G.R. No.

L-20214 March 17, 1923

G. C. ARNOLD, plaintiff-appellant,
vs.
WILLITS & PATTERSON, LTD., defendant-appellee.

Fisher, DeWitt, Perkins and Brady for appellant.

Ross and Lawrence for appellee.

STATEMENT

For a number of years prior to the times alleged in the complaint, the plaintiff was in the employ of
the International Banking Corporation of Manila, and it is conceded that he is a competent and
experienced business man. July 31, 1916, C. D. Willits and I. L. Patterson were partners doing
business in San Francisco, California, under the name of Willits & Patterson. The plaintiff was then
in San Francisco, and as a result of negotiations the plaintiff and the firm entered into a written
contract, known in the record as Exhibit A, by which the plaintiff was employed as the agent of the
firm in the Philippine Islands for certain purposes for the period of five years at a minimum salary of
$200 per month and travelling expenses. The plaintiff returned to Manila and entered on the
discharge of his duties under the contract. As a result of plaintiff's employment and the world war
conditions, the business of the firm in the Philippines very rapidly increased and grew beyond the
fondest hopes of either party. A dispute arose between the plaintiff and the firm as to the
construction of Exhibit A as to the amount which plaintiff should receive for his services. Meanwhile
Patterson retired from the firm and Willits became the sole owner of its assets. For convenience of
operation and to serve his own purpose, Willits organized a corporation under the laws of California
with its principal office at San Francisco, in and by which he subscribed for, and became the
exclusive owner of all the capital stock except a few shares for organization purposes only, and the
name of the firm was used as the name of the corporation. A short time after that Willits came to
Manila and organized a corporation here known as Willits & Patterson, Ltd., in and to which he again
subscribed for all of the capital stock except the nominal shares necessary to qualify the directors. In
legal effect, the San Francisco corporation took over and acquired all of the assets and liabilities of
the Manila corporation. At the time that Willits was in Manila and while to all intents and purposes he
was the sole owner of the stock of corporations, there was a conference between him and the
plaintiff over the disputed construction of Exhibit A. As a result of which another instrument, known in
the record as Exhibit B, was prepared in the form of a letter which the plaintiff addressed to Willits at
Manila on November 10, 1919, the purpose of which was to more clearly define and specify the
compensation which the plaintiff was to receive for his services. Willits received and confirmed this
letter by signing the name of Willits & Patterson, By C.d. Willits. At the time both corporations were
legally organized, and there is nothing in the corporate minutes to show that Exhibit B was ever
formally ratified or approved by either corporation. After its organization, the Manila corporation
employed a regular accountant whose duty it was to audit the accounts of the company and render
financial statements both for the use of the local banks and the local and parent corporations at San
Francisco. From time to time and in the ordinary course of business such statements of account
were prepared by the accountant and duly forwarded to the home office, and among other things
was a statement of July 31, 1921, showing that there was due and owing the plaintiff under Exhibit B
the sum of P106,277.50. A short time previous to that date, the San Francisco corporation became
involved in financial trouble, and all of its assets were turned over to a "creditors' committee." When
this statement was received, the "creditors' committee" immediately protested its allowance. An
attempt was made without success to adjust the matter on a friendly basis and without litigation.
January 10, 1922, the plaintiff brought this action to recover from the defendant the sum of
P106,277.50 with legal interest and costs, and written instruments known in the record as Exhibits A
and B were attached to, and made a part of, the complaint.
For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit A and
denies each and every other allegation, except as specifically admitted, and alleges that what is
known as Exhibit B was signed by Willits without the authority of the defendant corporation or the
firm of Willits & Patterson, and that it is not an agreement which was ever entered into with the
plaintiff by the defendant or the firm, and, as a separate defense and counterclaim, it alleges that on
the 30th of June, 1920, there was a balance due and owing the plaintiff from the defendant under the
contract Exhibit A of the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921,
under Exhibit A was $400 per month, or a total of P10,400. That about July 6, 1921, the plaintiff
wrongfully took P30,000 from the assets of the firm, and that he is now indebted to the firm in the
sum of P10,858.95, with interest and costs, from which it prays judgement.

The plaintiff admits that he withdrew the P30,000, but alleges that it was with the consent and
authority of the defendant, and denies all other new matter in the answer.

Upon such issues a trial was had, and the lower court rendered judgment in favor of the defendant
as prayed for in its counterclaim, from which the plaintiff appeals, contending that the trial court erred
in not holding that the contract between the parties is that which is embodied in Exhibits A and B,
and that the defendant assumed all partnership obligations, and in failing to render judgment for the
plaintiff, as prayed for, and in dismissing his complaint, and denying plaintiff's motion for a new trial.

JOHNS, J.:

In their respective briefs opposing counsel agree that the important questions involved are "what
was the contract under which the plaintiff rendered services for five years ending July 31, 1921," and
"what is due the plaintiff under that contract." Plaintiff contends that his services were performed
under Exhibits A and B, and that the defendant assumed all of the obligations of the original
partnership under Exhibit A, and is now seeking to deny its liability under, and repudiate, Exhibit B.
The defendant admits that Exhibit A was the original contract between Arnold and the firm of Willits
& Patterson by which he came to the Philippine Islands, and that it was therein agreed that he was
to be employed for a period of five years as the agent of Willits & Patterson in the Philippine Islands
to operate a certain oil mill, and to do such other business as might be deemed advisable for which
he was to receive, first, the travelling expenses of his wife and self from San Francisco to Manila,
second, the minimum salary of $200 per month, third, a brokerage of 1 per cent upon all purchases
and sales of merchandise, except for the account of the coconut oil mill, fourth, one-half of the profits
on any transaction in the name of the firm or himself not provided for in the agreement. That the
agreement also provided that if it be found that the business was operated at a loss, Arnold should
receive a monthly salary of $400 during such period. That the business was operated at a loss from
June 30, 1920, to July 31, 1921, and that for such reason, he was entitled to nothing more than a
salary of $400 per month, or for that period P10,400. Adding this amount to the P8,741.05, which the
defendant admits he owed Arnold on June 30, 1920, makes a total of P19,141.05, leaving a balance
due the defendant as set out in the counterclaim. In other words, that the plaintiff's compensation
was measured by, and limited to, the above specified provisions in the contract Exhibit A, and that
the defendant corporation is not bound by the terms or provisions of Exhibit B, which is as follows:

WILLITS & PATTERSON, LTD.

MANILA, P. I., Nov. 10, 1919.

CHAS. D. WILLITS, Esq.,

 Present.

DEAR MR. WILLITS: My understanding of the intent of my agreement with

Willits & Patterson is as under:

Commissions. Willits & Patterson, San Francisco, pay me a commission of

one per cent on all purchases made for them in the Philippines or sales made
to them by Manila and one per cent on all sales made for them in the
Philippines, or purchases made from them by Manila. If such purchases or
sales are on an f. o. b. basis the commission is on the f. o. b. price; if on a c.
i. f. basis the commission is computed on the c. i. f. price

These commissions are credited to me in San Francisco.

I do not participate in any profits on business transacted between Willits &

Patterson, San Francisco, and Willits & Patterson, Ltd., Manila.

Profits. On all business transacted between Willits & Patterson, Ltd. and
others than Willits & Patterson, San Francisco, half the profits are to be
credited to my account and half to the Profit & Loss account of Willits &
Patterson, Ltd., Manila.

On all other business, such as the Cooperative Coconut Products Co.

account, or any other business we may undertake as agents or managers,
half the profits are to be credited to my account and half to the Profit & Loss
account of Willits & Patterson, Ltd., Manila.

Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila,
have their own funds invested in the capital stock or a corporation, I of course
do not participate in the earnings of such stock, any more than Willits &
Patterson would participate in the earnings of stock held by me on my
account.

If the foregoing conforms to your understanding of our agreement, please

confirm below.

Yours faithfully,

(Sgd.) G. C. ARNOLD

Confirmed:

WILLITS & PATTERSON

By (Sgd.) CHAS. D. WILLITS

There is no dispute about any of the following facts: That at the inception C.D. Willits and I. L.
Patterson constituted the firm of Willits & Patterson doing business in the City of San Francisco; that
later Patterson retired from the firm, and Willits acquired all of his interests and thereafter continued
the business under the name and style of Willits & Patterson; that the original contract Exhibit A was
made between the plaintiff and the old firm at San Francisco on July 31, 1916, to cover a period of
five years from that date; that plaintiff entered upon the discharged of his duties and continued his
services in the Philippine Islands to someone for the period of five years; that on November 10,
1919, and as a result of conferences between Willits and the plaintiff, Exhibit B was addressed and
signed in the manner and form above stated in the City of Manila. A short time prior to that date
Willits organized a corporation in San Francisco, in the State of California, which took over and
acquired all of the assets of the firm's business in California then being conducted under the name
and style of Willits & Patterson; that he subscribed for all of the capital stock of the corporation, and
that in truth and in fact he was the owner of all of its capital stock. After this was done he caused a
new corporation to be organized under the laws of the Philippine Islands with principal office at
Manila, which took over and acquired all the business and assets of the firm of Willits & Patterson in
the Philippine Islands, in and to which, in legal effect, he subscribed for all of its capital stock, and
was the owner of all of its stock. After both corporations were organized the above letter was drafted
and signed. The plaintiff contends that the signing of Exhibit B in the manner and under the
conditions in which it was signed, and through the subsequent acts and conduct of the parties, was
ratified and, in legal effect, became and is now binding upon the defendant.

It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by Willits, he
was to all intents and purposes the legal owner of all the stock in both corporations. It also appears
from the evidence that the parent corporation at San Francisco took over and acquired all of the
assets and liabilities of the local corporation at Manila. That after it was organized the Manila
corporation kept separate records and account books of its own, and that from time to time financial
statements were made and forwarded to the home office, from which it conclusively appears that
plaintiff was basing his claim for services upon Exhibit A, as it was modified by Exhibit B. That at no
time after Exhibit B was signed was there ever any dispute between plaintiff and Willits as to the
compensation for plaintiff's services. That is to say, as between the plaintiff and Willits, Exhibit B was
approved, followed and at all times in force and effect, after it was signed November 10, 1919. It
appears from an analysis of Exhibit B that it was for the mutual interest of both parties. From a small
beginning, the business was then in a very flourishing conditions and growing fast, and the profits
were very large and were running into big money.

Among other things, Exhibit A provided: "(a) That the net profits from said coconut oil business shall
be divided in equal shares between the said parties hereto; (b) that Arnold should receive a
brokerage of 1 per cent from all purchases and sales of merchandise, except for the account of the
coconut mills; (c) that the net profits from all other business should be divided in equal half shares
between the parties hereto."

Under the above provisions, the plaintiff might well contend that he was entitled to one-half of all the
profits and a brokerage of 1 per cent from all purchases and sales, except those for the account of
the coconut oil mills, which under the volume of business then existing would run into a very large
sum of money. It was for such reason and after personal conferences between them, and to settle all
disputed questions, that Exhibit B was prepared and signed.

The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the plaintiff
faithfully performed all the duties incumbent upon him under his contract of employment, it being
understood, however, that this admission does not include an admission that the plaintiff placed a
proper interpretation upon his right to remuneration under said contract of employment."

It being admitted that the plaintiff worked "under his contract of employment" for the period of five
years, the question naturally arises, for whom was he working? His contract was made with the
original firm of Willits & Patterson, and that firm was dissolved and it ceased to exist, and all of its
assets were merged in, and taken over by, the parent corporation at San Francisco. In the very
nature of things, after the corporation was formed, the plaintiff could not and did not continue to work
for the firm, and, yet, he continued his employment for the full period of five years. For whom did he
work after the partnership was merged in the corporation and ceased to exist?

It is very apparent that, under the conditions then existing, the signing of Exhibit B was for the mutual
interests of both parties, and that if the contract Exhibit A was to be enforced according to its terms,
that Arnold might well contend for a much larger sum of money for his services. In truth and in fact
Willits and both corporations recognized his employment and accepted the benefits of his services.
He continued his employment and rendered his services after the corporation were organized and
Exhibit B was signed just the same as he did before, and both corporations recognized and
accepted his services. Although the plaintiff was president of the local corporation, the testimony is
conclusive that both of them were what is known as a one man corporation, and Willits, as the owner
of all of the stock, was the force and dominant power which controlled them. After Exhibit B was
signed it was recognized by Willits that the plaintiff's services were to be performed and measured
by its term and provisions, and there never was any dispute between plaintiff and Willits upon that
question.

The controversy first arose after the corporation was in financial trouble and the appointment of what
is known in the record as a "creditors' committee." There is no claim or pretense that there was any
fraud or collusion between plaintiff and Willits, and it is very apparent that Exhibit B was to the
mutual interest of both parties. It is elementary law that if Exhibit B is a binding contract between the
plaintiff and Willits and the corporations, it is equally binding upon the creditors' committee. It would
not have any higher or better legal right than the corporation itself, and could not make any defense
which it could not make. It is very significant that the claim or defense which is now interposed by the
creditors' committee was never made or asserted at any previous time by the defendant, and that it
never was made by Willits, and it is very apparent that if he had remained in control of the
corporation, it would never have made the defense which is now made by the creditors' committee.
The record is conclusive that at the time he signed Exhibit B, Willits was, in legal effect, the owner
and holder of all the stock in both corporations, and that he approved it in their interest, and to
protect them from the plaintiff having and making a much larger claim under Exhibit A. As a matter of
fact, it appears from the statement of Mr. Larkin, the accountant, in the record that if plaintiff's cause
of action was now founded upon Exhibit A, he would have a claim for more than P160,000.

Thompson on Corporations, 2d ed., vol. I, section 10, says:

The proposition that a corporation has an existence separate and distinct from its
membership has its limitations. It must be noted that this separate existence is for particular
purposes. It must also be remembered that there can be no corporate existence without
persons to compose it; there can be no association without associates. This separate
existence is to a certain extent a legal fiction. Whenever necessary for the interests of the
public or for the protection or enforcement of the rights of the membership, courts will
disregard this legal fiction and operate upon both the corporation and the persons composing
it.

In the same section, the author quotes from a decision in 49 Ohio State, 1371; 15 L. R. A., 145, in
which the Supreme Court of Ohio says:

"So long as a proper use is made of the fiction that a corporation is an entity apart from its
shareholders, it is harmless, and, because convenient, should not be called in question; but
where it is urged to an end subversive of its policy, or such is the issue, the fiction must be
ignored, and the question determined whether the act in question, though done by
shareholders, — that is to say, by the persons uniting in one body, — was done simply as
individuals, and with respect to their individual interest as shareholders, or was done
 ostensibly as such, but, as a matter of fact, to control the corporation, and affect the
transaction of its business, in the same manner as if the act had been clothed with all the
formalities of a corporate act. This must be so, because, the stockholders having a dual
capacity, and capable of acting in either, and a possible interest to conceal their character
when acting in their corporate capacity, the absence of the formal evidence of the character
of the act cannot preclude judicial inquiry on the subject. If it were otherwise, then in that
department of the law fraud would enjoy an immunity awarded to it in no other."

Where the stock of a corporation is owned by one person whereby the corporation functions
only for the benefit of such individual owner, the corporation and the individual should be
deemed to be the same. (U. S. Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)

Ruling Case Law, vol. 7, section 663, says:

While of course a corporation cannot ratify a contract which is strictly ultra vires, and which it
in the first instance could not have made, it may by ratification render binding on it a contract,
entered into on its behalf by its officers or agents without authority. As a general rule such
ratification need not be manifested by any voted or formal resolution of the corporation or be
authenticated by the corporate seal; no higher degree of evidence is requisite in establishing
ratification on the part of a corporation, than is requisite in showing an antecedent
authorization.

xxx xxx xxx

SEC. 666. The assent or approval of a corporation to acts done on its account may be
inferred in the same manner that the absent of a natural person may be, and it is well settled
that where a corporation with full knowledge of the unauthorized act of its officer or agents
acquiesces in and consents to such acts, it thereby ratifies them, especially where the
acquiescence results in prejudice to a third person.

xxx xxx xxx

SEC. 669. So, when, in the usual course of business of a corporation, an officer has been
allowed in his official capacity to manage its affair, his authority to represent the corporation
may be inferred from the manner in which he has been permitted by the directors to transact
its business.

SEC. 656. In accordance with a well-known rule of the law of agency, notice to corporate
officers or agents within the scope or apparent scope of their authority is attributed to the
corporation.

SEC. 667. As a general rule, if a corporation with knowledge of its agents unauthorized act
received and enjoys the benefits thereof, it impliedly ratifies the unauthorized act if it is one
capable of ratification by parol.

In its article on corporations, Corpus Juris, in section 2241 says:

Ratification by a corporation of a transaction not previously authorized is more easily inferred

where the corporation receives and retains property under it, and as a general rule where a
corporation, through its proper officers or board, takes and retains the benefits of the
unauthorized act or contract of an officer or agent, with full knowledge of all the material
 facts, it thereby ratifies and becomes bound by such act of contract, together with all the
liabilities and burdens resulting therefrom, and in some jurisdiction this rule is, in effect,
declared by statute. Thus the corporation is liable on the ground of ratification where, with
knowledge of the facts, it accepts the benefit of services rendered under an unauthorized
contract of employment . . . .

Applying the law to the facts.

Mr. Larkin, an experienced accountant, was employed by the local corporation, and from time to time
and in the ordinary course of business made and prepared financial statements showing its assets
and liabilities, true copies of which were sent to the home office in San Francisco. It appears upon
their face that plaintiff's compensation was made and founded on Exhibit B, and that such
statements were made and prepared by the accountant on the assumption that Exhibit B was in full
force and effect as between the plaintiff and the defendant. In the course of business in the early
part of 1920, plaintiff, as manager of the defendant, sold 500 tons of oil for future delivery at P740
per ton. Due to break in the market, plaintiff was able to purchase the oil at P380 per ton or a profit
of P180,000.

It appears from Exhibit B under the heading of "Profits" that:

On all the business transacted between Willits & Patterson, Ltd. and others than Willits &
Patterson, San Francisco, half the profit are to be credited to may account and half to the
Profit & Loss account Willits & Patterson, Ltd., Manila.

The purchasers paid P105,000 on the contracts and gave their notes for P75,000, and it was agreed
that all of the oil purchased should be held as security for the full payment of the purchase price. As
a result, the defendant itself received the P105,000 in cash, P75,000 in notes, and still holds the 500
tons of oil as security for the balance of the purchase price. This transaction was shown in the semi-
annual financial statement for the period ending December 31, 1920. That is to say, the business
was transacted by and through the plaintiff, and the defendant received and accepted all of the
profits on the deal, and the statement which was rendered gave him a credit for P90,737.88, or half
the profit as provided in the contract Exhibit B, with interest.

Although the previous financial statements show upon their face that the account of plaintiff was
credit with several small items on the same basis, it was not until the 23d of March, 1921, that any
objection was ever made by anyone, and objection was made for the first time by the creditors'
committee in a cable of that date.

As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now binding upon
the defendant corporation, and the plaintiff is entitled to recover for his services on that writing as it
modified the original contract Exhibit A.

It appears from the statement prepared by accountant Larkin founded upon Exhibit B that the plaintiff
is entitled to recover P106,277.50. It is very apparent that his statement was based upon the
assumption that there was a net profit of P180,000 on the 500 tons of oil, of which the plaintiff was
entitled to one-half.

In the absence of any other proof, we have the right to assume that the 500 tons of oil was worth the
amount which the defendant paid for them at the time of the purchase or P380 per ton, and the
record shows that the defendant took and now has the possession of all of the oil secure the
payment of the price at which it was sold. Hence, the profit on the deal to the defendant at the time
of the sale would amount to the difference between what the defendant paid for the oil and the
amount which it received for the oil at the time it sold the oil. It appears that at the time of the sale
the defendant only received P105,000 in cash, and that it took and accepted the promissory notes of
Cruz & Tan Chong Say, the purchasers, for P75,000 more which have been collected and may
never be. Hence, it must follow that the amount evidence by the notes cannot now be deemed or
treated as profits on the deal and cannot be until such times as the notes are paid.

The judgment of the lower court is reversed, and a money judgment will be entered here in favor of
the plaintiff and against the defendant for the sum of P68,527.50, with thereon at the rate of 6 per
cent per annum from the 10th day of January, 1922. In addition thereto, judgment will be rendered
against the defendant in substance and to the effect that the plaintiff is the owner of an undivided
one-half interest in the promissory notes for P75,000 which were executed by Cruz & Tan Chong
Say, as a part of the purchase price of the oil, and that he is entitled to have and receive one-half of
all the proceeds from the notes or either of them, and that also he have judgment against the
defendant for costs. So ordered.

Araullo, C. J., Street, Malcolm, Avanceña, Ostrand, and Romualdez, JJ., concur.

G.R. No. 125469 October 27, 1997

PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and
PUERTO AZUL LAND, INC., respondents.

TORRES, JR., J.:

The Securities and Exchange Commission is the government agency, under the direct general
supervision of the Office of the President, 1 with the immense task of enforcing the Revised
Securities Act, and all other duties assigned to it by pertinent laws. Among its inumerable functions,
and one of the most important, is the supervision of all corporations, partnerships or associations,
who are grantees of primary franchise and/or a license or permit issued by the government to
operate in the Philippines. 2Just how far this regulatory authority extends, particularly, with regard to
the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent Court of
Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange
Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the private respondent
Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way for the public offering of
PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares
to the public in order to raise funds allegedly to develop its properties and pay its loans with several
banking institutions. In January, 1995, PALI was issued a Permit to Sell its shares to the public by
the Securities and Exchange Commission (SEC). To facilitate the trading of its shares among
investors, PALI sought to course the trading of its shares through the Philippine Stock Exchange,
Inc. (PSE), for which purpose it filed with the said stock exchange an application to list its shares,
with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's application,
recommended to the PSE's Board of Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of Governors of the
PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos
was the legal and beneficial owner of certain properties forming part of the Puerto Azul Beach Hotel
and Resort Complex which PALI claims to be among its assets and that the Ternate Development
Corporation, which is among the stockholders of PALI, likewise appears to have been held and
continue to be held in trust by one Rebecco Panlilio for then President Marcos and now, effectively
for his estate, and requested PALI's application to be deferred. PALI was requested to comment
upon the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and Resort
Complex were not claimed by PALI as its assets. On the contrary, the resort is actually owned by
Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI.
Furthermore, the Ternate Development Corporation owns only 1.20% of PALI. The Marcoses
responded that their claim is not confined to the facilities forming part of the Puerto Azul Hotel and
Resort Complex, thereby implying that they are also asserting legal and beneficial ownership of
other properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential
Commission on Good Government (PCGG) requesting for comments on the letters of the PALI and
the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses received a Temporary
Restraining Order on the same date, enjoining the Marcoses from, among others, "further impeding,
obstructing, delaying or interfering in any manner by or any means with the consideration,
processing and approval by the PSE of the initial public offering of PALI." The TRO was issued by
Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561,
pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its
decision to reject PALI's application, citing the existence of serious claims, issues and circumstances
surrounding PALI's ownership over its assets that adversely affect the suitability of listing PALI's
shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto
R. Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in the application of PALI
for the listing of its shares with the PSE, and requesting that the SEC, in the exercise of its
supervisory and regulatory powers over stock exchanges under Section 6(j) of P.D. No. 902-A,
review the PSE's action on PALI's listing application and institute such measures as are just and
proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of
PALI and directing the PSE to file its comments thereto within five days from its receipt and for its
authorized representative to appear for an "inquiry" on the matter. On April 22, 1996, the PSE
submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive portion
of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioner's authority and
jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section
3, 6(j) and 6(m) of Presidential Decree No. 902-A, the decision of the Board of
 Governors of the Philippine Stock Exchange denying the listing of shares of Puerto
Azul Land, Inc., is hereby set aside, and the PSE is hereby ordered to immediately
cause the listing of the PALI shares in the Exchange, without prejudice to its authority
to require PALI to disclose such other material information it deems necessary for the
protection of the investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however
denied by the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no compelling reason to
reconsider its order dated April 24, 1996, and in the light of recent developments on
the adverse claim against the PALI properties, PSE should require PALI to submit full
disclosure of material facts and information to protect the investing public. In this
regard, PALI is hereby ordered to amend its registration statements filed with the
Commission to incorporate the full disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for
Review (with Application for Writ of Preliminary Injunction and Temporary Restraining Order),
assailing the above mentioned orders of the SEC, submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT
POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER
TO ORDER THE LISTING AND SALE OF SHARES OF PALI
WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;

II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF

DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY
AND ABUSIVE MANNER IN DISAPPROVING PALI'S LISTING
APPLICATION;

III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID

FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES IN
CUSTODIA LEGIS AND WHICH FORM PART OF NAVAL/MILITARY
RESERVATION; AND

IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY

PROMULGATED AND ITS IMPLEMENTATION AND APPLICATION
IN THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE
CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment
and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and Opposition to Motion
to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's Petition for
Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to look into the
decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in relation to
Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b)5 of the Revised Securities Act, and for
the purpose of ensuring fair administration of the exchange. Both as a corporation and as a stock
exchange, the petitioner is subject to public respondent's jurisdiction, regulation and control.
Accepting the argument that the public respondent has the authority merely to supervise or regulate,
would amount to serious consequences, considering that the petitioner is a stock exchange whose
business is impressed with public interest. Abuse is not remote if the public respondent is left without
any system of control. If the securities act vested the public respondent with jurisdiction and control
over all corporations; the power to authorize the establishment of stock exchanges; the right to
supervise and regulate the same; and the power to alter and supplement rules of the exchange in
the listing or delisting of securities, then the law certainly granted to the public respondent the
plenary authority over the petitioner; and the power of review necessarily comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing, affirming the
SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner in
disapproving the application of PALI for listing of its shares in the face of the
following considerations:
1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure
requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing of
shares, PSE has failed to justify why it acted differently on the application of PALI, as
compared to the IPOs of other companies similarly situated that were allowed listing
in the Exchange;
3. It appears that the claims and issues on the title to PALI's properties were even
less serious than the claims against the assets of the other companies in that, the
assertions of the Marcoses that they are owners of the disputed properties were not
substantiated enough to overcome the strength of a title to properties issued under
the Torrens System as evidence of ownership thereof;
4. No action has been filed in any court of competent jurisdiction seeking to nullify
PALI's ownership over the disputed properties, neither has the government instituted
recovery proceedings against these properties. Yet the import of PSE's decision in
denying PALI's application is that it would be PALI, not the Marcoses, that must go to
court to prove the legality of its ownership on these properties before its shares can
be listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not
inspire belief. The point is, the PALI properties are now titled. A property losses its public character
the moment it is covered by a title. As a matter of fact, the titles have long been settled by a final
judgment; and the final decree having been registered, they can no longer be re-opened considering
that the one year period has already passed. Lastly, the determination of what standard to apply in
allowing PALI's application for listing, whether the discretion method or the system of public
disclosure adhered to by the SEC, should be addressed to the Securities Commission, it being the
government agency that exercises both supervisory and regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for Review
on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals. Respondent PALI
filed its Comment to the petition on October 17, 1996. On the same date, the PCGG filed a Motion
for Leave to file a Petition for Intervention. This was followed up by the PCGG's Petition for
Intervention on October 21, 1996. A supplemental Comment was filed by PALI on October 25, 1997.
The Office of the Solicitor General, representing the SEC and the Court of Appeals, likewise filed its
Comment on December 26, 1996. In answer to the PCGG's motion for leave to file petition for
intervention, PALI filed its Comment thereto on January 17, 1997, whereas the PSE filed its own
Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI
(October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997, PALI filed its
Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to
list the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the powers of
the SEC over stock exchanges are more limited as compared to its authority over ordinary
corporations. In connection with this, the powers of the SEC over stock exchanges under the
Revised Securities Act are specifically enumerated, and these do not include the power to reverse
the decisions of the stock exchange. Authorities are in abundance even in the United States, from
which the country's security policies are patterned, to the effect of giving the Securities Commission
less control over stock exchanges, which in turn are given more lee-way in making the decision
whether or not to allow corporations to offer their stock to the public through the stock exchange.
This is in accord with the "business judgment rule" whereby the SEC and the courts are barred from
intruding into business judgments of corporations, when the same are made in good faith. the said
rule precludes the reversal of the decision of the PSE to deny PALI's listing application, absent a
showing of bad faith on the part of the PSE. Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the discretion to accept or reject applications for listing.
Thus, even if an issuer has complied with the PSE listing rules and requirements, PSE retains the
discretion to accept or reject the issuer's listing application if the PSE determines that the listing shall
not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with
corporations whose properties are under sequestration. A reading of Republic of the Philippines
vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI, which
were derived from the Ternate Development Corporation (TDC) and the Monte del Sol Development
Corporation (MSDC). are under sequestration by the PCGG, and subject of forfeiture proceedings in
the Sandiganbayan. This ruling of the Court is the "law of the case" between the Republic and TDC
and MSDC. It categorically declares that the assets of these corporations were sequestered by the
PCGG on March 10, 1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its properties
can no longer be questioned, since certificates of title have been issued to PALI and more than one
year has since lapsed, is erroneous and ignores well settled jurisprudence on land titles. That a
certificate of title issued under the Torrens System is a conclusive evidence of ownership is not an
absolute rule and admits certain exceptions. It is fundamental that forest lands or military
reservations are non-alienable. Thus, when a title covers a forest reserve or a government
reservation, such title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of "full
disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear mandate for
the effectivity of such policy. As it is, the case records reveal the truth that PALI did not comply with
the listing rules and disclosure requirements. In fact, PALI's documents supporting its application
contained misrepresentations and misleading statements, and concealed material information. The
matter of sequestration of PALI's properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed
with the markings of a corporate entity, it functions as the primary channel through which the vessels
of capital trade ply. The PSE's relevance to the continued operation and filtration of the securities
transactions in the country gives it a distinct color of importance such that government intervention in
its affairs becomes justified, if not necessarily. Indeed, as the only operational stock exchange in the
country today, the PSE enjoys a monopoly of securities transactions, and as such, it yields an
immense influence upon the country's economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to give
special treatment to the administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of jurisdiction, and right of supervision and
control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be
vigilant in the supervision of the affairs of stock exchanges so that the interests of the investing
public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's
challenged control authority over the petitioner PSE even as it provides that "the Commission shall
have absolute jurisdiction, supervision, and control over all corporations, partnerships or
associations, who are the grantees of primary franchises and/or a license or permit issued by the
government to operate in the Philippines. . ." The SEC's regulatory authority over private
corporations encompasses a wide margin of areas, touching nearly all of a corporation's concerns.
This authority springs from the fact that a corporation owes its existence to the concession of its
corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be
considered as necessary or incidental to the carrying out of the SEC's express power to insure fair
dealing in securities traded upon a stock exchange or to ensure the fair administration of such
exchange. 7 It is, likewise, observed that the principal function of the SEC is the supervision and
control over corporations, partnerships and associations with the end in view that investment in
these entities may be encouraged and protected, and their activities for the promotion of economic
development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to
deny the application for listing in the stock exchange of the private respondent PALI. The SEC's
action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not securities, including
shares of stock of a corporation, may be traded or not in the stock exchange. This is in line with the
SEC's mission to ensure proper compliance with the laws, such as the Revised Securities Act and to
regulate the sale and disposition of securities in the country. 9 As the appellate court explains:

Paramount policy also supports the authority of the public respondent to review
petitioner's denial of the listing. Being a stock exchange, the petitioner performs a
function that is vital to the national economy, as the business is affected with public
interest. As a matter of fact, it has often been said that the economy moves on the
 basis of the rise and fall of stocks being traded. By its economic power, the petitioner
certainly can dictate which and how many users are allowed to sell securities thru the
facilities of a stock exchange, if allowed to interpret its own rules liberally as it may
please. Petitioner can either allow or deny the entry to the market of securities. To
repeat, the monopoly, unless accompanied by control, becomes subject to abuse;
hence, considering public interest, then it should be subject to government
regulation.

The role of the SEC in our national economy cannot be minimized. The legislature, through the
Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted to it
the serious responsibility of enforcing all laws affecting corporations and other forms of associations
not otherwise vested in some other government office. 10

This is not to say, however, that the PSE's management prerogatives are under the absolute control
of the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the PSE's main concerns, as such, is still the
generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to
corporations, including the right to sue and be sued, to hold property in its own name, to enter (or not
to enter) into contracts with third persons, and to perform all other legal acts within its allocated
express or implied powers.
A corporation is but an association of individuals, allowed to transact under an assumed corporate
name, and with a distinct legal personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such a body. 11 As to its corporate and
management decisions, therefore, the state will generally not interfere with the same. Questions of
policy and of management are left to the honest decision of the officers and directors of a
corporation, and the courts are without authority to substitute their judgment for the judgment of the
board of directors. The board is the business manager of the corporation, and so long as it acts in
good faith, its orders are not reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to
reverse the PSE's decision in matters of application for listing in the market, the SEC may exercise
such power only if the PSE's judgment is attended by bad faith. In Board of Liquidators vs. Kalaw,13 it
was held that bad faith does not simply connote bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty
through some motive or interest of ill will, partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered important
facts, which, in the general scheme, brings to serious question the qualification of PALI to sell its
shares to the public through the stock exchange. During the time for receiving objections to the
application, the PSE heard from the representative of the late President Ferdinand E. Marcos and
his family who claim the properties of the private respondent to be part of the Marcos estate. In time,
the PCGG confirmed this claim. In fact, an order of sequestration has been issued covering the
properties of PALI, and suit for reconveyance to the state has been filed in the Sandiganbayan
Court. How the properties were effectively transferred, despite the sequestration order, from the
TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in only a short span of
time, are not yet explained to the Court, but it is clear that such circumstances give rise to serious
doubt as to the integrity of PALI as a stock issuer. The petitioner was in the right when it refused
application of PALI, for a contrary ruling was not to the best interest of the general public. The
purpose of the Revised Securities Act, after all, is to give adequate and effective protection to the
investing public against fraudulent representations, or false promises, and the imposition of
worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental
to legitimate business, thus:
The Securities Act, often referred to as the "truth in securities" Act, was designed not
only to provide investors with adequate information upon which to base their
decisions to buy and sell securities, but also to protect legitimate business seeking to
obtain capital through honest presentation against competition from crooked
promoters and to prevent fraud in the sale of securities. (Tenth Annual Report, U.S.
Securities & Exchange Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1) prevention of
excesses and fraudulent transactions, merely by requirement of that their details be
revealed; (2) placing the market during the early stages of the offering of a security a
body of information, which operating indirectly through investment services and
expert investors, will tend to produce a more accurate appraisal of a security, . . .
Thus, the Commission may refuse to permit a registration statement to become
effective if it appears on its face to be incomplete or inaccurate in any material
respect, and empower the Commission to issue a stop order suspending the
effectiveness of any registration statement which is found to include any untrue
statement of a material fact or to omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and goodwill, and it has
the right to protect such goodwill by maintaining a reasonable standard of propriety in the entities
who choose to transact through its facilities. It was reasonable for the PSE, therefore, to exercise its
judgment in the manner it deems appropriate for its business identity, as long as no rights are
trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism is a thing of the
past, and should remain so.
The observation that the title of PALI over its properties is absolute and can no longer be assailed is
of no moment. At this juncture, there is the claim that the properties were owned by TDC and MSDC
and were transferred in violation of sequestration orders, to Rebecco Panlilio and later on to PALI,
besides the claim of the Marcoses that such properties belong to the Marcos estate, and were held
only in trust by Rebecco Panlilio. It is also alleged by the petitioner that these properties belong to
naval and forest reserves, and therefore beyond private dominion. If any of these claims is
established to be true, the certificates of title over the subject properties now held by PALI map be
disregarded, as it is an established rule that a registration of a certificate of title does not confer
ownership over the properties described therein to the person named as owner. The inscription in
the registry, to be effective, must be made in good faith. The defense of indefeasibility of a Torrens
Title does not extend to a transferee who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing the application
of PALI, the true ownership of the properties of PALI need not be determined as an absolute fact.
What is material is that the uncertainty of the properties' ownership and alienability exists, and this
puts to question the qualification of PALI's public offering. In sum, the Court finds that the SEC had
acted arbitrarily in arrogating unto itself the discretion of approving the application for listing in the
PSE of the private respondent PALI, since this is a matter addressed to the sound discretion of the
PSE, a corporation entity, whose business judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the registration and sale of
securities in the SEC is not for the Court to determine, but is left to the sound discretion of the
Securities and Exchange Commission. In mandating the SEC to administer the Revised Securities
Act, and in performing its other functions under pertinent laws, the Revised Securities Act, under
Section 3 thereof, gives the SEC the power to promulgate such rules and regulations as it may
consider appropriate in the public interest for the enforcement of the said laws. The second
paragraph of Section 4 of the said law, on the other hand, provides that no security, unless exempt
by law, shall be issued, endorsed, sold, transferred or in any other manner conveyed to the public,
unless registered in accordance with the rules and regulations that shall be promulgated in the public
interest and for the protection of investors by the Commission. Presidential Decree No. 902-A, on
the other hand, provides that the SEC, as regulatory agency, has supervision and control over all
corporations and over the securities market as a whole, and as such, is given ample authority in
determining appropriate policies. Pursuant to this regulatory authority, the SEC has manifested that
it has adopted the policy of "full material disclosure" where all companies, listed or applying for
listing, are required to divulge truthfully and accurately, all material information about themselves
and the securities they sell, for the protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In connection with this, a fact is deemed material if it
tends to induce or otherwise effect the sale or purchase of its securities. 15 While the employment of
this policy is recognized and sanctioned by the laws, nonetheless, the Revised Securities Act sets
substantial and procedural standards which a proposed issuer of securities must
satisfy. 16 Pertinently, Section 9 of the Revised Securities Act sets forth the possible Grounds for the
Rejection of the registration of a security:
— The Commission may reject a registration statement and refuse to issue a permit
to sell the securities included in such registration statement if it finds that —
(1) The registration statement is on its face incomplete or inaccurate in any material
respect or includes any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in sound financial condition;

(ii) has violated or has not complied with the provisions of this Act, or
the rules promulgated pursuant thereto, or any order of the
Commission;
(iii) has failed to comply with any of the applicable requirements and
conditions that the Commission may, in the public interest and for the
protection of investors, impose before the security can be registered;
(iv) has been engaged or is engaged or is about to engage in
fraudulent transaction;
(v) is in any way dishonest or is not of good repute; or
 (vi) does not conduct its business in accordance with law or is
engaged in a business that is illegal or contrary to government rules
and regulations.
(3) The enterprise or the business of the issuer is not shown to be sound or to be
based on sound business principles;
(4) An officer, member of the board of directors, or principal stockholder of the issuer
is disqualified to be such officer, director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction of the Commission that
the sale of its security would not work to the prejudice of the public interest or as a
fraud upon the purchasers or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration
and issuance of securities dependent, to a certain extent, on the merits of the securities themselves,
and of the issuer, to be determined by the Securities and Exchange Commission. This measure was
meant to protect the interests of the investing public against fraudulent and worthless securities, and
the SEC is mandated by law to safeguard these interests, following the policies and rules therefore
provided. The absolute reliance on the full disclosure method in the registration of securities is,
therefore, untenable. As it is, the Court finds that the private respondent PALI, on at least two points
(nos. 1 and 5) has failed to support the propriety of the issue of its shares with unfailing clarity,
thereby lending support to the conclusion that the PSE acted correctly in refusing the listing of PALI
in its stock exchange. This does not discount the effectivity of whatever method the SEC, in the
exercise of its vested authority, chooses in setting the standard for public offerings of corporations
wishing to do so. However, the SEC must recognize and implement the mandate of the law,
particularly the Revised Securities Act, the provisions of which cannot be amended or supplanted by
mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified circumspection, discounting,
therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in refusing to
allow the listing of PALI in the stock exchange is justified by the law and by the circumstances
attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition for
Review on Certiorari. The Decisions of the Court of Appeals and the Securities and Exchange
Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby REVERSED and SET
ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of the Philippine Stock
Exchange to deny the application for listing of the private respondent Puerto Azul Land, Inc.
SO ORDERED