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Republic of the Philippines computed from October 4, 1999 the date the letter of demand was presumably
SUPREME COURT received by the defendant.
Manila
The foregoing effectively dispose of the defenses raised by the defendant and
FIRST DIVISION furnish the reason of the Court for not giving due course to them.

G.R. No. 182398 July 20, 2010 WHEREFORE, judgment is rendered directing defendant to pay plaintiff
P2,516,826.68 with interest at the rate of 6% from October 4, 1999 until full
BENNY Y. HUNG,x Petitioner, payment.
vs.
BPI CARD FINANCE CORP. Respondent. The antecedent facts of the case are as follows:

DECISION Guess? Footwear and BPI Express Card Corporation entered into two merchant
agreements,5 dated 25 August 1994 and 16 November 1994, whereby Guess?
PEREZ, J.: Footwear agreed to honor validly issued BPI Express Credit Cards presented by
cardholders in the purchase of its goods and services. In the first agreement,
For our resolution is the instant petition for review by certiorari assailing the petitioner Benny Hung signed as owner and manager of Guess? Footwear. He
Decision1 dated 31 August 2007 and Resolution2 dated 14 April 2008 of the Court signed the second agreement as president of Guess? Footwear which he also
of Appeals in CA-G.R. CV No. 84641. The Court of Appeals’ Decision affirmed the referred to as B & R Sportswear Enterprises.
Order3 dated 30 November 2004 of the Regional Trial Court (RTC) of Makati City
in Civil Case No. 99-2040, entitled BPI Card Finance Corporation v. B & R From May 1997 to January 1999, respondent BPI mistakenly credited, through
Sportswear Distributor, Inc., finding petitioner Benny Hung liable to respondent three hundred fifty-two (352) checks, Three Million Four Hundred Eighty
BPI Card Finance Corporation (BPI for brevity) for the satisfaction of the RTC’s 24 Thousand Four Hundred Twenty-Seven Pesos and 23/100 (P3,480,427.23) to the
June 2002 Decision4 against B & R Sportswear Distributor, Inc. The pertinent account of Guess? Footwear. When informed of the overpayments,6 petitioner
portion of the Decision states: Benny Hung transferred Nine Hundred Sixty-Three Thousand Six Hundred Four
Pesos and 03/100 (₱963,604.03) from the bank account of B & R Sportswear
xxx Enterprises to BPI’s account as partial payment.7 The letter dated 31 May 1999
was worded as follows:
The delivery by the plaintiff to the defendant of P3,480,427.43 pursuant to the
Merchant Agreements was sufficiently proven by the checks, Exhibits B to V-5. Dear Sir/Madame
Plaintiff’s evidence that the amount due to the defendant was P139,484.38 only
was not controverted by the defendant, hence the preponderance of evidence is in This is to authorize BPI Ortigas Branch to transfer the amount of P963,604.03
favor of the plaintiff. The lack of controversy on the amount due to the defendant from the account of B & R Sportswear Enterprises to the account of BPI Card
when considered with the contents of the letter of the defendant, Exhibit TT when Corporation.
it returned to plaintiff P963,604.03 "as partial settlement of overpayments made
by BPI Card Corporation to B & R Sportswear, pending final reconciliation of exact The aforementioned amount shall represent partial settlement of overpayments
amount of overpayment" amply support the finding of the Court that plaintiff made by BPI Card Corporation to B & R Sportswear, pending final reconciliation of
indeed has a right to be paid by the defendant of the amount of P2,516,826.68. exact amount of overpayment. (Emphasis supplied.)

Plaintiff claims interest of 12%. The obligation of the defendant to return did not Thank you for your usual kind cooperation.
arose out of a loan or forbearance of money, hence, applying Eastern Shipping
Lines Inc. vs. Court of Appeals, 234 SCRA 78 (1994) the rate due is only 6% Very truly yours,
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(Sgd.) FOR LACK OF SERVICE OF SUMMONS AND A COPY OF THE COMPLAINT UPON
Benny Hung [HIM], THE ASSAILED DECISION OF THE COURT OF APPEALS, AS WELL AS, ITS
RESOLUTION DENYING [HIS] MOTION FOR RECONSIDERATION SHOULD BE
In a letter dated 27 September 1999, BPI demanded the balance payment DECLARED NULL AND VOID FOR LACK OF JURISDICTION.14
amounting to Two Million Five Hundred Sixteen Thousand Eight Hundred Twenty-
Six Pesos and 68/100 (P2,516,826.68), but Guess? Footwear failed to pay. In essence, the basic issue is whether petitioner can be held liable for the
satisfaction of the RTC’s Decision against B & R Sportswear Distributor, Inc.? As we
BPI filed a collection suit before the RTC of Makati City naming as defendant B & R answer this question, we shall pass upon the grounds raised by petitioner.
Sportswear Distributor, Inc.8Although the case was against B & R Sportswear
Distributor, Inc., it was B & R Footwear Distributors, Inc., that filed an answer, Petitioner claims that he never represented B & R Sportswear Distributor, Inc., the
appeared and participated in the trial.9 non-existent corporation sued by respondent; that it would be unfair to treat his
single proprietorship B & R Sportswear Enterprises as B & R Sportswear
On 24 June 2002, the RTC rendered a decision ordering defendant B & R Distributor, Inc.; that the confusing similarity in the names should not be taken
Sportswear Distributor, Inc., to pay the plaintiff (BPI) ₱2,516,826.68 with 6% against him because he established his single proprietorship long before
interest from 4 October 1999. The RTC ruled that the overpayment of respondent sued; that he did not defraud respondent; that he even paid
₱3,480,427.43 was proven by checks credited to the account of Guess? Footwear respondent "in the course of their mutual transactions;" and that without fraud, he
and the ₱963,604.03 partial payment proved that defendant ought to pay cannot be held liable for the obligations of B & R Footwear Distributors, Inc. or B &
₱2,516,826.6810 more. During the execution of judgment, it was discovered that B R Sportswear Distributor, Inc. by piercing the veil of corporate fiction.
& R Sportswear Distributor, Inc., is a non-existing entity. Thus, the trial court failed
to execute the judgment. Petitioner also states that the "real corporation" B & R Footwear Distributors, Inc.
or Guess? Footwear acknowledged itself as the "real defendant." It answered the
Consequently, respondent filed a Motion11 to pierce the corporate veil of B & R complaint and participated in the trial. According to petitioner, respondent should
Footwear Distributors, Inc. to hold its stockholders and officers, including have executed the judgment against it as the "real contracting party" in the
petitioner Benny Hung, personally liable. In its 30 November 2004 Order, the RTC merchant agreements. Execution against him was wrong since he was not served
ruled that petitioner is liable for the satisfaction of the judgment, since he signed with summons nor was he a party to the case. Thus, the lower courts did not
the merchant agreements in his personal capacity.12 acquire jurisdiction over him, and their decisions are null and void for lack of due
process.
The Court of Appeals affirmed the order and dismissed petitioner’s appeal. It ruled
that since B & R Sportswear Distributor, Inc. is not a corporation, it therefore has Respondent counters that petitioner’s initial silence on the non-existence of B & R
no personality separate from petitioner Benny Hung who induced the respondent Sportswear Distributor, Inc. was intended to mislead. Still, the evidence showed
BPI and the RTC to believe that it is a corporation.13 that petitioner treats B & R Footwear Distributors, Inc. and his single
proprietorship B & R Sportswear Enterprises as one and the same entity.
After his motion for reconsideration was denied, petitioner filed the instant Petitioner ordered the partial payment using the letterhead of B & R Footwear
petition anchored on the following grounds: Distributor, Inc. and yet the fund transferred belongs to his single proprietorship B
& R Sportswear Enterprises. This fact, according to respondent, justifies piercing
the corporate veil of B & R Footwear Distributor, Inc. to hold petitioner personally
I. liable.

PIERCING THE VEIL OF CORPORATE FICTION CANNOT JUSTIFY EXECUTION Citing Sections 4 and 5, Rule 10 of the Rules of Court, respondent also prays that
AGAINST [HIM]. the name of the inexistent defendant B & R Sportswear Distributor, Inc. be
amended and changed to Benny Hung and/or B & R Footwear Distributors, Inc.
II.
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Moreover, respondent avers that petitioner cannot claim that he was not served to soften the significance of his directive to the bank, under the letterhead of B & R
with summons because it was served at his address and the building standing Footwear Distributor’s, Inc., to transfer the funds belonging to his sole
thereon is registered in his name per the tax declaration. proprietorship B & R Sportswear Enterprises as partial payment to the
overpayments made by respondent to Guess? Footwear. He now claims the partial
At the outset, we note the cause of respondent’s predicament in failing to execute payment as his payment to respondent "in the course of their mutual
the 2002 judgment in its favor: its own failure to state the correct name of the transactions."
defendant it sued and seek a correction earlier. Instead of suing Guess? Footwear
and B & R Sportswear Enterprises, the contracting parties in the merchant Clearly, petitioner has represented in his dealings with respondent that Guess?
agreements, BPI named B & R Sportswear Distributor, Inc. as defendant. BPI Footwear or B & R Footwear Distributors, Inc. is also B & R Sportswear
likewise failed to sue petitioner Benny Hung who signed the agreements as Enterprises. For this reason, the more complete correction on the name of
owner/manager and president of Guess? Footwear and B & R Sportswear defendant should be from B & R Sportswear Distributor, Inc. to B & R Footwear
Enterprises. Moreover, when B & R Footwear Distributors, Inc. appeared as Distributors, Inc. and Benny Hung. Petitioner is the proper defendant because his
defendant, no corresponding correction was sought. Unfortunately, BPI has buried sole proprietorship B & R Sportswear Enterprises has no juridical personality
its omission by silence and lamented instead petitioner’s alleged initial silence on apart from him.19 Again, the correction only confirms the voluntary correction
the non-existence of B & R Sportswear Distributor, Inc. Respondent even accused already made by B & R Footwear Distributors, Inc. or Guess? Footwear which is
the "defendant" in its motion to pierce the corporate veil of B & R Footwear also B & R Sportswear Enterprises. Correction of this formal defect is also allowed
Distributors, Inc. of having "employed deceit, bad faith and illegal by Section 4, Rule 10 of the Rules of Court.
scheme/maneuver,"15 an accusation no longer pursued before us.
Relatedly, petitioner cannot complain of non-service of summons upon his person.
Our impression that respondent BPI should have named petitioner as a defendant Suffice it to say that B & R Footwear Distributors, Inc. or Guess? Footwear which is
finds validation from (1) petitioner’s own admission that B & R Sportswear also B & R Sportswear Enterprises had answered the summons and the complaint
Enterprises is his sole proprietorship and (2) respondent’s belated prayer that and participated in the trial.
defendant’s name be changed to Benny Hung and/or B & R Footwear Distributors,
Inc. on the ground that such relief is allowed under Sections 416 and 5,17 Rule 10 of Accordingly, we find petitioner liable to respondent and we affirm, with the
the Rules of Court. foregoing clarification, the finding of the RTC that he signed the second merchant
agreement in his personal capacity.
Indeed, we can validly make the formal correction on the name of the defendant
from B & R Sportswear Distributor, Inc. to B & R Footwear Distributors, Inc. Such The correction on the name of the defendant has rendered moot any further
correction only confirms the voluntary correction already made by B & R discussion on the doctrine of piercing the veil of corporate fiction. In any event, we
Footwear Distributors, Inc. which answered the complaint and claimed that it is have said that whether the separate personality of a corporation should be pierced
the defendant. Section 4, Rule 10 of the Rules of Court also allows a summary hinges on facts pleaded and proved.20 In seeking to pierce the corporate veil of B &
correction of this formal defect. Such correction can be made even if the case is R Footwear Distributors, Inc., respondent complained of "deceit, bad faith and
already before us as it can be made at any stage of the action.18 Respondent’s illegal scheme/maneuver." As stated earlier, respondent has abandoned such
belated prayer for correction is also sufficient since a court can even make the accusation. And respondent’s proof – the SEC certification that B & R Sportswear
correction motu propio. More importantly, no prejudice is caused to B & R Distributor, Inc. is not an existing corporation – would surely attest to no other
Footwear Distributors, Inc. considering its participation in the trial. Hence, fact but the inexistence of a corporation named B & R Sportswear Distributor, Inc.
petitioner has basis for saying that respondent should have tried to execute the as such name only surfaced because of its own error. Hence, we cannot agree with
judgment against B & R Footwear Distributors, Inc. the Court of Appeals that petitioner has represented a non-existing corporation
and induced the respondent and the RTC to believe in his representation.1avvphi1
But we cannot agree with petitioner that B & R Footwear Distributors, Inc. or
Guess? Footwear is the only "real contracting party." The facts show that B & R On petitioner’s alleged intention to mislead for his initial silence on the non-
Sportswear Enterprises is also a contracting party. Petitioner conveniently ignores existence of the named defendant, we find more notable respondent’s own silence
this fact although he himself signed the second agreement indicating that Guess? on the error it committed. Contrary to the allegation, the "real" defendant has even
Footwear is also referred to as B & R Sportswear Enterprises. Petitioner also tries corrected respondent’s error. While the evidence showed that petitioner has
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treated B & R Footwear Distributors, Inc. or Guess? Footwear as B & R Sportswear No pronouncement as to costs.
Enterprises, respondent did not rely on this ground in filing the motion to pierce
the corporate veil of B & R Footwear Distributors, Inc. Respondent’s main SO ORDERED.
contention therein was petitioner’s alleged act to represent a non-existent
corporation amounting to deceit, bad faith and illegal scheme/maneuver. JOSE PORTUGAL PEREZ
Associate Justice
With regard to the imposable rate of legal interest, we find application of the rule
laid down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals,21 to
wit:

2. When an obligation, not constituting a loan or forbearance of money, is


breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes


final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.

Since this case before us involves an obligation not arising from a loan or
forbearance of money, the applicable interest rate is 6% per annum. The legal
interest rate of 6% shall be computed from 4 October 1999, the date the letter of
demand was presumably received by the defendant.22 And in accordance with the
aforesaid decision, the rate of 12% per annum shall be charged on the total
amount outstanding, from the time the judgment becomes final and executory
until its satisfaction.

WHEREFORE, we DENY the petition for lack of merit, and ORDER B & R Footwear
Distributors, Inc. and petitioner Benny Hung TO PAY respondent BPI Card Finance
Corporation: (a) ₱2,516,823.40, representing the overpayments, with interest at
the rate of 6% per annum from 4 October 1999 until finality of judgment; and (b)
additional interest of 12% per annum from finality of judgment until full payment.
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2) In RTC Civil Case No. 803-84-C: Guillermo Roxas and all persons claiming
Republic of the Philippines
under him to:
SUPREME COURT
Manila
a) Immediately vacate the residential house near the tennis court located
within the premises of the Hidden Valley Springs Resort at Limao, Calauan,
THIRD DIVISION
Laguna;

G.R. No. 100866 July 14, 1992


b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983,
for his occupancy of the said residential house until the same is vacated; and
REBECCA BOYER-ROXAS and GUILLERMO ROXAS, petitioners,
vs.
c) Pay the costs. (Rollo, p. 36)
HON. COURT OF APPEALS and HEIRS OF EUGENIA V. ROXAS, INC., respondents.
In two (2) separate complaints for recovery of possession filed with the Regional
GUTIERREZ, JR., J.:
Trial Court of Laguna against petitioners Rebecca Boyer-Roxas and Guillermo
Roxas respectively, respondent corporation, Heirs of Eugenia V. Roxas, Inc., prayed
This is a petition to review the decision and resolution of the Court of Appeals in for the ejectment of the petitioners from buildings inside the Hidden Valley
CA-G.R. No. 14530 affirming the earlier decision of the Regional Trial Court of Springs Resort located at Limao, Calauan, Laguna allegedly owned by the
Laguna, Branch 37, at Calamba, in the consolidated RTC Civil Case Nos. 802-84-C respondent corporation.
and 803-84-C entitled "Heirs of Eugenia V. Roxas, Inc. v. Rebecca Boyer-Roxas" and
Heirs of Eugenia V. Roxas, Inc. v. Guillermo Roxas," the dispositive portion of
In the case of petitioner Rebecca Boyer-Roxas (Civil Case No-802-84-C), the
which reads:
respondent corporation alleged that Rebecca is in possession of two (2) houses,
one of which is still under construction, built at the expense of the respondent
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the corporation; and that her occupancy on the two (2) houses was only upon the
plaintiff and against the defendants, by ordering as it is hereby ordered that: tolerance of the respondent corporation.

1) In RTC Civil Case No. 802-84-C: Rebecca Boyer-Roxas and all persons In the case of petitioner Guillermo Roxas (Civil Case No. 803-84-C), the respondent
claiming under her to: corporation alleged that Guillermo occupies a house which was built at the
expense of the former during the time when Guillermo's father, Eriberto Roxas,
a) Immediately vacate the residential house near the Balugbugan pool located was still living and was the general manager of the respondent corporation; that
inside the premises of the Hidden Valley Springs Resort at Limao, Calauan, the house was originally intended as a recreation hall but was converted for the
Laguna; residential use of Guillermo; and that Guillermo's possession over the house and
lot was only upon the tolerance of the respondent corporation.
b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983,
for her occupancy of the residential house until the same is vacated; In both cases, the respondent corporation alleged that the petitioners never paid
rentals for the use of the buildings and the lots and that they ignored the demand
c) Remove the unfinished building erected on the land of the plaintiff within letters for them to vacate the buildings.
ninety (90) days from receipt of this decision;
In their separate answers, the petitioners traversed the allegations in the
d) Pay the plaintiff the amount of P100.00 per month from September 10, 1983, complaint by stating that they are heirs of Eugenia V. Roxas and therefore, co-
until the said unfinished building is removed from the land of the plaintiff; and owners of the Hidden Valley Springs Resort; and as co-owners of the property,
they have the right to stay within its premises.
e) Pay the costs.
The cases were consolidated and tried jointly.
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At the pre-trial, the parties limited the issues as follows: To support the complaints, the plaintiff offered the testimonies of Maria
Milagros Roxas and that of Victoria Roxas Villarta as well as Exhibits "A" to
1) whether plaintiff is entitled to recover the questioned premises; "M-3".

2) whether plaintiff is entitled to reasonable rental for occupancy of the The evidence of the plaintiff established the following: that the plaintiff, Heirs
premises in question; of Eugenia V Roxas, Incorporated, was incorporated on December 4, 1962
(Exh. "C") with the primary purpose of engaging in agriculture to develop the
3) whether the defendant is legally authorized to pierce the veil of corporate properties inherited from Eugenia V. Roxas and that of y Eufrocino Roxas; that
fiction and interpose the same as a defense in an accion publiciana; the Articles of Incorporation of the plaintiff, in 1971, was amended to allow it
to engage in the resort business (Exh.
"C-1"); that the incorporators as original members of the board of directors of
4) whether the defendants are truly builders in good faith, entitled to occupy the plaintiff were all members of the same family, with Eufrocino Roxas
the questioned premises; having the biggest share; that accordingly, the plaintiff put up a resort known
as Hidden Valley Springs Resort on a portion of its land located at Bo. Limao,
5) whether plaintiff is entitled to damages and reasonable compensation for Calauan, Laguna, and covered by TCT No. 32639 (Exhs. "A" and "A-l"); that
the use of the questioned premises; improvements were introduced in the resort by the plaintiff and among them
were cottages, houses or buildings, swimming pools, tennis court, restaurant
6) whether the defendants are entitled to their counterclaim to recover moral and open pavilions; that the house near the Balugbugan Pool (Exh. "B-l") being
and exemplary damages as well as attorney's fees in the two cases; occupied by Rebecca B. Roxas was originally intended as staff house but later
used as the residence of Eriberto Roxas, deceased husband of the defendant
7) whether the presence and occupancy by the defendants on the premises in Rebecca Boyer-Roxas and father of Guillermo Roxas; that this house presently
questioned (sic) hampers, deters or impairs plaintiff's operation of Hidden being occupied by Rebecca B. Roxas was built from corporate funds; that the
Valley Springs Resort; and construction of the unfinished house (Exh. "B-2") was started by the
defendant Rebecca Boyer-Roxas and her husband Eriberto Roxas; that the
8) whether or not a unilateral and sudden withdrawal of plaintiffs tolerance third building (Exh. "B-3") presently being occupied by Guillermo Roxas was
allowing defendants' occupancy of the premises in questioned (sic) is unjust originally intended as a recreation hall but later converted as a residential
enrichment. (Original Records, 486) house; that this house was built also from corporate funds; that the said house
occupied by Guillermo Roxas when it was being built had nipa roofing but was
later changed to galvanized iron sheets; that at the beginning, it had no
Upon motion of the plaintiff respondent corporation, Presiding Judge Francisco
partition downstairs and the second floor was an open space; that the
Ma. Guerrero of Branch 34 issued an Order dated April 25, 1986 inhibiting himself
conversion from a recreation hall to a residential house was with the
from further trying the case. The cases were re-raffled to Branch 37 presided by
knowledge of Eufrocino Roxas and was not objected to by any of the Board of
Judge Odilon Bautista. Judge Bautista continued the hearing of the cases.
Directors of the plaintiff; that most of the materials used in converting the
building into a residential house came from the materials left by Coppola, a
For failure of the petitioners (defendants below) and their counsel to attend the film producer, who filmed the movie "Apocalypse Now"; that Coppola left the
October 22, 1986 hearing despite notice, and upon motion of the respondent materials as part of his payment for rents of the rooms that he occupied in the
corporation, the court issued on the same day, October 22, 1986, an Order resort; that after the said recreation hall was converted into a residential
considering the cases submitted for decision. At this stage of the proceedings, the house, defendant Guillermo Roxas moved in and occupied the same together
petitioners had not yet presented their evidence while the respondent corporation with his family sometime in 1977 or 1978; that during the time Eufrocino
had completed the presentation of its evidence. Roxas was still alive, Eriberto Roxas was the general manager of the
corporation and there was seldom any board meeting; that Eufrocino Roxas
The evidence of the respondent corporation upon which the lower court based its together with Eriberto Roxas were (sic) the ones who were running the
decision is as follows: corporation; that during this time, Eriberto Roxas was the restaurant and
wine concessionaire of the resort; that after the death of Eufrocino Roxas,
Eriberto Roxas continued as the general manager until his death in 1980; that
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after the death of Eriberto Roxas in 1980, the defendants Rebecca B. Roxas III The respondent Court misapplied the law when it ordered petitioner Rebecca
and Guillermo Roxas, committed acts that impeded the plaintiff's expansion Boyer-Roxas to remove the unfinished building in RTC Case No. 802-84-C, when
and normal operation of the resort; that the plaintiff could not even use its the trial court opined that she spent her own funds for the construction thereof.
own pavilions, kitchen and other facilities because of the acts of the (CA Rollo, pp. 17-18)
defendants which led to the filing of criminal cases in court; that cases were
even filed before the Ministry of Tourism, Bureau of Domestic Trade and the Were the petitioners denied due process of law in the lower court?
Office of the President by the parties herein; that the defendants violated the
resolution and orders of the Ministry of Tourism dated July 28, 1983, August After the cases were re-raffled to the sala of Presiding Judge Odilon Bautista of
3, 1983 and November 26, 1984 (Exhs. "G", "H" and "H-l") which ordered them Branch 37 the following events transpired:
or the corporation they represent to desist from and to turn over immediately
to the plaintiff the management and operation of the restaurant and wine
outlets of the said resort (Exh. "G-l"); that the defendants also violated the On July 3, 1986, the lower court issued an Order setting the hearing of the cases on
decision of the Bureau of Domestic Trade dated October 23, 1983 (Exh. "C"); July 21, 1986. Petitioner Rebecca V. Roxas received a copy of the Order on July 15,
that on August 27, 1983, because of the acts of the defendants, the Board of 1986, while petitioner Guillermo Roxas received his copy on July 18, 1986. Atty.
Directors of the plaintiff adopted Resolution No. 83-12 series of 1983 (Exh. Conrado Manicad, the petitioners' counsel received another copy of the Order on
"F") authorizing the ejectment of the defendants from the premises occupied July 11, 1986. (Original Records, p. 260)
by them; that on September 1, 1983, demand letters were sent to Rebecca
Boyer-Roxas and Guillermo Roxas (Exhs. "D" and "D-1") demanding that they On motion of the respondent corporation's counsel, the lower court issued an
vacate the respective premises they occupy; and that the dispute between the Order dated July 15, 1986 cancelling the July 21, 1986 hearing and resetting the
plaintiff and the defendants was brought before the barangay level and the hearing to August 11, 1986. (Original records, 262-263) Three separate copies of
same was not settled (Exhs. "E" and "E-l"). (Original Records, pp. 454-456) the order were sent and received by the petitioners and their counsel. (Original
Records, pp. 268, 269, 271)
The petitioners appealed the decision to the Court of Appeals. However, as stated
earlier, the appellate court affirmed the lower court's decision. The Petitioners' A motion to cancel and re-schedule the August 11, 1986 hearing filed by the
motion for reconsideration was likewise denied. respondent corporation's counsel was denied in an Order dated August 8, 1986.
Again separate copies of the Order were sent and received by the petitioners and
Hence, this petition. their counsel. (Original Records, pp. 276-279)

In a resolution dated February 5, 1992, we gave due course to the petition. At the hearing held on August 11, 1986, only Atty. Benito P. Fabie, counsel for the
respondent corporation appeared. Neither the petitioners nor their counsel
appeared despite notice of hearing. The lower court then issued an Order on the
The petitioners now contend: same date, to wit:

I Respondent Court erred when it refused to pierce the veil of corporate fiction ORDER
over private respondent and maintain the petitioners in their possession and/or
occupancy of the subject premises considering that petitioners are owners of
aliquot part of the properties of private respondent. Besides, private respondent When these cases were called for continuation of trial, Atty.
itself discarded the mantle of corporate fiction by acts and/or omissions of its Benito P. Fabie appeared before this Court, however, the
board of directors and/or stockholders. defendants and their lawyer despite receipt of the Order setting
the case for hearing today failed to appear. On Motion of Atty.
Fabie, further cross examination of witness Victoria Vallarta is
II The respondent Court erred in not holding that petitioners were in fact denied hereby considered as having been waived.
due process or their day in court brought about by the gross negligence of their
former counsel.
The plaintiff is hereby given twenty (20) days from today within
which to submit formal offer of evidence and defendants are also
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given ten (10) days from receipt of such formal offer of evidence On December 16, 1986, the lower court issued an Order, to wit:
to file their objection thereto.
ORDER
In the meantime, hearing in these cases is set to September 29,
1986 at 10:00 o'clock in the morning. (Original Records, p. 286) Considering that the Court up to this date has not received any
Motion for Reconsideration filed by the defendants in the above-
Copies of the Order were sent and received by the petitioners and their counsel on entitled cases, the Court cannot act on the Opposition to Motion
the following dates — Rebecca Boyer-Roxas on August 20, 1986, Guillermo Roxas for Reconsideration filed by the plaintiff and received by the
on August 26, 1986, and Atty. Conrado Manicad on September 19, 1986. (Original Court on November 14, 1986. (Original Records, p. 446)
Records, pp. 288-290)
On January 15, 1987, the lower court rendered the questioned decision in the two
On September 1, 1986, the respondent corporation filed its "Formal Offer of (2) cases. (Original Records, pp. 453-459)
Evidence." In an Order dated September 29, 1986, the lower court issued an Order
admitting exhibits "A" to "M-3" submitted by the respondent corporation in its On January 20, 1987, Atty. Conrado Manicad, the petitioners' counsel filed an Ex-
"Formal Offer of Evidence . . . there being no objection . . ." (Original Records, p. Parte Manifestation and attached thereto, a motion for reconsideration of the
418) Copies of this Order were sent and received by the petitioners and their October 22, 1986 Order submitting the cases for decision. He prayed that the
counsel on the following dates: Rebecca Boyer-Roxas on October 9, 1986; Order be set aside and the cases be re-opened for reception of evidence for the
Guillermo Roxas on October 9, 1986 and Atty. Conrado Manicad on October 4, petitioners. He averred that: 1) within the reglementary period he prepared the
1986 (Original Records, pp. 420, 421, 428). motion for reconsideration and among other documents, the draft was sent to his
law office thru his messenger; after signing the final copies, he caused the service
The scheduled hearing on September 29, 1986 did not push through as the of a copy to the respondent corporation's counsel with the instruction that the
petitioners and their counsel were not present prompting Atty. Benito Fabie, the copy of the Court be filed; however, there was a miscommunication between his
respondent corporation's counsel to move that the cases be submitted for secretary and messenger in that the secretary mailed the copy for the respondent
decision. The lower court denied the motion and set the cases for hearing on corporation's counsel and placed the rest in an envelope for the messenger to file
October 22, 1986. However, in its Order dated September 29, 1986, the the same in court but the messenger thought that it was the secretary who would
court warned that in the event the petitioners and their counsel failed to appear on file it; it was only later on when it was discovered that the copy for the Court has
the next scheduled hearing, the court shall consider the cases submitted for not yet been filed and that such failure to file the motion for reconsideration was
decision based on the evidence on record. (Original Records, p. 429, 430 and 431) due to excusable neglect and/or accident. The motion for reconsideration
contained the following allegations: that on the date set for hearing (October 22,
Separate copies of this Order were sent and received by the petitioners and their 1986), he was on his way to Calamba to attend the hearing but his car suffered
counsel on the following dates: Rebecca Boyer-Roxas on October 9, 1986, transmission breakdown; and that despite efforts to repair said transmission, the
Guillermo Roxas on October 9, 1986; and Atty. Conrado Manicad on October 1, car remained inoperative resulting in his absence at the said hearing. (Original
1986. (Original Records, pp. 429-430) Records, pp. 460-469)

Despite notice, the petitioners and their counsel again failed to attend the On February 3, 1987, Atty. Manicad filed a motion for reconsideration of the
scheduled October 22, 1986 hearing. Atty. Fabie representing the respondent January 15, 1987 decision. He explained that he had to file the motion because the
corporation was present. Hence, in its Order dated October 22, 1986, on motion of receiving clerk refused to admit the motion for reconsideration attached to the ex-
Atty. Fabie and pursuant to the order dated September 29, 1986, the Court parte manifestation because there was no proof of service to the other party.
considered the cases submitted for decision. (Original Records, p. 436) Included in the motion for reconsideration was a notice of hearing of the motion
on February 3, 1987. (Original Records, p. 476-A)
On November 14, 1986, the respondent corporation, filed a "Manifestation",
stating that ". . . it is submitting without further argument its "Opposition to the On February 4, 1987, the respondent corporation through its counsel filed a
Motion for Reconsideration" for the consideration of the Honorable Court in Manifestation and Motion manifesting that they received the copy of the motion
resolving subject incident." (Original Records, p. 442)
Page |9

for reconsideration only today (February 4, 1987), hence they prayed for the Where there was something fishy and suspicious
postponement of the hearing. (Original Records, pp. 478-479) about the actuations of the former counsel of
petitioners in the case at bar, in that he did not
On the same day, February 4, 1987, the lower court issued an Order setting the give any significance at all to the processes of the
hearing on February 13, 1987 on the ground that it received the motion for court, which has proven prejudicial to the rights
reconsideration late. Copies of this Order were sent separately to the petitioners of said clients, under a lame and flimsy
and their counsel. The records show that Atty. Manicad received his copy on explanation that the court's processes just
February 11, 1987. As regards the petitioners, the records reveal that Rebecca escaped his attention, it is held that said lawyer
Boyer-Roxas did not receive her copy while as regards Guillermo Roxas, somebody deprived his clients of their day in court, thus
signed for him but did not indicate when the copy was received. (Original Records, entitling said clients to petition for relief from
pp. 481-483) judgment despite the lapse of the reglementary
period for filing said period for filing said
At the scheduled February 13, 1987 hearing, the counsels for the parties were petition.
present. However, the hearing was reset for March 6, 1987 in order to allow the
respondent corporation to file its opposition to the motion for reconsideration. In Escudero v. Judge Dulay (158 SCRA 69 [1988]), this Court, in
(Order dated February 13, 1987, Original Records, p. 486) Copies of the Order holding that the counsel's blunder in procedure is an exception to
were sent and received by the petitioners and their counsel on the following dates: the rule that the client is bound by the mistakes of counsel, made
Rebecca Boyer-Roxas on February 23, 1987; Guillermo Roxas on February 23, the following disquisition:
1987 and Atty. Manicad on February 19, 1987. (Original Records, pp. 487, 489-
490) Petitioners contend, through their new counsel,
that the judgment rendered against them by the
The records are not clear as to whether or not the scheduled hearing on March 6, respondent court was null and void, because
1987 was held. Nevertheless, the records reveal that on March 13, 1987, the lower they were therein deprived of their day in court
court issued an Order denying the motion for reconsideration. and divested of their property without due
process of law, through the gross ignorance,
The well-settled doctrine is that the client is bound by the mistakes of his lawyer. mistake and negligence of their previous
(Aguila v. Court of First Instance of Batangas, Branch I, 160 SCRA 352 [1988]; See counsel. They acknowledge that, while as a rule,
also Vivero v. Santos, et al., 98 Phil. 500 [1956]; Isaac v. Mendoza, 89 Phil. 279 clients are bound by the mistake of their
[1951]; Montes v. Court of First Instance of Tayabas, 48 Phil. 640 [1926]; People v. counsel, the rule should not be applied
Manzanilla, 43 Phil. 167 [1922]; United States v. Dungca, 27 Phil. 274 [1914]; and automatically to their case, as their trial
United States v. Umali, 15 Phil. 33 [1910]) This rule, however, has its exceptions. counsel's blunder in procedure and gross
Thus, in several cases, we ruled that the party is not bound by the actions of his ignorance of existing jurisprudence changed
counsel in case the gross negligence of the counsel resulted in the client's their cause of action and violated their
deprivation of his property without due process of law. In the case of Legarda v. substantial rights.
Court of Appeals (195 SCRA 418 [1991]), we said:
We are impressed with petitioner's contentions.
In People's Homesite & Housing Corp. v. Tiongco and Escasa (12
SCRA 471 [1964]), this Court ruled as follows: xxx xxx xxx

Procedural technicality should not be made a While this Court is cognizant of the rule that,
bar to the vindication of a legitimate grievance. generally, a client will suffer consequences of the
When such technicality deserts from being an negligence, mistake or lack of competence of his
aid to Justice, the courts are justified in counsel, in the interest of Justice and equity,
excepting from its operation a particular case. exceptions may be made to such rule, in
P a g e | 10

accordance with the facts and circumstances of attend despite notice. The lower court denied the motion and gave the petitioners
each case. Adherence to the general rule would, and their counsel another chance by rescheduling the October 22, 1986 hearing.
in the instant case, result in the outright
deprivation of their property through a Indeed, the petitioners knew all along that their counsel was not attending the
technicality. scheduled hearings. They did not take steps to change their counsel or make him
attend to their cases until it was too late. On the contrary, they continued to retain
In its questioned decision dated November 19, 1989 the Court of the services of Atty. Manicad knowing fully well his lapses vis-a-vis their cases.
Appeals found, in no uncertain terms, the negligence of the then They, therefore, cannot raise the alleged gross negligence of their counsel
counsel for petitioners when he failed to file the proper motion to resulting in their denial of due process to warrant the reversal of the lower court's
dismiss or to draw a compromise agreement if it was true that decision. In a similar case, Aguila v. Court of First Instance of Batangas, Branch
they agreed on a settlement of the case; or in simply filing an 1 (supra), we ruled:
answer; and that after having been furnished a copy of the
decision by the court he failed to appeal therefrom or to file a In the instant case, the petitioner should have noticed the
petition for relief from the order declaring petitioners in default. succession of errors committed by his counsel and taken
In all these instances the appellate court found said counsel appropriate steps for his replacement before it was altogether
negligent but his acts were held to bind his client, petitioners too late. He did not. On the contrary, he continued to retain his
herein, nevertheless. counsel through the series of proceedings that all resulted in the
rejection of his cause, obviously through such counsel's
The Court disagrees and finds that the negligence of counsel in "ineptitude" and, let it be added, the clients' forbearance. The
this case appears to be so gross and inexcusable. This was petitioner's reverses should have cautioned him that his lawyer
compounded by the fact, that after petitioner gave said counsel was mishandling his case and moved him to seek the help of
another chance to make up for his omissions by asking him to file other counsel, which he did in the end but rather tardily.
a petition for annulment of the judgment in the appellate court,
again counsel abandoned the case of petitioner in that after he Now petitioner wants us to nullify all of the antecedent
received a copy of the adverse judgment of the appellate court, he proceedings and recognize his earlier claims to the disputed
did not do anything to save the situation or inform his client of property on the justification that his counsel was grossly inept.
the judgment. He allowed the judgment to lapse and become final. Such a reason is hardly plausible as the petitioner's new counsel
Such reckless and gross negligence should not be allowed to bind should know. Otherwise, all a defeated party would have to do to
the petitioner. Petitioner was thereby effectively deprived of her salvage his case is claim neglect or mistake on the part of his
day in court. (at pp. 426-427) counsel as a ground for reversing the adverse judgment. There
would be no end to litigation if these were allowed as every
The herein petitioners, however, are not similarly situated as the parties shortcoming of counsel could be the subject of challenge by his
mentioned in the abovecited cases. We cannot rule that they, too, were victims of client through another counsel who, if he is also found wanting,
the gross negligence of their counsel. would likewise be disowned by the same client through another
counsel, and so on ad infinitum. This would render court
The petitioners are to be blamed for the October 22, 1986 order issued by the proceedings indefinite, tentative and subject to reopening at any
lower court submitting the cases for decision. They received notices of the time by the mere subterfuge of replacing counsel. (at pp. 357-
scheduled hearings and yet they did not do anything. More specifically, the parties 358)
received notice of the Order dated September 29, 1986 with the warning that if
they fail to attend the October 22, 1986 hearing, the cases would be submitted for We now discuss the merits of the cases.
decision based on the evidence on record. Earlier, at the scheduled hearing on
September 29, 1986, the counsel for the respondent corporation moved that the In the first assignment of error, the petitioners maintain that their possession of
cases be submitted for decision for failure of the petitioners and their counsel to the questioned properties must be respected in view of their ownership of an
aliquot portion of all the properties of the respondent corporation being
P a g e | 11

stockholders thereof. They propose that the veil of corporate fiction be pierced, to the possession of any definite portion of its property or assets
considering the circumstances under which the respondent corporation was (Gottfried V. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474).
formed. The stockholder is not a co-owner or tenant in common of the
corporate property (Harton v. Johnston, 166 Ala., 317, 51 So.
Originally, the questioned properties belonged to Eugenia V. Roxas. After her 992). (at pp. 375-376)
death, the heirs of Eugenia V. Roxas, among them the petitioners herein, decided to
form a corporation — Heirs of Eugenia V. Roxas, Incorporated (private respondent The petitioners point out that their occupancy of the staff house which was later
herein) with the inherited properties as capital of the corporation. The used as the residence of Eriberto Roxas, husband of petitioner Rebecca Boyer-
corporation was incorporated on December 4, 1962 with the primary purpose of Roxas and the recreation hall which was converted into a residential house were
engaging in agriculture to develop the inherited properties. The Articles of with the blessings of Eufrocino Roxas, the deceased husband of Eugenia V. Roxas,
Incorporation of the respondent corporation were amended in 1971 to allow it to who was the majority and controlling stockholder of the corporation. In his
engage in the resort business. Accordingly, the corporation put up a resort known lifetime, Eufrocino Roxas together with Eriberto Roxas, the husband of petitioner
as Hidden Valley Springs Resort where the questioned properties are located. Rebecca Boyer-Roxas, and the father of petitioner Guillermo Roxas managed the
corporation. The Board of Directors did not object to such an arrangement. The
These facts, however, do not justify the position taken by the petitioners. petitioners argue that . . . the authority thus given by Eufrocino Roxas for the
conversion of the recreation hall into a residential house can no longer be
The respondent is a bona fide corporation. As such, it has a juridical personality of questioned by the stockholders of the private respondent and/or its board of
its own separate from the members composing it. (Western Agro Industrial directors for they impliedly but no leas explicitly delegated such authority to said
Corporation v. Court of Appeals, 188 SCRA 709 [1990]; Tan Boon Bee & Co., Inc. v. Eufrocino Roxas. (Rollo, p. 12)
Jarencio, 163 SCRA 205 [1988]; Yutivo Sons Hardware Company v. Court of Tax
Appeals, 1 SCRA 160 [1961]; Emilio Cano Enterprises, Inc. v. Court of Industrial Again, we must emphasize that the respondent corporation has a distinct
Relations, 13 SCRA 290 [1965]) There is no dispute that title over the questioned personality separate from its members. The corporation transacts its business
land where the Hidden Valley Springs Resort is located is registered in the name of only through its officers or agents. (Western Agro Industrial Corporation v. Court
the corporation. The records also show that the staff house being occupied by of Appeals, supra). Whatever authority these officers or agents may have is
petitioner Rebecca Boyer-Roxas and the recreation hall which was later on derived from the board of directors or other governing body unless conferred by
converted into a residential house occupied by petitioner Guillermo Roxas are the charter of the corporation. An officer's power as an agent of the corporation
owned by the respondent corporation. Regarding properties owned by a must be sought from the statute, charter, the by-laws or in a delegation of
corporation, we stated in the case of Stockholders of F. Guanzon and Sons, Inc. v. authority to such officer, from the acts of the board of directors, formally
Register of Deeds of Manila, (6 SCRA 373 [1962]): expressed or implied from a habit or custom of doing business. (Vicente v.
Geraldez, 52 SCRA 210 [1973])
xxx xxx xxx
In the present case, the record shows that Eufrocino V. Roxas who then controlled
. . . Properties registered in the name of the corporation are the management of the corporation, being the majority stockholder, consented to
owned by it as an entity separate and distinct from its members. the petitioners' stay within the questioned properties. Specifically, Eufrocino
While shares of stock constitute personal property, they do not Roxas gave his consent to the conversion of the recreation hall to a residential
represent property of the corporation. The corporation has house, now occupied by petitioner Guillermo Roxas. The Board of Directors did
property of its own which consists chiefly of real estate (Nelson v. not object to the actions of Eufrocino Roxas. The petitioners were allowed to stay
Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 within the questioned properties until August 27, 1983, when the Board of
N.W. 743). A share of stock only typifies an aliquot part of the Directors approved a Resolution ejecting the petitioners, to wit:
corporation's property, or the right to share in its proceeds to
that extent when distributed according to law and equity (Hall & R E S O L U T I O N No. 83-12
Faley v. Alabama Terminal, 173 Ala., 398, 56 So. 235), but its
holder is not the owner of any part of the capital of the RESOLVED, That Rebecca B. Roxas and Guillermo Roxas, and all
corporation (Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled persons claiming under them, be ejected from their occupancy of
P a g e | 12

the Hidden Valley Springs compound on which their houses have Article 453 of the Civil Code provides:
been constructed and/or are being constructed only on tolerance
of the Corporation and without any contract therefor, in order to If there was bad faith, not only on the part of the person who
give way to the Corporation's expansion and improvement built, planted or sown on the land of another but also on the part
program and obviate prejudice to the operation of the Hidden of the owner of such land, the rights of one and the other shall be
Valley Springs Resort by their continued interference. the same as though both had acted in good faith.

RESOLVED, Further that the services of Atty. Benito P. Fabie be In such a case, the provisions of Article 448 of the Civil Code govern the
engaged and that he be authorized as he is hereby authorized to relationship between petitioner Rebecca-Boyer-Roxas and the respondent
effect the ejectment, including the filing of the corresponding corporation, to wit:
suits, if necessary to do so. (Original Records, p. 327)
Art. 448 — The owner of the land on which anything has been
We find nothing irregular in the adoption of the Resolution by the Board of built, sown or planted in good faith, shall have the right to
Directors. The petitioners' stay within the questioned properties was merely by appropriate as his own the works, sowing or planting after
tolerance of the respondent corporation in deference to the wishes of Eufrocino payment of the indemnity provided for in articles 546 and 548, or
Roxas, who during his lifetime, controlled and managed the corporation. Eufrocino to oblige the one who built or planted to pay the price of the land,
Roxas' actions could not have bound the corporation forever. The petitioners have and the one who sowed, the proper rent. However, the builder or
not cited any provision of the corporation by-laws or any resolution or act of the planter cannot be obliged to buy the land if its value is
Board of Directors which authorized Eufrocino Roxas to allow them to stay within considerably more than that of the building or trees. In such case,
the company premises forever. We rule that in the absence of any existing contract he shall pay reasonable rent, if the owner of the land does not
between the petitioners and the respondent corporation, the corporation may choose to appropriate the buildings or trees after proper
elect to eject the petitioners at any time it wishes for the benefit and interest of the indemnity. The parties shall agree upon the terms of the lease and
respondent corporation. in case of disagreement, the court shall fix the terms thereof.

The petitioners' suggestion that the veil of the corporate fiction should be pierced WHEREFORE, the present petition is partly GRANTED. The questioned decision of
is untenable. The separate personality of the corporation may be disregarded only the Court of Appeals affirming the decision of the Regional Trial Court of Laguna,
when the corporation is used "as a cloak or cover for fraud or illegality, or to work Branch 37, in RTC Civil Case No. 802-84-C is MODIFIED in that subparagraphs (c)
injustice, or where necessary to achieve equity or when necessary for the and (d) of Paragraph 1 of the dispositive portion of the decision are deleted. In
protection of the creditors." (Sulong Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 their stead, the petitioner Rebecca Boyer-Roxas and the respondent corporation
[1976] cited in Tan Boon Bee & Co., Inc., v. Jarencio, supra and Western Agro are ordered to follow the provisions of Article 448 of the Civil Code as regards the
Industrial Corporation v. Court of Appeals, supra) The circumstances in the questioned unfinished building in RTC Civil Case No. 802-84-C. The questioned
present cases do not fall under any of the enumerated categories. decision is affirmed in all other respects.

In the third assignment of error, the petitioners insist that as regards the SO ORDERED.
unfinished building, Rebecca Boyer-Roxas is a builder in good faith.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.
The construction of the unfinished building started when Eriberto Roxas, husband
of Rebecca Boyer-Roxas, was still alive and was the general manager of the
respondent corporation. The couple used their own funds to finance the
construction of the building. The Board of Directors of the corporation, however,
did not object to the construction. They allowed the construction to continue
despite the fact that it was within the property of the corporation. Under these
circumstances, we agree with the petitioners that the provision of Article 453 of
the Civil Code should have been applied by the lower courts.
P a g e | 13

Republic of the Philippines xxxx


SUPREME COURT
Manila 12. Machinery and Equipment:

SECOND DIVISION The following machinery/equipment have been contributed by you to the
company:
G.R. No. 150283 April 16, 2008
Splitting machine - 1 unit
RYUICHI YAMAMOTO, petitioner,
vs. Samming machine - 1 unit
NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO, respondents.
Forklift - 1 unit
DECISION
Drums - 4 units
CARPIO MORALES, J.:
Toggling machine - 2 units
In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese national,
organized under Philippine laws Wako Enterprises Manila, Incorporated (WAKO), Regarding the above machines, you may take them out with you (for your
a corporation engaged principally in leather tanning, now known as Nishino own use and sale) if you want, provided, the value of such machines is
Leather Industries, Inc. (NLII), one of herein respondents. deducted from your and Wako’s capital contributions, which will be paid
to you.
In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a
Japanese national, forged a Memorandum of Agreement under which they agreed Kindly let me know of your comments on all the above, soonest.
to enter into a joint venture wherein Nishino would acquire such number of shares
of stock equivalent to 70% of the authorized capital stock of WAKO. x x x x5 (Emphasis and underscoring supplied)

Eventually, Nishino and his brother1 Yoshinobu Nishino (Yoshinobu) acquired On the basis of such letter, Yamamoto attempted to recover the machineries and
more than 70% of the authorized capital stock of WAKO, reducing Yamamoto’s equipment which were, by Yamamoto’s admission, part of his investment in the
investment therein to, by his claim, 10%,2 less than 10% according to Nishino.3 corporation,6 but he was frustrated by respondents, drawing Yamamoto to file on
January 15, 1992 before the Regional Trial Court (RTC) of Makati a
The corporate name of WAKO was later changed to, as reflected earlier, its current complaint7 against them for replevin.
name NLII.
Branch 45 of the Makati RTC issued a writ of replevin after Yamamoto filed a
Negotiations subsequently ensued in light of a planned takeover of NLII by Nishino bond. 8
who would buy-out the shares of stock of Yamamoto. In the course of the
negotiations, Yoshinobu and Nishino’s counsel Atty. Emmanuel G. Doce (Atty. In their Answer with Counterclaim,9 respondents claimed that the machineries
Doce) advised Yamamoto by letter dated October 30, 1991, the pertinent portions and equipment subject of replevin form part of Yamamoto’s capital contributions
of which follow: in consideration of his equity in NLII and should thus be treated as corporate
property; and that the above-said letter of Atty. Doce to Yamamoto was merely a
Hereunder is a simple memorandum of the subject matters discussed with proposal, "conditioned on [Yamamoto’s] sell-out to . . . Nishino of his entire
me by Mr. Yoshinobu Nishino yesterday, October 29th, based on the letter equity,"10 which proposal was yet to be authorized by the stockholders and Board
of Mr. Ikuo Nishino from Japan, and which I am now transmitting to you. 4 of Directors of NLII.
P a g e | 14

By way of Counterclaim, respondents, alleging that they suffered damage due to x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR
the seizure via the implementation of the writ of replevin over the machineries ATTORNEY’S FEES.22
and equipment, prayed for the award to them of moral and exemplary damages,
attorney’s fees and litigation expenses, and costs of suit. The resolution of the petition hinges, in the main, on whether the advice in the
letter of Atty. Doce that Yamamoto may retrieve the machineries and equipment,
The trial court, by Decision of June 9, 1995, decided the case in favor of which admittedly were part of his investment, bound the corporation. The Court
Yamamoto,11 disposing thus: holds in the negative.

WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff as the Indeed, without a Board Resolution authorizing respondent Nishino to act for and
rightful owner and possessor of the machineries in question, and making in behalf of the corporation, he cannot bind the latter. Under the Corporation Law,
the writ of seizure permanent; (2) ordering defendants to pay plaintiff unless otherwise provided, corporate powers are exercised by the Board of
attorney’s fees and expenses of litigation in the amount of Fifty Thousand Directors.23
Pesos (P50,000.00), Philippine Currency; (3) dismissing defendants’
counterclaims for lack of merit; and (4) ordering defendants to pay the Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:
costs of suit.
During the negotiations, the issue as to the ownership of the
SO ORDERED.12 (Underscoring supplied) Machiner[ies] never came up. Neither did the issue on the proper
procedure to be taken to execute the complete take-over of the Company
On appeal,13 the Court of Appeals held in favor of herein respondents and come up since Ikuo, Yoshinobu, and Yamamoto were the owners thereof,
accordingly reversed the RTC decision and dismissed the complaint.14 In so the presence of other stockholders being only for the purpose of
holding, the appellate court found that the machineries and equipment claimed by complying with the minimum requirements of the law.
Yamamoto are corporate property of NLII and may not thus be retrieved without
the authority of the NLII Board of Directors;15 and that petitioner’s argument that What course of action the Company decides to do or not to do depends
Nishino and Yamamoto cannot hide behind the shield of corporate fiction does not not on the "other members of the Board of Directors". It depends on
lie,16 nor does petitioner’s invocation of the doctrine of promissory estoppel.17 At what Ikuo and Yoshinobu decide. The Company is but a mere
the same time, the Court of Appeals found no ground to support respondents’ instrumentality of Ikuo [and] Yoshinobu.24
Counterclaim.18
xxxx
The Court of Appeals having denied19 his Motion for Reconsideration,20 Yamamoto
filed the present petition,21faulting the Court of Appeals x x x The Company hardly holds board meetings. It has an inactive board,
the directors are directors in name only and are there to do the bidding of
A. the Nish[i]nos, nothing more. Its minutes are paper minutes. x x x 25

x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION SHOULD NOT xxxx


BE PIERCED IN THE CASE AT BAR.
The fact that the parties started at a 70-30 ratio and Yamamoto’s
B. percentage declined to 10% does not mean the 20% went to others. x x x
The 20% went to no one else but Ikuo himself. x x x Yoshinobu is the
x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY ESTOPPEL younger brother of Ikuo and has no say at all in the business. Only
DOES NOT APPLY TO THE CASE AT BAR. Ikuo makes the decisions. There were, therefore, no other members
of the Board who have not given their approval.26 (Emphasis and
C. underscoring supplied)
P a g e | 15

While the veil of separate corporate personality may be pierced when the intended that the promise should be relied upon and in fact it was relied
corporation is merely an adjunct, a business conduit, or alter ego of a person, 27 the upon, and if a refusal to enforce it would be virtually to sanction the
mere ownership by a single stockholder of even all or nearly all of the capital perpetration of fraud or would result in other injustice.
stocks of a corporation is not by itself a sufficient ground to disregard the separate
corporate personality.28 x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company. For this
purpose negotiations were had between the parties. Having expressly
The elements determinative of the applicability of the doctrine of piercing the veil given Yamamoto, through the Letter and through a subsequent meeting at
of corporate fiction follow: the Manila Peninsula where Ikuo himself confirmed that Yamamoto may
take out the Machinery from the Company anytime, respondents should
"1. Control, not mere majority or complete stock control, but complete not be allowed to turn around and do the exact opposite of what they have
domination, not only of finances but of policy and business practice in represented they will do.
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own; In paragraph twelve (12) of the Letter, Yamamoto was expressly advised
that he could take out the Machinery if he wanted to so, provided that the
2. Such control must have been used by the defendant to commit fraud or value of said machines would be deducted from his capital contribution x
wrong, to perpetuate the violation of a statutory or other positive legal duty, x x.
or dishonest and unjust act in contravention of the plaintiff’s legal rights;
and xxxx

3. The aforesaid control and breach of duty must proximately cause the Respondents cannot now argue that they did not intend for Yamamoto to
injury or unjust loss complained of. rely upon the Letter. That was the purpose of the Letter to begin with.
Petitioner[s] in fact, relied upon said Letter and such reliance was further
The absence of any one of these elements prevents "piercing the strengthened during their meeting at the Manila Peninsula.
corporate veil." In applying the ‘instrumentality’ or ‘alter ego’ doctrine, the
courts are concerned with reality and not form, with how the corporation To sanction respondents’ attempt to evade their obligation would be to
operated and the individual defendant’s relationship to that sanction the perpetration of fraud and injustice against
operation."29 (Italics in the original; emphasis and underscoring supplied) petitioner.32 (Underscoring supplied)

In relation to the second element, to disregard the separate juridical personality of It bears noting, however, that the aforementioned paragraph 12 of the letter is
a corporation, the wrongdoing or unjust act in contravention of a plaintiff’s legal followed by a request for Yamamoto to give his "comments on all the above,
rights must be clearly and convincingly established; it cannot be soonest."33
presumed.30 Without a demonstration that any of the evils sought to be prevented
by the doctrine is present, it does not apply.31 What was thus proffered to Yamamoto was not a promise, but a mere offer, subject
to his acceptance. Without acceptance, a mere offer produces no obligation. 34
In the case at bar, there is no showing that Nishino used the separate personality
of NLII to unjustly act or do wrong to Yamamoto in contravention of his legal Thus, under Article 1181 of the Civil Code, "[i]n conditional obligations, the
rights. acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes the
Yamamoto argues, in another vein, that promissory estoppel lies against condition." In the case at bar, there is no showing of compliance with the condition
respondents, thus: for allowing Yamamoto to take the machineries and equipment, namely, his
agreement to the deduction of their value from his capital contribution due him in
Under the doctrine of promissory estoppel, x x x estoppel may arise from the buy-out of his interests in NLII. Yamamoto’s allegation that he agreed to the
the making of a promise, even though without consideration, if it was condition35remained just that, no proof thereof having been presented.
P a g e | 16

The machineries and equipment, which comprised Yamamoto’s investment in


NLII,36 thus remained part of the capital property of the corporation.37

It is settled that the property of a corporation is not the property of its


stockholders or members.38 Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are regarded as equity in trust for the
payment of corporate creditors which are preferred over the stockholders in the
distribution of corporate assets.39The distribution of corporate assets and
property cannot be made to depend on the whims and caprices of the
stockholders, officers, or directors of the corporation unless the indispensable
conditions and procedures for the protection of corporate creditors are followed. 40

WHEREFORE, the petition is DENIED.

Costs against petitioner.

SO ORDERED.

CONCHITA CARPIO MORALES


Associate Justice
P a g e | 17

Republic of the Philippines attorney's fees from July 2,1966, until full payment is made; plus
SUPREME COURT P70,000.00 moral and exemplary damages.
Manila
It is found in the records that the cross party plaintiffs incurred
THIRD DIVISION additional miscellaneous expenses aside from
Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S.
G.R. No. 84197 July 28, 1989 Lim is further required to pay cross party plaintiff, Bormaheco,
the Cervanteses one-half and Maglana the other half, the amount
PIONEER INSURANCE & SURETY CORPORATION, petitioner, of Pl84,878.74 with interest from the filing of the cross-
vs. complaints until the amount is fully paid; plus moral and
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, exemplary damages in the amount of P184,878.84 with interest
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. from the filing of the cross-complaints until the amount is fully
LIM, respondents. paid; plus moral and exemplary damages in the amount of
P50,000.00 for each of the two Cervanteses.
G.R. No. 84157 July 28, 1989
Furthermore, he is required to pay P20,000.00 to Bormaheco and
the Cervanteses, and another P20,000.00 to Constancio B.
JACOB S. LIM, petitioner, Maglana as attorney's fees.
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and xxx xxx xxx
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.
WHEREFORE, in view of all above, the complaint of plaintiff
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation. Pioneer against defendants Bormaheco, the Cervanteses and
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim. Constancio B. Maglana, is dismissed. Instead, plaintiff is required
Renato J. Robles for BORMAHECO, Inc. and Cervanteses. to indemnify the defendants Bormaheco and the Cervanteses the
Leonardo B. Lucena for Constancio Maglana. amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the
time it is paid.
GUTIERREZ, JR., J.:
Furthermore, the plaintiff is required to pay Constancio B.
The subject matter of these consolidated petitions is the decision of the Court of Maglana the amount of P20,000.00 as attorney's fees and costs.
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of
First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint
(petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. No moral or exemplary damages is awarded against plaintiff for
84197) was dismissed but in all other respects the trial court's decision was this action was filed in good faith. The fact that the properties of
affirmed. the Bormaheco and the Cervanteses were attached and that they
were required to file a counterbond in order to dissolve the
attachment, is not an act of bad faith. When a man tries to protect
The dispositive portion of the trial court's decision reads as follows: his rights, he should not be saddled with moral or exemplary
damages. Furthermore, the rights exercised were provided for in
WHEREFORE, judgment is rendered against defendant Jacob S. the Rules of Court, and it was the court that ordered it, in the
Lim requiring Lim to pay plaintiff the amount of P311,056.02, exercise of its discretion.
with interest at the rate of 12% per annum compounded
monthly; plus 15% of the amount awarded to plaintiff as No damage is decided against Malayan Insurance Company, Inc.,
the third-party defendant, for it only secured the attachment
P a g e | 18

prayed for by the plaintiff Pioneer. If an insurance company Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics
would be liable for damages in performing an act which is clearly Law (Republic Act No. 776), respectively.
within its power and which is the reason for its being, then
nobody would engage in the insurance business. No further claim Lim defaulted on his subsequent installment payments prompting JDA to request
or counter-claim for or against anybody is declared by this Court. payments from the surety. Pioneer paid a total sum of P298,626.12.
(Rollo - G.R. No. 24197, pp. 15-16)
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline mortgage before the Sheriff of Davao City. The Cervanteses and Maglana, however,
business as owner-operator of Southern Air Lines (SAL) a single proprietorship. filed a third party claim alleging that they are co-owners of the aircrafts,

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered On July 19, 1966, Pioneer filed an action for judicial foreclosure with an
into and executed a sales contract (Exhibit A) for the sale and purchase of two (2) application for a writ of preliminary attachment against Lim and respondents, the
DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed Cervanteses, Bormaheco and Maglana.
price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry
No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims
Manila on July 18,1965. against Lim alleging that they were not privies to the contracts signed by Lim and,
by way of counterclaim, sought for damages for being exposed to litigation and for
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner recovery of the sums of money they advanced to Lim for the purchase of the
in G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit aircrafts in question.
C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the
aircrafts and spare parts. After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer
but dismissed Pioneer's complaint against all other defendants.
It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio As stated earlier, the appellate court modified the trial court's decision in that the
Maglana (respondents in both petitions) contributed some funds used in the plaintiffs complaint against all the defendants was dismissed. In all other respects
purchase of the above aircrafts and spare parts. The funds were supposed to be the trial court's decision was affirmed.
their contributions to a new corporation proposed by Lim to expand his airline
business. They executed two (2) separate indemnity agreements (Exhibits D-1 and
D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim We first resolve G.R. No. 84197.
for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated
that the indemnitors principally agree and bind themselves jointly and severally to Petitioner Pioneer Insurance and Surety Corporation avers that:
indemnify and hold and save harmless Pioneer from and against any/all damages,
losses, costs, damages, taxes, penalties, charges and expenses of whatever kind RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN
and nature which Pioneer may incur in consequence of having become surety IT DISMISSED THE APPEAL OF PETITIONER ON THE SOLE
upon the bond/note and to pay, reimburse and make good to Pioneer, its GROUND THAT PETITIONER HAD ALREADY COLLECTED THE
successors and assigns, all sums and amounts of money which it or its PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF
representatives should or may pay or cause to be paid or become liable to pay on THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO
them of whatever kind and nature. RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS
AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197,
On June 10, 1965, Lim doing business under the name and style of SAL executed in p. 10)
favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship
in favor of the former. It was stipulated therein that Lim transfer and convey to the The petitioner questions the following findings of the appellate court:
surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office
of the Register of Deeds of the City of Manila and with the Civil Aeronautics
P a g e | 19

We find no merit in plaintiffs appeal. It is undisputed that plaintiff tantamount to unjust enrichment as it has already been paid by
Pioneer had reinsured its risk of liability under the surety bond in the reinsurance company of the amount plaintiff has paid to JDA
favor of JDA and subsequently collected the proceeds of such as surety of defendant Lim vis-a-vis defendant Lim's liability to
reinsurance in the sum of P295,000.00. Defendants' alleged JDA. Well settled is the rule that no person should unjustly enrich
obligation to Pioneer amounts to P295,000.00, hence, plaintiffs himself at the expense of another (Article 22, New Civil Code).
instant action for the recovery of the amount of P298,666.28 from (Rollo-84197, pp. 24-25).
defendants will no longer prosper. Plaintiff Pioneer is not the real
party in interest to institute the instant action as it does not stand The petitioner contends that-(1) it is at a loss where respondent court based its
to be benefited or injured by the judgment. finding that petitioner was paid by its reinsurer in the aforesaid amount, as this
matter has never been raised by any of the parties herein both in their answers in
Plaintiff Pioneer's contention that it is representing the reinsurer the court below and in their respective briefs with respondent court; (Rollo, p. 11)
to recover the amount from defendants, hence, it instituted the (2) even assuming hypothetically that it was paid by its reinsurer, still none of the
action is utterly devoid of merit. Plaintiff did not even present any respondents had any interest in the matter since the reinsurance is strictly
evidence that it is the attorney-in-fact of the reinsurance between the petitioner and the re-insurer pursuant to section 91 of the Insurance
company, authorized to institute an action for and in behalf of the Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to
latter. To qualify a person to be a real party in interest in whose recover from respondents Bormaheco and Maglana; and (4) the principle of unjust
name an action must be prosecuted, he must appear to be the enrichment is not applicable considering that whatever amount he would recover
present real owner of the right sought to be enforced (Moran, Vol. from the co-indemnitor will be paid to the reinsurer.
I, Comments on the Rules of Court, 1979 ed., p. 155). It has been
held that the real party in interest is the party who would be The records belie the petitioner's contention that the issue on the reinsurance
benefited or injured by the judgment or the party entitled to the money was never raised by the parties.
avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil.
125, 131). By real party in interest is meant a present substantial A cursory reading of the trial court's lengthy decision shows that two of the issues
interest as distinguished from a mere expectancy or a future, threshed out were:
contingent, subordinate or consequential interest (Garcia v.
David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d
1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. xxx xxx xxx
City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
1. Has Pioneer a cause of action against defendants with respect
Based on the foregoing premises, plaintiff Pioneer cannot be to so much of its obligations to JDA as has been paid with
considered as the real party in interest as it has already been paid reinsurance money?
by the reinsurer the sum of P295,000.00 — the bulk of
defendants' alleged obligation to Pioneer. 2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the
In addition to the said proceeds of the reinsurance received by amount it has realized from the sale of the mortgaged properties?
plaintiff Pioneer from its reinsurer, the former was able to (Record on Appeal, p. 359, Annex B of G.R. No. 84157).
foreclose extra-judicially one of the subject airplanes and its
spare engine, realizing the total amount of P37,050.00 from the In resolving these issues, the trial court made the following findings:
sale of the mortgaged chattels. Adding the sum of P37,050.00, to
the proceeds of the reinsurance amounting to P295,000.00, it is It appearing that Pioneer reinsured its risk of liability under the
patent that plaintiff has been overpaid in the amount of surety bond it had executed in favor of JDA, collected the
P33,383.72 considering that the total amount it had paid to JDA proceeds of such reinsurance in the sum of P295,000, and paid
totals to only P298,666.28. To allow plaintiff Pioneer to recover with the said amount the bulk of its alleged liability to JDA under
from defendants the amount in excess of P298,666.28 would be
P a g e | 20

the said surety bond, it is plain that on this score it no longer has agreement is still valid and effective. But since the amount
any right to collect to the extent of the said amount. realized from the sale of the mortgaged chattels are P35,000.00
for one of the airplanes and P2,050.00 for a spare engine, or a
On the question of why it is Pioneer, instead of the reinsurance total of P37,050.00, Pioneer is still overpaid by P33,383.72.
(sic), that is suing defendants for the amount paid to it by the Therefore, Pioneer has no more claim against defendants.
reinsurers, notwithstanding that the cause of action pertains to (Record on Appeal, pp. 360-363).
the latter, Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue alone the The payment to the petitioner made by the reinsurers was not disputed in the
case.. . . . Pioneer Insurance & Surety Corporation is representing appellate court. Considering this admitted payment, the only issue that cropped up
the reinsurers to recover the amount.' In other words, insofar as was the effect of payment made by the reinsurers to the petitioner. Therefore, the
the amount paid to it by the reinsurers Pioneer is suing petitioner's argument that the respondents had no interest in the reinsurance
defendants as their attorney-in-fact. contract as this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the Insurance Code has
But in the first place, there is not the slightest indication in the no basis.
complaint that Pioneer is suing as attorney-in- fact of the
reinsurers for any amount. Lastly, and most important of all, In general a reinsurer, on payment of a loss acquires the same
Pioneer has no right to institute and maintain in its own name an rights by subrogation as are acquired in similar cases where the
action for the benefit of the reinsurers. It is well-settled that an original insurer pays a loss (Universal Ins. Co. v. Old Time
action brought by an attorney-in-fact in his own name instead of Molasses Co. C.C.A. La., 46 F 2nd 925).
that of the principal will not prosper, and this is so even where
the name of the principal is disclosed in the complaint. The rules of practice in actions on original insurance policies are
in general applicable to actions or contracts of reinsurance.
Section 2 of Rule 3 of the Old Rules of Court (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126
provides that 'Every action must be prosecuted GA. 380, 7 Ann. Con. 1134).
in the name of the real party in interest.' This
provision is mandatory. The real party in Hence the applicable law is Article 2207 of the new Civil Code, to wit:
interest is the party who would be benefitted or
injured by the judgment or is the party entitled Art. 2207. If the plaintiffs property has been insured, and he has
to the avails of the suit. received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
This Court has held in various cases that an the insurance company shall be subrogated to the rights of the
attorney-in-fact is not a real party in interest, insured against the wrongdoer or the person who has violated
that there is no law permitting an action to be the contract. If the amount paid by the insurance company does
brought by an attorney-in-fact. Arroyo v. not fully cover the injury or loss, the aggrieved party shall be
Granada and Gentero, 18 Phil. Rep. 484; entitled to recover the deficiency from the person causing the
Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. loss or injury.
12; Filipinos Industrial Corporation v. San Diego
G.R. No. L- 22347,1968, 23 SCRA 706, 710-714. Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v.
Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied
The total amount paid by Pioneer to JDA is P299,666.29. Since in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650
Pioneer has collected P295,000.00 from the reinsurers, the [1987]):
uninsured portion of what it paid to JDA is the difference between
the two amounts, or P3,666.28. This is the amount for which Note that if a property is insured and the owner receives the
Pioneer may sue defendants, assuming that the indemnity indemnity from the insurer, it is provided in said article that the
P a g e | 21

insurer is deemed subrogated to the rights of the insured against The following is averred under oath by Pioneer in the original
the wrongdoer and if the amount paid by the insurer does not complaint:
fully cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the The various conflicting claims over the
real party in interest with regard to the portion of the indemnity mortgaged properties have impaired and
paid is the insurer and not the insured. (Emphasis supplied). rendered insufficient the security under the
chattel mortgage and there is thus no other
It is clear from the records that Pioneer sued in its own name and not as an sufficient security for the claim sought to be
attorney-in-fact of the reinsurer. enforced by this action.

Accordingly, the appellate court did not commit a reversible error in dismissing This is judicial admission and aside from the chattel mortgage
the petitioner's complaint as against the respondents for the reason that the there is no other security for the claim sought to be enforced by
petitioner was not the real party in interest in the complaint and, therefore, has no this action, which necessarily means that the indemnity
cause of action against the respondents. agreement had ceased to have any force and effect at the time this
action was instituted. Sec 2, Rule 129, Revised Rules of Court.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the evidence on Prescinding from the foregoing, Pioneer, having foreclosed the
record shows that it is entitled to recover from the counter indemnitors. It does chattel mortgage on the planes and spare parts, no longer has any
not, however, cite any grounds except its allegation that respondent "Maglanas further action against the defendants as indemnitors to recover
defense and evidence are certainly incredible" (p. 12, Rollo) to back up its any unpaid balance of the price. The indemnity agreement was
contention. ipso jure extinguished upon the foreclosure of the chattel
mortgage. These defendants, as indemnitors, would be entitled to
On the other hand, we find the trial court's findings on the matter replete with be subrogated to the right of Pioneer should they make payments
evidence to substantiate its finding that the counter-indemnitors are not liable to to the latter. Articles 2067 and 2080 of the New Civil Code of the
the petitioner. The trial court stated: Philippines.

Apart from the foregoing proposition, the indemnity agreement Independently of the preceding proposition Pioneer's election of
ceased to be valid and effective after the execution of the chattel the remedy of foreclosure precludes any further action to recover
mortgage. any unpaid balance of the price.

Testimonies of defendants Francisco Cervantes and Modesto SAL or Lim, having failed to pay the second to the eight and last
Cervantes. installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were
Pioneer Insurance, knowing the value of the aircrafts and the as provided in Article 1484 of the New Civil Code, known as the
spare parts involved, agreed to issue the bond provided that the Recto Law.
same would be mortgaged to it, but this was not possible because
the planes were still in Japan and could not be mortgaged here in Pioneer exercised the remedy of foreclosure of the chattel
the Philippines. As soon as the aircrafts were brought to the mortgage both by extrajudicial foreclosure and the instant suit.
Philippines, they would be mortgaged to Pioneer Insurance to Such being the case, as provided by the aforementioned
cover the bond, and this indemnity agreement would be provisions, Pioneer shall have no further action against the
cancelled. purchaser to recover any unpaid balance and any agreement to
the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance
Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.
P a g e | 22

The operation of the foregoing provision cannot be escaped from much less, would have it believed that these defendants Maglana
through the contention that Pioneer is not the vendor but JDA. (sic). Pioneer's official Numeriano Carbonel would have it
The reason is that Pioneer is actually exercising the rights of JDA believed that these defendants and defendant Maglana knew of
as vendor, having subrogated it in such rights. Nor may the and consented to the modification of the obligations. But if that
application of the provision be validly opposed on the ground were so, there would have been the corresponding documents in
that these defendants and defendant Maglana are not the vendee the form of a written notice to as well as written conformity of
but indemnitors. Pascual, et al. v. Universal Motors Corporation, these defendants, and there are no such document. The
G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124. consequence of this was the extinguishment of the obligations
and of the surety bond secured by the indemnity agreement
The restructuring of the obligations of SAL or Lim, thru the which was thereby also extinguished. Applicable by analogy are
change of their maturity dates discharged these defendants from the rulings of the Supreme Court in the case of Kabankalan Sugar
any liability as alleged indemnitors. The change of the maturity Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic
dates of the obligations of Lim, or SAL extinguish the original Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
obligations thru novations thus discharging the indemnitors.
Art. 2079. An extension granted to the debtor by
The principal hereof shall be paid in eight equal the creditor without the consent of the
successive three months interval installments, guarantor extinguishes the guaranty The mere
the first of which shall be due and payable 25 failure on the part of the creditor to demand
August 1965, the remainder of which ... shall be payment after the debt has become due does not
due and payable on the 26th day x x x of each of itself constitute any extension time referred to
succeeding three months and the last of which herein, (New Civil Code).'
shall be due and payable 26th May 1967.
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
However, at the trial of this case, Pioneer produced a Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
memorandum executed by SAL or Lim and JDA, modifying the
maturity dates of the obligations, as follows: Pioneer's liability as surety to JDA had already prescribed when
Pioneer paid the same. Consequently, Pioneer has no more cause
The principal hereof shall be paid in eight equal of action to recover from these defendants, as supposed
successive three month interval installments the indemnitors, what it has paid to JDA. By virtue of an express
first of which shall be due and payable 4 stipulation in the surety bond, the failure of JDA to present its
September 1965, the remainder of which ... shall claim to Pioneer within ten days from default of Lim or SAL on
be due and payable on the 4th day ... of each every installment, released Pioneer from liability from the claim.
succeeding months and the last of which shall be
due and payable 4th June 1967. Therefore, Pioneer is not entitled to exact reimbursement from
these defendants thru the indemnity.
Not only that, Pioneer also produced eight purported promissory
notes bearing maturity dates different from that fixed in the Art. 1318. Payment by a solidary debtor shall not
aforesaid memorandum; the due date of the first installment entitle him to reimbursement from his co-
appears as October 15, 1965, and those of the rest of the debtors if such payment is made after the
installments, the 15th of each succeeding three months, that of obligation has prescribed or became illegal.
the last installment being July 15, 1967.
These defendants are entitled to recover damages and attorney's
These restructuring of the obligations with regard to their fees from Pioneer and its surety by reason of the filing of the
maturity dates, effected twice, were done without the knowledge, instant case against them and the attachment and garnishment of
P a g e | 23

their properties. The instant action is clearly unfounded insofar We first state the principles.
as plaintiff drags these defendants and defendant Maglana.'
(Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157). While it has been held that as between themselves the rights of
the stockholders in a defectively incorporated association should
We find no cogent reason to reverse or modify these findings. be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Cannon
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious. v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a
We now discuss the merits of G.R. No. 84157. corporation and who carry on business under the corporate
name occupy the position of partners inter se (Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus,
Petitioner Jacob S. Lim poses the following issues: where persons associate themselves together under articles to
purchase property to carry on a business, and their organization
l. What legal rules govern the relationship among co-investors is so defective as to come short of creating a corporation within
whose agreement was to do business through the corporate the statute, they become in legal effect partners inter se, and their
vehicle but who failed to incorporate the entity in which they had rights as members of the company to the property acquired by
chosen to invest? How are the losses to be treated in situations the company will be recognized (Smith v. Schoodoc Pond Packing
where their contributions to the intended 'corporation' were Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So,
invested not through the corporate form? This Petition presents where certain persons associated themselves as a corporation for
these fundamental questions which we believe were resolved the development of land for irrigation purposes, and each
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6). conveyed land to the corporation, and two of them contracted to
pay a third the difference in the proportionate value of the land
These questions are premised on the petitioner's theory that as a result of the conveyed by him, and no stock was ever issued in the
failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and corporation, it was treated as a trustee for the associates in an
petitioner Lim to incorporate, a de facto partnership among them was created, and action between them for an accounting, and its capital stock was
that as a consequence of such relationship all must share in the losses and/or treated as partnership assets, sold, and the proceeds distributed
gains of the venture in proportion to their contribution. The petitioner, therefore, among them in proportion to the value of the property
questions the appellate court's findings ordering him to reimburse certain contributed by each (Shorb v. Beaudry, 56 Cal. 446). However,
amounts given by the respondents to the petitioner as their contributions to the such a relation does not necessarily exist, for ordinarily persons
intended corporation, to wit: cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall
However, defendant Lim should be held liable to pay his co- exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S.
defendants' cross-claims in the total amount of P184,878.74 as 461, 472, 29 L.Ed. 688), and it should be implied only when
correctly found by the trial court, with interest from the filing of necessary to do justice between the parties; thus, one who takes no
the cross-complaints until the amount is fully paid. Defendant part except to subscribe for stock in a proposed corporation which
Lim should pay one-half of the said amount to Bormaheco and the is never legally formed does not become a partner with other
Cervanteses and the other one-half to defendant Maglana. It is subscribers who engage in business under the name of the
established in the records that defendant Lim had duly received pretended corporation, so as to be liable as such in an action for
the amount of Pl51,000.00 from defendants Bormaheco and settlement of the alleged partnership and contribution (Ward v.
Maglana representing the latter's participation in the ownership Brigham, 127 Mass. 24). A partnership relation between certain
of the subject airplanes and spare parts (Exhibit 58). In addition, stockholders and other stockholders, who were also directors,
the cross-party plaintiffs incurred additional expenses, hence, the will not be implied in the absence of an agreement, so as to make
total sum of P 184,878.74. the former liable to contribute for payment of debts illegally
contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa
23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).
P a g e | 24

In the instant case, it is to be noted that the petitioner was declared non-suited for personal capacity as the alleged proprietor of the SAL. The
his failure to appear during the pretrial despite notification. In his answer, the answering defendants learned for the first time of this trickery
petitioner denied having received any amount from respondents Bormaheco, the and misrepresentation of the other, Jacob Lim, when the herein
Cervanteses and Maglana. The trial court and the appellate court, however, found plaintiff chattel mortgage (sic) allegedly executed by defendant
through Exhibit 58, that the petitioner received the amount of P151,000.00 Lim, thereby forcing them to file an adverse claim in the form of
representing the participation of Bormaheco and Atty. Constancio B. Maglana in third party claim. Notwithstanding repeated oral demands made
the ownership of the subject airplanes and spare parts. The record shows that by defendants Bormaheco and Cervanteses, to defendant Lim, to
defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses. surrender the possession of the two planes and their accessories
and or return the amount advanced by the former amounting to
It is therefore clear that the petitioner never had the intention to form a an aggregate sum of P 178,997.14 as evidenced by a statement of
corporation with the respondents despite his representations to them. This gives accounts, the latter ignored, omitted and refused to comply with
credence to the cross-claims of the respondents to the effect that they were them. (Record on Appeal, pp. 341-342).
induced and lured by the petitioner to make contributions to a proposed
corporation which was never formed because the petitioner reneged on their Applying therefore the principles of law earlier cited to the facts of the case,
agreement. Maglana alleged in his cross-claim: necessarily, no de facto partnership was created among the parties which would
entitle the petitioner to a reimbursement of the supposed losses of the proposed
... that sometime in early 1965, Jacob Lim proposed to Francisco corporation. The record shows that the petitioner was acting on his own and not
Cervantes and Maglana to expand his airline business. Lim was to in behalf of his other would-be incorporators in transacting the sale of the
procure two DC-3's from Japan and secure the necessary airplanes and spare parts.
certificates of public convenience and necessity as well as the
required permits for the operation thereof. Maglana sometime in WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
May 1965, gave Cervantes his share of P75,000.00 for delivery to Court of Appeals is AFFIRMED.
Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in SO ORDERED.
an undertaking sometime on or about August 9,1965, promised
to incorporate his airline in accordance with their agreement and Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
proceeded to acquire the planes on his own account. Since then
up to the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of Maglana. Feliciano, J., took no part.
(Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer,


counterclaim, cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the


answering defendants to purchase two airplanes and spare parts
from Japan which the latter considered as their lawful
contribution and participation in the proposed corporation to be
known as SAL. Arrangements and negotiations were undertaken
by defendant Lim. Down payments were advanced by defendants
Bormaheco and the Cervanteses and Constancio Maglana (Exh. E-
1). Contrary to the agreement among the defendants, defendant
Lim in connivance with the plaintiff, signed and executed the
alleged chattel mortgage and surety bond agreement in his
P a g e | 25

Republic of the Philippines statements which include the Balance Sheet, the Income Statement and the
SUPREME COURT Statement of Cash Flows present fairly its financial position and results of
Manila operations.

EN BANC xxxx

G.R. No. 177131 June 7, 2011 BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the Boy
Scouts of the Philippines shall be classified among the government corporations
BOY SCOUTS OF THE PHILIPPINES, Petitioner, belonging to the Educational, Social, Scientific, Civic and Research Sector under the
vs. Corporate Audit Office I, to be audited, similar to the subsidiary corporations, by
COMMISSION ON AUDIT, Respondent. employing the team audit approach.8 (Emphases supplied.)

DECISION The BSP sought reconsideration of the COA Resolution in a letter9 dated November
26, 1999 signed by the BSP National President Jejomar C. Binay, who is now the
LEONARDO-DE CASTRO, J.: Vice President of the Republic, wherein he wrote:

The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the It is the position of the BSP, with all due respect, that it is not subject to the
Philippines (BSP) is the subject matter of this controversy that reached us via Commission’s jurisdiction on the following grounds:
petition for prohibition1 filed by the BSP under Rule 65 of the 1997 Rules of Court.
In this petition, the BSP seeks that the COA be prohibited from implementing its 1. We reckon that the ruling in the case of Boy Scouts of the Philippines vs.
June 18, 2002 Decision,2 its February 21, 2007 Resolution,3 as well as all other National Labor Relations Commission, et al. (G.R. No. 80767) classifying
issuances arising therefrom, and that all of the foregoing be rendered null and the BSP as a government-controlled corporation is anchored on the
void. 4 "substantial Government participation" in the National Executive Board of
the BSP. It is to be noted that the case was decided when the BSP Charter
Antecedent Facts and Background of the Case is defined by Commonwealth Act No. 111 as amended by Presidential
Decree 460.
This case arose when the COA issued Resolution No. 99-0115 on August 19, 1999
("the COA Resolution"), with the subject "Defining the Commission’s policy with However, may we humbly refer you to Republic Act No. 7278 which amended the
respect to the audit of the Boy Scouts of the Philippines." In its whereas clauses, BSP’s charter after the cited case was decided. The most salient of all amendments
the COA Resolution stated that the BSP was created as a public corporation under in RA No. 7278 is the alteration of the composition of the National Executive Board
Commonwealth Act No. 111, as amended by Presidential Decree No. 460 and of the BSP.
Republic Act No. 7278; that in Boy Scouts of the Philippines v. National Labor
Relations Commission,6 the Supreme Court ruled that the BSP, as constituted The said RA virtually eliminated the "substantial government participation" in the
under its charter, was a "government-controlled corporation within the meaning National Executive Board by removing: (i) the President of the Philippines and
of Article IX(B)(2)(1) of the Constitution"; and that "the BSP is appropriately executive secretaries, with the exception of the Secretary of Education, as
regarded as a government instrumentality under the 1987 Administrative members thereof; and (ii) the appointment and confirmation power of the
Code."7 The COA Resolution also cited its constitutional mandate under Section President of the Philippines, as Chief Scout, over the members of the said Board.
2(1), Article IX (D). Finally, the COA Resolution reads:
The BSP believes that the cited case has been superseded by RA 7278. Thereby
NOW THEREFORE, in consideration of the foregoing premises, the COMMISSION weakening the case’s conclusion that the BSP is a government-controlled
PROPER HAS RESOLVED, AS IT DOES HEREBY RESOLVE, to conduct an annual corporation (sic). The 1987 Administrative Code itself, of which the BSP vs. NLRC
financial audit of the Boy Scouts of the Philippines in accordance with generally relied on for some terms, defines government-owned and controlled corporations
accepted auditing standards, and express an opinion on whether the financial
P a g e | 26

as agencies organized as stock or non-stock corporations which the BSP, under its Counsel. In said Memorandum, the COA General Counsel opined that Republic Act
present charter, is not. No. 7278 did not supersede the Court’s ruling in Boy Scouts of the Philippines v.
National Labor Relations Commission, even though said law eliminated the
Also, the Government, like in other GOCCs, does not have funds invested in the substantial government participation in the selection of members of the National
BSP. What RA 7278 only provides is that the Government or any of its Executive Board of the BSP. The Memorandum further provides:
subdivisions, branches, offices, agencies and instrumentalities can from time to
time donate and contribute funds to the BSP. Analysis of the said case disclosed that the substantial government participation is
only one (1) of the three (3) grounds relied upon by the Court in the resolution of
xxxx the case. Other considerations include the character of the BSP’s purposes and
functions which has a public aspect and the statutory designation of the BSP as a
Also the BSP respectfully believes that the BSP is not "appropriately regarded as a "public corporation". These grounds have not been deleted by R.A. No. 7278. On
government instrumentality under the 1987 Administrative Code" as stated in the the contrary, these were strengthened as evidenced by the amendment made
COA resolution. As defined by Section 2(10) of the said code, instrumentality relative to BSP’s purposes stated in Section 3 of R.A. No. 7278.
refers to "any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, On the argument that BSP is not appropriately regarded as "a government
endowed with some if not all corporate powers, administering special funds, and instrumentality" and "agency" of the government, such has already been answered
enjoying operational autonomy, usually through a charter." and clarified. The Supreme Court has elucidated this matter in the BSP case when
it declared that BSP is regarded as, both a "government-controlled corporation
The BSP is not an entity administering special funds. It is not even included in the with an original charter" and as an "instrumentality" of the Government. Likewise,
DECS National Budget. x x x it is not disputed that the Administrative Code of 1987 designated the BSP as one
of the attached agencies of DECS. Being an attached agency, however, it does not
change its nature as a government-controlled corporation with original charter
It may be argued also that the BSP is not an "agency" of the Government. The 1987 and, necessarily, subject to COA audit jurisdiction. Besides, Section 2(1), Article IX-
Administrative Code, merely referred the BSP as an "attached agency" of the DECS D of the Constitution provides that COA shall have the power, authority, and duty
as distinguished from an actual line agency of departments that are included in the to examine, audit and settle all accounts pertaining to the revenue and receipts of,
National Budget. The BSP believes that an "attached agency" is different from an and expenditures or uses of funds and property, owned or held in trust by, or
"agency." Agency, as defined in Section 2(4) of the Administrative Code, is defined pertaining to, the Government, or any of its subdivisions, agencies or
as any of the various units of the Government including a department, bureau, instrumentalities, including government-owned or controlled corporations with
office, instrumentality, government-owned or controlled corporation or local original charters.14
government or distinct unit therein.
Based on the Memorandum of the COA General Counsel, Director Sunico wrote:
Under the above definition, the BSP is neither a unit of the Government; a
department which refers to an executive department as created by law (Section
2[7] of the Administrative Code); nor a bureau which refers to any principal In view of the points clarified by said Memorandum upholding COA Resolution No.
subdivision or unit of any department (Section 2[8], Administrative Code).10 99-011, we have to comply with the provisions of the latter, among which is to
conduct an annual financial audit of the Boy Scouts of the Philippines.15
Subsequently, requests for reconsideration of the COA Resolution were also made
separately by Robert P. Valdellon, Regional Scout Director, Western Visayas In a letter dated November 20, 2000 signed by Director Amorsonia B. Escarda,
Region, Iloilo City and Eugenio F. Capreso, Council Scout Executive of Calbayog CAO I, the COA informed the BSP that a preliminary survey of its organizational
City.11 structure, operations and accounting system/records shall be conducted on
November 21 to 22, 2000.16
In a letter12 dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit
Officer (CAO) I of the COA, furnished the BSP with a copy of the Upon the BSP’s request, the audit was deferred for thirty (30) days. The BSP then
Memorandum13 dated June 20, 2000 of Atty. Santos M. Alquizalas, the COA General filed a Petition for Review with Prayer for Preliminary Injunction and/or
Temporary Restraining Order before the COA. This was denied by the COA in its
P a g e | 27

questioned Decision, which held that the BSP is under its audit jurisdiction. The government participation restricted to the seat of the Secretary of Education,
BSP moved for reconsideration but this was likewise denied under its questioned Culture and Sports."21 It cites Philippine Airlines Inc. v. Commission on
Resolution.17 Audit22 wherein the Court declared that, "PAL, having ceased to be a government-
owned or controlled corporation is no longer under the audit jurisdiction of the
This led to the filing by the BSP of this petition for prohibition with preliminary COA."23 Claiming that the amendments introduced by Republic Act No. 7278
injunction and temporary restraining order against the COA. constituted a supervening event that changed the BSP’s corporate identity in the
same way that the government’s privatization program changed PAL’s, the BSP
The Issue makes the case that the government no longer has control over it; thus, the COA
cannot use the Boy Scouts of the Philippines v. National Labor Relations
Commission as its basis for the exercise of its jurisdiction and the issuance of COA
As stated earlier, the sole issue to be resolved in this case is whether the BSP falls Resolution No. 99-011.24 The BSP further claims as follows:
under the COA’s audit jurisdiction.
It is not far-fetched, in fact, to concede that BSP’s funds and assets are private in
The Parties’ Respective Arguments character. Unlike ordinary public corporations, such as provinces, cities, and
municipalities, or government-owned and controlled corporations, such as Land
The BSP contends that Boy Scouts of the Philippines v. National Labor Relations Bank of the Philippines and the Development Bank of the Philippines, the assets
Commission is inapplicable for purposes of determining the audit jurisdiction of and funds of BSP are not derived from any government grant. For its operations,
the COA as the issue therein was the jurisdiction of the National Labor Relations BSP is not dependent in any way on any government appropriation; as a matter of
Commission over a case for illegal dismissal and unfair labor practice filed by fact, it has not even been included in any appropriations for the government. To be
certain BSP employees.18 sure, COA has not alleged, in its Resolution No. 99-011 or in the Memorandum of
its General Counsel, that BSP received, receives or continues to receive assets and
While the BSP concedes that its functions do relate to those that the government funds from any agency of the government. The foregoing simply point to the
might otherwise completely assume on its own, it avers that this alone was not private nature of the funds and assets of petitioner BSP.
determinative of the COA’s audit jurisdiction over it. The BSP further avers that
the Court in Boy Scouts of the Philippines v. National Labor Relations Commission xxxx
"simply stated x x x that in respect of functions, the BSP is akin to a public
corporation" but this was not synonymous to holding that the BSP is a government As stated in petitioner’s third argument, BSP’s assets and funds were never
corporation or entity subject to audit by the COA. 19 acquired from the government. Its operations are not in any way financed by the
government, as BSP has never been included in any appropriations act for the
The BSP contends that Republic Act No. 7278 introduced crucial amendments to government. Neither has the government invested funds with BSP. BSP, has not
its charter; hence, the findings of the Court in Boy Scouts of the Philippines v. been, at any time, a user of government property or funds; nor have properties of
National Labor Relations Commission are no longer valid as the government has the government been held in trust by BSP. This is precisely the reason why, until
ceased to play a controlling influence in it. The BSP claims that the this time, the COA has not attempted to subject BSP to its audit jurisdiction. x x x.25
pronouncements of the Court therein must be taken only within the context of that
case; that the Court had categorically found that its assets were acquired from the To summarize its other arguments, the BSP contends that it is not a government-
Boy Scouts of America and not from the Philippine government, and that its owned or controlled corporation; neither is it an instrumentality, agency, or
operations are financed chiefly from membership dues of the Boy Scouts subdivision of the government.
themselves as well as from property rentals; and that "the BSP may correctly be
characterized as non-governmental, and hence, beyond the audit jurisdiction of
the COA." It further claims that the designation by the Court of the BSP as a In its Comment,26 the COA argues as follows:
government agency or instrumentality is mere obiter dictum.20
1. The BSP is a public corporation created under Commonwealth Act No.
The BSP maintains that the provisions of Republic Act No. 7278 suggest that 111 dated October 31, 1936, and whose functions relate to the fostering of
"governance of BSP has come to be overwhelmingly a private affair or nature, with public virtues of citizenship and patriotism and the general improvement
of the moral spirit and fiber of the youth. The manner of creation and the
P a g e | 28

purpose for which the BSP was created indubitably prove that it is a xxxx
government agency.
Petitioner claims that its funds are not public funds because no budgetary
2. Being a government agency, the funds and property owned or held in appropriations or government funds have been released to the VFP directly or
trust by the BSP are subject to the audit authority of respondent indirectly from the DBM, and because VFP funds come from membership dues and
Commission on Audit pursuant to Section 2 (1), Article IX-D of the 1987 lease rentals earned from administering government lands reserved for the VFP.
Constitution.
The fact that no budgetary appropriations have been released to the VFP does not
3. Republic Act No. 7278 did not change the character of the BSP as a prove that it is a private corporation. The DBM indeed did not see it fit to propose
government-owned or controlled corporation and government budgetary appropriations to the VFP, having itself believed that the VFP is a
instrumentality.27 private corporation. If the DBM, however, is mistaken as to its conclusion
regarding the nature of VFP's incorporation, its previous assertions will not
The COA maintains that the functions of the BSP that include, among others, the prevent future budgetary appropriations to the VFP. The erroneous application of
teaching to the youth of patriotism, courage, self-reliance, and kindred virtues, are the law by public officers does not bar a subsequent correct application of the
undeniably sovereign functions enshrined under the Constitution and discussed law.31(Citations omitted.)
by the Court in Boy Scouts of the Philippines v. National Labor Relations
Commission. The COA contends that any attempt to classify the BSP as a private The COA points out that the government is not precluded by law from extending
corporation would be incomprehensible since no less than the law which created financial support to the BSP and adding to its funds, and that "as a government
it had designated it as a public corporation and its statutory mandate embraces instrumentality which continues to perform a vital function imbued with public
performance of sovereign functions.28 interest and reflective of the government’s policy to stimulate patriotic sentiments
and love of country, the BSP’s funds from whatever source are public funds, and
The COA claims that the only reason why the BSP employees fell within the scope can be used solely for public purpose in pursuance of the provisions of Republic
of the Civil Service Commission even before the 1987 Constitution was the fact Act No. [7278]."32
that it was a government-owned or controlled corporation; that as an attached
agency of the Department of Education, Culture and Sports (DECS), the BSP is an The COA claims that the fact that it has not yet audited the BSP’s funds may not bar
agency of the government; and that the BSP is a chartered institution under the subsequent exercise of its audit jurisdiction.
Section 1(12) of the Revised Administrative Code of 1987, embraced under the
term government instrumentality.29 The BSP filed its Reply33 on August 29, 2007 maintaining that its statutory
designation as a "public corporation" and the public character of its purpose and
The COA concludes that being a government agency, the funds and property functions are not determinative of the COA’s audit jurisdiction; reiterating its
owned or held by the BSP are subject to the audit authority of the COA pursuant to stand that Boy Scouts of the Philippines v. National Labor Relations Commission is
Section 2(1), Article IX (D) of the 1987 Constitution. not applicable anymore because the aspect of government ownership and control
has been removed by Republic Act No. 7278; and concluding that the funds and
In support of its arguments, the COA cites The Veterans Federation of the property that it either owned or held in trust are not public funds and are not
Philippines (VFP) v. Reyes,30 wherein the Court held that among the reasons why subject to the COA’s audit jurisdiction.
the VFP is a public corporation is that its charter, Republic Act No. 2640,
designates it as one. Furthermore, the COA quotes the Court as saying in that case: Thereafter, considering the BSP’s claim that it is a private corporation, this Court,
in a Resolution34 dated July 20, 2010, required the parties to file, within a period of
In several cases, we have dealt with the issue of whether certain specific activities twenty (20) days from receipt of said Resolution, their respective comments on
can be classified as sovereign functions. These cases, which deal with activities not the issue of whether Commonwealth Act No. 111, as amended by Republic Act No.
immediately apparent to be sovereign functions, upheld the public sovereign 7278, is constitutional.
nature of operations needed either to promote social justice or to stimulate
patriotic sentiments and love of country. In compliance with the Court’s resolution, the parties filed their respective
Comments.
P a g e | 29

In its Comment35 dated October 22, 2010, the COA argues that the constitutionality The BSP reiterates its stand that the public character of its purpose and functions
of Commonwealth Act No. 111, as amended, is not determinative of the resolution do not place it within the ambit of the audit jurisdiction of the COA as it lacks the
of the present controversy on the COA’s audit jurisdiction over petitioner, and in government ownership or control that the Constitution requires before an entity
fact, the controversy may be resolved on other grounds; thus, the requisites before may be subject of said jurisdiction.45 It avers that it merely stated in its Reply that
a judicial inquiry may be made, as set forth in Commissioner of Internal Revenue v. the withdrawal of government control is akin to privatization, but it does not
Court of Tax Appeals,36 have not been fully met.37 Moreover, the COA maintains necessarily mean that petitioner is a private corporation.46The BSP claims that it
that behind every law lies the presumption of constitutionality.38 The COA likewise has a unique characteristic which "neither classifies it as a purely public nor a
argues that contrary to the BSP’s position, repeal of a law by implication is not purely private corporation";47 that it is not a quasi-public corporation; and that it
favored.39 Lastly, the COA claims that there was no violation of Section 16, Article may belong to a different class altogether.48
XII of the 1987 Constitution with the creation or declaration of the BSP as a
government corporation. Citing Philippine Society for the Prevention of Cruelty to The BSP claims that assuming arguendo that it is a private corporation, its creation
Animals v. Commission on Audit,40 the COA further alleges: is not contrary to the purpose of Section 16, Article XII of the Constitution; and
that the evil sought to be avoided by said provision is inexistent in the enactment
The true criterion, therefore, to determine whether a corporation is public or of the BSP’s charter,49 as, (i) it was not created for any pecuniary purpose; (ii)
private is found in the totality of the relation of the corporation to the State. If the those who will primarily benefit from its creation are not its officers but its entire
corporation is created by the State as the latter’s own agency or instrumentality to membership consisting of boys being trained in scoutcraft all over the country;
help it in carrying out its governmental functions, then that corporation is (iii) it caters to all boys who wish to join the organization without any distinction;
considered public; otherwise, it is private. x x x.41 and (iv) it does not limit its membership to a particular class or group of boys.
Thus, the enactment of its charter confers no special privilege to particular
For its part, in its Comment42 filed on December 3, 2010, the BSP submits that its individuals, families, or groups; nor does it bring about the danger of granting
charter, Commonwealth Act No. 111, as amended by Republic Act No. 7278, is undue favors to certain groups to the prejudice of others or of the interest of the
constitutional as it does not violate Section 16, Article XII of the Constitution. The country, which are the evils sought to be prevented by the constitutional provision
BSP alleges that "while [it] is not a public corporation within the purview of COA’s involved.50
audit jurisdiction, neither is it a private corporation created by special law falling
within the ambit of the constitutional prohibition x x x."43 The BSP further alleges: Finally, the BSP states that the presumption of constitutionality of a legislative
enactment prevails absent any clear showing of its repugnancy to the
Petitioner’s purpose is embodied in Section 3 of C.A. No. 111, as amended by Constitution.51
Section 1 of R.A. No. 7278, thus:
The Ruling of the Court
xxxx
After looking at the legislative history of its amended charter and carefully
A reading of the foregoing provision shows that petitioner was created to advance studying the applicable laws and the arguments of both parties, we find that the
the interest of the youth, specifically of young boys, and to mold them into BSP is a public corporation and its funds are subject to the COA’s audit jurisdiction.
becoming good citizens. Ultimately, the creation of petitioner redounds to the
benefit, not only of those boys, but of the public good or welfare. Hence, it can be The BSP Charter (Commonwealth Act No. 111, approved on October 31, 1936),
said that petitioner’s purpose and functions are more of a public rather than a entitled "An Act to Create a Public Corporation to be Known as the Boy Scouts of
private character. Petitioner caters to all boys who wish to join the organization the Philippines, and to Define its Powers and Purposes" created the BSP as a
without any distinction. It does not limit its membership to a particular class of "public corporation" to serve the following public interest or purpose:
boys. Petitioner’s members are trained in scoutcraft and taught patriotism, civic
consciousness and responsibility, courage, self-reliance, discipline and kindred Sec. 3. The purpose of this corporation shall be to promote through organization
virtues, and moral values, preparing them to become model citizens and and cooperation with other agencies, the ability of boys to do useful things for
outstanding leaders of the country.44 themselves and others, to train them in scoutcraft, and to inculcate in them
patriotism, civic consciousness and responsibility, courage, self-reliance, discipline
P a g e | 30

and kindred virtues, and moral values, using the method which are in common use such real and personal estate, land grants, rights and choses in action as shall be
by boy scouts. necessary for corporate purposes, and to accept and receive funds, real and
personal property by gift, devise, bequest or other means, to conduct fund-raising
Presidential Decree No. 460, approved on May 17, 1974, amended Commonwealth activities; to adopt and use a seal, and the same to alter and destroy; to have
Act No. 111 and provided substantial changes in the BSP organizational structure. offices and conduct its business and affairs in Metropolitan Manila and in the
Pertinent provisions are quoted below: regions, provinces, cities, municipalities, and barangays of the Philippines, to make
and adopt by-laws, rules and regulations not inconsistent with this Act and the
Section II. Section 5 of the said Act is also amended to read as follows: laws of the Philippines, and generally to do all such acts and things, including the
establishment of regulations for the election of associates and successors, as may
be necessary to carry into effect the provisions of this Act and promote the
The governing body of the said corporation shall consist of a National Executive purposes of said corporation: Provided, That said corporation shall have no power
Board composed of (a) the President of the Philippines or his representative; (b) to issue certificates of stock or to declare or pay dividends, its objectives and
the charter and life members of the Boy Scouts of the Philippines; (c) the Chairman purposes being solely of benevolent character and not for pecuniary profit of its
of the Board of Trustees of the Philippine Scouting Foundation; (d) the Regional members.
Chairman of the Scout Regions of the Philippines; (e) the Secretary of Education
and Culture, the Secretary of Social Welfare, the Secretary of National Defense, the
Secretary of Labor, the Secretary of Finance, the Secretary of Youth and Sports, "Sec. 3. The purpose of this corporation shall be to promote through organization
and the Secretary of Local Government and Community Development; (f) an equal and cooperation with other agencies, the ability of boys to do useful things for
number of individuals from the private sector; (g) the National President of the themselves and others, to train them in scoutcraft, and to inculcate in them
Girl Scouts of the Philippines; (h) one Scout of Senior age from each Scout Region patriotism, civic consciousness and responsibility, courage, self-reliance, discipline
to represent the boy membership; and (i) three representatives of the cultural and kindred virtues, and moral values, using the method which are in common use
minorities. Except for the Regional Chairman who shall be elected by the Regional by boy scouts."
Scout Councils during their annual meetings, and the Scouts of their respective
regions, all members of the National Executive Board shall be either by Sec. 2. Section 4 of Commonwealth Act No. 111, as amended, is hereby repealed
appointment or cooption, subject to ratification and confirmation by the Chief and in lieu thereof, Section 4 shall read as follows:
Scout, who shall be the Head of State. Vacancies in the Executive Board shall be
filled by a majority vote of the remaining members, subject to ratification and "Sec. 4. The President of the Philippines shall be the Chief Scout of the Boy Scouts
confirmation by the Chief Scout. The by-laws may prescribe the number of of the Philippines."
members of the National Executive Board necessary to constitute a quorum of the
board, which number may be less than a majority of the whole number of the Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No. 111, as amended, are
board. The National Executive Board shall have power to make and to amend the hereby amended to read as follows:
by-laws, and, by a two-thirds vote of the whole board at a meeting called for this
purpose, may authorize and cause to be executed mortgages and liens upon the "Sec. 5. The governing body of the said corporation shall consist of a National
property of the corporation. Executive Board, the members of which shall be Filipino citizens of good moral
character. The Board shall be composed of the following:
Subsequently, on March 24, 1992, Republic Act No. 7278 further amended
Commonwealth Act No. 111 "by strengthening the volunteer and democratic "(a) One (1) charter member of the Boy Scouts of the Philippines who
character" of the BSP and reducing government representation in its governing shall be elected by the members of the National Council at its meeting
body, as follows: called for this purpose;

Section 1. Sections 2 and 3 of Commonwealth Act. No. 111, as amended, is hereby "(b) The regional chairmen of the scout regions who shall be elected by
amended to read as follows: the representatives of all the local scout councils of the region during its
meeting called for this purpose: Provided, That a candidate for regional
"Sec. 2. The said corporation shall have the powers of perpetual succession, to sue chairman need not be the chairman of a local scout council;
and be sued; to enter into contracts; to acquire, own, lease, convey and dispose of
P a g e | 31

"(c) The Secretary of Education, Culture and Sports; (3) Corporations, partnerships and associations for private interest or
purpose to which the law grants a juridical personality, separate and
"(d) The National President of the Girl Scouts of the Philippines; distinct from that of each shareholder, partner or member. (Emphases
supplied.)
"(e) One (1) senior scout, each from Luzon, Visayas and Mindanao areas,
to be elected by the senior scout delegates of the local scout councils to The BSP, which is a corporation created for a public interest or purpose, is subject
the scout youth forums in their respective areas, in its meeting called for to the law creating it under Article 45 of the Civil Code, which provides:
this purpose, to represent the boy scout membership;
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article
"(f) Twelve (12) regular members to be elected by the members of the are governed by the laws creating or recognizing them.
National Council in its meeting called for this purpose;
Private corporations are regulated by laws of general application on the subject.
"(g) At least ten (10) but not more than fifteen (15) additional members
from the private sector who shall be elected by the members of the Partnerships and associations for private interest or purpose are governed by the
National Executive Board referred to in the immediately preceding provisions of this Code concerning partnerships. (Emphasis and underscoring
paragraphs (a), (b), (c), (d), (e) and (f) at the organizational meeting of the supplied.)
newly reconstituted National Executive Board which shall be held
immediately after the meeting of the National Council wherein the twelve The purpose of the BSP as stated in its amended charter shows that it was created
(12) regular members and the one (1) charter member were elected. in order to implement a State policy declared in Article II, Section 13 of the
Constitution, which reads:
xxxx
ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES
"Sec. 8. Any donation or contribution which from time to time may be made to the
Boy Scouts of the Philippines by the Government or any of its subdivisions, Section 13. The State recognizes the vital role of the youth in nation-building and
branches, offices, agencies or instrumentalities or by a foreign government or by shall promote and protect their physical, moral, spiritual, intellectual, and social
private, entities and individuals shall be expended by the National Executive Board well-being. It shall inculcate in the youth patriotism and nationalism, and
in pursuance of this Act. encourage their involvement in public and civic affairs.

The BSP as a Public Corporation under Par. 2, Art. 2 of the Civil Code Evidently, the BSP, which was created by a special law to serve a public purpose in
pursuit of a constitutional mandate, comes within the class of "public
There are three classes of juridical persons under Article 44 of the Civil Code and corporations" defined by paragraph 2, Article 44 of the Civil Code and governed by
the BSP, as presently constituted under Republic Act No. 7278, falls under the the law which creates it, pursuant to Article 45 of the same Code.
second classification. Article 44 reads:
The BSP’s Classification Under the Administrative Code of 1987
Art. 44. The following are juridical persons:
The public, rather than private, character of the BSP is recognized by the fact that,
(1) The State and its political subdivisions; along with the Girl Scouts of the Philippines, it is classified as an attached agency
of the DECS under Executive Order No. 292, or the Administrative Code of 1987,
(2) Other corporations, institutions and entities for public interest or which states:
purpose created by law; their personality begins as soon as they
have been constituted according to law; TITLE VI – EDUCATION, CULTURE AND SPORTS

Chapter 8 – Attached Agencies


P a g e | 32

SEC. 20. Attached Agencies. – The following agencies are hereby attached to the At the outset, it should be noted that the provision of Section 16 in issue is found in
Department: Article XII of the Constitution, entitled "National Economy and Patrimony." Section
1 of Article XII is quoted as follows:
xxxx
SECTION 1. The goals of the national economy are a more equitable distribution of
(12) Boy Scouts of the Philippines; opportunities, income, and wealth; a sustained increase in the amount of goods
and services produced by the nation for the benefit of the people; and an
(13) Girl Scouts of the Philippines. expanding productivity as the key to raising the quality of life for all, especially the
underprivileged.
The administrative relationship of an attached agency to the department is defined
in the Administrative Code of 1987 as follows: The State shall promote industrialization and full employment based on sound
agricultural development and agrarian reform, through industries that make full
and efficient use of human and natural resources, and which are competitive in
BOOK IV both domestic and foreign markets. However, the State shall protect Filipino
THE EXECUTIVE BRANCH enterprises against unfair foreign competition and trade practices.

Chapter 7 – ADMINISTRATIVE RELATIONSHIP In the pursuit of these goals, all sectors of the economy and all regions of the
country shall be given optimum opportunity to develop. Private enterprises,
SEC. 38. Definition of Administrative Relationship. – Unless otherwise expressly including corporations, cooperatives, and similar collective organizations, shall be
stated in the Code or in other laws defining the special relationships of particular encouraged to broaden the base of their ownership.
agencies, administrative relationships shall be categorized and defined as follows:
The scope and coverage of Section 16, Article XII of the Constitution can be seen
xxxx from the aforementioned declaration of state policies and goals which pertains to
national economy and patrimony and the interests of the people in economic
(3) Attachment. – (a) This refers to the lateral relationship between the development.
department or its equivalent and the attached agency or corporation for purposes
of policy and program coordination. The coordination may be accomplished by Section 16, Article XII deals with "the formation, organization, or regulation of
having the department represented in the governing board of the attached agency private corporations,"52 which should be done through a general law enacted by
or corporation, either as chairman or as a member, with or without voting rights, if Congress, provides for an exception, that is: if the corporation is government
this is permitted by the charter; having the attached corporation or agency comply owned or controlled; its creation is in the interest of the common good; and it
with a system of periodic reporting which shall reflect the progress of programs meets the test of economic viability. The rationale behind Article XII, Section 16 of
and projects; and having the department or its equivalent provide general policies the 1987 Constitution was explained in Feliciano v. Commission on Audit,53 in the
through its representative in the board, which shall serve as the framework for the following manner:
internal policies of the attached corporation or agency. (Emphasis ours.)
The Constitution emphatically prohibits the creation of private corporations
As an attached agency, the BSP enjoys operational autonomy, as long as policy and except by a general law applicable to all citizens. The purpose of this constitutional
program coordination is achieved by having at least one representative of provision is to ban private corporations created by special charters, which
government in its governing board, which in the case of the BSP is the DECS historically gave certain individuals, families or groups special privileges denied to
Secretary. In this sense, the BSP is not under government control or "supervision other citizens.54 (Emphasis added.)
and control." Still this characteristic does not make the attached chartered agency
a private corporation covered by the constitutional proscription in question. It may be gleaned from the above discussion that Article XII, Section 16 bans the
creation of "private corporations" by special law. The said constitutional provision
Art. XII, Sec. 16 of the Constitution refers to "private corporations" created should not be construed so as to prohibit the creation of public corporations or a
by government for proprietary or economic/business purposes corporate agency or instrumentality of the government intended to serve a public
P a g e | 33

interest or purpose, which should not be measured on the basis of economic Note that in Boy Scouts of the Philippines v. National Labor Relations Commission,
viability, but according to the public interest or purpose it serves as envisioned by the BSP, under its former charter, was regarded as both a government owned or
paragraph (2), of Article 44 of the Civil Code and the pertinent provisions of the controlled corporation with original charter and a "public corporation." The said
Administrative Code of 1987. case pertinently stated:

The BSP is a Public Corporation Not Subject to the Test of Government Ownership While the BSP may be seen to be a mixed type of entity, combining aspects of both
or Control and Economic Viability public and private entities, we believe that considering the character of its
purposes and its functions, the statutory designation of the BSP as "a public
The BSP is a public corporation or a government agency or instrumentality with corporation" and the substantial participation of the Government in the selection
juridical personality, which does not fall within the constitutional prohibition in of members of the National Executive Board of the BSP, the BSP, as presently
Article XII, Section 16, notwithstanding the amendments to its charter. Not all constituted under its charter, is a government-controlled corporation within the
corporations, which are not government owned or controlled, are ipso facto to be meaning of Article IX (B) (2) (1) of the Constitution.
considered private corporations as there exists another distinct class of
corporations or chartered institutions which are otherwise known as "public We are fortified in this conclusion when we note that the Administrative Code of
corporations." These corporations are treated by law as agencies or 1987 designates the BSP as one of the attached agencies of the Department of
instrumentalities of the government which are not subject to the tests of Education, Culture and Sports ("DECS"). An "agency of the Government" is defined
ownership or control and economic viability but to different criteria relating to as referring to any of the various units of the Government including a department,
their public purposes/interests or constitutional policies and objectives and their bureau, office, instrumentality, government-owned or -controlled corporation, or
administrative relationship to the government or any of its Departments or local government or distinct unit therein. "Government instrumentality" is in turn
Offices. defined in the 1987 Administrative Code in the following manner:

Classification of Corporations Under Section 16, Article XII of the Constitution on Instrumentality - refers to any agency of the National Government, not integrated
National Economy and Patrimony within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds,
The dissenting opinion of Associate Justice Antonio T. Carpio, citing a line of cases, and enjoying operational autonomy usually through a charter. This term includes
insists that the Constitution recognizes only two classes of corporations: private regulatory agencies, chartered institutions and government-owned or controlled
corporations under a general law, and government-owned or controlled corporations.
corporations created by special charters.
The same Code describes a "chartered institution" in the following terms:
We strongly disagree. Section 16, Article XII should not be construed so as to
prohibit Congress from creating public corporations. In fact, Congress has enacted Chartered institution - refers to any agency organized or operating under a special
numerous laws creating public corporations or government agencies or charter, and vested by law with functions relating to specific constitutional
instrumentalities vested with corporate powers. Moreover, Section 16, Article XII, policies or objectives. This term includes the state universities and colleges, and
which relates to National Economy and Patrimony, could not have tied the hands the monetary authority of the State.
of Congress in creating public corporations to serve any of the constitutional
policies or objectives. We believe that the BSP is appropriately regarded as "a government
instrumentality" under the 1987 Administrative Code.
In his dissent, Justice Carpio contends that this ponente introduces "a totally
different species of corporation, which is neither a private corporation nor a It thus appears that the BSP may be regarded as both a "government controlled
government owned or controlled corporation" and, in so doing, is missing the fact corporation with an original charter" and as an "instrumentality" of the
that the BSP, "which was created as a non-stock, non-profit corporation, can only Government within the meaning of Article IX (B) (2) (1) of the Constitution. x x
be either a private corporation or a government owned or controlled corporation." x.55(Emphases supplied.)
P a g e | 34

The existence of public or government corporate or juridical entities or chartered Economic Viability and Ownership and Control Tests Inapplicable to Public
institutions by legislative fiat distinct from private corporations and government Corporations
owned or controlled corporation is best exemplified by the 1987 Administrative
Code cited above, which we quote in part: As presently constituted, the BSP still remains an instrumentality of the national
government. It is a public corporation created by law for a public purpose,
Sec. 2. General Terms Defined. – Unless the specific words of the text, or the context attached to the DECS pursuant to its Charter and the Administrative Code of 1987.
as a whole, or a particular statute, shall require a different meaning: It is not a private corporation which is required to be owned or controlled by the
government and be economically viable to justify its existence under a special law.
xxxx
The dissent of Justice Carpio also submits that by recognizing "a new class of
(10) "Instrumentality" refers to any agency of the National Government, not public corporation(s)" created by special charter that will not be subject to the test
integrated within the department framework, vested with special functions or of economic viability, the constitutional provision will be circumvented.
jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. This However, a review of the Record of the 1986 Constitutional Convention reveals the
term includes regulatory agencies, chartered institutions and government-owned intent of the framers of the highest law of our land to distinguish between
or controlled corporations. 
 government corporations performing governmental functions and corporations
involved in business or proprietary functions:
xxxx
THE PRESIDENT. Commissioner Foz is recognized.
(12) "Chartered institution" refers to any agency organized or operating under a
special charter, and vested by law with functions relating to specific constitutional MR. FOZ. Madam President, I support the proposal to insert "ECONOMIC
policies or objectives. This term includes the state universities and colleges and VIABILITY" as one of the grounds for organizing government corporations. x x x.
the monetary authority of the State.
MR. OPLE. Madam President, the reason for this concern is really that when the
(13) "Government-owned or controlled corporation" refers to any agency government creates a corporation, there is a sense in which this corporation
organized as a stock or non-stock corporation, vested with functions relating to becomes exempt from the test of economic performance. We know what happened
public needs whether governmental or proprietary in nature, and owned by the in the past. If a government corporation loses, then it makes its claim upon the
Government directly or through its instrumentalities either wholly, or, where taxpayers’ money through new equity infusions from the government and what is
applicable as in the case of stock corporations, to the extent of at least fifty-one always invoked is the common good. x x x
(51) per cent of its capital stock: Provided, That government-owned or controlled
corporations may be further categorized by the Department of the Budget, the Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
Civil Service Commission, and the Commission on Audit for purposes of the "common good," this becomes a restraint on future enthusiasts for state capitalism
exercise and discharge of their respective powers, functions and responsibilities to excuse themselves from the responsibility of meeting the market test so that
with respect to such corporations. they become viable. x x x.

Assuming for the sake of argument that the BSP ceases to be owned or controlled xxxx
by the government because of reduction of the number of representatives of the
government in the BSP Board, it does not follow that it also ceases to be a THE PRESIDENT. Commissioner Quesada is recognized.
government instrumentality as it still retains all the characteristics of the latter as
an attached agency of the DECS under the Administrative Code. Vesting corporate
powers to an attached agency or instrumentality of the government is not MS. QUESADA. Madam President, may we be clarified by the committee on what is
constitutionally prohibited and is allowed by the above-mentioned provisions of meant by economic viability?
the Civil Code and the 1987 Administrative Code.
THE PRESIDENT. Please proceed.
P a g e | 35

MR. MONSOD. Economic viability normally is determined by cost-benefit ratio that MS. QUESADA. So, is the Commissioner saying then that the Filipinos will benefit
takes into consideration all benefits, including economic external as well as more if these government-controlled corporations were given to private hands,
internal benefits. These are what they call externalities in economics, so that these and that there will be more goods and services that will be affordable and within
are not strictly financial criteria. Economic viability involves what we call the reach of the ordinary citizens?
economic returns or benefits of the country that are not quantifiable in financial
terms. x x x. MR. OPLE. Yes. There is nothing here, Madam President, that will prevent the
formation of a government corporation in accordance with a special charter given
xxxx by Congress. However, we are raising the standard a little bit so that, in the future,
corporations established by the government will meet the test of the common
MS. QUESADA. So, would this particular formulation now really limit the entry of good but within that framework we should also build a certain standard of
government corporations into activities engaged in by corporations? economic viability.

MR. MONSOD. Yes, because it is also consistent with the economic philosophy that xxxx
this Commission approved – that there should be minimum government
participation and intervention in the economy. THE PRESIDENT. Commissioner Padilla is recognized.

MS. QUESDA. Sometimes this Commission would just refer to Congress to provide MR. PADILLA. This is an inquiry to the committee. With regard to corporations
the particular requirements when the government would get into corporations. created by a special charter for government-owned or controlled corporations,
But this time around, we specifically mentioned economic viability. x x x. will these be in the pioneer fields or in places where the private enterprise does
not or cannot enter? Or is this so general that these government corporations can
MR. VILLEGAS. Commissioner Ople will restate the reason for his introducing that compete with private corporations organized under a general law?
amendment.
MR. MONSOD. Madam President, x x x. There are two types of government
MR. OPLE. I am obliged to repeat what I said earlier in moving for this particular corporations – those that are involved in performing governmental functions, like
amendment jointly with Commissioner Foz. During the past three decades, there garbage disposal, Manila waterworks, and so on; and those government
had been a proliferation of government corporations, very few of which have corporations that are involved in business functions. As we said earlier, there are
succeeded, and many of which are now earmarked by the Presidential two criteria that should be followed for corporations that want to go into business.
Reorganization Commission for liquidation because they failed the economic test. First is for government corporations to first prove that they can be efficient in the
x x x. areas of their proper functions. This is one of the problems now because they go
into all kinds of activities but are not even efficient in their proper functions.
xxxx Secondly, they should not go into activities that the private sector can do better.

MS. QUESADA. But would not the Commissioner say that the reason why many of MR. PADILLA. There is no question about corporations performing governmental
the government-owned or controlled corporations failed to come up with the functions or functions that are impressed with public interest. But the question is
economic test is due to the management of these corporations, and not the idea with regard to matters that are covered, perhaps not exhaustively, by private
itself of government corporations? It is a problem of efficiency and effectiveness of enterprise. It seems that under this provision the only qualification is economic
management of these corporations which could be remedied, not by eliminating viability and common good, but shall government, through government-controlled
government corporations or the idea of getting into state-owned corporations, but corporations, compete with private enterprise?
improving management which our technocrats should be able to do, given the
training and the experience. MR. MONSOD. No, Madam President. As we said, the government should not
engage in activities that private enterprise is engaged in and can do better. x x
MR. OPLE. That is part of the economic viability, Madam President. x.56 (Emphases supplied.)
P a g e | 36

Thus, the test of economic viability clearly does not apply to public corporations what was happening on the national level, but they were left to implement what
dealing with governmental functions, to which category the BSP belongs. The was decided by the Board.58
discussion above conveys the constitutional intent not to apply this constitutional
ban on the creation of public corporations where the economic viability test would A portion of the legislators’ discussion is quoted below to clearly show their
be irrelevant. The said test would only apply if the corporation is engaged in some intent:
economic activity or business function for the government.
HON. DEL MAR. x x x I need not mention to you the value and the tremendous
It is undisputed that the BSP performs functions that are impressed with public good that the Boy Scout Movement has done not only for the youth in particular
interest. In fact, during the consideration of the Senate Bill that eventually became but for the country in general. And that is why, if we look around, our past and
Republic Act No. 7278, which amended the BSP Charter, one of the bill’s sponsors, present national leaders, prominent men in the various fields of endeavor, public
Senator Joey Lina, described the BSP as follows: servants in government offices, and civic leaders in the communities all over the
land, and not only in our country but all over the world many if not most of them
Senator Lina. Yes, I can only think of two organizations involving the masses of our have at one time or another been beneficiaries of the Scouting Movement. And so,
youth, Mr. President, that should be given this kind of a privilege – the Boy Scouts it is along this line, Mr. Chairman, that we would like to have the early approval of
of the Philippines and the Girl Scouts of the Philippines. Outside of these two this measure if only to pay back what we owe much to the Scouting Movement.
groups, I do not think there are other groups similarly situated. Now, going to the meat of the matter, Mr. Chairman, if I may just – the Scouting
Movement was enacted into law in October 31, 1936 under Commonwealth Act
The Boy Scouts of the Philippines has a long history of providing value formation No. 111. x x x [W]e were acknowledged as the third biggest scouting organization
to our young, and considering how huge the population of the young people is, at in the world x x x. And to our mind, Mr. Chairman, this erratic growth and this
this point in time, and also considering the importance of having an organization decrease in membership [number] is because of the bad policy measures that
such as this that will inculcate moral uprightness among the young people, and were enunciated with the enactment or promulgation by the President before of
further considering that the development of these young people at that tender age Presidential Decree No. 460 which we feel is the culprit of the ills that is flagging
of seven to sixteen is vital in the development of the country producing good the Boy Scout Movement today. And so, this is specifically what we are attacking,
citizens, I believe that we can make an exception of the Boy Scouting movement of Mr. Chairman, the disenfranchisement of the National Council in the election of the
the Philippines from this general prohibition against providing tax exemption and national board. x x x. And so, this is what we would like to be appraised of by the
privileges.57 officers of the Boy [Scouts] of the Philippines whom we are also confident, have
the best interest of the Boy Scout Movement at heart and it is in this spirit, Mr.
Furthermore, this Court cannot agree with the dissenting opinion which equates Chairman, that we see no impediment towards working together, the Boy Scout of
the changes introduced by Republic Act No. 7278 to the BSP Charter as clear the Philippines officers working together with the House of Representatives in
manifestation of the intent of Congress "to return the BSP to the private sector." It coming out with a measure that will put back the vigor and enthusiasm of the Boy
was not the intent of Congress in enacting Republic Act No. 7278 to give up all Scout Movement. x x x.59 (Emphasis ours.)
interests in this basic youth organization, which has been its partner in forming
responsible citizens for decades. The following is another excerpt from the discussion on the House version of the
bill, in the Committee on Government Enterprises:
In fact, as may be seen in the deliberation of the House Bills that eventually
resulted to Republic Act No. 7278, Congress worked closely with the BSP to HON. AQUINO: x x x Well, obviously, the two bills as well as the previous laws that
rejuvenate the organization, to bring it back to its former glory reached under its have created the Boy Scouts of the Philippines did not provide for any direct
original charter, Commonwealth Act No. 111, and to correct the perceived ills government support by way of appropriation from the national budget to support
introduced by the amendments to its Charter under Presidential Decree No. 460. the activities of this organization. The point here is, and at the same time they have
The BSP suffered from low morale and decrease in number because the been subjected to a governmental intervention, which to their mind has been
Secretaries of the different departments in government who were too busy to inimical to the objectives and to the institution per se, that is why they are seeking
attend the meetings of the BSP’s National Executive Board ("the Board") sent legislative fiat to restore back the original mandate that they had under
representatives who, as it turned out, changed from meeting to meeting. Thus, the Commonwealth Act 111. Such having been the experience in the hands of
Scouting Councils established in the provinces and cities were not in touch with government, meaning, there has been negative interference on their part and
P a g e | 37

inasmuch as their mandate is coming from a legislative fiat, then shouldn’t it be, HON. AQUINO: Well, that’s very well taken so I will proceed with other issues, Mr.
this rhetorical question, shouldn’t it be better for this organization to seek a Chairman. x x x.60 (Emphases added.)
mandate from, let’s say, the government the Corporation Code of the Philippines
and register with the SEC as non-profit non-stock corporation so that government Therefore, even though the amended BSP charter did away with most of the
intervention could be very very minimal. Maybe that’s a rhetorical question, they governmental presence in the BSP Board, this was done to more strongly promote
may or they may not answer, ano. I don’t know what would be the benefit of a the BSP’s objectives, which were not supported under Presidential Decree No. 460.
charter or a mandate being provided for by way of legislation versus a registration The BSP objectives, as pointed out earlier, are consistent with the public purpose
with the SEC under the Corporation Code of the Philippines inasmuch as they don’t of the promotion of the well-being of the youth, the future leaders of the country.
get anything from the government anyway insofar as direct funding. In fact, the The amendments were not done with the view of changing the character of the
only thing that they got from government was intervention in their affairs. Maybe BSP into a privatized corporation. The BSP remains an agency attached to a
we can solicit some commentary comments from the resource persons. department of the government, the DECS, and it was not at all stripped of its public
Incidentally, don’t take that as an objection, I’m not objecting. I’m all for the character.
objectives of these two bills. It just occurred to me that since you have had very
bad experience in the hands of government and you will always be open to such The ownership and control test is likewise irrelevant for a public corporation like
possible intervention even in the future as long as you have a legislative mandate the BSP. To reiterate, the relationship of the BSP, an attached agency, to the
or your mandate or your charter coming from legislative action. government, through the DECS, is defined in the Revised Administrative Code of
1987. The BSP meets the minimum statutory requirement of an attached
xxxx government agency as the DECS Secretary sits at the BSP Board ex officio, thus
facilitating the policy and program coordination between the BSP and the DECS.
MR. ESCUDERO: Mr. Chairman, there may be a disadvantage if the Boy Scouts of
the Philippines will be required to register with the SEC. If we are registered with Requisites for Declaration of Unconstitutionality Not Met in this Case
the SEC, there could be a danger of proliferation of scout organization. Anybody
can organize and then register with the SEC. If there will be a proliferation of this, The dissenting opinion of Justice Carpio improperly raised the issue of
then the organization will lose control of the entire organization. Another unconstitutionality of certain provisions of the BSP Charter. Even if the parties
disadvantage, Mr. Chairman, anybody can file a complaint in the SEC against the were asked to Comment on the validity of the BSP charter by the Court, this alone
Boy Scouts of the Philippines and the SEC may suspend the operation or freeze the does not comply with the requisites for judicial review, which were clearly set
assets of the organization and hamper the operation of the organization. I don’t forth in a recent case:
know, Mr. Chairman, how you look at it but there could be a danger for anybody
filing a complaint against the organization in the SEC and the SEC might suspend
the registration permit of the organization and we will not be able to operate. When questions of constitutional significance are raised, the Court can exercise its
power of judicial review only if the following requisites are present: (1) the
existence of an actual and appropriate case; (2) the existence of personal and
HON. AQUINO: Well, that I think would be a problem that will not be exclusive to substantial interest on the part of the party raising the constitutional question; (3)
corporations registered with the SEC because even if you are government recourse to judicial review is made at the earliest opportunity; and (4) the
corporation, court action may be taken against you in other judicial bodies constitutional question is the lis mota of the case.61(Emphasis added.)
because the SEC is simply another quasi-judicial body. But, I think, the first point
would be very interesting, the first point that you raised. In effect, what you are
saying is that with the legislative mandate creating your charter, in effect, you Thus, when it comes to the exercise of the power of judicial review, the
have been given some sort of a franchise with this movement. constitutional issue should be the very lis mota, or threshold issue, of the case, and
that it should be raised by either of the parties. These requirements would be
ignored under the dissent’s rather overreaching view of how this case should have
MR. ESCUDERO: Yes. been decided. True, it was the Court that asked the parties to comment, but the
Court cannot be the one to raise a constitutional issue. Thus, the Court chooses to
HON. AQUINO: Exclusive franchise of that movement? once more exhibit restraint in the exercise of its power to pass upon the validity of
a law.
MR. ESCUDERO: Yes.
P a g e | 38

Re: the COA’s Jurisdiction Martial Law years, the BSP was receiving a subsidy in the form of an annual… a
one draw from the Sweepstakes. And, this was the case also with the Girl Scouts at
Regarding the COA’s jurisdiction over the BSP, Section 8 of its amended charter the Anti-TB, but then this was… and the Boy Scouts then because of this funding
allows the BSP to receive contributions or donations from the government. Section partly from government was being subjected to audit in the contributions being
8 reads: made in the part of the Sweepstakes. But this was removed later during the
Martial Law years with the creation of the Human Settlements Commission. So the
Section 8. Any donation or contribution which from time to time may be made to situation right now is that the Boy Scouts does not receive any funding from
the Boy Scouts of the Philippines by the Government or any of its subdivisions, government, but then in the case of the local councils and this legislative charter,
branches, offices, agencies or instrumentalities shall be expended by the Executive so to speak, enables the local councils even the national headquarters in view of
Board in pursuance of this Act.lawph!1 the provisions in the existing law to receive donations from the government or any
of its instrumentalities, which would be difficult if the Boy Scouts is registered as a
private corporation with the Securities and Exchange Commission. Government
The sources of funds to maintain the BSP were identified before the House bodies would be estopped from making donations to the Boy Scouts, which at
Committee on Government Enterprises while the bill was being deliberated, and present is not the case because there is the Boy Scouts charter, this
the pertinent portion of the discussion is quoted below: Commonwealth Act 111 as amended by PD 463.

MR. ESCUDERO. Yes, Mr. Chairman. The question is the sources of funds of the xxxx
organization. First, Mr. Chairman, the Boy Scouts of the Philippines do not receive
annual allotment from the government. The organization has to raise its own
funds through fund drives and fund campaigns or fund raising activities. Aside HON. AMATONG: Mr. Chairman, in connection with that.
from this, we have some revenue producing projects in the organization that gives
us funds to support the operation. x x x From time to time, Mr. Chairman, when we THE CHAIRMAN: Yeah, Gentleman from Zamboanga.
have special activities we request for assistance or financial assistance from
government agencies, from private business and corporations, but this is only HON. AMATONG: There is no auditing being made because there’s no money put in
during special activities that the Boy Scouts of the Philippines would conduct the organization, but how about donated funds to this organization? What are the
during the year. Otherwise, we have to raise our own funds to support the remedies of the donors of how will they know how their money are being spent?
organization.62
MR. ESCUDERO: May I answer, Mr. Chairman?
The nature of the funds of the BSP and the COA’s audit jurisdiction were likewise
brought up in said congressional deliberations, to wit: THE CHAIRMAN: Yes, gentleman.

HON. AQUINO: x x x Insofar as this organization being a government created MR. ESCUDERO: The Boy Scouts of the Philippines has an external auditor and by
organization, in fact, a government corporation classified as such, are your funds the charter we are required to submit a financial report at the end of each year to
or your finances subjected to the COA audit? the National Executive Board. So all the funds donated or otherwise is accounted
for at the end of the year by our external auditor. In this case the SGV.63
MR. ESCUDERO: Mr. Chairman, we are not. Our funds is not subjected. We don’t
fall under the jurisdiction of the COA. Historically, therefore, the BSP had been subjected to government audit in so far as
public funds had been infused thereto. However, this practice should not preclude
HON. AQUINO: All right, but before were you? the exercise of the audit jurisdiction of COA, clearly set forth under the
Constitution, which pertinently provides:
MR. ESCUDERO: No, Mr. Chairman.
Section 2. (1) The Commission on Audit shall have the power, authority, and duty
MR. JESUS: May I? As historical backgrounder, Commonwealth Act 111 was to examine, audit, and settle all accounts pertaining to the revenue and receipts of,
written by then Secretary Jorge Vargas and before and up to the middle of the and expenditures or uses of funds and property, owned or held in trust by, or
P a g e | 39

pertaining to, the Government, or any of its subdivisions, agencies, or


instrumentalities, including government-owned and controlled corporations with
original charters, and on a post-audit basis: (a) constitutional bodies, commissions
and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or
controlled corporations with original charters and their subsidiaries; and (d) such
non-governmental entities receiving subsidy or equity, directly or indirectly, from
or through the Government, which are required by law of the granting institution
to submit to such audit as a condition of subsidy or equity. x x x. 64

Since the BSP, under its amended charter, continues to be a public corporation or a
government instrumentality, we come to the inevitable conclusion that it is subject
to the exercise by the COA of its audit jurisdiction in the manner consistent with
the provisions of the BSP Charter.

WHEREFORE, premises considered, the instant petition for prohibition is


DISMISSED.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO


Associate Justice
P a g e | 40

Republic of the Philippines In 1969, General Telephone and Electronics Corporation (GTE), an American
SUPREME COURT company and a major PLDT stockholder, sold 26 percent of the outstanding
Manila common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was
incorporated by several persons, including Roland Gapud and Jose Campos, Jr.
EN BANC Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by virtue
of three Deeds of Assignment executed by PTIC stockholders Ramon Cojuangco
G.R. No. 176579 June 28, 2011 and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI
were sequestered by the Presidential Commission on Good Government (PCGG).
The 111,415 PTIC shares, which represent about 46.125 percent of the
WILSON P. GAMBOA, Petitioner, outstanding capital stock of PTIC, were later declared by this Court to be owned by
vs. the Republic of the Philippines.2
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY
JOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,
CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20
PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET Government announced that it would sell the 111,415 PTIC shares, or 46.125
HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG percent of the outstanding capital stock of PTIC, through a public bidding to be
DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING conducted on 4 December 2006. Subsequently, the public bidding was reset to 8
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and
OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF Pan-Asia Presidio Capital, submitted their bids. Parallax won with a bid of ₱25.6
THE SECURITIES EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF billion or US$510 million.
THE PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention. Thereafter, First Pacific announced that it would exercise its right of first refusal as
a PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of
DECISION Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set
by IPC and instead, yielded its right to PTIC itself which was then given by IPC
until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific,
CARPIO, J.: through its subsidiary, MPAH, entered into a Conditional Sale and Purchase
Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding
The Case capital stock of PTIC, with the Philippine Government for the price of
₱25,217,556,000 or US$510,580,189. The sale was completed on 28 February
This is an original petition for prohibition, injunction, declaratory relief and 2007.
declaration of nullity of the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the government of the Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of
Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an 46.125 percent of PTIC shares is actually an indirect sale of 12 million shares or
affiliate of First Pacific Company Limited (First Pacific). about 6.3 percent of the outstanding common shares of PLDT. With the sale, First
Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37
The Antecedents percent, thereby increasing the common shareholdings of foreigners in
PLDT to about 81.47 percent. This violates Section 11, Article XII of the 1987
The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Philippine Constitution which limits foreign ownership of the capital of a public
Long Distance Telephone Company (PLDT), are as follows:1 utility to not more than 40 percent.3

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications business.
P a g e | 41

On the other hand, public respondents Finance Secretary Margarito B. Teves, Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted
Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the a public bidding for the sale of 111,415 PTIC shares or 46 percent of the
following relevant facts: outstanding capital stock of PTIC (the remaining 54 percent of PTIC shares was
already owned by First Pacific and its affiliates); (b) Parallax offered the highest
On 9 November 1967, PTIC was incorporated and had since engaged in the bid amounting to ₱25,217,556,000; (c) pursuant to the right of first refusal in
business of investment holdings. PTIC held 26,034,263 PLDT common shares, or favor of PTIC and its shareholders granted in PTIC’s Articles of Incorporation,
13.847 percent of the total PLDT outstanding common shares. PHI, on the other MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the
hand, was incorporated in 1977, and became the owner of 111,415 PTIC shares or highest bid offered for PTIC shares on 13 February 2007; and (d) on 28 February
46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds of 2007, the sale was consummated when MPAH paid IPC ₱25,217,556,000 and the
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the government delivered the certificates for the 111,415 PTIC shares. Respondent
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently Pangilinan denies the other allegations of facts of petitioner.
declared by this Court as part of the ill-gotten wealth of former President
Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the Republic On 28 February 2007, petitioner filed the instant petition for prohibition,
of the Philippines in accordance with this Court’s decision4 which became final and injunction, declaratory relief, and declaration of nullity of sale of the 111,415 PTIC
executory on 8 August 2006. shares. Petitioner claims, among others, that the sale of the 111,415 PTIC shares
would result in an increase in First Pacific’s common shareholdings in PLDT from
The Philippine Government decided to sell the 111,415 PTIC shares, which 30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMo’s
represent 6.4 percent of the outstanding common shares of stock of PLDT, and common shareholdings in PLDT, would result to a total foreign common
designated the Inter-Agency Privatization Council (IPC), composed of the shareholdings in PLDT of 51.56 percent which is over the 40 percent
Department of Finance and the PCGG, as the disposing entity. An invitation to bid constitutional limit.6 Petitioner asserts:
was published in seven different newspapers from 13 to 24 November 2006. On
20 November 2006, a pre-bid conference was held, and the original deadline for If and when the sale is completed, First Pacific’s equity in PLDT will go up from
bidding scheduled on 4 December 2006 was reset to 8 December 2006. The 30.7 percent to 37.0 percent of its common – or voting- stockholdings, x x x. Hence,
extension was published in nine different newspapers. the consummation of the sale will put the two largest foreign investors in PLDT –
First Pacific and Japan’s NTT DoCoMo, which is the world’s largest wireless
During the 8 December 2006 bidding, Parallax Capital Management LP emerged as telecommunications firm, owning 51.56 percent of PLDT common equity. x x x
the highest bidder with a bid of ₱25,217,556,000. The government notified First With the completion of the sale, data culled from the official website of the New
Pacific, the majority owner of PTIC shares, of the bidding results and gave First York Stock Exchange (www.nyse.com) showed that those foreign entities, which
Pacific until 1 February 2007 to exercise its right of first refusal in accordance with own at least five percent of common equity, will collectively own 81.47 percent of
PTIC’s Articles of Incorporation. First Pacific announced its intention to match PLDT’s common equity. x x x
Parallax’s bid.
x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x
On 31 January 2007, the House of Representatives (HR) Committee on Good which PLDT submitted to the New York Stock Exchange for the period 2003-2005,
Government conducted a public hearing on the particulars of the then impending revealed that First Pacific and several other foreign entities breached the
sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those constitutional limit of 40 percent ownership as early as 2003. x x x" 7
who attended the public hearing. The HR Committee Report No. 2270 concluded
that: (a) the auction of the government’s 111,415 PTIC shares bore due diligence, Petitioner raises the following issues: (1) whether the consummation of the then
transparency and conformity with existing legal procedures; and (b) First impending sale of 111,415 PTIC shares to First Pacific violates the constitutional
Pacific’s intended acquisition of the government’s 111,415 PTIC shares limit on foreign ownership of a public utility; (2) whether public respondents
resulting in First Pacific’s 100% ownership of PTIC will not violate the 40 committed grave abuse of discretion in allowing the sale of the 111,415 PTIC
percent constitutional limit on foreign ownership of a public utility since shares to First Pacific; and (3) whether the sale of common shares to foreigners in
PTIC holds only 13.847 percent of the total outstanding common shares of excess of 40 percent of the entire subscribed common capital stock violates the
PLDT.5 On 28 February 2007, First Pacific completed the acquisition of the constitutional limit on foreign ownership of a public utility.8
111,415 shares of stock of PTIC.
P a g e | 42

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for However, since the threshold and purely legal issue on the definition of the term
Leave to Intervene and Admit Attached Petition-in-Intervention. In the Resolution "capital" in Section 11, Article XII of the Constitution has far-reaching implications
of 28 August 2007, the Court granted the motion and noted the Petition-in- to the national economy, the Court treats the petition for declaratory relief as one
Intervention. for mandamus.12

Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for
others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares declaratory relief as one for mandamus considering the grave injustice that would
to First Pacific or assignee." Petitioners-in-intervention claim that, as PLDT result in the interpretation of a banking law. In that case, which involved the crime
subscribers, they have a "stake in the outcome of the controversy x x x where the of rape committed by a foreign tourist against a Filipino minor and the execution
Philippine Government is completing the sale of government owned assets in of the final judgment in the civil case for damages on the tourist’s dollar deposit
[PLDT], unquestionably a public utility, in violation of the nationality restrictions with a local bank, the Court declared Section 113 of Central Bank Circular No. 960,
of the Philippine Constitution." exempting foreign currency deposits from attachment, garnishment or any other
order or process of any court, inapplicable due to the peculiar circumstances of the
The Issue case. The Court held that "injustice would result especially to a citizen aggrieved
by a foreign guest like accused x x x" that would "negate Article 10 of the Civil
This Court is not a trier of facts. Factual questions such as those raised by Code which provides that ‘in case of doubt in the interpretation or application of
petitioner,9 which indisputably demand a thorough examination of the evidence of laws, it is presumed that the lawmaking body intended right and justice to
the parties, are generally beyond this Court’s jurisdiction. Adhering to this well- prevail.’" The Court therefore required respondents Central Bank of the
settled principle, the Court shall confine the resolution of the instant controversy Philippines, the local bank, and the accused to comply with the writ of execution
solely on the threshold and purely legal issue of whether the term "capital" in issued in the civil case for damages and to release the dollar deposit of the accused
Section 11, Article XII of the Constitution refers to the total common shares only or to satisfy the judgment.
to the total outstanding capital stock (combined total of common and non-voting
preferred shares) of PLDT, a public utility. In Alliance of Government Workers v. Minister of Labor,14 the Court similarly
brushed aside the procedural infirmity of the petition for declaratory relief and
The Ruling of the Court treated the same as one for mandamus. In Alliance, the issue was whether the
government unlawfully excluded petitioners, who were government employees,
from the enjoyment of rights to which they were entitled under the law.
The petition is partly meritorious. Specifically, the question was: "Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or controlled
Petition for declaratory relief treated as petition for mandamus corporations included among the four ‘employers’ under Presidential Decree No.
851 which are required to pay their employees x x x a thirteenth (13th) month pay
At the outset, petitioner is faced with a procedural barrier. Among the remedies x x x ?" The Constitutional principle involved therein affected all government
petitioner seeks, only the petition for prohibition is within the original jurisdiction employees, clearly justifying a relaxation of the technical rules of procedure, and
of this court, which however is not exclusive but is concurrent with the Regional certainly requiring the interpretation of the assailed presidential decree.
Trial Court and the Court of Appeals. The actions for declaratory
relief,10 injunction, and annulment of sale are not embraced within the original In short, it is well-settled that this Court may treat a petition for declaratory relief
jurisdiction of the Supreme Court. On this ground alone, the petition could have as one for mandamus if the issue involved has far-reaching implications. As this
been dismissed outright. Court held in Salvacion:

While direct resort to this Court may be justified in a petition for prohibition, 11 the The Court has no original and exclusive jurisdiction over a petition for declaratory
Court shall nevertheless refrain from discussing the grounds in support of the relief. However, exceptions to this rule have been recognized. Thus, where
petition for prohibition since on 28 February 2007, the questioned sale was the petition has far-reaching implications and raises questions that should
consummated when MPAH paid IPC ₱25,217,556,000 and the government be resolved, it may be treated as one for mandamus.15 (Emphasis supplied)
delivered the certificates for the 111,415 PTIC shares.
P a g e | 43

In the present case, petitioner seeks primarily the interpretation of the term Article XII of the Constitution, but also in Section 2, Article XII on co-production
"capital" in Section 11, Article XII of the Constitution. He prays that this Court and joint venture agreements for the development of our natural resources,19 in
declare that the term "capital" refers to common shares only, and that such shares Section 7, Article XII on ownership of private lands,20 in Section 10, Article XII on
constitute "the sole basis in determining foreign equity in a public utility." the reservation of certain investments to Filipino citizens,21 in Section 4(2), Article
Petitioner further asks this Court to declare any ruling inconsistent with such XIV on the ownership of educational institutions,22 and in Section 11(2), Article
interpretation unconstitutional. XVI on the ownership of advertising companies.23

The interpretation of the term "capital" in Section 11, Article XII of the Petitioner has locus standi
Constitution has far-reaching implications to the national economy. In fact, a
resolution of this issue will determine whether Filipinos are masters, or second There is no dispute that petitioner is a stockholder of PLDT. As such, he has the
class citizens, in their own country. What is at stake here is whether Filipinos or right to question the subject sale, which he claims to violate the nationality
foreigners will have effective control of the national economy. Indeed, if ever requirement prescribed in Section 11, Article XII of the Constitution. If the sale
there is a legal issue that has far-reaching implications to the entire nation, and to indeed violates the Constitution, then there is a possibility that PLDT’s franchise
future generations of Filipinos, it is the threshhold legal issue presented in this could be revoked, a dire consequence directly affecting petitioner’s interest as a
case. stockholder.

The Court first encountered the issue on the definition of the term "capital" in More importantly, there is no question that the instant petition raises matters of
Section 11, Article XII of the Constitution in the case of Fernandez v. transcendental importance to the public. The fundamental and threshold legal
Cojuangco, docketed as G.R. No. 157360.16 That case involved the same public issue in this case, involving the national economy and the economic welfare of the
utility (PLDT) and substantially the same private respondents. Despite the Filipino people, far outweighs any perceived impediment in the legal personality
importance and novelty of the constitutional issue raised therein and despite the of the petitioner to bring this action.
fact that the petition involved a purely legal question, the Court declined to resolve
the case on the merits, and instead denied the same for disregarding the hierarchy In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on
of courts.17There, petitioner Fernandez assailed on a pure question of law the matters of transcendental importance to the public, thus:
Regional Trial Court’s Decision of 21 February 2003 via a petition for review
under Rule 45. The Court’s Resolution, denying the petition, became final on 21
December 2004. In Tañada v. Tuvera, the Court asserted that when the issue concerns a public
right and the object of mandamus is to obtain the enforcement of a public
duty, the people are regarded as the real parties in interest; and because it is
The instant petition therefore presents the Court with another opportunity to sufficient that petitioner is a citizen and as such is interested in the
finally settle this purely legal issuewhich is of transcendental importance to the execution of the laws, he need not show that he has any legal or special
national economy and a fundamental requirement to a faithful adherence to our interest in the result of the action. In the aforesaid case, the petitioners sought
Constitution. The Court must forthwith seize such opportunity, not only for the to enforce their right to be informed on matters of public concern, a right then
benefit of the litigants, but more significantly for the benefit of the entire Filipino recognized in Section 6, Article IV of the 1973 Constitution, in connection with the
people, to ensure, in the words of the Constitution, "a self-reliant and independent rule that laws in order to be valid and enforceable must be published in the Official
national economy effectively controlled by Filipinos."18 Besides, in the light of Gazette or otherwise effectively promulgated. In ruling for the petitioners’ legal
vague and confusing positions taken by government agencies on this purely legal standing, the Court declared that the right they sought to be enforced ‘is a public
issue, present and future foreign investors in this country deserve, as a matter of right recognized by no less than the fundamental law of the land.’
basic fairness, a categorical ruling from this Court on the extent of their
participation in the capital of public utilities and other nationalized businesses.
Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that
‘when a mandamus proceeding involves the assertion of a public right, the
Despite its far-reaching implications to the national economy, this purely legal requirement of personal interest is satisfied by the mere fact that petitioner
issue has remained unresolved for over 75 years since the 1935 Constitution. is a citizen and, therefore, part of the general ‘public’ which possesses the
There is no reason for this Court to evade this ever recurring fundamental issue right.’
and delay again defining the term "capital," which appears not only in Section 11,
P a g e | 44

Further, in Albano v. Reyes, we said that while expenditure of public funds may not general public. The participation of foreign investors in the governing body of any
have been involved under the questioned contract for the development, public utility enterprise shall be limited to their proportionate share in the capital
management and operation of the Manila International Container Terminal, thereof. (Emphasis supplied)
‘public interest [was] definitely involved considering the important role [of
the subject contract] . . . in the economic development of the country and the The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV
magnitude of the financial consideration involved.’ We concluded that, as a of the 1935 Constitution, viz:
consequence, the disclosure provision in the Constitution would constitute
sufficient authority for upholding the petitioner’s standing. (Emphasis supplied) Section 8. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the
Clearly, since the instant petition, brought by a citizen, involves matters of Philippines or to corporations or other entities organized under the laws of
transcendental public importance, the petitioner has the requisite locus standi. the Philippines sixty per centum of the capital of which is owned by citizens
of the Philippines,nor shall such franchise, certificate, or authorization be
Definition of the Term "Capital" in exclusive in character or for a longer period than fifty years. No franchise or right
Section 11, Article XII of the 1987 Constitution shall be granted to any individual, firm, or corporation, except under the condition
that it shall be subject to amendment, alteration, or repeal by the Congress when
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution the public interest so requires. (Emphasis supplied)
mandates the Filipinization of public utilities, to wit:
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional
Section 11. No franchise, certificate, or any other form of authorization for Commission, reminds us that the Filipinization provision in the 1987 Constitution
the operation of a public utility shall be granted except to citizens of the is one of the products of the spirit of nationalism which gripped the 1935
Philippines or to corporations or associations organized under the laws of Constitutional Convention.25 The 1987 Constitution "provides for the Filipinization
the Philippines, at least sixty per centum of whose capital is owned by such of public utilities by requiring that any form of authorization for the operation of
citizens; nor shall such franchise, certificate, or authorization be exclusive in public utilities should be granted only to ‘citizens of the Philippines or to
character or for a longer period than fifty years. Neither shall any such franchise or corporations or associations organized under the laws of the Philippines at least
right be granted except under the condition that it shall be subject to amendment, sixty per centum of whose capital is owned by such citizens.’ The provision is [an
alteration, or repeal by the Congress when the common good so requires. The express] recognition of the sensitive and vital position of public utilities both
State shall encourage equity participation in public utilities by the general public. in the national economy and for national security."26 The evident purpose of
The participation of foreign investors in the governing body of any public utility the citizenship requirement is to prevent aliens from assuming control of public
enterprise shall be limited to their proportionate share in its capital, and all the utilities, which may be inimical to the national interest.27 This specific provision
executive and managing officers of such corporation or association must be explicitly reserves to Filipino citizens control of public utilities, pursuant to an
citizens of the Philippines. (Emphasis supplied) overriding economic goal of the 1987 Constitution: to "conserve and develop our
patrimony"28 and ensure "a self-reliant and independent national
The above provision substantially reiterates Section 5, Article XIV of the 1973 economy effectively controlled by Filipinos."29
Constitution, thus:
Any citizen or juridical entity desiring to operate a public utility must therefore
Section 5. No franchise, certificate, or any other form of authorization for the meet the minimum nationality requirement prescribed in Section 11, Article XII of
operation of a public utility shall be granted except to citizens of the the Constitution. Hence, for a corporation to be granted authority to operate a
Philippines or to corporations or associations organized under the laws of public utility, at least 60 percent of its "capital" must be owned by Filipino citizens.
the Philippines at least sixty per centum of the capital of which is owned by
such citizens, nor shall such franchise, certificate, or authorization be exclusive in The crux of the controversy is the definition of the term "capital." Does the term
character or for a longer period than fifty years. Neither shall any such franchise or "capital" in Section 11, Article XII of the Constitution refer to common shares or to
right be granted except under the condition that it shall be subject to amendment, the total outstanding capital stock (combined total of common and non-voting
alteration, or repeal by the National Assembly when the public interest so preferred shares)?
requires. The State shall encourage equity participation in public utilities by the
P a g e | 45

Petitioner submits that the 40 percent foreign equity limitation in domestic public Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in
utilities refers only to common shares because such shares are entitled to vote and Section 11, Article XII of the Constitution. Neither does he refute petitioner’s claim
it is through voting that control over a corporation is exercised. Petitioner posits of foreigners holding more than 40 percent of PLDT’s common shares. Instead,
that the term "capital" in Section 11, Article XII of the Constitution refers to "the respondent Pangilinan focuses on the procedural flaws of the petition and the
ownership of common capital stock subscribed and outstanding, which class of alleged violation of the due process rights of foreigners. Respondent Pangilinan
shares alone, under the corporate set-up of PLDT, can vote and elect members of emphasizes in his Memorandum (1) the absence of this Court’s jurisdiction over
the board of directors." It is undisputed that PLDT’s non-voting preferred shares the petition; (2) petitioner’s lack of standing; (3) mootness of the petition; (4) non-
are held mostly by Filipino citizens.30 This arose from Presidential Decree No. availability of declaratory relief; and (5) the denial of due process rights.
217,31 issued on 16 June 1973 by then President Ferdinand Marcos, requiring Moreover, respondent Pangilinan alleges that the issue should be whether
every applicant of a PLDT telephone line to subscribe to non-voting preferred "owners of shares in PLDT as well as owners of shares in companies holding
shares to pay for the investment cost of installing the telephone line. 32 shares in PLDT may be required to relinquish their shares in PLDT and in those
companies without any law requiring them to surrender their shares and also
Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt without notice and trial."
petitioner’s definition of the term "capital."33 Petitioners-in-intervention allege
that "the approximate foreign ownership of common capital stock of PLDT x x x Respondent Pangilinan further asserts that "Section 11, [Article XII of the
already amounts to at least 63.54% of the total outstanding common stock," which Constitution] imposes no nationality requirement on the shareholders of the
means that foreigners exercise significant control over PLDT, patently violating utility company as a condition for keeping their shares in the utility
the 40 percent foreign equity limitation in public utilities prescribed by the company." According to him, "Section 11 does not authorize taking one person’s
Constitution. property (the shareholder’s stock in the utility company) on the basis of another
party’s alleged failure to satisfy a requirement that is a condition only for that
Respondents, on the other hand, do not offer any definition of the term "capital" in other party’s retention of another piece of property (the utility company being at
Section 11, Article XII of the Constitution. More importantly, private respondents least 60% Filipino-owned to keep its franchise)."36
Nazareno and Pangilinan of PLDT do not dispute that more than 40 percent of the
common shares of PLDT are held by foreigners. The OSG, representing public respondents Secretary Margarito Teves,
Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe
In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps Barin, is likewise silent on the definition of the term "capital." In its
mainly on the procedural infirmities of the petition and the supposed violation of Memorandum37 dated 24 September 2007, the OSG also limits its discussion on
the due process rights of the "affected foreign common shareholders." Respondent the supposed procedural defects of the petition, i.e. lack of standing, lack of
Nazareno does not deny petitioner’s allegation of foreigners’ dominating the jurisdiction, non-inclusion of interested parties, and lack of basis for injunction.
common shareholdings of PLDT. Nazareno stressed mainly that the petition The OSG does not present any definition or interpretation of the term "capital" in
"seeks to divest foreign common shareholders purportedly exceeding 40% Section 11, Article XII of the Constitution. The OSG contends that "the petition
of the total common shareholdings in PLDT of their ownership over their actually partakes of a collateral attack on PLDT’s franchise as a public utility,"
shares." Thus, "the foreign natural and juridical PLDT shareholders must be which in effect requires a "full-blown trial where all the parties in interest are
impleaded in this suit so that they can be heard."34 Essentially, Nazareno invokes given their day in court."38
denial of due process on behalf of the foreign common shareholders.
Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer
While Nazareno does not introduce any definition of the term "capital," he states of the Philippine Stock Exchange (PSE), does not also define the term "capital" and
that "among the factual assertions that need to be established to counter seeks the dismissal of the petition on the following grounds: (1) failure to state a
petitioner’s allegations is the uniform interpretation by government cause of action against Lim; (2) the PSE allegedly implemented its rules and
agencies (such as the SEC), institutions and corporations (such as the required all listed companies, including PLDT, to make proper and timely
Philippine National Oil Company-Energy Development Corporation or PNOC- disclosures; and (3) the reliefs prayed for in the petition would adversely impact
EDC) of including both preferred shares and common shares in "controlling the stock market.
interest" in view of testing compliance with the 40% constitutional
limitation on foreign ownership in public utilities."35
P a g e | 46

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to stand in the face of a clear legislative policy as stated in the FIA which took effect
be a stockholder of record of PLDT, contended that the term "capital" in the 1987 in 1991 or way after said opinions were rendered, and as clarified by the above-
Constitution refers to shares entitled to vote or the common shares. Fernandez quoted Amendments. In this regard, suffice it to state that as between the law and
explained thus: an opinion rendered by an administrative agency, the law indubitably prevails.
Moreover, said Opinions are merely advisory and cannot prevail over the clear
The forty percent (40%) foreign equity limitation in public utilities prescribed by intent of the framers of the Constitution.
the Constitution refers to ownership of shares of stock entitled to vote, i.e.,
common shares, considering that it is through voting that control is being In the same vein, the SEC’s construction of Section 11, Article XII of the
exercised. x x x Constitution is at best merely advisory for it is the courts that finally determine
what a law means.39
Obviously, the intent of the framers of the Constitution in imposing limitations and
restrictions on fully nationalized and partially nationalized activities is for Filipino On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V.
nationals to be always in control of the corporation undertaking said activities. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-
Otherwise, if the Trial Court’s ruling upholding respondents’ arguments were to be Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F.
given credence, it would be possible for the ownership structure of a public utility Del Rosario, and Orlando B. Vea, argued that the term "capital" in Section 11,
corporation to be divided into one percent (1%) common stocks and ninety-nine Article XII of the Constitution includes preferred shares since the Constitution
percent (99%) preferred stocks. Following the Trial Court’s ruling adopting does not distinguish among classes of stock, thus:
respondents’ arguments, the common shares can be owned entirely by foreigners
thus creating an absurd situation wherein foreigners, who are supposed to be 16. The Constitution applies its foreign ownership limitation on the corporation’s
minority shareholders, control the public utility corporation. "capital," without distinction as to classes of shares. x x x

xxxx In this connection, the Corporation Code – which was already in force at the time
the present (1987) Constitution was drafted – defined outstanding capital stock as
Thus, the 40% foreign ownership limitation should be interpreted to apply to both follows:
the beneficial ownership and the controlling interest.
Section 137. Outstanding capital stock defined. – The term "outstanding capital
xxxx stock", as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or
Clearly, therefore, the forty percent (40%) foreign equity limitation in public partially paid, except treasury shares.
utilities prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares. Furthermore, ownership of record of shares Section 137 of the Corporation Code also does not distinguish between common
will not suffice but it must be shown that the legal and beneficial ownership rests and preferred shares, nor exclude either class of shares, in determining the
in the hands of Filipino citizens. Consequently, in the case of petitioner PLDT, since outstanding capital stock (the "capital") of a corporation. Consequently,
it is already admitted that the voting interests of foreigners which would gain petitioner’s suggestion to reckon PLDT’s foreign equity only on the basis of PLDT’s
entry to petitioner PLDT by the acquisition of SMART shares through the outstanding common shares is without legal basis. The language of the
Questioned Transactions is equivalent to 82.99%, and the nominee arrangements Constitution should be understood in the sense it has in common use.
between the foreign principals and the Filipino owners is likewise admitted, there
is, therefore, a violation of Section 11, Article XII of the Constitution. xxxx

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by 17. But even assuming that resort to the proceedings of the Constitutional
the Trial Court to support the proposition that the meaning of the word "capital" Commission is necessary, there is nothing in the Record of the Constitutional
as used in Section 11, Article XII of the Constitution allegedly refers to the sum Commission (Vol. III) – which petitioner misleadingly cited in the Petition x x x –
total of the shares subscribed and paid-in by the shareholder and it allegedly is
immaterial how the stock is classified, whether as common or preferred, cannot
P a g e | 47

which supports petitioner’s view that only common shares should form the basis Shares of capital stock issued without par value shall be deemed fully paid and
for computing a public utility’s foreign equity. non-assessable and the holder of such shares shall not be liable to the corporation
or to its creditors in respect thereto: Provided; That shares without par value may
xxxx not be issued for a consideration less than the value of five (₱5.00) pesos per
share: Provided, further, That the entire consideration received by the corporation
18. In addition, the SEC – the government agency primarily responsible for for its no-par value shares shall be treated as capital and shall not be available for
implementing the Corporation Code, and which also has the responsibility of distribution as dividends.
ensuring compliance with the Constitution’s foreign equity restrictions as regards
nationalized activities x x x – has categorically ruled that both common and A corporation may, furthermore, classify its shares for the purpose of insuring
preferred shares are properly considered in determining outstanding capital stock compliance with constitutional or legal requirements.
and the nationality composition thereof.40
Except as otherwise provided in the articles of incorporation and stated in the
We agree with petitioner and petitioners-in-intervention. The term "capital" in certificate of stock, each share shall be equal in all respects to every other share.
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 Where the articles of incorporation provide for non-voting shares in the cases
shares,41 and not to the total outstanding capital stock comprising both common allowed by this Code, the holders of such shares shall nevertheless be entitled to
and non-voting preferred shares. vote on the following matters:

The Corporation Code of the Philippines42 classifies shares as common or 1. Amendment of the articles of incorporation;
preferred, thus:
2. Adoption and amendment of by-laws;
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
divided into classes or series of shares, or both, any of which classes or series of substantially all of the corporate property;
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 4. Incurring, creating or increasing bonded indebtedness;
rights except those classified and issued as "preferred" or "redeemable" 5. Increase or decrease of capital stock;
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 6. Merger or consolidation of the corporation with another corporation or
or all of the shares or series of shares may have a par value or have no par value as other corporations;
may be provided for in the articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public utilities, and building and 7. Investment of corporate funds in another corporation or business in
loan associations shall not be permitted to issue no-par value shares of stock. accordance with this Code; and

Preferred shares of stock issued by any corporation may be given preference in 8. Dissolution of the corporation.
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 Except as provided in the immediately preceding paragraph, the vote necessary to
articles of incorporation which are not violative of the provisions of this Code: approve a particular corporate act as provided in this Code shall be deemed to
Provided, That preferred shares of stock may be issued only with a stated par refer only to stocks with voting rights.
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:
Indisputably, one of the rights of a stockholder is the right to participate in the
Provided, That such terms and conditions shall be effective upon the filing of a
control or management of the corporation.43 This is exercised through his vote in
certificate thereof with the Securities and Exchange Commission.
the election of directors because it is the board of directors that controls or
manages the corporation.44 In the absence of provisions in the articles of
P a g e | 48

incorporation denying voting rights to preferred shares, preferred shares have the MR. VILLEGAS. That is right.
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 MR. NOLLEDO. Thank you.
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 With respect to an investment by one corporation in another corporation, say, a
bondholders.45 In fact, under the Corporation Code only preferred or redeemable corporation with 60-40 percent equity invests in another corporation which is
shares can be deprived of the right to vote.46 Common shares cannot be deprived permitted by the Corporation Code, does the Committee adopt the grandfather
of the right to vote in any corporate meeting, and any provision in the articles of rule?
incorporation restricting the right of common shareholders to vote is invalid.47
MR. VILLEGAS. Yes, that is the understanding of the Committee.
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 MR. NOLLEDO. Therefore, we need additional Filipino capital?
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 MR. VILLEGAS. Yes.48
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 xxxx
"capital" in Section 11, Article XII of the Constitution refers only to shares of
stock that can vote in the election of directors. MR. AZCUNA. May I be clarified as to that portion that was accepted by the
Committee.
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 MR. VILLEGAS. The portion accepted by the Committee is the deletion of the
utilities. As revealed in the deliberations of the Constitutional Commission, phrase "voting stock or controlling interest."
"capital" refers to the voting stock or controlling interest of a corporation, to wit:
MR. AZCUNA. Hence, without the Davide amendment, the committee report would
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino read: "corporations or associations at least sixty percent of whose CAPITAL is
equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3- owned by such citizens."
1/3 in Section 15.
MR. VILLEGAS. Yes.
MR. VILLEGAS. That is right.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of
MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do the capital to be owned by citizens.
we base the equity requirement, is it on the authorized capital stock, on the
subscribed capital stock, or on the paid-up capital stock of a corporation"? Will the MR. VILLEGAS. That is right.
Committee please enlighten me on this?
MR. AZCUNA. But the control can be with the foreigners even if they are the
MR. VILLEGAS. We have just had a long discussion with the members of the team minority. Let us say 40 percent of the capital is owned by them, but it is the
from the UP Law Center who provided us a draft. The phrase that is contained voting capital, whereas, the Filipinos own the nonvoting shares. So we can
here which we adopted from the UP draft is "60 percent of voting stock." have a situation where the corporation is controlled by foreigners despite
being the minority because they have the voting capital. That is the anomaly
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless that would result here.
declared delinquent, unpaid capital stock shall be entitled to vote.
P a g e | 49

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the Philippine national and at least sixty percent [60%] of the fund will accrue to the
1973 and 1935 Constitutions is that according to Commissioner Rodrigo, benefit of the Philippine nationals; Provided, that where a corporation its non-
there are associations that do not have stocks. That is why we say "CAPITAL." Filipino stockholders own stocks in a Securities and Exchange Commission [SEC]
registered enterprise, at least sixty percent [60%] of the capital stock outstanding
MR. AZCUNA. We should not eliminate the phrase "controlling interest." and entitled to vote 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
MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis Directors of each of both corporation must be citizens of the Philippines, in order
supplied) that the corporation shall be considered a Philippine national. The control test
shall be applied for this purpose.
Thus, 60 percent of the "capital" assumes, or should result in, "controlling
interest" in the corporation. Reinforcing this interpretation of the term "capital," Compliance with the required Filipino ownership of a corporation shall be
as referring to controlling interest or shares entitled to vote, is the definition of a determined on the basis of outstanding capital stock whether fully paid or
"Philippine national" in the Foreign Investments Act of 1991,50 to wit: not, but only such stocks which are generally entitled to vote are considered.

SEC. 3. Definitions. - As used in this Act: 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
a. The term "Philippine national" shall mean a citizen of the Philippines; or a rights is essential. Thus, stocks, the voting rights of which have been
domestic partnership or association wholly owned by citizens of the Philippines; assigned or transferred to aliens cannot be considered held by Philippine
or a corporation organized under the laws of the Philippines of which at least citizens or Philippine nationals.
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 Individuals or juridical entities not meeting the aforementioned
Code of which one hundred percent (100%) of the capital stock outstanding and qualifications are considered as non-Philippine nationals. (Emphasis
entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or supplied)
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 Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital"
benefit of Philippine nationals: Provided, That where a corporation and its non- required in the Constitution. Full beneficial ownership of 60 percent of the
Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) outstanding capital stock, coupled with 60 percent of the voting rights, is required.
registered enterprise, at least sixty percent (60%) of the capital stock outstanding The legal and beneficial ownership of 60 percent of the outstanding capital stock
and entitled to vote of each of both corporations must be owned and held by must rest in the hands of Filipino nationals in accordance with the constitutional
citizens of the Philippines and at least sixty percent (60%) of the members of the mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."
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." Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens
(Emphasis supplied) 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
In explaining the definition of a "Philippine national," the Implementing Rules and may prescribe, certain areas of investments." Thus, in numerous laws Congress
Regulations of the Foreign Investments Act of 1991 provide: 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
b. "Philippine national" shall mean a citizen of the Philippines or a domestic these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183;
partnership or association wholly owned by the citizens of the Philippines; or a (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for
corporation organized under the laws of the Philippines of which at least Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas
sixty percent [60%] of the capital stock outstanding and entitled to vote is Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development
owned and held by citizens of the Philippines; or a trustee of funds for pension Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or
or other employee retirement or separation benefits, where the trustee is a R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term
P a g e | 50

"capital" in Section 11, Article XII of the Constitution is also used in the same holders of Common Capital Stock shall have the exclusive right to vote for
context in numerous laws reserving certain areas of investments to Filipino the election of directors and for all other purposes."53
citizens.
In short, only holders of common shares can vote in the election of directors,
To construe broadly the term "capital" as the total outstanding capital stock, meaning only common shareholders exercise control over PLDT. Conversely,
including both common and non-votingpreferred shares, grossly contravenes the holders of preferred shares, who have no voting rights in the election of directors,
intent and letter of the Constitution that the "State shall develop a self-reliant and do not have any control over PLDT. In fact, under PLDT’s Articles of Incorporation,
independent national economy effectively controlled by Filipinos." A broad holders of common shares have voting rights for all purposes, while holders of
definition unjustifiably disregards who owns the all-important voting stock, which preferred shares have no voting right for any purpose whatsoever.
necessarily equates to control of the public utility.
It must be stressed, and respondents do not dispute, that foreigners hold a
We shall illustrate the glaring anomaly in giving a broad definition to the term majority of the common shares of PLDT. In fact, based on PLDT’s 2010 General
"capital." Let us assume that a corporation has 100 common shares owned by Information Sheet (GIS),54 which is a document required to be submitted annually
foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with to the Securities and Exchange Commission,55 foreigners hold 120,046,690
both classes of share having a par value of one peso (₱1.00) per share. Under the common shares of PLDT whereas Filipinos hold only 66,750,622 common
broad definition of the term "capital," such corporation would be considered shares.56 In other words, foreigners hold 64.27% of the total number of PLDT’s
compliant with the 40 percent constitutional limit on foreign equity of public common shares, while Filipinos hold only 35.73%. Since holding a majority of the
utilities since the overwhelming majority, or more than 99.999 percent, of the common shares equates to control, it is clear that foreigners exercise control over
total outstanding capital stock is Filipino owned. This is obviously absurd. PLDT. Such amount of control unmistakably exceeds the allowable 40 percent
limit on foreign ownership of public utilities expressly mandated in Section 11,
In the example given, only the foreigners holding the common shares have voting Article XII of the Constitution.
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 Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC,
over the public utility. On the other hand, the Filipinos, holding more than 99.999 shows that per share the SIP58preferred shares earn a pittance in dividends
percent of the equity, cannot vote in the election of directors and hence, have no compared to the common shares. PLDT declared dividends for the common shares
control over the public utility. This starkly circumvents the intent of the framers of at ₱70.00 per share, while the declared dividends for the preferred shares
the Constitution, as well as the clear language of the Constitution, to place the amounted to a measly ₱1.00 per share.59 So the preferred shares not only cannot
control of public utilities in the hands of Filipinos. It also renders illusory the State vote in the election of directors, they also have very little and obviously negligible
policy of an independent national economy effectively controlled by Filipinos. dividend earning capacity compared to common shares.

The example given is not theoretical but can be found in the real world, and in fact As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT
exists in the present case. common shares is ₱5.00 per share, whereas the par value of preferred shares is
₱10.00 per share. In other words, preferred shares have twice the par value of
Holders of PLDT preferred shares are explicitly denied of the right to vote in the common shares but cannot elect directors and have only 1/70 of the dividends of
election of directors. PLDT’s Articles of Incorporation expressly state that "the common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos
holders of Serial Preferred Stock shall not be entitled to vote at any meeting while foreigners own only a minuscule 0.56% of the preferred shares.61 Worse,
of the stockholders for the election of directors or for any other purpose or preferred shares constitute 77.85% of the authorized capital stock of PLDT while
otherwise participate in any action taken by the corporation or its stockholders, or common shares constitute only 22.15%.62 This undeniably shows that beneficial
to receive notice of any meeting of stockholders."51 interest in PLDT is not with the non-voting preferred shares but with the common
shares, blatantly violating the constitutional requirement of 60 percent Filipino
On the other hand, holders of common shares are granted the exclusive right to control and Filipino beneficial ownership in a public utility.
vote in the election of directors. PLDT’s Articles of Incorporation52 state that "each
holder of Common Capital Stock shall have one vote in respect of each share of The legal and beneficial ownership of 60 percent of the outstanding capital stock
such stock held by him on all matters voted upon by the stockholders, and the must rest in the hands of Filipinos in accordance with the constitutional mandate.
P a g e | 51

Full beneficial ownership of 60 percent of the outstanding capital stock, coupled must perform its solemn duty to defend and uphold the intent and letter of the
with 60 percent of the voting rights, is constitutionally required for the State’s Constitution to ensure, in the words of the Constitution, "a self-reliant and
grant of authority to operate a public utility. The undisputed fact that the PLDT independent national economy effectively controlled by Filipinos."
preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70
of the dividends that PLDT common shares earn, grossly violates the Section 11, Article XII of the Constitution, like other provisions of the Constitution
constitutional requirement of 60 percent Filipino control and Filipino beneficial expressly reserving to Filipinos specific areas of investment, such as the
ownership of a public utility. development of natural resources and ownership of land, educational institutions
and advertising business, is self-executing. There is no need for legislation to
In short, Filipinos hold less than 60 percent of the voting stock, and earn less implement these self-executing provisions of the Constitution. The rationale why
than 60 percent of the dividends, of PLDT. This directly contravenes the these constitutional provisions are self-executing was explained in Manila Prince
express command in Section 11, Article XII of the Constitution that "[n]o franchise, Hotel v. GSIS,66 thus:
certificate, or any other form of authorization for the operation of a public utility
shall be granted except to x x x corporations x x x organized under the laws of the x x x Hence, unless it is expressly provided that a legislative act is necessary to
Philippines, at least sixty per centum of whose capital is owned by such enforce a constitutional mandate, the presumption now is that all provisions of the
citizens x x x." constitution are self-executing. If the constitutional provisions are treated as
requiring legislation instead of self-executing, the legislature would have the
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class power to ignore and practically nullify the mandate of the fundamental law. This
of shares exercises the sole right to vote in the election of directors, and thus can be cataclysmic. That is why the prevailing view is, as it has always been, that
exercise control over PLDT; (2) Filipinos own only 35.73% of PLDT’s common —
shares, constituting a minority of the voting stock, and thus do not exercise control
over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting . . . in case of doubt, the Constitution should be considered self-executing rather
rights; (4) preferred shares earn only 1/70 of the dividends that common shares than non-self-executing. . . . Unless the contrary is clearly intended, the
earn;63 (5) preferred shares have twice the par value of common shares; and (6) provisions of the Constitution should be considered self-executing, as a
preferred shares constitute 77.85% of the authorized capital stock of PLDT and contrary rule would give the legislature discretion to determine when, or
common shares only 22.15%. This kind of ownership and control of a public utility whether, they shall be effective. These provisions would be subordinated to the
is a mockery of the Constitution. will of the lawmaking body, which could make them entirely meaningless by
simply refusing to pass the needed implementing statute. (Emphasis supplied)
Incidentally, the fact that PLDT common shares with a par value of ₱5.00 have a
current stock market value of ₱2,328.00 per share,64 while PLDT preferred shares In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice
with a par value of ₱10.00 per share have a current stock market value ranging Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
from only ₱10.92 to ₱11.06 per share,65 is a glaring confirmation by the market presumed to be self-executing. Justice Puno stated:
that control and beneficial ownership of PLDT rest with the common shares, not
with the preferred shares. Courts as a rule consider the provisions of the Constitution as self-executing,
rather than as requiring future legislation for their enforcement. The reason is not
Indisputably, construing the term "capital" in Section 11, Article XII of the difficult to discern. For if they are not treated as self-executing, the mandate of
Constitution to include both voting and non-voting shares will result in the abject the fundamental law ratified by the sovereign people can be easily ignored
surrender of our telecommunications industry to foreigners, amounting to a clear and nullified by Congress. Suffused with wisdom of the ages is the unyielding
abdication of the State’s constitutional duty to limit control of public utilities to rule that legislative actions may give breath to constitutional rights but
Filipino citizens. Such an interpretation certainly runs counter to the congressional inaction should not suffocate them.
constitutional provision reserving certain areas of investment to Filipino citizens,
such as the exploitation of natural resources as well as the ownership of land, Thus, we have treated as self-executing the provisions in the Bill of Rights on
educational institutions and advertising businesses. The Court should never open arrests, searches and seizures, the rights of a person under custodial investigation,
to foreign control what the Constitution has expressly reserved to Filipinos for the rights of an accused, and the privilege against self-incrimination. It is
that would be a betrayal of the Constitution and of the national interest. The Court recognized that legislation is unnecessary to enable courts to effectuate
P a g e | 52

constitutional provisions guaranteeing the fundamental rights of life, liberty and Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function
the protection of property. The same treatment is accorded to constitutional to reject or disapprove the Articles of Incorporation of any corporation where "the
provisions forbidding the taking or damaging of property for public use without required percentage of ownership of the capital stock to be owned by
just compensation. (Emphasis supplied) citizens of the Philippines has not been complied with as required by
existing laws or the Constitution." Thus, the SEC is the government agency
Thus, in numerous cases,67 this Court, even in the absence of implementing tasked with the statutory duty to enforce the nationality requirement prescribed
legislation, applied directly the provisions of the 1935, 1973 and 1987 in Section 11, Article XII of the Constitution on the ownership of public utilities.
Constitutions limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68this This Court, in a petition for declaratory relief that is treated as a petition for
Court ruled: mandamus as in the present case, can direct the SEC to perform its statutory duty
under the law, a duty that the SEC has apparently unlawfully neglected to do based
x x x As the Constitution is silent as to the effects or consequences of a sale by a on the 2010 GIS that respondent PLDT submitted to the SEC.
citizen of his land to an alien, and as both the citizen and the alien have violated
the law, none of them should have a recourse against the other, and it should only Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the
be the State that should be allowed to intervene and determine what is to be done "power and function" to "suspend or revoke, after proper notice and hearing,
with the property subject of the violation. We have said that what the State should the franchise or certificate of registration of corporations, partnerships or
do or could do in such matters is a matter of public policy, entirely beyond the associations, upon any of the grounds provided by law." The SEC is mandated
scope of judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L- under Section 5(d) of the same Code with the "power and function" to
5996, June 27, 1956.) While the legislature has not definitely decided what "investigate x x x the activities of persons to ensure compliance" with the laws
policy should be followed in cases of violations against the constitutional and regulations that SEC administers or enforces. The GIS that all corporations are
prohibition, courts of justice cannot go beyond by declaring the disposition required to submit to SEC annually should put the SEC on guard against violations
to be null and void as violative of the Constitution. x x x (Emphasis supplied) of the nationality requirement prescribed in the Constitution and existing laws.
This Court can compel the SEC, in a petition for declaratory relief that is treated as
To treat Section 11, Article XII of the Constitution as not self-executing would a petition for mandamus as in the present case, to hear and decide a possible
mean that since the 1935 Constitution, or over the last 75 years, not one of the violation of Section 11, Article XII of the Constitution in view of the ownership
constitutional provisions expressly reserving specific areas of investments to structure of PLDT’s voting shares, as admitted by respondents and as stated in
corporations, at least 60 percent of the "capital" of which is owned by Filipinos, PLDT’s 2010 GIS that PLDT submitted to SEC.
was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment, like WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in
the operation by corporations of public utilities, the exploitation by corporations Section 11, Article XII of the 1987 Constitution refers only to shares of stock
of mineral resources, the ownership by corporations of real estate, and the entitled to vote in the election of directors, and thus in the present case only to
ownership of educational institutions. All the legislatures that convened since common shares, and not to the total outstanding capital stock (common and non-
1935 also miserably failed to enact legislations to implement these vital voting preferred shares). Respondent Chairperson of the Securities and Exchange
constitutional provisions that determine who will effectively control the national Commission is DIRECTED to apply this definition of the term "capital" in
economy, Filipinos or foreigners. This Court cannot allow such an absurd determining the extent of allowable foreign ownership in respondent Philippine
interpretation of the Constitution. Long Distance Telephone Company, and if there is a violation of Section 11, Article
XII of the Constitution, to impose the appropriate sanctions under the law.
This Court has held that the SEC "has both regulatory and adjudicative
functions."69 Under its regulatory functions, the SEC can be compelled by SO ORDERED.
mandamus to perform its statutory duty when it unlawfully neglects to perform
the same. Under its adjudicative or quasi-judicial functions, the SEC can be also be ANTONIO T. CARPIO
compelled by mandamus to hear and decide a possible violation of any law it Associate Justice
administers or enforces when it is mandated by law to investigate such
violation.1awphi1
P a g e | 53

Republic of the Philippines Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to
SUPREME COURT petitioner McArthur.2
Baguio City
Petitioner Narra acquired its MPSA from Alpha Resources and Development
THIRD DIVISION Corporation and Patricia Louise Mining & Development Corporation (PLMDC)
which previously filed an application for an MPSA with the MGB, Region IV-B,
G.R. No. 195580 April 21, 2014 DENR on January 6, 1992. Through the said application, the DENR issued MPSA-
IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San Isidro,
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND Municipality of Narra, Palawan. Subsequently, PLMDC conveyed, transferred
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners, and/or assigned its rights and interests over the MPSA application in favor of
vs. Narra.
REDMONT CONSOLIDATED MINES CORP., Respondent.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled
DECISION 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
VELASCO, JR., J.: said MPSA application to Tesoro.

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the
Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and DENR three (3) separate petitions for the denial of petitioners’ applications for
Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks to MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.
reverse the October 1, 2010 Decision1 and the February 15, 2011 Resolution of the
Court of Appeals (CA).
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.
The Facts (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a
considerable stockholder of petitioners, it was the driving force behind
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. petitioners’ filing of the MPSAs over the areas covered by applications since it
(Redmont), a domestic corporation organized and existing under Philippine laws, knows that it can only participate in mining activities through corporations which
took interest in mining and exploring certain areas of the province of Palawan. are deemed Filipino citizens. Redmont argued that given that petitioners’ capital
After inquiring with the Department of Environment and Natural Resources stocks were mostly owned by MBMI, they were likewise disqualified from
(DENR), it learned that the areas where it wanted to undertake exploration and engaging in mining activities through MPSAs, which are reserved only for Filipino
mining activities where already covered by Mineral Production Sharing citizens.
Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
In their Answers, petitioners averred that they were qualified persons under
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. Section 3(aq) of Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995
(SMMI), filed an application for an MPSA and Exploration Permit (EP) with the which provided:
Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the Department of
Environment and Natural Resources (DENR). Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following
terms, whether in singular or plural, shall mean:
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over
1,782 hectares in Barangay Sumbiling, Municipality of Bataraza, Province of xxxx
Palawan and EPA-IVB-44 which includes an area of 3,720 hectares in Barangay
Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to
P a g e | 54

(aq) "Qualified person" means any citizen of the Philippines with capacity to Development Corp. as, DISQUALIFIED for being considered as Foreign
contract, or a corporation, partnership, association, or cooperative organized or Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x
authorized for the purpose of engaging in mining, with technical and financial x DECLARED NULL AND VOID.6
capability to undertake mineral resources development and duly registered in
accordance with law at least sixty per cent (60%) of the capital of which is owned The POA considered petitioners as foreign corporations being "effectively
by citizens of the Philippines: Provided, That a legally organized foreign-owned controlled" by MBMI, a 100% Canadian company and declared their MPSAs null
corporation shall be deemed a qualified person for purposes of granting an and void. In the same Resolution, it gave due course to Redmont’s EPAs.
exploration permit, financial or technical assistance agreement or mineral Thereafter, on February 7, 2008, the POA issued an Order7 denying the Motion for
processing permit. Reconsideration filed by petitioners.

Additionally, they stated that their nationality as applicants is immaterial because Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a
they also applied for Financial or Technical Assistance Agreements (FTAA) joint Notice of Appeal8 and Memorandum of Appeal9 with the Mines Adjudication
denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA- Board (MAB) while Narra separately filed its Notice of Appeal 10 and Memorandum
IVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless, of Appeal.11
they claimed that the issue on nationality should not be raised since McArthur,
Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned In their respective memorandum, petitioners emphasized that they are qualified
by citizens of the Philippines. They asserted that though MBMI owns 40% of the persons under the law. Also, through a letter, they informed the MAB that they had
shares of PLMC (which owns 5,997 shares of Narra),3 40% of the shares of MMC their individual MPSA applications converted to FTAAs. McArthur’s FTAA was
(which owns 5,997 shares of McArthur)4 and 40% of the shares of SLMC (which, in denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application
turn, owns 5,997 shares of Tesoro),5 the shares of MBMI will not make it the was converted to AFTA-IVB-0813 on May 28, 2007, and Narra’s FTAA was
owner of at least 60% of the capital stock of each of petitioners. They added that converted to AFTA-IVB-0714 on March 30, 2006.
the best tool used in determining the nationality of a corporation is the "control
test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They
also claimed that the POA of DENR did not have jurisdiction over the issues in Pending the resolution of the appeal filed by petitioners with the MAB, Redmont
Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942. Finally, filed a Complaint15 with the Securities and Exchange Commission (SEC), seeking
they stressed that Redmont has no personality to sue them because it has no the revocation of the certificates for registration of petitioners on the ground that
pending claim or application over the areas applied for by petitioners. they are foreign-owned or controlled corporations engaged in mining in violation
of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a
Manifestation and Motion to Suspend Proceeding before the MAB praying for the
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.
gaining MPSAs. It held:
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial
[I]t is clearly established that respondents are not qualified applicants to engage in Court of Quezon City, Branch 92 (RTC) a Complaint16 for injunction with
mining activities. On the other hand, [Redmont] having filed its own applications application for issuance of a temporary restraining order (TRO) and/or writ of
for an EPA over the areas earlier covered by the MPSA application of respondents preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed for
may be considered if and when they are qualified under the law. The violation of the deferral of the MAB proceedings pending the resolution of the Complaint
the requirements for the issuance and/or grant of permits over mining areas is before the SEC.
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. But before the RTC can resolve Redmont’s Complaint and applications for
injunctive reliefs, the MAB issued an Order on September 10, 2008, finding the
appeal meritorious. It held:
xxxx
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining REVERSES and SETS ASIDE the Resolution dated 14 December 2007 of the Panel
Inc., Tesoro Mining and Development, Inc., and Narra Nickel Mining and of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01,
P a g e | 55

2007-02 and 2007-03, and its Order dated 07 February 2008 denying the Motions SO ORDERED.23
for Reconsideration of the Appellants. The Petition filed by Redmont Consolidated
Mines Corporation on 02 January 2007 is hereby ordered DISMISSED.17 In a Resolution dated February 15, 2011, the CA denied the Motion for
Reconsideration filed by petitioners.
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s
application for a TRO and setting the case for hearing the prayer for the issuance After a careful review of the records, the CA found that there was doubt as to the
of a writ of preliminary injunction on September 19, 2008. nationality of petitioners when it realized that petitioners had a common major
investor, MBMI, a corporation composed of 100% Canadians. Pursuant to the first
Meanwhile, on September 22, 2008, Redmont filed a Motion for sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of
Reconsideration19 of the September 10, 2008 Order of the MAB. Subsequently, it 2005, adopting the 1967 SEC Rules which implemented the requirement of the
filed a Supplemental Motion for Reconsideration20 on September 29, 2008. Constitution and other laws pertaining to the exploitation of natural resources, the
CA used the "grandfather rule" to determine the nationality of petitioners. It
Before the MAB could resolve Redmont’s Motion for Reconsideration and provided:
Supplemental Motion for Reconsideration, Redmont filed before the RTC a
Supplemental Complaint21 in Civil Case No. 08-63379. 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,
On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of but if the percentage of Filipino ownership in the corporation or partnership is
preliminary injunction enjoining the MAB from finally disposing of the appeals of less than 60%, only the number of shares corresponding to such percentage shall
petitioners and from resolving Redmont’s Motion for Reconsideration and be counted as of Philippine nationality. Thus, if 100,000 shares are registered in
Supplement Motion for Reconsideration of the MAB’s September 10, 2008 the name of a corporation or partnership at least 60% of the capital stock or
Resolution. 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
On July 1, 2009, however, the MAB issued a second Order denying Redmont’s stock or capital of the corporation or partnership, respectively, belongs to Filipino
Motion for Reconsideration and Supplemental Motion for Reconsideration and citizens, only 50,000 shares shall be recorded as belonging to aliens. 24(emphasis
resolving the appeals filed by petitioners. supplied)

Hence, the petition for review filed by Redmont before the CA, assailing the Orders In determining the nationality of petitioners, the CA looked into their corporate
issued by the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive structures and their corresponding common shareholders. Using the grandfather
of which reads: rule, the CA discovered that MBMI in effect owned majority of the common stocks
of the petitioners as well as at least 60% equity interest of other majority
shareholders of petitioners through joint venture agreements. The CA found that
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated through a "web of corporate layering, it is clear that one common controlling
September 10, 2008 and July 1, 2009 of the Mining Adjudication Board are investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded
reversed and set aside. The findings of the Panel of Arbitrators of the Department that petitioners McArthur, Tesoro and Narra are also in partnership with, or
of Environment and Natural Resources that respondents McArthur, Tesoro and privies-in-interest of, MBMI.
Narra are foreign corporations is upheld and, therefore, the rejection of their
applications for Mineral Product Sharing Agreement should be recommended to
the Secretary of the DENR. Furthermore, the CA viewed the conversion of the MPSA applications of
petitioners into FTAA applications suspicious in nature and, as a consequence, it
recommended the rejection of petitioners’ MPSA applications by the Secretary of
With respect to the applications of respondents McArthur, Tesoro and Narra for the DENR.
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 With regard to the settlement of disputes over rights to mining areas, the CA
the Philippines. pointed out that the POA has jurisdiction over them and that it also has the power
to determine the of nationality of petitioners as a prerequisite of the Constitution
P a g e | 56

prior the conferring of rights to "co-production, joint venture or production- Decision and Resolution of the OP. Thereafter, petitioners appealed the same CA
sharing agreements" of the state to mining rights. However, it also stated that the decision to this Court which is now pending with a different division.
POA’s jurisdiction is limited only to the resolution of the dispute and not on the
approval or rejection of the MPSAs. It stipulated that only the Secretary of the Thus, the instant petition for review against the October 1, 2010 Decision of the
DENR is vested with the power to approve or reject applications for MPSA. CA. Petitioners put forth the following errors of the CA:

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution I.
which considered petitioners McArthur, Tesoro and Narra as foreign corporations. The Court of Appeals erred when it did not dismiss the case for mootness
Nevertheless, the CA determined that the POA’s declaration that the MPSAs of
despite the fact that the subject matter of the controversy, the MPSA
McArthur, Tesoro and Narra are void is highly improper.
Applications, have already been converted into FTAA applications and that the
While the petition was pending with the CA, Redmont filed with the Office of the same have already been granted.
President (OP) a petition dated May 7, 2010 seeking the cancellation of II.
petitioners’ FTAAs. The OP rendered a Decision26 on April 6, 2011, wherein it The Court of Appeals erred when it did not dismiss the case for lack of
canceled and revoked petitioners’ FTAAs for violating and circumventing the jurisdiction considering that the Panel of Arbitrators has no jurisdiction to
"Constitution x x x[,] the Small Scale Mining Law and Environmental Compliance determine the nationality of Narra, Tesoro and McArthur.
Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. III.
584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with
The Court of Appeals erred when it did not dismiss the case on account of
Redmont stating that petitioners committed violations against the
abovementioned laws and failed to submit evidence to negate them. The Decision Redmont’s willful forum shopping.
further quoted the December 14, 2007 Order of the POA focusing on the alleged IV.
misrepresentation and claims made by petitioners of being domestic or Filipino The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign
corporations and the admitted continued mining operation of PMDC using their corporations based on the "Grandfather Rule" is contrary to law, particularly the
locally secured Small Scale Mining Permit inside the area earlier applied for an express mandate of the Foreign Investments Act of 1991, as amended, and the
MPSA application which was eventually transferred to Narra. It also agreed with FIA Rules.
the POA’s estimation that the filing of the FTAA applications by petitioners is a
V.
clear admission that they are "not capable of conducting a large scale mining
operation and that they need the financial and technical assistance of a foreign The Court of Appeals erred when it applied the exceptions to the res inter alios
entity in their operation, that is why they sought the participation of MBMI acta rule.
Resources, Inc."28 The Decision further quoted: VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA
The filing of the FTAA application on June 15, 2007, during the pendency of the Applications into FTAA Applications were of "suspicious nature" as the same is
case only demonstrate the violations and lack of qualification of the respondent based on mere conjectures and surmises without any shred of evidence to show
corporations to engage in mining. The filing of the FTAA application conversion the same.31
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. We find the petition to be without merit.
furnished its stockholders in their head office in Canada suggest that they are
conducting operation only through their local counterparts.29 This case not moot and academic

The Motion for Reconsideration of the Decision was further denied by the OP in a The claim of petitioners that the CA erred in not rendering the instant case as
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on moot is without merit.
Certiorari of the OP’s Decision and Resolution with the CA, docketed as CA-G.R. SP
No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the
P a g e | 57

Basically, a case is said to be moot and/or academic when it "ceases to present a thus, the issue on the prohibition relating to MPSA applications of foreign mining
justiciable controversy by virtue of supervening events, so that a declaration corporations is academic. Also, petitioners would want us to correct the CA’s
thereon would be of no practical use or value."32 Thus, the courts "generally finding which deemed the aforementioned conversions of applications as
decline jurisdiction over the case or dismiss it on the ground of mootness."33 suspicious in nature, since it is based on mere conjectures and surmises and not
supported with evidence.
The "mootness" principle, however, does accept certain exceptions and the mere
raising of an issue of "mootness" will not deter the courts from trying a case when We disagree.
there is a valid reason to do so. In David v. Macapagal-Arroyo (David), the Court
provided four instances where courts can decide an otherwise moot case, thus: The CA’s analysis of the actions of petitioners after the case was filed against them
by respondent is on point. The changing of applications by petitioners from one
1.) There is a grave violation of the Constitution; type to another just because a case was filed against them, in truth, would raise
not a few sceptics’ eyebrows. What is the reason for such conversion? Did the said
2.) The exceptional character of the situation and paramount public conversion not stem from the case challenging their citizenship and to have the
interest is involved; case dismissed against them for being "moot"? It is quite obvious that it is
petitioners’ strategy to have the case dismissed against them for being "moot."
3.) When constitutional issue raised requires formulation of controlling
principles to guide the bench, the bar, and the public; and Consider the history of this case and how petitioners responded to every action
done by the court or appropriate government agency: on January 2, 2007,
4.) The case is capable of repetition yet evading review.34 Redmont filed three separate petitions for denial of the MPSA applications of
petitioners before the POA. On June 15, 2007, petitioners filed a conversion of
their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution,
All of the exceptions stated above are present in the instant case. We of this Court observed this suspect change of applications while the case was pending before it
note that a grave violation of the Constitution, specifically Section 2 of Article XII, and held:
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, The filing of the Financial or Technical Assistance Agreement application is a clear
MBMI, is of exceptional character and involves paramount public interest since it admission that the respondents are not capable of conducting a large scale mining
undeniably affects the exploitation of our Country’s natural resources. The operation and that they need the financial and technical assistance of a foreign
corresponding actions of petitioners during the lifetime and existence of the entity in their operation that is why they sought the participation of MBMI
instant case raise questions as what principle is to be applied to cases with similar Resources, Inc. The participation of MBMI in the corporation only proves the fact
issues. No definite ruling on such principle has been pronounced by the Court; that it is the Canadian company that will provide the finances and the resources to
hence, the disposition of the issues or errors in the instant case will serve as a operate the mining areas for the greater benefit and interest of the same and not
guide "to the bench, the bar and the public."35 Finally, the instant case is capable of the Filipino stockholders who only have a less substantial financial stake in the
repetition yet evading review, since the Canadian company, MBMI, can keep on corporation.
utilizing dummy Filipino corporations through various schemes of corporate
layering and conversion of applications to skirt the constitutional prohibition xxxx
against foreign mining in Philippine soil.
x x x The filing of the FTAA application on June 15, 2007, during the pendency of
Conversion of MPSA applications to FTAA applications the case only demonstrate the violations and lack of qualification of the
respondent corporations to engage in mining. The filing of the FTAA application
We shall discuss the first error in conjunction with the sixth error presented by conversion which is allowed foreign corporation of the earlier MPSA is an
petitioners since both involve the conversion of MPSA applications to FTAA admission that indeed the respondent is not Filipino but rather of foreign
applications. Petitioners propound that the CA erred in ruling against them since nationality who is disqualified under the laws. Corporate documents of MBMI
the questioned MPSA applications were already converted into FTAA applications; Resources, Inc. furnished its stockholders in their head office in Canada suggest
that they are conducting operation only through their local counterparts.36
P a g e | 58

On October 1, 2010, the CA rendered a Decision which partially granted the corporate structures. The new documents filed by petitioners are factual evidence
petition, reversing and setting aside the September 10, 2008 and July 1, 2009 that this Court has no power to verify.
Orders of the MAB. In the said Decision, the CA upheld the findings of the POA of
the DENR that the herein petitioners are in fact foreign corporations thus a The only thing clear and proved in this Court is the fact that the OP declared that
recommendation of the rejection of their MPSA applications were recommended petitioner corporations have violated several mining laws and made
to the Secretary of the DENR. With respect to the FTAA applications or conversion misrepresentations and falsehood in their applications for FTAA which lead to the
of the MPSA applications to FTAAs, the CA deferred the matter for the revocation of the said FTAAs, demonstrating that petitioners are not beyond going
determination of the Secretary of the DENR and the President of the Republic of against or around the law using shifty actions and strategies. Thus, in this instance,
the Philippines.37 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.
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for
the dismissal of the petition asserting that on April 5, 2010, then President Gloria Grandfather test
Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which
rendered the petition moot and academic. However, the CA, in a Resolution dated The main issue in this case is centered on the issue of petitioners’ nationality,
February 15, 2011 denied their motion for being a mere "rehash of their claims whether Filipino or foreign. In their previous petitions, they had been adamant in
and defenses."38 Standing firm on its Decision, the CA affirmed the ruling that insisting that they were Filipino corporations, until they submitted their
petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated Manifestation and Submission dated October 19, 2012 where they stated the
the case to us via a Petition for Review on Certiorari under Rule 45, questioning alleged change of corporate ownership to reflect their Filipino ownership. Thus,
the Decision of the CA. Interestingly, the OP rendered a Decision dated April 6, there is a need to determine the nationality of petitioner corporations.
2011, a day after this petition for review was filed, cancelling and revoking the
FTAAs, quoting the Order of the POA and stating that petitioners are foreign
corporations since they needed the financial strength of MBMI, Inc. in order to Basically, there are two acknowledged tests in determining the nationality of a
conduct large scale mining operations. The OP Decision also based the cancellation corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion
on the misrepresentation of facts and the violation of the "Small Scale Mining Law No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
and Environmental Compliance Certificate as well as Sections 3 and 8 of the requirement of the Constitution and other laws pertaining to the controlling
Foreign Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a interests in enterprises engaged in the exploitation of natural resources owned by
Resolution, denying the Motion for Reconsideration filed by the petitioners. Filipino citizens, provides:

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Shares belonging to corporations or partnerships at least 60% of the capital of
Court the fact of the OP’s Decision and Resolution. In their Reply, petitioners chose which is owned by Filipino citizens shall be considered as of Philippine nationality,
to ignore the OP Decision and continued to reuse their old arguments claiming that but if the percentage of Filipino ownership in the corporation or partnership is
they were granted FTAAs and, thus, the case was moot. Petitioners filed a less than 60%, only the number of shares corresponding to such percentage shall
Manifestation and Submission dated October 19, 2012,40 wherein they asserted be counted as of Philippine nationality. Thus, if 100,000 shares are registered in
that the present petition is moot since, in a remarkable turn of events, MBMI was the name of a corporation or partnership at least 60% of the capital stock or
able to sell/assign all its shares/interest in the "holding companies" to DMCI capital, respectively, of which belong to Filipino citizens, all of the shares shall be
Mining Corporation (DMCI), a Filipino corporation and, in effect, making their recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital
respective corporations fully-Filipino owned. 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.
Again, it is quite evident that petitioners have been trying to have this case
dismissed for being "moot." Their final act, wherein MBMI was able to allegedly
sell/assign all its shares and interest in the petitioner "holding companies" to The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to
DMCI, only proves that they were in fact not Filipino corporations from the start. corporations or partnerships at least 60% of the capital of which is owned by
The recent divesting of interest by MBMI will not change the stand of this Court Filipino citizens shall be considered as of Philippine nationality," pertains to the
with respect to the nationality of petitioners prior the suspicious change in their control test or the liberal rule. On the other hand, the second part of the DOJ
Opinion which provides, "if the percentage of the Filipino ownership in the
P a g e | 59

corporation or partnership is less than 60%, only the number of shares flora and fauna, and other natural resources are owned by the State. With the
corresponding to such percentage shall be counted as Philippine nationality," exception of agricultural lands, all other natural resources shall not be alienated.
pertains to the stricter, more stringent grandfather rule. 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
Prior to this recent change of events, petitioners were constant in advocating the activities, or it may enter into co-production, joint venture or production-sharing
application of the "control test" under RA 7042, as amended by RA 8179, agreements with Filipino citizens, or corporations or associations at least sixty per
otherwise known as the Foreign Investments Act (FIA), rather than using the centum of whose capital is owned by such citizens. Such agreements may be for a
stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides: 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.
SECTION 3. Definitions. - As used in this Act:
xxxx
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 The President may enter into agreements with Foreign-owned corporations
Philippines; a corporation organized under the laws of the Philippines of which at involving either technical or financial assistance for large-scale exploration,
least sixty percent (60%) of the capital stock outstanding and entitled to vote is development, and utilization of minerals, petroleum, and other mineral oils
wholly owned by Filipinos or a trustee of funds for pension or other employee according to the general terms and conditions provided by law, based on real
retirement or separation benefits, where the trustee is a Philippine national and at contributions to the economic growth and general welfare of the country. In such
least sixty percent (60%) of the fund will accrue to the benefit of Philippine agreements, the State shall promote the development and use of local scientific
nationals: Provided, That were a corporation and its non-Filipino stockholders and technical resources. (emphasis supplied)
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 The emphasized portion of Sec. 2 which focuses on the State entering into different
each of both corporations must be owned and held by citizens of the Philippines types of agreements for the exploration, development, and utilization of natural
and at least sixty percent (60%) of the members of the Board of Directors, in order resources with entities who are deemed Filipino due to 60 percent ownership of
that the corporation shall be considered a Philippine national. (emphasis supplied) 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
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant ascertain the nationality of petitioners since, as the Constitution so provides, such
case since the definition of a "Philippine National" under Sec. 3 of the FIA does not agreements are only allowed corporations or associations "at least 60 percent of
provide for it. They further claim that the grandfather rule "has been abandoned such capital is owned by such citizens." The deliberations in the Records of the
and is no longer the applicable rule."41 They also opined that the last portion of 1986 Constitutional Commission shed light on how a citizenship of a corporation
Sec. 3 of the FIA admits the application of a "corporate layering" scheme of will be determined:
corporations. Petitioners claim that the clear and unambiguous wordings of the
statute preclude the court from construing it and prevent the court’s use of Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an
discretion in applying the law. They said that the plain, literal meaning of the independent national economy is freedom from undue foreign control? What is
statute meant the application of the control test is obligatory. the meaning of undue foreign control?

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national
to circumvent the Constitution and pertinent laws, then it becomes illegal. Further, sovereignty and the welfare of the Filipino in the economic sphere.
the pronouncement of petitioners that the grandfather rule has already been
abandoned must be discredited for lack of basis. MR. BENNAGEN: Why does it have to be qualified still with the word "undue"?
Why not simply freedom from foreign control? I think that is the meaning of
Art. XII, Sec. 2 of the Constitution provides: independence, because as phrased, it still allows for foreign control.

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,
P a g e | 60

MR. VILLEGAS: It will now depend on the interpretation because if, for example, MR. VILLEGAS: Yes, that is the understanding of the Committee.
we retain the 60/40 possibility in the cultivation of natural resources, 40 percent
involves some control; not total control, but some control. MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. BENNAGEN: In any case, I think in due time we will propose some MR. VILLEGAS: Yes.42 (emphasis supplied)
amendments.
It is apparent that it is the intention of the framers of the Constitution to apply the
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology. grandfather rule in cases where corporate layering is present.

Mr. BENNAGEN: Yes. Elementary in statutory construction is when there is conflict between the
Constitution and a statute, the Constitution will prevail. In this instance,
Thank you, Mr. Vice-President. 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
xxxx application. As decreed by the honorable framers of our Constitution, the
grandfather rule prevails and must be applied.
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino
equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3- Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
1/3 in Section 15.
The above-quoted SEC Rules provide for the manner of calculating the Filipino
MR. VILLEGAS: That is right. interest in a corporation for purposes, among others, of determining compliance
with nationality requirements (the ‘Investee Corporation’). Such manner of
MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do computation is necessary since the shares in the Investee Corporation may be
we base the equity requirement, is it on the authorized capital stock, on the owned both by individual stockholders (‘Investing Individuals’) and by
subscribed capital stock, or on the paid-up capital stock of a corporation’? Will the corporations and partnerships (‘Investing Corporation’). The said rules thus
Committee please enlighten me on this? provide for the determination of nationality depending on the ownership of the
Investee Corporation and, in certain instances, the Investing Corporation.
MR. VILLEGAS: We have just had a long discussion with the members of the team
from the UP Law Center who provided us with a draft. The phrase that is Under the above-quoted SEC Rules, there are two cases in determining the
contained here which we adopted from the UP draft is ‘60 percent of the voting nationality of the Investee Corporation. The first case is the ‘liberal rule’, later
stock.’ 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
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless owned by Filipino citizens shall be considered as of Philippine nationality.’ Under
declared delinquent, unpaid capital stock shall be entitled to vote. 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
MR. VILLEGAS: That is right. which is at least 60% Filipino-owned is considered as Filipino.

MR. NOLLEDO: Thank you. 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
With respect to an investment by one corporation in another corporation, say, a percentage of Filipino ownership in the corporation or partnership is less than
corporation with 60-40 percent equity invests in another corporation which is 60%, only the number of shares corresponding to such percentage shall be
permitted by the Corporation Code, does the Committee adopt the grandfather counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule
rule? Proper, the combined totals in the Investing Corporation and the Investee
P a g e | 61

Corporation must be traced (i.e., "grandfathered") to determine the total McArthur Mining, Inc.
percentage of Filipino ownership.
To establish the actual ownership, interest or participation of MBMI in each of
Moreover, the ultimate Filipino ownership of the shares must first be traced to the petitioners’ corporate structure, they have to be "grandfathered."
level of the Investing Corporation and added to the shares directly owned in the
Investee Corporation x x x. As previously discussed, McArthur acquired its MPSA application from MMC,
which acquired its application from SMMI. McArthur has a capital stock of ten
xxxx million pesos (PhP 10,000,000) divided into 10,000 common shares at one
thousand pesos (PhP 1,000) per share, subscribed to by the following:44
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 Name Nationality Number of Amount Amount Paid
equity ownership is in doubt (i.e., in cases where the joint venture corporation Shares Subscribed
with Filipino and foreign stockholders with less than 60% Filipino stockholdings
[or 59%] invests in other joint venture corporation which is either 60-40% Madridejos Filipino 5,997 PhP PhP 825,000.00
Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Mining 5,997,000.00
Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not Corporation
apply. (emphasis supplied)
MBMI Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Resources,
After a scrutiny of the evidence extant on record, the Court finds that this case calls Inc.
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. Lauro L. Filipino 1 PhP 1,000.00 PhP 1,000.00
Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of Salazar
petitioners Narra, McArthur and Tesoro, since their common investor, the 100%
Canadian corporation––MBMI, funded them. However, petitioners also claim that Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
there is "doubt" only when the stockholdings of Filipinos are less than 60%. 43 Esguerra
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
The assertion of petitioners that "doubt" only exists when the stockholdings are Agcaoili
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 Michael T. American 1 PhP 1,000.00 PhP 1,000.00
the ownership of the corporation exists. It would be ludicrous to limit the Mason
application of the said word only to the instances where the stockholdings of non- Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Filipino stockholders are more than 40% of the total stockholdings in a Cawkell
corporation. The corporations interested in circumventing our laws would clearly
strive to have "60% Filipino Ownership" at face value. It would be senseless for Total 10,000 PhP PhP 2,708,174.60
these applying corporations to state in their respective articles of incorporation 10,000,000.00 (emphasis
that they have less than 60% Filipino stockholders since the applications will be supplied)
denied instantly. Thus, various corporate schemes and layerings are utilized to
circumvent the application of the Constitution.
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
Obviously, the instant case presents a situation which exhibits a scheme employed also a major investor and "controls"45 MBMI and also, similar nominal
by stockholders to circumvent the law, creating a cloud of doubt in the Court’s shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar
mind. To determine, therefore, the actual participation, direct or indirect, of MBMI, (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
the grandfather rule must be used.
P a g e | 62

Madridejos Mining Corporation it holds directly and indirectly a 60% effective equity interest in the Olympic
Properties.46 Quoting the said Annual report:
Name Nationality Number of Amount Amount Paid
Shares Subscribed On September 9, 2004, the Company and Olympic Mines & Development
Corporation ("Olympic") entered into a series of agreements including a Property
Olympic Mines Filipino 6,663 PhP PhP 0 Purchase and Development Agreement (the Transaction Documents) with respect
& 6,663,000.00 to three nickel laterite properties in Palawan, Philippines (the "Olympic
Properties"). The Transaction Documents effectively establish a joint venture
Development between the Company and Olympic for purposes of developing the Olympic
Properties. The Company holds directly and indirectly an initial 60% interest in
Corp. the joint venture. Under certain circumstances and upon achieving certain
milestones, the Company may earn up to a 100% interest, subject to a 2.5% net
MBMI Canadian 3,331 PhP PhP 2,803,900.00 revenue royalty.47 (emphasis supplied)
Resources, 3,331,000.00
Thus, as demonstrated in this first corporation, McArthur, when it is
Inc. "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
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00 McArthur, making the latter a foreign corporation.
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Tesoro Mining and Development, Inc.
Esguerra
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 million pesos (PhP 10,000,000) divided into ten thousand (10,000) common
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00 shares at PhP 1,000 per share, as demonstrated below:

Hernando [[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/apri
Michael T. American 1 PhP 1,000.00 PhP 1,000.00 l2014/195580.pdf]]
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00 Name Nationality Number Amount Amount
Cawkell of Paid
Total 10,000 PhP PhP 2,809,900.00 Subscribed
10,000,000.00 Shares
(emphasis Sara Marie Filipino 5,997 PhP PhP
supplied) 5,997,000.00 825,000.00
Mining, Inc.
Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any
amount with respect to the number of shares they subscribed to in the MBMI Canadian 3,998 PhP PhP
corporation, which is quite absurd since Olympic is the major stockholder in MMC. 3,998,000.00 1,878,174.60
MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount Resources,
with respect to the number of shares it subscribed to. It states that Olympic Inc.
entered into joint venture agreements with several Philippine companies, wherein
P a g e | 63

Lauro L. Filipino 1 PhP 1,000.00 PhP Olympic Mines & Filipino 6,663 PhP PhP 0
Salazar 1,000.00 6,663,000.00
Development
Fernando Filipino 1 PhP 1,000.00 PhP
B. 1,000.00
Corp.

Esguerra MBMI Canadian 3,331 PhP PhP 2,794,000.00


Resources, 3,331,000.00
Manuel A. Filipino 1 PhP 1,000.00 PhP
1,000.00
Inc.
Agcaoili
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. American 1 PhP 1,000.00 PhP
Mason 1,000.00 Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Kenneth Canadian 1 PhP 1,000.00 PhP
Esguerra
Cawkell 1,000.00
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
(emphasis
Hernando
supplied)
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
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 Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra,
Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," Total 10,000 PhP PhP 2,809,900.00
"Amount Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we 10,000,000.00
scrutinize SMMI’s corporate structure: (emphasis
supplied)
Sara Marie Mining, Inc.
After subsequently studying SMMI’s corporate structure, it is not farfetched for us
[[reference to spot the glaring similarity between SMMI and MMC’s corporate structure. Again,
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/apri the presence of identical stockholders, namely: Olympic, MBMI, Amanti Limson
l2014/195580.pdf]] (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the
headings "Nationality," "Number of Shares," "Amount Subscribed," and "Amount
Name Nationality Number Amount Amount PaidPaid" are exactly the same except for the amount paid by MBMI which now reflects
of the amount of two million seven hundred ninety four thousand pesos (PhP
2,794,000). Oddly, the total value of the amount paid is two million eight hundred
Subscribed
nine thousand nine hundred pesos (PhP 2,809,900).
Shares
P a g e | 64

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s


Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
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 Agcaoili
exploitation, utilization and development of our natural resources.
Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Narra Nickel Mining and Development Corporation
Bocalan
Moving on to the last petitioner, Narra, which is the transferee and assignee of Bayani H. Filipino 1 PhP 1,000.00 PhP 1,000.00
PLMDC’s MPSA application, whose corporate structure’s arrangement is similar to Agabin
that of the first two petitioners discussed. The capital stock of Narra is ten million
pesos (PhP 10,000,000), which is divided into ten thousand common shares Robert L. American 1 PhP 1,000.00 PhP 1,000.00
(10,000) at one thousand pesos (PhP 1,000) per share, shown as follows:
McCurdy
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/apri Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
l2014/195580.pdf]] Cawkell

Total 10,000 PhP PhP


Name Nationality Number Amount Amount Paid
10,000,000.00 2,800,000.00
of
(emphasis
Subscribed supplied)
Shares

Patricia Louise Filipino 5,997 PhP PhP Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and
5,997,000.00 1,677,000.00 Esguerra, is present in this corporate structure.
Mining &
Patricia Louise Mining & Development Corporation
Development
Using the grandfather method, we further look and examine PLMDC’s corporate
Corp. structure:

MBMI Canadian 3,998 PhP PhP


Name Nationality Number Amount Amount Paid
3,996,000.00 1,116,000.00
of Shares Subscribed
Resources, Inc.
Palawan Alpha South Filipino 6,596 PhP PhP 0
Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00 Resources 6,596,000.00
Development
Mendoza, Jr. Corporation
MBMI Resources, Canadian 3,396 PhP PhP
Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00
3,396,000.00 2,796,000.00
Inc.
Fernandez
P a g e | 65

Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00 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
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00 to a shareholders’ agreement, the Company exercises joint control over the
companies in the Olympic Group.
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 (b) Alpha Group
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
The Philippine companies holding the Alpha Property, and the ownership interests
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00 therein, are as follows:

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00 Alpha- Philippines (the "Alpha Group")
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
Narra Nickel Mining & Development Corporation (Narra) 60.4%
(emphasis
supplied)
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
Yet again, the usual players in petitioners’ corporate structures are present. shareholders’ agreement, the Company exercises joint control over the companies
Similarly, the amount of money paid by the 2nd tier majority stock holder, in this in the Alpha Group.48 (emphasis supplied)
case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero.
Concluding from the above-stated facts, it is quite safe to say that petitioners
Studying MBMI’s Summary of Significant Accounting Policies dated October 31, McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
2005 explains the reason behind the intricate corporate layering that MBMI corporation, owns 60% or more of their equity interests. Such conclusion is
immersed itself in: derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI
and PLMDC. Going further and adding to the picture, MBMI’s Summary of
JOINT VENTURES The Company’s ownership interests in various mining ventures Significant Accounting Policies statement– –regarding the "joint venture"
engaged in the acquisition, exploration and development of mineral properties in agreements that it entered into with the "Olympic" and "Alpha" groups––involves
the Philippines is described as follows: SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the "layered"
corporations boils down to MBMI, Olympic or corporations under the "Alpha"
(a) Olympic Group group wherein MBMI has joint venture agreements with, practically exercising
majority control over the corporations mentioned. In effect, whether looking at the
The Philippine companies holding the Olympic Property, and the ownership and capital structure or the underlying relationships between and among the
interests therein, are as follows: 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.
Olympic- Philippines (the "Olympic Group")
Application of the res inter alios acta rule
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Petitioners question the CA’s use of the exception of the res inter alios acta or the
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
"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
P a g e | 66

should not be admitted in this case since it is not a party to the case and that it is [T]he relations of the parties to a joint venture and the nature of their association
not a "partner" of petitioners. 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
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide: 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
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or distinctions between a partnership and a joint venture, very little law being found
agent of the party within the scope of his authority and during the existence of the applicable to one that does not apply to the other.51
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 Though some claim that partnerships and joint ventures are totally different
itself. The same rule applies to the act or declaration of a joint owner, joint debtor, animals, there are very few rules that differentiate one from the other; thus, joint
or other person jointly interested with the party. ventures are deemed "akin" or similar to a partnership. In fact, in joint venture
agreements, rules and legal incidents governing partnerships are applied.52
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 Accordingly, culled from the incidents and records of this case, it can be assumed
the property, is evidence against the former. that the relationships entered between and among petitioners and MBMI are no
simple "joint venture agreements." As a rule, corporations are prohibited from
Petitioners claim that before the above-mentioned Rule can be applied to a case, entering into partnership agreements; consequently, corporations enter into joint
"the partnership relation must be shown, and that proof of the fact must be made venture agreements with other corporations or partnerships for certain
by evidence other than the admission itself."49 Thus, petitioners assert that the CA transactions in order to form "pseudo partnerships."
erred in finding that a partnership relationship exists between them and MBMI
because, in fact, no such partnership exists. Obviously, as the intricate web of "ventures" entered into by and among
petitioners and MBMI was executed to circumvent the legal prohibition against
Partnerships vs. joint venture agreements 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
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by to partnerships since the elements of partnership are present.
stating that "by entering into a joint venture, MBMI have a joint interest" with
Narra, Tesoro and McArthur. They challenged the conclusion of the CA which
pertains to the close characteristics of 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
"partnerships" and "joint venture agreements." Further, they asserted that before interest" with Narra, Tesoro and McArthur.
this particular partnership can be formed, it should have been formally reduced
into writing since the capital involved is more than three thousand pesos (PhP
3,000). Being that there is no evidence of written agreement to form a partnership Panel of Arbitrators’ jurisdiction
between petitioners and MBMI, no partnership was created.
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the
We disagree. instant case. The POA has jurisdiction to settle disputes over rights to mining areas
which definitely involve the petitions filed by Redmont against petitioners Narra,
McArthur and Tesoro. Redmont, by filing its petition against petitioners, is
A partnership is defined as two or more persons who bind themselves to asserting the right of Filipinos over mining areas in the Philippines against alleged
contribute money, property, or industry to a common fund with the intention of foreign-owned mining corporations. Such claim constitutes a "dispute" found in
dividing the profits among themselves.50 On the other hand, joint ventures have Sec. 77 of RA 7942:
been deemed to be "akin" to partnerships since it is difficult to distinguish
between joint ventures and partnerships. Thus:
P a g e | 67

Within thirty (30) days, after the submission of the case by the parties for the xxxx
decision, the panel shall have exclusive and original jurisdiction to hear and decide
the following: Within fifteen (15) working days form the receipt of the Certification issued by the
Panel of Arbitrators as provided in Section 38 hereof, the concerned Regional
(a) Disputes involving rights to mining areas Director shall initially evaluate the Mineral Agreement applications in areas
outside Mineral reservations. He/She shall thereafter endorse his/her findings to
(b) Disputes involving mineral agreements or permits the Bureau for further evaluation by the Director within fifteen (15) working days
from receipt of forwarded documents. Thereafter, the Director shall endorse the
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.: 53 same to the secretary for consideration/approval within fifteen working days
from receipt of such endorsement.
The phrase "disputes involving rights to mining areas" refers to any adverse claim,
protest, or opposition to an application for mineral agreement. The POA therefore In case of Mineral Agreement applications in areas with Mineral Reservations,
has the jurisdiction to resolve any adverse claim, protest, or opposition to a within fifteen (15) working days from receipt of the Certification issued by the
pending application for a mineral agreement filed with the concerned Regional Panel of Arbitrators as provided for in Section 38 hereof, the same shall be
Office of the MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which evaluated and endorsed by the Director to the Secretary for
provide: consideration/approval within fifteen days from receipt of such endorsement.
(emphasis supplied)
Sec. 38.
It has been made clear from the aforecited provisions that the "disputes involving
rights to mining areas" under Sec. 77(a) specifically refer only to those disputes
xxxx relative to the applications for a mineral agreement or conferment of mining
rights.
Within thirty (30) calendar days from the last date of publication/posting/radio
announcements, the authorized officer(s) of the concerned office(s) shall issue a The jurisdiction of the POA over adverse claims, protest, or oppositions to a
certification(s) that the publication/posting/radio announcement have been mining right application is further elucidated by Secs. 219 and 43 of DENR AO 95-
complied with. Any adverse claim, protest, opposition shall be filed directly, within 936, which read:
thirty (30) calendar days from the last date of publication/posting/radio
announcement, with the concerned Regional Office or through any concerned
PENRO or CENRO for filing in the concerned Regional Office for purposes of its Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and provisions of Sections 28, 43 and 57 above, any adverse claim, protest or
these implementing rules and regulations. Upon final resolution of any adverse opposition specified in said sections may also be filed directly with the Panel of
claim, protest or opposition, the Panel of Arbitrators shall likewise issue a Arbitrators within the concerned periods for filing such claim, protest or
certification to that effect within five (5) working days from the date of finality of opposition as specified in said Sections.
resolution thereof. Where there is no adverse claim, protest or opposition, the
Panel of Arbitrators shall likewise issue a Certification to that effect within five Sec. 43. Publication/Posting of Mineral Agreement.-
working days therefrom.
xxxx
xxxx
The Regional Director or concerned Regional Director shall also cause the posting
No Mineral Agreement shall be approved unless the requirements under this of the application on the bulletin boards of the Bureau, concerned Regional
Section are fully complied with and any adverse claim/protest/opposition is office(s) and in the concerned province(s) and municipality(ies), copy furnished
finally resolved by the Panel of Arbitrators. the barangays where the proposed contract area is located once a week for two (2)
consecutive weeks in a language generally understood in the locality. After forty-
Sec. 41. five (45) days from the last date of publication/posting has been made and no
P a g e | 68

adverse claim, protest or opposition was filed within the said forty-five (45) days, made and that no adverse claim, protest or opposition of whatever nature has
the concerned offices shall issue a certification that publication/posting has been been filed. On the other hand, if there be any adverse claim, protest or opposition,
made and that no adverse claim, protest or opposition of whatever nature has the same shall be filed within forty-five (45) days from the last date of
been filed. On the other hand, if there be any adverse claim, protest or opposition, publication/posting, with the Regional offices concerned, or through the
the same shall be filed within forty-five (45) days from the last date of Department’s Community Environment and Natural Resources Officers (CENRO)
publication/posting, with the Regional Offices concerned, or through the or Provincial Environment and Natural Resources Officers (PENRO), to be filed at
Department’s Community Environment and Natural Resources Officers (CENRO) the Regional Office for resolution of the Panel of Arbitrators. However, previously
or Provincial Environment and Natural Resources Officers (PENRO), to be filed at published valid and subsisting mining claims are exempted from posted/posting
the Regional Office for resolution of the Panel of Arbitrators. However previously required under this Section.
published valid and subsisting mining claims are exempted from posted/posting
required under this Section. No mineral agreement shall be approved unless the requirements under this
section are fully complied with and any opposition/adverse claim is dealt with in
No mineral agreement shall be approved unless the requirements under this writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
section are fully complied with and any opposition/adverse claim is dealt with in supplied.)
writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.) These provisions lead us to conclude that the power of the POA to resolve any
adverse claim, opposition, or protest relative to mining rights under Sec. 77(a) of
It has been made clear from the aforecited provisions that the "disputes involving RA 7942 is confined only to adverse claims, conflicts and oppositions relating to
rights to mining areas" under Sec. 77(a) specifically refer only to those disputes applications for the grant of mineral rights.
relative to the applications for a mineral agreement or conferment of mining
rights. POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts
and oppositions and it has no authority to approve or reject said applications. Such
The jurisdiction of the POA over adverse claims, protest, or oppositions to a power is vested in the DENR Secretary upon recommendation of the MGB
mining right application is further elucidated by Secs. 219 and 43 of DENRO AO Director. Clearly, POA’s jurisdiction over "disputes involving rights to mining
95-936, which reads: areas" has nothing to do with the cancellation of existing mineral agreements.
(emphasis ours)
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the
provisions of Sections 28, 43 and 57 above, any adverse claim, protest or Accordingly, as we enunciated in Celestial, the POA unquestionably has
opposition specified in said sections may also be filed directly with the Panel of jurisdiction to resolve disputes over MPSA applications subject of Redmont’s
Arbitrators within the concerned periods for filing such claim, protest or petitions. However, said jurisdiction does not include either the approval or
opposition as specified in said Sections. rejection of the MPSA applications, which is vested only upon the Secretary of the
DENR. Thus, the finding of the POA, with respect to the rejection of petitioners’
Sec. 43. Publication/Posting of Mineral Agreement Application.- MPSA applications being that they are foreign corporation, is valid.

xxxx Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular
courts, not the POA, that has jurisdiction over the MPSA applications of petitioners.
The Regional Director or concerned Regional Director shall also cause the posting
of the application on the bulletin boards of the Bureau, concerned Regional This postulation is incorrect.
office(s) and in the concerned province(s) and municipality(ies), copy furnished
the barangays where the proposed contract area is located once a week for two (2) It is basic that the jurisdiction of the court is determined by the statute in force at
consecutive weeks in a language generally understood in the locality. After forty- the time of the commencement of the action.54
five (45) days from the last date of publication/posting has been made and no
adverse claim, protest or opposition was filed within the said forty-five (45) days, Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
the concerned offices shall issue a certification that publication/posting has been
P a g e | 69

Act of 1980" reads: Whatever may be the decision of the POA will eventually reach the court system
via a resort to the CA and to this Court as a last recourse.
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive
original jurisdiction: Selling of MBMI’s shares to DMCI

1. In all civil actions in which the subject of the litigation is incapable of pecuniary As stated before, petitioners’ Manifestation and Submission dated October 19,
estimation. 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
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942: 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
Section 77. Panel of Arbitrators.— 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
x x x Within thirty (30) days, after the submission of the case by the FTAA with the State."57Petitioners stress that there should no longer be any issue
parties for the decision, the panel shall have exclusive and original left as regards their qualification to enter into FTAA contracts since they are
jurisdiction to hear and decide the following: qualified to engage in mining activities in the Philippines. Thus, whether the
"grandfather rule" or the "control test" is used, the nationalities of petitioners
(c) Disputes involving rights to mining areas cannot be doubted since it would pass both tests.

(d) Disputes involving mineral agreements or permits 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
It is clear that POA has exclusive and original jurisdiction over any and all disputes be considered by us since it is being tackled in G.R. No. 202877 pending before this
involving rights to mining areas. One such dispute is an MPSA application to which Court.1âwphi1 Thus, the question of whether petitioners, allegedly a Philippine-
an adverse claim, protest or opposition is filed by another interested owned corporation due to the sale of MBMI's shareholdings to DMCI, are allowed
applicant.1âwphi1 In the case at bar, the dispute arose or originated from MPSA to enter into FTAAs with the State is a non-issue in this case.
applications where petitioners are asserting their rights to mining areas subject of
their respective MPSA applications. Since respondent filed 3 separate petitions for In ending, the "control test" is still the prevailing mode of determining whether or
the denial of said applications, then a controversy has developed between the not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the
parties and it is POA’s jurisdiction to resolve said disputes. 1987 Constitution, entitled to undertake the exploration, development and
utilization of the natural resources of the Philippines. When in the mind of the
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners Court there is doubt, based on the attendant facts and circumstances of the case, in
filed with the DENR Regional Office or any concerned DENRE or CENRO are MPSA the 60-40 Filipino-equity ownership in the corporation, then it may apply the
applications. Thus POA has jurisdiction. "grandfather rule."

Furthermore, the POA has jurisdiction over the MPSA applications under the WHEREFORE, premises considered, the instant petition is DENIED. The assailed
doctrine of primary jurisdiction. Euro-med Laboratories v. Province of Court of Appeals Decision dated October 1, 2010 and Resolution dated February
Batangas55 elucidates: 15, 2011 are hereby AFFIRMED.

The doctrine of primary jurisdiction holds that if a case is such that its SO ORDERED.
determination requires the expertise, specialized training and knowledge of an
administrative body, relief must first be obtained in an administrative proceeding PRESBITERO J. VELASCO, JR.
before resort to the courts is had even if the matter may well be within their Associate Justice
proper jurisdiction.
P a g e | 70

Republic of the Philippines I.


SUPREME COURT
Manila The case has not been rendered moot and academic

SPECIAL THIRD DIVISION Petitioners have first off criticized the Court for resolving in its Decision a
substantive issue, which,as argued, has supposedly been rendered moot by the
G.R. No. 195580 January 28, 2015 fact that petitioners’ applications for MPSAs had already been converted to an
application for a Financial Technical Assistance Agreement (FTAA), as petitioners
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND have in fact been granted an FTAA. Further, the nationality issue, so petitioners
DEVELOPMENT, INC., and McARTHUR MINING, INC., Petitioners, presently claim, had been rendered moribund by the fact that MBMI had already
vs. divested itself and sold all its shareholdings in the petitioners, as well as in their
REDMONT CONSOLIDATED MINES CORP., Respondent. corporate stockholders, to a Filipino corporation—DMCI Mining Corporation
(DMCI).
RESOLUTION
As a counterpoint, respondent Redmontavers that the present case has not been
VELASCO, JR., J.: rendered moot by the supposed issuance of an FTAA in petitioners’ favor as this
FTAA was subsequently revoked by the Office of the President (OP) and is
currently a subject of a petition pending in the Court’s First Division. Redmont
Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, likewise contends that the supposed sale of MBMI’s interest in the petitioners and
which denied the Petition for Review on Certiorari under Rule 45 jointly in their "holding companies" is a question of fact that is outside the Court’s
interposed by petitioners Narra Nickel and Mining Development Corp. (Narra), province to verify in a Rule 45 certiorari proceedings. In any case, assuming that
Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. the controversy has been rendered moot, Redmont claims that its resolution on
(McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011 the merits is still justified by the fact that petitioners have violated a constitutional
Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 109703. provision, the violation is capable of repetition yet evading review, and the present
case involves a matter of public concern.
Very simply, the challenged Decision sustained the appellate court's ruling that
petitioners, being foreign corporations, are not entitled to Mineral Production Indeed, as the Court clarified in its Decision, the conversion of the MPSA
Sharing Agreements (MPSAs). In reaching its conclusion, this Court upheld with application to one for FTAAs and the issuance by the OP of an FTAA in petitioners’
approval the appellate court's finding that there was doubt as to petitioners' favor are irrelevant. The OP itself has already cancelled and revoked the FTAA
nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), thusissued to petitioners. Petitioners curiously have omitted this critical factin
effectively owns 60% of the common stocks of the petitioners by owning equity their motion for reconsideration. Furthermore, the supposed sale by MBMI of its
interest of petitioners' other majority corporate shareholders. shares in the petition ercorporations and in their holding companies is not only a
question of fact that this Court is without authority toverify, it also does not negate
In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners- any violation of the Constitutional provisions previously committed before any
movants argued, in the main, that the Court's Decision was not in accord with law such sale.
and logic. In its September 2, 2014 Comment, on the other hand, respondent
Redmont Consolidated Mines Corp. (Redmont) countered that petitioners’ motion We can assume for the nonce that the controversy had indeed been rendered moot
for reconsideration is nothing but a rehash of their arguments and should, thus, be by these two events. Asthis Court has time and again declared, the "moot and
denied outright for being pro-forma. Petitioners have interposed on September 30, academic" principle is not a magical formula that automatically dissuades courts in
2014 their Reply to the respondent’s Comment. resolving a case.1 The Court may still take cognizance of an otherwise moot and
academic case, if it finds that (a) there is a grave violation of the Constitution;(b)
After considering the parties’ positions, as articulated in their respective the situation is of exceptional character and paramount public interest is involved;
submissions, We resolve to deny the motion for reconsideration. (c) the constitutional issue raised requires formulation of controlling principles to
guide the bench, the bar, and the public; and (d) the case is capable of repetition
P a g e | 71

yet evading review.2 The Court’s April 21, 2014 Decision explained in some detail associations at least sixty per centum of whose capital is owned by such [Filipino]
that all four (4) of the foregoing circumstances are present in the case. If only to citizens" may enjoy certain rights and privileges, like the exploration and
stress a point, we will do so again. First, allowing the issuance of MPSAs to development of natural resources.
applicants that are owned and controlled by a 100% foreign-owned corporation,
albeit through an intricate web of corporate layering involving alleged Filipino The application of the Grandfather Rule in the present case does not eschew the
corporations, is tantamount to permitting a blatant violation of Section 2, Article Control Test.
XII of the Constitution. The Court simply cannot allow this breach and inhibit itself
from resolving the controversy on the facile pretext that the case had already been Clearly, petitioners have misread, and failed to appreciate the clear import of, the
rendered academic. Court’s April 21, 2014 Decision. Nowhere in that disposition did the Court
foreclose the application of the Control Test in determining which corporations
Second, the elaborate corporate layering resorted to by petitioners so as to make it may be considered as Philippine nationals. Instead, to borrow Justice Leonen’s
appear that there is compliance with the minimum Filipino ownership in the term, the Court used the Grandfather Rule as a "supplement" to the Control Test so
Constitution is deftly exceptional in character. More importantly, the case is of that the intent underlying the averted Sec. 2, Art. XII of the Constitution be given
paramount public interest, as the corporate layering employed by petitioners was effect. The following excerpts of the April 21, 2014 Decision cannot be clearer:
evidently designed to circumvent the constitutional caveat allowing only Filipino
citizens and corporations 60%-owned by Filipino citizens to explore, develop, and In ending, the "control test" is still the prevailing mode of determining whether or
use the country’s natural resources. not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. XII of the
1987 Constitution, entitled to undertake the exploration, development and
Third, the facts of the case, involving as they do a web of corporate layering utilization of the natural resources of the Philippines. When in the mind of the
intended to go around the Filipino ownership requirement in the Constitution and Court, there is doubt, based on the attendant facts and circumstances of the case,
pertinent laws, requirethe establishment of a definite principle that will ensure in the 60-40 Filipino equity ownership in the corporation, then it may apply the
that the Constitutional provision reserving to Filipino citizens or "corporations at "grandfather rule." (emphasis supplied)
least sixty per centum of whose capital is owned by such citizens" be effectively
enforced and complied with. The case, therefore, is an opportunity to establish a With that, the use of the Grandfather Rule as a "supplement" to the Control Test is
controlling principle that will "guide the bench, the bar, and the public." not proscribed by the Constitution or the Philippine Mining Act of 1995.

Lastly, the petitioners’ actions during the lifetime and existence of the instant case The Grandfather Rule implements the intent of the Filipinization provisions of the
that gave rise to the present controversy are capable of repetition yet evading Constitution.
review because, as shown by petitioners’ actions, foreign corporations can easily
utilize dummy Filipino corporations through various schemes and stratagems to
skirt the constitutional prohibition against foreign mining in Philippine soil. To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration,
development, and utilization of natural resources to Filipino citizens and
"corporations or associations at least sixty per centum of whose capital is owned
II. by such citizens." Similarly, Section 3(aq) of the Philippine Mining Act of 1995
considers a "corporation x x x registered in accordance with law at least sixty per
The application of the Grandfather Ruleis justified by the circumstances of the case cent of the capital of which is owned by citizens of the Philippines" as a person
to determine the nationality of petitioners. qualified to undertake a mining operation. Consistent with this objective, the
Grandfather Rulewas originally conceived to look into the citizenshipof the
To petitioners, the Court’s application of the Grandfather Rule to determine their individuals who ultimately own and control the shares of stock of a corporation
nationality is erroneous and allegedly without basis in the Constitution, the for purposes of determining compliance with the constitutional requirement of
Foreign Investments Act of 1991 (FIA), the Philippine Mining Act of 1995,3 and Filipino ownership. It cannot, therefore, be denied that the framers of the
the Rules issued by the Securities and Exchange Commission (SEC). These laws Constitution have not foreclosed the Grandfather Rule as a tool in verifying the
and rules supposedly espouse the application of the Control Test in verifying the nationality of corporations for purposes of ascertaining their right to participate in
Philippine nationality of corporate entities for purposes of determining nationalized or partly nationalized activities. The following excerpts from the
compliance withSec. 2, Art. XII of the Constitution that only "corporations or Record of the 1986 Constitutional Commission suggest as much:
P a g e | 72

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the
equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3- SEC applied the Grandfather Rule even if the corporation engaged in mining
1/3 in Section 15. operation passes the 60-40 requirement of the Control Test, viz:

MR. VILLEGAS: That is right. You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1)
MML owns 40% equity in MEDC, while the 60% is ostensibly owned by Philippine
xxxx individual citizens who are actually MML’s controlled nominees; (2) MEDC, in
turn, owns 60% equity in MOHC, while MML owns the remaining 40%; (3) Lastly,
MR. NOLLEDO: Thank you. MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%. You provide
the following figure to illustrate this structure:
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 xxxx
permitted by the Corporation Code, does the Committee adopt the grandfather
rule? We note that the Constitution and the statute use the concept "Philippine citizens."
Article III, Section 1 of the Constitution provides who are Philippine citizens: x x x
MR. VILLEGAS: Yes, that is the understanding of the Committee. This enumeration is exhaustive. In other words, there can be no other Philippine
citizens other than those falling within the enumeration provided by the
Constitution. Obviously, only natural persons are susceptible of citizenship. Thus,
As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method for purposes of the Constitutional and statutory restrictions on foreign
by which the percentage of Filipino equity in a corporation engaged in participation in the exploitation of mineral resources, a corporation investing in a
nationalized and/or partly nationalized areas of activities, provided for under the mining joint venture can never be considered as a Philippine citizen.
Constitution and other nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose
shareholder."4 Thus, to arrive at the actual Filipino ownership and control in a Petroleum [Inc.]. The Court held that a corporation investing in another
corporation, both the direct and indirect shareholdings in the corporation are corporation engaged ina nationalized activity cannot be considered as a citizen for
determined. purposes of the Constitutional provision restricting foreign exploitation of natural
resources:
This concept of stock attribution inherent in the Grandfather Rule to determine
the ultimate ownership in a corporation is observed by the Bureau of Internal xxxx
Revenue (BIR) in applying Section 127 (B)5 of the National Internal Revenue Code
on taxes imposed on closely held corporations, in relation to Section 96 of the Accordingly, we opine that we must look into the citizenship of the individual
Corporation Code6 on close corporations. Thus, in BIR Ruling No. 148-10, stockholders, i.e. natural persons, of that investor-corporation in order to
Commissioner Kim Henares held: determine if the Constitutional and statutory restrictions are complied with. If the
shares of stock of the immediate investor corporation is in turn held and
In the case of a multi-tiered corporation, the stock attribution rule must be controlled by another corporation, then we must look into the citizenship of the
allowed to run continuously along the chain of ownership until it finally reaches individual stockholders of the latter corporation. In other words, if there are layers
the individual stockholders. This is in consonance with the "grandfather rule" of intervening corporations investing in a mining joint venture, we must delve into
adopted in the Philippines under Section 96 of the Corporation Code(Batas the citizenship of the individual stockholders of each corporation. This is the strict
Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued application of the grandfather rule, which the Commission has been consistently
stock of a corporation are held by not more than twenty persons, among others, a applying prior to the 1990s. Indeed, the framers of the Constitution intended for
corporation is nonetheless not to be deemed a close corporation when at least two the "grandfather rule" to apply in case a 60%-40% Filipino-Foreign equity
thirds of its voting stock or voting rights is owned or controlled by another corporation invests in another corporation engaging in an activity where the
corporation which is not a close corporation.7 Constitution restricts foreign participation.
P a g e | 73

xxxx to accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.
Accordingly, under the structure you represented, the joint mining venture is
87.04 % foreign owned, while it is only 12.96% owned by Philippine citizens. The method employed in the Grandfather Rule of attributing the shareholdings of
Thus, the constitutional requirement of 60% ownership by Philippine citizens a given corporate shareholder to the second or even the subsequent tier of
isviolated. (emphasis supplied) ownership hews with the rule that the "beneficial ownership" of corporations
engaged in nationalized activities must reside in the hands of Filipino citizens.
Similarly, in the eponymous Redmont Consolidated Mines Corporation v. Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied,
McArthur Mining Inc., et al.,8 the SEC en bancapplied the Grandfather Rule despite the Department of Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an
the fact that the subject corporations ostensibly have satisfied the 60-40 Filipino agreement that may distort the actual economic or beneficial ownership of a
equity requirement. The SEC en bancheld that to attain the Constitutional mining corporation may be struck down as violative of the constitutional
objective of reserving to Filipinos the utilization of natural resources, one should requirement, viz:
not stop where the percentage of the capital stock is 60%.Thus:
In this connection, you raise the following specific questions:
[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI,
provided practically all the funds of the remaining appellee-corporations. The 1. Can a Philippine corporation with 30% equity owned by foreigners enter into a
records disclose that: (1) Olympic Mines and Development Corporation ("OMDC"), mining service contract with a foreign company granting the latter a share of not
a domestic corporation, and MBMI subscribed to 6,663 and 3,331 shares, morethan 40% from the proceeds of the operations?
respectively, out of the authorized capital stock of Madridejos; however, OMDC
paid nothing for this subscription while MBMI paid ₱2,803,900.00 out of its total xxxx
subscription cost of ₱3,331,000.00; (2) Palawan Alpha South Resource
Development Corp. ("Palawan Alpha"), also a domestic corporation, and MBMI By law, a mining lease may be granted only to a Filipino citizen, or to a corporation
subscribed to 6,596 and 3,996 shares, respectively, out of the authorized capital or partnership registered with the [SEC] at least 60% of the capital of which is
stock of PatriciaLouise; however, Palawan Alpha paid nothing for this subscription owned by Filipino citizens and possessing x x x.The sixty percent Philippine equity
while MBMI paid ₱2,796,000.00 out of its total subscription cost of ₱3,996,000.00; requirement in mineral resource exploitation x x xis intended to insure, among
(3) OMDC and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the other purposes, the conservation of indigenous natural resources, for Filipino
authorized capital stock of Sara Marie; however, OMDC paid nothing for this posterityx x x. I think it is implicit in this provision, even if it refers merely to
subscription while MBMI paid ₱2,794,000.00 out of its total subscription cost of ownership of stock in the corporation holding the mining concession, that
₱3,331,000.00; and (4) Falcon Ridge Resources Management Corp. ("Falcon beneficial ownership of the right to dispose, exploit, utilize, and develop natural
Ridge"), another domestic corporation, and MBMI subscribed to 5,997 and 3,998 resources shall pertain to Filipino citizens, and that the nationality requirementis
shares, respectively, out of the authorized capital stock of San Juanico; however, not satisfied unless Filipinos are the principal beneficiaries in the exploitation of
Falcon Ridge paid nothing for this subscription while MBMI paid ₱2,500,000.00 the country’s natural resources. This criterion of beneficial ownership is tacitly
out of its total subscription cost of ₱3,998,000.00. Thus, pursuant to the afore- adopted in Section 44 of P.D. No. 463, above-quoted, which limits the service fee in
quoted DOJ Opinion, the Grandfather Rule must be used. service contracts to 40% of the proceeds of the operation, thereby implying that
the 60-40 benefit-sharing ration is derived from the 60-40 equity requirement in
xxxx the Constitution.

The avowed purpose of the Constitution is to place in the hands of Filipinos the xxxx
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting
the constitutional provision should not diminish that right through the legal fiction It is obvious that while payments to a service contractor may be justified as a
of corporate ownership and control. But the constitutional provision, as service fee, and therefore, properly deductible from gross proceeds, the service
interpreted and practicedvia the 1967 SEC Rules, has favored foreigners contrary contract could be employed as a means of going about or circumventing the
to the command of the Constitution. Hence, the Grandfather Rule must be applied constitutional limit on foreign equity participation and the obvious constitutional
policy to insure that Filipinos retain beneficial ownership of our mineral
P a g e | 74

resources. Thus, every service contract scheme has to be evaluated in its entirety, Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x
on a case to case basis, to determine reasonableness of the total "service fee" x x x the total foreign equity in the investing corporation is 58% while the Filipino
like the options available tothe contractor to become equity participant in the equity is only 42%, in the investing corporation, subject of your query, is
Philippine entity holding the concession, or to acquire rights in the processing and disqualified from investing in real estate, which is a nationalized activity, as it does
marketing stages. x x x (emphasis supplied) not meet the 60%-40% Filipino-Foreign equity requirement under the
Constitution.
The "beneficial ownership" requirement was subsequently used in tandem with
the "situs of control" todetermine the nationality of a corporation in DOJ Opinion This pairing of the concepts "beneficial ownership" and the "situs of control" in
No. 84, S.of 1988, through the Grandfather Rule, despite the fact that both the determining what constitutes"capital" has been adopted by this Court in Heirs of
investee and investor corporations purportedly satisfy the 60-40 Filipino equity Gamboa v. Teves.10 In its October 9, 2012 Resolution, the Court clarified, thus:
requirement:9
This is consistent with Section 3 of the FIA which provides that where 100% of the
This refers to your request for opinion on whether or not there may be an capital stock is heldby "a trustee of funds for pension or other employee
investment in real estate by a domestic corporation (the investing corporation) retirement or separation benefits," the trustee is a Philippine national if "at least
seventy percent (70%) of the capital stock of which is owned by another domestic sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."
corporation withat least 60%-40% Filipino-Foreign Equity, while the remaining Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for
thirty percent (30%) of the capital stock is owned by a foreign corporation. 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
xxxx ownership of the stocks, coupled with appropriate voting rights, is essential."
(emphasis supplied)
This Department has had the occasion to rule in several opinions that it is implicit
in the constitutional provisions, even if it refers merely to ownership of stock in In emphasizing the twin requirements of "beneficial ownership" and "control" in
the corporation holding the land or natural resource concession, that the determining compliance with the required Filipino equity in Gamboa, the en
nationality requirement is not satisfied unless it meets the criterion of beneficial bancCourt explicitly cited with approval the SEC en banc’s application in Redmont
ownership, i.e. Filipinos are the principal beneficiaries in the exploration of natural Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of the Grandfather Rule,
resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the to wit:
same "the primordial consideration is situs of control, whether in a stock or
nonstock corporation"(Op. No. 178, s. 1974). As stated in the Register of Deeds vs. Significantly, the SEC en banc, which is the collegial body statutorily empowered to
Ung Sui Si Temple (97 Phil. 58), obviously toinsure that corporations and issue rules and opinions on behalf of SEC, has adopted the Grandfather Rulein
associations allowed to acquire agricultural land or to exploit natural resources determining compliance with the 60-40 ownership requirement in favor of
"shall be controlled by Filipinos." Accordingly, any arrangement which attempts to Filipino citizens mandated by the Constitution for certain economic activities. This
defeat the constitutional purpose should be eschewed (Op. No 130, s. 1985). prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the
We are informed that in the registration of corporations with the [SEC], 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v.
compliance with the sixty per centum requirement is being monitored by SEC McArthur Mining, Inc., et al. x x x (emphasis supplied)
under the "Grandfather Rule" a method by which the percentage of Filipino equity
in corporations engaged in nationalized and/or partly nationalized areas of Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel
activities provided for under the Constitution and other national laws is accurately Communications, Inc.,11 denied the foreign creditors’ proposal to convert part of
computed, and the diminution if said equity prevented (SEC Memo, S. 1976). The Bayantel’s debts to common shares of the company at a rate of 77.7%. Supposedly,
"Grandfather Rule" is applied specifically in cases where the corporation has the conversion of the debts to common shares by the foreign creditors would be
corporate stockholders with alien stockholdings, otherwise, if the rule is not done, both directly and indirectly, in order to meet the control test principle under
applied, the presence of such corporate stockholders could diminish the effective the FIA.Under the proposed structure, the foreign creditors would own 40% of the
control of Filipinos. outstanding capital stock of the telecommunications company on a direct basis,
while the remaining 40% of shares would be registered to a holding company that
P a g e | 75

shall retain, on a direct basis, the other 60% equity reserved for Filipino citizens. Grandfather Rule may be applied. Put in another manner, if the subject
Nonetheless, the Court found the proposal non-compliant with the Constitutional corporation’s Filipino equity falls below the threshold 60%, the corporation is
requirement of Filipino ownership as the proposed structure would give more immediately considered foreign-owned, in which case, the needto resort to the
than 60% of the ownership of the common shares of Bayantel to the foreign Grandfather Rule disappears.
corporations, viz:
On the other hand, a corporation that complies with the 60-40 Filipino to foreign
In its Rehabilitation Plan, among the material financial commitments made by equity requirement can be considered a Filipino corporation if there is no doubtas
respondent Bayantelis that its shareholders shall relinquish the agreed-upon to who has the "beneficial ownership" and "control" of the corporation. In that
amount of common stock[s] as payment to Unsecured Creditors as per the Term instance, there is no need fora dissection or further inquiry on the ownership of
Sheet. Evidently, the parties intend to convert the unsustainable portion of the corporate shareholders in both the investing and investee corporation or the
respondent’s debt into common stocks, which have voting rights. If we indulge application of the Grandfather Rule.12 As a corollary rule, even if the 60-40 Filipino
petitioners on their proposal, the Omnibus Creditors which are foreign to foreign equity ratio is apparently met by the subject or investee corporation, a
corporations, shall have control over 77.7% of Bayantel, a public utility company. resort to the Grandfather Rule is necessary if doubt existsas to the locusof the
This is precisely the scenario proscribed by the Filipinization provision of the "beneficial ownership" and "control." In this case, a further investigation as to the
Constitution.Therefore, the Court of Appeals acted correctly in sustaining the 40% nationality of the personalities with the beneficial ownership and control of the
debt-to-equity ceiling on conversion. (emphasis supplied) As shown by the quoted corporate shareholders in both the investing and investee corporations is
legislative enactments, administrative rulings, opinions, and this Court’s decisions, necessary.
the Grandfather Rule not only finds basis, but more importantly, it implements the
Filipino equity requirement, in the Constitution. As explained in the April 21,2012 Decision, the "doubt" that demands the
application of the Grandfather Rule in addition to or in tandem with the Control
Application of the Grandfather Test is not confined to, or more bluntly, does not refer to the fact that the apparent
Filipino ownership of the corporation’s equity falls below the 60% threshold.
Rule with the Control Test. Rather, "doubt" refers to various indicia that the "beneficial ownership" and
"control" of the corporation do not in fact reside in Filipino shareholders but in
Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in foreign stakeholders. As provided in DOJ Opinion No. 165, Series of 1984, which
determining compliance with the minimum Filipino equity requirement vis-à-vis applied the pertinent provisions of the Anti-DummyLaw in relation to the
the Control Test. This confusion springs from the erroneous assumption that the minimum Filipino equity requirement in the Constitution, "significant indicators of
use of one method forecloses the use of the other. the dummy status" have been recognized in view of reports "that some Filipino
investors or businessmen are being utilized or [are] allowing themselves to be
used as dummies by foreign investors" specifically in joint ventures for national
As exemplified by the above rulings, opinions, decisions and this Court’s April 21, resource exploitation. These indicators are:
2014 Decision, the Control Test can be, as it has been, applied jointly withthe
Grandfather Rule to determine the observance of foreign ownership restriction in
nationalized economic activities. The Control Test and the Grandfather Rule are 1. That the foreign investors provide practically all the funds for the joint
not, as it were, incompatible ownership-determinant methods that canonly be investment undertaken by these Filipino businessmen and their foreign
applied alternative to each other. Rather, these methodscan, if appropriate, be partner;
used cumulatively in the determination of the ownership and control of
corporations engaged in fully or partly nationalized activities, as the mining 2. That the foreign investors undertake to provide practically all the
operation involved in this case or the operation of public utilities as in Gamboa or technological support for the joint venture;
Bayantel.
3. That the foreign investors, while being minority stockholders, manage
The Grandfather Rule, standing alone, should not be used to determine the Filipino the company and prepare all economic viability studies.
ownership and control in a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized or partly nationalized Thus, In the Matter of the Petition for Revocation of the Certificate of Registration
activities. Hence, it is only when the Control Test is first complied with that the of Linear Works Realty Development Corporation,13 the SEC held that when
P a g e | 76

foreigners contribute more capital to an enterprise, doubt exists as to the actual Parenthetically, it is advanced that the application of the Grandfather Rule is
control and ownership of the subject corporation even if the 60% Filipino equity impractical as tracing the shareholdings to the point when natural persons hold
threshold is met. Hence, the SEC in that one ordered a further investigation, viz: rights to the stocks may very well lead to an investigation ad infinitum. Suffice it to
say in this regard that, while the Grandfather Rule was originally intended to trace
x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the shareholdings to the point where natural persons hold the shares, the SEC had
the basis for determining the level of foreign participation is the number of shares already set up a limit as to the number of corporate layers the attribution of the
subscribed, regardless of the par value. Applying such an interpretation, the EPD nationality of the corporate shareholders may be applied.
rules that the foreign equity participation in Linear works Realty Development
Corporation amounts to 26.41% of the corporation’s capital stock since the In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule
amount of shares subscribed by foreign nationals is 1,795 only out of the 6,795 on two (2) levels of corporate relations for publicly-held corporations or where
shares. Thus, the subject corporation is compliant with the 40% limit on foreign the shares are traded in the stock exchanges, and to three (3) levels for closely
equity participation. Accordingly, the EPD dismissed the complaint, and did not held corporations or the shares of which are not traded in the stock
pursue any investigation against the subject corporation. exchanges.14 These limits comply with the requirement in Palting v. San Jose
Petroleum, Inc.15 that the application of the Grandfather Rule cannot go beyond
xxxx the level of what is reasonable.

x x x [I]n this respect we find no error in the assailed order made by the EPD. The A doubt exists as to the extent of control and beneficial ownership of MBMI over
EPD did not err when it did not take into account the par value of shares in the petitioners and their investing corporate stockholders.
determining compliance with the constitutional and statutory restrictionson
foreign equity. In the Decision subject of this recourse, the Court applied the Grandfather Rule to
determine the matter of true ownership and control over the petitioners as doubt
However, we are aware that some unscrupulous individuals employ schemes to exists as to the actual extent of the participation of MBMI in the equity of the
circumvent the constitutional and statutory restrictions on foreign equity. In the petitioners and their investing corporations.
present case, the fact that the shares of the Japanese nationals have a greater par
value but only have similar rights to those held by Philippine citizens having much We considered the following membership and control structures and like nuances:
lower par value, is highly suspicious. This is because a reasonable investor would
expect to have greater control and economic rights than other investors who Tesoro
invested less capital than him. Thus, it is reasonable to suspectthat there may be
secret arrangements between the corporation and the stockholders wherein the Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds
Japanese nationals who subscribed to the shares with greater par value actually 59.97% of the 10,000 commonshares of petitioner Tesoro while the Canadian-
have greater control and economic rights contrary to the equality of shares based owned company, MBMI, holds 39.98% of its shares.
on the articles of incorporation.

With this in mind, we find it proper for the EPD to investigate the subject Name Nationality Number Amount Amount Paid
corporation. The EPD is advised to avail of the Commission’s subpoena powers in of Subscribed
order to gather sufficient evidence, and file the necessary complaint. Shares
Sara Marie Filipino 5,997 ₱5,997,000.00 ₱825,000.00
As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Mining,
Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a Inc.
reasonable suspicion that the Filipino shareholders do not actually have the
requisite number of control and beneficial ownership in petitioners Narra, Tesoro, MBMI Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60
and McArthur. Hence, a further investigation and dissection of the extent of the Resources,
ownership of the corporate shareholders through the Grandfather Rule is justified. Inc.16
P a g e | 77

Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00 Michael T. American 1 ₱1,000.00 ₱1,000.00


Salazar Mason
Fernando Filipino 1 ₱1,000.00 ₱1,000.00 Kenneth Canadian 1 ₱1,000.00 ₱1,000.00
B. Cawkel
Esguerra
Total 10,000 ₱10,000,000.00 ₱2,800,000.00
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
The fact that MBMI had practically provided all the funds in Sara Marie and
Michael T. American 1 ₱1,000.00 ₱1,000.00 Tesoro creates serious doubt as to the true extent of its (MBMI) control and
Mason ownership over both Sara Marie and Tesoro since, as observed by the SEC, "a
reasonable investor would expect to have greater control and economic rights
Kenneth Canadian 1 ₱1,000.00 ₱1,000.00 than other investors who invested less capital than him." The application of the
Cawkel Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control
Total 10,000 ₱10,000,000.00 ₱2,708,174.60 and economic benefits in petitioner Tesoro (through Sara Marie) fallbelow the
threshold 60%, viz:

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) Filipino participation in petitioner Tesoro: 40.01%
holds 66.63% of Sara Marie’s shares while the same Canadian company MBMI
holds 33.31% of Sara Marie’s shares. Nonetheless, it is admitted that Olympic did
not pay a single peso for its shares. On the contrary, MBMI paid for 99% of the 66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in
paid-up capital of Sara Marie. Tesoro) = 39.98%
100
Name Nationality Number of Amount Amount Paid 39.98% + .03% (shares of individual Filipino shareholders [SHs] in
Shares Subscribed Tesoro)
=40.01%
Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00
&
Development Foreign participation in petitioner Tesoro: 59.99%
Corp.17
MBMI Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00 33.33
Resources, Inc. (Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in
Tesoro) = 19.99%
100
Amanti Filipino 1 ₱1,000.00 ₱1,000.00
Limson 19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02%
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00 (shares of foreign individual SHs in Tesoro)
Esguerra = 59.99%

Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00


With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99%
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00 foreign ownership of its shares, it is clear that petitioner Tesoro does not comply
with the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the
Hernando Constitution. Hence, the appellate court’s observation that Tesoro is a foreign
corporation not entitled to an MPSA is apt.
P a g e | 78

McArthur MBMI Canadian 3,331 ₱3,331,000.00 ₱2,803,900.00


Resources, Inc.
Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97%
of its 10, 000 common shares is owned by supposedly Filipino Madridejos Mining Amanti Filipino 1 ₱1,000.00 ₱1,000.00
Corporation (Madridejos), while 39.98% belonged to the Canadian MBMI. Limson
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Name Nationality Number Amount Amount Paid Esguerra
of Subscribed
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Shares
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Madridejos Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Hernando
Mining
Corporation Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
MBMI Canadian 3,998 ₱3,998,000.0 ₱1,878,174.60
Resources, Kenneth Canadian 1 ₱1,000.00 ₱1,000.00
Inc.18 Cawkel
Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00 Total 10,000 ₱10,000,000.00 ₱2,809,900.00
Salazar
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00 Again, the fact that MBMI had practically provided all the funds in Madridejos and
McArthur creates serious doubt as to the true extent of its control and ownership
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00 of MBMI over both Madridejos and McArthur. The application of the Grandfather
Agcaoili Rule is clearly called for, and as will be shown below, MBMI, along with the other
Michael T. American 1 ₱1,000.00 ₱1,000.00 foreign shareholders, breached the maximum limit of 40% ownership in petitioner
Mason McArthur, rendering the petitioner disqualified to an MPSA:

Kenneth Canadian 1 ₱1,000.00 ₱1,000.00 Filipino participation in petitioner McArthur: 40.01%


Cawkel
Total 10,000 ₱10,000,000.00 ₱2,708,174.60 66.67
(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in
McArthur) = 39.98%
In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its 100
shares belonged to MBMI. Yet again, Olympic did not contribute to the paid-up
capital of Madridejos and it was MBMI that provided 99.79% of the paid-up capital 39.98% + .03% (shares of individual Filipino SHs in McArthur)
=40.01%
of Madridejos.

Name Nationality Number of Amount Amount Paid Foreign participation in petitioner McArthur: 59.99%
Shares Subscribed
Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00 33.33 (Foreign equity in Madridejos) x 59.97 (Madridejos’ share in
& McArthur) = 19.99%
Development
Corp.19
P a g e | 79

19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
(shares of foreign individual SHs in McArthur) Agcaoili
= 59.99%
Bayani H. Filipino 1 ₱1,000.00 ₱1,000.00
Agabin
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner
Total 10,000 ₱10,000,000.00 ₱2,800,000.00
McArthur, as compared to 59.99% foreign ownership of its shares, it is clear that
petitioner McArthur does not comply with the minimum Filipino equity
requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate PLMDC’s shares, in turn, were held by Palawan Alpha South Resources
court did not err in holding that petitioner McArthur is a foreign corporation not Development Corporation (PASRDC), which subscribed to 65.96% of PLMDC’s
entitled to an MPSA. shares, and the Canadian MBMI, which subscribed to 33.96% of PLMDC’s shares.

Narra Name Nationality Number of Amount Amount Paid


Shares Subscribed
As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining &
Development Corporation (PLMDC), while Canadian MBMI held 39.98% of its Palawan Filipino 6,596 ₱6,596,000.00 P0
shares. Alpha South
Resource
Development
Name Nationality Number Amount Amount Paid Corp.
of Subscribed
Shares MBMI Canadian 3,396 ₱3,396,000.00 ₱2,796,000.00
Resources,
Patricia Filipino 5,997 ₱5,997,000.00 ₱1,677,000.00 Inc.21
Lousie
Mining and Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00
Development Mendoza, Jr.
Corp.
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
MBMI Canadian 3,996 ₱3,996,000.00 ₱1,116,000.00 Esguerra
Resources,
Inc.20 Henry E. Filipino 1 ₱1,000.00 ₱1,000.00
Fernandez
Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00
Mendoza, Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Henry E. Filipino 1 ₱1,000.00 ₱1,000.00
Fernandez Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
McCurdy
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
McCurdy Bayani H, Filipino 1 ₱1,000.00 ₱1,000.00
Agabin
P a g e | 80

Total 10,000 ₱10,000,000.00 ₱2,804,000.00 voting rights, [thus] it must be assumed that all such shares have voting
rights."22 It cannot therefore be gain said that the foregoing computation hewed
with the pronouncements of Gamboa, as implemented by SEC Memorandum
Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI Circular No. 8, Series of 2013, (SEC Memo No. 8)23 Section 2 of which states:
contributed 99.75% of PLMDC’s paid-up capital. This fact creates serious doubt as
to the true extent of MBMI’s control and ownership over both PLMDC and Narra Section 2. All covered corporations shall, at all times, observe the constitutional or
since "a reasonable investor would expect to have greater control and economic statutory requirement.1âwphi1 For purposes of determining compliance
rights than other investors who invested less capital than him." Thus, the therewith, the required percentage of Filipino ownership shall be applied to BOTH
application of the Grandfather Rule is justified. And as will be shown, it is clear (a) the total outstanding shares of stock entitled to vote in the election of
that the Filipino ownership in petitioner Narra falls below the limit prescribed in directors; AND (b) the total number of outstanding shares of stock, whether or not
both the Constitution and the Philippine Mining Act of 1995. entitled to vote in the election of directors.

Filipino participation in petitioner Narra: 39.64% In fact, there is no indication that herein petitioners issued any other class of
shares besides the 10,000 common shares. Neither is it suggested that the
66.02 common shares were further divided into voting or non-voting common shares.
(Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = Hence, for purposes of this case, items a) and b) in SEC Memo No. 8 both refer to
39.59% the 10,000 common shares of each of the petitioners, and there is no need to
100
separately apply the 60-40 ratio to any segment or part of the said common
39.59% + .05% (shares of individual Filipino SHs in McArthur) shares.
=39.64%
III.
Foreign participation in petitioner Narra: 60.36%
In mining disputes, the POA has jurisdiction to pass upon the nationality of
applications for MPSAs
33.98
(Foreign equity in PLMDC) x 59.97 (PLMDC’s share in
Narra) = 20.38% Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the
100 Panel of Arbitrators (POA) of the Department of Environment and Natural
Resources (DENR) since the POA’s determination of petitioners’ nationalities is
20.38% + 39.96% (MBMI’s direct participation in Narra) + .02%
supposedly beyond its limited jurisdiction, as defined in Gonzales v. Climax Mining
(shares of foreign individual SHs in McArthur)
Ltd.24 and Philex Mining Corp. v. Zaldivia.25
= 60.36%
The April 21, 2014 Decision did not dilute, much less overturn, this Court’s
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% pronouncements in either Gonzales or Philex Mining that POA’s jurisdiction "is
Filipino ownership of its shares, it is clear that petitioner Narra does not comply limited only to mining disputes which raise questions of fact," and not judicial
with the minimum Filipino equity requirement imposed in Section 2, Article XII of questions cognizable by regular courts of justice. However, to properly recognize
the Constitution. Hence, the appellate court did not err in holding that petitioner and give effect to the jurisdiction vested in the POA by Section 77 of the Philippine
McArthur is a foreign corporation not entitled to an MPSA. Mining Act of 1995,26 and in parallel with this Court’s ruling in Celestial Nickel
Mining Exploration Corporation v. Macroasia Corp.,27 the Court has recognized in
It must be noted that the foregoing determination and computation of petitioners’ its Decision that in resolving disputes "involving rights to mining areas" and
Filipino equity composition was based on their common shareholdings, not "involving mineral agreements or permits," the POA has jurisdiction to make a
preferred or redeemable shares. Section 6 of the Corporation Code of the preliminary finding of the required nationality of the corporate applicant in order
Philippines explicitly provides that "no share may be deprived of voting rights to determine its right to a mining area or a mineral agreement.
except those classified as ‘preferred’ or ‘redeemable’ shares." Further, as Justice
Leonen puts it, there is "no indication that any of the shares x x x do not have
P a g e | 81

There is certainly nothing novel or aberrant in this approach. In ejectment and


unlawful detainer cases, where the subject of inquiry is possession de facto, the
jurisdiction of the municipal trial courts to make a preliminary adjudication
regarding ownership of the real property involved is allowed, but only for
purposes of ruling on the determinative issue of material possession.

The present case arose from petitioners' MPSA applications, in which they
asserted their respective rights to the mining areas each applied for. Since
respondent Redmont, itself an applicant for exploration permits over the same
mining areas, filed petitions for the denial of petitioners' applications, it should be
clear that there exists a controversy between the parties and it is POA's
jurisdiction to resolve the said dispute. POA's ruling on Redmont's assertion that
petitioners are foreign corporations not entitled to MPSA is but a necessary
incident of its disposition of the mining dispute presented before it, which is
whether the petitioners are entitled to MPSAs.

Indeed, as the POA has jurisdiction to entertain "disputes involving rights to


mining areas," it necessarily follows that the POA likewise wields the authority to
pass upon the nationality issue involving petitioners, since the resolution of this
issue is essential and indispensable in the resolution of the main issue, i.e., the
determination of the petitioners' right to the mining areas through MPSAs.

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No


further pleadings shall be entertained. Let entry of judgment be made in due
course.

SO ORDERED.

PRESBITERO J. VELASCO, JR.


Associate Justice