of the President of the Philippines: Provided,
further, That such person or entity with whom the grantee may enter into management contract shall be a citizen of the Philippines and
in case of an entity or a corporation, at least sixty per centum of the capital or capital stock of which is owned by citizens
of the Philippines. (Emphasis supplied.)
In 1968, RA 5207,49 otherwise known as the "Atomic Energy Regulatory Act of 1968," considered a corporation sixty percent of whose capital stock as
domestic:
Sec. 9. Citizenship Requirement. No license to acquire, own, or operate any atomic energy facility shall be issued to an alien, or any
corporation or other entity which is owned or controlled by an alien, a foreign corporation, or a foreign government.
For purposes of this Act, a corporation or entity is not owned or controlled by an alien, a foreign corporation of a foreign
government if at least sixty percent (60%) of its capital stock is owned by Filipino citizens. (Emphasis supplied.)
Anent pertinent judicial decisions, this Court has used the very same definition of capital as equivalent to the entire capital stockholdings in a
corporation in resolving various other issues. In National Telecommunications Commission v. Court of Appeals,50 this Court, thus, held:
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 be, 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 loosely be 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 consideration therefor.51
This is similar to the holding in Banco Filipino v. Monetary Board52 where the Court treated the term "capital" as including both common and
preferred stock, which are usually deprived of voting rights:
It is clear from the law that a solvent bank is one in which its assets exceed its liabilities. It is a basic accounting principle that assets
are composed of liabilities and capital. The term "assets" includes capital and surplus" (Exley v. Harris, 267 p. 970, 973, 126 Kan., 302).
On the other hand, the term "capital" includes common and preferred stock, surplus reserves, surplus and undivided
profits. (Manual of Examination Procedures, Report of Examination on Department of Commercial and Savings Banks, p. 3-C). If
valuation reserves would be deducted from these items, the result would merely be the networth or the unimpaired capital and surplus
of the bank applying Sec. 5 of RA 337 but not the total financial condition of the bank.
In Commissioner of Internal Revenue v. Court of Appeals,53 the Court alluded to the doctrine of equality of shares in resolving the issue therein
and held that all shares comprise the capital stock of a corporation:
A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are those which
entitle the shareholder to some priority on dividends and asset distribution. Both shares are part of the corporations capital
stock. Both stockholders are no different from ordinary investors who take on the same investment risks. Preferred and
common shareholders participate in the same venture, willing to share in the profit and losses of the enterprise.
Moreover, under the doctrine of equality of shares --- all stocks issued by the corporation are presumed equal with the
same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences.54 (Emphasis supplied.)
The SEC has reflected the popular contemporaneous

construction of capital in computing the nationality
requirement based on the total capital stock, not only
the voting stock, of a corporation (5th extrinsic aid)
The SEC has confirmed that, as an institution, it has always interpreted and applied the 40% maximum foreign ownership limit for public utilities to the
total capital stock, and not just its total voting stock.
In its July 29, 2011 Manifestation and Omnibus Motion, the SEC reaffirmed its longstanding practice and history of enforcement of the 40% maximum
foreign ownership limit for public utilities, viz:
5. The Commission respectfully submits that it has always performed its duty under Section 17(4) of the Corporation Code to enforce
the foreign equity restrictions under Section 11, Article XII of the Constitution on the ownership of public utilities.
xxxx
8. Thus, in determining compliance with the Constitutional restrictions on foreign equity, the Commission consistently
construed and applied the term "capital" in its commonly accepted usage, that is the sum total of the shares
subscribed irrespective of their nomenclature and whether or not they are voting or non-voting (Emphasis supplied).
9. This commonly accepted usage of the term capital is based on persuasive authorities such as the widely esteemed Fletcher
Cyclopedia of the Law of Private Corporations , and doctrines from American Jurisprudence. To illustrate, in its Opinion dated February
15, 1988 addresses to Gozon, Fernandez, Defensor and Associates, the Commission discussed how the term capital is commonly used:
"Anent thereto, please be informed that the term capital as applied to corporations, refers to the money, property or
means contributed by stockholders as the form or basis for the business or enterprise for which the corporation was
formed and generally implies that such money or property or means have been contributed in payment for stock issued
to the contributors. (United Grocers, Ltd. v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol.,
sec. 5080 at 18). As further ruled by the court, capital of a corporation is the fund or other property, actually or
potentially in its possession, derived or to be derived from the sale by it of shares of its stock or his
exchange by it for property other than money. This fund includes not only money or other property received by
the corporation for shares of stock but all balances of purchase money, or instalments, due the corporation for shares of
stock sold by it, and all unpaid subscriptions for shares." (Williams v. Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc.
Corp., 1058 rev. vol., sec. 5080, p. 21).
The term capital is also used synonymously with the words capital stock, as meaning the amount subscribed and
paidin and upon which the corporation is to conduct its operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at
15). And, as held by the court in Haggard v. Lexington Utilities Co., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc.
Corp., 1958 rev. vol., sec. 5079 at 17), The capital stock of a corporation is the amount paidin by its stockholders in
money, property or services with which it is to conduct its business, and it is immaterial how the stock is
classified, whether as common or preferred.
The Commission, in a previous opinion, ruled that the term capital denotes the sum total of the shares subscribed and
paid by the shareholders or served to be paid, irrespective of their nomenclature. (Letter to Supreme Technotronics
Corporation, dated April 14, 1987)." (Emphasis ours)
10. Further, in adopting this common usage of the term capital, the Commission believed in good faith and with sound reasons that it
was consistent with the intent and purpose of the Constitution. In an Opinion dated 27 December 1995 addressed to Joaquin Cunanan
& Co. the Commission observed that:
"To construe the 60-40% equity requirement as merely based on the voting shares, disregarding the preferred non-
voting share, not on the total outstanding subscribed capital stock, would give rise to a situation where the actual
foreign interest would not really be only 40% but may extend beyond that because they could also own even the entire
preferred non-voting shares. In this situation, Filipinos may have the control in the operation of the corporation by way
of voting rights, but have no effective ownership of the corporate assets which includes lands, because the actual
Filipino equity constitutes only a minority of the entire outstanding capital stock. Therefore, in essence, the
company, although controlled by Filipinos, is beneficially owned by foreigners since the actual ownership
of at least 60% of the entire outstanding capital stocks would be in the hands of foreigners. Allowing this
situation would open the floodgates to circumvention of the intent of the law to make the Filipinos the
principal beneficiaries in the ownership of alienable lands." (Emphasis ours)
11. The foregoing settled principles and esteemed authorities relied upon by the Commission show that its interpretation of the term
capital is reasonable.
12. And, it is well settled that courts must give due deference to an administrative agencys reasonable interpretation of the statute it
enforces.55
It should be borne in mind that the SEC is the government agency invested with the jurisdiction to determine at the first instance the observance by a
public utility of the constitutional nationality requirement prescribed vis--vis the ownership of public utilities 56 and to interpret legislative acts, like the
FIA. The rationale behind the doctrine of primary jurisdiction lies on the postulate that such administrative agency has the "special knowledge,
experience and tools to determine technical and intricate matters of fact" 57 Thus, the determination of the SEC is afforded great respect by other
executive agencies, like the Department of Justice (DOJ),58 and by the courts.
Verily, when asked as early as 1988 "Would it be legal for foreigners to own in a public utility entity more than 40% of the common shares but not
more than 40% of the total outstanding capital stock which would include both common and non-voting preferred shares?" the SEC, citing Fletcher,
invariably answered in the affirmative, whether the poser was made in light of the present or previous Constitutions:
The pertinent provision of the Philippine Constitution under Article XII, Section 7, reads in part thus:
"No franchise, certificate, or any form of authorization for the operation of a public utility shall be granted except to citizens of the
Philippines, or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is
owned by such citizens. . ." x x x
The issue raised on your letter zeroes in on the meaning of the word "capital" as used in the above constitutional
provision. Anent thereto, please be informed that the term "capital" as applied to corporations, refers to the money, property or means
contributed by stockholders as the form or basis for the business or enterprise for which the corporation was formed and generally
implies that such money or property or means have been contributed in payment for stock issued to the contributors. (United Grocers,
Ltd. v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As further ruled by the court,
"capital of a corporation is the fund or other property, actually or potentially in its possession, derived or to be derived from the sale by
it of shares of its stock or his exchange by it for property other than money. This fund includes not only money or other property
received by the corporation for shares of stock but all balances of purchase money, or installments, due the corporation for shares of
stock sold by it, and all unpaid subscriptions for shares." (Williams v. Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc. Corp., 1058 rev.
vol., sec. 5080, p. 21).
The term "capital" is also used synonymously with the words "capital stock", as meaning the amount subscribed and paid-in and upon
which the corporation is to conduct its operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court in
Haggard v. Lexington Utilities Co., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc. Corp., 1958 rev. vol., sec. 5079 at 17), "The
capital stock of a corporation is the amount paid-in by its stockholders in money, property or services with which it is to
conduct its business, and it is immaterial how the stock is classified, whether as common or preferred."
The Commission, in a previous opinion, ruled that the term capital denotes the sum total of the shares subscribed and
paid by the shareholders or served to be paid, irrespective of their nomenclature. (Letter to Supreme Technotronics
Corporation, dated April 14, 1987). Hence, your query is answered in the affirmative. 59 (Emphasis supplied.)
As it were, the SEC has held on the same positive response long before the 1987 Constitution came into effect, a matter of fact which has received due
acknowledgment from this Court. In People v. Quasha,60 a case decided under the 1935 Constitution, this Court narrated that in 1946 the SEC
approved the incorporation of a common carrier, a public utility, where Filipinos, while not holding the controlling vote, owned the majority of the
capital, viz:
The essential facts are not in dispute. On November 4, 1946, the Pacific Airways Corporation registered its articles of incorporation with
the [SEC]. The articles were prepared and the registration was effected by the accused, who was in fact the organizer of the
corporation. The articles stated that the primary purpose of the corporation was to carry on the business of a common carrier by air,
land, or water, that its capital stock was 1,000,000, represented by 9,000 preferred and 100,000 common shares, each
preferred share being of the par value of 100 and entitled to 1/3 vote and each common share, of the par value of 1
and entitled to one vote; that the amount of capital stock actually subscribed was 200,000, and the names of the subscriber were
Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James Obannon, Denzel J. Cavin, and William H. Quasha, the first being a
Filipino and the other five all Americans; that Baylons subscription was for 1,145 preferred shares, of the total value of 114,500
and 6,500 common shares, of the total par value of 6,500, while the aggregate subscriptions of the American subscribers were for 200
preferred shares, of the total par value of 20,000 and 59,000 common shares, of the total par value of 59,000; and that Baylon and
the American subscribers had already paid 25 percent of their respective subscriptions. Ostensibly the owner of, or subscriber to,
60.005 per cent of the subscribed capital stock of the corporation, Baylon, did not have the controlling vote because of
the difference in voting power between the preferred shares and the common shares. Still, with the capital structure as
it was, the articles of incorporation were accepted for registration and a certificate of incorporation was issued by the
[SEC]. (Emphasis supplied.)
The SEC has, through the years, stood by this interpretation. In an Opinion dated November 21, 1989, the SEC held that the basis of the computation
for the nationality requirement is the total outstanding capital stock, to wit:
As to the basis of computation of the 60-40 percentage nationality requirement under existing laws (whether it should be based on the
number of shares or the aggregate amount in pesos of the par value of the shares), the following definitions of corporate terms are
worth mentioning.
"The term capital stock signifies the aggregate of the shares actually subscribed". (11 Fletcher, Cyc. Corps. (1971 Rev. Vol.) sec. 5082,
citing Goodnow v. American Writing Paper Co., 73 NJ Eq. 692, 69 A 1014 aff'g 72 NJ Eq. 645, 66 A, 607).
"Capital stock means the capital subscribed (the share capital)". (Ibid., emphasis supplied).
"In its primary sense a share of stock is simply one of the proportionate integers or units, the sum of which constitutes the capital stock
of corporation. (Fletcher, sec. 5083).
The equitable interest of the shareholder in the property of the corporation is represented by the term stock, and the extent of his
interest is described by the term shares. The expression shares of stock when qualified by words indicating number and ownership
expresses the extent of the owner's interest in the corporate property (Ibid, Sec. 5083, emphasis supplied).
Likewise, in all provisions of the Corporation Code the stockholders right to vote and receive dividends is always determined and based
on the "outstanding capital stock", defined as follows:
"SECTION 137. Outstanding capital stock defined. The term "outstanding capital stock" as used in this Code, means the total shares
of stock issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscription
agreement, except treasury shares."
The computation, therefore, should be based on the total outstanding capital stock, irrespective of the amount of the par value of the
shares.
Then came SEC-OGC Opinion No. 08-14 dated June 02, 2008:
The instant query now centers on whether both voting and nonvoting shares are included in the computation of the required percentage
of Filipino equity, As a rule, the 1987 Constitution does not distinguish between voting and non-voting shares with regard to the
computation of the percentage interest by Filipinos and non-Filipinos in a company. In other words, non-voting shares should be
included in the computation of the foreign ownership limit for domestic corporation. This was the rule applied [in SEC
Opinion No. 04-30 x x x It was opined therein that the ownership of the shares of stock of a corporation is based on the total
outstanding or subscribed/issued capital stock regardless of whether they are classified as common voting shares or preferred shares
without voting rights. This is in line with the policy of the State to develop an independent national economy effectively controlled by
Filipinos. x x x (Emphasis added.)
The SEC again echoed the same interpretation in an Opinion issued last April 19, 2011 wherein it stated, thus:
This is, thus, the general rule, such that when the provision merely uses the term "capital" without qualification (as in Section 11, Article
XII of the 1987 Constitution, which deals with equity structure in a public utility company), the same should be interpreted to refer to
the sum total of the outstanding capital stock, irrespective of the nomenclature or classification as common, preferred, voting or non-
voting.61
The above construal is in harmony with the letter and spirit of Sec. 11, Art. XII of the Constitution and its counterpart provisions in the 1935 and 1973
Constitution and, thus, is entitled to respectful consideration. As the Court declared in Philippine Global Communications, Inc. v. Relova :62
x x x As far back as In re Allen, (2 Phil. 630) a 1903 decision, Justice McDonough, as ponente, cited this excerpt from the leading
American case of Pennoyer v. McConnaughy, decided in 1891: "The principle that the contemporaneous construction of a
statute by the executive officers of the government, whose duty it is to execute it, is entitled to great respect, and
should ordinarily control the construction of the statute by the courts, is so firmly embedded in our jurisprudence that no
authorities need be cited to support it. x x x There was a paraphrase by Justice Malcolm of such a pronouncement in Molina v. Rafferty,
(37 Phil. 545) a 1918 decision:" Courts will and should respect the contemporaneous construction placed upon a statute by the
executive officers whose duty it is to enforce it, and unless such interpretation is clearly erroneous will ordinarily be controlled thereby.
(Ibid, 555) Since then, such a doctrine has been reiterated in numerous decisions. 63 (Emphasis supplied.)
Laxamana v. Baltazar64 restates this long-standing dictum: "[w]here a statute has received a contemporaneous and practical interpretation and the
statute as interpreted is re-enacted, the practical interpretation is accorded greater weight than it ordinarily receives, and is regarded as presumptively
the correct interpretation of the law. The rule here is based upon the theory that the legislature is acquainted with the contemporaneous interpretation
of a statute, especially when made by an administrative body or executive officers charged with the duty of administering or enforcing the law, and
therefore impliedly adopts the interpretation upon re-enactment." 65 Hence, it can be safely assumed that the framers, in the course of deliberating the
1987 Constitution, knew of the adverted SEC interpretation.
Parenthetically, it is immaterial whether the SEC opinion was rendered by the banc or by the SEC-Office of the General Counsel (OGC) considering that
the latter has been given the authority to issue opinions on the laws that the SEC implements under SEC-EXS. Res. No. 106, Series of 2002. 66 The
conferment does not violate Sec. 4.6 67 of the Securities and Regulation Code (SRC) that proscribes the non-delegation of the legislative rule making
power of the SEC, which is in the nature of subordinate legislation. As may be noted, the same Sec. 4.6 does not mention the SECs power to issue
interpretative "opinions and provide guidance on and supervise compliance with such rules," 68 which is incidental to the SECs enforcement functions. A
legislative rule and an interpretative rule are two different concepts and the distinction between the two is established in administrative law. 69 Hence,
the various opinions issued by the SEC-OGC deserve as much respect as the opinions issued by the SEC en banc.
Nonetheless, the esteemed ponente posits that the SEC, contrary to its claim, has been less than consistent in its construal of "capital." During the oral
arguments, he drew attention to various SEC Opinions, nine (9) to be precise, that purportedly consider "capital" as referring only to voting stocks.
Refuting this position, the SEC in its Memorandum dated July 25, 2012 explained in some detail that the Commission has been consistent in
applying the term "capital" to the total outstanding capital stock, whether voting or non-voting . The SEC Opinions referred to by Justice
Carpio, which cited the provisions of the FIA, is not, however, pertinent or decisive of the issue on the meaning of "capital." The said SEC Memorandum
states:
During the oral arguments held on 26 June 2012, the SEC was directed to explain nine (9) of its Opinions in relation to the definition of
"capital" as used in Section 11, Article XII of the Constitution, namely: (1) Opinion dated 3 March 1993 for Mr. Francis F. How; (2)
Opinion dated 14 April 1993 for Director Angeles T. Wong; (3) Opinion dated 23 November 1993 for Mssrs. Dominador Almeda and
Renato S. Calma; (4) Opinion dated 7 December 1993 for Roco Buag Kapunan Migallos & Jardeleza Law Offices; (5) Opinion dated 22
December 2004 for Romulo Mabanta Buenaventura Sayoc & De Los Angeles; (6) Opinion dated 27 September 2007 for Reynaldo G.
David; (7) Opinion dated 28 November 2007 for Santiago & Santiago law Offices; (8) Opinion dated 15 January 2008 for Attys. Ruby
Rose J. Yusi and Rudyard S. Arbolado; and (9) Opinion dated 18 August 2010 for Castillo Laman Tan Pantaleon & San Jose.
xxxx
With due respect, the issue of whether "capital" refers to outstanding capital stock or only voting stocks was never
raised in the requests for these opinions. In fact, the definition of "capital" could not have been a relevant and/or a material issue
in some of these opinions because the common and preferred shares involved have the same voting rights. Also, some Opinions
mentioned the FIA to emphasize that the said law mandates the application of the Control Test. Moreover, these Opinions state they are
based solely on the facts disclosed and relevant only to the issues raised therein.
For one, the Opinion dated 3 March 1993 for Mr. Francis F. How does not discuss whether "capital" refers to total outstanding
capital stock or only voting stocks. Instead, it talks about the application of the Control test in a mining corporation by looking into
the nationality of its investors. The FIA is not mentioned to provide a definition of "capital," but to explain the nationality
requirement pertinent to investors of a mining corporation.
The Opinion dated 14 April 1993 for Dir. Angeles T. Wong also does not define "capital" as referring to total outstanding
capital or only to voting shares, but talks about the application of the Control Test x x x. The FIA is again mentioned only to
explain the nationality required of investors of a corporation engaged in overseas recruitment.
The Opinion dated 23 November 1993 for Mssrs. Dominador Almeda and Renato S. Calma distinguishes between the nationality of
a corporation as an investing entity and the nationality of a corporation as an investee corporation. The FIA is
mentioned only in the discussion of the nationality of the investors of a corporation owning land in the Philippines ,
composed of a trustee for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals, and another domestic corporation which is 100%
foreign owned.
Unlike the Decision rendered by this Honorable Court on 28 June 2011, the Opinion dated 07 December 1993 for Roco Buag Kapunan
Migallos & Jardeleza does not parley on the issue of the proper interpretation of "capital" because it is not a relevant
and/or a material issue in this opinion xxx. The FIA is mentioned only to explain the application of the control test. Note,
however, that manufacturing fertilizer is neither a nationalized or partly nationalized activity, which is another reason why this Opinion
has no relevance in this case.
The Opinion dated 22 December 2004 for Romulo Mabanta Buenaventura Sayoc & De Los Angeles focuses on the nationality of the
investors of a corporation that will acquire land wherein one of the investors is a foundation. It confirms the view that the test for
compliance with the nationality requirement is based on the total outstanding capital stock irrespective of the amount
of the par value of shares. The FIA is used merely to justify the application of the Control Test as adopted in the Department of
Justice Opinion, No. 18, Series of 1989, dated 19 January 1989m viz
xxxx
The Opinion dated 27 September 2007 for Mr. Reynaldo G. David, likewise, does not discuss whether "capital" refers to total
outstanding capital stock or only to voting stocks, but rather whether the Control Test is applicable in determining the
nationality of the proposed corporate bidder or buyer of PNOC-EDC shares. x x x The FIA was cited only to emphasize that the
said law mandates the application of the Control Test.
The Opinion dated 28 November 2007 for Santiago & Santiago Law Offices maintains and supports the position of the
Commission that Section 11, Article XII of the Constitution makes no distinction between common and preferred
shares, thus, both shares should be included in the computation of the foreign equity cap for domestic corporations .
Simply put, the total outstanding capital stock, without regard to how the shares are classified, should be used as the basis in
determining the compliance by public utilities with the nationality requirement as provided for in Section 11, Article XII of the
Constitution. Notably, all shares of the subject corporation, Pilipinas First, have voting rights, whether common or preferred. Hence, the
issue on whether "capital" refers to total outstanding capital stock or only to voting stocks has no relevance in this Opinion.
In the same way, the Opinion dated 15 January 2008 for Attys. Ruby Rose J. Yusi and Rudyard S. Arbolada never discussed whether
"capital" refers to outstanding capital stock or only to voting stocks, but rather whether the Control Test is applicable or
not. The FIA was used merely to justify the application of the Control Test. More importantly, the term "capital" could not have been
relevant and/or material issue in this Opinion because the common and preferred shares involved have the same voting rights.
The Opinion dated 18 August 2010 for Castillo Laman Tan Pantaleon & San Jose reiterates that the test for compliance with the
nationality requirement is based on the total outstanding capital stock, irrespective of the amount of the par value of
the shares. The FIA is mentioned only to explain the application of the Control Test and the Grandfather Rule in a
corporation owning land in the Philippines by looking into the nationality of its investors. (Emphasis supplied). 70
In view of the foregoing, it is submitted that the long-established interpretation and mode of computing by the SEC of the total capital stock strongly
recognize the intent of the framers of the Constitution to allow access to much-needed foreign investments confined to 40% of the capital stock of
public utilities.
Consequences of alternative interpretation: mischievous

effects of the construction proposed in the petition and
sustained in the June 28, 2011 Decision. (6th extrinsic aid)
Filipino shareholders will not
control the fundamental corporate
matters nor own the majority
economic benefits of the public
utility corporation.
Indeed, if the Court persists in adhering to the rationale underlying the majoritys original interpretation of "capital" found in the first sentence of Section
11, Article XII, We may perhaps be allowing Filipinos to direct and control the daily business of our public utilities, but would irrevocably and
injudiciously deprive them of effective "control" over the major and equally important corporate decisions and the eventual beneficial
ownership of the corporate assets that could include, among others, claim over our soilour land . This undermines the clear textual
commitment under the Constitution that reserves ownership of disposable lands to Filipino citizens. The interplay of the ensuing provisions of Article XII
is unmistakable:
SECTION 2. All lands of the public domain x x x forests or timber, wildlife, flora and fauna, and other natural resources are owned by
the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development,
and utilization of natural resources shall be under the full control and supervision of the State. x x x
xxxx
SECTION 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national parks. Agricultural
lands of the public domain may be further classified by law according to the uses which they may be devoted. Alienable lands of the
public domain shall be limited to agricultural lands. Private corporations or associations may not hold such alienable lands except by
lease, for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and not to exceed one thousand
hectares in area. Citizens of the Philippines may lease not more than five hundred hectares, or acquire not more than twelve hectares
thereof by purchase, homestead or grant.
xxxx
SECTION 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals,
corporations or associations qualified to acquire or hold lands of the public domain. (Emphasis supplied.)
Consider the hypothetical case presented in the original ponencia:
Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso ( 1.00) per share. Under the broad definition of the term "capital,"
such corporation would be considered compliant with the 40 percent constitutional limit on foreign equity of public utilities since the
overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is obviously absurd.
Albeit trying not to appear to, the majority actually finds fault in the wisdom of, or motive behind, the provision in question through "highly unlikely
scenarios of clinical extremes," to borrow from Veterans Federation Party v. COMELEC.71 It is submitted that the flip side of the ponencias hypothetical
illustration, which will be exhaustively elucidated in this opinion, is more anomalous and prejudicial to Filipino interests.
For instance, let us suppose that the authorized capital stock of a public utility corporation is divided into 100 common shares and 1,000,000 non-voting
preferred shares. Since, according to the Courts June 28, 2011 Decision, the word "capital" in Sec. 11, Art. XII refers only to the voting shares, then the
40% cap on foreign ownership applies only to the 100 common shares. Foreigners can, therefore, own 100% of the 1,000,000 nonvoting preferred
shares. But then again, the ponencia continues, at least, the "control" rests with the Filipinos because the 60% Filipino-owned common shares will
necessarily ordain the majority in the governing body of the public utility corporation, the board of directors/trustees. Hence, Filipinos are assured of
control over the day-to-day activities of the public utility corporation.
Let us, however, take this corporate scenario a little bit farther and consider the irresistible implications of changes and circumstances that are inevitable
and common in the business world. Consider the simple matter of a possible investment of corporate funds in another corporation or business, or a
merger of the public utility corporation, or a possible dissolution of the public utility corporation. Who has the "control" over these vital and
important corporate matters? The last paragraph of Sec. 6 of the Corporation Code provides:
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such (non-
voting) shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation."(Emphasis and underscoring supplied.)
In our hypothetical case, all 1,000,100 (voting and non-voting) shares are entitled to vote in cases involving fundamental and major changes in the
corporate structure, such as those listed in Sec. 6 of the Corporation Code. Hence, with only 60 out of the 1,000,100 shares in the hands of the Filipino
shareholders, control is definitely in the hands of the foreigners. The foreigners can opt to invest in other businesses and corporations, increase its
bonded indebtedness, and even dissolve the public utility corporation against the interest of the Filipino holders of the majority voting shares. This
cannot plausibly be the constitutional intent.
Consider further a situation where the majority holders of the total outstanding capital stock, both voting and non-voting, decide to dissolve our
hypothetical public utility corporation. Who will eventually acquire the beneficial ownership of the corporate assets upon dissolution and
liquidation? Note that Sec. 122 of the Corporation Code states:
Section 122. Corporate liquidation.Every corporation whose charter expires by its own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a
body corporate for three (3) years to dispose of and convey its property and to distribute its assets, but not for the purpose
of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the
benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation
of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members , creditors or other persons in interest. (Emphasis and underscoring supplied.)
Clearly then, the bulk of the assets of our imaginary public utility corporation, which may include private lands, will go to the beneficial ownership of the
foreigners who can hold up to 40 out of the 100 common shares and the entire 1,000,000 preferred non-voting shares of the corporation. These foreign
shareholders will enjoy the bulk of the proceeds of the sale of the corporate lands, or worse, exercise control over these lands behind the faade of
corporations nominally owned by Filipino shareholders. Bluntly, while the Constitution expressly prohibits the transfer of land to aliens, foreign
stockholders may resort to schemes or arrangements where such land will be conveyed to their dummies or nominees. Is this not circumvention, if not
an outright violation, of the fundamental Constitutional tenet that only Filipinos can own Philippine land?
A construction of "capital" as referring to the total shareholdings of the company is an acknowledgment of the existence of numerous corporate control-
enhancing mechanisms, besides ownership of voting rights, that limits the proportion between the separate and distinct concepts of economic right to
the cash flow of the corporation and the right to corporate control (hence, they are also referred to as proportionality-limiting measures). This
corporate reality is reflected in SRC Rule 3(E) of the Amended Implementing Rules and Regulations (IRR) of the SRC and Sec. 3(g) of The Real Estate
Investment Trust Act (REIT) of 2009,72 which both provide that control can exist regardless of ownership of voting shares. The SRC IRR states:
Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.
Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of
an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control.
Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is:
i. Power over more than one half of the voting rights by virtue of an agreement with other investors;
ii. Power to govern the financial and operating policies of the enterprise under a statute or an agreement;
iii. Power to appoint or remove the majority of the members of the board of directors or equivalent governing body;
iv. Power to cast the majority of votes at meetings of the board of directors or equivalent governing body. (Emphasis and
underscoring supplied.)
As shown above, ownership of voting shares or power alone without economic control of the company does not necessarily equate to
corporate control. A shareholders agreement can effectively clip the voting power of a shareholder holding voting shares. In the same way, a voting
right ceiling, which is "a restriction prohibiting shareholders to vote above a certain threshold irrespective of the number of voting shares they hold," 73
can limit the control that may be exerted by a person who owns voting stocks but who does not have a substantial economic interest over the company.
So also does the use of financial derivatives with attached conditions to ensure the acquisition of corporate control separately from the ownership of
voting shares, or the use of supermajority provisions in the bylaws and articles of incorporation or association. Indeed, there are innumerable ways and
means, both explicit and implicit, by which the control of a corporation can be attained and retained even with very limited voting shares , i.e.., there are
a number of ways by which control can be disproportionately increased compared to ownership 74 so long as economic rights over the majority of the
assets and equity of the corporation are maintained.
Hence, if We follow the construction of "capital" in Sec. 11, Art. XII stated in the ponencia of June 28, 2011 and turn a blind eye to these realities of the
business world, this Court may have veritably put a limit on the foreign ownership of common shares but have indirectly allowed
foreigners to acquire greater economic right to the cash flow of public utility corporations , which is a leverage to bargain for far greater
control through the various enhancing mechanisms or proportionality-limiting measures available in the business world.
In our extremely hypothetical public utility corporation with the equity structure as thus described, since the majority recognized only the 100 common
shares as the "capital" referred to in the Constitution, the entire economic right to the cash flow arising from the 1,000,000 non-voting preferred shares
can be acquired by foreigners. With this economic power, the foreign holders of the minority common shares will, as they easily can, bargain with the
holders of the majority common shares for more corporate control in order to protect their economic interest and reduce their economic risk in the
public utility corporation. For instance, they can easily demand the right to cast the majority of votes during the meeting of the board of directors. After
all, money commands control.
The court cannot, and ought not, accept as correct a holding that routinely disregards legal and practical considerations as significant as above
indicated. Committing an error is bad enough, persisting in it is worse.
Foreigners can be owners of fully

nationalized industries
Lest it be overlooked, "capital" is an oft-used term in the Constitution and various legislative acts that regulate corporate entities. Hence, the meaning
assigned to it within the context of a constitutional provision limiting foreign ownership in corporations can affect corporations whose ownership is
reserved to Filipinos, or whose foreign equity is limited by law pursuant to Sec. 10, Art. XII of the Constitution which states:
SECTION 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates,
reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is
owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The
Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly
owned by Filipinos. (Emphasis supplied).
For instance, Republic Act No. 7042, also known as the Foreign Investments Act of 199175 (FIA), provides for the formation of a Regular Foreign
Investment Negative List (RFINL) covering investment areas/activities that are partially or entirely reserved to Filipinos. The 8 th RFINL76 provides that
"No Foreign Equity" is allowed in the following areas of investments/activities:
1. Mass Media except recording (Article XVI, Section 1 of the Constitution and Presidential Memorandum dated May 4, 1994);
2. Practice of all professions (Article XII, Section 14 of the Constitution and Section 1, RA 5181); 77
3. Retail trade enterprises with paid-up capital of less than $2,500,000 (Section 5, RA 8762);
4. Cooperatives (Chapter III, Article 26, RA 6938);
5. Private Security Agencies (Section 4, RA 5487);
6. Small-scale Mining (Section 3, RA 7076)
7. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive economic zone as well as small scale utilization of
natural resources in rivers, lakes, bays, and lagoons (Article XII, Section 2 of the Constitution);
8. Ownership, operation and management of cockpits (Section 5, PD 449);
9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Article II, Section 8 of the Constitution);
10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personnel mines
(Various treaties to which the Philippines is a signatory and conventions supported by the Philippines);
11. Manufacture of fire crackers and other pyrotechnic devices (Section 5, RA 7183).
If the construction of "capital," as espoused by the June 28, 2011 Decision, were to be sustained, the reservation of the full ownership of corporations in
the foregoing industries to Filipinos could easily be negated by the simple expedience of issuing and making available non-voting shares to foreigners.
After all, these non-voting shares do not, following the June 28, 2011 Decision, form part of the "capital" of these supposedly fully nationalized
industries. Consequently, while Filipinos can occupy all of the seats in the board of directors of corporations in fully nationalized industries, it is possible
for foreigners to own the majority of the equity of the corporations through "non-voting" shares, which are nonetheless allowed to determine
fundamental corporate matters recognized in Sec. 6 of the Corporation Code. Filipinos may therefore be unwittingly deprived of the "effective"
ownership of corporations supposedly reserved to them by the Constitution and various laws.
The Foreign Investments Act of 1991 does

not qualify or restrict the meaning of "capital"
in Sec. 11, Art. XII of the Constitution.
Nonetheless, Justice Carpio parlays the thesis that the FIA, and its predecessors, the Investments Incentives Act of 1967 ("1967 IIA"), 78 Omnibus
Investments Code of 1981 ("1981 OIC"), 79 and the Omnibus Incentives Code of 1987 ("1987 OIC"), 80 (collectively, "Investment Incentives Laws")
more particularly their definition of the term "Philippine National," constitutes a good guide for ascertaining the intent behind the use of the term
"capital" in Sec. 11, Art. XIIthat it refers only to voting shares of public utility corporations.
I cannot share this posture. The Constitution may only be amended through the procedure outlined in the basic document itself .81 An
amendment cannot, therefore, be made through the expedience of a legislative action that diagonally opposes the clear provisions of
the Constitution.
Indeed, the constitutional intent on the equity prescribed by Sec. 11, Art. XII cannot plausibly be fleshed out by a look through the prism of
economic statutes passed after the adoption of the Constitution, such as the cited FIA, the Magna Carta for Micro, Small and Medium
Industries (Republic Act No. 6977) and other kindred laws envisaged to Filipinize certain areas of investment. It should be the other way around. Surely,
the definition of a "Philippine National" in the FIA, or for that matter, the 1987 OIC 82 could not have influenced the minds of the 1986 CONCOM or the
people when they ratified the Constitution. As heretofore discussed, the primary source whence to ascertain constitutional intent or purpose is the
constitutional text, or, to be more precise, the language of the provision itself, 83 as inquiry on any controversy arising out of a constitutional provision
ought to start and end as much as possible with the provision itself. 84 Legislative enactments on commerce, trade and national economy must
be so construed, when appropriate, to determine whether the purpose underlying them is in accord with the policies and objectives
laid out in the Constitution. Surely, a law cannot validly broaden or restrict the thrust of a constitutional provision unless expressly
sanctioned by the Constitution itself. And the Court may not read into the Constitution an intent or purpose that is not there. Any attempt to
enlarge the breadth of constitutional limitations beyond what its provision dictates should be stricken down.
In fact, it is obvious from the FIA itself that its framers deemed it necessary to qualify the term "capital" with the phrase "stock outstanding and entitled
to vote" in defining a "Philippine National" in Sec. 3(a). This only supports the construal that the term "capital," standing alone as in Sec. 11, Art. XII of
the Constitution, applies to all shares, whether classified as voting or non-voting, and this is the interpretation in harmony with the Constitution.
In passing the FIA, the legislature could not have plausibly intended to restrict the 40% foreign ownership limit imposed by the Constitution on all
capital stock to only voting stock. Precisely, Congress enacted the FIA to liberalize the laws on foreign investments. Such intent is at once apparent in
the very title of the statute, i.e., "An Act to Promote Foreign Investments," and the policy: "attract, promote and welcome productive investments from
foreign individuals, partnerships, corporations, and government,"85 expresses the same.
The Senate, through then Senator Vicente Paterno, categorically stated that the FIA is aimed at "liberalizing foreign investments" 86 because "Filipino
investment is not going to be enough [and] we need the support and the assistance of foreign investors x x x." 87 The senator made clear that "the
term Philippine national" means either Filipino citizens or enterprises of which the " total Filipino ownership" is 60 percent or greater, thus:
Senator Paterno. May I first say that the term "Philippine national" means either Filipino citizens or enterprises of which
the total Filipino ownership is 60 percent or greater. In other words, we are not excluding foreign participation in domestic
market enterprises with total assets of less than 25 million. We are merely limiting foreign participation to not more than 40 percent in
this definition.88
Even granting, arguendo, that the definition of a "Philippine National" in the FIA was lifted from the Investment Incentives Laws issued in 1967, 1981,
and 1987 that defined "Philippine National" as a corporation 60% of whose voting stocks is owned by Filipino citizens, such definition does not limit or
qualify the nationality requirement prescribed for public utility corporations by Sec. 11, Art. XII of the 1987 Constitution. The latter does not refer to the
definition of a "Philippine National." Instead, Sec. 11, Art. XII reiterates the use of the unqualified term "capital" in the 1935 and 1973 Constitutions.
In fact, neither the 1973 Constitutional Convention nor the 1986 CONCOM alluded to the Investment Incentives Laws in their deliberations on the
nationality requirement of public utility corporations. With the unequivocal rejection of the UP Law Center proposal to use the qualifying "voting stock or
controlling interest," the non-consideration of the Investment Incentives Laws means that these laws are not pertinent to the issue of the Filipino-
foreign capital ratio in public utility corporations.
Besides, none of the Investment Incentives Laws defining a "Philippine National" has sought to expand or modify the definition of "capital," as used in
the Constitutions then existing. The definition of a "Philippine National" in these laws was, to stress, only intended to identify the corporations qualified
for registration to avail of the incentives prescribed therein. The definition was not meant to find context outside the scope of the various Investment
Incentives Laws, much less to modify a nationality requirement set by the then existing Constitution. This much is obvious in the very heading of the
first of these Investment Incentives Laws, 1967 IIA :
SECTION 3. Definition of Terms. - For purposes of this Act:
xxxx
(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly owned by citizens of the
Philippines; or a corporation organized and existing under the laws of the Philippines of which at least sixty per cent of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines xxxx (Emphasis and underscoring supplied.)
Indeed, the definition of a "Philippine National" in the FIA cannot apply to the ownership structure of enterprises applying for, and those granted, a
franchise to operate as a public utility under Sec. 11, Art. XII of the Constitution. As aptly observed by the SEC, the definition of a "Philippine National"
provided in the FIA refers only to a corporation that is permitted to invest in an enterprise as a Philippine citizen ( investorcorporation). The FIA does
not prescribe the equity ownership structure of the enterprise granted the franchise or the power to operate in a fully or partially
nationalized industry (investee-corporation). This is apparent from the FIA itself, which also defines the act of an "investment" and "foreign
investment":
Section 3. Definitions. As used in this Act:
a) The term "Philippine national" shall mean a citizen of the Philippines, or a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent [60%] of the
capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines x x x
b) The term "investment" shall mean equity participation in any enterprise organized or existing the laws of the Philippines;
c) The term "foreign investment" shall mean as equity investment made by a non-Philippine national in the form of foreign
exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and
appraise the value of such assets other than foreign exchange.
In fact, Sec. 7 of the FIA, as amended, allows aliens or non-Philippine nationals to own an enterprise up to the extent provided by the Constitution,
existing laws or the FINL:
Sec. 7. Foreign investments in domestic market enterprises. Non- Philippine nationals may own up to one hundred percent [100%] of
domestic market enterprises unless foreign ownership therein is prohibited or limited by the Constitution and existing laws or the
Foreign Investment Negative List under Section 8 hereof. (Emphasis supplied.)
Hence, pursuant to the Eight Regular FINL, List A, the foreign " equity" is up to 40% in enterprises engaged in the operation and management of public
utilities while the remaining 60% of the " equity" is reserved to Filipino citizens and "Philippine Nationals" as defined in Sec. 3(a) of the FIA. Notably,
the term "equity" refers to the "ownership interest in a business"89 or a "share in a publicly traded company,"90 and not to the "controlling" or
"management" interest in a company. It necessarily includes all and every share in a corporation, whether voting or non-voting.
Again, We must recognize the distinction of the separate concepts of "ownership" and "control" in modern corporate governance in order to realize the
intent of the framers of our Constitution to reserve for Filipinos the ultimate and all-encompassing control of public utility entities from their daily
administration to the acts of ownership enumerated in Sec. 6 of the Corporation Code. 91 As elucidated, by equating the word "capital" in Sec. 11, Art.
XII to the limited aspect of the right to control the composition of the board of directors, the Court could very well be depriving Filipinos of the majority
economic interest in the public utility corporation and, thus, the effective control and ownership of such corporation.
The Court has no jurisdiction over PLDT and foreign

stockholders who are indispensable parties in interest
More importantly, this Court cannot apply a new doctrine adopted in a precedent-setting decision to parties that have never been given the chance to
present their own views on the substantive and factual issues involved in the precedent-setting case.
To recall, the instant controversy arose out of an original petition filed in February 2007 for, among others, declaratory relief on Sec. 11, Art. XII of
the 1987 Constitution "to clarify the intent of the Constitutional Commission that crafted the 1987 Constitution to determine the very nature of such
limitation on foreign ownership."92
The petition impleaded the following personalities as the respondents: (1) Margarito B. Teves, then Secretary of Finance and Chair of the Privatization
Council; (2) John P. Sevilla, then undersecretary for privatization of the Department of Finance; (3) Ricardo Abcede, commissioner of the Presidential
Commission on Good Government; (4) Anthoni Salim, chair of First Pacific Co. Ltd. and director of Metro Pacific Asset Holdings, Inc. (MPAH); (5) Manuel
V. Pangilinan, chairman of the board of PLDT; (6) Napoleon L. Nazareno, the president of PLDT; (7) Fe Barin (Barin), then chair of the SEC; and (8)
Francis Lim (Lim), then president of the PSE.
Notably, neither PLDT itself nor any of its stockholders were named as respondents in the petition, albeit it sought from the Court the following main
reliefs:
5. x x x to issue a declaratory relief that ownership of common or voting shares is the sole basis in determining foreign equity in a public
utility and that any other government rulings, opinions, and regulations inconsistent with this declaratory relief be declared as
unconstitutional and a violation of the intent and spirit of the 1987 Constitution;
6. x x x to declare null and void all sales of common stocks to foreigners in excess of 40 percent of the total subscribed common
shareholdings; and
7. x x x to direct the [SEC] and [PSE] to require PLDT to make a public disclosure of all of its foreign shareholdings and their actual and
real beneficial owners."
Clearly, the petition seeks a judgment that can adversely affect PLDT and its foreign shareholders. If this Court were to accommodate the petitions
prayer, as the majority did in the June 28, 2011 Decision and proposes to do presently, PLDT stands to lose its franchise, while the foreign stockholders
will be compelled to divest their voting shares in excess of 40% of PLDTs voting stock, if any, even at a loss. It cannot, therefore, be gainsaid that PLDT
and its foreign shareholders are indispensable parties to the instant case under the terms of Secs. 2 and 7, Rule 3 of the Rules of Civil Procedure, which
read:
Section 2. Parties in interest.Every action must be prosecuted and defended in the name of the real party in interest. All persons
having an interest in the subject of the action and in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim an
interest in the controversy or the subject thereof adverse to the plaintiff, or who are necessary to a complete determination or
settlement of the questions involved therein, shall be joined as defendants.
xxxx
Section 7. Compulsory joinder of indispensable parties. Parties in interest without whom no final determination can be had of an action
shall be joined either as plaintiffs or defendants.
Yet, again, PLDT and its foreign shareholders have not been given notice of this petition to appear before, much less heard by, this Court. Nonetheless,
the majority has allowed such irregularity in contravention of the settled jurisprudence that an action cannot proceed unless indispensable parties are
joined93 since the non-joinder of these indispensable parties deprives the court the jurisdiction to issue a decision binding on the indispensable parties
that have not been joined or impleaded. In other words, if an indispensable party is not impleaded, any personal judgment would have no
effectiveness94 as to them for the tribunals want of jurisdiction.
In Arcelona v. Court of Appeals,95 We explained that the basic notions of due process require the observance of this rule that refuses the effectivity
of a decision that was rendered despite the non-joinder of indispensable parties:
Basic considerations of due process, however, impel a similar holding in cases involving jurisdiction over the persons of indispensable
parties which a court must acquire before it can validly pronounce judgments personal to said defendants. Courts acquire jurisdiction
over a party plaintiff upon the filing of the complaint. On the other hand, jurisdiction over the person of a party defendant is assured
upon the service of summons in the manner required by law or otherwise by his voluntary appearance. As a rule, if a defendant has not
been summoned, the court acquires no jurisdiction over his person, and a personal judgment rendered against such defendant is null
and void. A decision that is null and void for want of jurisdiction on the part of the trial court is not a decision in the
contemplation of law and, hence, it can never become final and executory.
Rule 3, Section 7 of the Rules of Court, defines indispensable parties as parties-in-interest without whom there can be no final
determination of an action. As such, they must be joined either as plaintiffs or as defendants. The general rule with reference to
the making of parties in a civil action requires, of course, the joinder of all necessary parties where possible, and the
joinder of all indispensable parties under any and all conditions, their presence being a sine qua non for the exercise of
judicial power. It is precisely "when an indispensable party is not before the court (that) the action should be
dismissed." The absence of an indispensable party renders all subsequent actions of the court null and void for want of
authority to act, not only as to the absent parties but even as to those present. 96
Hence, the June 28, 2011 Decision having been rendered in a case where the indispensable parties have not been impleaded, much less summoned or
heard, cannot be given any effect and is, thus, null and void. Ergo, the assailed June 28, 2011 Decision is virtually a useless judgment, at least insofar
as it tends to penalize PLDT and its foreign stockholders. It cannot bind and affect PLDT and the foreign stockholders or be enforced and executed
against them. It is settled that courts of law "should not render judgments which cannot be enforced by any process known to the
law,"97 hence, this Court should have refused to give cognizance to the petition.
The ineffectivity caused by the non-joinder of the indispensable parties, the deprivation of their day in court, and the denial of their right to due process,
cannot be cured by the sophistic expedience of naming PLDT in the fallo of the decision as a respondent. The dispositive portion of the June 28, 2011
Decision all the more only highlights the unenforceability of the majoritys disposition and serves as an implied admission of this Courts lack of
jurisdiction over the persons of PLDT and its foreign stockholders when it did not directly order the latter to dispose the common shares in excess of the
40% limit. Instead, it took the circuitous route of ordering the SEC, in the fallo of the assailed decision, "to apply this definition of the term capital in
determining the extent of allowable ownership in respondent PLDT and, if there is a violation of Sec. 11, Art. XII of the Constitution, to impose the
appropriate sanctions under the law."98
Clearly, since PLDT and the foreign stockholders were not impleaded as indispensable parties to the case, the majority would want to
indirectly execute its decision which it could not execute directly. The Court may be criticized for violating the very rules it
promulgated and for trenching the provisions of Sec. 5, Art. VIII of the Constitution, which defines the powers and jurisdiction of this
Court.
It is apropos to stress, as a reminder, that the Rules of Court is not a mere body of technical rules that can be disregarded at will whenever convenient.
It forms an integral part of the basic notion of fair play as expressed in this Constitutional caveat: "No person shall be deprived of life, liberty or property
without due process of law," 99 and obliges this Court, as well as other courts and tribunals, to hear a person first before rendering a judgment for or
against him. As Daniel Webster explained, "due process of law is more clearly intended the general law, a law which hears before it condemns; which
proceeds upon enquiry, and renders judgment only after trial."100 The principle of due process of law "contemplates notice and opportunity to be heard
before judgment is rendered, affecting ones person or property."101 Thus, this Court has stressed the strict observance of the following requisites of
procedural due process in judicial proceedings in order to comply with this honored principle:
(1) There must be a court or tribunal clothed with judicial power to hear and determine the matter before it;
(2) Jurisdiction must be lawfully acquired over the person of the defendant or over the property which is the subject of the proceedings;
(3) The defendant must be given an opportunity to be heard; and
(4) Judgment must be rendered upon lawful hearing.102
Apparently, not one of these requisites has been complied with before the June 28, 2011 Decision was rendered. Instead, PLDT and its foreign
stockholders were not given their day in court, even when they stand to lose their properties, their shares, and even the franchise to operate as a public
utility. This stands counter to our discussion in Agabon v. NLRC,103 where We emphasized that the principle of due process comports with the
simplest notions of what is fair and just:
To be sure, the Due Process Clause in Article III, Section 1 of the Constitution embodies a system of rights based on moral principles so
deeply imbedded in the traditions and feelings of our people as to be deemed fundamental to a civilized society as conceived by our
entire history. Due process is that which comports with the deepest notions of what is fair and right and just . It is a
constitutional restraint on the legislative as well as on the executive and judicial powers of the government provided by the
Bill of Rights.104
Parenthetically, the present petition partakes of a collateral attack on PLDTs franchise as a public utility. Giving due course to the recourse is contrary to
the Courts ruling in PLDT v. National Telecommunications Commission,105 where We declared a franchise to be a property right that can only be
questioned in a direct proceeding. 106 Worse, the June 28, 2011 Decision facilitates and guarantees the success of that unlawful attack by
allowing it to be undertaken in the absence of PLDT.
The Philippine Government is barred by estoppel from ordering foreign investors to divest voting shares in public utilities in excess of
the 40 percent cap
The Philippine governments act of pushing for and approving the sale of the PTIC shares, which is equivalent to 12 million PLDT common shares, to
foreign investors precludes it from asserting that the purchase violates the Constitutional limit on foreign ownership of public utilities so that the foreign
investors must now divest the common PLDT shares bought. The elementary principle that a person is prevented from going back on his own act or
representation to the prejudice of another who relied thereon107 finds application in the present case.
Art. 1431 of the Civil Code provides that an "admission or representation is rendered conclusive upon the person making it, and cannot be denied or
disproved as against a person relying thereon." This rule is supported by Section 2(a) of Rule 131 of the Rules of Court on the burden of proof and
presumptions, which states:
Section 2. Conclusive presumptions. The following are instances of conclusive presumptions:
(a) Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission, be permitted to
falsify it.
The government cannot plausibly hide behind the mantle of its general immunity to resist the application of this equitable principle for "the rule on non-
estoppel of the government is not designed to perpetrate an injustice." 108 Hence, this Court has allowed several exceptions to the rule on the
governments non-estoppel. As succinctly explained in Republic of the Philippines v. Court of Appeals:109
The general rule is that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. However, like all general
rules, this is also subject to exceptions, viz.:
"Estoppel against the public are little favored. They should not be invoked except in rare and unusual circumstances and
may not be invoked where they would operate to defeat the effective operation of a policy adopted to protect the
public. They must be applied with circumspection and should be applied only in those special cases where the interests
of justice clearly require it. Nevertheless, the government must not be allowed to deal dishonorably or
capriciously with its citizens, and must not play an ignoble part or do a shabby thing; and subject to
limitations . . ., the doctrine of equitable estoppel may be invoked against public authorities as well as
against private individuals."
In Republic v. Sandiganbayan, the government, in its effort to recover ill-gotten wealth, tried to skirt the application of estoppel against
it by invoking a specific constitutional provision. The Court countered:
"We agree with the statement that the State is immune from estoppel, but this concept is understood to refer to acts
and mistakes of its officials especially those which are irregular (Sharp International Marketing vs. Court of Appeals, 201
SCRA 299; 306 1991; Republic v. Aquino, 120 SCRA 186 1983), which peculiar circumstances are absent in the case at
bar. Although the State's right of action to recover ill-gotten wealth is not vulnerable to estoppel[;] it is non sequitur to
suggest that a contract, freely and in good faith executed between the parties thereto is susceptible to
disturbance ad infinitum. A different interpretation will lead to the absurd scenario of permitting a party
to unilaterally jettison a compromise agreement which is supposed to have the authority of res judicata
(Article 2037, New Civil Code), and like any other contract, has the force of law between parties thereto
(Article 1159, New Civil Code; Hernaez vs. Kao, 17 SCRA 296 1966; 6 Padilla, Civil Code Annotated, 7th ed., 1987, p.
711; 3 Aquino, Civil Code, 1990 ed., p. 463) . . ."
The Court further declared that "(t)he real office of the equitable norm of estoppel is limited to supply[ing] deficiency in the law, but it
should not supplant positive law."110 (Emphasis supplied.)
Similarly, in Ramos v. Central Bank of the Philippines,111 this Court berated the government for reneging on its representations and urged it to
keep its word, viz:
Even in the absence of contract, the record plainly shows that the CB [Central Bank] made express representations to petitioners herein
that it would support the OBM [Overseas Bank of Manila], and avoid its liquidation if the petitioners would execute (a) the Voting Trust
Agreement turning over the management of OBM to the CB or its nominees, and (b) mortgage or assign their properties to the Central
Bank to cover the overdraft balance of OBM. The petitioners having complied with these conditions and parted with value to the profit of
the CB (which thus acquired additional security for its own advances), the CB may not now renege on its representations and liquidate
the OBM, to the detriment of its stockholders, depositors and other creditors, under the rule of promissory estoppel (19 Am. Jur., pages
657-658; 28 Am. Jur. 2d, 656-657; Ed. Note, 115 ALR, 157).
"The broad general rule to the effect that a promise to do or not to do something in the future does not work an
estoppel must be qualified, since there are numerous cases in which an estoppel has been predicated on promises or
assurances as to future conduct. The doctrine of promissory estoppel is by no means new, although the name has
been adopted only in comparatively recent years. According to that doctrine, an estoppel may arise from the making of
a promise even though without consideration, if it was intended that the promise should be relied upon and in fact it
was relied upon, and if a refusal to enforce it would be virtually to sanction the perpetration of fraud or would result in
other injustice. In this respect, the reliance by the promises is generally evidenced by action or forbearance on his part,
and the idea has been expressed that such action or forbearance would reasonably have been expected by the
promisor. Mere omission by the promisee to do whatever the promisor promised to do has been held insufficient
forbearance to give rise to a promissory estoppel." (19 Am. Jur., loc. cit.)
The exception established in the foregoing cases is particularly appropriate presently since the "indirect" sale of PLDT common shares to foreign
investors partook of a propriety business transaction of the government which was not undertaken as an incident to any of its governmental functions.
Accordingly, the government, by concluding the sale, has descended to the level of an ordinary citizen and stripped itself of the vestiges of immunity
that is available in the performance of governmental acts.112
Ergo, the government is vulnerable to, and cannot hold off, the application of the principle of estoppel that the foreign investors can very well invoke in
case they are compelled to divest the voting shares they have previously acquired through the inducement of no less the government. In other words,
the government is precluded from penalizing these alien investors for an act performed upon its guarantee, through its facilities, and with its
imprimatur.
Under the "fair and equitable treatment" clause of our bilateral investment treaties and fair trade agreements, foreign investors have
the right to rely on the same legal framework existing at the time they made their investments
Not only is the government put in estoppel by its acts and representations during the sale of the PTIC shares to MPAH, it is likewise bound by its
guarantees in the Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) with other countries.
To date, the Philippines has concluded numerous BITs and FTAs to encourage and facilitate foreign direct investments in the country. These BITs and
FTAs invariably contain guarantees calculated to ensure the safety and stability of these foreign investments. Foremost of these is the commitment to
give fair and equitable treatment (FET) to the foreign investors and investments in the country.
Take for instance the BIT concluded between the Philippines and China, 113 Article 3(1) thereof provides that "investments and activities associated with
such investments of investors of either Contracting Party shall be accorded equitable treatment and shall enjoy protection in the territory of the
other Contracting Party."114 The same assurance is in the Agreement on Investment of the Framework Agreement on Comprehensive Economic
Cooperation Between the Association of Southeast Asian Nations and the Peoples Republic of China (ASEAN-China Investment Agreement) 115 where
the Philippines assured Chinese investors that the country "shall accord to [them] fair and equitable treatment and full protection and security."116
In the same manner, the Philippines agreed to "accord investments [made by Japanese investors] treatment in accordance with international law,
including fair and equitable treatment and full protection and security"117 in the Agreement between the Republic of the Philippines and Japan for
Economic Partnership (JPEPA).118
Similar provisions are found in the ASEAN Comprehensive Investment Agreement (ACIA) 119 and the BITs concluded by the Philippines with, among
others, the Argentine Republic,120 Australia,121 Austria,122 Bangladesh,123 Belgium,124 Cambodia,125 Canada,126 Chile,127 the Czech Republic,128
Denmark,129 Finland,130 France,131 Germany,132 India,133 Indonesia,134 Iran,135 Italy,136 Mongolia,137 Myanmar,138 Netherlands,139
Pakistan,140 Portuguese Republic,141 Romania,142 Russia,143 Saudi Arabia,144 Spain,145 Sweden,146 Switzerland,147 Thailand,148 Turkey,149
United Kingdom,150 and Vietnam.151
Explaining the FET as a standard concordant with the rule of law, Professor Vandevelde wrote that it requires the host county to treat foreign
investments with consistency, security, non-discrimination and reasonableness:
The thesis is that the awards issued to date implicitly have interpreted the fair and equitable treatment standard as requiring treatment
in accordance with the concept of the rule of law. That is, the concept of legality is the unifying theory behind the fair and
equitable treatment standard.
xxxx
Thus, international arbitral awards interpreting the fair and equitable treatment standard have incorporated the substantive and
procedural principles of the rule of law into that standard. The fair and equitable treatment standard in BITs has been
interpreted as requiring that covered investment or investors receive treatment that is reasonable, consistent, non-
discriminatory, transparent, and in accordance with due process. As will be seen, these principles explain virtually all of the
awards applying the fair and equitable treatment standard. No award is inconsistent with this theory of the standard.
Understanding fair and equitable treatment as legality is consistent with the purposes of the BITs. BITs essentially are instruments that
impose legal restraints on the treatment of covered investments and investors by host states. The very essence of a BIT is a partial
subordination of the sovereign's power to the legal constraints of the treaty. Further, individual BIT provisions are themselves a
reflection of the principles of the rule of law. (Emphasis and underscoring supplied.) 152
On the requirement of consistency, the International Centre for the Settlement of Investment Disputes (ICSID) explained in Tecnicas
Medioambientales Tecmed S.A. v. The united Mexican States 153 that the host country must maintain a stable and predictable legal and
business environment to accord a fair and equitable treatment to foreign investors.
153. The Arbitral Tribunal finds that the commitment of fair and equitable treatment included in Article 4(1) of the Agreement is
an expression and part of the bona fide principle recognized in international law, although bad faith from the State is not
required for its violation:
To the modern eye, what is unfair or inequitable need not equate with the outrageous or the egregious. In particular, a
State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith.
154. The Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established by
international law, requires the Contracting Parties to provide to international investments treatment that does not affect
the basic expectations that were taken into account by the foreign investor to make the investment. The foreign
investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its
relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its
investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its
investment and comply with such regulations. Any and all State actions conforming to such criteria should relate not only to the
guidelines, directives or requirements issued, or the resolutions approved thereunder, but also to the goals underlying such regulations.
The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting
decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to
plan and launch its commercial and business activities. The investor also expects the State to use the legal instruments
that govern the actions of the investor or the investment in conformity with the function usually assigned to such
instruments, and not to deprive the investor of its investment without the required compensation . In fact, failure by the
host State to comply with such pattern of conduct with respect to the foreign investor or its investments affects the investors ability to
measure the treatment and protection awarded by the host State and to determine whether the actions of the host State conform to the
fair and equitable treatment principle. Therefore, compliance by the host State with such pattern of conduct is closely related
to the above-mentioned principle, to the actual chances of enforcing such principle, and to excluding the possibility that
state action be characterized as arbitrary; i.e. as presenting insufficiencies that would be recognized "by any reasonable and
impartial man," or, although not in violation of specific regulations, as being contrary to the law because:
...(it) shocks, or at least surprises, a sense of juridical propriety. (Emphasis and underscoring supplied added.)
The Philippines, therefore, cannot, without so much as a notice of policy shift, alter and change the legal and business environment in
which the foreign investments in the country were made in the first place. These investors obviously made the decision to come in after
studying the countrys legal framework-its restrictions and incentivesand so, as a matter of fairness, they must be accorded the right to expect that
the same legal climate and the same substantive set of rules will remain during the period of their investments.
The representation that foreigners can invest up to 40% of the entirety of the total stockholdings, and not just the voting shares, of a public utility
corporation is an implied covenant that the Philippines cannot renege without violating the FET guarantee. Especially in this case where the Philippines
made specific commitments to countries like Japan and China that their investing nationals can own up to 40% of the equity of a public utility like a
telecommunications corporation. In the table contained in Schedule 1(B), Annex 6 of the JPEPA, the Philippines categorically represented that Japanese
investors entry into the Philippine telecommunications industry, specifically corporations offering "voice telephone services," is subject to only the
following requirements and conditions:
A. Franchise from Congress of the Philippines
B. Certificate of Public Convenience and Necessity (CPCN) from the National Telecommunications Commission
C. Foreign equity is permitted up to 40 percent.
D. x x x154 (Emphasis supplied.)
The same representation is made in the Philippines Schedule of Specific Commitments appended to the ASEAN-China Agreement on Trade in
Services.155
Further, as previously pointed out, it was the Philippine government that pushed for and approved the sale of the 111,415 PTIC shares to MPAH,
thereby indirectly transferring the ownership of 6.3 percent of the outstanding common shares of PLDT, to a foreign firm and so increasing the foreign
voting shareholding in PLDT. Hence, the presence of good faith may not be convincingly argued in favour of the Philippine government in a suit for
violation of its FET guarantee.
In fact, it has been held that a bona fide change in policy by a branch of government does not excuse compliance with the FET obligations. In
Occidental Exploration and Production Company (OEPC) v. the Republic of Ecuador ,156 the United Nations Commission on International
Trade Law (UNCITRAL) ruled that Ecuador violated the US/Ecuador BIT by denying OEPC fair and equitable treatment when it failed to provide a
predictable framework for its investment planning. Ruling thus, the tribunal cited Ecuadors change in tax law and its tax authoritys unsatisfactory and
vague response to OEPCs consulta, viz:
183. x x x The stability of the legal and business framework is thus an essential element of fair and equitable treatment.
184. The tribunal must note in this context that the framework under which the investment was made and operates has
been changed in an important manner by actions adopted by [the Ecuadorian tax authority]. The clarifications that OEPC
sought on the applicability of VAT by means of "consulta" made to [the Ecuadorian tax authority] received a wholly unsatisfactory and
thoroughly vague answer. The tax law was changed without providing any clarity abut its meaning and extend and the
practice and regulations were also inconsistent with such changes.
185. Various arbitral tribunals have recently insisted on the need for this stability. The tribunal in Metalcad held that the Respondent
"failed to ensure a transparent and predictable framework for Metalcads business planning and investment. The totality of these
circumstances demonstrate a lack of orderly process and timely disposition in relation to an investor of a Party acting in the expectation
that it would be treated fairly and justly" x x x
186. It is quite clear from the record of this case and from the events discussed in this Final Award that such requirements were not met
by Ecuador. Moreover, this is an objective requirement that does not depend on whether the Respondent has proceeded in
good faith or not.
187. The Tribunal accordingly holds that the Respondent has breached its obligations to accord fair and equitable treatment under
Article II (3)
(a) of the Treaty. x x x
xxxx
191. The relevant question for international law in this discussion is not whether there is an obligation to refund VAT, which is the point
on which the parties have argued most intensely, but rather whether the legal and business framework meets the
requirements of stability and predictability under international law. It was earlier concluded that there is not a VAT refund
obligation under international law, except in the specific case of the Andean Community Law, which provides for the option of either
compensation or refund, but there is certainly an obligation not to alter the legal and business environment in which the
investment has been made. In this case it is the latter question that triggers a treatment that is not fair and equitable .
To maintain the FET guarantee contained in the various BITs and FTAs concluded by the country and avert a deluge of investor suits before the ICSID,
the UNCITRAL or other fora, any decision of this court that tends to drastically alter the foreign investors basic expectations when they
made their investments, taking into account the consistent SEC Opinions and the executive and legislative branches Specific Commitments, must
be applied prospectively.
This Court cannot turn oblivious to the fact that if We diverge from the prospectivity rule and implement the resolution on the present issue immediately
and, without giving due deference to the foreign investors rights to due process and the equal protection of the laws, compel the foreign stockholders
to divest their voting shares against their wishes at prices lower than the acquisition costs, these foreign investors may very well shy away from
Philippine stocks and avoid investing in the Philippines. Not to mention, the validity of the franchise granted to PLDT and similarly situated public utilities
will be put under a cloud of doubt. Such uncertainty and the unfair treatment of foreign investors who merely relied in good faith on the policies, rules
and regulations of the PSE and the SEC will likely upset the volatile capital market as it would have a negative impact on the value of these companies
that will discourage investors, both local and foreign, from purchasing their shares. In which case, foreign direct investments (FDIs) in the country
(which already lags behind our Asian neighbors) will take a nosedive. Indeed, it cannot be gainsaid that a sudden and unexpected deviation from the
accepted and consistent construction of the term "capital" will create a domino effect that may cripple our capital markets.
Therefore, in applying the new comprehensive interpretation of Sec. 11, Art. XII of the Constitution, the current voting shares of the foreign investors in
public utilities in excess of the 40% capital shall be maintained and honored. Otherwise the due process guarantee under the Constitution and the long
established precepts of justice, equity and fair play would be impaired.
Prospective application of new laws or changes in interpretation
The June 28, 2011 Decision construed "capital" in the first sentence of Section 11, Article XII of the Constitution as "full beneficial ownership of 60
percent of the outstanding capital stocks coupled with 60 percent of the voting rights." In the Resolution denying the motions for reconsideration, it
further amplified the scope of the word "capital" by clarifying that "the 60- 40 ownership requirement in favor of Filipino citizens must apply separately
to each class of shares whether common, preferred, preferred voting or any other class of shares." This is a radical departure from the clear intent of
the framers of the 1987 Constitution and the long established interpretation ascribed to said word by the Securities and Exchange Commissionthat
"capital" in the first sentence of Sec. 11, Art. XII means capital stock or BOTH voting and non-voting shares. The recent interpretation enunciated in the
June 28, 2011 and in the Resolution at hand can only be applied PROSPECTIVELY. It cannot be applied retroactively to corporations such as PLDT and
its investors such as its shareholders who have all along relied on the consistent reading of "capital" by SEC and the Philippine government to apply it to
a public utilitys total capital stock.
Lex prospicit, non respicit "laws have no retroactive effect unless the contrary is provided." 157 As a necessary corollary, judicial rulings should not be
accorded retroactive effect since "judicial decisions applying or interpreting the laws or the Constitution shall form part of the legal system of the
Philippines."158 It has been the constant holding of the Court that a judicial decision setting a new doctrine or principle ("precedent-setting decision")
shall not retroactively apply to parties who relied in good faith on the principles and doctrines standing prior to the promulgation thereof ("old
principles/doctrines"), especially when a retroactive application of the precedent-setting decision would impair the rights and obligations of the parties.
So it is that as early as 1940, the Court has refused to apply the new doctrine of jus sanguinis to persons who relied in good faith on the principle of jus
soli adopted in Roa v. Collector of Customs.159 Similarly, in Co v. Court of Appeals,160 the Court sustained petitioner Cos bona fide reliance on
the Minister of Justices Opinion dated December 15, 1981 that the delivery of a "rubber" check as guarantee for an obligation is not a punishable
offense despite the Courts pronouncement on September 21, 1987 in Que v. People that Batas Pambansa Blg. (BP) 22 nonetheless covers a check
issued to guarantee the payment of an obligation. In so ruling, the Court quoted various decisions applying precedent-setting decisions prospectively.
We held:
Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system of the
Philippines," according to Article 8 of the Civil Code. "Laws shall have no retroactive effect, unless the contrary is
provided," declares Article 4 of the same Code, a declaration that is echoed by Article 22 of the Revised Penal Code: "Penal laws
shall have a retroactive effect insofar as they favor the person guilty of a felony, who is not a habitual criminal . . ."
xxxx
The principle of prospectivity has also been applied to judicial decisions which, "although in themselves not laws, are
nevertheless evidence of what the laws mean, . . . (this being) the reason why under Article 8 of the New Civil Code,
'Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system . . .' "
So did this Court hold, for example, in Peo. v. Jabinal, 55 SCRA 607, 611:
xxxx
So, too, did the Court rule in Spouses Gauvain and Bernardita Benzonan v. Court of Appeals, et al. (G.R. No. 97973) and Development
Bank of the Philippines v. Court of Appeals, et al. (G.R. No 97998), Jan. 27, 1992, 205 SCRA 515, 527-528:
xxxx
A compelling rationalization of the prospectivity principle of judicial decisions is well set forth in the oft-cited case of Chicot County
Drainage Dist. v. Baxter States Bank , 308 US 371, 374 1940. The Chicot doctrine advocates the imperative necessity to take
account of the actual existence of a statute prior to its nullification, as an operative fact negating acceptance of "a
principle of absolute retroactive invalidity."
xxxx
Much earlier, in De Agbayani v. PNB, 38 SCRA 429 xxx the Court made substantially the same observations
xxxx
Again, treating of the effect that should be given to its decision in Olaguer v. Military Commission No 34, declaring invalid criminal
proceedings conducted during the martial law regime against civilians, which had resulted in the conviction and incarceration of
numerous persons this Court, in Tan vs. Barrios, 190 SCRA 686, at p. 700, ruled as follows:
"In the interest of justice and consistency, we hold that Olaguer should, in principle, be applied
prospectively only to future cases and cases still ongoing or not yet final when that decision was
promulgated. x x x"
It would seem, then, that the weight of authority is decidedly in favor of the proposition that the Courts decision of September 21,
1987 in Que v. People, 154 SCRA 160 (1987) i.e., that a check issued merely to guarantee the performance of an obligation is
nevertheless covered by B.P. Blg. 22 should not be given retrospective effect to the prejudice of the petitioner and other
persons similarly situated, who relied on the official opinion of the Minister of Justice that such a check did not fall within
the scope of B.P. Blg. 22. (Emphasis supplied).
Indeed, pursuant to the doctrine of prospectivity, new doctrines and principles must be applied only to acts and events transpiring after the precedent-
setting judicial decision, and not to those that occurred and were caused by persons who relied on the "old" doctrine and acted on the faith thereof.
Not content with changing the rule in the middle of the game, the majority, in the June 28, 2011 Decision, went a little further by ordering respondent
SEC Chairperson "to apply this definition of the term capital in determining the extent of allowable foreign ownership in respondent Philippine Long
Distance Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the
law." This may be viewed as unreasonable and arbitrary. The Court in the challenged June 28, 2011 Decision already made a finding that foreigners
hold 64.27% of the total number of PLDT common shares while Filipinos hold only 35.73%. 161 In this factual setting, PLDT will, as clear as day, face
sanctions since its present capital structure is presently in breach of the rule on the 40% cap on foreign ownership of voting shares even without need
of a SEC investigation.
In answering the SECs query regarding the proper period of application and imposition of appropriate sanctions against PLDT, Justice Carpio tersely
stated that "once the 28 June 2011 Decision becomes final, the SEC shall impose the appropriate sanctions only if it finds after due hearing that, at the
start of the administrative cases or investigation, there is an existing violation of Sec. 11, Art. XII of the Constitution." 162 As basis therefor, Justice
Carpio cited Halili v. Court of Appeals163 and United Church Board for World Ministries (UCBWM) v. Sebastian .164 However, these cases do not provide
a jurisprudential foundation to this mandate that may very well deprive PLDT foreign shareholders of their voting shares. In fact, UCBWM v. Sebastian
respected the voluntary transfer in a will by an American of his shares of stocks in a land-holding corporation. In the same manner, Halili v. Court of
Appeals sustained as valid the waiver by an alien of her right of inheritance over a piece of land in favour of her son. Nowhere in these cases did this
Court order the involuntary dispossession of corporate stocks by alien stockholders. At most, these two cases only recognized the principle validating the
transfer of land to an alien who, after the transfer, subsequently becomes a Philippine citizen or transfers the land to a Filipino citizen. They do not
encompass the situation that will eventually ensue after the investigation conducted by the SEC in accordance with the June 28, 2011 and the present
resolution. They do not justify the compulsory deprivation of voting shares in public utility corporations from foreign stockholders who had legally
acquired these stocks in the first instance.
The abrupt application of the construction of Sec. 11, Art. XII of the Constitution to foreigners currently holding voting shares in a public utility
corporation is not only constitutionally problematic; it is likewise replete with pragmatic difficulties that could hinder the real-world translation of this
Courts Resolution. Although apparently benevolent, the majoritys concession to allow "public utilities that fail to comply with the nationality
requirement under Section 11, Article XII and the FIA [to] cure their deficiencies prior to the start of the administrative case or
investigation"165 could indirectly occasion a compulsory deprivation of the public utilities foreign stockholders of their voting shares. Certainly, these
public utilities must immediately pare down their foreign-owned voting shares to avoid the imposable sanctions. This holds true especially for PLDT
whose 64.27% of its common voting shares are foreign-subscribed and held. PLDT is, therefore, forced to immediately deprive, or at the very least,
dilute the property rights of their foreign stockholders before the commencement of the administrative proceedings, which would be a mere farce
considering the transparency of the public utility from the onset.
Even with the chance granted to the public utilities to remedy their supposed deficiency, the nebulous time-frame given by the majority, i.e., "prior to
the start of the administrative case or investigation," 166 may very well prove too short for these public utilities to raise the necessary amount of money
to increase the number of their authorized capital stock in order to dilute the property rights of their foreign stockholders holding voting shares. 167
Similarly, if they induce their foreign stockholders to transfer the excess voting shares to qualified Philippine nationals, this period before the filing of the
administrative may not be sufficient for these stockholders to find Philippine nationals willing to purchase these voting shares at the market price. This
Court cannot ignore the fact that the voting shares of Philippine public utilities like PLDT are listed and sold at large in foreign capital markets. Hence,
foreigners who have previously purchased their voting shares in these markets will not have a ready Philippine market to immediately transfer their
shares. More than likely, these foreign stockholders will be forced to sell their voting shares at a loss to the few Philippine nationals with money to
spare, or the public utility itself will be constrained to acquire these voting shares to the prejudice of its retained earnings. 168
Whatever means the public utilities choose to employ in order to cut down the foreign stockholdings of voting shares, it is necessary to determine who
among the foreign stockholders of these public utilities must bear the burden of unloading the voting shares or the dilution of their property rights. In a
situation like this, there is at present no settled rule on who should be deprived of their property rights. Will it be the foreign stockholders who bought
the latest issuances? Or the first foreign stockholders of the public utility corporations? This issue cannot be realistically settled within the time-frame
given by the majority without raising more disputes. With these loose ends, the majority cannot penalize the public utilities if they should fail to comply
with the directive of complying with the "nationality requirement under Section 11, Article XII and the FIA" within the unreasonably nebulous and limited
period "prior to the start of the administrative case or investigation." 169
In the light of the new pronouncement of the Court that public utilities that fail to comply with the nationality requirement under Section 11, Article XII
of the Constitution CAN CURE THEIR DEFICIENCIES prior to the start of the administrative case or investigation, I submit that affected companies like
PLDT should be given reasonable time to undertake the necessary measures to make their respective capital structure compliant, and the SEC, as the
regulatory authority, should come up with the appropriate guidelines on the process and supervise the same. SEC should likewise adopt the necessary
rules and regulations to implement the prospective compliance by all affected companies with the new ruling regarding the interpretation of the
provision in question. Such rules and regulations must respect the due process rights of all affected corporations and define a reasonable period for
them to comply with the June 28, 2011 Decision.
A final note.
Year in and year out, the governments trade managers attend economic summits courting businessmen to invest in the country, doubtless promising
them a playing field where the rules are friendly as they are predictable. So it would appear odd if a branch of government would make business life
complicated for investors who are already here. Indeed, stability and predictability are the key pillars on which our legal system must be founded and
run to guarantee a business environment conducive to the countrys sustainable economic growth. Hence, it behoves this Court to respect the basic
expectations taken into account by the investors at the time they made the investments. In other words, it is the duty of this Court to stand guard
against any untoward change of the rules in the middle of the game.
I, therefore, vote to GRANT the motions for reconsideration and accordingly REVERSE and SET ASIDE the June 28, 2011 Decision. The Court should
declare that the word "capital" in the first sentence of Section 11, Article Xll of the 1987 Constitution means the entire capital stock or both voting and
non-voting shares.
Since the June 28, 2011 Decision was however sustained, I submit that said decision should take effect only on the date of its finality and should be
applied prospectively.
PLDT should be given time to umkrtake the nec~ssary meast1res to make its capital structure compliant, and th~ Securities and Exchange Commission
should formulalc appropriate guidelines and supervise the process. Said Commission should also adopt ruks and regulations to implement the
prospective compliance by all affected companies with the new ruling on the interpretation of Sec. 11, Art. XII of the Constitution. Such rules and
regulations must respect the due process rights of all affected corporations and provide a reasonable period for them to com pi y with the June 28, 2011
Decision. The rights of foreigners over the voting shares they presently own in excess of 40% of said shares should, in the meantime, be respected.
PRESBITERO J. VELASCO, JR.

Associate Justice
DISSENTING OPINION
ABAD, J.:
In the Decision dated June 28, 2011, the Court partially granted the petition for prohibition, injunction, declaratory relieC and declaration of nullity of
sale, of Wilson P. Gamboa, a Philippine Long Distance Telephone Company (PLDT) stockholder, and ruled that the term "capital" in Section 11, Article
XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus only to common shares, and not to the
total outstanding capital stock (common and non-voting preferred shares). The Court also directed the Chairperson of the Securities and Exchange
Commission (SEC) to apply this definition of the term "capital" in determining the extent of allowable hm~ign ownership in PLDT, and to impose the
appropriate sanctions if there is a violation of Section 11, Article XII ofthe 1987 Constitution.
Respondents Manuel V. Pangilinan, Napoleon L. Nazareno, Francis Lim, Pablito V. Sanidad, Arno V. Sanidad, and the SEC filed their respective motions
for reconsideration.
Thereafter, the Court conducted oral arguments to hear the parties on the following issues:
1. Whether the term ''capital" in Section ll, Article XII of the 1987 Constitution refers only to shares of stock with the right to vote in the
election of directors (common shares), or to all kinds of shares of stock, including those with no right to vote in the election of directors;
2. Assuming the term "capital" refers only to shares of stock with the right to vote in the election of directors, whether this ruling of the Court
should have retroactive effect to affect such shares of stock owned by foreigners prior to this ruling;
3. Whether PLDT and its foreign stockholders are indispensable parties in the resolution of the legal issue on the definition of the term
"capital" in Section 11, Article XII of the 1987 Constitution; and
3.1. If so, whether the Court has acquired jurisdiction over the persons of PLDT and its foreign stockholders.
I am constrained to maintain my dissent to the majority opinion.
One. To reiterate, the authority to define and interpret the meaning of "capital" in Section 11, Article XII of the 1987 Constitution belongs, not to the
Court, but to Congress, as part of its policy making powers. This matter is addressed to the sound discretion of the lawmaking department of
government since the power to authorize and control a public utility is admittedly a prerogative that stems from Congress. 1 It may very well in its
wisdom define the limit of foreign ownership in public utilities.
Section 11, Article XII of the 1987 Constitution which reads:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines.
is one of the constitutional provisions that are not self-executing and need sufficient details for a meaningful implementation. While the provision states
that no franchise for the operation of a public utility shall be granted to a corporation organized under Philippine laws unless at least 60% of its capital is
owned by Filipino citizens, it does not provide for the meaning of the term "capital."
As Fr. Joaquin G. Bernas, S.J. explained, acting as Amicus Curiae, the result of the absence of a clear definition of the term "capital," was to base the
60-40 proportion on the total outstanding capital stock, that is, the combined total of both common and non-voting preferred shares. But while this has
become the popular and common understanding of the people, it is still incomplete. He added that in the Foreign Investments Act of 1991 (FIA),
Congress tried to clarify this understanding by specifying what capital means for the purpose of determining corporate citizenship, thus:
Sec. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; of a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board
of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation, shall be considered a
"Philippine national." (As amended by Republic Act 8179)
Indeed, the majority opinion also resorted to the various investment Laws 2 in construing the term "capital." But while these laws admittedly govern
foreign investments in the country, they do not expressly or impliedly seek to supplant the ambiguity in the definition of the term "capital" nor do they
seek to modify foreign ownership limitation in public utilities. It is a rule that when the operation of the statute is limited, the law should receive a
restricted construction.3
More particularly, much discussion was made on the FIA since it was enacted after the 1987 Constitution took effect. Yet it does not seem to be a
supplementary or enabling legislation which accurately defines the term "capital."
For one, it specifically applies only to companies which intend to invest in certain areas of investment. It does not apply to companies which intend to
apply for a franchise, much less to those which are already enjoying their franchise. It aims "to attract, promote or welcome productive investments
from foreign individuals, partnerships, corporations and government, including their political subdivisions, in activities which significantly contribute to
national industrialization and socio-economic development." 4 What the FIA provides are new rules for investing in the country.
Moreover, with its adoption of the definition of the term "Philippine national," has the previous understanding that the term "capital" referred to the total
outstanding capital stock, as Fr. Bernas explained, been supplanted or modified? While it is clear that the term "Philippine national" shall mean a
corporation organized under Philippine laws at least 60% of the capital stock outstanding and entitled to vote is owned and held by Filipino citizens "as
used in the FIA," it is not evident whether Congress intended this definition to be used in all other cases where the term "capital" presents itself as an
issue.
Two. Granting that it is the Court, and not Congress, which must define the meaning of "capital," I submit that it must be interpreted to encompass the
entirety of a corporations outstanding capital stock (both common and preferred shares, voting or non-voting).
First, the term "capital" is also used in the fourth sentence of Section 11, Article XII, as follows:
Section 11. xxx The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the
Philippines.
If the term "capital" as used in the first sentence is interpreted as pertaining only to shares of stock with the right to vote in the election of directors,
then such sentence will already prescribe the limit of foreign participation in the election of the board of directors. On the basis of the first sentence
alone, the capacity of foreign stockholders to elect the directors will already be limited by their ownership of 40% of the voting shares. This will then
render the fourth sentence meaningless and will run counter to the principle that the provisions of the Constitution should be read in consonance with
its other related provisions.
Second, Dr. Bernardo M. Villegas, also an Amicus Curiae, who was the Chairman of the Committee on the National Economy that drafted Article XII of
the 1987 Constitution, emphasized that by employing the term "capital," the 1987 Constitution itself did not distinguish among classes of shares.
During their Committee meetings, Dr. Villegas explained that in both economic and business terms, the term "capital" found in the balance sheet of any
corporation always meant the entire capital stock, both common and preferred. He added that even the non-voting shares in a corporation have a great
influence in its major decisions such as: (1) the amendment of the articles of incorporation; (2) the adoption and amendment of by-laws; (3) the sale,
lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; (4) incurring, creating or increasing bonded
indebtedness; (5) the increase or decrease of capital stock; (6) the merger or consolidation of the corporation with another corporation or other
corporations; (7) the investment of corporate funds in another corporation or business in accordance with this Code; and (8) the dissolution of the
corporation.
Thus, the Committee decisively rejected in the end the proposal of the UP Law Center to define the term "capital" as voting stock or controlling interest.
To quote Dr. Villegas, "in the minds of the Commissioners the word capital in Section 11 of Article XII refers, not to voting stock, but to total subscribed
capital, both common and preferred."
Finally, Dr. Villegas observed that our existing policy on foreign ownership in public utilities already discourages, as it is, foreign investments to come in.
To impose additional restrictions, such as the restrictive interpretation of the term "capital," will only aggravate our already slow economic growth and
incapacity to compete with our East Asian neighbours.
The Court can simply adopt the interpretations given by Fr. Bernas and Dr. Villegas since they were both part of the Constitutional Commission that
drafted the 1987 Constitution. No one is in a better position to determine the intent of the framers of the questioned provision than they are.
Furthermore, their interpretations also coincide with the long-standing practice to base the 60-40 proportion on the total outstanding capital stock, that
is, both common and preferred shares.
For sure, both common and preferred shares have always been considered part of the corporations capital stock. Its shareholders are no different from
ordinary investors who take on the same investment risks. They participate in the same venture, willing to share in the profits and losses of the
enterprise. Under the doctrine of equality of shares all stocks issued by the corporation are presumed equal with the same privileges and liabilities,
provided that the Articles of Incorporation is silent on such differences. 5
As a final note, the Filipinization of public utilities under the 1987 Constitution is a recognition of the very strategic position of public utilities both in the
national economy and for national security. 6 The participation of foreign capital is enjoined since the establishment and operation of public utilities may
require the investment of substantial capital which Filipino citizens may not afford. But at the same time, foreign involvement is limited to prevent them
from assuming control of public utilities which may be inimical to national interest. 7 Section 11, Article XII of the 1987 Constitution already provides
three limitations on foreign participation in public utilities. The Court need not add more by further restricting the meaning of the term ''capital" when
none was intended by the flamers of the 1987 Constitution.
Based on these considerations, I vote to GRANT the motions for reconsideration.
ROBERTO A. ABAD
Associate Justice
G.R. No. 195580 April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and MCARTHUR MINING, INC.,
Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and
Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision1 and the February 15, 2011
Resolution of the Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic corporation organized and existing under Philippine
laws, took interest in mining and exploring certain areas of the province of Palawan. After inquiring with the Department of Environment and Natural
Resources (DENR), it learned that the areas where it wanted to undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an MPSA and Exploration Permit (EP)
with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the Department of Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay Sumbiling, Municipality of Bataraza, Province
of Palawan and EPA-IVB-44 which includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then
transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining & Development Corporation (PLMDC)
which previously filed an application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the said application, the DENR issued
MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC
conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in
Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights
and interest over the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for the denial of petitioners
applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and controlled by MBMI Resources,
Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving force
behind petitioners filing of the MPSAs over the areas covered by applications since it knows that it can only participate in mining activities through
corporations which are deemed Filipino citizens. Redmont argued that given that petitioners capital stocks were mostly owned by MBMI, they were
likewise disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino citizens.
In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No. (RA) 7942 or the Philippine Mining Act of
1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation, partnership, association, or cooperative
organized or authorized for the purpose of engaging in mining, with technical and financial capability to undertake mineral resources development and
duly registered in accordance with law at least sixty per cent (60%) of the capital of which is owned by citizens of the Philippines: Provided, That a
legally organized foreign-owned corporation shall be deemed a qualified person for purposes of granting an exploration permit, financial or technical
assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or Technical Assistance Agreements
(FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-owned
corporations. Nevertheless, they claimed that the issue on nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine
Nationals as 60% of their capital is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC (which owns
5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of McArthur)4 and 40% of the shares of SLMC (which, in turn, owns
5,997 shares of Tesoro),5 the shares of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners. They added that the
best tool used in determining the nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of
1991. They also claimed that the POA of DENR did not have jurisdiction over the issues in Redmonts petition since they are not enumerated in Sec. 77
of RA 7942. Finally, they stressed that Redmont has no personality to sue them because it has no pending claim or application over the areas applied
for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On the other hand, [Redmont] having filed its own
applications for an EPA over the areas earlier covered by the MPSA application of respondents may be considered if and when they are qualified under
the law. The violation of the requirements for the issuance and/or grant of permits over mining areas is clearly established thus, there is reason to
believe that the cancellation and/or revocation of permits already issued under the premises is in order and open the areas covered to other qualified
applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and Development, Inc., and Narra Nickel Mining and
Development Corp. as, DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x
x DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian company and declared their MPSAs
null and void. In the same Resolution, it gave due course to Redmonts EPAs. Thereafter, on February 7, 2008, the POA issued an Order 7 denying the
Motion for Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal8 and Memorandum of Appeal9 with the Mines
Adjudication Board (MAB) while Narra separately filed its Notice of Appeal10 and Memorandum of Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified persons under the law. Also, through a letter, they informed the MAB
that they had their individual MPSA applications converted to FTAAs. McArthurs FTAA was denominated as AFTA-IVB-09 12 on May 2007, while Tesoros
MPSA application was converted to AFTA-IVB-0813 on May 28, 2007, and Narras FTAA was converted to AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint15 with the Securities and Exchange Commission
(SEC), seeking the revocation of the certificates for registration of petitioners on the ground that they are foreign-owned or controlled corporations
engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion to Suspend Proceeding
before the MAB praying for the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92 (RTC) a Complaint 16 for injunction with
application for issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-63379. Redmont
prayed for the deferral of the MAB proceedings pending the resolution of the Complaint before the SEC.
But before the RTC can resolve Redmonts Complaint and applications for injunctive reliefs, the MAB issued an Order on September 10, 2008, finding
the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE the Resolution dated 14 December 2007 of the
Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying
the Motions for Reconsideration of the Appellants. The Petition filed by Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered
DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmonts application for a TRO and setting the case for hearing the prayer for
the issuance of a writ of preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the September 10, 2008 Order of the MAB. Subsequently, it filed a
Supplemental Motion for Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmonts Motion for Reconsideration and Supplemental Motion for Reconsideration, Redmont filed before the RTC a
Supplemental Complaint21 in Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary injunction enjoining the MAB from finally disposing of the
appeals of petitioners and from resolving Redmonts Motion for Reconsideration and Supplement Motion for Reconsideration of the MABs September 10,
2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmonts Motion for Reconsideration and Supplemental Motion for Reconsideration
and resolving the appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On October 1, 2010, the CA rendered a Decision,
the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and July 1, 2009 of the Mining Adjudication Board
are reversed and set aside. The findings of the Panel of Arbitrators of the Department of Environment and Natural Resources that respondents
McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of their applications for Mineral Product Sharing Agreement
should be recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical Assistance Agreement (FTAA) or conversion of
their MPSA applications to FTAA, the matter for its rejection or approval is left for determination by the Secretary of the DENR and the President of the
Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when it realized that petitioners had a
common major investor, MBMI, a corporation composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of Justice
(DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining
to the exploitation of natural resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine
nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least
60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less
than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall
be recorded as belonging to aliens.24 (emphasis supplied)
In determining the nationality of petitioners, the CA looked into their corporate structures and their corresponding common shareholders. Using the
grandfather rule, the CA discovered that MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60% equity interest
of other majority shareholders of petitioners through joint venture agreements. The CA found that through a "web of corporate layering, it is clear that
one common controlling investor in all mining corporations involved x x x is MBMI." 25 Thus, it concluded that petitioners McArthur, Tesoro and Narra
are also in partnership with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications suspicious in nature and, as a consequence, it
recommended the rejection of petitioners MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has jurisdiction over them and that it also has
the power to determine the of nationality of petitioners as a prerequisite of the Constitution prior the conferring of rights to "co-production, joint venture
or production-sharing agreements" of the state to mining rights. However, it also stated that the POAs jurisdiction is limited only to the resolution of the
dispute and not on the approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested with the power to approve or
reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners McArthur, Tesoro and Narra as foreign
corporations. Nevertheless, the CA determined that the POAs declaration that the MPSAs of McArthur, Tesoro and Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated May 7, 2010 seeking the cancellation of
petitioners FTAAs. The OP rendered a Decision26 on April 6, 2011, wherein it canceled and revoked petitioners FTAAs for violating and circumventing
the "Constitution x x x[,] the Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment
Act and E.O. 584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners committed violations
against the abovementioned laws and failed to submit evidence to negate them. The Decision further quoted the December 14, 2007 Order of the POA
focusing on the alleged misrepresentation and claims made by petitioners of being domestic or Filipino corporations and the admitted continued mining
operation of PMDC using their locally secured Small Scale Mining Permit inside the area earlier applied for an MPSA application which was eventually
transferred to Narra. It also agreed with the POAs estimation that the filing of the FTAA applications by petitioners is a clear admission that they are
"not capable of conducting a large scale mining operation and that they need the financial and technical assistance of a foreign entity in their operation,
that is why they sought the participation of MBMI Resources, Inc."28 The Decision further quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations and lack of qualification of the
respondent corporations to engage in mining. The filing of the FTAA application conversion which is allowed foreign corporation of the earlier MPSA is
an admission that indeed the respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of
MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting operation only through their local
counterparts.29
The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution30 dated July 6, 2011. Petitioners then filed a Petition for
Review on Certiorari of the OPs Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012,
the CA affirmed the Decision and Resolution of the OP. Thereafter, petitioners appealed the same CA decision to this Court which is now pending with a
different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the subject matter of the controversy, the
MPSA Applications, have already been converted into FTAA applications and that the same have already been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the Panel of Arbitrators has no jurisdiction
to determine the nationality of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of Redmonts willful forum shopping.
IV.
The Court of Appeals ruling that Narra, Tesoro and McArthur are foreign corporations based on the "Grandfather Rule" is contrary to law,
particularly the express mandate of the Foreign Investments Act of 1991, as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA Applications were of "suspicious nature"
as the same is based on mere conjectures and surmises without any shred of evidence to show the same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy by virtue of supervening events, so that a
declaration thereon would be of no practical use or value."32 Thus, the courts "generally decline jurisdiction over the case or dismiss it on the ground of
mootness."33
The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of "mootness" will not deter the courts from trying a
case when there is a valid reason to do so. In David v. Macapagal-Arroyo (David), the Court provided four instances where courts can decide an
otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest is involved;
3.) When constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case. We of this Court note that a grave violation of the Constitution, specifically Section 2
of Article XII, is being committed by a foreign corporation right under our countrys nose through a myriad of corporate layering under different,
allegedly, Filipino corporations. The intricate corporate layering utilized by the Canadian company, MBMI, is of exceptional character and involves
paramount public interest since it undeniably affects the exploitation of our Countrys natural resources. The corresponding actions of petitioners during
the lifetime and existence of the instant case raise questions as what principle is to be applied to cases with similar issues. No definite ruling on such
principle has been pronounced by the Court; hence, the disposition of the issues or errors in the instant case will serve as a guide "to the bench, the bar
and the public."35 Finally, the instant case is capable of repetition yet evading review, since the Canadian company, MBMI, can keep on utilizing dummy
Filipino corporations through various schemes of corporate layering and conversion of applications to skirt the constitutional prohibition against foreign
mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by petitioners since both involve the conversion of MPSA applications to
FTAA applications. Petitioners propound that the CA erred in ruling against them since the questioned MPSA applications were already converted into
FTAA applications; thus, the issue on the prohibition relating to MPSA applications of foreign mining corporations is academic. Also, petitioners would
want us to correct the CAs finding which deemed the aforementioned conversions of applications as suspicious in nature, since it is based on mere
conjectures and surmises and not supported with evidence.
We disagree.
The CAs analysis of the actions of petitioners after the case was filed against them by respondent is on point. The changing of applications by
petitioners from one type to another just because a case was filed against them, in truth, would raise not a few sceptics eyebrows. What is the reason
for such conversion? Did the said conversion not stem from the case challenging their citizenship and to have the case dismissed against them for being
"moot"? It is quite obvious that it is petitioners strategy to have the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action done by the court or appropriate government agency: on January 2,
2007, Redmont filed three separate petitions for denial of the MPSA applications of petitioners before the POA. On June 15, 2007, petitioners filed a
conversion of their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution, observed this suspect change of applications while the
case was pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission that the respondents are not capable of conducting a large
scale mining operation and that they need the financial and technical assistance of a foreign entity in their operation that is why they sought the
participation of MBMI Resources, Inc. The participation of MBMI in the corporation only proves the fact that it is the Canadian company that will provide
the finances and the resources to operate the mining areas for the greater benefit and interest of the same and not the Filipino stockholders who only
have a less substantial financial stake in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations and lack of qualification of
the respondent corporations to engage in mining. The filing of the FTAA application conversion which is allowed foreign corporation of the earlier MPSA
is an admission that indeed the respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of
MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting operation only through their local
counterparts.36
On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and setting aside the September 10, 2008 and July 1,
2009 Orders of the MAB. In the said Decision, the CA upheld the findings of the POA of the DENR that the herein petitioners are in fact foreign
corporations thus a recommendation of the rejection of their MPSA applications were recommended to the Secretary of the DENR. With respect to the
FTAA applications or conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination of the Secretary of the DENR and
the President of the Republic of the Philippines.37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the petition asserting that on April 5, 2010, then
President Gloria Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which rendered the petition moot and academic. However,
the CA, in a Resolution dated February 15, 2011 denied their motion for being a mere "rehash of their claims and defenses." 38 Standing firm on its
Decision, the CA affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case to us via a Petition
for Review on Certiorari under Rule 45, questioning the Decision of the CA. Interestingly, the OP rendered a Decision dated April 6, 2011, a day after
this petition for review was filed, cancelling and revoking the FTAAs, quoting the Order of the POA and stating that petitioners are foreign corporations
since they needed the financial strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also based the cancellation on
the misrepresentation of facts and the violation of the "Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of
the Foreign Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a Resolution, denying the Motion for Reconsideration filed by the
petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the OPs Decision and Resolution. In their Reply,
petitioners chose to ignore the OP Decision and continued to reuse their old arguments claiming that they were granted FTAAs and, thus, the case was
moot. Petitioners filed a Manifestation and Submission dated October 19, 2012,40 wherein they asserted that the present petition is moot since, in a
remarkable turn of events, MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a Filipino
corporation and, in effect, making their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot." Their final act, wherein MBMI was able to
allegedly sell/assign all its shares and interest in the petitioner "holding companies" to DMCI, only proves that they were in fact not Filipino corporations
from the start. The recent divesting of interest by MBMI will not change the stand of this Court with respect to the nationality of petitioners prior the
suspicious change in their corporate structures. The new documents filed by petitioners are factual evidence that this Court has no power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations have violated several mining laws and made
misrepresentations and falsehood in their applications for FTAA which lead to the revocation of the said FTAAs, demonstrating that petitioners are not
beyond going against or around the law using shifty actions and strategies. Thus, in this instance, we can say that their claim of mootness is moot in
itself because their defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners nationality, whether Filipino or foreign. In their previous petitions, they had been
adamant in insisting that they were Filipino corporations, until they submitted their Manifestation and Submission dated October 19, 2012 where they
stated the alleged change of corporate ownership to reflect their Filipino ownership. Thus, there is a need to determine the nationality of petitioner
corporations.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. Paragraph 7 of
DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to
the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine
nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least
60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less
than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall
be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the second
part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number
of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of the "control test" under RA 7042, as amended by RA
8179, otherwise known as the Foreign Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision under Sec. 3 of the
FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by the citizens of the
Philippines; a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled
to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That were a corporation and
its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital
stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors, in order that the corporation shall be considered a Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a "Philippine National" under Sec. 3 of the
FIA does not provide for it. They further claim that the grandfather rule "has been abandoned and is no longer the applicable rule." 41 They also opined
that the last portion of Sec. 3 of the FIA admits the application of a "corporate layering" scheme of corporations. Petitioners claim that the clear and
unambiguous wordings of the statute preclude the court from construing it and prevent the courts use of discretion in applying the law. They said that
the plain, literal meaning of the statute meant the application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and pertinent laws, then it becomes
illegal. Further, the pronouncement of petitioners that the grandfather rule has already been abandoned must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, forests or timber,
wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall
not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The
State may directly undertake such activities, or it may enter into co-production, joint venture or production-sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving either technical or financial assistance for large-scale exploration,
development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real
contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local
scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the exploration, development, and
utilization of natural resources with entities who are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since the issues are
centered on the utilization of our countrys natural resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners since,
as the Constitution so provides, such agreements are only allowed corporations or associations "at least 60 percent of such capital is owned by such
citizens." The deliberations in the Records of the 1986 Constitutional Commission shed light on how a citizenship of a corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairmans interpretation of an independent national economy is freedom from undue foreign control? What is
the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the welfare of the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom from foreign control? I think that is the meaning
of independence, because as phrased, it still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40 possibility in the cultivation of natural resources,
40 percent involves some control; not total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9,
and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question: Where do we base the equity requirement, is it on the authorized capital stock,
on the subscribed capital stock, or on the paid-up capital stock of a corporation? Will the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law Center who provided us with a draft. The phrase
that is contained here which we adopted from the UP draft is 60 percent of the voting stock.
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be entitled to vote.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation
which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution and a statute, the Constitution will prevail. In this instance,
specifically pertaining to the provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of
application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for purposes, among others, of determining
compliance with nationality requirements (the Investee Corporation). Such manner of computation is necessary since the shares in the Investee
Corporation may be owned both by individual stockholders (Investing Individuals) and by corporations and partnerships (Investing Corporation). The
said rules thus provide for the determination of nationality depending on the ownership of the Investee Corporation and, in certain instances, the
Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee Corporation. The first case is the liberal rule,
later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which
states, (s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality. Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the
Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states,
"but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing
Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to the shares directly
owned in the Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40
Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60%
Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated
differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the grandfather rule since, as ruled by the
POA and affirmed by the OP, doubt prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is present in the 60-
40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporationMBMI, funded
them. However, petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than 60%.43
The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince this Court. DOJ Opinion No. 20, which
petitioners quoted in their petition, only made an example of an instance where "doubt" as to the ownership of the corporation exists. It would be
ludicrous to limit the application of the said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the
total stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive to have "60% Filipino Ownership" at face
value. It would be senseless for these applying corporations to state in their respective articles of incorporation that they have less than 60% Filipino
stockholders since the applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application of
the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the law, creating a cloud of doubt in
the Courts mind. To determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of petitioners corporate structure, they have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from SMMI. McArthur has a capital stock of
ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the following:44
Name Nationality Number of Shares Amount Subscribed Amount Paid
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Corporation
MBMI Resources, Inc. Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)
Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and composition as McArthur. In fact, it would seem
that MBMI is also a major investor and "controls"45 MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra),
Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0
Development
Corp.
MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Inc.
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
Hernando
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
(emphasis supplied)
Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the number of shares they subscribed to in the
corporation, which is quite absurd since Olympic is the major stockholder in MMC. MBMIs 2006 Annual Report sheds light on why Olympic failed to pay
any amount with respect to the number of shares it subscribed to. It states that Olympic entered into joint venture agreements with several Philippine
companies, wherein it holds directly and indirectly a 60% effective equity interest in the Olympic Properties.46 Quoting the said Annual report:
On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic") entered into a series of agreements including a
Property Purchase and Development Agreement (the Transaction Documents) with respect to three nickel laterite properties in Palawan, Philippines (the
"Olympic Properties"). The Transaction Documents effectively establish a joint venture between the Company and Olympic for purposes of developing
the Olympic Properties. The Company holds directly and indirectly an initial 60% interest in the joint venture. Under certain circumstances and upon
achieving certain milestones, the Company may earn up to a 100% interest, subject to a 2.5% net revenue royalty.47 (emphasis supplied)
Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was utilized by MBMI to gain control over
McArthur. It is apparent that MBMI has more than 60% or more equity interest in McArthur, making the latter a foreign corporation.
Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000) divided into ten thousand (10,000)
common shares at PhP 1,000 per share, as demonstrated below:
[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Mining, Inc.
MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60
Resources, Inc.
Esguerra
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate structure of petitioner McArthur, down
to the last centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality,"
"Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we scrutinize SMMIs corporate structure:
Sara Marie Mining, Inc.
Shares Subscribed
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0
Development
Corp.

Inc.
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
Hernando
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
(emphasis supplied)
After subsequently studying SMMIs corporate structure, it is not farfetched for us to spot the glaring similarity between SMMI and MMCs corporate
structure. Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and
Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for
the amount paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total
value of the amount paid is two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympics participation in SMMIs corporate structure, it is clear that MBMI is in
control of Tesoro and owns 60% or more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to
participate in the exploitation, utilization and development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDCs MPSA application, whose corporate structures arrangement is
similar to that of the first two petitioners discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into ten thousand
common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as follows:
Shares Subscribed
Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00
Mining &
Development
Corp.
MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00
Resources, Inc.
Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.
Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernandez
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Bocalan
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Robert L. American 1 PhP 1,000.00 PhP 1,000.00
McCurdy
Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00

(emphasis supplied)
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDCs corporate structure:
Name Nationality Number of Amount Subscribed Amount Paid

Shares
Palawan Alpha South Resources Filipino 6,596 PhP 6,596,000.00 PhP 0

Development Corporation
Inc.
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)
Yet again, the usual players in petitioners corporate structures are present. Similarly, the amount of money paid by the 2nd tier majority stock holder,
in this case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero.
Studying MBMIs Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind the intricate corporate layering that
MBMI immersed itself in:
JOINT VENTURES The Companys ownership interests in various mining ventures engaged in the acquisition, exploration and development of mineral
properties in the Philippines is described as follows:
(a) Olympic Group
The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity interest in the Olympic Property of
60.0%. Pursuant to a shareholders agreement, the Company exercises joint control over the companies in the Olympic Group.
(b) Alpha Group
The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the Alpha Property of 60.4%. Pursuant to a
shareholders agreement, the Company exercises joint control over the companies in the Alpha Group.48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering petitioners corporate owners, namely: MMI,
SMMI and PLMDC. Going further and adding to the picture, MBMIs Summary of Significant Accounting Policies statement regarding the "joint
venture" agreements that it entered into with the "Olympic" and "Alpha" groupsinvolves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership
of the "layered" corporations boils down to MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements with,
practically exercising majority control over the corporations mentioned. In effect, whether looking at the capital structure or the underlying relationships
between and among the corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of their capital stocks or
equity interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CAs use of the exception of the res inter alios acta or the "admission by co-partner or agent" rule and "admission by privies"
under the Rules of Court in the instant case, by pointing out that statements made by MBMI should not be admitted in this case since it is not a party to
the case and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within the scope of his authority and during the
existence of the partnership or agency, may be given in evidence against such party after the partnership or agency is shown by evidence other than
such act or declaration itself. The same rule applies to the act or declaration of a joint owner, joint debtor, or other person jointly interested with the
party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or omission of the latter, while holding the title, in
relation to the property, is evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation must be shown, and that proof of the fact
must be made by evidence other than the admission itself."49 Thus, petitioners assert that the CA erred in finding that a partnership relationship exists
between them and MBMI because, in fact, no such partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have a joint
interest" with Narra, Tesoro and McArthur. They challenged the conclusion of the CA which pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this particular partnership can be formed, it should have been formally
reduced into writing since the capital involved is more than three thousand pesos (PhP 3,000). Being that there is no evidence of written agreement to
form a partnership between petitioners and MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry to a common fund with the intention of
dividing the profits among themselves.50 On the other hand, joint ventures have been deemed to be "akin" to partnerships since it is difficult to
distinguish between joint ventures and partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership that it is ordinarily held
that their rights, duties, and liabilities are to be tested by rules which are closely analogous to and substantially the same, if not exactly the same, as
those which govern partnership. In fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint
venture, very little law being found applicable to one that does not apply to the other.51
Though some claim that partnerships and joint ventures are totally different animals, there are very few rules that differentiate one from the other;
thus, joint ventures are deemed "akin" or similar to a partnership. In fact, in joint venture agreements, rules and legal incidents governing partnerships
are applied.52
Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships entered between and among petitioners and
MBMI are no simple "joint venture agreements." As a rule, corporations are prohibited from entering into partnership agreements; consequently,
corporations enter into joint venture agreements with other corporations or partnerships for certain transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was executed to circumvent the legal prohibition against
corporations entering into partnerships, then the relationship created should be deemed as "partnerships," and the laws on partnership should be
applied. Thus, a joint venture agreement between and among corporations may be seen as similar to partnerships since the elements of partnership are
present.
Considering that the relationships found between petitioners and MBMI are considered to be partnerships, then the CA is justified in applying Sec. 29,
Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA has jurisdiction to settle disputes over rights to
mining areas which definitely involve the petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by filing its petition
against petitioners, is asserting the right of Filipinos over mining areas in the Philippines against alleged foreign-owned mining corporations. Such claim
constitutes a "dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive and original jurisdiction to hear
and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53
The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition to an application for mineral agreement. The
POA therefore has the jurisdiction to resolve any adverse claim, protest, or opposition to a pending application for a mineral agreement filed with the
concerned Regional Office of the MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the authorized officer(s) of the concerned office(s) shall
issue a certification(s) that the publication/posting/radio announcement have been complied with. Any adverse claim, protest, opposition shall be filed
directly, within thirty (30) calendar days from the last date of publication/posting/radio announcement, with the concerned Regional Office or through
any concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its resolution by the Panel of Arbitrators pursuant to the
provisions of this Act and these implementing rules and regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel of
Arbitrators shall likewise issue a certification to that effect within five (5) working days from the date of finality of resolution thereof. Where there is no
adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a Certification to that effect within five working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under this Section are fully complied with and any adverse claim/protest/opposition is
finally resolved by the Panel of Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as provided in Section 38 hereof, the concerned
Regional Director shall initially evaluate the Mineral Agreement applications in areas outside Mineral reservations. He/She shall thereafter endorse
his/her findings to the Bureau for further evaluation by the Director within fifteen (15) working days from receipt of forwarded documents. Thereafter,
the Director shall endorse the same to the secretary for consideration/approval within fifteen working days from receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working days from receipt of the Certification issued by
the Panel of Arbitrators as provided for in Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary for
consideration/approval within fifteen days from receipt of such endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a) specifically refer only to
those disputes relative to the applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated by Secs. 219 and 43 of DENR
AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57 above, any adverse claim, protest or
opposition specified in said sections may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or
opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin boards of the Bureau, concerned
Regional office(s) and in the concerned province(s) and municipality(ies), copy furnished the barangays where the proposed contract area is located
once a week for two (2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned offices shall
issue a certification that publication/posting has been made and that no adverse claim, protest or opposition of whatever nature has been filed. On the
other hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional Offices concerned, or through the Departments Community Environment and Natural Resources Officers (CENRO)
or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators. However
previously published valid and subsisting mining claims are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully complied with and any opposition/adverse claim is dealt
with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a) specifically refer only to
those disputes relative to the applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated by Secs. 219 and 43 of DENRO
AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57 above, any adverse claim, protest or
opposition specified in said sections may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such claim, protest or
opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin boards of the Bureau, concerned
Regional office(s) and in the concerned province(s) and municipality(ies), copy furnished the barangays where the proposed contract area is located
once a week for two (2) consecutive weeks in a language generally understood in the locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned offices shall
issue a certification that publication/posting has been made and that no adverse claim, protest or opposition of whatever nature has been filed. On the
other hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional offices concerned, or through the Departments Community Environment and Natural Resources Officers (CENRO)
or Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators. However,
previously published valid and subsisting mining claims are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully complied with and any opposition/adverse claim is dealt
with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition, or protest relative to mining rights under Sec.
77(a) of RA 7942 is confined only to adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.
POAs jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it has no authority to approve or reject said
applications. Such power is vested in the DENR Secretary upon recommendation of the MGB Director. Clearly, POAs jurisdiction over "disputes involving
rights to mining areas" has nothing to do with the cancellation of existing mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes over MPSA applications subject of Redmonts
petitions. However, said jurisdiction does not include either the approval or rejection of the MPSA applications, which is vested only upon the Secretary
of the DENR. Thus, the finding of the POA, with respect to the rejection of petitioners MPSA applications being that they are foreign corporation, is
valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA, that has jurisdiction over the MPSA applications of
petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the time of the commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.Regional Trial Courts shall exercise exclusive original jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.
x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive and original
jurisdiction to hear and decide the following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to mining areas. One such dispute is an MPSA
application to which an adverse claim, protest or opposition is filed by another interested applicant. 1wphi1 In the case at bar, the dispute arose or
originated from MPSA applications where petitioners are asserting their rights to mining areas subject of their respective MPSA applications. Since
respondent filed 3 separate petitions for the denial of said applications, then a controversy has developed between the parties and it is POAs jurisdiction
to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR Regional Office or any concerned DENRE or CENRO
are MPSA applications. Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary jurisdiction. Euro-med Laboratories v. Province of
Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise, specialized training and knowledge of an
administrative body, relief must first be obtained in an administrative proceeding before resort to the courts is had even if the matter may well be within
their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA and to this Court as a last recourse.
Selling of MBMIs shares to DMCI
As stated before, petitioners Manifestation and Submission dated October 19, 2012 would want us to declare the instant petition moot and academic
due to the transfer and conveyance of all the shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing under Philippine
laws and is at least 60% Philippine-owned.56 Petitioners reasoned that they now cannot be considered as foreign-owned; the transfer of their shares
supposedly cured the "defect" of their previous nationality. They claimed that their current FTAA contract with the State should stand since "even
wholly-owned foreign corporations can enter into an FTAA with the State."57 Petitioners stress that there should no longer be any issue left as regards
their qualification to enter into FTAA contracts since they are qualified to engage in mining activities in the Philippines. Thus, whether the "grandfather
rule" or the "control test" is used, the nationalities of petitioners cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact should be disregarded. The manifestation can
no longer be considered by us since it is being tackled in G.R. No. 202877 pending before this Court. 1wphi1 Thus, the question of whether petitioners,
allegedly a Philippine-owned corporation due to the sale of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue
in this case.
In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2,
Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in
the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the
corporation, then it may apply the "grandfather rule."
WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals Decision dated October 1, 2010 and Resolution dated
February 15, 2011 are hereby AFFIRMED.
SO ORDERED.
G.R. No. 195580 January 28, 2015
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and McARTHUR MINING, INC.,
Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
RESOLUTION
VELASCO, JR., J.:
Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the Petition for Review on Certiorari under Rule 45 jointly
interposed by petitioners Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc.
(McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011 Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 109703.
Very simply, the challenged Decision sustained the appellate court's ruling that petitioners, being foreign corporations, are not entitled to Mineral
Production Sharing Agreements (MPSAs). In reaching its conclusion, this Court upheld with approval the appellate court's finding that there was doubt
as to petitioners' nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively owns 60% of the common stocks of the
petitioners by owning equity interest of petitioners' other majority corporate shareholders.
In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-movants argued, in the main, that the Court's Decision was not in
accord with law and logic. In its September 2, 2014 Comment, on the other hand, respondent Redmont Consolidated Mines Corp. (Redmont) countered
that petitioners motion for reconsideration is nothing but a rehash of their arguments and should, thus, be denied outright for being pro-forma.
Petitioners have interposed on September 30, 2014 their Reply to the respondents Comment.
After considering the parties positions, as articulated in their respective submissions, We resolve to deny the motion for reconsideration.
I.
The case has not been rendered moot and academic
Petitioners have first off criticized the Court for resolving in its Decision a substantive issue, which,as argued, has supposedly been rendered moot by
the fact that petitioners applications for MPSAs had already been converted to an application for a Financial Technical Assistance Agreement (FTAA), as
petitioners have in fact been granted an FTAA. Further, the nationality issue, so petitioners presently claim, had been rendered moribund by the fact
that MBMI had already divested itself and sold all its shareholdings in the petitioners, as well as in their corporate stockholders, to a Filipino corporation
DMCI Mining Corporation (DMCI).
As a counterpoint, respondent Redmontavers that the present case has not been rendered moot by the supposed issuance of an FTAA in petitioners
favor as this FTAA was subsequently revoked by the Office of the President (OP) and is currently a subject of a petition pending in the Courts First
Division. Redmont likewise contends that the supposed sale of MBMIs interest in the petitioners and in their "holding companies" is a question of fact
that is outside the Courts province to verify in a Rule 45 certiorari proceedings. In any case, assuming that the controversy has been rendered moot,
Redmont claims that its resolution on the merits is still justified by the fact that petitioners have violated a constitutional provision, the violation is
capable of repetition yet evading review, and the present case involves a matter of public concern.
Indeed, as the Court clarified in its Decision, the conversion of the MPSA application to one for FTAAs and the issuance by the OP of an FTAA in
petitioners favor are irrelevant. The OP itself has already cancelled and revoked the FTAA thusissued to petitioners. Petitioners curiously have omitted
this critical factin their motion for reconsideration. Furthermore, the supposed sale by MBMI of its shares in the petition ercorporations and in their
holding companies is not only a question of fact that this Court is without authority toverify, it also does not negate any violation of the Constitutional
provisions previously committed before any such sale.
We can assume for the nonce that the controversy had indeed been rendered moot by these two events. Asthis Court has time and again declared, the
"moot and academic" principle is not a magical formula that automatically dissuades courts in resolving a case. 1 The Court may still take cognizance of
an otherwise moot and academic case, if it finds that (a) there is a grave violation of the Constitution;(b) the situation is of exceptional character and
paramount public interest is involved; (c) the constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and
the public; and (d) the case is capable of repetition yet evading review.2 The Courts April 21, 2014 Decision explained in some detail that all four (4) of
the foregoing circumstances are present in the case. If only to stress a point, we will do so again. First, allowing the issuance of MPSAs to applicants
that are owned and controlled by a 100% foreign-owned corporation, albeit through an intricate web of corporate layering involving alleged Filipino
corporations, is tantamount to permitting a blatant violation of Section 2, Article XII of the Constitution. The Court simply cannot allow this breach and
inhibit itself from resolving the controversy on the facile pretext that the case had already been rendered academic.
Second, the elaborate corporate layering resorted to by petitioners so as to make it appear that there is compliance with the minimum Filipino
ownership in the Constitution is deftly exceptional in character. More importantly, the case is of paramount public interest, as the corporate layering
employed by petitioners was evidently designed to circumvent the constitutional caveat allowing only Filipino citizens and corporations 60%-owned by
Filipino citizens to explore, develop, and use the countrys natural resources.
Third, the facts of the case, involving as they do a web of corporate layering intended to go around the Filipino ownership requirement in the
Constitution and pertinent laws, requirethe establishment of a definite principle that will ensure that the Constitutional provision reserving to Filipino
citizens or "corporations at least sixty per centum of whose capital is owned by such citizens" be effectively enforced and complied with. The case,
therefore, is an opportunity to establish a controlling principle that will "guide the bench, the bar, and the public."
Lastly, the petitioners actions during the lifetime and existence of the instant case that gave rise to the present controversy are capable of repetition yet
evading review because, as shown by petitioners actions, foreign corporations can easily utilize dummy Filipino corporations through various schemes
and stratagems to skirt the constitutional prohibition against foreign mining in Philippine soil.
II.
The application of the Grandfather Ruleis justified by the circumstances of the case to determine the nationality of petitioners.
To petitioners, the Courts application of the Grandfather Rule to determine their nationality is erroneous and allegedly without basis in the Constitution,
the Foreign Investments Act of 1991 (FIA), the Philippine Mining Act of 1995,3 and the Rules issued by the Securities and Exchange Commission (SEC).
These laws and rules supposedly espouse the application of the Control Test in verifying the Philippine nationality of corporate entities for purposes of
determining compliance withSec. 2, Art. XII of the Constitution that only "corporations or associations at least sixty per centum of whose capital is
owned by such [Filipino] citizens" may enjoy certain rights and privileges, like the exploration and development of natural resources.
The application of the Grandfather Rule in the present case does not eschew the Control Test.
Clearly, petitioners have misread, and failed to appreciate the clear import of, the Courts April 21, 2014 Decision. Nowhere in that disposition did the
Court foreclose the application of the Control Test in determining which corporations may be considered as Philippine nationals. Instead, to borrow
Justice Leonens term, the Court used the Grandfather Rule as a "supplement" to the Control Test so that the intent underlying the averted Sec. 2, Art.
XII of the Constitution be given effect. The following excerpts of the April 21, 2014 Decision cannot be clearer:
In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2,
Art. XII of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in
the mind of the Court, there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino equity ownership in the
corporation, then it may apply the "grandfather rule." (emphasis supplied)
With that, the use of the Grandfather Rule as a "supplement" to the Control Test is not proscribed by the Constitution or the Philippine Mining Act of
1995.
The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization of natural resources to Filipino citizens and
"corporations or associations at least sixty per centum of whose capital is owned by such citizens." Similarly, Section 3(aq) of the Philippine Mining Act
of 1995 considers a "corporation x x x registered in accordance with law at least sixty per cent of the capital of which is owned by citizens of the
Philippines" as a person qualified to undertake a mining operation. Consistent with this objective, the Grandfather Rulewas originally conceived to look
into the citizenshipof the individuals who ultimately own and control the shares of stock of a corporation for purposes of determining compliance with
the constitutional requirement of Filipino ownership. It cannot, therefore, be denied that the framers of the Constitution have not foreclosed the
Grandfather Rule as a tool in verifying the nationality of corporations for purposes of ascertaining their right to participate in nationalized or partly
nationalized activities. The following excerpts from the Record of the 1986 Constitutional Commission suggest as much:
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9,
and 2/3-1/3 in Section 15.
xxxx
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation
which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by which the percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases
where corporate shareholders are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality
of the corporate shareholder."4 Thus, to arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect shareholdings in
the corporation are determined.
This concept of stock attribution inherent in the Grandfather Rule to determine the ultimate ownership in a corporation is observed by the Bureau of
Internal Revenue (BIR) in applying Section 127 (B)5 of the National Internal Revenue Code on taxes imposed on closely held corporations, in relation to
Section 96 of the Corporation Code6 on close corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim Henares held:
In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously along the chain of ownership until it finally
reaches the individual stockholders. This is in consonance with the "grandfather rule" adopted in the Philippines under Section 96 of the Corporation
Code(Batas Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued stock of a corporation are held by not more than twenty
persons, among others, a corporation is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or voting rights is
owned or controlled by another corporation which is not a close corporation.7
In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC applied the Grandfather Rule even if the corporation engaged in
mining operation passes the 60-40 requirement of the Control Test, viz:
You allege that the structure of MMLs ownership in PHILSAGA is as follows: (1) MML owns 40% equity in MEDC, while the 60% is ostensibly owned by
Philippine individual citizens who are actually MMLs controlled nominees; (2) MEDC, in turn, owns 60% equity in MOHC, while MML owns the remaining
40%; (3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%. You provide the following figure to illustrate this structure:
xxxx
We note that the Constitution and the statute use the concept "Philippine citizens." Article III, Section 1 of the Constitution provides who are Philippine
citizens: x x x This enumeration is exhaustive. In other words, there can be no other Philippine citizens other than those falling within the enumeration
provided by the Constitution. Obviously, only natural persons are susceptible of citizenship. Thus, for purposes of the Constitutional and statutory
restrictions on foreign participation in the exploitation of mineral resources, a corporation investing in a mining joint venture can never be considered as
a Philippine citizen.
The Supreme Court En Banc confirms this [in] Pedro R. Palting, vs. San Jose Petroleum [Inc.]. The Court held that a corporation investing in another
corporation engaged ina nationalized activity cannot be considered as a citizen for purposes of the Constitutional provision restricting foreign
exploitation of natural resources:
xxxx
Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e. natural persons, of that investor-corporation in order to
determine if the Constitutional and statutory restrictions are complied with. If the shares of stock of the immediate investor corporation is in turn held
and controlled by another corporation, then we must look into the citizenship of the individual stockholders of the latter corporation. In other words, if
there are layers of intervening corporations investing in a mining joint venture, we must delve into the citizenship of the individual stockholders of each
corporation. This is the strict application of the grandfather rule, which the Commission has been consistently applying prior to the 1990s. Indeed, the
framers of the Constitution intended for the "grandfather rule" to apply in case a 60%-40% Filipino-Foreign equity corporation invests in another
corporation engaging in an activity where the Constitution restricts foreign participation.
xxxx
Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned, while it is only 12.96% owned by Philippine
citizens. Thus, the constitutional requirement of 60% ownership by Philippine citizens isviolated. (emphasis supplied)
Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et al.,8 the SEC en bancapplied the Grandfather Rule
despite the fact that the subject corporations ostensibly have satisfied the 60-40 Filipino equity requirement. The SEC en bancheld that to attain the
Constitutional objective of reserving to Filipinos the utilization of natural resources, one should not stop where the percentage of the capital stock is
60%.Thus:
[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided practically all the funds of the remaining appellee-
corporations. The records disclose that: (1) Olympic Mines and Development Corporation ("OMDC"), a domestic corporation, and MBMI subscribed to
6,663 and 3,331 shares, respectively, out of the authorized capital stock of Madridejos; however, OMDC paid nothing for this subscription while MBMI
paid 2,803,900.00 out of its total subscription cost of 3,331,000.00; (2) Palawan Alpha South Resource Development Corp. ("Palawan Alpha"), also a
domestic corporation, and MBMI subscribed to 6,596 and 3,996 shares, respectively, out of the authorized capital stock of PatriciaLouise; however,
Palawan Alpha paid nothing for this subscription while MBMI paid 2,796,000.00 out of its total subscription cost of 3,996,000.00; (3) OMDC and MBMI
subscribed to 6,663 and 3,331 shares, respectively, out of the authorized capital stock of Sara Marie; however, OMDC paid nothing for this subscription
while MBMI paid 2,794,000.00 out of its total subscription cost of 3,331,000.00; and (4) Falcon Ridge Resources Management Corp. ("Falcon Ridge"),
another domestic corporation, and MBMI subscribed to 5,997 and 3,998 shares, respectively, out of the authorized capital stock of San Juanico;
however, Falcon Ridge paid nothing for this subscription while MBMI paid 2,500,000.00 out of its total subscription cost of 3,998,000.00. Thus,
pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must be used.
xxxx
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily, therefore, the Rule
interpreting the constitutional provision should not diminish that right through the legal fiction of corporate ownership and control. But the constitutional
provision, as interpreted and practicedvia the 1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the
Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a
nationalized activity or business.
The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate shareholder to the second or even the subsequent
tier of ownership hews with the rule that the "beneficial ownership" of corporations engaged in nationalized activities must reside in the hands of Filipino
citizens. Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied, the Department of Justice (DOJ), in its Opinion No. 144, S.
of 1977, stated that an agreement that may distort the actual economic or beneficial ownership of a mining corporation may be struck down as violative
of the constitutional requirement, viz:
In this connection, you raise the following specific questions:
1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining service contract with a foreign company granting the latter a
share of not morethan 40% from the proceeds of the operations?
xxxx
By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or partnership registered with the [SEC] at least 60% of the capital
of which is owned by Filipino citizens and possessing x x x.The sixty percent Philippine equity requirement in mineral resource exploitation x x xis
intended to insure, among other purposes, the conservation of indigenous natural resources, for Filipino posterityx x x. I think it is implicit in this
provision, even if it refers merely to ownership of stock in the corporation holding the mining concession, that beneficial ownership of the right to
dispose, exploit, utilize, and develop natural resources shall pertain to Filipino citizens, and that the nationality requirementis not satisfied unless
Filipinos are the principal beneficiaries in the exploitation of the countrys natural resources. This criterion of beneficial ownership is tacitly adopted in
Section 44 of P.D. No. 463, above-quoted, which limits the service fee in service contracts to 40% of the proceeds of the operation, thereby implying
that the 60-40 benefit-sharing ration is derived from the 60-40 equity requirement in the Constitution.
xxxx
It is obvious that while payments to a service contractor may be justified as a service fee, and therefore, properly deductible from gross proceeds, the
service contract could be employed as a means of going about or circumventing the constitutional limit on foreign equity participation and the obvious
constitutional policy to insure that Filipinos retain beneficial ownership of our mineral resources. Thus, every service contract scheme has to be
evaluated in its entirety, on a case to case basis, to determine reasonableness of the total "service fee" x x x like the options available tothe contractor
to become equity participant in the Philippine entity holding the concession, or to acquire rights in the processing and marketing stages. x x x (emphasis
supplied)
The "beneficial ownership" requirement was subsequently used in tandem with the "situs of control" todetermine the nationality of a corporation in DOJ
Opinion No. 84, S.of 1988, through the Grandfather Rule, despite the fact that both the investee and investor corporations purportedly satisfy the 60-40
Filipino equity requirement:9
This refers to your request for opinion on whether or not there may be an investment in real estate by a domestic corporation (the investing
corporation) seventy percent (70%) of the capital stock of which is owned by another domestic corporation withat least 60%-40% Filipino-Foreign
Equity, while the remaining thirty percent (30%) of the capital stock is owned by a foreign corporation.
xxxx
This Department has had the occasion to rule in several opinions that it is implicit in the constitutional provisions, even if it refers merely to ownership of
stock in the corporation holding the land or natural resource concession, that the nationality requirement is not satisfied unless it meets the criterion of
beneficial ownership, i.e. Filipinos are the principal beneficiaries in the exploration of natural resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and
that in applying the same "the primordial consideration is situs of control, whether in a stock or nonstock corporation"(Op. No. 178, s. 1974). As stated
in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously toinsure that corporations and associations allowed to acquire agricultural land or
to exploit natural resources "shall be controlled by Filipinos." Accordingly, any arrangement which attempts to defeat the constitutional purpose should
be eschewed (Op. No 130, s. 1985).
We are informed that in the registration of corporations with the [SEC], compliance with the sixty per centum requirement is being monitored by SEC
under the "Grandfather Rule" a method by which the percentage of Filipino equity in corporations engaged in nationalized and/or partly nationalized
areas of activities provided for under the Constitution and other national laws is accurately computed, and the diminution if said equity prevented (SEC
Memo, S. 1976). The "Grandfather Rule" is applied specifically in cases where the corporation has corporate stockholders with alien stockholdings,
otherwise, if the rule is not applied, the presence of such corporate stockholders could diminish the effective control of Filipinos.
Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the total foreign equity in the investing corporation is 58% while the
Filipino equity is only 42%, in the investing corporation, subject of your query, is disqualified from investing in real estate, which is a nationalized
activity, as it does not meet the 60%-40% Filipino-Foreign equity requirement under the Constitution.
This pairing of the concepts "beneficial ownership" and the "situs of control" in determining what constitutes"capital" has been adopted by this Court in
Heirs of Gamboa v. Teves.10 In its October 9, 2012 Resolution, the Court clarified, thus:
This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is heldby "a trustee of funds for pension or other
employee retirement or separation benefits," the trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential." (emphasis supplied)
In emphasizing the twin requirements of "beneficial ownership" and "control" in determining compliance with the required Filipino equity in Gamboa, the
en bancCourt explicitly cited with approval the SEC en bancs application in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of the
Grandfather Rule, to wit:
Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of SEC, has adopted the
Grandfather Rulein determining compliance with the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of the required Filipino "ownership and
control," is laid down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. x x x (emphasis
supplied)
Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel Communications, Inc., 11 denied the foreign creditors proposal to
convert part of Bayantels debts to common shares of the company at a rate of 77.7%. Supposedly, the conversion of the debts to common shares by
the foreign creditors would be done, both directly and indirectly, in order to meet the control test principle under the FIA.Under the proposed structure,
the foreign creditors would own 40% of the outstanding capital stock of the telecommunications company on a direct basis, while the remaining 40% of
shares would be registered to a holding company that shall retain, on a direct basis, the other 60% equity reserved for Filipino citizens. Nonetheless, the
Court found the proposal non-compliant with the Constitutional requirement of Filipino ownership as the proposed structure would give more than 60%
of the ownership of the common shares of Bayantel to the foreign corporations, viz:
In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantelis that its shareholders shall relinquish the agreed-
upon amount of common stock[s] as payment to Unsecured Creditors as per the Term Sheet. Evidently, the parties intend to convert the unsustainable
portion of respondents debt into common stocks, which have voting rights. If we indulge petitioners on their proposal, the Omnibus Creditors which are
foreign corporations, shall have control over 77.7% of Bayantel, a public utility company. This is precisely the scenario proscribed by the Filipinization
provision of the Constitution.Therefore, the Court of Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion. (emphasis
supplied) As shown by the quoted legislative enactments, administrative rulings, opinions, and this Courts decisions, the Grandfather Rule not only finds
basis, but more importantly, it implements the Filipino equity requirement, in the Constitution.
Application of the Grandfather
Rule with the Control Test.
Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance with the minimum Filipino equity requirement
vis--vis the Control Test. This confusion springs from the erroneous assumption that the use of one method forecloses the use of the other.
As exemplified by the above rulings, opinions, decisions and this Courts April 21, 2014 Decision, the Control Test can be, as it has been, applied jointly
withthe Grandfather Rule to determine the observance of foreign ownership restriction in nationalized economic activities. The Control Test and the
Grandfather Rule are not, as it were, incompatible ownership-determinant methods that canonly be applied alternative to each other. Rather, these
methodscan, if appropriate, be used cumulatively in the determination of the ownership and control of corporations engaged in fully or partly
nationalized activities, as the mining operation involved in this case or the operation of public utilities as in Gamboa or Bayantel.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a corporation, as it could result in an
otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may be applied. Put in another manner, if the subject corporations Filipino equity falls below the threshold
60%, the corporation is immediately considered foreign-owned, in which case, the needto resort to the Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino corporation if there is
no doubtas to who has the "beneficial ownership" and "control" of the corporation. In that instance, there is no need fora dissection or further inquiry
on the ownership of the corporate shareholders in both the investing and investee corporation or the application of the Grandfather Rule. 12 As a
corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation, a resort to the Grandfather Rule
is necessary if doubt existsas to the locusof the "beneficial ownership" and "control." In this case, a further investigation as to the nationality of the
personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations is necessary.
As explained in the April 21,2012 Decision, the "doubt" that demands the application of the Grandfather Rule in addition to or in tandem with the
Control Test is not confined to, or more bluntly, does not refer to the fact that the apparent Filipino ownership of the corporations equity falls below the
60% threshold. Rather, "doubt" refers to various indicia that the "beneficial ownership" and "control" of the corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders. As provided in DOJ Opinion No. 165, Series of 1984, which applied the pertinent provisions of the Anti-
DummyLaw in relation to the minimum Filipino equity requirement in the Constitution, "significant indicators of the dummy status" have been
recognized in view of reports "that some Filipino investors or businessmen are being utilized or [are] allowing themselves to be used as dummies by
foreign investors" specifically in joint ventures for national resource exploitation. These indicators are:
1. That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino businessmen and their
foreign partner;
2. That the foreign investors undertake to provide practically all the technological support for the joint venture;
3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.
Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works Realty Development Corporation,13 the SEC held that
when foreigners contribute more capital to an enterprise, doubt exists as to the actual control and ownership of the subject corporation even if the 60%
Filipino equity threshold is met. Hence, the SEC in that one ordered a further investigation, viz:
x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the basis for determining the level of foreign participation is the
number of shares subscribed, regardless of the par value. Applying such an interpretation, the EPD rules that the foreign equity participation in Linear
works Realty Development Corporation amounts to 26.41% of the corporations capital stock since the amount of shares subscribed by foreign nationals
is 1,795 only out of the 6,795 shares. Thus, the subject corporation is compliant with the 40% limit on foreign equity participation. Accordingly, the EPD
dismissed the complaint, and did not pursue any investigation against the subject corporation.
xxxx
x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD did not err when it did not take into account the par value of
shares in determining compliance with the constitutional and statutory restrictionson foreign equity.
However, we are aware that some unscrupulous individuals employ schemes to circumvent the constitutional and statutory restrictions on foreign
equity. In the present case, the fact that the shares of the Japanese nationals have a greater par value but only have similar rights to those held by
Philippine citizens having much lower par value, is highly suspicious. This is because a reasonable investor would expect to have greater control and
economic rights than other investors who invested less capital than him. Thus, it is reasonable to suspectthat there may be secret arrangements
between the corporation and the stockholders wherein the Japanese nationals who subscribed to the shares with greater par value actually have greater
control and economic rights contrary to the equality of shares based on the articles of incorporation.
With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is advised to avail of the Commissions subpoena powers
in order to gather sufficient evidence, and file the necessary complaint.
As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the present case that
gives rise to a reasonable suspicion that the Filipino shareholders do not actually have the requisite number of control and beneficial ownership in
petitioners Narra, Tesoro, and McArthur. Hence, a further investigation and dissection of the extent of the ownership of the corporate shareholders
through the Grandfather Rule is justified.
Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the shareholdings to the point when natural persons
hold rights to the stocks may very well lead to an investigation ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was
originally intended to trace the shareholdings to the point where natural persons hold the shares, the SEC had already set up a limit as to the number of
corporate layers the attribution of the nationality of the corporate shareholders may be applied.
In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of corporate relations for publicly-held corporations
or where the shares are traded in the stock exchanges, and to three (3) levels for closely held corporations or the shares of which are not traded in the
stock exchanges.14 These limits comply with the requirement in Palting v. San Jose Petroleum, Inc.15 that the application of the Grandfather Rule
cannot go beyond the level of what is reasonable.
A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and their investing corporate stockholders.
In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the matter of true ownership and control over the
petitioners as doubt exists as to the actual extent of the participation of MBMI in the equity of the petitioners and their investing corporations.
We considered the following membership and control structures and like nuances:
Tesoro
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of the 10,000 commonshares of petitioner Tesoro while the
Canadian-owned company, MBMI, holds 39.98% of its shares.
Sara Marie Mining, Inc. Filipino 5,997 5,997,000.00 825,000.00
MBMI Resources, Canadian 3,998 3,998,000.00 1,878,174.60

Inc.16
Lauro L. Salazar Filipino 1 1,000.00 1,000.00
Fernando B. Esguerra Filipino 1 1,000.00 1,000.00
Manuel A. Agcaoili Filipino 1 1,000.00 1,000.00
Michael T. Mason American 1 1,000.00 1,000.00
Kenneth Cawkel Canadian 1 1,000.00 1,000.00
Total 10,000 10,000,000.00 2,708,174.60

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds 66.63% of Sara Maries shares while the same Canadian company
MBMI holds 33.31% of Sara Maries shares. Nonetheless, it is admitted that Olympic did not pay a single peso for its shares. On the contrary, MBMI paid
for 99% of the paid-up capital of Sara Marie.
Olympic Mines & Filipino 6,663 6,663,000.00 P0.00

Development Corp.17
MBMI Resources, Inc. Canadian 3,331 3,331,000.00 2,794,000.00
Amanti Limson Filipino 1 1,000.00 1,000.00
Lauro Salazar Filipino 1 1,000.00 1,000.00
Emmanuel G. Filipino 1 1,000.00 1,000.00
Hernando
Total 10,000 10,000,000.00 2,800,000.00

The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates serious doubt as to the true extent of its
(MBMI) control and ownership over both Sara Marie and Tesoro since, as observed by the SEC, "a reasonable investor would expect to have
greater control and economic rights than other investors who invested less capital than him." The application of the Grandfather Rule is clearly called
for, and as shown below, the Filipinos control and economic benefits in petitioner Tesoro (through Sara Marie) fallbelow the threshold 60%, viz:
Filipino participation in petitioner Tesoro: 40.01%
66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Maries share in Tesoro) = 39.98%
100
39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)

=40.01%
Foreign participation in petitioner Tesoro: 59.99%
33.33
(Foreign equity in Sara Marie) x 59.97 (Sara Maries share in Tesoro) = 19.99%
100
19.99% + 39.98% (MBMIs direct participation in Tesoro) + .02% (shares of foreign individual SHs in Tesoro)
= 59.99%
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership of its shares, it is clear that petitioner Tesoro does
not comply with the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Hence, the appellate courts observation that
Tesoro is a foreign corporation not entitled to an MPSA is apt.
McArthur
Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000 common shares is owned by supposedly Filipino
Madridejos Mining Corporation (Madridejos), while 39.98% belonged to the Canadian MBMI.
Madridejos Mining Filipino 5,997 5,997,000.00 825,000.00

Corporation

Inc.18
Lauro L. Salazar Filipino 1 1,000.00 1,000.00
Fernando B. Filipino 1 1,000.00 1,000.00
Total 10,000 10,000,000.00 2,708,174.60

In turn, 66.63% of Madridejos shares were held by Olympic while 33.31% of its shares belonged to MBMI. Yet again, Olympic did not contribute to the
paid-up capital of Madridejos and it was MBMI that provided 99.79% of the paid-up capital of Madridejos.
Olympic Mines & Filipino 6,663 6,663,000.00 P0.00

Development Corp.19
MBMI Resources, Inc. Canadian 3,331 3,331,000.00 2,803,900.00
Amanti Limson Filipino 1 1,000.00 1,000.00
Lauro Salazar Filipino 1 1,000.00 1,000.00
Emmanuel G. Filipino 1 1,000.00 1,000.00

Hernando
Total 10,000 10,000,000.00 2,809,900.00

Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates serious doubt as to the true extent of its control and
ownership of MBMI over both Madridejos and McArthur. The application of the Grandfather Rule is clearly called for, and as will be shown below, MBMI,
along with the other foreign shareholders, breached the maximum limit of 40% ownership in petitioner McArthur, rendering the petitioner disqualified to
an MPSA:
Filipino participation in petitioner McArthur: 40.01%
66.67
(Filipino equity in Madridejos) x 59.97 (Madridejos share in McArthur) = 39.98%
100
39.98% + .03% (shares of individual Filipino SHs in McArthur)

=40.01%
Foreign participation in petitioner McArthur: 59.99%
33.33
(Foreign equity in Madridejos) x 59.97 (Madridejos share in McArthur) = 19.99%
19.99% + 39.98% (MBMIs direct participation inMcArthur) + .02% (shares of foreign individual SHs in McArthur)
= 59.99%
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared to 59.99% foreign ownership of its shares, it is clear
that petitioner McArthur does not comply with the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the
appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.
Narra
As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development Corporation (PLMDC), while Canadian MBMI held
39.98% of its shares.
Patricia Lousie Mining Filipino 5,997 5,997,000.00 1,677,000.00

and Development
Corp.

Inc.20
Higinio C. Mendoza, Filipino 1 1,000.00 1,000.00
Henry E. Fernandez Filipino 1 1,000.00 1,000.00
Ma. Elena A. Bocalan Filipino 1 1,000.00 1,000.00
Robert L. McCurdy Canadian 1 1,000.00 1,000.00
Bayani H. Agabin Filipino 1 1,000.00 1,000.00
Total 10,000 10,000,000.00 2,800,000.00

PLMDCs shares, in turn, were held by Palawan Alpha South Resources Development Corporation (PASRDC), which subscribed to 65.96% of PLMDCs
shares, and the Canadian MBMI, which subscribed to 33.96% of PLMDCs shares.
Palawan Alpha South Filipino 6,596 6,596,000.00 P0

Resource Development
Corp.

Inc.21
Higinio C. Mendoza, Jr. Filipino 1 1,000.00 1,000.00
Henry E. Fernandez Filipino 1 1,000.00 1,000.00
Ma. Elena A. Bocalan Filipino 1 1,000.00 1,000.00

Robert L. McCurdy Canadian 1 1,000.00 1,000.00
Bayani H, Agabin Filipino 1 1,000.00 1,000.00
Total 10,000 10,000,000.00 2,804,000.00

Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed 99.75% of PLMDCs paid-up capital. This fact creates serious
doubt as to the true extent of MBMIs control and ownership over both PLMDC and Narra since "a reasonable investor would expect to have greater
control and economic rights than other investors who invested less capital than him." Thus, the application of the Grandfather Rule is justified. And as
will be shown, it is clear that the Filipino ownership in petitioner Narra falls below the limit prescribed in both the Constitution and the Philippine Mining
Act of 1995.
Filipino participation in petitioner Narra: 39.64%
66.02
(Filipino equity in PLMDC) x 59.97 (PLMDCs share in Narra) = 39.59%
100
39.59% + .05% (shares of individual Filipino SHs in McArthur)

=39.64%
Foreign participation in petitioner Narra: 60.36%
33.98
(Foreign equity in PLMDC) x 59.97 (PLMDCs share in Narra) = 20.38%
100
20.38% + 39.96% (MBMIs direct participation in Narra) + .02% (shares of foreign individual SHs in McArthur)
= 60.36%
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership of its shares, it is clear that petitioner Narra does
not comply with the minimum Filipino equity requirement imposed in Section 2, Article XII of the Constitution. Hence, the appellate court did not err in
holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.
It must be noted that the foregoing determination and computation of petitioners Filipino equity composition was based on their common
shareholdings, not preferred or redeemable shares. Section 6 of the Corporation Code of the Philippines explicitly provides that "no share may be
deprived of voting rights except those classified as preferred or redeemable shares." Further, as Justice Leonen puts it, there is "no indication that any
of the shares x x x do not have voting rights, [thus] it must be assumed that all such shares have voting rights."22 It cannot therefore be gain said that
the foregoing computation hewed with the pronouncements of Gamboa, as implemented by SEC Memorandum Circular No. 8, Series of 2013, (SEC
Memo No. 8)23 Section 2 of which states:
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory requirement. 1wphi1 For purposes of determining
compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total outstanding shares of stock entitled to vote in
the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
In fact, there is no indication that herein petitioners issued any other class of shares besides the 10,000 common shares. Neither is it suggested that the
common shares were further divided into voting or non-voting common shares. Hence, for purposes of this case, items a) and b) in SEC Memo No. 8
both refer to the 10,000 common shares of each of the petitioners, and there is no need to separately apply the 60-40 ratio to any segment or part of
the said common shares.
III.
In mining disputes, the POA has jurisdiction to pass upon the nationality of applications for MPSAs
Petitioners also scoffed at this Courts decision to uphold the jurisdiction of the Panel of Arbitrators (POA) of the Department of Environment and Natural
Resources (DENR) since the POAs determination of petitioners nationalities is supposedly beyond its limited jurisdiction, as defined in Gonzales v.
Climax Mining Ltd.24 and Philex Mining Corp. v. Zaldivia.25
The April 21, 2014 Decision did not dilute, much less overturn, this Courts pronouncements in either Gonzales or Philex Mining that POAs jurisdiction "is
limited only to mining disputes which raise questions of fact," and not judicial questions cognizable by regular courts of justice. However, to properly
recognize and give effect to the jurisdiction vested in the POA by Section 77 of the Philippine Mining Act of 1995, 26 and in parallel with this Courts
ruling in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.,27 the Court has recognized in its Decision that in resolving disputes
"involving rights to mining areas" and "involving mineral agreements or permits," the POA has jurisdiction to make a preliminary finding of the required
nationality of the corporate applicant in order to determine its right to a mining area or a mineral agreement.
There is certainly nothing novel or aberrant in this approach. In ejectment and unlawful detainer cases, where the subject of inquiry is possession de
facto, the jurisdiction of the municipal trial courts to make a preliminary adjudication regarding ownership of the real property involved is allowed, but
only for purposes of ruling on the determinative issue of material possession.
The present case arose from petitioners' MPSA applications, in which they asserted their respective rights to the mining areas each applied for. Since
respondent Redmont, itself an applicant for exploration permits over the same mining areas, filed petitions for the denial of petitioners' applications, it
should be clear that there exists a controversy between the parties and it is POA's jurisdiction to resolve the said dispute. POA's ruling on Redmont's
assertion that petitioners are foreign corporations not entitled to MPSA is but a necessary incident of its disposition of the mining dispute presented
before it, which is whether the petitioners are entitled to MPSAs.
Indeed, as the POA has jurisdiction to entertain "disputes involving rights to mining areas," it necessarily follows that the POA likewise wields the
authority to pass upon the nationality issue involving petitioners, since the resolution of this issue is essential and indispensable in the resolution of the
main issue, i.e., the determination of the petitioners' right to the mining areas through MPSAs.
WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further pleadings shall be entertained. Let entry of judgment be made in
due course.
SO ORDERED.

Corporation Law - A-D Cases (FULLTEXTS)

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Corporation Law - A-D Cases (FULLTEXTS)

Transféré par

Droits d'auteur :

Formats disponibles

NATIONALITY OF THE CORPORATION

G.R. No. L-64013 November 28, 1983

Eduardo R. Ceniza for petitioners.

TEEHANKEE, J., concurring:

AQUINO, J., dissenting:

TEEHANKEE, J., concurring:

AQUINO, J., dissenting:

Fernando, C.J. and Makasiar, J., join Aquino, J., dissent.

TEEHANKEE, J., concurring:

AQUINO, J., dissenting:

G.R. No. L-63558 May 19, 1987

No. L-68450-51 May 19, 1987

A. ABEJOS ACTIONS IN SEC

B. BRAGAS' ACTION IN SEC

C. BRAGAS' ACTION IN CFI (NOWRTC)

D. ABEJOS' PETITION AT BAR

E. BRAGAS' PETITION AT BAR

c) Controversies in the election or appointments of directors, trustees, officers or managers of such

ACCORDINGLY, judgment is hereby rendered:

This decision shall be immediately executory upon its promulgation.

G.R. No. 87135 May 22, 1992

ALMA MAGALAD, petitioner,

The antecedent facts of the case are as follows:

(b) P10,000.00 both for moral and exemplary damages;

(c) P5,000.00 for and as attorney's fees; and

(d) the costs of suit.

SO ORDERED. (Ibid., p. 30)

Hence, this appeal.

Presidential Decree No. 902-A, Section 3, provides:

G.R. No. L-12719 May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

Office of the Solicitor General for petitioner.

As percentage tax on its gross receipts

Surcharge therein 2,399.77

As fixed tax for the years 1946 to 1952 70.00

Compromise penalty 500.00

The dominant issues involved in this case are twofold:

WHEREFORE, the decision appealed from is affirmed without costs.

G.R. No. 91889 August 27, 1993

Virgilio E. Dulay for petitioners.

The facts as found by the trial court are as follows:

On December 23, 1976, Manuel Dulay by virtue of Board Resolution

Hence, this petition.

Section 101 of the Corporation Code of the Philippines provides:

Paragraph 1, Article 1498 of the New Civil Code provides:

[G.R. Nos. 84132-33 : December 10, 1990.]

192 SCRA 257

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

GUTIERREZ, JR., J.:

The dispositive portion of the trial court's decision reads as follows:

xxx xxx xxx

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

The petitioner questions the following findings of the appellate court:

xxx xxx xxx

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

The following is averred under oath by Pioneer in the original complaint:

We find no cogent reason to reverse or modify these findings.

We now discuss the merits of G.R. No. 84157.