G.R. No.

207246, November 22, 2016

JOSE M. ROY III, Petitioner, v. CHAIRPERSON TERESITA HERBOSA,THE
SECURITIES AND EXCHANGE COMMISSION, AND PHILILIPPINE LONG
DISTANCE TELEPHONE COMPANY, Respondents.

WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P.

GABINETE, ANTONIO V. PESINA, JR., MODESTO MARTIN Y. MAMON III, AND
GERARDO C. EREBAREN, Petitioners-in-Intervention,

PHILIPPINE STOCK EXCHANGE, INC., Respondent-in-Intervention,

SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-

Intervention.

CAGUIOA, J.:
FACTS
On June 28, 2011, the Court issued the Gamboa Decision. It defined the term
“capital” in Section 11, XII of the Constitution.
CAPITAL: refers only to shares of stock entitled to vote in the election of
directors.

And thus in the present case, “capital” refers only to common shares, and
not to the total outstanding capital stock (common and non-voting
preferred shares).

Several motions for reconsideration were filed assailing the Gamboa Decision.
They were denied in the Gamboa Resolution (2012). The Gamboa Decision
attained finality.

In 2012, the SEC posted a Notice in its website inviting the public to attend a
public dialogue and to submit comments on the draft memorandum circular
(attached thereto) on the guidelines to be followed in determining compliance
with the Filipino ownership requirement in public utilities under Section 11,
Article XII of the Constitution pursuant to the Court's directive in
the Gamboa Decision. The SEC held the scheduled dialogue and more than 100
representatives from various organizations, government agencies, the academe
and the private sector attended.

Thereafter, the SEC received a copy of the Entry of Judgmentfrom the Court
certifying that the Gamboa Decision had become final and executory. The SEC
posted another Notice in its website soliciting from the public comments and
suggestions on the draft guidelines.
Thus, petitioner Atty. Jose M. Roy III ("Roy") submitted his written comments on
the draft guidelines.

In 2013, the SEC, through respondent Chairperson Teresita J. Herbosa, issued

SEC-MC No. 8 entitled "Guidelines on Compliance with the Filipino-Foreign
Ownership Requirements Prescribed in the Constitution and/or Existing
Laws by Corporations Engaged in Nationalized and Partly Nationalized
Activities." It was published in the Philippine Daily Inquirer and the Business
Mirror on May 22, 2013. Section 2 of SEC-MC No. 8 provides:

Section 2. All covered corporations shall, at all times, observe the

constitutional or statutory ownership requirement. For purposes of
determining compliance therewith, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total number of
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.

Corporations covered by special laws which provide specific citizenship

requirements shall comply with the provisions of said law.

Hence, petitioner Roy, as a lawyer and taxpayer, filed the

Petition, assailing the validity of SEC-MC No. 8 for not conforming to the
letter and spirit of the Gamboa Decision and Resolution and for having
been issued by the SEC with grave abuse of discretion. Petitioner Roy seeks
to apply the 60-40 Filipino ownership requirement separately to each class of
shares of a public utility corporation, whether common, preferred nonvoting,
preferred voting or any other class of shares. Petitioner Roy also questions the
ruling of the SEC that respondent Philippine Long Distance Telephone Company
("PLDT") is compliant with the constitutional rule on foreign ownership. He
prays that the Court declare SEC-MC No. 8 unconstitutional and direct the SEC to
issue new guidelines regarding the determination of compliance with Section
11, Article XII of the Constitution in accordance with Gamboa.

ISSUES

The twin issues of the Petition and the Petition-in-Intervention are: (1) whether
the SEC gravely abused its discretion in issuing SEC-MC No. 8 in light of
the Gamboa Decision and Gamboa Resolution, and (2) whether the SEC gravely
abused its discretion in ruling that PLDT is compliant with the constitutional
limitation on foreign ownership.
RULING

At the outset, the Court disposes of the second issue for being without merit. In
its Consolidated Comment dated September 13, 2013,34 the SEC already clarified
that it "has not yet issued a definitive ruling anent PLDT's compliance with the
limitation on foreign ownership imposed under the Constitution and relevant
laws and in fact, a careful perusal of SEC-MC No. 8 readily reveals that all
existing covered corporations which are non-compliant with Section 2 thereof
were given a period of one (1) year from the effectivity of the same within which
to comply with said ownership requirement." Thus, in the absence of a definitive
ruling by the SEC on PLDT's compliance with the capital requirement pursuant
to the Gamboa Decision and Resolution, any question relative to the inexistent
ruling is premature.

The only substantive issue that the petitions assert is whether the SEC's
issuance of SEC-MC No. 8 is tainted with grave abuse of discretion.

The Court holds that, even if the resolution of the procedural issues were
conceded in favor of petitioners, the petitions, being anchored on Rule 65, must
nonetheless fail because the SEC did not commit grave abuse of discretion
amounting to lack or excess of jurisdiction when it issued SEC-MC No. 8. To the
contrary, the Court finds SEC-MC No. 8 to have been issued in fealty to
the Gamboa Decision and Resolution.

THE GAMBOA DECISION

To recall, the sole issue in the Gamboa case was: "whether the term 'capital'
in Section 11, Article XII of the Constitution refers to the total common shares only
or to the total outstanding capital stock (combined total of common and non-
voting preferred shares) of PLDT, a public utility."

The Court directly answered the Issue and consistently defined the term
"capital" as follows:
The term "capital" in Section 11, Article XII of the Constitution refers only
to shares of stock entitled to vote in the election of directors, and thus
in the present case only to common shares, and not to the total
outstanding capital stock comprising both common and non-voting
preferred shares.

Considering that common shares have voting rights which translate to

control, as opposed to preferred shares which usually have no voting
rights, the term "capital" in Section 11, Article XII of the Constitution
 refers only to common shares. However, if the preferred shares also have
the right to vote in the election of directors, then the term "capital" shall
include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right
to vote in the election of directors. In short, the term "capital" in Section
11, Article XII of the Constitution refers only to shares of stock that can
vote in the election of directors.

The Court observed further in the Gamboa Decision that reinforcing this
interpretation of the term "capital", as referring to interests or shares entitled to
vote, is the definition of a Philippine national in the Foreign Investments Act of
1991 ("FIA"), which is explained in the Implementing Rules and Regulations of
the FIA ("FIA-IRR"). The FIA-IRR provides:
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or
not, but only such stocks which are generally entitled to vote are
considered.

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. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.

THE GAMBOA RESOLUTION

Was the definition of the term "capital" in Section 11, Article XII of the
1987 Constitution declared for the first time by the Court in
the Gamboa Decision modified in the Gamboa Resolution?

The Court is convinced that it was not. The Gamboa Resolution consists of 51
pages (excluding the dissenting opinions of Associate Justices Velasco and
Abad). For the most part of the Gamboa Resolution, the Court, after reviewing
SEC and DOJ Opinions as well as the provisions of the FIA and its predecessor
statutes, reiterated that both the Voting Control Test and the Beneficial
Ownership Test must be applied to determine whether a corporation is a
"Philippine national" and that a "Philippine national," as defined in the FIA
and all its predecessor statutes, is "a Filipino citizen, or a domestic
corporation "at least 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."
The Court also reiterated that, from the deliberations of the Constitutional
Commission, it is evident that the term "capital" refers to controlling interest of
a corporation, and the framers of the Constitution intended public utilities to
be majority Filipino-owned and controlled.

The assailed SEC-MC No. 8.

The relevant provision in the assailed SEC-MC No. 8 IS Section 2, which

provides:
Section 2. All covered corporations shall, at all times, observe the
constitutional or statutory ownership requirement. For purposes of
determining compliance therewith, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total number of
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.

Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the
controlling interest requirement. In fact, Section 2 goes beyond requiring a 60-
40 ratio in favor of Filipino nationals in the voting stocks; it moreover requires
the 60-40 percentage ownership in the total number of outstanding shares of
stock, whether voting or not. The SEC formulated SEC-MC No. 8 to adhere to the
Court's unambiguous pronouncement that "full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the
voting rights is required." Clearly, SEC-MC No. 8 cannot be said to have been
issued with grave abuse of discretion.

A simple illustration involving Company X with three kinds of shares of stock,

easily shows how compliance with the requirements of SEC-MC No. 8 will
necessarily result to full and faithful compliance with the Gamboa Decision as
well as the Gamboa Resolution.

NOTE:
BENEFICIAL INTERES TEST
VOTING CONTROL TEST
The following is the composition of the outstanding capital stock of Company X:

100 common shares

 100 Class A preferred shares (with right to elect directors)
 100 Class B preferred shares (without right to elect directors)

SEC-MC No. 8 GAMBOA DECISION

60% (required percentage of Filipino) "shares of stock entitled to vote in the

applied to the total number of election of directors" (60% of the
outstanding shares of stock entitled to voting rights)
vote in the election of directors

If at least a total of 120 of common shares and Class A preferred shares (in
any combination) are owned and controlled by Filipinos, Company X is
compliant with the 60% of the voting rights in favor of Filipinos
requirement of both SEC-MC No. 8 and the Gamboa Decision.

SEC-MC No. 8 GAMBOA DECISION/RESOLUTION

60% (required percentage of Filipino) "Full beneficial ownership of 60

applied to BOTH: percent of the outstanding capital
a. the total number of outstanding stock, coupled with 60 percent of the
 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.
voting rights" or "Full beneficial
ownership of the stocks, coupled with
appropriate voting rights x x x shares
with voting rights, as well as with full
beneficial ownership"

If at least a total of 180 shares of all the outstanding capital stock of

Company X are owned and controlled by Filipinos, provided that among
those 180 shares a total of 120 of the common shares and Class A preferred
shares (in any combination) are owned and controlled by Filipinos, then
Company X is compliant with both requirements of voting rights and
beneficial ownership under SEC-MC No. 8 and the Gamboa Decision and
Resolution.

From the foregoing illustration, SEC-MC No. 8 simply implemented, and is

fully in accordance with, the Gamboa Decision and Resolution.

While SEC-MC No. 8 does not expressly mention the Beneficial Ownership Test
or full beneficial ownership of stocks requirement in the FIA, this will not, as it
does not, render it invalid meaning, it does not follow that the SEC will not apply
this test in determining whether the shares claimed to be owned by Philippine
nationals are Filipino, i.e., are held by them by mere title or in full beneficial
ownership. To be sure, the SEC takes its guiding lights also from the FIA and its
implementing rules, the Securities Regulation Code (Republic Act No. 8799;
"SRC") and its implementing rules.

THE FULL BENEFICIAL OWNERSHIP TEST.

While it is correct to state that beneficial ownership is that which may exist
either through voting power and/or investment returns, it does not follow, as
espoused by the minority opinion, that the SRC-IRR, in effect, recognizes a
possible situation where voting power is not commensurate to investment
power. That is a wrong syllogism. The fallacy arises from a misunderstanding on
what the definition is for. The "beneficial ownership" referred to in the
definition, while it may ultimately and indirectly refer to the overall ownership
of the corporation, more pertinently refers to the ownership of the share subject
of the question: is it Filipino-owned or not?

As noted earlier, the FIA-IRR states:

Compliance with the required Filipino ownership of a corporation
shall be determined on the basis of outstanding capital stock whether
 fully paid or not, but only such stocks which are generally entitled to vote
are considered.

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. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.85
The emphasized portions in the foregoing provision is the equivalent of
the so-called "beneficial ownership test". That is all.
The term "full beneficial ownership" found in the FIA-IRR is to be understood in
the context of the entire paragraph defining the term "Philippine national".
Mere legal title is not enough to meet the required Filipino equity, which
means that it is not sufficient that a share is registered in the name of a
Filipino citizen or national, i.e., he should also have full beneficial
ownership of the share. If the voting right of a share held in the name of a
Filipino citizen or national is assigned or transferred to an alien, that
share is not to be counted in the determination of the required Filipino
equity. In the same vein, if the dividends and other fruits and accessions of
the share do not accrue to a Filipino citizen or national, then that share is
also to be excluded or not counted.

Given that beneficial ownership of the outstanding capital stock of the public
utility corporation has to be determined for purposes of compliance with the
60% Filipino ownership requirement, the definition in the SRC-IRR can now be
applied to resolve only the question of who is the beneficial owner or who has
beneficial ownership of each "specific stock" of the said corporation. Thus, if a
"specific stock" is owned by a Filipino in the books of the corporation, but
the stock's voting power or disposing power belongs to a foreigner, then
that "specific stock" will not be deemed as "beneficially owned" by a
Filipino.

Stated inversely, if the Filipino has the "specific stock's" voting power (he can
vote the stock or direct another to vote for him), or the Filipino has the
investment power over the "specific stock" (he can dispose of the stock or direct
another to dispose it for him), or he has both (he can vote and dispose of the
"specific stock" or direct another to vote or dispose it for him), then such
Filipino is the "beneficial owner" of that "specific stock" and that "specific stock"
is considered (or counted) as part of the 60% Filipino ownership of the
corporation. In the end, all those "specific stocks" that are determined to be
Filipino (per definition of "beneficial owner" or "beneficial ownership") will be
added together and their sum must be equivalent to at least 60% of the total
outstanding shares of stock entitled to vote in the election of directors and at
least 60% of the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.

To reiterate, the "beneficial owner or beneficial ownership" definition in the

SRC-IRR is understood only in determining the respective nationalities of the
outstanding capital stock of a public utility corporation in order to determine its
compliance with the percentage of Filipino ownership required by the
Constitution.

THE RESTRICTIVE RE-INTERPRETATION OF "CAPITAL" AS INSISTED BY THE

PETITIONERS IS UNWARRANTED.

Petitioners' insistence that the 60% Filipino equity requirement must be applied
to each class of shares is simply beyond the literal text and contemplation of
Section 11, Article XII of the 1987 Constitution, viz:
Sec. 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 or 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.

There are basically only two types of shares or stocks,

 common stock and
 preferred stock.
 cumulative preferred shares
 non-cumulative preferred shares
 convertible preferred shares
 participating preferred shares

However, the classes and variety of shares that a corporation may issue are
dictated by the confluence of the corporation's financial position and needs,
business opportunities, short-term and long term targets, risks involved, to
name a few; and they can be classified and re-classified from time to time.
Because of the different features of preferred shares, it is required that the
presentation and disclosure of these financial instruments in financial
statements should be in accordance with the substance of the contractual
arrangement and the definitions of a financial liability, a financial asset and an
equity instrument.

Under IAS 32.16, a financial instrument is an equity instrument only if (a) the
instrument includes no contractual obligation to deliver cash or another
financial asset to another entity, and (b) if the instrument will or may be settled
in the issuer's own equity instruments, it is either: (i) a non derivative that
includes no contractual obligation for the issuer to deliver a variable number of
its own equity instruments; or (ii) a derivative that will be settled only by the
issuer exchanging a fixed amount of cash or another financial asset for a fixed
number of its own equity instruments.91

The following are illustrations of how preferred shares should be presented and
disclosed:chanRoblesvirtualLawlibrary
Illustration - preference shares

If an entity issues preference (preferred) shares that pay a fixed rate of dividend
and that have a mandatory redemption feature at a future date, the substance is
that they are a contractual obligation to deliver cash and, therefore, should be
recognized as a liability. [IAS 32.18(a)] In contrast, preference shares that do
not have a fixed maturity, and where the issuer does not have a contractual
obligation to make any payment are equity. In this example even though both
instruments are legally termed preference shares they have different
contractual terms and one is a financial liability while the other is equity.

Illustration - issuance of fixed monetary amount of equity instruments

A contractual right or obligation to receive or deliver a number of its own shares

or other equity instruments that varies so that the fair value of the entity's own
equity instruments to be received or delivered equals the fixed monetary
amount of the contractual right or obligation is a financial liability. [IAS 32.20]

Illustration - one party bas a choice over bow an instrument is settled

When a derivative financial instrument gives one party a choice over how it is
settled (for instance, the issuer or the holder can choose settlement net in cash
or by exchanging shares for cash), it is a financial asset or a financial liability
unless all of the settlement alternatives would result in it being an equity
instrument. [IAS 32.26]92
The fact that from an accounting standpoint, the substance or essence of the
financial instrument is the key determinant whether it should be categorized as
a financial liability or an equity instrument, there is no compelling reason why
the same treatment may not be recognized from a legal perspective. Thus, to
require Filipino shareholders to acquire preferred shares that are substantially
debts, in order to meet the "restrictive" Filipino ownership requirement that
petitioners espouse, may not bode well for the Philippine corporation and its
Filipino shareholders.

Parenthetically, given the innumerable permutations that the types and classes
of stocks may take, requiring the SEC and other government agencies to keep
track of the ever-changing capital classes of corporations will be impracticable,
if not downright impossible. And the law does not require the impossible. (Lex
non cogit ad impossibilia.)93

That stock corporations are allowed to create shares of different classes with
varying features is a flexibility that is granted, among others, for the corporation
to attract and generate capital (funds) from both local and foreign capital
markets. This access to capital - which a stock corporation may need for
expansion, debt relief/repayment, working capital requirement and other
corporate pursuits - will be greatly eroded with further unwarranted limitations
that are not articulated in the Constitution. The intricacies and delicate balance
between debt instruments (liabilities) and equity (capital) that stock
corporations need to calibrate to fund their business requirements and achieve
their financial targets are better left to the judgment of their boards and officers,
whose bounden duty is to steer their companies to financial stability and
profitability and who are ultimately answerable to their shareholders.

Going back to the illustration above, the restrictive meaning of the term "capital"
espoused by petitioners will definitely be complied with if 60% of each of the
three classes of shares of Company X, consisting of 100 common shares, 100
Class A preferred shares (with right to elect directors) and 100 Class B
preferred shares (without right to elect directors), is owned by
Filipinos. However, what if the 60% Filipino ownership in each class of
preferred shares, i.e., 60 Class A preferred shares and 60 Class B preferred
shares, is not fully subscribed or achieved because there are not enough Filipino
takers? Company X will be deprived of capital that would otherwise be
accessible to it were it not for this unwarranted "restrictive" meaning of
"capital".
The fact that all shares have the right to vote in 8 specific corporate actions as
provided in Section 6 of the Corporation Code does not per se justify the
favorable adoption of the restrictive re-interpretation of "capital" as the
petitioners espouse. As observed in the Gamboa Decision, viz:
The Corporation Code of the Philippines classifies shares as common or
preferred, thus:
Sec. 6. Classification of shares. The shares of stock of stock
corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the shares or
series of shares may have a par value or have no par value as may
be provided for in the articles of incorporation: Provided, however,
That banks, trust companies, insurance companies, public utilities,
and building and loan associations shall not be permitted to issue
no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given

preference in the distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value.
The Board of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares
of stock or any series thereof: Provided, That such terms and
conditions shall be effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.

xxxx

A corporation may, furthermore, classify its shares for the purpose

 of insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and

stated in the certificate of stock, each share shall be equal in all
respects to every other share.

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.

Except as provided in the immediately preceding paragraph, the

vote necessary to approve a particular corporate act as provided in
this Code shall be deemed to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in

the control or management of the corporation. This is exercised through
his vote in the election of directors because it is the board of directors that
controls or manages the corporation. In the absence of provisions in the
articles of incorporation denying voting rights to preferred shares,
preferred shares have the same voting rights as common shares. However,
preferred shareholders are often excluded from any control, that is,
deprived of the right to vote in the election of directors and on other
matters, on the theory that the preferred shareholders are merely
investors in the corporation for income in the same manner as
bondholders. In fact, under the Corporation Code only preferred or
redeemable shares can be deprived of the right to vote. Common shares
cannot be deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of common
shareholders to vote is invalid.

Considering that common shares have voting rights which translate to

control, as opposed to preferred shares which usually have no voting
 rights, the term "capital" in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred shares also have
the right to vote in the election of directors, then the term "capital" shall
include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right
to vote in the election of directors. In short, the term "capital" in Section
11, Article XII of the Constitution refers only to shares of stock that can
vote in the election of directors.

This interpretation is consistent with the intent of the framers of the

Constitution to place in the hands of Filipino citizens the control and
management of public utilities. As revealed in the deliberations of the
Constitutional Commission, "capital" refers to the voting stock
or controlling interest of a corporation x x x.

The Gamboa Decision held that preferred shares are to be factored in only
if they are entitled to vote in the election of directors. If preferred shares
have no voting rights, then they cannot elect members of the board of
directors, which wields control of the corporation. As to the right of non
voting preferred shares to vote in the 8 instances enumerated in Section 6 of the
Corporation Code, the Gamboa Decision considered them but, in the end, did not
find them significant in resolving the issue of the proper interpretation of the
word "capital" in Section 11, Article XII of the Constitution.

Therefore, to now insist in the present case that preferred shares be regarded
differently from their unambiguous treatment in the Gamboa Decision is enough
proof that the Gamboa Decision, which had attained finality more than 4 years
ago, is being drastically changed or expanded.

In this regard, it should be noted that the 8 corporate matters enumerated in

Section 6 of the Corporation Code require, at the outset, a favorable
recommendation by the management to the board. As mandated by Section 11,
Article XII of the Constitution, all the executive and managing officers of a public
utility company must be Filipinos. Thus, the all-Filipino management team must
first be convinced that any of the 8 corporate actions in Section 6 will be to the
best interest of the company. Then, when the all-Filipino management team
recommends this to the board, a majority of the board has to approve the
recommendation and, as required by the Constitution, foreign participation in
the board cannot exceed 40% of the total number of board seats. Since the
Filipino directors comprise the majority, they, if united, do not even need
the vote of the foreign directors to approve the intended corporate act.
After approval by the board, all the shareholders (with and without voting
rights) will vote on the corporate action. The required vote in the
shareholders' meeting is 2/3 of the outstanding capital stock. Given the super
majority vote requirement, foreign shareholders cannot dictate upon their
Filipino counterpart. However, foreigners (if owning at least a third of the
outstanding capital stock) must agree with Filipino shareholders for the
corporate action to be approved. The 2/3 voting requirement applies to all
corporations, given the significance of the 8 corporate actions contemplated in
Section 6 of the Corporation Code.

In short, if the Filipino officers, directors and shareholders will not approve of
the corporate act, the foreigners are helpless.

Allowing stockholders holding preferred shares without voting rights to

vote in the 8 corporate matters enumerated in Section 6 is an
acknowledgment of their right of ownership. If the owners of preferred
shares without right to vote/elect directors are not allowed to vote in any of
those 8 corporate actions, then they will not be entitled to the appraisal
right provided under Section 8196 of the Corporation Code in the event that
they dissent in the corporate act. As required in Section 82, the appraisal
right can only be exercised by any stockholder who voted against the
proposed action. Thus, without recognizing the right of every stockholder to
vote in the 8 instances enumerated in Section 6, the stockholder cannot
exercise his appraisal right in case he votes against the corporate action. In
simple terms, the right to vote in the 8 instances enumerated in Section 6 is
more in furtherance of the stockholder's right of ownership rather than as a
mode of control.

As acknowledged in the Gamboa Decision, preferred shareholders are merely

investors in the company for income in the same manner as bondholders.
Without a lucrative package, including an attractive return of investment,
preferred shares will not be subscribed and the much-needed additional capital
will be elusive. A too restrictive definition of "capital", one which was never
contemplated in the GamboaDecision, will surely have a dampening effect on the
business milieu by eroding the flexibility inherent in the issuance of preferred
shares with varying terms and conditions. Consequently, the rights and
prerogatives of the owners of the corporation will be unwarrantedly stymied.

Moreover, the restrictive interpretation of the term "capital" would have a

tremendous impact on the country as a whole and to all Filipinos.

The Court in Abacus Securities Corp. v. Ampil observed that: "stock market
transactions affect the general public and the national economy. The rise and fall
of stock market indices reflect to a considerable degree the state of the
economy. Trends in stock prices tend to herald changes in business conditions.
Consequently, securities transactions are impressed with public interest x x x."
The importance of the stock market in the economy cannot simply be glossed
over.

In view of the foregoing, the pronouncement of the Court in

the Gamboa Resolution - the constitutional requirement to apply
uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation107 - is
clearly an obiter dictum that cannot override the Court's unequivocal
definition of the term "capital" in both the Gamboa Decision and
Resolution.

Nowhere in the discussion of the definition of the term "capital" in Section

11, Article XII of the 1987 Constitution in the Gamboa Decision did the
Court mention the 60% Filipino equity requirement to be applied to each
class of shares. The definition of "Philippine national" in the FIA and
expounded in its IRR, which the Court adopted in its interpretation of the term
"capital", does not support such application. In fact, even the Final Word of
the Gamboa Resolution does not even intimate or suggest the need for a
clarification or re-interpretation.

To revisit or even clarify the unequivocal definition of the term "capital" as

referring "only to shares of stock entitled to vote in the election of
directors" and apply the 60% Filipino ownership requirement to each
class of share is effectively and unwarrantedly amending or changing
the Gamboa Decision and Resolution. The Gamboa Decision and Resolution
Doctrine did NOT make any definitive ruling that the 60% Filipino
ownership requirement was intended to apply to each class of share.

THE CLEAR AND UNEQUIVOCAL DEFINITION OF "CAPITAL"

IN GAMBOA HAS ATTAINED FINALITY.

CLOSING

Ultimately, the key to nationalism is in the individual. Particularly for a public

utility corporation or association, whether stock or non-stock, it starts with the
Filipino shareholder or member who, together with other Filipino shareholders or
members wielding 60% voting power, elects the Filipino director who, in turn,
together with other Filipino directors comprising a majority of the board of
directors or trustees, appoints and employs the all-Filipino management team.
This is what is envisioned by the Constitution to assure effective control by
Filipinos. If the safeguards, which are already stringent, fail, i.e., a public utility
corporation whose voting stocks are beneficially owned by Filipinos, the majority
of its directors are Filipinos, and all its managing officers are Filipinos, is proalien
(or worse, dummies), then that is not the fault or failure of the Constitution. It is
the breakdown of nationalism in each of the Filipino shareholders, Filipino
directors and Filipino officers of that corporation. No Constitution, no decision of
the Court, no legislation, no matter how ultranationalistic they are, can guarantee
nationalism.

WHEREFORE, premises considered, the Court DENIES the Petition and Petition-
in-Intervention.

SO ORDERED.
DISSENTING OPINION
CARPIO, J.:

ACCORDINGLY, I vote to GRANT the petition IN PART SEC Memorandum

Circular No. 8, series of 2013, is valid and constitutional if all the shares of
stock have the same par values. However, if the shares of stock have
different par values, the 60 percent Filipino ownership requirement must
be applied to each class of shares.

In the Gamboa Decision, the Court held that for a corporation to be granted
authority to operate a public utility, at least 60 percent of its "capital" must be
owned by Filipino citizens."2 The 60 percent Filipino ownership of the
"capital" assumes, or should result in, "controlling interest" in the
corporation.

In the Gamboa Decision, the Court defined the term "capital" as referring to
shares of stock that can vote in the election of directors. Voting rights
translate to control. Otherwise stated, "the right to participate in the control or
management of the corporation is exercised through the right to vote in the
election of directors."

In the same decision, the Court pointed out that "mere legal title is insufficient
to meet the 60 percent Filipino-owned 'capital' required in the
Constitution."4 Full beneficial ownership of 60 percent of the total
outstanding capital stock, coupled with 60 percent of the voting rights, is
the minimum constitutional requirement for a corporation to operate a
public utility.

Significantly, in the Gamboa Resolution denying the motion for

reconsideration, the Court reiterated the twin requirement of full
beneficial ownership of at least 60 percent of the outstanding capital stock
and at least 60 percent of the voting rights.

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 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.
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.

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 selfreliant 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 (P1.00) 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.

Clearly, in both Gamboa Decision and Resolution, the Court categorically

declared that the 60 percent minimum Filipino ownership refers not only
to voting rights but likewise to full beneficial ownership of the stocks.
Likewise, the 60 percent Filipino ownership applies uniformly to each
class of shares. Such interpretation ensures effective control by Filipinos
of public utilities, as expressly mandated by the Constitution.

********************************************************************************
****************

BENEFICIAL INTEREST TEST

SEC Memorandum Circular No. 8 can be sustained as valid and fully compliant with the Gamboa
Decision and Resolution only if:
1. the stocks with voting rights and
2. the stocks without voting rights, which comprise the capital of a corporation operating a
public utility,
have equal par values. If the shares of stock have different par values, then applying SEC
Memorandum Circular No. 8 would contravene the Gamboa Decision that the "legal and
beneficial ownership of 60 percent of the outstanding capital stock rests in the hands of Filipino
nationals in accordance with the constitutional mandate."

ILLUSTRATION
Class A shares: Voting Shares (P1.00/share)
Class B shares: Non-voting Shares (P100.00/share)

Case:
 100 outstanding Class A shares are all owned by Filipino citizens,
 80 outstanding Class B shares are owned by foreigners and
 20 Class B shares are owned by Filipino citizens,

the 60-40 percent ownership requirement in favor of Filipino citizens for voting
shares, as well as for the total voting and non-voting shares, will be complied
with.

100 Class A shares (P1.00) = 100 ----------------------------------------------

20 Class B shares (P100.00) = 2,000
Filipino owned shares: Add:
2,100 8,000
----------------------------------
80 Class B shares (P100.00) = 8,000 10,100 = 100% shareholdings of
----------------------------------------------- the company
Foreign owned shares:
8,000 2,100/10,100 = 20.8% Filipino
8,000/ 10,100 = 79.2% Foregin
2,100

If dividends are declared equivalent to the par value per share for all
classes of shares, only 20.8 percent of the dividends will go to Filipino
citizens while 79.2 percent of the dividends will go to foreigners, an
absurdity or anomaly that the framers of the Constitution certainly did not
intend. Such absurdity or anomaly will also be contrary to the Gamboa
Decision that the "legal and beneficial ownership of 60 percent of the
outstanding capital stock rests in the hands of Filipino nationals in
accordance with the constitutional mandate."

Thus, SEC Memorandum Circular No. 8 is valid and constitutional provided that
the par values of the shares with voting rights and the shares without voting
rights are equal. If the par values vary, then the 60 percent Filipino ownership
requirement must be applied to each class of shares in order that the "legal and
beneficial ownership of 60 percent of the outstanding capital stock x x x rests in
the hands of Filipino nationals in accordance with the constitutional mandate,"
as expressly stated in the Gamboa Decision and as reiterated and amplified in
the Gamboa Resolution.

DISSENTING OPINION
MENDOZA, J.:.

My position is that SEC MC No. 8 is non-compliant with the final Gamboa ruling
and must be amended to conform thereto.

ISSUE
A reading of the contending pleadings discloses that the issues primarily raised
are (1) whether the SEC gravely abused its discretion when it omitted in SEC MC
No. 8 the uniform and separate application of the 60:40 rule in favor of Filipinos
to each and every class of shares of a corporation; and (2) whether the
constitutional prescription has been complied with in the case of PLDT.

Considering that this Court is not a trier of facts, questions pertaining to

whether there was violation of the constitutional limits on foreign ownership by
PLDT requires the reception and examination of evidence. As this is beyond the
Court's jurisdiction, it will just confine itself to the first
question.chanroblesvirtuallawlibrary

RULING
For the reason that Filipinos must remain in effective control of a public utility
company, I am of the strong view that the Court should have partly granted the
petition and declared SEC MC No. 8 as non-compliant with the
final Gamboa ruling.

The petitioners strongly assert that the SEC gravely abused its discretion when
it issued MC No. 8, with specific reference to Section 2, which is again quoted as
follows:
Section 2. All covered corporations shall, at all times, observe the
constitutional or statutory ownership requirement. For purposes of
determining compliance therewith, the required percentage of Filipino
shall be applied to BOTH (a) the total number of 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.

Roy points out that the SEC did not include in the assailed circular the
requirement of applying the 60-40 rule to each and every class of shares.
He fears that although Filipinos will have voting rights, they may remain
deprived of the full economic benefits if the rule is not applied to all classes of
shares.

I agree with the petitioners.

The Basis of the Uniform and Separate Application of 60:40 Rule to Each and
Every Class of Shares

It has been said that economic rights give meaning to control. The general
assumption is that control rights are always coupled with proportionate
economic interest in a corporation. This proportionality gives stockholders
theoretically an incentive to exercise voting power well, makes possible the
market for corporate control and legitimates managerial property the managers
do not own.49
The same theory is adhered to by the Constitution. The words "own and
control," used to qualify the minimum Filipino participation in Section 11,
Article XII of the Constitution, reflects the importance of Filipinos having both
the ability to influence the corporation through voting rights and economic
benefits. In other words, full ownership up to 60% of a public
utility encompasses both control and economic rights, both of which must
stay in Filipino hands. Filipinos, who own 60% of the controlling interest,
must also own 60% of the economic interest in a public utility.

In a single class structured corporation, the proportionality required can easily

be determined. In mixed class or dual structured corporations, however, there is
variance in the proportion of stockholders' controlling interest vis-a-vis their
economic ownership rights. This resulting variation is recognized by the
Implementing Rules and Regulation (IRR) of the Securities Regulation
Code,50 which defined beneficial ownership as that may exist either through
voting power and/or through investment returns. By using and/or in defining
beneficial ownership, the IRR, in effect, recognizes a possible situation where
voting power is not commensurate to investment power.

Disparity in privileges accorded to different classes of shares was best

illustrated in the Gamboa Resolution. By operation of Section 6 of the
Corporation Code,51 preferred class of shares may be created with superior
economic rights as compared to the other classes. Dissimilar shares, although
similar in terms of number, can differ in terms of benefits. In such cases, holders
of preferred shares, although constituting only a smaller portion of the total
outstanding capital stock of the corporation, can have greater economic interest
over those of common stockholders.

In the event that a public utility corporation restructures and eventually

concentrates all foreign shareholdings solely to a preferred class of shares with
high yielding investment power, foreigners would, in effect, have economic
interests exceeding those of the Filipinos with less economically valuable
common shares. Evidently, this was not envisioned by the framers of the
Constitution. And for the reasons that follow, the Court considers such a
situation as an affront to the Constitution.

To begin with, it dilutes the potency of Filipino control in a public utility.

Economic rights effectively encourage the controlling stockholders to exercise

their control rights in accordance with their own interest. Necessarily, if Filipino
controlling stockholders have dominance over both economic ownership and
control rights, their decisions on corporate matters will mean independence
from external forces.

Conversely, if Filipino controlling stockholders do not have commensurate level

of interest in the economic gains of a public utility, the disparity would allow
foreigners to intervene in the management, operation, administration or control
of the corporation through means that circumvent the limitations imposed by
the Constitution. It would foster the creation of falsely simulated existence of
the required Filipino equity participation, an act prohibited under Section 2 of
Commonwealth Act No. 108, commonly known as the Anti-Dummy
Law,52 effectively circumventing the rationale behind the constitutional
limitations on foreign equity participation.

Moreover, the variation in the classes of shares would allow foreigners to

acquire preferential interest and advantage in the remaining assets of the
corporation after its dissolution or termination. This runs counter to the intent
of the present constitution - the conservation and development of the national
patrimony. Filipino stockholders should not only be entitled to the benefits
generated by a public utility, they should equally have the right to receive the
greater share in whatever asset that would be left should the corporation face
its end.

Clearly the only way to minimize, if not totally prevent disparity of control and
economic rights given to Filipinos, and to obstruct consequences not envisioned
by the Constitution, is to apply the 60-40 rule separately to each class of shares
of a public utility corporation. It results in the equalization of Filipino interests,
both in terms of control and economic rights, in each and every class of shares.
By making the economic rights and controlling rights of Filipinos in a public
utility paramount, directors and managers would be persuaded to act in the
interest of the Filipino stockholders. In turn, the Filipino stockholders would
exercise their corporate ownership rights in ways that would benefit the entire
Filipino people cognizant of the trust and preference accorded to them by the
Constitution.

Neither an Obiter Dictum or a Treaty Violation

The respondents claim that the statement that the 60-40 rule applies to each
type of shares was a mere obiter dictum. As reference, they point to the
dispositive portions of the Gamboa Decision and Gamboa Resolution, where
there is no directive that the 60-40 rule should apply to each class of shares.
They insisted that the controlling rule should be what was stated in the fallo of
the decision in Gamboa that the 60-40 rule applied only to shares with the right
to vote in the election of directors. PSEI also cautions this Court in upholding the
application of the 60-40 rule to each type of shares because it would redefine
what was stated in the Gamboa Decision. It would also affect the obligation of the
State under different treaties and executive agreements, and could disastrously
affect the stock exchange market and the state of foreign investments in the
country.

Again, on this point, I differ. The majority disregarded the final ruling
in Gamboa.

Jurisprudence is replete with the doctrine that a final and executory judgment
may nonetheless be "clarified" by reference to other portions of the decision of
which it forms a part; that a judgment must not be read separately but in
connection with the other portions of the decision of which it forms a part.
Otherwise stated, a decision should be taken as a whole and considered in its
entirety to get the true meaning and intent of any particular portion thereof.53 It
"must be construed as a whole so as to bring all of its parts into harmony as far
as this can be done by fair and reasonable interpretation and so as to give effect
to every word and part, if possible, and to effectuate the obvious intention and
purpose of the Court, consistent with the provisions of the organic law."54 A final
ruling in Gamboa, therefore, includes the clarification and elucidation in the
subsequent Gamboa Resolution, which was unquestioned until it lapsed into
finality.

The claimed inconsistency in the definition of capital in the Gamboa

Decision and Gamboa Resolution and on how the Court uses them in this case is
more apparent than real. A deeper understanding of the Court's philosophical
underpinning on the issue of capital is that capital must be construed in relation
to the constitutional goal of securing the controlling interest in favor of
Filipinos.

Plain from the Court's previous discussions is the conclusion that controlling
interest in a public utility cannot be achieved by applying the 60-40 rule solely
to shares with the right to vote in the election of directors; it must be applied to
all classes of shares. Although applying the rule only to such shares gives an
assurance that Filipinos will have control over the choice on who will manage
the corporation, it does not mean that they also control the decisions that are
fundamentally important to the corporation. If they would own 60% of all the
shares of whatever class, they cannot be denied the right to vote on important
corporate matters. To the Court, the only way by which Filipinos can be assured
of having the controlling interest is to apply the 60:40 rule to each class of
shares regardless of restrictions or privileges present, with each class, being
considered as a distinct but indispensable and integral part of the entire capital
of a public utility for the purpose of determining the nationality restrictions
under the Constitution.

On the point of PSEI that a ruling in favor of the petitioners would lead to a
violation of the obligation of the Philippines to provide fair and equitable
treatment to foreign investors who have relied on the FIA and its IRR, as well as
predecessor statutes, the Court believes otherwise. Basic is the rule that the
Constitution is paramount above all else. It prevails not only over domestic laws,
but also against treaties and executive agreements. It cannot be said either that
due process and equal protection were violated. These constitutional limitations
on foreign equity participation have been there all along.

Need for a Constitutional Amendment

Until the people decide, through a new constitution, to ease the restrictions on
foreign participation in the public utility sector, the Court should resolve all
doubts in favor of upholding the spirit and intent of the 1987 Constitution.

As the SEC Memorandum Circular No. 8 is non-compliant with the

final Gamboa ruling, the omission by the SEC of the 60-40 rule application in
favor of Filipinos to each and every class of shares of a public utility constituted,
and should have been declared, a grave abuse of discretion.

In view of all the foregoing, the petition should have been granted and SEC
Memorandum Circular No. 8 should have been declared as non compliant with
the final Gamboa ruling.

Accordingly, the Security and Exchange Commission should have been directed
to strictly comply with the final Gamboa ruling, by including in the assailed
circular the rule on the application of the 60-40 nationality requirement to
each class of shares regardless of restrictions or privileges in accordance
with the foregoing disquisition.
DISSENTING OPINION
LEONEN, J.:

I dissent from the Decision denying the Petition. Respondent Securities and
Exchange Commission's Memorandum Circular No. 8, series of 2013 is
inadequate as it fails to encompass each and every class of shares in a
corporation engaged in nationalized economic activities. This is in violation
of the constitutional provisions limiting foreign ownership in certain economic
activities, and is in patent disregard of this Court's statements in its June 28,
2011 Decision1 as furthr illuminated in its October 9, 2012
Resolution2 in Gamboa v. Finance Secretary Teves. Thus, the Securities and
Exchange Commission gravely abused its discretion.

A better considered reading of both the 2011 Decision and 2012

Resolution in Gamboa demonstrates this Court's adherence to the rule on
which the present Decision turns: that the 60 per centum (or higher, in the
case of Article XII, Section 10) Filipino ownership requirement in
corporations engaged in nationalized economic activities, as articulated in
Article XII and Article XIV3 of the 1987 Constitution, must apply "to each class
of shares, regardless of differences in voting rights, privileges and
restrictions."

The 2011 Decision and 2012 Resolution in Gamboa concededly lend

themselves to some degree of confusion. The dispositive portion in the
2011 Decision explicitly stated 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." The 2012 Resolution, for its part, fine-tuned this.
Thus, it clarified that each class of shares, not only those entitled to vote in
the election of directors, is subject to the Filipino ownership
requirement. However, the 2012 Resolution did not recalibrate the 2011
Decision's dispositive portion inclusive of its definition of "capital." Rather, it
merely stated that the motions for reconsideration were denied with finality
and that no further pleadings shall be allowed.

Nevertheless, a judgment must be read in its entirety; in such a manner as to

bring harmony to all of its parts and to facilitate an interpretation that gives
effect to its entire text. The brief statement in the dispositive portion of the 2012
Resolution that the motions for reconsideration were denied was not
inconsistent with the jurisprudential fine-tuning of the concept of "capital."
Neither was it inadequate; it succinctly stated the action taken by the court on
the pending incidents of the case. The dispositive portion no longer needed to
pontificate on the concept of "capital," for all that it needed to state to dispose of
the case, at that specific instance was that the motions for reconsideration had
been denied.

A consideration of the constitutional equity requirement as applying to each and

every single class of shares, not just to those entitled to vote for directors in a
corporation, is more in keeping with the "philosophical underpinning" of the
1987 Constitution, i.e., "that capital must be construed in relation to the
constitutional goal of securing the controlling interest in favor of Filipinos."

No class of shares is ever truly bereft of a measure of control of a

corporation. It is true, as Section 6of the Corporation Code permits, that
preferred and/or redeemable shares may be denied the right to vote extended
to other classes of shares. For this reason, they are also often referred to as 'non-
voting shares.' However, the absolutist connotation of the description "non-
voting" is misleading. The same Section 6 provides that these "non voting
shares" are still entitled to vote on the following matters:
 Amendment of the articles of incorporation;
 Adoption and amendment of by-laws;
 Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
 Incurring, creating or increasing bonded indebtedness;
 Increase or decrease of capital stock;
 Merger or consolidation of the corporation with another corporation
or other corporations;
 Investment of corporate funds in another corporation or business in
accordance with this Code; and
 Dissolution of the corporation.
In the most crucial corporate actions - those that go into the very
constitution of the corporation - even so-called non-voting shares may vote.
Not only can they vote; they can be pivotal in deciding the most basic issues
confronting a corporation. Certainly, the ability to decide a corporation's
framework of governance (i.e., its articles of incorporation and by-laws),
viability (through the encumbrance or disposition of all or substantially all of its
assets, engagement in another enterprise, or subjection to indebtedness), or
even its very existence (through its merger or consolidation with another
corporate entity, or even through its outright dissolution) demonstrates not
only a measure of control, but even possibly overruling control. "Nonvoting"
preferred and redeemable shares are hardly irrelevant in controlling a
corporation.

It is in this light that I emphasize the necessity, not only of legal title, but
more so of full beneficial ownership by Filipinos of the required
percentage of capital in certain corporations engaged in nationalized
economic activities. This has been underscored in Gamboa. This too, is a
matter, which I emphasized in my Dissenting Opinion in the Narra Nickel and
Development Corp. v. Redmont Consolidated Mines Corp17 April 21, 2014
Decision.

I likewise emphasize "the Control Test as a primary method of

determining compliance with the restrictions imposed by the Constitution
on foreign equity participation," along with a recognition of the
Grandfather Rule as a "supplement" to the Control Test.

My Dissent from the Decision in Narra Nickel, noted that "there are two (2) ways
through which one may be a beneficial owner of securities, such as shares of
stock:
 first, by having or sharing voting power; and
 second, by having or sharing investment returns or power."

This is gleaned from the definition of "beneficial owner or beneficial ownership"

provided for in the Implementing Rules and Regulations of the Securities
Regulation Code.

Full beneficial ownership vis-a-vis capacity to control a corporation is self-

evident in ownership of voting stocks: the investiture of the capacity to vote
evinces involvement in the running of the corporation. Through it, a stockholder
participates in corporate decision-making, or otherwise participates in the
designation of directors - those individuals tasked with overseeing the
corporation's activities.

Appreciating full beneficial ownership and control in a corporation may require

a more nuanced approach when the subject of inquiry is investment returns or
power. Control through the capacity to vote can be countervailed, if not totally
negated, by reducing voting shares to empty shells that represent nominal
ownership even as the corporation's economic gains actually redound to the
holders of other classes of shares. There exist practices such as corporate
layering which, can be used to undermine the Constitution's equity
requirements.

It is in the spirit of ensuring that effective control is lodged in Filipinos that the
dynamics of applying the Control Test and the Grandfather Rule must be
considered.

As I emphasized in my twin dissents in the Narra Nickel April 21, 2014 Decision
and January 28, 2015 Resolution,22 with the 1987 Constitution's silence on the
specific mechanism for reckoning Filipino and foreign equity ownership in
corporations, the Control Test - statutorily established through Republic Act
No. 8179, the Foreign Investments Act "must govern in reckoning foreign
equity ownership in corporations engaged in nationalized economic
activities." Nevertheless, "the Grandfather Rule may be used ... as a further
check to ensure that control and beneficial ownership of a corporation is
in fact lodged in Filipinos."

The Control Test was established by legislative fiat. The Foreign Investments
Act "is the basic law governing foreign investments in the Philippines,
irrespective of the nature of business and area of investment."25 Its Section
3(a) defines a "Philippine national" as including "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."
 An illustration is apt.

Suppose that a corporation, "C", is engaged in a nationalized activity requiring that 60% of its capital be owned
by Filipinos and that this 60% is owned by another corporation, "B", while the remaining 40% is owned by
stockholders, collectively referred to as "Y". Y is composed entirely of foreign nationals. As for B, 60% of its
capital is owned by stockholders collectively referred to as "A", while the remaining 40% is owned by
stockholders collectively referred to as "X". The collective A, is composed entirely of Philippine nationals,
while the collective X is composed entirely of foreign nationals. (N.b., in this illustration, capital is understood
to mean "shares of stock entitled to vote in the election of directors," per the definition in Gamboa).

By owning 60% of B's capital, A controls B. Likewise, by owning 60% of C's capital, B controls C. From this,
it follows, as a matter of transitivity, that A controls C; albeit indirectly, that is, through B.

This "control" holds true regardless of the aggregate foreign capital in B and C. As explained in Gamboa,
control by stockholders is a matter resting on the ability to vote in the election of directors.

B will not be outvoted by Y in matters relating to C, while A will not be outvoted by X in matters relating to B.
Since all actions taken by B must necessarily be in conformity with the will of A, anything that B does in
relation to C is, in effect, in conformity with the will of A. No amount of aggregating the foreign capital in B
and C will enable X to outvote A, nor Y to outvote B.

In effect, A controls C, through B. Stated otherwise, the collective Filipinos in A, effectively control C, through
their control of B.

Full beneficial ownership is addressed both with respect to voting power

and investment returns or power.

As I explained, on voting power:

Voting power, as discussed previously, ultimately rests on the controlling
stockholders of the controlling investor corporation. To go back to the
previous illustration, voting power ultimately rests on A, it having the
voting power in B which, in tum, has the voting power in C.2
As I also explained, on investment returns or power:
As to investment returns or power, it is ultimately A which enjoys
investment power. It controls B's investment decisions including the
disposition of securities held by B and (again, through B) controls C's
investment decisions.

Similarly, it is ultimately A which benefits from investment returns

generated through C. Any income generated by C redounds to B's benefit,
that is, through income obtained from C, B gains funds or assets which it
can use either to finance itself in respect of capital and/or operations. This
is a direct benefit to B, itself a Philippine national. This is also an indirect
benefit to A, a collectivity of Philippine nationals, as then, its business B -
not only becomes more viable as a going concern but also becomes
equipped to funnel income to A.

Moreover, beneficial ownership need not be direct. A controlling

shareholder is deemed the indirect beneficial owner of securities (e.g.,
shares) held by a corporation of which he or she is a controlling
shareholder. Thus, in the previous illustration, A, the controlling
shareholder of B, is the indirect beneficial owner of the shares in C to the
extent that they are held by B.

Nevertheless, ostensible equity ownership does not preclude unscrupulous

parties' resort to devices that undermine the constitutional objective of full
beneficial ownership of and effective control by Filipinos. It is at this juncture
that the Grandfather Rule finds application:

Bare ownership of 60% of a corporation's shares would not suffice. What

is necessary is such ownership as will ensure control of a corporation.

... [T]he Grandfather Rule may be used as a supplement to the Control Test,
that is, as a further check to ensure that control and beneficial ownership of
a corporation is in fact lodged in Filipinos.

ACCORDINGLY, I vote to grant the Petition.

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.
VELASCO, JR., J.:
 Narra Nickel and Mining Development Corp. (Narra)
  Tesoro Mining and Development, Inc. (Tesoro), and
 McArthur Mining Inc. (McArthur)
FACTS
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 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.

From SMMI to 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), DENR. Subsequently, SMMI was
issued
1. MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay
Sumbiling, Municipality of Bataraza, Province of Palawan and
2. 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 was subsequently assigned to petitioner McArthur.

From SMMI to Tesoro

Another MPSA application of SMMI was filed with the DENR, 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.

From PLMDC to Narra

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,
DENR. Through the said application, the DENR issued
1. 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.
Thereafter, Redmont filed before the DENR three (3) separate petitions
for the denial of petitioners’ applications for MPSA. 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.

ISSUE
On the Nationality Requirement

RULING
Grandfather test
The main issue in this case is centered on the issue of petitioners’
nationality, whether Filipino or foreign.

Basically, there are two acknowledged tests in determining the nationality of a

corporation:
1. the control test and
2. 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, (CONTROL TEST or the
LIBERAL RULE)
 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. (GRANDFATHER RULE)
 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.
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.

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.
 that the grandfather rule "has been abandoned and is no longer the
applicable rule."
 that the last portion of Sec. 3 of the FIA admits the application of a "corporate
layering" scheme of corporations.
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 60% 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.

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. 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.

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.

Control Test vs. Grandfather Rule

When a corporation becomes a stockholder of another corporation

Control Test: 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. 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.

Grandfather Rule: 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

When applicable?
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.

The Grandfather Rule applies in this case.

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 corporation––MBMI, funded them.
However, petitioners also claim that there is "doubt" only when the
stockholdings of Filipinos are less than 60%.

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 Court’s 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
PhP 10,000,000 divided into 10,000 common shares at PhP 1,000 per share,
subscribed to by the following:
 Name Nationality Number Amount Amount Paid
of Shares Subscribed
Madridejos Filipino 5,997 PhP PhP
Mining 5,997,000.00 825,000.00
Corporation
MBMI Canadian 3,998 PhP PhP
Resources, 3,998,000.0 1,878,174.60
Inc.
Lauro L. Filipino 1 PhP 1,000.00 PhP 1,000.00
Salazar
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60

Madridejos Mining Corporation

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):
Name Nationality Number Amount Amount Paid
of Subscribed
Shares
Olympic Filipino 6,663 PhP PhP 0
Mines & 6,663,000.00
Development
Corp.
 MBMI Canadian 3,331 PhP PhP
Resources, Inc. 3,331,000.00 2,803,900.00
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 Filipino 1 PhP 1,000.00 PhP 1,000.00
G.Hernando
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP PhP
10,000,000.00 2,809,900.00

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. MBMI’s 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.

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
PhP 10,000,000 divided into 10,000 common shares at PhP 1,000 per share,
as demonstrated below:

Name Nationality Number of Amount Amount

Shares Subscribed Paid

Sara Marie Filipino 5,997 PhP PhP

Mining, Inc. 5,997,000.00 825,000.00

MBMI Canadian 3,998 PhP PhP

Resources, 3,998,000.00 1,878,174.60
Inc.

Lauro L. Filipino 1 PhP 1,000.00 PhP 1,000.00

Salazar

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. American 1 PhP 1,000.00 PhP 1,000.00

Mason

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

Cawkell

Total 10,000 PhP PhP

10,000,000.00 2,708,174.60

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 SMMI’s corporate structure:

Sara Marie Mining, Inc.

Name Nationality Number Amount Amount

of Shares Subscribed Paid

Olympic Mines Filipino 6,663 PhP PhP 0

& 6,663,000.00
Development
Corp.

MBMI Canadian 3,331 PhP PhP

Resources, Inc. 3,331,000.00 2,794,000.00
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

Michael T. American 1 PhP 1,000.00 PhP 1,000.00

Mason

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

Cawkell

Total 10,000 PhP PhP

10,000,000.00 2,809,900.00

After subsequently studying SMMI’s corporate structure, it is not

farfetched for us to spot the glaring similarity between SMMI and MMC’s
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 PhP 2,794,000. Oddly,
the total value of the amount paid is PhP 2,809,900.

Accordingly, after "grandfathering" petitioner Tesoro and factoring in

Olympic’s participation in SMMI’s 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
PLMDC’s MPSA application, whose corporate structure’s arrangement is similar
to that of the first two petitioners discussed. The capital stock of Narra is PhP
10,000,000, which is divided into 10, 000 common shares at PhP 1,000 per
share, shown as follows:

Name Nationality Number Amount Amount Paid

 of Subscribed
Shares

Patricia Filipino 5,997 PhP PhP

Louise 5,997,000.00 1,677,000.00
Mining &
Development
Corp.

MBMI Canadian 3,998 PhP PhP

Resources, 3,996,000.00 1,116,000.00
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. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agabin

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

Cawkell

Total 10,000 PhP PhP

10,000,000.00 2,800,000.00
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 PLMDC’s corporate
structure:
Name Nationality Number Amount Amount
of Shares Subscribed Paid
Palawan Alpha Filipino 6,596 PhP PhP 0
 South Resources 6,596,000.00
Development
Corporation
MBMI Resources, Canadian 3,396 PhP PhP
Inc. 3,396,000.00 2,796,000.00
Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00
Mendoza, Jr.
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernandez
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
Bayani H. Agabin 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 PhP
10,000,000.00 2,708,174.60

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 MBMI’s 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 Company’s 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.

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, MBMI’s Summary of Significant Accounting Policies statement– –
regarding the "joint venture" agreements that it entered into with the "Olympic"
and "Alpha" groups––involves 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.
Computation (as to percentage) Hence, MBMI owns 43.28% of
Mc Arthur Tesoro
a. Madridejos Mining
 Olympic: (although it paid 0
peso): 66.6%
 MBMI: 33.3%
b. MBMI- 39.98 % of Mc Arthur Narra
Hence MBMI owns 73.28% of a. Paticia Louise Mining: 59.97%
McArthur  Palawan Alpha (although it
paid 0 peso): 65.96%
Tesoro  MBMI: 33.96%
a. Sara Marie Mining: 59.97% b. MBMI: 39.98%
 Olympic (although it paid 0
peso): 66.6% Hence MBMI owns 73.94 of Narra
 MBMI: 33.33%
b. MBMI: 39.98% of Tesoro NOTE: MBMI is a 100% Canadian
Corporation.

Application of the res inter alios acta rule

Petitioners question the CA’s 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.

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:
The 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.

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.

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.
Selling of MBMI’s 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."57Petitioners 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.1âwphi1 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. 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.
CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed
by
1. the Philippine Stock Exchange's (PSE) President,
2. Manuel V. Pangilinan (Pangilinan),
3. Napoleon L. Nazareno (Nazareno ), and
4. the Securities and Exchange Commission (SEC)
(collectively, movants ).

We deny the motions for reconsideration.

DISCUSSION

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.

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.

Both the Voting Control Test and the Beneficial Ownership Test must be applied
to determine whether a corporation is a "Philippine national."

.
Filipinization of Public Utilities

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.

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.

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."

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 corporation’s capital must at least be 60 percent owned
by Philippine nationals.
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)

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.

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.

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 stock35 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

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 Pangilinan’s 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.

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 FIA’s 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.

PHILIPPINE NATIONAL BANK

vs.
HYDRO RESOURCES CONTRACTORS CORPORATION
G.R. No. 167561
ASSET PRIVATIZATION TRUST
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION
G.R. No. 167603
DEVELOPMENT BANK OF THE PHILIPPINES
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION
G.R. No. 167530. March 13, 2013

FACTS:

A contract was entered into between Hydro and NIA for the project of the
latter. The contract price is to be payable partly in Philippine peso and US
dollars. Once the project was being executed, there was depreciation in value of
Peso resulting to price differential. In order to resolve the issue, the
administrator of NIA, Mr Tek, and Hydro made a joint computation of the
amount corresponding to the foreign currency differential. The computation
showed that NIA owed Hydro for the differential. When a demand was made by
Hydro against NIA, NIA refused to pay contending that Mr Tek has no authority
to participate into a joint computation of the foreign currency differential and
that Mr Tek has no authority to bind NIA.

ISSUE:

Whether or not the corporate entity of PNB and DBP must be pierced.

RULING:

NO.

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. 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 entity and 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.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. This protection from liability for
shareholders is the principle of limited liability.
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.
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. Thus, cutting
through the corporate cover requires an approach characterized by due care
and caution.
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.

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND

DEVELOPMENT, INC., and MCARTHUR MINING, INC.,vs.REDMONT
CONSOLIDATED MINES CORP.,
G.R. No. 195580 April 21, 2014
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.

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.
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.

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

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.
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.

Issues:

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.

Held: We find the petition to be without merit.This case not moot and academic.
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 country’s 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 Country’s
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.
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)
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 corporation––
MBMI, 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 Court’s mind. To determine, therefore, the actual participation, direct or
indirect, of MBMI, the grandfather rule must be used.

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.

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. 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 applicantn 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 POA’s jurisdiction to resolve said
disputes.

Furthermore, the POA has jurisdiction over the MPSA applications under the
doctrine of primary jurisdiction. Euro-med Laboratories v. Province of Batangas
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.

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.
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.

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 country’s 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."

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.
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, MBMI’s Summary of
Significant Accounting Policies statement– –regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groups––
involves 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.

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.

We disagree.
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
Respondent Redmont, in its Comment dated October 10, 2011, made known to
the Court the fact of the OP’s 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.

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.

Selling of MBMI’s 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.1âwphi1
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.

CORPORATION LAW

G.R. No. 157549 May 30, 2011

DONNINA C. HALLEY, Petitioner, 
 vs.
 PRINTWELL, INC., Respondent.

FACTS:

BMPI (Business Media Philippines Inc.) is a corporation under the control

of its stockholders, including Donnina Halley. In the course of its business, BMPI
commissioned PRINTWELL to print Philippines, Inc. (a magazine published and
distributed by BMPI). PRINTWELL extended 30-day credit accommodation in
favor of BMPI and in a period of 9 mos. BMPI placed several orders amounting
to 316,000.
However, only 25,000 was paid hence a balance of 291,000. PRINTWELL sued
BMPI for collection of the unpaid balance and later on impleaded BMPI’s original
stockholders and incorporators to recover on their unpaid subscriptions.

It appears that BMPI has an authorized capital stock of 3M divided into

300,000

shares with P10 par value. Only 75,000 shares worth P750,000 were originally
subscribed of which P187,500 were paid up capital. Halley subscribed to 35,000
shares worth P350,000 but only paid P87,500.

Halley contends that:

1. They all had already paid their subscriptions in full

2. BMPI had a separate and distinct personality

3. BOD and SH had resolved to dissolve BMPI

RTC and CA:

Defendant merely used the corporate fiction as a cloak/cover to create an

injustice (against PRINTWELL). Rejected allegations of full payment in view of
irregularity in the issuance of ORs Payment made on a later date was covered by
an OR with a lower serial number than payment made on an earlier date).

 Doctrine of Limited Liability (b. Cases)

ISSUE: Whether or not petitioner Donnina Halley is personally liable though she
submits she had no participation in the transaction between BMPI and Printwell
and that BMPI acted on its own.

HELD:
 Yes. Although a corporation has a personality separate and distinct from
those of its stockholders, directors, or officers, such separate and distinct
personality is merely a fiction created by law for the sake of convenience and to
promote the ends of justice. The corporate personality may be disregarded, and
the individuals composing the corporation will be treated as individuals, if the
corporate entity is being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; as an alter ego, an adjunct, or a business conduit for
the sole benefit of the stockholders. As a general rule, a corporation is looked
upon as a legal entity, unless and until sufficient reason to the contrary appears.
Thus, the courts always presume good faith, and for that reason accord prime
importance to the separate personality of the corporation, disregarding the
corporate personality only after the wrongdoing is first clearly and convincingly
established. It thus behooves the courts to be careful in assessing the milieu
where the piercing of the corporate veil shall be done.

Although nowhere in Printwell’s amended complaint or in the testimonies

Printwell offered can it be read or inferred from that the petitioner was
instrumental in persuading BMPI to renege on its obligation to pay; or that she
induced Printwell to extend the credit accommodation by misrepresenting the
solvency of BMPI to Printwell, her personal liability, together with that of her
co-defendants, remained because the CA found her and the other defendant
stockholders to be in charge of the operations of BMPI at the time the unpaid
obligation was transacted and incurred.

In the case at bench, it is undisputed that BMPI made several orders on

credit from appellee PRINTWELL involving the printing of business magazines,
wrappers and subscription cards, in the total amount of P291,342.76 (Record
pp. 3-5, Annex "A") which facts were never denied by appellants’ stockholders
that they owe(d) appellee the amount of P291,342.76. The said goods were
delivered to and received by BMPI but it failed to pay its overdue account to
appellee as well as the interest thereon, at the rate of 20% per annum until fully
paid. It was also during this time that appellants stockholders were in charge of
the operation of BMPI despite the fact that they were not able to pay their
unpaid subscriptions to BMPI yet greatly benefited from said transactions. In
view of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny appellee from
recovering from appellants would place appellee in a limbo on where to assert
their right to collect from BMPI since the stockholders who are appellants
herein are availing the defense of corporate fiction to evade payment of its
obligations.

Both the RTC and the CA applied the trust fund doctrine against the
defendant stockholders, including the petitioner. The trust fund doctrine
enunciates a –

xxx rule that the property of a corporation is a trust fund for the payment of
creditors, but such property can be called a trust fund ‘only by way of analogy or
metaphor.’ As between the corporation itself and its creditors it is a simple
debtor, and as between its creditors and stockholders its assets are in equity a
fund for the payment of its debts.

SC clarified that the trust fund doctrine is not limited to reaching the
stockholder’s unpaid subscriptions. The scope of the doctrine when the
corporation is insolvent encompasses not only the capital stock, but also other
property and assets generally regarded in equity as a trust fund for the payment
of corporate debts. All assets and property belonging to the corporation held in
trust for the benefit of creditors that were distributed or in the possession of the
stockholders, regardless of full payment of their subscriptions, may be reached
by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine, a corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation of paying
for his shares, in whole or in part, without a valuable consideration, or
fraudulently, to the prejudice of creditors. The creditor is allowed to maintain an
action upon any unpaid subscriptions and thereby steps into the shoes of the
corporation for the satisfaction of its debt. To make out a prima facie case in a
suit against stockholders of an insolvent corporation to compel them to
contribute to the payment of its debts by making good unpaid balances upon
their subscriptions, it is only necessary to establish that the stockholders have
not in good faith paid the par value of the stocks of the corporation.
  Doctrine of Piercing the Veil of Corporate Fiction

ISSUE: Whether or not the CA erred in affirming the decision of the RTC which
essentially allowed the piercing of the Veil of Corporate Fiction.

HELD:

No. Settled is the rule that when the veil of corporate fiction is used as a
means of perpetrating fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievements or
perfection of monopoly or generally the perpetration of knavery or crime, 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 (First Philippine International Bank vs.
Court of Appeals, 252 SCRA 259). Moreover, under this doctrine, the corporate
existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligations or to justify
wrong (Claparols vs. CIR, 65 SCRA 613).

Although a corporation has a personality separate and distinct from those

of its stockholders, directors, or officers, such separate and distinct personality
is merely a fiction created by law for the sake of convenience and to promote the
ends of justice. The corporate personality may be disregarded, and the
individuals composing the corporation will be treated as individuals, if the
corporate entity is being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; as an alter ego, an adjunct, or a business conduit for
the sole benefit of the stockholders. As a general rule, a corporation is looked
upon as a legal entity, unless and until sufficient reason to the contrary appears.
Thus, the courts always presume good faith, and for that reason accord prime
importance to the separate personality of the corporation, disregarding the
corporate personality only after the wrongdoing is first clearly and convincingly
established. It thus behooves the courts to be careful in assessing the milieu
where the piercing of the corporate veil shall be done.

Although nowhere in Printwell’s amended complaint or in the testimonies

Printwell offered can it be read or inferred from that the petitioner was
instrumental in persuading BMPI to renege on its obligation to pay; or that she
induced Printwell to extend the credit accommodation by misrepresenting the
solvency of BMPI to Printwell, her personal liability, together with that of her
co-defendants, remained because the CA found her and the other defendant
stockholders to be in charge of the operations of BMPI at the time the unpaid
obligation was transacted and incurred, to wit:

In the case at bench, it is undisputed that BMPI made several orders on

credit from appellee PRINTWELL involving the printing of business magazines,
wrappers and subscription cards, in the total amount of P291,342.76 (Record
pp. 3-5, Annex "A") which facts were never denied by appellants’ stockholders
that they owe(d) appellee the amount of P291,342.76. The said goods were
delivered to and received by BMPI but it failed to pay its overdue account to
appellee as well as the interest thereon, at the rate of 20% per annum until fully
paid. It was also during this time that appellants stockholders were in charge of
the operation of BMPI despite the fact that they were not able to pay their
unpaid subscriptions to BMPI yet greatly benefited from said transactions. In
view of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny appellee from
recovering from appellants would place appellee in a limbo on where to assert
their right to collect from BMPI since the stockholders who are appellants
herein are availing the defense of corporate fiction to evade payment of its
obligations.

ACCORDINGLY, we deny the petition for review on certiorari;and affirm

with modification the decision promulgated on August 14, 2002by ordering the
petitionerto pay to Printwell, Inc. the sum of P262,500.00, plus interest of 12%
per annum to be computed from February 8, 1990 until full payment.